Despite geopolitical tensions, investors embraced equities, with broader sector participation signalling hopes that corporate earnings growth will stretch beyond technology this year. The US dollar continued to soften, though this week’s inflation data is unlikely to spark any sharp drops.
Market recap
Beyond the numbers
Macroeconomics
In the US, job creation levels remained positive (50,000 in December after 56,000 in November) and the unemployment ratio came in lower than expected (4.4% after 4.6% the previous month). While the global picture suggests that the labour market is stabilising, job creation remained volatile at sector level, and private surveys (ADP and Jolts) pointed to ongoing weaknesses. Nevertheless, there is less urgency for the Fed to cut rates in January. Elsewhere, US services were confirmed to be on a sustained trend (ISM services at 54.4), while the manufacturing sector remained weak (ISM below 50).
Economic indicators were better oriented in the eurozone thanks to firmer retail sales (November’s figures were up by 0.2% m/m) and a rebound in Germany (industrial production was up by 0.8% m/m in November). Eurozone inflation stabilised at 2.0% y/y in early December estimates.
Asset allocation: strategic views as at January 2026
Equities
Global equities advanced in their first full trading week of 2026 (MSCI ACWI total return +1.5%), with the sector rotation trend observed in December continuing into the new year. Investors piled into cyclical areas of the market (materials +3.9%, consumer discretionary +3.7%, industrials +3.1%), while technology (+0.8%), financials (+0.7%), and utilities (-0.4%) were among the week’s laggards.
Risk appetite also favoured high growth (Invesco S&P 500 High Beta +3.3%) and small caps (Russell 2000 +4.7%) as investors looked past mounting geopolitical tensions and weak US economic data (labour, manufacturing) to a flurry of announcements from President Trump that pointed to further measures to support the US economy and consumers.
Broadening sector participation reflects hopes of corporate earnings growth expanding beyond the technology sector this year. This trend, supported by fiscal and monetary policies in several major economies, highlights why diversification in equity markets remains a compelling strategy in 2026.
Broadening sector participation reflects hopes of corporate earnings growth expanding beyond the technology sector this year
Fixed income
Euro and sterling markets outperformed their US counterparts on the back of the 10-year Bunds moving down 4 bps, while 10-year gilts declined by 16 bps on hopes of a Bank of England (BoE) rate cut and lower planned long-dated gilt issuance. Spreads also tightened more in Europe, with investment grade (IG) and high yield (HY) compressing by 4 bps and 19 bps, respectively, as euro markets clawed back some of last year’s underperformance, with euro IG, HY and AT1s up 0.3%, 0.5% and 0.7%, respectively (versus 0.1%, 0.3% and 0.4% for their US counterparts).
President Trump requested that Fannie Mae and Freddie Mac purchase USD 200 billion in mortgages, with the stated goal of reducing borrowing costs and reinforcing housing-market support. While lacking details for now, mortgage spreads tightened after the announcement, with the average 30-year mortgage rate falling below 6%, the lowest level since February of 2023 and down more than 1% over the past year. It should be noted that in late 2024 we added mortgages to portfolios as an IG diversifier and continue to like the trade.
Federal Reserve Chair Powell disclosed he had been served with grand jury subpoenas threatening criminal charges in connection to Powell’s earlier testimony on renovations of the Fed’s headquarters. Trump is expected to nominate Powell’s replacement soon, with Kevin Hassett and Kevin Warsh currently tied in probability markets (40% each, followed by Christopher Waller at 10%).
Mortgage spreads tightened after the announcement of mortgage purchases, with the average 30-year mortgage rate falling below 6%
Forex & Commodities
The USD weakened modestly at the beginning of the week, following the news of the US Department of Justice’s subpoenaing of the US Federal Reserve Chair Jerome Powell. Powell’s statement made it clear that he views the subpoenas as an attack on the Fed’s independence – which raises the prospect of inappropriately low interest rates if the Fed loses its independence – whether de facto or de jure.
The main data release for the USD over the coming week should be the publication of December inflation numbers, which are expected to print at 2.7% y/y. On balance, we anticipate that the USD should not weaken too aggressively in the absence of a much lower-than-expected inflation print.
The USD/JPY rose to levels of above 158 following news reports that the Japanese government was considering calling a snap election (an election is seen as precluding Bank of Japan (BoJ) rate hikes). Investors should anticipate that the BoJ will increase verbal interventions on any USD/JPY moves to levels of 160 as it has done before.
Gold rose to highs of just under USD 4,600 per oz following the events in Iran over the weekend, with the US said it is considering military action against the Iranian regime. News of the subpoenas on the Federal Reserve also pushed gold to higher levels. Given the confluence of risks, investors should prepare for the possibility of further upside moves over the coming week. We believe that downside risks should be limited in the near term.
Gold rose to highs of just under USD 4,600 per oz amid tensions over Iran
The opinions expressed herein are correct as at 12 January 2026 and are subject to change without notice. This information should not be relied upon by the reader as research or investment advice regarding any particular fund, strategy or security. Past performance is not a guide to current or future results. Any forecast, projection or target, where provided, is indicative only and is not guaranteed in any way.
