• Despite heightened geopolitical instability, global equities advanced by 3% in January, supported by a "goldilocks" economic backdrop. 'Broadening’ was the word of the month with small caps leading and Nasdaq lagging. International markets outperformed US markets.

• Gold and silver prices rallied to record highs, only to crash on Friday following the nomination of a new Fed chair. Kevin Warsh is perceived as a “hawkish dove” who would aim at the central bank’s balance sheet reduction while cutting short term rates, thus potentially putting pressure on market liquidity. We disagree with this narrative.

• While we expect volatility to stay elevated in the short run, the fundamental pillars of broadening participation and accommodative policy support a constructive stance for Q1 2026. Global economic growth is doing fine, inflation is cooling down and earnings growth remains strong.

• We remain overweight equities with a preference for emerging markets and the US. We stay overweight gold and overweight commodities, underweight Govies 1-10 years , and neutral the dollar against all currencies.

Despite heightened geopolitical instability, January was characterised by a notable increase in investor risk appetite. While global bond markets remained largely stagnant, global equities advanced by 3%, supported by a "goldilocks" economic backdrop of resilient growth data and moderating inflation. This combination has bolstered expectations for real income gains, fuelling market optimism.

Fixed income and monetary policy
Global bonds faced headwinds from improved economic activity and shifting central bank expectations. In the United States, front-end rates sold off as markets recalibrated, pushing the anticipated timing of the next Federal Reserve rate cut further into the future. Concurrently, Japanese long-term bonds experienced their most significant January decline since 1994, driven by intensifying fiscal concerns.
Credit posted modest gains while US Treasuries are slightly down.

Geopolitical volatility
Geopolitical tensions escalated following the US intervention in Venezuela and administrative threats of tariffs against European nations over the Greenland sovereignty dispute. While the World Economic Forum at Davos facilitated a temporary easing of these frictions, the impact on specific asset classes was pronounced:
•    Gold: appreciated by 13% as a primary safe-haven play.
•    European defence: the sector saw an 18% surge.
•    Volatility indices: curiously, the VIX and EUR/CHF movements remained relatively muted despite the underlying friction.

Equity market dynamics: the "broadening" trend
January marked a significant shift in equity leadership, defined by a broadening of market participation away from US mega-cap technology.
•    Global equity markets gained +3.0%.
•    US markets: small-cap stocks outperformed, rising 5%, while the "Magnificent Seven" lagged with a loss of -0.3%.
•    Regional performance: emerging markets led global returns with a 9% increase, followed by Japan’s Topix at 5%. UK (+5.2%), China (+4.7%) and Euro area (+4.1%) outperformed the US as well. 

Commodities and energy
The commodities sector delivered robust returns, with the Bloomberg Commodity Index rising 10%. Energy was a primary driver; WTI Crude climbed 14.3%, while natural gas prices in both Europe and the US surged in response to unseasonably cold winter weather. Silver is up +11.65% and gold +8.8%

With 4 pillars (macro, liquidity, earnings and market factors) signalling an overweight and 1 in neutral (valuations), the weight of evidence is positive for equities.

✅ January trade was all around the “Fed is losing independence, will print money and cut rates like there is no tomorrow, the dollar will keep declining” => all of this led to the following trades: long commodities, long precious metals, long EM, long value, long small caps. Many of these trades were leveraged.

✅ Kevin Warsh’s nomination as next Fed chair came as a surprise as he was NOT the frontrunner. Markets suddenly realise he is a “Hawkish dove” and that he might be willing to reduce the size of the Fed balance sheet. There is also a lot of uncertainty related to Fed composition, when he will become Fed Chair and how/if he will implement this “privatisation” of QE. Markets hate uncertainty – hence the deleveraging and the sell-off.

✅   We think the shift of monetary policy (rate cuts + reduction of Fed balance sheet + financial deregulation) is not going to happen any time soon. First, because Warsh is still not the Fed chair and is not guaranteed to have the majority at the Fed board. Second, there is such an abundance of US Treasuries and corporate debt issuance that the Fed will probably need to continue supporting the bond market. Remember April 2025? 

✅ However, we expect some volatility in the short term. There were a lot of leveraged and crowded trades. Bottoming is a process and markets could stay bumpy during a few weeks. 

✅ While we expect some volatility, the fundamental pillars of broadening market participation and accommodative policy support a constructive stance for Q1 2026. Global economic growth remains solid, inflation is cooling, and earnings growth remains strong.