Traders brace for Q1's two key market pulse checks

US markets

AI trade shaken as DeepSeek disrupts the narrative—All eyes on nvidia

The S&P 500 closed lower on Monday, with any hopes of a rebound fizzling before they even started. The post-election honeymoon is already wearing off, and fears of weakness in the artificial intelligence trade are hitting hard, sending tech stocks tumbling.

China-based DeepSeek continues to send shockwaves through the AI sector, shaking up the super-bullish thesis that’s driven markets for years and raising concerns that competition is heating up faster than expected. The days of AI stocks riding unchecked euphoria may be fading as investors are now forced to reassess whether valuations match reality.

And then there’s Nvidia—the AI bellwether. With its high-stakes earnings report looming, the company’s influence over the sector has never been more significant. The entire AI ecosystem feels it when a stock of this magnitude starts casting long shadows. Investors aren’t just watching—they’re recalibrating in real time.

With BigBear.ai and other AI-driven firms feeling the tremors, it’s clear that AI optimism is no longer running on hype alone—it’s now tied to cold, hard earnings results. And if Nvidia disappoints, the sector isn’t just looking at a dip—it’s looking at a full-blown reset.

Nvidia's margin for disappointment is almost nonexistent. Analysts have set an exceptionally high bar, and anything less than flawless execution could send shockwaves through the AI trade.

Pulse Check #1: The market isn't just watching whether Nvidia beats expectations—it’s scrutinizing every detail. Revenue, margins, guidance—all of it needs to hold up under sky-high valuations. With competition heating up and China’s DeepSeek already rattling the sector, any sign of slowing growth or margin pressure could trigger a brutal re-rating across AI names.

Tech turbulence meets macro uncertainty—All eyes on PCE

As if the tech wreck wasn’t enough, the macro landscape isn’t offering any relief either. Inflation fears, which had briefly taken a backseat, are back above the fold and dominating market conversations. It may only be Tuesday, but if this is the sentiment across trading desks, then Friday’s January PCE report isn’t just the most important data release of the month—it could be the most critical of the year.

With year-end rate-cut bets hanging by a thread and markets increasingly jittery over inflationary pressures tied to tariffs, the Fed’s next move is riding on this print. If disinflation momentum fades, expect a hawkish repricing that could send shockwaves across risk assets. Conversely, a softer-than-expected number might be the lifeline markets desperately hope for, but will the market run with it?

The market desperately needs a meaningful downside surprise to offset inflationary panic tied to tariffs—if there was ever a time for a disinflationary readout, it’s now. But the real test won’t be the number itself—it’ll be how the market reacts. If PCE surprises to the upside, buckle up. A hot print would ignite a massive hawkish repricing, pushing rate-cut bets further out, sinking stocks, sending yields higher, and putting a fresh bid under the dollar. Risk assets would get smoked.

This is the market’s next big moment of truth. Either inflation cools more decisively, giving the Fed room to breathe, or Powell & Co. will have no choice but to stay tight. And that’s the last thing equity bulls want to hear.

For now, inflation fueled by import tariffs is the dominant macro risk. It’s no secret that the entrenched inflationary environment will keep core PCE well above the Fed’s 2.0% target—likely through the end of next year.

Pulse Check #2: Yes, a softer-than-expected PCE print could spark a short-term relief rally, but the elephant in the room remains: once tariff policies fully roll out in the coming months, inflation estimates are only going one direction—higher.

Markets may want to cheer a disinflationary surprise, but the real test comes when trade war fallout starts filtering through price pressures. Pick your poison carefully.

Asia markets

Markets at a crossroads: Growth jitters, trade war drums, and the flight to safety

Global markets are teetering on a knife’s edge, caught between softer-than-expected U.S. economic data and rising global trade tensions. Geopolitical uncertainty continues to cloud the investment landscape.

Risk assets are feeling the heat. Stocks are wobbling, the dollar is under pressure, and safe havens are back in vogue—especially gold, which continues to attract heavy inflows. Meanwhile, Treasuries are getting a bid as investors reposition in anticipation of what could be a more dramatic shift in the macro landscape.

On Monday, traders cheered Germany’s election results, hoping the new government might pursue pro-growth policies. But that sugar high faded fast, and red screens dominated the region in Asia—thanks mainly to another round of tariff drumbeats from Trump’s trade war camp.

While tariffs remain front and center, another issue is gaining urgency for global markets—U.S. economic deterioration. Just days ago, investors were confident in the soft landing narrative, pricing in a smooth glide path. That certainty is starting to crack.

A steady drumbeat of weaker U.S. data forces traders to reassess their positioning. The question now isn’t just about whether tariffs will pinch global exporters—it’s whether the U.S. economy is in the early stages of rolling over. And if that’s the case, markets may have far more to worry about than just the next round of tariff headlines.

Forex markets

While I’ll investigate this after the Tokyo flows have run their course, I have to say—I’m surprised, but maybe not—that the yen didn’t perform better overnight in a classic risk-off environment.

Price action always tells the real story. In this case, it seems the market is respecting the MOF's pushback and factoring in the possibility that the BOJ could step in with a bond-buying spree if JGB yields continue to rise. That’s likely why the yen didn’t get its usual safe-haven boost despite the broader macro backdrop screaming risk aversion.

It’s only a short-term signal for now, but it was enough to lock in some small profits on short EUR/JPY—though nowhere near what I had positioned for. The bigger question is whether this is a temporary distortion.

The US exceptionalism trade

Is US exceptionalism fading or just taking a breather?

So, what’s happened to U.S. exceptionalism? Is it fading quietly or dying of old age? The answer isn’t complicated—it’s just being re-evaluated.

Tech behemoths—the Magnificent Seven—are now under the most scrutiny as investors question stretched valuations and slowing earnings growth after their peak in 2023. After leading the charge since late 2022, these stocks are now facing real skepticism about how much higher they can go.

At the same time, President Trump has played the role of ‘Negotiator-in-Chief’ more than ‘Tariff Man,’ using tariffs as a bargaining chip rather than a blunt-force weapon. While that’s temporarily reassured markets, traders are still wary that the real economic toll could come in late innings.

The great rotation: Europe and China steal the spotlight

It’s not just about the U.S. cooling off—it’s about where capital is flowing instead.

• European stocks are in full catch-up mode, fueled by optimism over a potential fast-track resolution to the war in Ukraine.
• China is seeing fresh inflows, thanks to the DeepSeek AI rally and Xi’s recent efforts to show ‘love’ to the private sector.

The numbers don’t lie:

• S&P 500 is up a modest 2% this year.
• Stoxx Europe 600 has surged 9%.
• Nasdaq Golden Dragon China Index has ripped 18%.
• Meanwhile, the Magnificent Seven Index is down 1.9%.

How long does this rotation last?

The real debate begins after April 2—Tariff D-Day. That’s when the market will decide whether this rotation is a structural shift or just a temporary repositioning. But let’s be clear—it’s far too early to write off U.S. stocks.

Even though I allocated some leverage positions into the HSI for the first time in four years, that was a trade, not an investment. U.S. equities may be taking a breather, but in this market, betting against American resilience has rarely been a winning long-term strategy.