Daily Market Outlook - Friday, Feb. 27

In February, Asian and European stock markets took the lead, leaving US indexes trailing behind. The so-called "AI fright trade" rattled Wall Street, driving investors to seek opportunities in regions viewed as more resilient to the risks of technological disruption. The MSCI Asia Pacific Index surged by an impressive 7.1% this month, achieving its best February performance since its creation in 1998. Meanwhile, Europe’s main stock index climbed 3.6%, marking its eighth straight month of gains – a winning streak not seen in nearly 13 years. In stark contrast, US markets faltered, with Wall Street indices posting losses and futures pointing to further declines. South Korea emerged as a standout performer in Asia, with its Kospi Index soaring nearly 20% in February alone. As a bellwether for investments in artificial intelligence technologies, the Kospi has also claimed the title of the world’s top-performing index this year, boasting an extraordinary 49% rise year-to-date. In the bond market, US Treasury yields edged lower, with the 10-year yield dipping by 1 basis point to 3.99%, its lowest level since late November. Commodities also drew attention. Oil prices steadied after the US and Iran agreed to resume nuclear talks next week following discussions on Thursday. However, heightened tensions due to a significant deployment of US military forces in the Middle East kept traders on edge. Gold continued its dazzling run, poised to close out its longest streak of monthly gains since 1973. February’s 6% rise marked the precious metal’s eighth consecutive month of growth, cementing its status as a safe haven for investors.

The GBP shows signs of modest weakness following the Greens' victory in the Gorton and Denton by-election, overturning a 13.4k Labour majority. This result placed Labour in third behind Reform, with the Greens securing a 4.4k majority. While FX movements remain limited, the outcome suggests market attention to potential political implications, particularly the pressure on Starmer to shift leftward in response to the Greens' growing momentum. Speculation persists that Labour leadership issues may be addressed more directly after the May local elections. Today, both GBP and gilts could face vulnerability due to headline risks, depending on MPs' reactions to the election results. In other UK developments, the February GfK consumer confidence index declined to -19 from -16, with survey participants expressing notably weaker expectations for the general economic situation over the next year. Additionally, the Lloyds Business Barometer for February remained steady at a net positive balance of 44%, though the employment outlook softened, with the net balance of firms intending to hire over the next year dropping by 6 percentage points to 35% from January.

Eurozone money supply grew to 3.3% y/y in January from 2.8% in December, driven by M1 overnight deposits. Household loan growth remained steady at 3.0% y/y, while non-financial corporate lending eased to 2.8% from 3.0%, mainly due to a debt contraction in Germany, offset by stronger momentum in smaller economies like Spain. New lending flows showed robust double-digit growth into year-end, supported by lower interest rates, looser fiscal policies, and easing trade pressures. Headline credit formation is expected to accelerate in the coming months.