Key Highlights

• U.S. Treasurys fall as China warns banks over exposures.
• Japanese stocks rally strongly after LDP’s landslide victory.
• Pessimism grows on Capitol Hill over Department of Homeland Security funding deal.

Chart of the Day

Japanese equities lead positioning in APAC, but low globally

^{Source: BNY, percentage figures denote country shares in global portfolios}

The Japanese lower house election has produced a landslide result for the ruling LDP coalition, as widely anticipated by pre-election polling. Japanese assets such as JPY and JGBs in particular have been crucial drivers of the global carry and fiscal dominance narrative, meaning that what happens next in asset allocation will have a significant bearing on global volatility and broader financial conditions. We have repeatedly highlighted the spillover into at-risk developed market fixed income from JGB markets, so this is a good opportunity to take stock of current holdings across Japanese assets on an absolute and relative basis.

FX has shown some volatility in holdings, while the opposite is true in equities, which have seen a steady recovery YTD. Although the past week has seen significant swings in risk appetite, this has not translated into any equity adjustments. Japanese equities have improved their holdings by around 5 percentage points of the rolling 12-month average and there was never any sign of a dip, even when FX translation risk picked up as markets showed some concern over intervention risk. The lack of sensitivity to FX is quite telling but requires careful analysis, given that the drivers were likely a combination of a secular tech theme and expectations that JPY would continue to weaken irrespective of official sector warnings. 

For equity asset allocators, we also highlight that Japan continues to punch below its weight in global portfolios. At present, although it is the best-owned market in developed Asia-Pacific, the absolute figure is still around 3.5% of global portfolios, barely 1/20 of that of the U.S. Even within the region, Taiwan and South Korea combined are not too far off Japan’s figure, even though the significance of their economies in absolute terms is lower. This underscores the strength of South Korea and Taiwan as part of the global semiconductor narrative, and Japan certainly has not featured as strongly in the theme’s run-up in recent years. Relative to GDP, some divergence is perhaps necessary, but whether that happens through a concentrated selloff in other markets or a material uplift in global holdings of Japan is a completely different story. The new government will hope to use its mandate to achieve the latter, and without much reliance on favorable FX valuations.

What's Changed?

The rush to buy global equities has returned on the back of the Japan election, tempered by bond selling and a weaker USD. The focus on tech shares and rotations has continued into another week of earning releases, with 15% of the S&P 500 reporting. Meanwhile, key economic goalposts of jobs and CPI data will set the field for volatility. Global recovery expectations are being extended on news of Taiwan’s export boom and a rise in the EU sentix index. The relative calm across markets adds to the Koppett S&P 500/Super Bowl predictions of another banner year for equities.

Elections: Beyond the super majority for the LDP and coalition surprise from the Japan election, there were notable other voting shifts in other places. Thailand’s ruling conservative party, Bhumjaithai, has secured its first victory of the century and is set to win 191 of the 500 seats in the House of Representatives, nearly triple its 2023 tally. That should provide stable policy ahead, driving THB over 1% higher. Spanish local elections in Aragon brought a win for the conservative PP over the Socialists, as the far-right made gains. The Portuguese presidential run-off election gave Socialist António José Seguro a win, but the far-right share of vote rose again. Overall, politics across the world continues to matter to markets as a guide to policy stability. EU shares are lackluster compared with APAC today.

Economic data: The Taiwanese trade data highlight the demand for AI globally: its exports rose nearly 70% y/y. The Lunar New Year and U.S. trade deal are key factors. In Europe, the ongoing gains for the sentix investor survey highlight the recovery in confidence. The German survey bounced sharply, despite natural gas worries. Overall, economic data outside the U.S. support views for stronger growth.

Alternatives: Gold and equities continue to correlate positively, with the yellow metal over $5k today. USD weakness is adding to the mix. Markets are also watching Bitcoin, which is holding at $70k, up from Friday’s lows of close to $60k, and oil, which is down 1%. The weekend’s news on a continuation of Iranian talks with U.S. and hopes of a March Ukraine deal kept the geopolitical support for precious metals and energy in check. This relative calm will be significant in keeping volatility in line for more equity buying. A focus on alternatives and on the role of cash on the sidelines pushing the momentum trade will remain key.

Bottom line: Today’s U.S. session brings less news than most of the rest of the week. The delayed jobs report on Wednesday will be the pivotal data release. The focus will be on policy and the speeches from the Fed, particularly Governor Christopher Waller, as the search for value and ongoing rotation trades across U.S. equities mix with more Q4 earnings reports. The “risk-on/risk-off” noise of last week makes any rush to add further to positions across markets seem more dangerous and likely to bring a penalty rather than a win. The main barometer is not gold, USD or oil but bonds, where selling at the long end globally is driving risk-free modeling into rougher territory. 

What You Need to Know

U.S. Treasurys suffered losses amid reports that China has urged major banks to curb exposures in recent weeks. Reports suggest that regulators have been verbally advising institutions to limit purchases and reduce elevated holdings due to concentration risk and potential market volatility. The guidance, which excludes China’s state reserve holdings and sets no targets on scale or timing, was framed as risk diversification rather than geopolitical signaling or doubts over U.S. creditworthiness. The move comes amid global debate over U.S. fiscal discipline and the dollar’s safe haven status, and preceded a recent Trump-Xi phone call. Treasurys weakened modestly on the report, with yields edging higher and the dollar softer, though foreign holdings remain near record highs and market volatility is subdued. S&P Mini +0.093% to 6959.25, DXY -0.264% to 97.376, 10y UST +2.4bp to 4.23%.

U.S. lawmakers remain sharply divided over a deal to fund the Department of Homeland Security (DHS). Negotiations have stalled just days ahead of a February 13 deadline, risking a partial shutdown affecting agencies such as Immigration and Customs Enforcement (ICE), Customs and Border Protection (CBP), the Federal Emergency Management Agency (FEMA) and the Transportation Security Administration (TSA). Democrats are demanding that immigration-related conditions be attached to the funding bill, including judicial warrants for agents and identification requirements, arguing they are necessary after recent fatal incidents involving immigration enforcement. Republicans have rejected those demands, insisting DHS funding should not be used to force policy changes and accusing Democrats of negotiating through the media rather than formally. With no substantive talks underway, Senate leaders are considering canceling recess plans or passing a short-term stopgap, though Democrats are opposed to another temporary extension, leaving the outcome highly uncertain.

Japan’s equity market surged to record highs at the start of the week after Prime Minister Sanae Takaichi secured a landslide victory in a snap general election, delivering a two-thirds supermajority in the lower house. The Nikkei 225 jumped as much as 5.7%, breaking above 57,000 for the first time, while the broader Topix also reached record high. Investors welcomed the prospect of political stability and policy continuity, betting that Takaichi’s strong mandate will allow her to implement economic stimulus and promote corporate investment in sectors such as technology, semiconductors and defense. Technology, machinery and defense stocks led gains, while analysts noted renewed foreign inflows and a potential revival of “Takaichi trades,” with attention now turning to policy execution and fiscal implications. Nikkei +3.89% to 56363.94, USDJPY -0.382% to 156.62, 10y JGB +5.9bp to 2.29%.

Thailand’s equity market rallied sharply at the market open, after election results indicated the Bhumjaithai Party was in a strong position to form a new coalition government, reducing political uncertainty. The Stock Exchange of Thailand Index rose more than 3% in early trading on Monday, reversing from a Friday close of 1,354.01, with turnover nearing THB 30bn. Gains were led by large-cap and politically sensitive names, including Airports of Thailand, Delta Electronics and Gulf Development, while banks, energy and retail stocks also advanced. Analysts said a decisive outcome was supportive for risk assets, with expectations that clearer governance could lift investor confidence and underpin further upside in Thai equities. SET +3.395% to 1399.98, USDTHB -1.388% to 31.208, 10y TGN -5.7bp to 1.831%.

U.K. Prime Minister Sir Keir Starmer is under increasing political pressure after his chief of staff, Morgan McSweeney, resigned over the controversial appointment of Peter Mandelson as ambassador to Washington. McSweeney accepted responsibility for advising the appointment, which has sparked a backlash due to Mandelson’s past ties to Jeffrey Epstein, intensifying pressure on Starmer’s leadership. Senior Labour figures are reported to be questioning whether Starmer can survive, with speculation of cabinet resignations and leadership challengers mounting. While Starmer has moved to stabilize No. 10 by appointing joint successors to McSweeney, critics argue accountability ultimately rests with the prime minister. Markets are watching closely, amid concerns political instability could undermine fiscal credibility ahead of key by-elections and local polls. FTSE 100 +0.28% to 10398.83, GBPUSD -0.067% to 1.3602, 10y gilt +2.2bp to 4.536%.

What We're Watching

Central bank speakers: Fed Governor Christopher Waller speaks on digital assets; Fed Governor Stephen Miran participates in a moderated conversation at Boston University; Atlanta Fed President Raphael Bostic participates in a moderated conversation with Bill Watts.

U.S. Treasury sells $89bn in 13-week bills and $77bn in 26-week bills.

What iFlow is Showing Us

Mood: iFlow Mood eased slightly. Equity demand was steady, while short covering was observed in core sovereign bonds. iFlow Mood stands at 0.445.

FX: Mixed and light flows except for ILS, which saw the only significant flows within the iFlow universe. ILS, CZK, USD and NOK were most sold, while EUR, ZAR, CLP and ZAR posted the most demand.

FI: New Zealand, Brazilian and Chilean government bonds posted the strongest demand, followed by Malaysia and India. Philippine, Chinese, South African, Turkish, Peruvian and Japanese government bonds were sold.

Equities: Selling continued in the G10 equities complex, led by the U.S and Europe. Elsewhere, strong buying was recorded in Czech, Chinese and Malaysian equities. Within EM APAC, the industrials, materials, energy, consumer staples and financials sectors were bought, while communications services was the only sector to be sold.

Quotes of the Day

“A delayed game is eventually good, but a rushed game is forever bad.” – Shigeru Miyamoto

“The man who judges things well, seeing things for what they are, is not in a hurry.” – Aristotle

Economic Details

The Eurozone sentix Economic Index rose sharply to +4.2, up six points in a third consecutive monthly improvement, signaling a potential cyclical upturn. The recovery was reinforced by Germany, where expectations jumped 10.8 points to the highest level since July, despite ongoing concerns around energy supply. Globally, sentiment strengthened further, with the sentix global aggregate rising to +15.2, taking it firmly into “boom” territory. Asia ex-Japan remained the main driver, with its index climbing for a sixth straight month to +23.9, the strongest reading since mid-2021, while Eastern Europe and Latin America also extended gains. In contrast, the U.S. outlook weakened modestly, with expectations slipping and sentiment lagging global peers. Euro Stoxx 50 +0.524% to 6029.86, EURUSD +0.381% to 1.186, BBG AGG Euro Government High Grade EUR 0bp to 2.936%.

The U.K. job market showed tentative improvement in January, according to the KPMG and REC U.K. Report on Jobs, as the pace of decline in permanent placements eased to its slowest in 18 months. Temporary billings rose slightly for the first time in three months, while overall vacancies continued to fall but at a slower rate than late 2025. Candidate availability increased at the weakest pace in a year, reflecting slower growth in both permanent and temporary staff supply. At the same time, pay pressures intensified, with starting salaries rising at the fastest pace in nearly a year and a half and temporary wage inflation reaching its joint-highest level since May. Despite these improvements, subdued confidence and constrained client budgets continued to limit hiring activity.

Switzerland’s January consumer sentiment index stood at -30.1 points, broadly in line with last January’s -29.3, indicating confidence remains close to its prior-year level. Within the survey, the sub-index for expected economic development weakened notably, falling to -34.1 from -20.1 a year earlier, highlighting increased caution about the macro outlook. By contrast, perceptions of the past financial situation improved to -36.8 from -44.7, while the index of people saying this is a good time to make major purchases also strengthened to -24.0 from -26.2. The expected financial situation sub-index was little changed at -25.5 compared with -26.1 previously. Overall, the data point to a stable but still clearly negative consumer confidence backdrop at the start of 2026. SMI +0.275% to 13503.06, EURCHF -0.002% to 0.9167, 10y Swiss GB -0.1bp to 0.271%

Norway’s mainland GDP rose 0.4% q/q in Q4, signaling continued but more moderate momentum toward year-end, according to Statistics Norway’s preliminary national accounts. For the full year, mainland GDP increased by 1.8% y/y in 2025, broadly consistent with a normal growth pace after weakness in 2023. Growth was slightly stronger in private industries at 1.9% y/y, while central and local government activity rose a slower 1.2% y/y. Household consumption strengthened markedly, supported by real wage growth and two policy rate cuts during the year, while exports and petroleum investment also contributed positively. This was partly offset by a third consecutive annual contraction in construction activity, reflecting subdued housing and commercial property investment. OSE +0.015% to 1816.38, EURNOK +0.156% to 11.4562, 10y NGB -0.9bp to 4.223%.

Norway’s January manufacturing producer prices rose 0.9% y/y, driven by higher domestic prices, while export prices declined. Prices for manufactured goods sold domestically increased by 1.9% y/y, easing from 2.8% in December, whereas export prices fell 1.1% y/y, extending a divergence that has been in place since April. The largest drag on export prices came from refined petroleum products, which dropped 22.5% y/y, alongside declines in fabricated metal products (-5.5% y/y) and chemicals (-7.3% y/y). In contrast, export prices for seafood rose about 12% y/y, while basic metals increased by 1.9% y/y. Over shorter horizons, export prices have firmed up in recent months but remain lower than a year earlier.

Hungary posted a central budget deficit of HUF 98.6bn in January, while the broader central subsystem of public finances recorded a surplus of HUF 32.3bn, reflecting offsetting surpluses in state funds and social security. The government said the 2026 budget remains stable despite the adverse external environment, allowing continued support for families, pensioners and SMEs. Tax and contribution revenues in January rose 9.0% y/y, with consumption taxes up 8% and VAT receipts increasing by 7%. EU program revenues totaled HUF 240.3bn, largely due to delayed transfers from the European Commission. Interest expenditure came to HUF 179.3bn, down sharply y/y, while spending on pensions and healthcare increased, with pension-related payments reaching HUF 593.3bn and curative and preventive benefits HUF 232.4bn. Budapest SI +0.363% to 130502.4, EURHUF -0.08% to 377.47, 10y HGB +7bp to 6.54%.

Czechia’s unemployment rate rose to 5.1% in January, up 0.3 percentage points from December, reflecting seasonal effects and changes to unemployment benefits, according to the Labor Office. The number of registered jobseekers increased to 378,547, up 58,031 from a year earlier, while new registrations rose sharply during the month. Authorities highlighted that January’s increase was partly driven by traditional winter seasonality and by behavioral effects linked to the “flexinovela” reform, which encouraged more applicants to claim benefits under revised rules. The share of jobseekers receiving unemployment benefits increased, with benefit recipients accounting for 28.7% of the total. Despite higher unemployment, labor market flows remained active, with over 30,000 people starting new jobs during the month. Prague SE +0.338% to 2768.72, EURCZK -0.108% to 24.219, 10y CZGB +0.4bp to 4.551%.

Japan’s December wage data showed real wages contracting for a 12th consecutive month, underscoring ongoing pressure on household purchasing power; this remains a key consideration for BoJ policy. Inflation-adjusted real wages fell 0.1% y/y, marking the slowest pace of decline since the contraction began in January 2025. Nominal total cash earnings rose 2.4% y/y to ¥631,986, accelerating from 1.7% previously but still slightly lagging inflation. Regular pay increased by 2.2% y/y, while overtime pay rose 0.9% y/y, easing vs. November and signaling softer private sector momentum. Special payments, mainly winter bonuses, grew by 2.6% y/y. Full-year data showed real wages fell 1.3% in 2025, extending annual declines for a fourth year.

Japan’s January banking data showed loan growth easing slightly while deposit growth remained subdued, according to preliminary BoJ figures. Total loans and discounts at major, regional and shinkin banks rose 4.5% y/y, from 4.9% previously, with major banks’ lending growth moderating to 5.8% y/y and the figure for regional banks at 4.1% y/y. Shinkin banks recorded more modest loan growth of 1.4% y/y. By contrast, deposits and CDs across city, regional and shinkin banks increased by just 0.9% y/y, broadly unchanged from recent months, reflecting weak inflows. City bank deposits grew 0.9% y/y, while shinkin bank deposits continued to contract at a rate of 0.3% y/y, underscoring divergent funding dynamics across bank types.

Japan’s current account recorded a surplus of ¥728.8bn in December, marking the 11th consecutive month of net inflows, according to preliminary Finance Ministry data. For the full year, Japan’s current account surplus in 2025 rose 11.1% y/y to a record ¥31.87tn, supported by an improvement in the goods balance and stronger primary income. The annual goods trade deficit narrowed sharply to ¥848.7bn from ¥3.66tn, as exports increased by 2.5% y/y to ¥107.76tn while imports edged down 0.1% y/y to ¥108.6tn, reflecting weaker energy prices. Net primary income rose 4.7% y/y to a record ¥41.59tn, while the services trade deficit widened to ¥3.39tn.

Japan’s January 2026 Economy Watchers Survey showed mixed but generally stabilizing conditions. The current conditions DI (seasonally adjusted) edged down slightly to 47.6, marking a third consecutive decline, as household and employment-related indicators weakened, despite improvement in corporate-related sentiment. The outlook DI improved to 50.1, reflecting stronger expectations in household and corporate activity, even as employment expectations fell. On a non-adjusted basis, the current DI dropped to 45.4, while the outlook DI rose to 50.6. Overall, respondents viewed the economy as recovering, though weather effects had something of a negative impact. Looking ahead, the recovery is expected to continue, albeit with concerns about rising prices.

Australian household spending fell 0.4% m/m in December, in a reversal from increases of 1.0% in November and 1.4% in October, according to seasonally adjusted data from the ABS. The decline was broad-based, spanning discretionary categories such as clothing, electronics and furnishings, as well as essentials including health. Clothing and footwear recorded the largest fall at 2.4% m/m, followed by furnishings and household equipment at 1.7% m/m, while health spending declined by 1.3% m/m after several months of gains. Higher spending on new vehicles partially offset the overall weakness. On a y/y basis, household spending remained elevated, rising 5.0% compared with December 2024, reflecting earlier strength driven by major sales and cultural events. ASX +0.288% to 5595.77, AUDUSD +0.286% to 0.7033, 10y ACGB +4bp to 4.866%.

Malaysia’s December industrial production rose 4.8% y/y, accelerating from 4.3% previously, while m/m output rebounded to 0.2% after a 1.1% contraction, extending positive momentum into a second consecutive year. The expansion was driven by manufacturing, which grew 6.7% y/y, supported by strong a strong rise of 7.5% y/y for export-oriented industries, led by electronics and vegetable oils, alongside a 3.7% y/y rise in electricity output. These gains offset a 2.5% y/y contraction in mining, reflecting a sharp decline in natural gas output despite higher crude oil production. For full-year 2025, Malaysia’s IPI rose 3.6% y/y, broadly stable versus 2024, with manufacturing up 4.5%, mining up 0.6% and electricity up 0.8%. KLCI +0.991% to 1750.01, USDMYR -0.342% to 3.934, 10y MGB -0.1bp to 3.564%.

Malaysia’s December manufacturing sales rose 6.4% y/y to MYR 168.6bn, driven by strong gains in electrical and electronic products at 12.6% y/y, alongside food, beverages and tobacco at 10.4% y/y and non-metallic mineral and fabricated metal products at 5.3% y/y. Export-oriented industries grew 6.8% y/y, led by computer, electronics and optical products, while domestic-oriented industries increased by 5.6% y/y. On a m/m basis, total sales edged down 0.5%. For the full year, Malaysia’s manufacturing sales reached MYR 1.97tn, rising 4.2% y/y. Employment increased by 1.1% y/y to 2.40 million, salaries and wages rose 2.0% y/y to MYR 101.2bn, and Q4 sales expanded 5.8% y/y. In December, employee numbers rose 0.1% m/m, while salaries and wages increased by 7.7% m/m.

Indonesian consumer confidence strengthened in January 2026, with the consumer confidence index (CCI) rising to 127.0 from 123.5. The improvement was driven by both the current economic conditions index (115.1) and the consumer expectations index (138.8), supported by higher income perceptions, better job availability and increased durable goods purchases. Confidence improved across most spending and age groups, and in the majority of surveyed cities, especially Semarang, Palembang and Padang. Looking ahead, consumers expect stronger income growth and business activity over the next six months. Financially, households allocated a smaller share of income to consumption, while savings increased, indicating stronger financial buffers. JCI +0.887% to 8005.664, USDIDR -0.374% to 16803, 10y IDGB +3bp to 6.469%.

Taiwan’s January exports, measured in U.S. dollars, surged 69.9% y/y to a record $65.8bn, while imports rose 63.6% y/y to $46.9bn, resulting in a trade surplus of $18.9bn, according to preliminary customs data from the Ministry of Finance. Export growth was driven overwhelmingly by electronics linked to AI, high-performance computing and cloud demand, with ICT and audiovisual products up 129.8% y/y and electronic components rising 59.8% y/y, both at record monthly levels. Imports were lifted by strong purchases of capital equipment and intermediate inputs, reflecting semiconductor investment and export-related demand. By market, exports to the U.S., ASEAN and Europe all hit record January highs. Authorities noted that the outsized y/y gains were amplified by a low base last year due to the timing of Lunar New Year. TAIEX +1.956% to 32404.62, USDTWD -0.445% to 31.546, 10y TGB +1.1bp to 1.41%.