Macro
The past two weeks reinforced a defining feature of the current macro regime: geopolitics now feeds directly into economic expectations, even when headline risks fade quickly. The tariff standoff linked to Greenland de-escalated, but the episode highlighted how trade policy, security commitments, and political credibility are increasingly intertwined. That message was amplified at Davos, where discussions broadly converged on the idea that the post-Cold War, U.S.-led economic order is under strain. What remains unresolved is whether this represents a durable structural shift or a noisy but ultimately reversible phase driven by a single political cycle. For markets, the practical takeaway is higher headline sensitivity and a more persistent geopolitical risk premium.
Against that backdrop, the global economy continues to prove more resilient than expected. Recent IMF updates point to global growth holding around the low-3% range, broadly unchanged from last year and slightly firmer than feared in late 2025. High-frequency indicators support this view. January flash PMIs show continued expansion in the U.S., UK, Japan, and much of Asia, while Europe remains the laggard, with France and parts of German manufacturing still under pressure. Services activity, however, continues to act as a stabiliser across most advanced economies, helping prevent a broader downturn despite trade frictions and political noise.
In the U.S., the macro picture remains finely balanced. Growth expectations have edged higher, consumer sentiment improved modestly in January, and risk assets have shown a strong tendency to recover quickly after political shocks. At the same time, the underlying data are mixed. Labour-market momentum appears to be cooling, housing indicators remain soft, and inflation has stopped falling in a straight line. Core PCE inflation remains around the high-2% range, keeping the Federal Reserve cautious even as disinflation progresses. The Fed’s challenge is therefore less about whether to ease eventually and more about when and how to do so without appearing politically influenced, especially given unresolved legal and institutional uncertainty around tariffs.
Europe’s macro story remains one of fragility rather than crisis. Inflation has drifted slightly below target, but confidence indicators remain weak, and political risk, most notably in France, continues to weigh on sentiment. The ECB’s recent communications underline this tension: policy is seen as appropriately calibrated, but officials are deliberately avoiding any commitment to a specific rate path. The emphasis is on flexibility in an environment where shocks are unpredictable, and confidence is easily shaken. For now, Europe looks stuck in a low-growth equilibrium, with limited momentum to either force rapid easing or justify tighter policy.
In Japan, macro developments carry outsized global importance. Inflation has cooled but remains above target, while wage dynamics and currency volatility keep the Bank of Japan on a gradual normalisation path. The decision to call snap elections adds another layer of uncertainty, but the broader direction is clear: Japan is no longer an anchor of ultra-loose policy. Even modest adjustments there have implications for global capital flows and term premia, especially in a world already dealing with heightened geopolitical risk.
China, meanwhile, continues to stabilise without meaningfully re-accelerating. Export performance remains relatively robust, helping offset weak domestic demand, but property prices, retail sales, and fixed investment all point to ongoing structural headwinds. Recent data underline a familiar pattern: pockets of improvement in production and profits alongside persistent softness in household spending. Policymakers appear comfortable managing this balance through targeted support rather than aggressive stimulus, reinforcing the view that China’s role in the global economy is shifting from growth engine to stabiliser.
Bottom line: despite an unusually heavy geopolitical overlay, the macro environment remains surprisingly resilient. Growth is holding up, inflation is easing only gradually, and central banks are broadly in a wait-and-see mode. Markets have learned to fade extreme political headlines, but each episode leaves a residue of uncertainty. The risk is not an imminent macro breakdown, but a slow accumulation of confidence shocks that could eventually weigh on investment, trade, and financial conditions if policy volatility becomes the norm rather than the exception.
Rates
Global rates markets are settling into a more cautious holding pattern after last week’s sharp repricing at the long end. Volatility has eased, geopolitical risks have faded into the background, and investor attention has shifted back toward central bank communication, policy sequencing, and supply dynamics rather than outright yield direction.
The U.S. 10Y yield broke out of its recent consolidation range around 4.1–4.2%, moving above its 200-day moving average and briefly reaching about 4.3% intraday. The Federal Reserve is expected to keep policy unchanged at 3.50%–3.75%, and front-end pricing continues to centre on a July rate cut as the base case. The yield curve remains modestly inverted, reflecting confidence in disinflation alongside lingering uncertainty around labour-market momentum. Near-term focus will be on 2-, 5-, and 7-year auctions, which should test demand in the belly of the curve amid elevated issuance.
Japan remains the key global driver of duration risk. Japanese Government Bond yields continue to draw scrutiny following last week’s historic long-end selloff, which pushed the 10-year JGB to its highest level since 1999 and exposed thin liquidity in ultra-long maturities. Political uncertainty, discussions of food tax cuts, and concerns about debt levels above 230% of GDP have raised questions about fiscal credibility. While scheduled BOJ bond purchases and heavy Ministry of Finance issuance, including ultra-long bonds, aim to maintain orderly conditions, Japan’s gradual exit from ultra-loose policy continues to exert global term-premium pressure.
In Europe, rates remain range-bound as the European Central Bank stays firmly in wait-and-see mode. Despite some internal dovish discussion, policymakers have emphasised flexibility and refrained from signalling a clear easing bias. With inflation near target and growth subdued, markets expect policy to remain broadly stable through much of the year.
Overall, rates markets are transitioning away from directional trades toward relative-value, carry, and policy-timing strategies. Central banks appear comfortable holding policy steady for now, leaving near-term moves driven more by nuances in communication, supply conditions, and global spillovers than by shifts in core macro fundamentals.
Credit
Credit markets remain resilient despite volatility across equities, rates, and geopolitics. Investor demand for yield continues to dominate, keeping spreads tight even as policy uncertainty and market noise increase.
U.S. IG borrowing costs have fallen to their lowest level this century. Spreads stand at ~73 bps over Treasuries, according to ICE BofA data, the tightest level since June 1998. This tightening persisted despite a choppy week triggered by President Trump’s tariff threats related to Greenland, which briefly unsettled equity markets before being partially reversed. Market participants note that macro and political shocks are increasingly absorbed without lasting impact on credit pricing.
Issuance remains strong. U.S. investment-grade borrowers have raised more than $172B YTD, the fastest pace since 2020, according to LSEG. Earlier this month, corporate bond sales reached $95 billion in a single week, the busiest since the pandemic. While some issuers briefly paused amid volatility, markets quickly normalised, with regional banks returning to the primary market following earnings.
In Europe, sovereign issuance rebounded to around €62 billion, though elevated rate volatility sidelined some borrowers. High-yield markets also saw renewed activity as falling risk premiums encouraged issuance. Eight issuers raised nearly $6 billion in a single day, the largest one-day total since September.
High-quality demand remains the key driver. Elevated policy rates mean that even tight spreads translate into attractive all-in yields, particularly for insurance companies and pension funds. Investors increasingly focus on absolute yield rather than spread compensation. Some also view U.S. government debt as carrying higher fiscal and policy risk, improving the relative appeal of corporate credit.
High-yield markets remain segmented. Demand is concentrated in stronger credits, while structurally challenged issuers lag. CCC-rated bonds, which account for roughly 80% of historical high-yield defaults, remain volatile but supported by carry in the absence of a recession.
Overall, credit markets remain firmly in a yield-driven environment. Spreads are at multi-decade tights, issuance is running at a rapid pace, and risks remain largely idiosyncratic rather than systemic as long as economic growth slows only gradually.
Equities
U.S. equities finished the week modestly lower, with broad indices slipping despite limited macro catalysts. The Dow fell 0.53%, the S&P 500 declined 0.35%, the Nasdaq edged down 0.06%, and the Russell 2000 lost 0.32%, giving back some gains from Friday’s selloff.
Sector performance highlighted notable dispersion. Energy (+3.11%) and Materials (+2.57%) led this week and Year-to-Date (both increased over 10% YTD), followed by Communication Services (+1.06%), Healthcare (+1.05%), Consumer Staples (+0.89%), and Consumer Discretionary (+0.66%). Laggards included Financials (-2.52%), Real Estate (-2.36%), Utilities (-1.95%), Industrials (-1.61%), and Technology (-0.77%).
Trading followed a distinct risk-off then stabilisation pattern. Markets reopened after the holiday amid renewed tariff and geopolitical rhetoric, triggering an early-week pullback and pushing flows toward defensives and real assets. Conditions stabilised midweek as escalation risks eased and AI-related demand narratives resurfaced, allowing equities to partially retrace losses. The secular AI narrative received incremental support from reports that OpenAI is in discussions to raise approximately $50B at a valuation of roughly $750–800B, while Anthropic is reportedly seeking capital at a valuation near $350B, reinforcing investor conviction around long-duration AI infrastructure spending.
However, earnings-related disappointments in select technology and semiconductor names capped the rebound, reinforcing investor selectivity. At the same time, investors grappled with a high bar for earnings delivery, renewed debate around Fed independence and rate-cut recalibration, stretched positioning and sentiment, and spillover from Japanese government bond markets where yields reached multi-decade highs. Inflation risks and tariff-related cost pressures also remain key overhangs. Mega-cap leadership remained narrow, with Meta Platforms standing out on strength, while momentum, high-beta exposures, and retail-favoured trades lagged. Small caps underperformed on the week but continue to lead year to date, remaining roughly 6.5% ahead of the S&P 500 (+7.5% vs +1% YTD), underscoring ongoing factor dispersion rather than broad risk aversion.
Looking ahead, the next two weeks mark the peak of earnings season, with Meta Platforms, Microsoft, and Tesla reporting Wednesday after the close, followed by Apple on Thursday after the bell. Other key reports next week include Boeing, General Motors, HCA Healthcare, RTX, UnitedHealth Group, and UPS (Tuesday pre-market).