As we move further into 2026, the global economic landscape is being shaped by shifting central bank policies, a resurgence in commodity prices, and the ongoing impact of the AI capital expenditure boom.

In this update, we break down the key developments from January and explore what they mean for your investment strategy in the months ahead.

Global market wrap: Central banks and leadership shifts

January started with a bang, with the US taking control of Venezuela and reiterating its interest in Greenland. Domestically in the US, Fed President Jerome Powell was threatened with a criminal investigation related to the costs of a renovation project at the Federal Reserve. Amidst this geopolitical noise, commodities soared while other assets remained mixed.

The US fed and the “Warsh” effect

One of the most notable recent trends is the widening divergence between unhedged and hedged global investment returns. As the AUD/USD has rallied from ~US$0.63 to US$0.70 over the past year, unhedged returns are now materially lower than hedged returns. We expect this to continue in the short term as the RBA enters a tightening cycle while the US Fed remains on hold.

The US Fed currently appears to be on hold at ~3.6%, with US growth remaining moderate and inflation running above target at 2.6%. President Trump has already announced Powell’s successor in Kevin Warsh, who will take over when Powell’s term ends in May 2026. While the market views Warsh as a competent candidate, his views on lowering rates while reducing the Fed balance sheet appear somewhat incompatible, as QE is traditionally what keeps yields lower by boosting demand for US debt.

International inflation trends

Other major developed economies are also allowing inflation to run above target:

• ECB: On hold at 2.0% (Core inflation: 2.2%)
• Bank of Canada: On hold at 2.5% (Core inflation: 2.8%)
• Bank of England: On hold at 3.75% (Core inflation: 3.4%)
• Bank of Japan: Forced to raise rates (to 0.75%) as inflation makes a comeback (Core: 1.9%)

Australian wrap: RBA responds to sticky inflation

The big news in January was December quarter inflation coming in above target at 3.8% (headline) or 3.3% (trimmed mean). With private demand recovering and the labour market tightening, the RBA lifted interest rates by 25bps to 3.85% in early February.

Interest rates and the Australian dollar

The sudden change in the cash rate outlook has seen the yield curve rise, with 10-year bond yields reaching 4.85% by early February. This has lifted the AUD/USD to US$0.70 – an 11% increase over the past year. While a higher currency helps reduce inflation via lower import prices, it also impacts investment return profiles.

Fiscal policy and the may budget

Government spending remains elevated, and a budget deficit is likely to persist in the medium term. However, Australia’s debt (40-50% of GDP) remains far lower than other developed economies. The Federal Government remains under pressure to find ways to reduce inflationary pressures in the upcoming May budget.

Market sector performance

• Commodities: Remains strong, led by precious metals and copper. Rio Tinto announced a possible merger with Glencore in January, but the “mega-merger” was called off in February over a disagreement on price.
• Technology: The local tech sector has faced headwinds due to a fear of AI’s impact on software companies, a higher currency, and higher bond yields. We still see good value in the sector, but investors must “find the roses amongst the thorns.”

Investment outlook for 2026

As we move into 2026, the easing cycle is nearing an end in most countries. Japan and Australia were the first developed countries to begin hiking interest rates. The commodity rally has expanded from precious metals to industrial metals, which may have further implications for inflation down the track.

Overall, conditions remain positive in the short term, but medium-term risks are building around loose policy settings and the AI capital expenditure boom.

Speak with the wealth management experts at LDB

Navigating a shifting interest rate environment and volatile commodity markets requires a proactive approach to portfolio management. Whether you are looking to review your currency hedging strategy or identify opportunities within the technology sector, LDB’s wealth management team is here to help.

To discuss how these global trends might impact your personal financial situation, please give us a call on (03) 9854 5555 or get in touch online to speak with an expert.