At the same time, policy shifts and rhetoric from Washington over trade and territorial ambitions stoked fears of broader turbulence. Threats of tariffs against NATO allies amid a standoff over Greenland reignited concerns about US–European economic ties. The result in January was a striking interplay of calm data and jittery risk sentiment: markets oscillated between relief at steady data and heightened sensitivity to political developments that have suddenly regained prominence in global asset pricing.

Equities

Global equities began 2026 with solid headline gains. The MSCI AC World Index rose 3% in January, reflecting a combination of stronger-than-expected activity data and moderating inflation prints. In the United States, the S&P 500 finished the month up 1.4% in total return terms, while the Nasdaq gained 1.0%. At face value, these are constructive numbers. However, performance dispersion was striking. Small caps outperformed meaningfully, with the Russell 2000 up 5.3% and 5% according to broader style data, marking one of the strongest starts to a year for the segment in decades. By contrast, the so-called “Magnificent 7” rose only around 1%, highlighting that leadership is no longer confined to a narrow cluster of megacaps.

Within US sectors, energy emerged as one of the strongest performers, supported by a 16.2% rise in Brent crude. Materials also outperformed, in part reflecting upward revisions to 2026 earnings expectations. The most notable weakness, however, was concentrated in software with a record outperformance of semiconductors versus software of nearly 30% in January. The decline in software was driven less by deteriorating fundamentals and more by fears of competitive displacement from AI agents, as investors questioned whether traditional SaaS revenue models can maintain pricing power in a rapidly evolving technological landscape. In several cases, strong earnings reports were met with negative price reactions, underscoring how elevated expectations had become.

This rotation reflects a broader reassessment of duration risk. Software and other long-duration growth segments had enjoyed substantial multiple expansion in 2025. January’s repricing suggests that investors are demanding clearer evidence that heavy AI-related capex (consensus expects USD 561bn of hyperscaler spending in 2026, up 38% year-on-year) will translate into sustained margin expansion rather than simply higher cost bases.

The Europe STOXX 600 gained 3.2% in local currency, with Banks up 5.5%, benefiting from stable net interest margins and improved fiscal clarity in parts of the euro area. Basic resources and energy also led gains, supported by higher commodity prices and renewed defence spending expectations. European earnings have modestly surprised to the upside so far, albeit with a lower beat ratio than in the US.

Japan was another standout with the Nikkei rising 5.9%. Improved corporate governance, currency dynamics and positive earnings revisions contributed to performance, further supported by strong fiscal measures.

Emerging markets delivered the strongest regional returns. The MSCI Emerging Markets Index rose 8.9%, the best January performance since 2022 and outperformed developed markets by a wide margin. Brazil’s Bovespa surged 12.6%, while Asian markets also posted solid gains. The magnitude of the EM vs DM outperformance of 7% in January marks a rare occurrence not seen since the early 2000s.

Fixed Income

Fixed income delivered only modest support to portfolios, as firmer activity data and renewed fiscal concerns capped returns. The Bloomberg Global Aggregate index rose just 0.9% in US dollar terms, masking meaningful regional divergence. US Treasuries were broadly flat over the month, with front-end yields drifting higher as expectations for the first Federal Reserve rate cut were pushed further out. In Japan, government bonds suffered their worst start to a year since the mid-1990s, with 10-year JGBs down 1.3% amid rising fiscal concerns and election-related volatility. By contrast, euro area sovereigns benefited from softer inflation prints and expectations of further ECB easing, with the broad euro sovereign index up 0.7%.

Commodities and Currencies

Precious metals dominated January’s cross-asset performance. Gold rose 13.3% over the month, its strongest monthly gain since September 1999, briefly touching an intraday record near USD 5,600 per ounce before pulling back into month-end. Silver advanced an even more striking 18.9%, reflecting both safe-haven demand and its higher beta to improving industrial expectations. The rally was driven by a confluence of factors: geopolitical escalation surrounding Venezuela and Iran, renewed debate over Federal Reserve independence, and a marked weakening of the US dollar. Central bank purchases, notably from emerging markets, continued to provide structural support, reinforcing gold’s role not merely as a hedge against inflation, but increasingly as insurance against institutional and geopolitical uncertainty. The magnitude of the move, coupled with elevated intramonth volatility, underscored how quickly positioning can shift when macro risk premia reprice.

In currency markets the dollar index declined 1.4% in January, with the greenback weakening against every other G10 currency. The euro appreciated to around USD 1.185 by month-end, while sterling gained 1.6% against the dollar. Emerging market currencies also firmed alongside strong equity inflows and improved global risk appetite. The softer dollar environment provided an additional tailwind to commodities and emerging assets, reinforcing the broader theme of diversification away from concentrated US exposure that characterised the start of 2026.

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