– Ivan Gundulic, Osman
“Fortune’s wheel goes ever round, true in its eternal course; the mighty fall from lofty ground, the lowly rise by unseen force”
February was a month of rotation. For some, the Winter Olympics reliably rekindles a brief fascination with curling, and its giant slabs of granite rotating over the ice, before the sport is forgotten again for another four years. Others were more occupied with market rotation away from tech into the unloved corners of the “old economy.” That theme dominated headlines until the final weekend, when joint US-Israeli strikes on Iran seized attention in a more urgent way. In Ukraine, on the 4th anniversary of the invasion, peace efforts continued to flounder. US economic data was decidedly mixed, and the Supreme Court struck down baseline IEEPA tariffs to a muted market reaction. Outside the US, markets performed remarkably well as investors continued diversifying.
“Outside the US, markets performed remarkably well as investors continued diversifying.”
The MSCI AC World Index ended the month largely flat, which conceals a large dispersion of outcomes beneath the surface. The US market was the centre of a violent rotation from tech into energy, materials, industrials, and staples. The starting gun was the release of new Claude plug-ins from Anthropic on January 30th which could reliably automate tasks performed by many SaaS-oriented companies. A sharp selloff followed, starting in legal and data information providers and enterprise SaaS before spreading to advertising, publishing, software, and publicly listed private asset managers.
A final push came in the last week of the month, when the independent research blogger Citrini published a speculative scenario in which AI leads to widespread white-collar job losses. At Bedrock, we will not wade into the macro debate on AI-promised prosperity and doom; we will simply note that it is concerning when an unsubstantiated piece of market fiction can move markets.
The S&P 500 closed the month down just over 1%. The software subcomponent fell 8%, and consumer discretionary finished at -6%. On the other side, energy led the “old economy” recovery at +10%, followed by materials at +7.5%, with industrials and staples each delivering around 6%.
Interestingly, macro data releases barely registered. Inflation came in below expectations, though the validity of data following the missed October print remains questioned. Growth slowed sharply to 1.4% annualised from 4.4%, reflecting reduced government spending and the pass-through of a net exports shock. The monthly jobs report came in better than expected, with unemployment falling to 4.3%, though annual revisions to prior-year data were negative. The Supreme Court struck down President Trump’s baseline 15% tariffs under IEEPA Economic Emergency legislation in a move the market had largely anticipated; the tariffs were immediately reinstated under a different legal precedent. None of it materially moved markets.
“The US market was the centre of a violent rotation from tech into energy, materials, industrials, and staples.”
Outside the US, markets did markedly better. The Euro Stoxx 600 continued to rally, gaining around 2.5% over the month as the continent enjoyed a brief period where no news was good news. In Japan, stocks were boosted by PM Takaichi’s decisive victory in the snap general election, with her promises of fiscal expansion and further corporate reforms driving the MSCI Japan up just over 10%.
Emerging markets also performed well, with the index up 8%, led by semiconductor-exposed markets: Korea and Taiwan delivered 29% and 13% respectively. Meanwhile, China (-3%) and India (+1%), the two largest index constituents, underperformed. The broader macro outlook remains supportive for EMs. A weaker dollar, easier monetary policy across developed markets, a building commodity cycle, and deepening integration into semiconductor supply chains set the stage for continued EM strength.
“The broader macro outlook remains supportive for EMs.”
While equity markets were turbulent, bonds enjoyed their moment in the sun. The US 10-year rallied, with yields falling below 4% for the first time since October last year. Longer-end yields followed, with the 30-year rallying by around 30bps from 4.9% to 4.6%. The move was mirrored across developed market rates. Doubts about the traditional safe-haven status of sovereign duration have become a common talking point in recent years, but February’s moves suggest investors still turn to government bonds instinctively during periods of market stress.
While UK, and to a lesser extent, European rates often move in lockstep with the US, what surprised was a move in JGBs. Despite the new government’s promises of fiscal expansion, yields on the 10-year Japanese government bond rallied by over 10bps, and 30-year by 30 bps following the election. The likely explanation is that a larger majority translated into greater political stability, which the bond market rewarded.
Concerns in credit are largely confined to private credit. The big story of the month was Blue Owl Capital’s retail-offered fund facing redemption requests it cannot honour in the short term, given the illiquid nature of its underlying investments. Broader concerns about the sector centre on its concentration of lending to software companies now threatened by AI and questions about underwriting quality. We do not see immediate spillover risk from these funds, though we will note that selling illiquid investments to trigger-happy retail investors without deposit insurance backing was never obviously a great idea. The financial system, whether through private credit or crypto, has a remarkable habit of trying to reinvent banking only to rediscover the same problems: maturity transformation requires confidence in the system from all parties involved.
In public markets, investment-grade credit spreads widened from 74 to 84 bps on concerns about the tech selloff’s impact on high-quality US tech issuers. High yield largely followed, ending the month some 30 bps wider at 327 bps.
“The financial system, whether through private credit or crypto, has a remarkable habit of trying to reinvent banking only to rediscover the same problems: maturity transformation requires confidence in the system from all parties involved.”
Beyond markets, attention was dominated by escalating tensions in the Middle East, culminating in joint Israeli-US strikes on Iran. After months of diplomatic pressure, the US opted for a more aggressive approach. The only thing we know with certainty so far is that senior Iranian leadership has been killed during the initial strike.
However, The Islamic Republic’s command and control remains intact, and it continues to launch retaliatory waves against US assets in the region. The key unknown is Washington’s strategic objective: full regime change, or a severely weakened Iran accepting punitive peace terms. We suspect the goal will shift with the fortunes of further engagements. If one thing has been consistent over the past year, it is President Trump’s fickle nature.
The month also saw the fourth anniversary of the Russian invasion of Ukraine come and go without a peace deal in place. Earlier optimism has faded as it becomes clear the two sides remain too far apart. There is, however, some room for cautious optimism: President Zelenskyy has committed to holding elections once a deal is signed, and the US and EU have intensified efforts to curtail Russia’s shadow tanker fleet and pressure its oil exports.
Commodities have responded. The US WTI crude benchmark has climbed to nearly $67 per barrel, and the global seaborne Brent to $72/bbl. As we write this, these prices have increased by a further 10%. While natural gas prices slowly fell during the month, the proceedings over the weekend have sent them soaring in early Monday trading, particularly in Europe. If Iranian attacks on regional energy infrastructure continue, we could see stronger market spillovers and a more sustained move higher in energy prices. Precious metals were volatile but ended the month positively, with gold above $5,000/oz and silver above $90/oz. The dollar fell early in the month before recovering to end flat.
“If Iranian attacks on regional energy infrastructure continue, we could see stronger market spill overs and a more sustained move higher in energy prices.”
In our view, while market rotations are a normal feature of investment cycles, the underlying fundamentals remain in place as the US economy continues to demonstrate resilience to shocks. While market rotations are a normal feature of investment cycles, these do not, in themselves, alter our broader reading of current conditions. Against this backdrop, diversification across different investment styles and regions remains a topic of ongoing market discussion.
From our perspective, recent developments also highlight that reliance on any single market is increasingly subject to debate. Global markets appear to present a wider range of potential opportunities than has been the case over much of the past decade, although outcomes will vary materially depending on individual circumstances.
More broadly, while traditional defensive assets continue to play a role in portfolio construction discussions, interest in alternative and less correlated asset classes has grown as part of wider market dialogue.1
“While traditional defensive assets continue to play a role in portfolio construction discussions, interest in alternative and less correlated asset classes has grown as part of wider market dialogue.1“
1 This commentary reflects general opinions and market observations only. It does not constitute investment advice, a recommendation, or an offer or solicitation to buy or sell any financial instrument. Any investment decisions should be made based on individual circumstances and, where appropriate, independent professional advice.
If you have any questions about the themes discussed in this article, please do not hesitate to get in contact with us: info@bedrockgroup.com
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