New Year, New Risks
Welcome back. If it’s excitement you crave, this is the year for you! As is tradition, we’ll be focusing on fact, data, and trajectory, which is of most use when news is fast and headlines bold. It does feel like some folk have taken the “new year, new me” more seriously than others. How this all plays out is hard to predict; staying on top of it all, as important as ever.
Macro
The close of play last year brought with it optimism for peace far and wide. How distant a memory that seems. Disruption the theme and falling markets, along with “Sell America”, potentially gaining momentum. Tariffs are back and the weapon of choice with those allies not playing ball. It’s fair to say that given the complexity and magnitude of change to foreign policy and geopolitics between Greenland, Iran, and Venezuela, to think or hope it might all be resolved any time soon verges on madness. As usual, prudence is our friend, being prepared is the name of the game.
At least in Europe we are seeing some of the silver lining come through. The focus on defence spending has seen factory orders jump 5.6% in Germany alone according to the latest stats (for November, DESTSTIS). The largest economy in the region is coming back to life. Deployment of capital to this sector can surely only rise from here, which in turn should see France regain some growth and, alongside this, ideally more stable politics from room to manoeuvre.
Risk
Plenty of it out there! Much of the brunt has been taken by oil, which given some of the countries involved here is to be expected. Despite the Tuesday selloff following Martin Luther King Jr Day in the US, global equity markets, for the most part, remain in the green. Given how early we are in the year, and how close to zero said gains now sit, what started as a boom could shift towards bust. The good news? The last quarter of 2025 looks decent. We have seen record results from that canary in the coalmine, financial services. The big US houses didn’t just do well, they smashed some of their own already lofty PBs. Goldman Sachs, for example, saw net revenues of almost $60 billion, this from a firm with just over 45,000 employees, putting earnings per worker through a million bucks (GS 2025 Earnings).
Morgan Stanley topped estimates, with records broken for both net revenues of $ 70.6 billion and net income of $ 4.4 billion (MS Earnings 2025). Other banks that have thus far reported generally followed suit at the very least in sentiment. All the bosses speaking of 2026 being set up to be a big one as highly fee-generative M&A activity was set to return and capital markets activity buoyant. It’ll certainly be volatile, great for traders at least. The only trouble is these results are of course backward looking and, in the current environment, further from the one we find ourselves in just a few weeks later.
Credit
It's not just banks breaking records. The bond market has done more than reopen, with over EUR 61.2 billion of debt pricing in a single day contributing to last week being the biggest ever volume of new borrowing. Ever. A whopping EUR 138 billion. Hopefully just a happy(?) coincidence that this is precisely the EU’s Annual Recovery Funding in 2024, a European Commission initiative to restore growth to the pandemic-hit group of nations.
Despite such vast sums being drawn down, the order side of the book came in and supported said issuance, remarkably leading to the tightest spreads for high-grade credits in four years. Historically, the flight to quality was government debt, and more specifically $-denominated US government issued paper. This time it really is different as Ole’ Sam has seen his cost to borrow rise, with money being funnelled into those old school safe havens of gold and silver.
EUR
Europe continues to be the winner in the race to the bottom (of benchmark interest rates) if the market is to be believed. Almost zero change expected all the way out to the middle of 2027 (as a reminder, 18 months now, Bloomberg data!). Philip Lane, Chief Economist (or most dismal scientist) reiterated this exact policy stance just a few short days ago (Reuters). What might rock this boat? Well…funny you should ask! Federal Reserve policy deviation (new chair coming!), US term premiums rising (like this week), or a reassessment of the dollars’ global role (see tariff wars, buying of gold, silver, copper, anything but dollars…).
Potential growth remains muted, hence the idea that we are at the bottom of the cutting cycle but are yet to see any steepening of benchmark interest rates. As a reminder, hikes are the crude tool used to cool economies far and wide and avoid inflation spiralling out of control. The IMF, at least, raised the expected headline growth rates but agrees there is a need for structural reform to maximise potential. GDP remains well below that of the US (2.4%) with a lack of investment, strong Euro, and the effects of energy price shocks not being shaken off just yet. An upward revision of 0.2% to 1.3% their two cents worth for the Eurozone (Euractiv).
For those keen to stay on top of it all, the first ECB announcement and corresponding press conference is happening January 28th. What was once likely to be entirely uneventful and verging on dull, might well be worth a watch for direction in this now geo-politically charged environment the year of the horse now brings us.
At least inflation is well in check. Headline CPI fell to 1.9% for December, although, as always, remembering this rate is blended has merit. Being made up of all the various members, dispersion is worth tracking as wider and longer term differences are likely a drag on sentiment. The range currently sits at 0.1% (Cyprus) out to 8.6% (Romania). Helpfully the larger economies are all coming in roughly around the print (Yahoo Finance). Tyranny of the majority? Less important with a smaller minority, apparently.
GBP
Sterling! Or not. Rates once again cut in December by 0.25% taking us to 3.75%. Concerns remain at the Bank of England that stagflation could materialize, but helpfully some of the major inputs to inflation, including services (and in particular wages in the sector) have cooled. Looking ahead, it is clear more caution will be taken in any move and thus surprises are not expected, at least at the last count prior to the early storms of 2026 (BoE website).
Bets on cuts have been trimmed this year despite sharper than expected drops in headline inflation with less than two 0.25% cuts priced in for the year (Bloomberg). We saw an 8-month low in headline inflation of 3.2% in November, and as a polite reminder, still 60% above target. Perhaps 2% is now relegated to just being a serving suggestion as apparently these higher levels remain palatable to most voting members (BoE data).
Growth though has outperformed (on a relative basis, versus expectation), GDP rising 0.1% for q3 and the November number at 0.3% beating the -0.1% expected by a panel of leading economists (Bloomberg). With the budget now in the wild and the respective uncertainty and risk having abated, perhaps it is just the bounce that should be expected before reverting to type. Hopefully not of course; mere theory at this point.
USD
Impact from the continued use of tariffs to enforce policy is yet to be seen at this scale in a global economy as intertwined as ours. History may tell us less unfortunately, bar that this was mere continued escalation towards… something more significant. Davos undoubtedly telling, although the pace of change is not to be discounted these days and thus updates are best left to others to flag to us all.
Domestically, unemployment reducing for December to 4.4%, shaving 0.1% month on month, took any chance of a cut in January entirely off the table. The labor market continues to hold up well, despite downward revisions to job openings (U.S Bureau of Labor Statistics).
The current administration remains keen to support the real estate market. Having agencies purchase more debt, along with tax breaks for individuals, could well provide the support needed to increase not just values but turnover. A functioning market is good for all, from professional services, to goods, all the way through to job creation. Getting that right could well add to what is already respectable growth.
According to the latest data, we might expect another 0.25% of easing in the middle of summer, and again come the end of the year (Bloomberg). Harder to predict than usual with the potential for a Presidential favourite with a mandate to ease along with increased uncertainty and less care for inflation.
So what?
There is a lot going on. This with an increased pace of change and potential rise in risk is both unusual and warranting proper thought and planning. Unintended consequences are often real, and as yet, at this particular juncture, unknown. I suppose that’s part of the fun. So…in all this, what can one do? Do what you can with what you know and what you have. Be conservative, hedge your bets, and strap in. It’s going to be quite the year.
*TreasurySpring’s blogs and commentaries are provided for general information purposes only, and do not constitute legal, investment or other advice.