Week of Feb 23 2025

The fundamental narrative has evolved beyond pure economic metrics into a more multifaceted story where traditional macro concerns are now intertwined with geopolitical realignments. The services PMI contraction below 50 and elevated inflation expectations would typically dominate market discourse, but these are now sharing the spotlight with deeper questions about the durability of post-war international arrangements. The apparent strategic divergence between US and European approaches to Ukraine, as evidenced by both Marco Rubio's Saudi diplomatic initiatives and Europe's substantial new aid package, adds another layer of complexity to market risk calculations.

The European flow dynamics present a particularly interesting development, with the largest equity inflows since February 2022 potentially signaling a shift in global capital allocation preferences. However, this constructive flow picture must be considered against the backdrop of deteriorating market internals, particularly the unusually low correlation levels that historically precede significant market adjustments.

As we begin Week 9, we face several critical catalysts that will test both market resilience and prevailing narratives. The sequence begins with German elections that carry implications for both fiscal policy and European security arrangements, continues through NVIDIA's earnings (a crucial test for the AI narrative that has underpinned much of the market's recent performance), and concludes with PCE data that could reshape monetary policy expectations.