This raises the question of whether investors are becoming too complacent. A closer examination of various indicators of actual investor behavior suggests that the positive sentiment has only partially translated into more aggressive positioning. While overall equity allocations have increased and are higher than in the fall, there is little evidence of excessive risk-taking. According to the weekly analysis of Deutsche Bankdiscretionary investors—those who operate at their own discretion—still have a overweight moderate in equities, while rules-based and quantitative strategies are more invested. At the same time, the put-call ratio, an indicator of portfolio hedging demand, does not point to pronounced complacency. Furthermore, the first weeks of January saw strong inflows into a wide range of equity funds, a typical pattern at the start of a new year. Together, these factors suggest that markets are well supported, rather than tipping into overbought territory.
In this apparently calm context, a test of political resistance arose in mid-January: Trump’s threat to impose punitive tariffs on countries that declared their support for Greenland caused a brief period of uncertainty. Still, investors largely remained calm, with major indices down no more than 2-3%, indicating that markets did not view an escalation of the tariff war as a particularly likely outcome.
Although relief was evident after the US president backed down, US confidence has been shaken in some segments of the market. The US dollar has not yet recovered all its losses, while gold, the traditional safe-haven asset, continues to reach new heights. Overall, the market direction appears to be driven primarily by what could be described as “almost relaxed bulls.”
next week
Capital markets will focus on two main themes next week: the situation of the American labor market and policy positions
monetary policy of the main European central banks. In the United States, the Job Openings and Labor Turnover Survey (JOLTS) and the ADP National Employment Report will provide a first glimpse of labor market dynamics. These will be followed on Friday by the official nonfarm payrolls report, the most important data release of the week. The picture will be completed by a short-term indicator: Thursday’s weekly initial jobless claims.
In addition, they will be published purchasing managers indices from several countries, which will provide greater clarity on underlying economic sentiment at the beginning of the year. Sentiment data released so far, particularly from Asia and Australia, has been encouraging. For European countries, there may be some revisions to the preliminary figures once the Greenland episode has faded from the news.
In the euro zone, attention is likely to focus on preliminary CPI data on Wednesday. It would not be surprising if the figures were below the 2% target of those responsible for monetary policy. In this context, attention will then focus on Thursday’s meeting of the European Central Bank (ECB)which is expected to be dominated less by the interest rate decision itself than by the Bank’s assessment of medium-term inflation risks and the long-term outlook for monetary policy. At the same time, the Bank of England will announce its own monetary policy decision in a context of moderate growth and continued wage pressures.
Whenever the fundamental trends Don’t disappoint the optimists, the evident gap between sentiment and actual positioning could offer further support to the markets. In any case, it is at least conceivable that more cautious investors will be forced to increase their investment exposure as prices advance, in order to avoid falling too far behind.
That said, the market vulnerability to corrections is increasing, if only because optimism and exposure are greater than just a few weeks ago. Still, there is little sign of unbridled euphoria and the latest political stress test has shown that markets remain resilient enough to absorb setbacks. In a context of high expectations and persistent geopolitical uncertainty, investors are best advised to maintain a disciplined and diversified approach.