Looking back at February: volatility returns, but the foundations still matter

Introduction

February delivered a sharp reminder that markets can reprice quickly when inflation is sticky, policy expectations shift, and geopolitics hits energy markets. Australia’s labour market remained tight and U.S. consumer sentiment improved, while Eurozone manufacturing finally moved back above 50. Offsetting that, the RBA lifted rates to 3.85%, Australian inflation held at 3.8% y/y, and U.S. growth slowed into year-end. Our base case remains constructive, but we expect a more policy- and headline-sensitive path than the decade before the pandemic.

What moved the dial

Supportive signals

• Australia employment held firm: unemployment stayed at 4.1% in January, consistent with a labour market operating close to capacity.
• U.S. labour resilience: January nonfarm payrolls rose 130k, supporting the view that labour conditions remain broadly steady.
• U.S. household sentiment improved: University of Michigan preliminary sentiment lifted to 57.3 in February, the highest in six months.
• Eurozone manufacturing re-entered expansion: HCOB manufacturing PMI rose above 50, with new orders and output improving.
• UK disinflation continued: headline CPI printed 3.0% annualised, down from 3.4% in December 2025.
• Japan political clarity: a snap election outcome lifted Japanese equities as markets priced a stable government and more expansionary fiscal settings.

Watch-outs

• Iran shock raised energy risk: a pre-emptive strike lifted volatility, with the key transmission channel via shipping through the Strait of Hormuz (around 20% of global seaborne oil supplies).
• RBA tightened again: the cash rate was raised to 3.85% and markets interpreted the messaging as a more hawkish pivot.
• Australian inflation stayed above target: headline inflation held at 3.8% y/y in January, keeping pressure on rate-sensitive assets.
• U.S. growth cooled: Q4 2025 GDP slowed to around 1.4% annualised.
• Trade policy uncertainty rose: the Supreme Court limited broad tariff authority, with the administration signalling alternative trade actions.
• Sticky U.S. inflation persisted: core PCE for December was 3.0% and PPI rose 0.8%, well ahead of expectations.
• China services weakened: January non-manufacturing PMI fell to 49.4 (from 50.2), a 37-month low.

Volatility from geopolitical shocks can fade quickly. The bigger risk is an oil price spike that lasts and changes the inflation and policy path.

Macro overview

February’s message sits in the interaction between inflation, policy reaction, and liquidity.

In Australia, a tight labour market alongside inflation holding above the 2–3% target has kept policy restrictive. The move to 3.85% matters because it can reprice the front end of the curve quickly, lift discount rates, and increase the hurdle for earnings-multiple expansion in rate-sensitive parts of the market.

In the U.S., the dataflow continues to split. Improving household sentiment and a steady labour backdrop sit alongside slower growth and persistent inflation pressures. That mix tends to create fast shifts between “growth slowdown” and “inflation constraint” narratives, which is where dispersion rises across assets and sectors.

Europe delivered a constructive signal through manufacturing momentum, while UK disinflation supported the idea that easing can resume over time. China remains more uncertain: services slipping back into contraction highlights the difficulty of sustaining domestic demand. Add geopolitics through the energy channel and it is not surprising that market confidence remained fragile during the month.

Asset class outlooks

Equities: Our base case still rests on earnings resilience, fiscal support, and the lagged benefits of rate cuts delivered last year. That combination can support risk assets over the medium term. The trade-off is the path: high confidence and heavy risk positioning can turn modest surprises into sharp moves, and February’s headlines reinforced that dynamic.

Energy is the key watch-item in the near term. If oil volatility is brief, markets usually stabilise. If oil reprices materially and stays elevated, inflation expectations can lift, central banks can become less flexible, and equity leadership can narrow quickly.

Fixed income: Rates are being pulled between slower growth and sticky inflation. Softer growth can support bonds, but persistent inflation and hawkish policy pricing can keep yields elevated and volatility higher than investors would like. Liquidity is also central: large amounts of new and refinanced debt through 2026 mean the system’s capacity to absorb issuance without disruption will materially influence outcomes in rates and credit.

Alternatives and real assets: The Iran shock is a reminder that energy is not only a macro variable; it is a portfolio risk factor via inflation and policy reaction. In a world where inflation outside China remains structurally higher than the pre-pandemic decade, real assets continue to have a role as stabilisers, particularly when volatility is being driven by supply-side shocks.

FX: AUD pricing continues to be shaped by Australia’s inflation and rates outlook. A firmer policy stance can support the currency, but it also tightens financial conditions at the margin and can weigh on domestic risk assets. In global FX, policy divergence remains the dominant driver when inflation surprises persist.

Positioning considerations

This is not an environment to treat “constructive” as synonymous with “low volatility”. A more useful frame is constructive medium-term returns with a higher probability of sharp pullbacks and significant dispersion.

Three practical implications follow:

• treat geopolitical shocks through the inflation and policy channel first (energy is the transmission mechanism);
• keep liquidity as a first-order variable given the refinancing task ahead;
• stay growth-oriented in the base case, but use weakness selectively rather than assuming a straight line.

Scenarios and probabilities

Scenario probabilities reflect our current assessment and are reviewed as new data emerges.

Base case — 76%

Despite February’s volatility, the foundations remain supportive: global profits are solid, governments continue to spend, and financial conditions remain relatively loose. Markets are still prone to sharp swings, with triggers including tariffs, inflation surprises, tighter-than-expected central bank policy, geopolitics, and stress in bond markets. Inflation outside China is expected to remain structurally higher than the decade before the pandemic, with an uneven path across regions in 2026. Liquidity remains a critical pillar given the amount of new and refinanced debt expected through 2026. Structural growth themes—AI investment, manufacturing reshoring, and energy infrastructure—should support equities over time.

Bear case — 11%

The downside centres on a sharper slowdown in consumer spending, led by the U.S., with limited improvement elsewhere. Higher inflation or weaker liquidity support would pressure both margins and valuation multiples at a time when valuations remain elevated. Financial stability risk is a core channel: tighter lending standards, higher yields driven by fiscal concerns, and slower liquidity growth can tighten conditions quickly. A sustained oil price spike—defined as an increase of roughly 50–100% from recent lows, particularly in the context of conflict involving Iran—would materially lift inflation risk and create a stagflationary mix that is historically challenging for both equities and fixed income. China’s property weakness remains a structural headwind, with direct implications for Australia via resource demand. In this environment, a more defensive stance is warranted, including higher cash, reduced equity exposure, and a tilt toward more resilient sectors.

Bull case — 13%

A stronger outcome would see policy uncertainty fade, supply chain pressures continue to ease, labour markets remain resilient, and productivity improve. Faster adoption of advanced technologies—particularly AI—supports profitability without the employment destruction many fear. Fiscal settings remain supportive, and central banks keep real rates contained while liquidity expands, reinforcing a renewed upswing in risk assets. For Australian-domiciled investors, this scenario supports a growth-oriented portfolio with relatively low cash and increasing exposure to cyclical sectors as activity indicators improve.

Closing perspective

February didn’t invalidate the constructive base case, but it did underline how quickly the market can switch regimes when inflation is sticky and headlines hit energy. The path into 2026 is likely to remain policy- and liquidity-sensitive. In that setting, the best outcomes come from staying constructive with discipline: remain selective, keep enough liquidity to act, and treat pullbacks as opportunities rather than surprises.

This publication is prepared by Akambo Pty Ltd (ABN 16 123 078 900) AFSL 322056.

The information presented in this publication is general information only, and is not intended to be financial product advice. It has not been prepared taking into account your investment objectives, financial situation or needs, and should not be used as the basis for making an investment decision. Before making any investment decision you need to consider (with your financial adviser) your particular investment needs, objectives and financial circumstances.

Some numerical figures in this publication have been subject to rounding adjustments. Akambo Pty Ltd (including any of its directors, officers or employees) will not accept liability for any loss or damage as a result of any reliance on this information. The market commentary reflect Akambo’s Pty Ltd’s views and beliefs at the time of preparation, which are subject to change without notice.

Past performance is not a reliable guide to future returns.