Feb 3, 2026
After the strong gains in markets in 2025, it was almost wishful thinking to believe that markets could replicate such returns in 2026. However it is worth observing that from a macroeconomic perspective 2026 has stated well. As chart 1 shows the economic growth data has largely beaten expectations leading to upgrades to forecasts. Global growth has been helped by consistently strong consumer spending growth through the turn of the year and ongoing strong corporate investment spending often linked to the tech sector.
Chart 1: Global Economic Surprise Indices – Inflation and Growth
Index
Source: Bloomberg
The better news has not had to rely on the United States. Europe and Japan have seen good momentum in the fourth quarter to carry into the new year.
Chart 2: Global Economic Growth Surprise Indices – Japan and Europe lead
Index
Source: Bloomberg
January saw a notable divergence in real economic momentum across the emerging world, moving beyond synchronized recovery into distinct regional cycles.
In Latin America, led by Brazil, economic activity accelerated on the back of strong commodity exports (energy, metals) and a surge in business investment. Government-led infrastructure programs and improved fiscal credibility began translating into tangible private sector confidence, driving a rebound in capital expenditure. Consumer spending, however, remained muted by lingering inflation concerns.
Across Asia ex-Japan, the story was one of export-led industrial revival. Economies deeply integrated into global tech and green energy supply chains—particularly in Southeast Asia, Korea, and Taiwan—saw manufacturing PMIs expand sharply, fueled by robust external demand for electronics, components, and critical minerals. This contrasted with China, where domestic consumption growth remained subdued despite steady policy stimulus, keeping overall GDP growth stable but unspectacular and reliant on public investment.
Eastern Europe, economies continued their post-adjustment recovery, benefiting from restructured energy supplies and strong demand from core EU markets. Poland and the Czech Republic, in particular, reported resilient industrial output and rising real wages, supporting domestic demand.
The outlier was India, where high-frequency data in January pointed to a modest slowdown in the pace of expansion. This was driven not by weakness but by cyclical factors—including a temporary tightening of financial conditions and a pullback in government capital spending ahead of the fiscal year-end—rather than a deterioration in its long-term growth trajectory.
The common tailwind for most EM economies remained the weakening US Dollar, which reduced imported inflation pressures and provided central banks, particularly in Latam, greater room to pivot towards growth-supportive monetary policies.
Chart 3: China’s Economic Growth Data positive surprises lags EM
Source: Bloomberg
The dominant theme across major central banks in January was policy inertia and a cautious pause, as institutions awaited clearer signals on the inflation trajectory amid a shifting growth landscape.
1. The Federal Reserve (Fed): On Permanent Hold
• Action: No change to the Federal Funds Rate.
2. The European Central Bank (ECB) & Bank of England (BoE): Cautiously Hawkish Pause
• Action: No change to key rates.
• Context: The ECB is likely emphasizing persistent services inflation and solid growth data, while the BoE remains vigilant on wage pressures. Their communication likely pushed back against aggressive market expectations for early rate cuts, supporting their currencies.
3. Bank of Japan (BoJ): The Dovish Outlier, Fueling Gains
• Action: Maintained ultra-accommodative policy (Yield Curve Control framework likely still in place or only minimally tightened).
• Impact: This was a key driver of Japan’s stellar equity performance (+6.6%). The sustained policy divergence with the Fed and ECB weakened the Yen (-1.2% vs USD), providing a massive tailwind for Japanese exporters and corporate earnings. The BoJ is likely prioritizing nurturing wage-growth momentum over fighting imported inflation.
Markets
Equities
US Markets: Leadership Shifts
The US market (S&P 500: +1.3%) while a laggard in global markets exhibited notable internal sector rotation. The NASDAQ (-1.1%) underperformed the broader market, reflecting profit-taking in the previously high-flying AI and tech giants that dominated 2025 returns. The Energy (+12.6%) and Banks (+3.4%) sectors led global indices, benefiting from resilient global demand, higher commodity prices, and a steeper yield curve. The global IT sector (-1.1%) was the clear laggard, suggesting a healthy breather rather than a structural breakdown.
International & EM: The Stars of January
Global ex US equity market continued their outperformance of the US.
• Japan (+6.6%) and Europe ex-UK (+4.2%) surged, supported by corporate governance reforms, stimulative policies, and robust earnings revisions.
• Emerging Markets (+8.9%) soared, with Brazil (+16.8%) standing out on strong commodity ties and fiscal progress. Asia ex-Japan (+8.2%) and China (+4.7%) also posted strong gains as investor sentiment toward the region turned more constructive.
• Notable Exception: India (-5.1%) continued its correction after a multi-year rally, as EM investors found stronger near-term opportunities in parts of Asia and Latin America.
Table 1: Equity Market returns in January
Source: Bloomberg, *MSCI
Equity sector performance
For a change the tech sector did not lead the performance of major sectors. Hopes for a pro-growth Trump Presidency led to a sharp rally in consumer discretionary stock performance. Banks also performed well as the market anticipated a more light-touch regulatory framework for US banks. Healthcare stocks were beaten up as the market anticipated a more maverick anti-establishment figure to lead the health ministry.
Table 2: Global equity sector returns in January
Source: Bloomberg
Bond markets
Fixed income markets were relatively calm. The Global Aggregate Bond Index (Hedged, +0.2%) saw minimal movement as central banks globally held policy steady. Credit outperformed duration, with US High Yield (+0.5%) and a Emerging Market Debt (+0.4%) posting modest gains, supported by strong equity sentiment and contained default fears. The stability here suggests the market views the growth uptick as non-inflationary for now
The modest but positive return for US High Yield bonds (+0.5%) in January, while equities surged, presents a nuanced picture. This performance suggests investor demand for yield remains robust, yet caution is mounting regarding absolute valuation and issuer quality. Spreads tightened only marginally, indicating the rally was driven more by underlying Treasury stability than by a pure “risk-on” embrace of lower-quality credit.
Building Concerns in Credit Markets:
While public markets were stable, several undercurrents point to building stress in less liquid segments:
Bottom Line: The public high yield market is currently being supported by yield-seeking capital and a benign default outlook in the immediate term. However, sophisticated investors are increasingly using the liquidity of the public market to express caution, while quietly reducing exposure to the far less liquid private credit sector where the confluence of high leverage, weak covenants, and maturing debt poses a material, though not immediate, systemic risk. This divergence is a key watchpoint for the remainder of 2026
Chart 4: Yield curve steepening
Source: Bloomberg
Table 3: Bond market returns in January 2026
Source: Bloomberg
FX and Precious metals
• Currencies: The broad-based USD decline was a key theme, amplifying returns for unhedged international investors. The British Pound (+0.8%) strengthened on relative policy hawkishness.
• Gold (+13.3%) and Silver were the month’s standout assets. Gold’s powerful surge, extending a 74.9% 12-month gain, reflects strong central bank buying, its role as a geopolitical hedge, and its increasing acceptance as a portfolio diversifier in an era of fiscal dominance.
• January witnessed a powerful surge across the industrial commodities complex, fundamentally driven by the confluence of accelerating global industrial capex, particularly for AI data centers, grid electrification, and a nascent manufacturing upcycle—against persistent supply-side constraints. The weakening US Dollar provided an additional tailwind.
Copper was the standout narrative, with front-month futures rallying approximately 14% for the month. This move was catalyzed by a series of unexpected supply disruptions at major South American mines, coinciding with surging physical purchase orders from Chinese grid builders and European green infrastructure projects. The scale of the gain signaled the market is transitioning from viewing copper as a cyclical play to pricing it as a critical, structurally undersupplied input for the energy transition and AI infrastructure build-out.
The rally extended robustly to aluminium and key battery metals like lithium and cobalt, reflecting the same demand themes. It is worth noting that some profit-taking emerged on the final trading day of the month, paring back copper’s intra-month peak gains by nearly 2%, a healthy consolidation after such a sharp move that does little to disrupt the bullish underlying narrative of tightening physical balances.
• Bitcoin (-7.5%) continued its correction, down 25.9% over three months. This suggests a continued unwinding of the “digital gold” trade and a focus on assets with tangible cash flows in the current environment.
Table 4: Performance of precious metals and currencies as at end of November
Source: Bloomberg
