Markets spent the first week of February grappling with an unusually dense set of cross-currents, an Australian rate hike, a crisis of confidence in big-tech capital spending, volatile commodity prices, and a US data picture clouded by the partial government shutdown. But beneath the headline volatility, the more interesting story may be what's happening under the surface: a rotation trade gaining momentum, unstable correlations, and a growing divergence between Australian and global monetary policy that is robbing Aussie diversified portfolios of their traditional currency cushion.

RBA delivers, flags more to come

The Reserve Bank of Australia unanimously raised the cash rate 25 basis points to 3.85% on Tuesday. The real action was in the Statement on Monetary Policy, which pushed the RBA's forecast for trimmed mean inflation returning to the 2.5% midpoint out to mid-2028. Governor Bullock framed the move as a "recalibration" rather than the start of a tightening cycle, but the tone was unmistakably hawkish. OIS markets quickly priced a cumulative 20 basis points of further tightening by May.

Australia is now marching to a distinctly different tune. With the ECB and Bank of England on hold — the BoE surprising with a dovish 5–4 vote split — and the US potentially headed for cuts, the policy divergence is stark. The Australian dollar surged above 70 US cents, up over 5% year-to-date, and therein lies the problem for Australian investors: the rising currency is stripping away the natural cushion that overseas holdings normally provide during turbulent markets. A typical 70/30 diversified portfolio that was up almost 2% in the first few weeks of the year is now roughly flat.

Earnings season and the AI capex reckoning

This was the busiest week of Q4 2025 reporting season, with roughly 128 S&P 500 companies reporting. The dominant theme was a widening gap between companies delivering tangible AI returns and those asking investors to fund enormous capex for distant payoffs.

Alphabet beat on revenue (+18% YoY) and EPS (+31%), with Google Cloud growing 48%, but its 2026 capex guidance of US$175–185 billion sent shares lower. Amazon fell roughly 10% after hours on a US$200 billion capex plan and soft Q1 profit guidance — the only Mag-7 EPS miss of the season. AMD reported record revenue up 34% on surging AI demand but was volatile and ended up only slightly up while Palantir crushed expectations with 70% revenue growth and is still down 20% this year. Qualcomm also delivered but sold off on memory chip shortage concerns.

Beyond tech, Eli Lilly stood out with revenue up 43% on Mounjaro and Zepbound demand. Disney posted record theme park revenue and streaming profits up 72%. PepsiCo beat modestly, Pfizer fell despite an EPS beat, Uber's revenue growth was offset by soft profit guidance, and ConocoPhillips reflected the tougher energy backdrop.

That meant the Nasdaq fell over 5% before a sharp Friday rebound saw the Dow close above 50,000 for the first time. The equal-weighted S&P 500 on the other hand continues to outperform the cap-weighted index, pointing to a rotation that may echo the early 2000s, money flowing out of expensive tech names and into value and smaller companies. International value managers are up 6–7% while many growth managers are down 10-15% this year. Interestingly, the rotational and quality-oriented strategies that suffered most last year haven't benefited as expected, with materials and energy exposure, sectors many managers have been underweight, among this year's best performers.

Correlations breaking down

One observation worth flagging: our cluster analysis of the ASX 200 has shown CBA increasingly correlated with technology stocks over the past six to nine months. But last week that supposed correlation completely blew apart,  tech fell another 10% in some cases while CBA bounced 6%. Correlations across the market are proving highly unstable, making traditional risk management models unreliable but also creating opportunities as stocks are repriced indiscriminately in the wash.

Oil, gold and geopolitics

Commodity markets swung on shifting Iran–US dynamics. Brent fell as low as $67.40 on diplomatic optimism before bouncing on reports of an Iranian drone approaching a US aircraft carrier and gunboats in the Strait of Hormuz. Gold saw an extraordinary 18% intraday swing on leveraged unwinds before finishing Friday up 3.9%, approaching $5,000 again.

US data: soft jobs, strong activity

US data was mixed. ISM manufacturing jumped to 52.6, but JOLTS job openings fell sharply to 6.5 million and ADP payrolls printed just 22,000. With non-farm payrolls delayed until Wednesday due to the shutdown, markets pulled forward Fed rate cut pricing to a full 25 basis points by June.

The week ahead promises resolution: US payrolls, CPI, and retail sales all land in the same week for the first time on record and with correlations this unstable, the outcomes could matter more than usual.