LONDON, Feb 6 - Financial markets enter a week heavy with catalysts after a string of recent events that have already altered investor positioning. Japan’s snap election delivered a commanding victory for Prime Minister Sanae Takaichi’s coalition at the weekend, while the U.S. economic calendar and corporate earnings will provide a concentrated burst of data and results for market participants to digest.
1. Political mandate in Tokyo and market reaction
Voters in Japan handed Prime Minister Sanae Takaichi a broad mandate, as her coalition achieved a historic win. The result cleared a clearer path for the policy agenda she campaigned on - including tax reductions and stepped-up military spending intended to counterbalance China - and markets responded promptly. Japanese equity indices climbed to record highs on Monday, reflecting investor enthusiasm for the prospect of pro-growth fiscal action.
At the same time, very long-dated Japanese government bonds recovered earlier weakness, suggesting at least some market participants view the election outcome as compatible with the government’s description of its approach as "responsible, proactive" fiscal policy. The yen also held its ground rather than weakening sharply, in part because traders remain mindful of the possibility of currency intervention, which appears to have constrained downside pressure on the currency.
Despite the expansive electoral endorsement, market commentators emphasise a tension that could re-emerge quickly - Ms. Takaichi may have limited headroom to expand deficits without prompting renewed strains on bond markets and the yen. An early and tangible test of how the government balances its fiscal commitments will be the pledge to suspend Japan’s 8% sales tax on food - investors will watch closely for details on how that measure would be funded.
2. AI trade fragments into winners and losers
The AI-driven reallocation of capital across technology sectors is becoming more pronounced. Firms such as Cisco Systems and Germany’s Siemens Energy are set to report earnings mid-week, and the market’s approach to AI exposure is showing increased dispersion. In practical terms, that means investors are differentiating with greater conviction between companies that stand to gain from AI and those that face the greatest disruption.
This sorting is visible in the weakness among software and data analytics stocks, which have fallen as traders focus on the existential threats posed by more powerful AI models. Conversely, companies that enable AI deployment - particularly those involved in the global build-out of data centre capacity - have generally performed better. Market participants should expect this selective pattern to continue, with the caveat that some observers warn of the risk of a broader pullback if concerns about an AI-related bubble intensify while equity valuations sit near record highs.
3. A backlog of U.S. economic data returns
Investors will receive a compressed set of major U.S. macro releases after some reports were delayed by the recent three-day government shutdown. The January non-farm payrolls report is now due on Wednesday and is expected, in a Reuters poll, to show an increase of 70,000 jobs. The Federal Reserve cited signs of stabilising conditions in the labour market when it opted to hold rates steady last month, pausing any easing of policy, and the upcoming payrolls print will be scrutinised for confirmation of that picture.
Two days later, the January consumer price index - a key gauge for inflation trends - is scheduled for publication. Both releases will be evaluated in the context of the nomination of Kevin Warsh as the likely new Fed chair. Market pricing currently points to the June Federal Reserve meeting as the most probable timing for a rate cut, and investors will use the incoming labour and inflation data to reassess the trajectory and timing of policy moves.
4. Munich Security Conference and broader geopolitical questions
The Munich Security Conference begins on Thursday and will sharpen focus on a range of geopolitical flashpoints, from Iran and Ukraine to broader debates about the role of NATO. The gathering also has a monetary policy dimension this year: the European Central Bank is reportedly preparing to widen access to euro liquidity to additional countries as part of efforts to strengthen the single currency’s international standing. ECB chief Christine Lagarde is expected to open a roundtable on trade dependencies at the conference and may make related announcements about the euro liquidity measures.
5. European banks and the sustainability of recent profits
European lenders have been among the strongest performers over the past year, recording more than a 60% gain as profitability has risen, loan defaults have remained low and banks have returned capital to shareholders. In the coming days a number of major banks will publish 2025 earnings, with Britain’s Barclays and NatWest and Italy’s UniCredit on the schedule, following solid reports from some peers such as Deutsche Bank and BNP Paribas.
However, analysts caution that the favourable conditions that supported bank profits may not endure if European economic growth slows. Evidence of increased provisioning appeared when Spain’s BBVA saw its shares fall 7% after reporting a 19% rise in cash set aside for loan losses in the fourth quarter versus a year earlier. Market participants are also attentive to signs that bank executives are willing to deploy excess capital into acquisitions; Santander’s announced $12.2 billion purchase of U.S. lender Webster Financial is the sort of deal that investors will be watching for clues on strategic appetite.
Overall, the coming week blends political, corporate, macroeconomic and geopolitical developments that together will shape near-term market moves. Traders and investors should be prepared for heightened volatility as the information flow forces fresh assessments across equities, bonds, currencies and banking stocks.