Monthly report

CIO Report - January 2026

Markets

Financial markets started the new year with positive momentum and proved broadly resilient, despite a marked increase in geopolitical risks, particularly related to Venezuela and Iran as well as a temporary escalation surrounding Greenland. Global equity markets posted strong gains, supported by solid economic signals and still accommodative monetary conditions. Across asset classes, the weakness of the US dollar stood out, as it declined against all G10 currencies. At times, the move was so pronounced that US Treasury Secretary Scott Bessent intervened verbally, contributing to a subsequent stabilisation. In fixed income markets, Japanese government bonds came under pressure. The announcement of early elections and campaign pledges of additional consumption tax cuts led to a sharp rise in yields, most notably at the long end of the yield curve. In commodity markets, precious metals were among the clear winners, with gold recording its strongest monthly performance since 1999. The rally was supported by the weaker US dollar and concerns about the institutional independence of the US Federal Reserve. The nomination of Kevin Warsh as the next Fed Chair was perceived as more hawkish than expected and triggered a partial correction in precious metals toward month-end. Overall, however, it was interpreted by markets as a signal of institutional continuity and monetary policy predictability. Oil prices also rose sharply, driven by geopolitical tensions and the resulting concerns about potential supply disruptions.

Outlook

The currently most significant development for the global financial system is an increasing shift in financial market liquidity toward the real economy. In the US in particular, monetary impulses are moving away from the Fed and toward the US Treasury. By increasingly financing sharply rising government spending through short-term T-bills rather than long-term T-bonds, public debt is effectively being monetised. T-bills are money-like instruments and facilitate debt financing without exerting upward pressure on interest rates. In this way, the US Treasury is assuming functions traditionally associated with the Fed, while simultaneously supporting economic activity. At the same time, the Chinese central bank has been injecting substantial liquidity for some time in order to stabilise domestic demand and the real estate sector. These funds are also flowing into the real economy (and indirectly into the global economy) rather than into equity markets. The previously strong rise in copper and silver prices corroborates this development. As a result, the momentum of financial market liquidity is declining globally. That said, there are pronounced regional differences. The US has already passed the peak of its financial market liquidity cycle. The ongoing global diversion of liquidity from financial markets to the real economy could, in the foreseeable future, lead to a shortage of “oxygen” in equity markets. At the same time, global economic activity and commodity prices are benefiting from this shift. A strong economy in itself is therefore not a catalyst for rising equity prices – rather, the opposite may be the case. An accelerating economic expansion would require additional liquidity and could further exacerbate the liquidity shortfall in equity markets. Moreover, solid global growth and rising commodity prices are likely to generate inflationary pressures over the medium term, resulting in upward pressure on long-term government bond yields. The nomination of Kevin Warsh as the new Fed Chair is expected to further support the shift from Fed-provided liquidity toward Treasury-driven, growth-supportive liquidity. A reduction of the Fed’s balance sheet therefore appears more likely. Consequently, despite a solid economic backdrop, deflationary impulses could emerge, which in turn may dampen long-term interest rates over the medium term.

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