The Cambridge Weekly- 26th January

Markets initially reacted negatively to suggestions by the US administration over the weekend that tariff policies could be implemented on EU countries opposing the US’s position on Greenland, with military intervention also not ruled out. However, following a speech at the World Economic Forum in Davos last Wednesday, it was announced that an “infinite deal” had been agreed between the US and NATO Chief Mark Rutte, lowering tensions.

Elsewhere, data released last week revealed that the Chinese economy grew 5% in 2025, as measured by GDP. Interestingly, figures revealed that Chinese growth was once again propped up by their booming export sector, despite the volatility in global trade policy over the year. However, despite the impressive headline figure, economists have raised concerns regarding the dependency of the Chinese economy on the export sector, given ongoing concerns around weak domestic demand.

Global Equity Markets:
After a bumper year for precious metals in 2025, driven by investors seeking safe-haven assets and diversification away from the US dollar, amid increased uncertainty and volatility, the momentum has continued in the first weeks of 2026. Rising geopolitical tensions has caused investors to look to these assets again, pushing gold to a new record high of $4,800 last Wednesday evening.

In equity markets, both the S&P 500 and Nasdaq fell sharply in response to the weekend news when they opened last Tuesday, after being closed on Monday for Martin Luther King Jr. Day. The S&P 500 index fell 2.1% last Tuesday but clawed back some of these losses as tensions eased during last week, following developments at the World Economic Forum. The FTSE 100 also fell sharply on the release of the news.

By close on Friday the S&P 500 and FTSE 100 had both fallen over the week by 0.34% and 0.9% respectively. Over the week the Nasdaq index achieved a marginally positive return. The dollar depreciated marginally last week against sterling and now trades at around 1.36.

Inflation, Interest Rates and Bond Markets:
UK inflation rose 3.4% in December, above the 3.2% predicted by analysts, and this was driven mostly by higher prices for both air travel and tobacco related products. Despite the unexpected increase, this did not cause much concern for investors who attributed most of the rise to seasonal distortions which make the headline figure look worse than it is. The inflation print will be a pivotal data point for the Bank of England’s Monetary Policy Committee, who are due to meet in February and make their next interest rate decision. Despite persistent inflation, economists continue to forecast that UK inflation will fall close to the BoE’s 2% target in the second quarter of the year.

Long-term UK borrowing costs have been slowly declining over the past few months, with 30-year gilt yields falling below 5.1% recently. They have since risen to around 5.2%, which still puts them well below their peak of almost 5.7% in September. The fall in yields – which signifies a rise in prices – is partly due to an improving fiscal situation and expectations of lower future levels of inflation.

Last Monday Japanese Prime Minister Sanae Takaichi called for a snap election, which is due to be held on 8th February. Her aim is to secure a parliamentary majority for her Liberal Democratic Party, and use this position to cut taxes and increase public spending. Japan famously has extremely high levels of government debt; investors are nervous about the plans to issue further debt and consequently sent the price of Japanese government bonds down after the announcement. The yield on Japanese 40-year bonds hit 4% for the first time ever – a historic milestone showing how the economic situation in the world’s 4th largest economy is evolving. The fallout of this was felt in bond markets all around the globe; long-term US bond yields reached their highest levels in over 3 months.

What’s on the horizon
It’s a busy week ahead on the macro front, with a plethora of data releases and central bank decisions from all over the world. Notably, on Wednesday, the Bank of Canada and the Federal Reserve are due to make decisions on whether to cut their interest rates. It is widely expected that both central banks will hold interest rates at their current levels.

Third quarter GDP figures for Germany are also likely to fall into the spotlight. Investors will be closely watching for any insight into the financial health and growth of the world’s third largest economy.

Big tech earning season kicks off this week, with Microsoft, Meta, Tesla and ASML all reporting earnings on Wednesday, whilst Apple is set to follow suit on Thursday. Investors will be keeping an eye on not just the headline earnings figures, but also management commentary on future outlook. Investors will be relying on these insights to paint a picture of how the vast quantity of investment going into AI is being deployed.

The Cambridge Team

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Source of financial market data: MorningstarDirect.