The Big Three - February 2026

Navigating risk as markets evolve

Market volatility punctuated the start of 2026 and is continuing into February across all equity markets, with even the star of 2025, precious metals, not shielded from the storm. The swings have been driven by a convergence of themes:  the unpredictable actions of President Trump, weakening global economic data and concerns around the size of artificial intelligence investment.

While the potential of AI remains a powerful long-term driver of growth, investors have become increasingly sensitive to questions around the scale of capital expenditure and whether it will deliver returns. A projected further surge in AI spending by major technology firms has weighed on sentiment, contributing to pronounced declines in software and services stocks and driving wider equity market weakness. This is set against the backdrop of mixed economic data in the United States, including signs of softening in the labour market and stagnating inflation.

The appointment of Kevin Warsh as the incoming chair for the Federal Reserve has presented some relief for the beleaguered dollar and contributed to the sell-off in Gold and Silver at the end of January. Known to be a proponent of using interest rates to control inflation, Warsh has more recently argued that economic strength warranted faster cutting. However, it is widely believed that his position is likely to revert back to supporting higher rates post midterm elections as the president’s power over domestic policy starts to wane.

Starmer stalls

Last week, the pound and gilts came under pressure as investors grew concerned about the risks to UK assets amid mounting questions over Sir Keir Starmer’s leadership. Political risk, which had largely subsided following the November Budget, resurfaced, pushing the pound sharply lower against both the dollar and the euro amid worries over potential instability within the Labour Party and the implications for fiscal discipline under future leadership.

UK government bond yields also moved higher, with borrowing costs briefly reaching their highest levels since November. These moves were later cut back by the Bank of England’s decision to hold interest rates while signalling that further cuts are likely. Although the policy stance supported yields in the near term, the combination of political uncertainty and evolving rate expectations weighed on sterling, particularly after its recent rally left valuations looking stretched. After a period of relative calm, markets are once again sensitive to UK-specific political risk, especially given lingering concerns over future borrowing and adherence to fiscal rules. As a result, sterling appears increasingly vulnerable to adverse headlines, while gilts may remain sensitive to shifts in confidence around policy credibility and political stability.

Japan’s fiscal pivot

Prime Minister Sane Takaichi’s landslide victory and the Liberal Democratic Party’s dominant majority vote have eliminated near term risk, creating a base for what many investors see as strong and prosperous Japan. Investors have aggressively embraced the "Takaichi trade," driving the Nikkei 225 to record highs above 57,000 as markets bet on massive fiscal stimulus and strategic investments in AI, semiconductors, and defence. This optimism was most visible in tech stocks—with chip-testing giant Advantest climbing over 11%—as analysts noted that Japan is currently outperforming the US market by a significant margin, a dynamic that is expected to pull more overseas capital back into Japanese equities.

However, this growth-focused agenda brings significant fiscal and currency challenges. Takaichi’s commitment to a record 122 trillion yen budget has fuelled concerns over Japan's debt sustainability, causing 10-year government bond yields to climb toward 2.27%. While the yen initially showed resilience due to official comments on fiscal responsibility, it remains under pressure near the 160-per-dollar threshold. This creates a delicate balancing act for the new administration.