Broader markets continue on a risk-off trajectory as a new narrative takes hold: inflation is more entrenched than expected, and to bring it under control requires an economic slowdown. If the slowdown occurs naturally, the Fed will not need to raise rates further. If it does not, then the Fed will need to bring further pain. In other words, there will be a comparable amount of pain coming from somewhere before markets can look upwards again. Regardless of the details, expect further downside in the short term.

Concurrently, one of the current driving forces behind NASDAQ’s previous strength, the craze over AI and ChatGPT, is also past. As time passes, the limits of diffusion-based AI models are becoming more apparent to the layman, and the exuberant emotions around the issues start to fade. This means a further damper on the US’ major tech stocks.

Tension between China and the US and uncertainty within China itself also continue to cloud the global outlook. Although the EU has done poorly in the past year, the EU is at least a known quantity, while China’s data is much more uncertain, with potential policy changes presenting a much larger risk. Within the last week, we have seen signs of continued decoupling between China and the US, with China pushing firms to drop big 4 auditors, stirring rumours of more books being cooked. Propaganda and policy have also stepped up elsewhere to denounce and curb “Western influence”. China’s continued coziness with Russia has been a serious source of unhappiness for the West; these are essentially sanctions busting within the limits of international law but also outside of the Western-led consensus. It is quite possible that we are looking at the precipice of moving from a globalized world of international supply chains focused on economic growth, to one with another iron curtain. Once the credit between the two sides has been broken, changes can arrive exceptionally quickly and recovery will be next to impossible.

In light of this, our analyst will limit exposure to the Chinese market in all its various forms. Given that the crypto market has been somewhat decoupled from China at this point, the overall impact may be limited in the short term. However, the broader impact of how China moves onwards will be difficult to overstate.

Events of note: US home prices, retail and inventories on Tuesday. S&P global manufacturing PMI on Wednesday. EU inflation data on Thursday.

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