Rollercoaster markets as rates stay on hold
Before we get started, happy Chinese New Year. The Year of the Horse is associated with opportunity and optimism, which I wish for all of you!
The first few weeks of the year were rather rosy: broad global gains, being anything but long was wrong! Just a few weeks later in the shortest of months and we’re back on the rollercoaster. Data has been mixed but themes are coming through, with the major central banks holding as the year gets underway. Hanging on to ammunition is no bad thing, although directionally we may be in just as much danger from inflation as we are from stagnation. Commodities have seen new levels of volatility, not helping input prices and driving further uncertainty. There are signs of continued growth and optimism though; this coming from the broadening in improved valuations for some of the smaller and often overlooked stocks out there.
Macro
Much of the volatility in commodities came from those shiny, precious metals such as gold. This in part driven by renewed concerns regarding global security with the asset class benefitting from safe haven status. This rally, following all sorts of headlines around Greenland, was short-lived though. Pleasing for all reasons to see the US, Denmark and NATO working together, delivering a framework for the future. Let’s hope it lasts. One thing that has not is the price of gold, having reached an all-time high of $5,600 an ounce before tanking to $4,400.
For a moment it was looking more like digital rather than physical assets. Profit-taking and risk-on sentiment having now subsided to a degree, recovery has also been swift with $5,000 looking like the new normal. As a reminder, this represents a doubling in price in just 24 months (all data from Bloomberg). There is nothing normal about this, rather we are in the midst of a rebalancing of portfolios. In particular, People’s Bank of China has been reducing its holdings of US government debt at a rate of $4.5Bn a month over the very same period whilst ramping up gold stores by a comparatively outsized $370Bn, versus a $114Bn reduction in underwriting Uncle Sam (South China Southern Post). The slight worry for the States being it appears to be a trend that is growing in momentum (The Economy).
Risk
If you thought recent tariff spats and the inevitable impact on US relations far and wide was impacting valuations here, you’d be wrong! Now time will tell who wins and who loses, but for now the price/earnings ratios for US listed stocks is 40% above the rest of world. This divergence has been building since the GFC of 2008, but most pronounced since COVID. Optimism is in the DNA here, where we have also seen increased participation from the retail investor. Access has never been easier, main street not wanting to be left behind those on Wall Street. It is worth remembering the 25% contribution the USA makes to the global economy…(Apollo)
In terms of some of the specifics though, and themes within themes, a slew of tech earnings and AI-pessimism led a volatile month in the markets with the announcement of Anthropic's release of Claude Cowork and Opus 4.6 triggering a wider sell-off as markets priced in a future where AI agents may replace seat-based software licenses. The S&P Software & Services Select Industry Index fell by 17% year-to-date with Intuit -31% and Salesforce -25% amongst the most significant impacted. (Reuters)
Elsewhere, hardware efficiency within the chip space also set the stage for AI stock volatility as DeepSeek proved models could be trained cheaply, threatening chip demand. Nvidia fell 17% in one day on Jan 27, 2025, erasing ~$593B market cap before recovering to start February in slightly better shape. Big moves! (Reuters)
In terms of the global picture, we remain in low single-digit advances since the beginning of the year, although the S&P is off but only by a meagre 1.30%. The massive outlier thus far has been from Brazil, with the Ibovespa up over 15%, and for those investing in dollars (given local currency strength) up a whopping 20% in a little over 6 weeks. (Reuters)
Credit
Despite repeatedly breaking records for daily, weekly and monthly issuance of new bonds in Europe, demand for credit remains strong, also breaking records for the size of orderbooks. The two-sided strength means credit spreads have remained close to long-term tights and US issuers are taking note. Alphabet is not the only one, but it achieved 5-tranche deals in CHF and GBP, including a 100-year tranche in sterling which achieved just shy of £10bn of demand!
Strength in bonds is exemplified by the fact that 90% of paper outstanding currently yields below 5%. What does this mean though for holders? Well…with inflation near 3% a real return of just 2% for locking up all that principal (Apollo).
In the States, subprime borrowing though has shown signs of bifurcation. Lenders’ books have been growing with access to new credit loosening whilst existing borrowing are at the highest levels of stress in almost a decade (SubPrime). This, along with tenor being extended, is all part of the continued hunt for yield whilst optimism remains. Credit card delinquencies on the other hand, have climbed to over 12%, the highest print since 2017 (KPMG).
EUR
The ECB remans firmly in hold territory. The first meeting of the year February 5th was once again a non-event. The deposit rate has now held at 2% for the last 5 meetings, reinforcing the view that policy is in a good place as inflation remains in the right range (at least when amalgamated across countries) and growth, well, happening.
Euro-area annual inflation fell, in line with expectations, to 1.7% in January 2026, down from December, extending the recent disinflation trend. (Source) The ECB maintains that inflation should stabilise at its 2% target over the medium term, with growth supported by low unemployment, solid private-sector balance sheets, defence and infrastructure spending, and the lagged impact of past rate cuts, though global trade uncertainty and geopolitical tensions continue to cloud the outlook. (Source)
Foreign tariffs (particularly US tariffs on European goods) tend to weigh on the euro area economy, lowering both inflation and industrial output over time, according to new ECB analysis. While prices may rise briefly as higher costs filter through supply chains, the medium-term impact is disinflationary as weaker export demand drags on growth. The ECB estimates that a 1% tariff-driven drop in euro area exports to the US would ultimately reduce consumer prices by around 0.1% and dent industrial production, with downstream sectors such as machinery and autos hit hardest. (Source).
Additionally, it is important for us to remember other factors that are growing in relevance here for policy makers in the Eurozone. ECB President Lagarde has stressed that the euro is not a policy target but an important input into inflation and growth forecasts. While she downplayed the currency’s recent strength, markets see further appreciation (particularly toward 1.25 EUR/USD) as a potential downside risk to inflation that could eventually prompt an insurance rate cut. (Source)
GBP
The BoE, as is often tradition, announced on the same day as European cousins. Rates were also held as expected, here at 3.75%. Once again the vote was split with the Governor needing to step in and cast the swing. Market pricing of a 50% chance of easing was seen as reasonable by Gov. Bailey who also sees further scope for cuts over the course of the year. In other words, the bank likely sees any combination of prices stagnating, unemployment going up and/or growth not where it needs to be. Come spring, inflation, currently sat at 3.4%, is magically expected to drop to target (Bank of England). Who doesn’t love a bit of optimism.
This meeting also saw a refresh in its market projections, with BOE now not just seeing inflation hitting 2% in April and persisting until the start of 2029, based on bank rate bottoming out at 3.25% before climbing back to 3.75% in 2029. It was slightly gloomier on its view on the wider economy though, with growth for this year downgraded to 0.9% from 1.2% and in 2027 to 1.5% from 1.6%, before growing slightly faster than expected in 2028. They also projected unemployment would peak in Q2 this year at 5.3%, up from the latest reading of 5.1% and 0.3% higher than previously thought for this year. (BOE)
Markets reacted to this dovish decision by pricing in 18.5bps (74% chance) worth of cuts in March, and the first full cut priced in by the April meeting. There are also currently 48bps (just under 2 full cuts) priced for the remainder of 2026. Should growth continue to drag, it is very possible we see rates come lower than the 3.25%, although, as ever, any input can rarely be looked at in isolation, thus the degree to which inflation drops to target, as well as to what extent the bank actually cares, remains to be seen.
Not helpful is that inflation actually rose from 3.2% in November before falling back to 3.0% in January, although the supposed drivers of said inputs are erratic in nature, being specifically tobacco and airfares (ONS). Services inflation, which has remained stickier along with being a proxy for wage inflation, remains stubbornly high at 4.4% (ONS). The UK economy grew by 0.1% in the final quarter of 2025, undershooting expectations and capping a year of lacklustre growth that was overshadowed by trade shocks and uncertainty over fiscal policy. The change in real quarterly GDP fell short of the 0.2% increase forecast in a Reuters poll of analysts and compared with an expansion of 0.1% in the Q3 revision. GDP increased 0.1% in the month of December alone.
USD
Once again the Fed started the year without a cut, with approximately 20 basis points of easing priced for June and a full 100% chance of a quarter of easing come the July Fed meeting. Helpfully for policy makers, inflation continues its downward trajectory with January CPI printing at 2.4%, shaving 0.3% off December's number (U.S. Bureau of Labor Statistics).
What is less widely appreciated is that January is typically associated with rising inflation as firms roll out new pricing most often at the beginning of the calendar year. This is adding to the case for more than what is currently expected to be 0.50% taken off the headline interest rate this year. Other reasons to think rates may come down further and perhaps faster are coming from the labour market, where revised figures for last year were significantly lower than originally thought, at 185,000 on a rolling basis for the last 12 months. January though, contributed a whole 130,000 to this figure.
So what?
For now rates in core currencies remain on hold, meaning more time to lock in higher for longer of course! Away from this though, whilst optimism remains we have been once again reminded of how much things can change, and how quickly. Commodities, metals, AI/or not stocks…what’s next? Maybe cash. Until next month…
*TreasurySpring’s blogs and commentaries are provided for general information purposes only, and do not constitute legal, investment or other advice.