2026 Weekly Update

Market update

The S&P 500 closed the week at 6,858.47, -1.03% lower. The Dow Jones closed at 48,382.39, -0.67%, with the Nasdaq lower by -1.52%. The volatility index VIX closed the week at 14.51, up from 13.60. The Euro Stoxx 600 rose +1.26%.

The 10-year UST closed at 4.19%, up from 4.13% a week before. The yield curve is upward sloping with the yield spread between the 3-month and 10-year UST at 57bps. US Corporate Bond spreads: Investment Grade spreads widened +1bp at 81bps and High Yield spreads narrowed -1bp at 323bps. German 10-year Bunds yield closed at +2.90% up from +2.86% a week before. In Europe, Corporate Investment Grade spreads narrowed -1bp at 90bps and High Yield narrowed -3bps at 300bps.

The US Dollar Index (DXY) appreciated +0.41% last week and closed at 98.42. The Euro closed at 1.1719 (-0.45%); the Yen depreciated -0.17%, closing at 156.84 and the Swiss Franc depreciated -0.37%, closing at 0.7924. Gold closed at $4,332.29, depreciating -4.43%. Oil was higher, Brent closed at $60.75 (+0.18%) and WTI at $57.32 (+1.02%).

Macroeconomy

US data

The Q3 GDP print, which was delayed because of the government shutdown, showed the US economy grew at an annualized pace of +4.3% (vs. +3.3% expected). That was the fastest quarterly growth in two years, and the so-called “core GDP” measure of real final sales to private domestic purchasers was up by a robust +3.0% as well. So that led to a lot of optimism about the economy’s momentum into next year, and the Atlanta Fed’s GDPNow measure for Q4 currently stands at +3.0%.

2026 tariff expectations

The most notable will be the US Supreme Court case, who are set to rule on the legality of the tariffs imposed under the International Emergency Economic Powers Act (IEEPA). As a reminder, roughly half of the tariff increases under President Trump have used IEEPA authority, and the legal challenges so far have been successful in the lower courts but were appealed by the Trump administration. Investors are now awaiting the ruling from the Supreme Court. Even if the IEEPA actions are ruled out, the administration can pursue other legal avenues to impose its tariff policies. For instance, the sectoral tariffs under section 232 (e.g. to steel and aluminum) are not covered by this court challenge. Or another option could be Section 122 of the 1974 Trade Act, which permits temporary 15% tariffs for 150 days. There are some trade deadlines in 2026. One is the scheduled review of the USMCA agreement, six years after it first came into force in July 2020. The other is the US-China trade truce, which was extended by a year after the meeting between Presidents Trump and Xi back in October. As it stands, the current US tariff reduction on China only runs until November 10, 2026. Nevertheless, there have been a few tariff reductions in recent weeks, particularly as concerns about affordability have risen up the agenda. There have been exemptions for products like coffee and beef, and it was also announced on New Years’ Eve that higher tariffs planned on Jan 1 for upholstered furniture and kitchen cabinets were being delayed by a year until Jan 1, 2027.

The Fed in 2026

President Trump said on Monday last week that there would be an announcement on Chair Powell’s replacement in “January sometime”. For reference, Powell’s term as Chair concludes in May, so the new Chair would be in place by the June FOMC decision, and futures are pricing in another 57bps of rate cuts by the December meeting. In terms of who the new Chair will be, the Polymarket odds continue to have NEC Director Kevin Hassett as the frontrunner (42%), followed by former Fed Governor Kevin Warsh (33%) and current Governor Christoper Waller (15%). Otherwise, the Supreme Court are also set to hear arguments on January 21 about the attempt to remove Governor Lisa Cook from the Fed’s Board of Governors.

Fiscal policies in 2026

In Europe, investors will see the fiscal impulse from the German stimulus, as well as from the One Big Beautiful Bill Act in the United States. All this comes at an interesting time, as 2025 saw periodic market flareups over loose fiscal policy, with sovereign bonds repeatedly seeing large losses before recovering again. That happened in May around the time of the US credit rating downgrade by Moody’s, which pushed the 30yr Treasury yield above 5%. And it was a similar story in Europe too, with a sharp selloff for UK gilts last summer when the government U-turned on welfare cuts, alongside losses for French OATs after PM Bayrou left office and new PM Lecornu resigned after 26 days, before he was reappointed again. Bond markets have been volatile, and last year even saw the biggest jump for Japan’s 10yr yield since 1994 as the BoJ kept hiking rates and the new government under PM Sanae Takaichi announced a further stimulus package.

2026 political agenda

In the US, we will have the midterm elections on November 3. That will see the full House of Representatives up for election, along with a third of the Senate. Currently on Polymarket, the Democrats are the 81% favorites to retake the House. That would be in keeping with the historic pattern, whereby the incumbent President’s party tend to lose House seats in the midterm votes. Meanwhile in the Senate, the Republicans are 66% favorites on Polymarket to keep control. However, the new Congress does not come into office until January 2027. In the UK, there will be a large set of local elections on May 7, which will be one of the most important midterm electoral tests for the political parties. Although that won’t change the government, PM Starmer’s position has been under increasing pressure. In France, the presidential election is expected for April 2027, but 2026 will be the year that campaigning begins in earnest, with candidates announcing. In Japan, a general election isn’t due until 2028, but speculation has been rising about a potential snap election given PM Sanae Takaichi’s approval ratings.

Highlights

2025 recap

Most financial assets had a decent performance in 2025, with global equities, bonds, credit and EM assets all having a strong year. That was driven by continued global growth, ongoing optimism around AI’s potential, and further central bank rate cuts. However, there were significant bumps along the way. Most notably, the April tariff announcements led to huge turmoil, and the S&P 500 saw its 5th-biggest two-day slide since WWII. Separately, the German fiscal stimulus announcement in March led to the 10yr bund yield’s biggest daily jump since German reunification in 1990. And with investors increasingly concerned about long-term inflation risks and potential currency debasement, gold and silver prices posted their biggest annual gain since 1979. For equities, the performance was strong across the board, with all the major global indices rising in 2025. That included a +25% gain for the Mag 7 in total return terms, as debate around a potential AI bubble remained top of the agenda. Global bonds had their strongest year since 2020, but there was a sharply divergent performance within that. For instance, US 10yr Treasury yields (-40bps) saw their first annual decline since 2020. But Japan’s 10yr yield (+97bps) had its biggest annual jump since 1994. Meanwhile in Europe, France’s 10yr yields ended the year above Italy’s, reversing decades where France had lower yields. Finally, the US dollar index (-9.4%) posted its worst year since 2017, weakening against every other G10 currency. So even as US assets performed strongly in local currency terms, they were relatively weaker on a USD basis.

Oil market

On the back of the weekend events in Venezuela, there is still much uncertainty on the potential impact for oil market. The US Energy Information Administration have said that Venezuela has the world’s largest proven crude oil reserves, at 17% of the global total. But despite those reserves, production has declined significantly over recent years, with crude oil production in 2023 down 70% from its 2013 levels. So, the prospect of a long-term supply recovery would serve to lower oil prices, and President Trump himself said over the weekend that US oil companies would “go in, spend billions of dollars, fix the badly broken infrastructure, the oil infrastructure, and start making money for the country”.

On rates

Last week, we saw a selloff on long-term bonds with yields hitting new milestones across several countries. That was particularly notable in Europe, where the 10yr bund yield (+4.5bps) closed at 2.90%, its highest level since October 2023, whilst the 30yr German yield (+6.4bps) moved up to its highest since 2011, at 3.54%. Similarly in the US, the 10yr Treasury yield (+2.4bps) moved up to 4.19%, and the 30yr yield (+2.7bps) rose to 4.87%, which in both cases was their highest since early September. Also, that brought the US 2s10s yield curve to close above 70bps on Friday for the first time since January 2022. This week, we will have the US jobs report for December on Friday. With more weakness in the labor market over recent months, the unemployment rate rose to a 4-year high of 4.6% in November. The Fed delivered 3 consecutive rate cuts since their September meeting, and futures are still pricing in a 53% chance of another cut by the March meeting. So, investors still think a Q1 rate cut is in the balance. Markets expect payrolls will rise by +59k in December, with the unemployment rate declining a tenth to 4.5%.

What to watch

• Monday: US December ISM index, total vehicle sales; China December services PMI; Japan December monetary base
• Tuesday: Germany & France December CPI; Italy December services PMI
• Wednesday: US December ADP report, ISM services, November JOLTS report, October factory orders; China December foreign reserves; Japan November labor cash earnings; Germany November retail sales, December construction PMI, unemployment claims rate; France December consumer confidence; Eurozone & Italy December CPI; Australia November CPI
• Thursday: US Q3 nonfarm productivity, unit labor costs, December NY Fed 1-yr inflation expectations, November consumer credit, October trade balance, wholesale trade sales, initial jobless claims; Japan December consumer confidence index, November household spending; Germany November factory orders; France November trade balance, current account balance; Eurozone December economic confidence, November PPI, unemployment rate; Switzerland & Sweden December CPI
• Friday: US December jobs report, January University of Michigan survey, October building permits, housing starts; China December CPI, PPI; Japan November leading index, November coincident index; Germany November industrial production, trade balance; France November consumer spending, industrial production; Eurozone November retail sales; Canada December labor force survey; Norway December CPI