US market rebound and rotation trends
United States (US) equity markets rebounded strongly on Friday, capping a highly volatile week that saw significant risk reduction across various asset classes, including precious metals, cryptocurrency, and tech stocks.
Despite the turbulence, the week’s defining trend – rotation from tech into cyclical stocks, initially sparked by a stronger-than-expected US manufacturing purchasing managers’ index (PMI) – accelerated into the weekend.
This was best illustrated by the Dow Jones, which surged 1223 points (2.50%) for the week to close at a new record above 50,000. Conversely, the Nasdaq 100 fell around 1.87%, weighed down by concerns over valuations, artificial intelligence (AI) disruption, and capital expenditure commitments.
For those expecting this rotation to continue, a short Nasdaq/long Dow Jones pairs trade is a clean way to express this view. To account for the Nasdaq’s significantly higher volatility, position sizing should be adjusted rather than traded dollar-for-dollar. This strategy, also known as a relative value or rotation trade, effectively captures the performance spread while normalising volatility.
Japan’s political impact and broader market effects
Risk sentiment has been further boosted at the start of the new week after Japanese Prime Minister Sanae Takaichi’s Liberal Democratic Party-led coalition secured a decisive two-thirds supermajority in Sunday’s snap election.
This landslide grants Takaichi a clear mandate for aggressive fiscal stimulus, including tax cuts, increased spending, and targeted investments in defence, AI, semiconductors, and growth – bullish for Japanese equities, bearish for the yen and Japanese government bonds (JGBs). This optimism has spilled over to broader Asian stock markets, supporting exporters and cyclicals.
Economic and earnings outlook
Looking ahead, the US fourth-quarter (Q4) earnings season dials back in intensity with reports from Spotify, Robinhood, Lyft, McDonald’s, Cisco, Airbnb, Rivian, Twilio, and Coinbase. On the economic front, the key domestic event is the January non-farm payrolls report, previewed below.
Non-farm payrolls
Date: Saturday, 12 February at 12.30am AEDT
For December, the US economy added just 50,000 jobs, falling short of expectations for a gain of around 60,000 and below November’s downwardly revised figure of 56,000.
Despite the weak headline number, the unemployment rate edged lower to 4.4%, down from a revised 4.5% in November, which had been the highest level since October 2021.
At the January Federal Open Market Committee (FOMC) press conference, Federal Reserve (Fed) Chair Jerome Powell highlighted these mixed signals, noting: ‘Job gains have remained low, and the unemployment rate has shown some signs of stabilisation.’
The January non-farm payrolls report, covering the first full post-holiday month, is expected to show the US economy added 70,000 jobs. The unemployment rate is expected to remain steady at 4.4%.
The US interest rate market starts the week pricing in roughly 58 basis points (bp) of Fed cuts for 2026, with the first 25 bp move expected in July and a second in December.