Key Highlights

• Markets struggle to separate noise from signals
• Yield chasing replaces growth fears
• Diversification overtakes U.S. exceptionalism

What you need to know

Short-term noise can cause long-term deafness. That may be the key takeaway after a holiday-shortened week delivered a weaker USD, stalled the January equity rally, and left U.S. bonds lower.

Davos added the noise from big tech CEOs and world leaders driving the AI focus. But it was President Trump’s questioning of European leadership that became the main takeaway. The Bank of Japan (BoJ) is blamed for JPY and JGB weakness, which echoes into U.S. markets. Meanwhile, Greenland has tagged the U.S. for roiling the dollar. Q4 earnings and 2026 guidance did the rest, spooking shares off historic highs.

This week is unlikely to provide much comfort or quiet, given the host of central bank meetings, the usual month-end rebalancing pressures, and the ongoing AI adoption and investment expectations in Q4 earnings reports.

Across macro markets, the biggest surprises so far this year started in Japan, where the Nikkei leads developed market equities at 7%, while the JPY leads losses, down 1%. The French and Italian bourses are down 0.3% so far this year, while the EUR is flat. Australia leads with AUD up 2.7%, but its two-year yields are up 13bp after strong jobs data and PMI.

Commodities are clearly key again, with natural gas leading – up 42% in the U.S., the U.K. and Europe. WTI is up a mere 6.5%, while gold is up 14.5% to new historic highs.

The returns point to a world not only focused on the U.S. but increasingly looking everywhere at once for diversification and safety.

Three key themes dominate the week ahead:

1)  U.S. growth is back – no fear of recession – but will require good-not-great data to keep the Fed’s two 2026 rate cuts intact. Investors will listen to FOMC Chair Jerome Powell’s press conference for clues about what matters ahead. The IMF and WEF confirmed global GDP for 2026 at 3.3% – the best outlook in three years. This week’s global economic data will need to confirm the optimism.

2)  Cash is being put to work. The flow out of money market funds into stock funds is one highlight of early 2026. Another is the decline in cash levels and savings rates. November PCE data on spending and income show a 3.5% savings rate, which is the lowest in three years. This week’s Q4 earnings will need to support the narrative that easier financial conditions are driving investor sentiment.

3)  TINA lives in the U.S. Last week saw a short lived return of “sell America” sentiment, followed by concerns over a slower strategic shift. The holdings of U.S. shares and bonds stand out as stretched – but there is no alternative. There is no easy or fast decoupling from U.S. assets, given the size of global markets relative to the U.S. Real returns and volatility may drive USD hedging first, asset allocation second, and global diversification third. As investors rethink safety, gold and silver have gained in the absence of better alternatives. This week’s month-end rebalancing will be critical. 

Hedging risk: Chasing safe yields, buying gold and rotating to small caps

EXHIBIT #1: CHASING SAFE YIELD – FX CARRY HOLDINGS AND IG SPREAD

_{Source: BNY, Bloomberg}

Our take: The historic spread of IG continues to surprise, with new record-tight levels approaching U.S. Treasurys. At the same time, our iFlow FX carry holdings show near three-year-high levels of risk. Both reflect a push in 2026 by investors to chase yields, particularly those seen as “safe.” The role of Fed policy on both will be tested this week. During periods of Fed holding bias, carry has tended to stall. For IG, earnings matter, and weaker Q4 reports could pose a significant problem if the Fed shifts from its current rate-cutting reluctance. 

Forward look: The risk for investors is that the search for yields skips over “safe” and broadens. This shift will link back to central bank policy and positioning. The spread of IG- HY spread will be one key barometer to watch. In FX, the mix of SGD, JPY and CHF funding relative to emerging market volatility will become crucial.

Rate decisions from the Monetary Authority of Singapore (MAS), South African Reserve Bank (SARB) and Brazil’s COPOM are likely to matter even more than usual in this context. With more than 20% of S&P 500 earnings due this week, micro may outweigh macro in shaping the risk narrative. 

What we are watching

U.S. Fed decision and more economic data unlikely to surprise markets

EXHIBIT #2: FED FUNDS AND OIS SWAPS

_{Source: BNY, Bloomberg}

Our take: Markets enter the week still whipsawed by last week’s events. With limited data releases and an FOMC meeting that promises few fireworks, participants may have a chance to catch their breath.

We start with the November durable goods report on Monday, with markets anticipating a strong print. Pay particular attention to the “core” capital goods orders, a proxy for capital expenditures.

Consumer confidence data from the Conference Board survey will be released on Tuesday. Consumer views of the labor market should be of interest. Among the major data releases, December producer prices may shed light on tariff passthrough. Some analysts believe higher import duties won’t persist much longer. 

Forward look: We’ll preview the FOMC meeting in Tuesday’s Short Thoughts. The meeting itself is likely to be tame, especially by recent standards. No rate move is expected, and the Powell press conference is likely to avoid discussing the recent Department of Justice probe into the Fed. At most, markets may glean an updated assessment of where the Fed sees inflation and labor markets trending and whether it views prices or jobs as the greater risk. 

EMEA: Fiscal risk just as pertinent, but inflation outlook more nuanced

EXHIBIT #3: PMIS IN CEE INDICATE CYCLICAL RECOVERY UNDERWAY

_{Source: BNY, Macrobond}

Our take: Although worst-case scenarios have been avoided for Europe, last week’s events in Davos remain seismic, and the continent will need to take a hard look at strategic autonomy, no matter the cost. Although there were some reports of pension funds diversifying away from U.S. Treasurys, we have not seen any meaningful flow to that effect. EURUSD was marginally net bought on the week, while U.S. Treasurys were also net bought by cross-border investors. As with the “Liberation Day” tariffs in 2025, if yields are moving and the dollar is weak, global investors believe U.S. assets still offer sufficient compensation for risk premia. Furthermore, much of the yield moves this week have been driven by a return to fiscal dominance fears. While Japan is clearly the main driver at present, it would not be hard to shift focus on both developed and emerging European economies, which face similar risks.

Europe will need to ramp up defense spending significantly, but huge disparities remain in individual countries’ ability to fund such work. On Friday, French Prime Minister Lecornu survived a confidence vote. He then confirmed he would bypass parliamentary approval to secure the spending portion of the French budget. History suggests further political instability will follow, which may affect flows and holdings of French OATs. The U.K.’s recent borrowing figures have surprised to the downside, but domestic political instability has also returned.

The greatest fiscal dominance risk remains in Central and Eastern Europe (CEE). Following the National Bank of Poland’s (NBP) decision to hold rates steady, Hungary’s Magyar Nemzeti Bank (MNB) is expected to do the same, maintaining rates at 6.5%. The high nominal rate may be helping anchor currency and asset performance. However, the downside risks remain in real rates, especially if strong wage growth – fueled by public sector spending – continues to push prices higher, despite the European Central Bank (ECB) shifting its balance of risks back toward disinflation. There are signs that the economic cycle is turning in the region (Exhibit #3), with PMIs moving further into, or toward, expansion, defying ongoing contraction in Germany and Western Europe.

Like the NBP, we do not expect the MNB to adopt a hawkish stance, given various constraints. However, risk premia may continue to rise if hard data begins to confirm acceleration.

Forward look: The only G10 central bank decision this week comes from the Riksbank. We expect rates to stay on hold at 1.75%, with the monetary policy board likely reaffirming forward guidance for an extended hold. Swedish inflation remains just above target, and recent developments may inject caution into the policy outlook. Still, renewed defense spending and a strong fiscal position could support better SEK valuations.

We’re also watching the SARB decision, where another 25bp cut to 6.50% is expected. Real rates remain strong, but with precious metals prices surging, South Africa’s improving terms of trade may start to look stretched, especially if the rally isn’t demand-driven. South African assets remain among the best-performing in emerging markets. The onus is on the Government of National Unity (GNU) to accelerate reforms while financial conditions remain loose and avoid spending or investment decisions that could undercut productivity growth.

Inflation data will be released across Europe, with stronger numbers likely from Spain and Germany. However, signs of sequential softness have triggered recent reports of ECB concern over price pressures. We believe the greatest downside risk in inflation will come from much lower wage growth as job openings continue to soften in Western Europe, especially if fiscal caution picks up due to further steepness in yield curves. 

APAC: China PMI, South Korea sentiment, Australia and Japan inflation, and MAS

EXHIBIT #4: SOUTH KOREA COMPOSITE BUSINESS INDEX

_{Source: BNY}

Our take: In APAC, key data releases include China’s PMI and South Korea’s Composite Business Sentiment Index (CBSI), as well as inflation figures from Australia and Japan. Taiwan and the Philippines are set to publish their Q4 GDP results, while Thailand, the Philippines and New Zealand will release trade data. Additional indicators include India’s fiscal deficit, Singapore’s home prices, unemployment rates for New Zealand, Singapore and Japan, and Japan’s retail sales, industrial production, and housing starts data.

The upcoming China January PMI survey will be closely monitored to assess the sustainability of ongoing recovery in sentiment. Both China’s manufacturing and non-manufacturing PMIs returned to expansion territory in December 2025, for the first time since March. Within the non-manufacturing sector, the construction business activities index surged to 52.8, its highest level since June 2025, following four consecutive months of contraction.

South Korea’s CBSI should offer an early read on sentiment, following a December dip amid global tariff uncertainties and strong export growth momentum. The South Korean cyclical leading index is anticipated to gain further upward momentum, suggesting that the recent unexpected contraction in Q4 GDP may have resulted from a strong Q3 rather than signaling a slowdown in South Korea’s recovery.

Australia’s December and Q4 inflation figures will play a pivotal role in determining the timing of the Reserve Bank of Australia’s initial rate hike, especially following last week’s robust December employment data. Likewise, Tokyo’s January CPI, December unemployment rate, and ongoing wage talks remain key considerations in the BoJ’s path toward further interest rate policy normalization.

In other regions, Taiwan’s Q4 GDP is anticipated to be strong, whereas downside risks persist for the Philippines’ Q4 GDP. While Singapore’s upcoming data on home prices and unemployment are noteworthy, market focus is expected to center on the MAS policy decision.

The MAS is scheduled to hold its policy meeting, with expectations for no change to the Singapore NEER policy band (Nominal Effective Exchange Rate). Thus far in 2026, the Bank of Korea has adopted a neutral stance, while Bank Indonesia has become less dovish to support foreign exchange stability. Meanwhile, Bank Negara Malaysia maintains a neutral position, supported by robust growth recovery. February is set to be an active month, with policy meetings planned for Australia, New Zealand, India, Indonesia, the Philippines, Thailand and South Korea.

Forward look: Over the past two weeks, risk sentiment across APAC has remained generally positive with limited disruptions. Although concerns about tariffs and geopolitical uncertainty persist, optimism in AI-related sectors – along with policy easing and FX stability measures – has prevailed. China reduced interest rates for structural policy tools and indicated further easing, including a possible reserve requirement ratio cut. Meanwhile, South Korea and Indonesia have implemented steps to mitigate currency depreciation, whereas Thailand is adopting measures to manage upward pressure on its currency. Overall, differentiation among APAC economies is increasing, primarily driven by specific domestic considerations and diminished sensitivity to global geopolitical events. Monetary and fiscal easing remain central to supporting economic growth within the region, though these actions may negatively impact currencies.

Nevertheless, robust equity market performance is expected to enhance investor confidence, which could be favorable for regional currencies through increased capital inflows.

Key upcoming events include India’s Union Budget (February 1), Thailand’s general election (February 8) and Japan’s general election (February 8). China’s 14th National People’s Congress (NPC) and the Chinese People’s Political Consultative Conference (CPPCC) are scheduled for March 4 and 5.

Bottom line

Markets enter the coming weeks facing a familiar challenge: distinguishing durable signals from an abundance of short-term noise. The past holiday-shortened week underscored this tension, with softer USD performance, stalled equity momentum, and higher bond yields, driven more by positioning and narrative shifts than by fundamental deterioration. While Davos amplified themes around AI and geopolitics, price action points to a deeper recalibration underway – one where investors increasingly prioritize diversification, income stability, and real returns over singular growth narratives.

Looking ahead, central bank meetings and earnings season will test the resilience of this repositioning. The Fed’s messaging remains pivotal, not for imminent policy change, but for clarity on inflation tolerance and labor market risk. Globally, Japan’s unusual combination of equity strength and currency weakness, Europe’s fiscal pressures, and APAC’s uneven recovery highlight a world no longer anchored solely to U.S. outcomes. Commodities – particularly gold and natural gas – signal rising demand for hedges amid geopolitical and policy uncertainty.

For investors, the risk is less about recession and more about mispricing safety. Tight credit spreads, elevated FX carry, and heavy positioning suggest limited margin for error. As micro fundamentals regain influence through earnings, prudent portfolio construction will likely emphasize selective risk, volatility management and diversified sources of return rather than broad beta exposure.

Calendar for January 26 – January 30

Central bank decisions

Hungary, MNB (Tuesday, January 27): The MNB is expected to keep rates unchanged at 6.5%, and we see little capacity for additional easing in the near term, though the central bank is unlikely to fully discount such a step. For now, markets are still not too concerned about risks of a sharp decline in real rates because headline rates are holding up, but we continue to see upside risks to inflation with strong fiscal impulse. The latest wage figures point to real wage growth of close to 6% y/y, which by any measure, would typically require far more restrictive conditions. For now, we continue to see good holdings performance in assets, but hedging activity will likely pick up.

Chile, Banco Central de Chile (Tuesday, January 27): No change is expected in the BCC overnight rate and at 4.5%, the currency is seen as one of the lowest yielders in LatAm. Within iFlow, out of the core carry names in the region and EMEA, CLP is the only currency that remains underheld – not helped by real rates that stand at just 1%. However, sequential inflation showed declines in December, and there is no sign yet that improved terms of trade are helping accelerate investment and activity. Caution will likely persist for now, but there is some scope for CLP to catch up, given continued interest in metals.

Canada, Bank of Canada (Wednesday, January 28): The BoC Governing Council meets this week, and no rate moves are expected – although futures point to eventual rate hikes later in the year. A quarterly Monetary Policy Report will be published that will present the BoC’s outlook for the rest of the year. Current pricing still indicates a tail risk of a cut over the next six months, but expectations shift dramatically to hikes thereafter.

U.S. Federal Reserve (Wednesday, January 28): The FOMC meeting promises few fireworks. With no rate move likely, the market will have to be satisfied with the statement and the press conference. How will the Fed characterize the balance of risks between inflation and unemployment, and will Powell address any questions about Fed independence? Markets are currently not pricing in two full cuts for the year, with terminal rates expected to stay comfortably above 3% for the duration of the policy horizon.

Brazil, COPOM (Wednesday, January 28): The Selic rate is expected to remain at 15% and keep real rates well-anchored, helping support BRL performance amid ongoing interest in high-carry FX holdings. Geopolitical noise has not been impactful on assets, but there will be some risk premia priced in as domestic politics move to the fore. Meanwhile, the economy will also be looking for a lift from improvements in the commodity space, though there will be concerns regarding the demand side of the equation. Economic momentum is showing some improvement, but fiscal conditions will continue to linger in the background.

Singapore, MAS (Thursday, January 29): We expect MAS to maintain its current SNEER policy stance and continue emphasizing readiness to address medium-term price risks. It is premature to signal a hawkish policy shift. Since the October 2025 quarterly meeting, Singapore’s macroeconomic conditions have been positive. Q4 GDP exceeded expectations at 1.9% q/q and 5.7% y/y, with full-year growth at 4.8%, up from 4.4% in 2024, mainly due to strong exports and domestic consumption. Housing markets eased slightly but remained high; Q4 home prices rose 0.7% q/q and 3.4% y/y, compared to 0.9% q/q and 5.1% y/y in Q3. Disinflation pressures have lessened, with both headline and core inflation at 1.2% y/y after rebounding from August lows.

Sweden, Riksbank (Thursday, January 29): The Riksbank is expected to keep rates unchanged at 1.75% and affirm the view that rates will stay at current levels for the foreseeable future. Inflation is broadly on target, but with the ECB expressing renewed caution, the Riksbank is likely to remain vigilant to downside risks. Domestic activity remains robust as Q4 figures point to improved industrial orders and household consumption, though structural unemployment continues to weigh on expectations. The Riksbank will likely reiterate that the SEK is undervalued, but we continue to see a funding preference for European low-yielders, ex-CHF.

South Africa, SARB (Thursday, January 29): We expect the SARB to cut rates further to 6.5% as inflation continues to run around 3.5%, which ensures a sufficiently anchored level of real rates. Fiscal credibility remains strong, and ZAR is benefiting from ongoing inflows. There is ample scope for duration addition in the current environment. The surge in metals prices is adding to interest and supporting the financial account, especially if hedge ratios on equity positions remain low. However, November figures pointed to a surprise sequential contraction in mining production, and we caution that price gains do not necessarily translate into higher activity levels.

Colombia, Banco de la República (Friday, January 30): Colombia is the first major LatAm economy to see a reverse in the monetary policy cycle as markets now expect a 50bp hike. This would push the overnight lending rate back up to 9.75%, though the decision is not expected to be unanimous. Inflation risk is clearly a factor, but markets will query the need for such a move with real rates still in the mid-single digits, while the currency has already strengthened materially this year. For now, expectations for tighter financial conditions are not leading to any impact on activity or confidence metrics. Mmarkets will also be attuned to any central bank assessment of geopolitical risks.

_{Source: BNY}

_{Source: BNY}

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