January 2026 market update: Global markets started the year mixed, with European shares leading gains while US markets slowed. Bond markets saw volatility, particularly in Japan, and central banks kept interest rates steady as inflation continues to ease. New Zealand shares remained relatively subdued compared with global markets.

Here’s what shaped financial markets in January.

Shares: Europe leads, while US momentum finally slows

Global share markets delivered mixed results to begin the year.

A growing “sell America” trading theme emerged as investors reduced exposure to US assets, amid concerns about policy unpredictability coming out of the White House. Geopolitical tensions escalated after President Trump doubled down on plans to take control of Greenland, straining relationships with his European allies and weighing on market confidence.

Most global share markets outperformed the US S&P 500 during the month. The large US technology companies known as the Magnificent Seven (or the "Mag 7") delivered modest gains of around 1%, roughly in line with the wider US market. This potentially reflects a shift away from the narrow tech-led market leadership seen in recent years.

European share markets were the standout performers. Stronger economic data, improving growth expectations, and a weaker US dollar helped lift returns. Market gains were seen across sectors, rather than concentrated in a small group of companies as we've seen in the US over the past years. Defence companies posted double-digit gains as geopolitical tensions increased following US action in Venezuela and renewed friction within NATO. Economic indicators in the euro area were positive, with GDP beating expectations and industrial production stabilising.

New Zealand shares remain subdued

The NZ sharemarket began 2026 on a mixed and relatively quiet note. This continues the pattern of NZX 50 underperformance seen in recent years compared with international market indices. While global markets have been driven by large technology companies and broader sector growth, NZ’s smaller and more concentrated market has struggled to keep pace.

Central banks and interest rates: The US market

Central bank policy and independence of these banks vs their governments emerged as key themes for January.

Tensions increased between the US administration and the Federal Reserve (aka the Fed). The Department of Justice (DOJ) issued grand jury subpoenas relating to Federal Reserve Chair Jerome Powell’s 2024 Senate testimony on building renovations. Powell responded strongly, emphasising that the Fed operates in the public interest and independently of political direction. Global central banks voiced support for the importance of central bank independence.

The Federal Reserve kept its official interest rate unchanged at 3.5–3.75%, emphasising the need for a data-dependent approach following rate cuts in late 2025. The tension between Trump and the Fed continues, indicating a "watch this space" situation continuing into 2026.

NZ and European interest rates

The Reserve Bank of New Zealand (RBNZ) kept the Official Cash Rate (OCR) at 2.25%, maintaining a wait-and-see approach as inflation continues to ease. RBNZ Governor Anna Breman joined other central bank leaders in signing a statement supporting the independence of the US Federal Reserve, which drew criticism from New Zealand’s Foreign Minister Winston Peters.

Like NZ, the European Central Bank (ECB) held interest rates steady in January. However, European markets increasingly expect potential rate cuts later in 2026 if inflation continues to slow and the stronger euro weighs on economic activity.

Bond markets: warning signs emerge

Global bond markets were a key focus during January, with significant movements drawing particular attention. Japanese government bonds were the main source of global market stress. A sharp selloff pushed long-term yields to multi-decade highs after investors reacted negatively to Prime Minister Sanae Takaichi’s pledge to cut food taxes ahead of a snap election scheduled for February. 

Long-term yields moved sharply higher, with 30-year and 40-year yields rising more than 25 basis points and the 40-year government bond yield surging above 4% (its highest level since inception in 2007). This was the largest increase since market volatility following President Trump’s Liberation Day tariffs in April last year. Since Takaichi took office in October 2025, Japan’s 20-year and 40-year yields have increased by roughly 80 basis points. Investors remain concerned about further volatility and potential spillover effects into global interest rates.

Global bond markets outside of Japan

European government bond markets were more stable. German government bond yields remained relatively contained, supported by softer inflation and expectations of potential European Central Bank easing later in 2026.

NZ government bond yields rose modestly during January, particularly at longer maturities. These moves largely reflected rising global yields rather than domestic economic developments. Higher global interest rates also reduced the relative attractiveness of NZ bonds to overseas investors.

What this all means - looking ahead

January highlighted several key themes likely to influence markets through 2026:

• Investors are becoming more sensitive to geopolitical risk and policy uncertainty
• Central bank independence remains an important issue for financial markets
• Bond markets, particularly in Japan, may signal broader global interest rate pressures
• Market leadership is broadening beyond large US technology companies
• New Zealand markets continue to lag larger global peers

While markets began the year with mixed momentum, ongoing developments in global politics, inflation, and interest rates will continue to shape investment returns in the months ahead. But as we all know, we can't predict the future, and past performance is no indicator of future performance. So what can we do? Focus on what you can control, understand your investment goals and time horizon, and stick to your strategy - regardless of all the noise which is likely to continue.

TL;DR - January 2026 markets

Key takeaways from January:

• European shares were the strongest performers globally
• US markets slowed as investors reduced exposure to American assets
• Central banks in the US, New Zealand and Europe held interest rates steady
• Japanese bond markets showed signs of stress, pushing global yields higher
• New Zealand shares continued to lag larger global markets

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