The last full trading week of the quarter began on a positive note across most major stock markets, with investors buoyed by reports about the Trump administration's upcoming tariff measures set to start on April 2.
A solid performance from the markets reinforced the upbeat sentiment on Wall Street, as investors began buying back shares they had aggressively sold off recently, particularly in Big Tech. Benchmark Asian, U.S., and global equity indices all experienced significant gains, while bond yields increased. In contrast, 'safe-haven' assets faced their longest losing streak since November.
All ten sectors of the S&P 500 advanced, with consumer cyclicals leading the way, surging 4% on hopes that a more targeted tariff approach would limit price increases for goods. This marked the sector's largest rise since November 2022. Among the biggest individual gainers on Wall Street were tech stocks, highlighted by a remarkable 12% jump in Tesla shares.
Despite a calmer sentiment about trade tensions, optimism on the interest rate front appeared subdued. Analysts noted that expectations for central bank rate cuts had shifted; one prominent economist suggested there would only be one quarter-point reduction this year, as inflation is projected to decrease more slowly than desired.
In Asia, new details emerged regarding Beijing's latest economic strategies. Vice Premier He Lifeng engaged with executives from Apple, Pfizer, Mastercard, Cargill, and others over the weekend. The efficacy of fiscal and monetary measures announced by Beijing since September has bolstered China's markets, which look poised to end the quarter on a strong note.
As the first quarter concludes, financial markets find themselves at a critical juncture. There's a potential decrease in foreign demand for U.S. assets, reflected in January's net sales of U.S. equities by foreign central banks, which hit $28 billion, and total net sales of U.S. assets by the private sector reaching $74.8 billion. This marks a record pace for U.S. equity selling by the official sector in a single month and the largest monthly outflow of U.S. assets by private sector investors in a year.
This sharp reversal in capital flows helps explain the notable underperformance of U.S. stocks compared to their global counterparts, with the gap widening to nearly 15 percentage points recently. However, one month does not establish a long-term trend, and it could require many months of similar outflows for this shift in sentiment to become entrenched.
TIC data indicates that private sector capital inflows into U.S. stocks and bonds totaled $980 billion last year, preceded by inflows of $668 billion and $1.6 trillion in 2021 and 2022, respectively. In total, private sector investors have injected $3.25 trillion into U.S. assets over the last three years, leading to foreign ownership of 18% of U.S. stocks— a record high since 1945.
While the pace of net inflows had been substantial, ongoing shifts in investment sentiment could alter this landscape. Goldman Sachs' chief U.S. equity strategist anticipates that foreign investors will remain active buyers of U.S. equities this year, drawn by a weaker dollar, attractive valuations amidst recent corrections, and favorable liquidity in U.S. markets.
Standard Chartered's head of G10 FX strategy adds that U.S. assets will continue to attract foreign interest as long as the country retains its innovation-friendly tax system, flexible financial environment, commitment to property rights, and manageable regulatory burdens. He argues that market corrections would not diminish this long-term appeal.
It's worth noting that TIC flow reports lag behind timely market changes, which means January's outflows may not reflect the recent shifts in market dynamics. There have been several reasons for the recent retreat from U.S. assets, including high valuations, market concentration, the rise of new technologies such as China's DeepSeek AI model, Germany's significant fiscal changes, and uncertainty surrounding U.S. trade policies.
The nature of this recent shift in investment flows—whether it’s a temporary phenomenon or a significant change in global investment strategies—remains unclear. The coming months will be crucial in determining the trajectory of these trends.