Markets shifted sharply in early 2026 as central banks eased their tone and inflation cooled. Softer price pressures prompted investors to rethink risk and duration: ten‑year US Treasury yields fell from about 4.75% to roughly 3.85% by mid‑February, while equities rallied—S&P 500 total return jumped roughly 6.5% and the MSCI World ex‑US climbed near 4.0%. With core inflation trending lower in the US, near‑term rate risk diminished and attention swung toward carry and longer-duration plays.
Quick snapshot of the moves
– Headline CPI across major advanced economies decelerated at an annualized 90–120 bps between Q4 2025 and Q1 2026. – US core CPI eased by about 70 bps. – 10‑year US Treasury yields fell roughly 90 bps (≈4.75% → ≈3.85%). – S&P 500 total return: ~+6.5%; MSCI World ex‑US: ~+4.0%.
Flows, positioning and volatility tell the same story. A change in policy expectations sparked a broad reallocation into risk assets and selected credit. Equity ETFs hauled in around US$45bn in Q1—more than double the typical quarterly inflow in 2025 (US$18bn). Fixed‑income mutual funds added roughly US$22bn, with investment‑grade corporate credit attracting about US$9bn. Volatility eased as money moved in: the VIX slid from 18 to 15, reflecting a calmer macro backdrop.
What’s behind the rotation? Central-bank forward guidance and slowing inflation are the headline drivers. Big passive managers’ rebalancing and the sheer liquidity in ETFs amplified the move, nudging flows into crowded trades. That said, the gains aren’t without fragility—geopolitical shocks or a sudden shift back to risk‑off could quickly unwind positioning.
Winners and laggards
Lower volatility and tighter credit spreads helped cyclical sectors and bank stocks outperform, as investors reached for higher beta and carry. Defensive names underperformed modestly. Within fixed income, investment‑grade spreads compressed and high‑yield benefited where yield dominance outweighed credit concern. REITs and utilities were among the stronger sector performers, while financials showed mixed results.
Divergence across regions is reshaping relative opportunities. Consensus growth for 2026 stands at about 1.6% in the US, 0.8% in the euro area and roughly 4.2% in China. The US labour market remains tight (unemployment around 3.7%; average hourly earnings up ~3.8% YoY). Futures price in better than a 60% chance of at least two Fed cuts by December 2026, while the ECB’s easing odds sit nearer 35%. That policy gap is nudging investors toward US‑centric, carry‑rich and higher‑beta exposures, and is feeding regional FX and carry trades alongside China’s relatively stronger growth. But crowded positioning and external shocks remain real risks, so caution and active credit/sector selection still matter.
