Markets head into a crowded week with several potential market-moving events lined up. A surprise election in Japan, a heavy slate of U.S. economic releases postponed by a recent government shutdown, an earnings cycle that highlights disparate outcomes from AI-related activity, a major diplomatic forum in Munich and a busy roll of European bank results together promise little respite for traders.
1 - Japan’s snap election and policy latitude
Japan will hold a lower house election on Sunday as Prime Minister Sanae Takaichi seeks a clearer mandate to deliver on promises of higher spending. The country, with a population of over 120 million people, faces one of the most unpredictable contests in years, though opinion polls suggest Takaichi’s Liberal Democratic Party could win a majority.
A decisive outcome for the LDP would increase the prime minister’s ability to expand stimulus. That prospect is being watched by fixed income investors who worry about Japan’s fiscal position and the potential for higher government bond yields. A selloff in Japanese government bonds could spill over into global markets.
Currency markets have already reacted: the yen has been sold recently. That depreciation prompted suspected rate checks from Japan and the U.S. to stem its decline - a move that, if confirmed, would be an unusual example of coordinated action.
2 - AI-driven dispersion in equity performance
Earnings from large industrials and technology firms, including Cisco Systems and Germany’s Siemens Energy on Wednesday, arrive against the backdrop of a market sorting out which businesses benefit from the AI wave. Barclays characterises the trade as displaying "extreme dispersion" - meaning investors are differentiating winners from losers more sharply than before.
The divergence is visible within software and data analytics stocks, which have plunged as market participants reassess their vulnerability to increasingly powerful AI models. At the same time, companies that enable AI infrastructure and those helping build out global data centre capacity have been more resilient.
Investors are balancing two concerns: clear winners among AI-related firms and the risk that a speculative excess in parts of the market could unwind, especially given that equities sit near record highs.
3 - Back-to-back U.S. data after a delayed release schedule
A three-day government shutdown pushed the timing of key U.S. macro releases, concentrating important information this week. The January non-farm payrolls report, rescheduled for Wednesday, is expected to show an increase of 70,000 jobs, according to a Reuters poll. The Federal Reserve said it saw signs of stabilisation in the labour market when it left policy unchanged last month, pausing an easing cycle.
Two days after the payrolls report, the January consumer price index - closely followed for inflation trends - will be released. These readings will give investors a critical view of underlying economic momentum as market participants assess the outlook for interest rates.
Another variable is the political transition at the U.S. central bank: newly nominated Fed chair Kevin Warsh could be in place in time for the Fed’s June meeting. Markets currently expect that meeting as the likely timing for a rate cut.
4 - Munich Security Conference widens its economic remit
The Munich Security Conference begins on Thursday and will address a range of geopolitical flashpoints, from Iran to Ukraine and questions about NATO’s future role. The gathering has in past years had far-reaching consequences; the 2025 meeting was noted as particularly consequential and contentious.
This year, the conference appears set to include overt economic policy discussions. The European Central Bank is working on widening access to euro liquidity to additional countries as part of efforts to strengthen the single currency’s international role. Sources indicate an announcement on this front will likely come from ECB chief Christine Lagarde, who will lead a roundtable on trade dependencies at the conference.
5 - European banks: rapid gains under scrutiny
European banking stocks have been among the best performers over the past 12 months, posting gains of more than 60 percent. That rally has been supported by rising profitability, low loan defaults and substantial returns of capital to shareholders. Several large banks are reporting 2025 earnings in the coming days, including Britain’s Barclays and NatWest and Italy’s UniCredit, following solid results from Deutsche Bank and BNP Paribas.
Some lenders have raised profitability targets, with the French lender and Lloyds among those signaling stronger ambitions. Yet analysts caution the strong run may not be sustainable if economic growth in the region weakens.
Concrete signs of potential strain appeared when Spain’s BBVA slid 7 percent after reporting it set aside 19 percent more cash for loan losses in the fourth quarter than a year earlier. Investors will also be looking for indications of managements’ appetite to deploy excess capital through mergers and acquisitions - exemplified by Santander’s recently announced acquisition of U.S. lender Webster Financial for $12.2 billion.
What to watch this week
- Japan’s lower house election outcome and any policy signals from Prime Minister Sanae Takaichi.
- Corporate earnings that illuminate which firms are benefiting from or threatened by AI-related dynamics, including Cisco Systems and Siemens Energy.
- U.S. January non-farm payrolls and consumer price index prints that will influence rate expectations ahead of potential Federal Reserve action.
- Announcements at the Munich Security Conference, including any ECB communication on euro liquidity access.
- European bank earnings and balance sheet developments, including provisioning and capital deployment plans.
With multiple high-stakes items clustered into a single week, market participants should prepare for heightened volatility and rapid information-driven moves across currencies, fixed income and equity markets.