Newsletter commentary Jan 2026

In January, broad-market indices also diverged significantly. Non-ferrous metals surged, gained 22.6% over the month, benefiting from the global commodities rally and anticipated demand from AI-driven industrial upgrades, while the banking sector experienced notable declines. The exuberance and volatility in January signal the beginning of two major rebalancing trends and a new phase in AI development.

First, the global capital allocation rebalancing is no longer a theoretical concept and it is now being implemented in practice. Political events, such as the arrest of Venezuela’s president and the Trump administration’s blunt statements regarding Greenland, have rendered prior narratives ineffective. The Canadian Prime Minister’s speech at Davos represented a systematic reflection on national destiny and a partial farewell to the old order. Carney proposed forming alliances among moderately strong nations to diversify risk. Even if Europe eventually reaches an agreement on Greenland, the Trump administration’s self-interested, strength-focused approach has left a lingering shadow.

The traditional habit of directing 80% of overseas investments to the U.S. is no longer considered safe. Trump’s warnings that Europe could face serious retaliation if it sells U.S. bonds or equities effectively restrict capital flows, forcing investors to seek safety elsewhere. The sharp swings in global asset prices also challenge U.S. assets: the depreciation of the dollar has reduced overseas investors’ returns on U.S. assets in the past year, the rapid rise in Japanese bond yields prompts Japanese financial institutions to reassess U.S. and Japanese government bonds’ attractiveness, and the rally in gold clearly signals a lack of confidence in the dollar. The frequent simultaneous declines in U.S. equities, bonds, and currencies encourage investors to pursue diversification.

The U.S. market is a large-capacity market; even small outflows can generate substantial ripple effects across other asset classes, with gold being just the beginning. Behind gold lies a return to physical assets. As major economies struggle with inflation and China emerges from a prolonged deflationary period, its production capacity will be increasingly recognized as the largest physical asset class.

Second, the rebalancing of China’s domestic asset allocation is already underway. Daily trading volumes approach usd 400 billion, and at times reach usd 600 billion, reflecting a sense of urgency. However, large-scale migration of savings has not yet occurred, and the market is already extremely active. The tradable portion represents 6–8% of daily turnover, equating to nearly 15 times annualized turnover, much higher than mature markets, where annual turnover may be less than twice. Protecting this enthusiasm is now a key challenge. The market has shown remarkable resilience, and some temporary measures during downturns can now be converted into more regular, long-term policies amid large-scale asset allocation shifts.

With the advent of various AI agents, the impact of AI on life and production is becoming tangible. The path of token consumption growth is now clear, and future opportunities and challenges will depend on improvements in usability and cost efficiency. Many entrenched internet-era platforms may be disrupted, and production processes will transform accordingly. U.S. software companies have faced scrutiny, and even after four years of GPT development, many cannot yet prove they are beneficiaries of AI. Supply chains are experiencing real impacts from cost surges due to supply-demand imbalances, cloud services are increasing prices, and some segments of the supply chain see profitability levels that could recover costs within a single year—a rare occurrence. Balancing short-term windfalls with long-term sustainability presents difficult investment trade-offs.

We view these two narratives, global and domestic rebalancing, and AI, as the defining themes of the current environment, and we aim to adapt proactively. Additionally, after a long period of deflation, China’s peak of new capacity investment has passed, carbon reduction constraints are becoming more prominent, and the unified domestic market is steadily advancing. These factors provide conditions for price recovery and profit improvement in many industries.

The recent surge in industrial metal prices, beyond macro narratives, still requires fundamental supply-demand verification. Downstream investment intentions remain uncertain, and consumers’ ability to absorb rapid price increases introduces volatility. For instance, the price of energy storage components has risen by nearly RMB 0.15 per watt, and the per-unit cost of electric vehicles has increased by approximately RMB 1,000. How the market digests these cost pressures remains a key question. Some commodities’ marginal demand is relatively resilient, but large price increases may subsequently rebalance supply and demand by suppressing traditional consumption.

We remain optimistic about the market, but the challenges of pacing and structural adjustments are real. The nomination of Waller has altered the previously linear market narrative, touching on the Fed’s independence, the sustainability of inflation and fiscal burdens, and the erosion of dollar credit from Fed balance sheet expansion. Waller’s approach appears more traditional, favoring less intervention, self-regulation of markets, and supply-side reforms. Rate cuts and balance sheet reduction may reduce demand for bonds, and while loosening regulations could increase some bond demand, concerns about uncontrolled dollar expansion may ease, relying instead on productivity improvements to resolve issues. Many of these assumptions may not fully materialize, and Waller’s policies may differ in practice. Nevertheless, the market is currently pricing in his ideal approach, and the recent period of one-sided market exuberance has come to a temporary halt, encountering some brakes on its prior logic.