Market overview
For a brief moment economic data and corporate earnings rather than geopolitics were front and centre of investors’ minds last week—so old school! Signs that tensions in Iran were easing, that the shockwaves caused by the US’ intervention in Venezuela were receding (for now at least) and that President Donald Trump’s call for the US to assume control of Greenland was just more posturing enabled global equities to continue their positive start to the year. Then came Trump’s social media post on Saturday threatening tariffs on eight European allies in response to these countries sending a handful of personnel each to take part in an exercise in Greenland. Cue a flick of the switch to risk-off mode.
We’ve been here before. Trump’s opening salvo on so-called Liberation Day in April 2025 when he first unveiled higher tariff rates for all and sundry, and then there was the threat of a tit-for-tat trade war with China in autumn 2025. Both occasions were initially marked by equity market weakness and a rally in government bonds before a Trump walk-back triggered a rebound in global stocks. Ever on the lookout for patterns, over the course of 2025 markets spotted one. Trump or his Administration throw a googly—markets react badly and/or Trump’s latest target threatens retaliation—Trump backs down. The question is though, is the TACO (Trump always chickens out) trade alive and well in 2026?
Quite possibly. The new year may just be weeks old but perhaps there has already been a TACO moment. Sunday 11 January saw Federal Reserve (Fed) chairman Jerome Powell announce the Justice Department is investigating the testimony he gave to Congress in June 2025 around ongoing building works at the Fed. Powell didn’t mince his words, saying the investigation was really about whether the Fed sets interest rates based on economic conditions or is directed by political pressure and intimidation. Powell’s remarks prompted a stream of support from former Fed chairs as well as other central bankers around the world. Concerns around the Fed’s independence had already been building; Powell’s remarks only served to stoke these further.
Up until then Fed independence worries had been centred around who Trump would nominate to replace Powell as Chair when his term expires in May 2026. White House insider Kevin Hassett had been the frontrunner. Hassett though is very much viewed as being the President’s man and so seen as being more likely to yield to pressure from Trump to slash interest rates if he was made Chair. But on Friday 16 January Trump announced that it would be a “serious concern” losing Hassett as his National Economic Council director. “I actually want to keep you where you are if you want to know the truth,” Trump told Hassett live on television. So, was this another TACO moment in response to backlash from members of Trump’s own Republican party and from the Union of Global Central Bankers who came out in support of Powell?
If it is, then maybe we’ll see another one this week when world leaders gather at Davos for the World Economic Forum—Trump, along with several leaders of the European countries threatened with tariffs, will be there. Certainly, the initial response from European leaders has been robust and equity markets have reacted negatively to the news, but will this be enough to make Trump back down? All eyes on Davos. Taco anyone?
Weekly market moves and economic news:
The MSCI All Country World Index (MSCI ACWI) edged 0.4% higher, bringing the year-to-date (YTD) gain to 2.4%.
United States:
A raft of relatively positive economic data couldn’t stop US equity markets from ceding ground—the main US stock index ended the week down 0.4% (+1.4% YTD). For the third week in a row, value (+0.7%) outperformed growth (-1.2%). Value stocks are now up 4.1% YTD compared to growth’s -0.6%. Small caps topped the lot with a 2% gain for the week, bringing the YTD tally to +8%. Yields on US Treasuries ticked marginally higher: the 2-year Treasury yield was up six basis points at 3.59% (up 11 basis points YTD); while the 10-year Treasury yield finished the week five basis points higher at 4.22 (up six basis points YTD).
As for the economic data, December’s consumer price index (CPI) showed a 0.3% month-over-month (MoM) increase and 2.7% year-over-year (YoY) rise. Core prices rose 0.2% MoM and 2.6% YoY—consensus estimates were for 0.3% and 2.7%. Producer prices were up 0.2% MoM and 3% YoY, a small uptick on the previous month’s 0.1% and 2.8% figures, according to November’s producer price index (PPI). Meanwhile, the Census Bureau’s consumer retail sales data for November came in stronger than expected at +0.6%, comfortably ahead of the +0.4% forecast.
United Kingdom:
UK stocks continued their good start to the year with large caps adding 1.1% (3.1% YTD). The more domestically focused mid-caps fared marginally better rising 1.2% (3.8% YTD). That could be down to a rebound in economic growth in November—the UK economy is estimated to have grown by a better-than-expected 0.3%, after contracting in the previous two months. The yield on the 10-year gilt ticked three basis points higher to 4.40% (down eight basis points YTD). Sterling was unchanged against the US dollar at US$1.34.
Europe ex UK:
Another good week for European equities with the MSCI Europe ex-UK Index up 0.7% (3.7% YTD) buoyed perhaps by news that the German economy, the largest in Europe, had registered its first year of growth in three years after expanding 0.2% in the fourth quarter. German stocks could only muster a 0.1% gain for the week though (3.3% YTD). Italy fared a tad better finishing up 0.2% (1.9% YTD). Switzerland was off -0.1% (1.1% YTD), while French stocks lost -1.2% (1.3% YTD).
Like sterling, the euro was unchanged against the US dollar at US$1.16. Finally, the yield on the 10-year German bund was down three basis points to 2.83% (down two basis points YTD).
