WeekWatch

Navigating 2026 - what's on the list?

The surgical intervention in Venezuela by the US, just days into the new year, sparked numerous responses across financial markets. This weekend’s news that Fed chair Powell is under criminal investigation is no less shocking. It is a reminder that surprise events and market volatility are almost inevitable during 2026. We list some areas which could occupy investors in the months ahead.        

A new Fed chair – a hawk or a dove? 

Powell’s term as chair of the US central bank (the Fed) expires at the end of May 2026. Many investors will be keen to see whether his replacement takes a “hawkish” (favouring interest rates higher for longer) or “dovish” (lower interest rates) approach. The eventual choice will be a key driver for market sentiment in the months to come.  

The Fed’s “dual mandate” seeks to create the best conditions for maximum domestic employment compatible with a 2% inflation target. Maintaining this balance has led many commentators to label this the hardest job in finance. The candidate shortlist to replace Powell was completed before Christmas. The final decision on a replacement will be made by President Trump. At times, he has been critical of Fed policy, believing it should move quicker to cut interest rates.  

Moves to select someone considered vulnerable to undue pressure could be poorly received by investors and viewed as an erosion of the Fed’s independence. This weekend’s news that Powell is under criminal investigation regarding the US$2.5 billion renovations to the Federal Reserve Building may add to these concerns. This could result in investors demanding higher yields on US government bonds to compensate for the higher perceived risks.  

Ukraine peace without the dividend? 

Russia’s invasion of Ukraine in early 2022 ended Europe’s decades long “peace dividend”. For years, many European members of the North Atlantic Treaty Organisation (NATO) did not meet their annual defence commitment of 2% of economic output (GDP). However, against the backdrop of greater regional tensions member states have agreed to increase defence expenditure to 5% of GDP by 2035.  

This is a huge commitment but, if implemented, could underpin the defence sector in Europe and elsewhere. A shift to high volume, low expense systems, useful against mass drone attacks, and the increasing digitisation of battlefields could also support the order books. 

However, such a move is likely to increase fiscal and political pressures across Europe. Many of the region’s governments are already struggling with high debt levels which show no sign of easing.  

Venezuela and tumbling oil prices – what will happen next? 

After a brief spike in oil markets following the US strike in Venezuela, the price has slumped to levels last seen in January 2021 at the height of the pandemic. Now below US$60/bbl, Trump has commented on his preference for a US$50/bbl level. This presents investors with a “glass half empty, glass half full” scenario. Pessimists regard the current relative oil price weakness as a signal of slowing consumer demand, weaker economic growth (GDP) expectations and global oil oversupply. Optimists argue the current price is “just right,” not too high to push inflation higher, but not too low to signal a downward spiral in the outlook for the global economy. 

There are conflicting forces acting on oil. High production from the OPEC+ group of oil producers, as well as in the US is meeting lacklustre demand.  Growth in China, Japan and the eurozone are all forecast to slow in 2026, with China a particular fault line. As the world’s second largest oil consumer, for many years it has driven global oil demand. Yet weak domestic consumer confidence has weighed on demand. There are also structural changes underway, such as the rise of electric vehicles (EVs), which now account for half of new car sales across the country. 

Optimists point to the broad positive benefits of lower oil prices. It helps to reduce inflation, helping central banks to lower interest rates. For businesses, this helps improve their profit margins without the need to raise prices. This goes beyond the effects of cheaper utility and motoring bills for consumers and businesses.  

Many emerging market (EM) economies are significant oil importers and so are specific beneficiaries of lower oil prices. It helps contribute to stronger government finances as less government revenue is spent on importing oil. It also relieves the cost of energy subsides, undertaken by many EMs across Asia, Latin America and the Middle East (including top oil producers like Saudi Arabia and Iran) to provide cheap energy.   

What’s happening in China? 

In 2025, China’s stock markets rose strongly, outperforming the US. In contrast, its annual economic growth (GDP) may have undershot its annual target of “around” 5%. 2026 sees the start of China’s Five-Year Plan for 2026 – 2031. This will lay out the next stage of the country’s economic and social development. It is generally expected to focus on technology and innovation. 

Despite heightened trade tensions with the US, China’s annual trade surplus (the balance between exports and imports) rose to over US$ 1 trillion in 2025 for the first time. Non-US exports filled the space from lower US demand. Domestically, there is little sign of a recovery in residential property prices (a major store of household wealth, affecting key areas such as consumer spending), which continued to weaken in 2025, for the fourth year in a row. Combined with unsold housing inventory and a weak jobs market, this weighs on consumer confidence and expenditure.  

Even if China’s economic growth remains below 5% in 2026, investor sentiment could prove supportive on signs the country’s investment in AI has real world applications in the services and industrial sector.  

AI OK?  

To date, global AI spending has been estimated at US$1.6 trillion, most of that on infrastructure. Another US$375 billion is forecast to have been spent in 2025. This year could be when many investors ask AI operators to “show me the money”.  Despite Open AI stating it doesn’t expect to be profitable until 2029, it plans to invest over US$1 trillion during the next few years.   

This mismatch may be unsustainable over the longer term, possibly leading to lower valuations for the whole sector. With a handful of technology companies accounting for between 35% - 40% of the US S&P 500, any weakness here could result in a broader market correction.  

As a result, investors might become more selective during 2026. AI companies that can charge meaningful subscriptions and plot a credible path to profitability may be rewarded, while those relying on endless rounds of funding based on unrealistic projections will eventually fade. 

US midterms - gridlock ahead?  

The midterm elections in November could prove one of the most significant moments for US financial markets in 2026. Taking place halfway through a presidential term, midterms provide the electorate with the opportunity to vote on who controls Congress. It’s a chance for people to respond to the politicians’ question on “how we doing?”…  

Known as the “midterm curse”, the president’s party almost always loses seats in midterm elections. This has been the case in 20 of the 22 midterms stretching back to 1938. Assuming the Republicans lose control of either the House or the Senate they will be put on the defensive. Such a swing would make it harder for Trump, with his poll ratings already at historic lows, to push ahead with his legislative programme, including further tax cuts and deregulation across the environmental, crypto and technology sectors.   

It might sound counter intuitive, but this stalemate can often provide a positive backdrop for markets. A legislative logjam gives markets one less thing to focus on, allowing them to devote their time to corporate activity.  Historically, the benchmark S&P 500 has consistently delivered double digit returns in the 12 months after the midterms ever since 1950.    

Is it too late to buy gold? 

Having risen by 65% during 2025, it was perhaps inevitable that the gold price would rise on news of the US incursion into Venezuela. Yet gold’s haven status at times of geopolitical tension is just one catalyst that could underpin support for the precious metal. The high level of government borrowings in many developed economies, led by the US, is a further driver. In turn this could lead to further inflationary pressures and weaker currencies.  

As a finite resource, gold has proved an effective foil against currency debasement, while being free of any default risk. Recent US dollar weakness against other key currencies during 2025 may have also proved helpful as it reduces the cost of gold for non-US buyers. High levels of gold purchases by central banks have been a further support. Since 2022 central banks have significantly increased their level of gold purchases. 

However, while gold has had a great run, there is no guarantee this will continue in 2026. Should the US dollar strengthens, and geopolitical tensions ease, it could yet be a different story.  

Chancellor set to soften business rate rises for pubs 

Rachel Reeves is set to back down on hikes to business rates for pubs after widespread concern the increase could see substantial numbers facing bankruptcy. 

In the 2025 Autumn Budget, the Chancellor announced that business rate relief introduced during the pandemic would fall from 40% to 0% from April of this year. It followed a widespread revaluation of pub premises which saw sharp increases in their rateable values. 

Yet a backlash by pub landlords and industry groups has seen the government forced to make yet another U-turn. It is believed to be considering a number of measures, including changing the methodology used to calculate business rates or increasing the discount for pubs. 

This decision removes some of the financial pressures from businesses in this struggling area of the hospitality sector, but it marks yet another reversal of the decisions announced in the Budget last year. 

For instance, after announcing a £1 million allowance on qualifying assets for agricultural property and business property in the 2024 Budget, the government raised the threshold to £2.5 million in December, after coming under pressure from the farming community. 

Other U-turns from Labour include reinstating winter fuel payments and increasing national insurance.

The announcement could also cause more headaches for the government, with other hospitality businesses such as hotels and entertainment venues calling for similar changes to the bills they face.

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