19.02.26 - Divided Fed - rebound stalled

Yesterday’s publication of the minutes showed, the Federal Reserve is far from united on the policy path ahead. While most officials agreed to keep rates unchanged at the January meeting, opinions diverge on what comes next. Some members emphasized the need to support the labor market, while others stressed that rates may need to stay higher for longer, or even rise further, if inflation fails to cool.

Markets are currently pricing a 94% probability that the Fed holds rates steady at the next meeting, with roughly a 50% chance of a first rate cut in June (CME FedWatch).

Markets: rebound lost quickly momentum
Equities: broadly lower, rebound stalled
Bonds: little changed - US 10y ~4.10%
Currencies: USD firmer
Commodities: metals sideways - oil supported by Iran-related risks
Cryptos: weak; Bitcoin back to USD 66k
Volatility: VIX continues to trend higher

My View: As highlighted in my comments yesterday, the recent rebound looks fragile and likely short-lived. There is little prospect of fresh liquidity support from the Fed before summer at the earliest. On the contrary, ongoing balance sheet reduction continues to drain liquidity from the system, which has been a big driver for cryptos. This could be an overall headwind for risk assets.

The macro backdrop remains unusually uncertain. Labor market dynamics and inflation trends are difficult to forecast, while political and legal risks around tariffs remain unresolved. Although some estimates suggest that up to 90% of tariffs are passed on to consumers, recent inflation prints do not yet fully reflect this — adding to the uncertainty around the true inflationary impact.

ETFMandate positioning remains rather defensive:

• Elevated cash levels, waiting for more attractive entry points in equities

• Precious metals favored as safe-haven assets

• Swiss franc expected to remain supported in risk-off phases (EUR and USD fully hedged)

• No bond allocation given the lack of a clear trend and headline-driven yield swings

With liquidity tightening, policy uncertainty rising and volatility creeping higher, downside risks still dominate. Patience remains key. Tactical rebounds may occur, but the broader risk-reward for equities remains unattractive at current levels. The reason I do not add fresh money to increase current equity exposure.

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