Monthly Market Review — February 2026

Equities

Global equities (+1.5%) advanced in February. Geopolitical tensions surged after the US and Israel commenced military strikes on Iran, killing Iranian Supreme Leader Ayatollah Ali Khamenei and other senior leaders of the Islamic Republic’s regime. These actions triggered retaliatory attacks by Iran across the Middle East, including civilian infrastructure within Gulf Cooperation Council states. The unknown scale and duration of the conflict added new risks for the global economy and upended energy markets, fueling anxiety about a potential resurgence in inflation across the globe. Monetary policy continued to diverge among key central banks. The Reserve Bank of Australia (RBA) raised interest rates due to a solid economy and renewed inflation pressures; the European Central Bank (ECB) signaled a prolonged pause in rate cuts amid significantly below-forecast inflation; the Bank of Japan (BOJ) is on track to gradually tighten policy; and the Bank of England (BOE) and the US Federal Reserve (Fed) remained on course to ease policy rates this year. The US Supreme Court struck down tariffs that President Donald Trump imposed under the International Emergency Economic Powers Act (IEEPA), including the April 2025 “reciprocal” tariffs. However, the US government quickly replaced the invalidated tariffs with a new 10% global tariff to maintain its protectionist trade agenda. Japanese Prime Minister Sanae Takaichi led her Liberal Democratic Party to a landslide victory in a snap election, securing a supermajority in Parliament that gives her a stronger mandate to implement her conservative agenda.

US

US equities (-0.8%) registered their first monthly decline in 10 months. Growth stocks significantly underperformed their value counterparts, as investors rotated toward cyclicals and more defensive areas of the market amid fears about the disruptive influence of AI on the technology sector, particularly software and data services companies. Panic spread to private equity firms and lenders with significant exposure to the software sector, in addition to financial services, real estate, logistics, and media firms viewed as potentially vulnerable to advancements in AI. Annualized GDP decelerated from 4.4% to 1.4% in the fourth quarter, well below the 2.8% consensus estimate. The downside surprise largely reflected the impact of the prolonged government shutdown, while a gauge of underlying demand was solid. The Supreme Court struck down President Trump’s global tariffs, undercutting his key economic policy and setting the stage for a prolonged legal battle for as much as US$170 billion in tariff refunds for importers. According to FactSet, with 96% of companies in the S&P 500 Index having reported fourth-quarter results, 73% reported better-than-expected earnings. The blended year-over-year earnings growth rate for the index stood at 14.2% (9.8% excluding the Magnificent 7 companies), well above the 10-year average of 9.9%.

Economic data released during the month suggested that the economy remains on a firm footing. In January, surprisingly robust nonfarm payroll growth of 130,000, a surge in overall labor income, and a decline in the unemployment rate to 4.3% potentially signaled a stabilizing labor market after much lower-than-expected job growth in 2025. Jobless claims data showed few signs of widespread layoffs. December retail sales were flat, although larger tax refunds and positive wealth effects may help to support spending in the first quarter. The Conference Board’s Consumer Confidence Index rebounded to 91.2, from 89.0, reflecting more optimistic views about the economy, job market, and incomes. Consumer Price Index (CPI) inflation was relatively mild in January, but a larger-than-forecast increase in the Producer Price Index, driven by the services sector, suggested lingering inflationary pressures that could delay anticipated interest-rate cuts by the Fed. A decline in mortgage rates to their lowest level since 2022 provided some optimism about the depressed housing market but failed to spur home-buying activity due to ongoing affordability headwinds.

The manufacturing sector remained in expansionary territory in February, with the Institute of Supply Management (ISM) Manufacturing Index edging slightly lower to 52.4. Concerningly, a gauge of input prices surged to a three-and-a-half-year high, which elevates the risk of higher inflation in the near term. The ISM Services Index remained firmly in expansionary territory in January, holding steady at 53.8 and matching the highest level since October 2024. The National Federation of Independent Business (NFIB) Small Business Optimism Index dipped slightly to 99.3 in January but remained above the long-term average of 98. Uncertainty and cooler labor demand offset expected improvements in sales, while capital spending over the past six months was the highest since November 2023.

Within the S&P 500 Index (-0.8%), four of the 11 sectors posted negative results for the month. Consumer discretionary (-5.4%) was the worst-performing sector, while communication services (-5.1%) and information technology (-3.9%) also underperformed the index. Utilities (+10.3%) was the best-performing sector. Energy (+9.4%), materials (+8.4%), and consumer staples (+7.9%) also outperformed.

Europe

European equities (+4.3%) surged higher, registering their eighth straight monthly gain. Macroeconomic indicators reinforced confidence of a gradual economic recovery in Europe and the UK. Despite the shifting US tariff landscape, heightened geopolitical tensions, and the strong euro, eurozone business activity was better than expected. Manufacturing expanded for the first time since August, and the HCOB Flash Eurozone Composite Purchasing Managers’ Index (PMI) increased to 51.9, marking the fourteenth consecutive month of expansion. Notably, German output reached a four-month high, while French business activity showed few signs of growth amid weak demand. The ECB left interest rates unchanged for the fifth consecutive time against a backdrop of resilient economic growth and contained inflation. Despite a reduced 2026 economic growth forecast and a higher peak unemployment projection, the BOE kept policy stable but signaled that an additional rate cut could come as soon as March. Annual eurozone headline inflation fell to a 16-month low of 1.7% in January, although sticky core inflation of 2.2% and services inflation at 3.2% warranted caution among policymakers. According to LSEG, fourth-quarter earnings for companies in the STOXX 600 Index are forecast to decrease 0.1% from a year earlier.

In February, the HCOB Eurozone Manufacturing PMI rose to a 44-month high of 50.8 and moved above the 50.0 expansionary threshold for the first time since August 2025, as new orders grew the most since April 2022. Notably, input prices accelerated to a 38-month high, while output prices rose at a faster pace. The HCOB Flash Eurozone Composite PMI revealed that services sector activity expanded modestly in February for the ninth consecutive month. Both input costs and output price inflation increased at a slower pace. The European Commission’s Economic Sentiment Indicator decreased to 98.3 in February, with consumer and industry confidence remaining broadly stable.

Germany’s (+3.7%) manufacturing sector showed encouraging signs of recovery, as larger increases in both output and new orders lifted the headline HCOB Manufacturing PMI to 50.9 in February and into growth territory for the first time in over three-and-a-half years. The ZEW Indicator of Economic Sentiment decreased modestly to 58.3 in February, falling well short of market expectations of 65, but still suggesting that respondents remain relatively optimistic about the near-term outlook for the economy. The UK’s (+7.3%) economy grew by 0.1% in December and by a less-than-expected 0.1% in the fourth quarter, overshadowed by trade shocks and uncertainty over fiscal policy. Encouragingly, the S&P Global Flash UK PMI Composite Output Index indicated that business activity increased to a 22-month high in February, supported by a robust and accelerated upturn in new work. Annual headline inflation fell sharply to 3.0% in January, strengthening the case for the BOE to cut interest rates in March.

Pacific Basin

Pacific Basin equities (+8.1%) surged. In Japan (+9.9%), Prime Minister Sanae Takaichi’s Liberal Democratic Party secured a more than two-thirds majority in the 465-seat lower house, giving her greater latitude to advance her conservative policy agenda. The landslide result sparked a rally in equities, while yields fell as political uncertainty eased and as markets gained confidence in the government’s fiscal spending plans. Recent economic data was mixed. GDP grew only 0.1% annualized in the fourth quarter, well below consensus expectations, strengthening the case for greater fiscal stimulus to bolster the economy and spur consumer confidence and demand. Inflation eased to 1.5% in January — its lowest since March 2022 — while core inflation slowed to 2% as subsidies and easing food prices reduced price pressures. However, real wages unexpectedly contracted as payments to workers failed to keep pace with rising prices, highlighting weaker household purchasing power and posing a potential challenge for the BOJ’s gradual policy tightening path. Consequently, Takaichi conveyed her reservations about further rate hikes to BOJ Governor Kazuo Ueda and moved to nominate two “reflationist” academics to the BOJ board. The surprise decision pushed long-term government bond yields higher and the yen lower. It also reinforced the potential for a slower pace of policy tightening, even as markets continued to price a meaningful chance of an April interest-rate hike.

In Australia (+5.8%), the RBA unanimously delivered its first rate hike since late 2023, lifting the cash rate 25 basis points (bps) to 3.85%. The decision came as the central bank struggled to curb inflation amid stronger-than-expected private demand and a capacity-constrained economy marked by stagnant productivity, a tight labor market, and high levels of public infrastructure investment. The RBA board signaled that inflation may remain above its 2% – 3% target but declined to commit to a defined policy path, with markets anticipating additional hikes. This sentiment was partially challenged following December’s household spending report, which unexpectedly fell 0.4% after robust spending in the preceding two months. Nonetheless, Australia’s labor market remained resilient in January; the jobless rate held steady at 4.1% and full-time hiring drove solid job growth, which reinforced the RBA’s view that the economy can absorb tighter policy. Core inflation rose faster than expected at 3.4% year over year in January, driven by housing and electricity costs, sending the Australian dollar higher and further bolstering the prospect of additional rate hikes.

In Singapore (+0.5%), the government raised its 2026 GDP growth forecast to 2% – 4%, from 1% – 3%. The upgrade came after the economy expanded 5.0% in 2025, buoyed by stronger-than-expected fourth-quarter growth due to resilient global trade and a surge in AI-related demand that boosted electronics and semiconductor production. The trade ministry cited sustained AI investment and supportive global fiscal and financial conditions as factors that should underpin growth, even as tariffs weigh on non-AI trade. Consumer inflation was muted and matched expectations in January, with headline CPI rising 1.4% year over year and core inflation easing to 1.0%.

Emerging Markets

Emerging markets (EM) equities (+5.0%) surged in February, led by Asia, followed by Latin America and Europe, the Middle East, and Africa (EMEA).

In Asia (+5.7%), China’s (-5.8%) economy remained strained by a prolonged property slump that has dampened consumer confidence and spending. New-home prices slid 3.1% annually in January, the sharpest drop in seven months and worse than the 2.7% decline in December. CPI inflation rose less than expected at 0.2% year over year in January, while producer price deflation persisted — underscoring ongoing deflationary pressures in the absence of more significant stimulus and a pickup in domestic demand. Factory activity in February contracted for a second consecutive month, as the official manufacturing PMI slipped to a four-month low of 49.0. Taiwan (+11.8%) signed a trade deal with the US that lowered tariffs on Taiwanese exports to 15% in exchange for an agreement to reduce 99% of tariff barriers on US goods and a commitment to purchase over US$84 billion in US goods from 2025 to 2029, including liquefied natural gas, crude oil, aircraft, and power equipment. The Directorate General of Budget, Accounting and Statistics hiked its 2026 GDP growth forecast from 3.5% to 7.7% and its export growth forecast from 6.3% to 22.2%, as the tech-reliant economy continues to benefit from booming demand for AI. South Korea’s (+22.0%) exports in February rose for the ninth straight month, up 29% from a year earlier to US$67.45 billion, driven by resilient semiconductor demand. Annual headline CPI inflation eased to a five-month low of 2.0% in January, largely due to stable fuel costs.

In Latin America (+2.6%), Brazil’s (+2.1%) average tariff rate on US exports plunged 13.6% on a trade-weighted basis after the US Supreme Court invalidated US tariffs imposed under the IEEPA. The IPCA-15 index monthly consumer inflation gauge rose more than expected to 0.84% in February, but the central bank is still expected to lower interest rates in March. Mexico’s (+6.3%) central bank raised its 2026 GDP growth forecast from 1.1% to 1.6% following stronger-than-expected economic growth in the fourth quarter. The central bank held interest rates at 7%, the first pause in its rate-cutting cycle since mid-2004. The prospect of a rate cut in March diminished after annual inflation accelerated to 3.9% in February.

In EMEA (+1.6%), Saudi Arabia (-5.6%) ended lower amid heightened tensions between the US and Iran. Oil production increased and oil exports surged to a three-year high as part of a contingency plan to mitigate the risk of supply disruptions if US military action against Iran impacts energy flows in the Middle East. Sentiment was further pressured by an increase in US tariffs to 15%, up from the 10% level that previously applied to many Gulf countries. South Africa (+8.8%) signed a framework agreement for a new trade deal with China, as the government sought new avenues for trade after the US imposed 30% tariffs on South African exports in August. Consumer inflation eased to 3.5% in January, providing scope for additional interest-rate cuts by the central bank.

Fixed Income

Global sovereign yields declined sharply amid softer economic growth signals and heightened geopolitical and trade policy uncertainty, and most fixed income sectors delivered negative excess returns as credit spreads widened. The RBA hiked rates by 25 bps, while the Fed and most other major central banks kept their policy rates unchanged. According to Bloomberg, the US Aggregate Index returned 1.64% for the month, underperforming duration-equivalent Treasuries by 0.20%. The Global Aggregate Index returned 1.41% in US-dollar-hedged terms, underperforming duration-equivalent government bonds by 0.12%. The TIPS Index delivered a total return of 1.31%, and the 10-year breakeven inflation rate decreased by 8 bps to 2.25% during the month.

Global sovereign yields moved lower as cooling inflation, signs of slowing economic growth, and renewed demand for government bonds supported the rally despite broader concerns around technological disruption and geopolitical uncertainty. In the US, Treasury yields declined across the curve amid mixed inflation readings and intermittent flight-to-quality flows. In the euro area, Bund yields fell on easing price pressures and a cautious growth outlook, while UK gilts outperformed following continued disinflation progress and a notably dovish central bank stance. Across Asia Pacific, Japanese yields moved lower, led by the intermediate and long tenors, reflecting strong auction demand and reduced expectations of near-term policy tightening. Australian yields declined alongside global peers, with still heightened domestic inflation tempering expectations for policy easing. Emerging markets yields ended broadly lower, supported by the global bond markets rally and a more constructive backdrop for fixed income, with lower US yields creating room for selective compression in higher-quality markets.

US investment-grade corporate bonds generated positive total returns and underperformed duration-equivalent Treasuries. The financials, industrials, and utilities sectors underperformed relative to duration-equivalent government bonds. High yield generated positive total returns. Higher-quality bonds outperformed their lower-quality counterparts, with BB rated bonds posting the strongest returns, followed by B and CCC rated bonds. The best-performing sectors during the month were oil field services, midstream, and supermarkets, while transportation services, technology, and building materials lagged. Global credit underperformed duration-equivalent government bonds as spreads widened. At the broad sector level, the financials, industrials, and utilities sectors underperformed relative to duration-equivalent government bonds. The US dollar-, euro-, and sterling-denominated corporate bonds generated positive total returns. All currency denominations produced negative excess returns relative to duration-equivalent bonds. Within EM, local market debt underperformed external debt. Spread widening hindered external debt performance, while a decrease in US Treasury yields aided results. Appreciation in EM currencies and EM rate movements contributed favorably to results in local markets. Within securitized sectors, agency mortgage-backed securities underperformed duration-equivalent government bonds, while commercial mortgage-backed and asset-backed securities outperformed.

Currencies

US-dollar returns were mixed in February, strengthening against most G10 peers amid periodic safe-haven demand and ongoing geopolitical uncertainty and supported by relatively favorable interest-rate differentials and resilient economic momentum. Within G10, the British pound underperformed as some softer UK economic data and shifting policy expectations weighed on sentiment, while the Japanese yen weakened amid persistent yield differentials and expectations that policy normalization would remain gradual. In contrast, the Australian dollar outperformed due to monetary policy tightening and firmer commodity price dynamics. EM currencies also finished mixed against the US dollar; high-carry Latin American currencies such as the Brazilian real and Mexican peso outperformed on relatively attractive yield differentials, while the Chinese yuan appreciated amid policy measures aimed at stabilizing the currency.

Commodities

Commodities rose (+2.4%) in February, with all four sectors contributing positively to performance.

Energy (+1.7%) was supported by broad-based gains across refined products and crude. Gasoline (+6.1%), heating oil (+5.8%), crude oil (+4.9%), and gas oil (+3.5%) gained as investors priced in rising geopolitical risk associated with escalating tensions between the US and Iran. Investor concerns centered on the potential for supply disruptions in the Middle East, particularly involving energy flows through the Strait of Hormuz, which serves as a key transit route for global oil shipments. Oil prices rose further after US and Israeli strikes on Iran heightened uncertainty about the security of supplies. In contrast, natural gas (-31.7%) declined sharply as US production rebounded after facilities returned to operation following severe winter weather. Selling pressure intensified after the Commodity Weather Group forecast warmer near-term temperatures, which reduced expectations for heating demand.

Industrial metals (+0.6%) advanced. Copper (+1.6%) continued to climb on a weaker US dollar, a steadier outlook for interest rates by the Fed, and robust demand from AI-related infrastructure and green energy projects. Aluminum (+0.3%) inched higher amid tightening global supplies caused by production constraints in China, less Russian metal available in Europe, and energy restrictions that impact smelters. However, demand was supported by renewed industrial activity in Western countries, higher defense spending, and the continued transition to renewable energy. Nickel (-0.7%) waned as elevated global inventories prompted a market correction following January's speculative rally. The decline was compounded by uncertainty surrounding Indonesian supply cuts, seasonal softness in Chinese demand, and broader weakness across the base metals complex. Zinc (-2.7%) fell due to higher inventories in China following the Chinese New Year holiday, persistent weakness in seasonal demand, and continued strength in the US dollar. Rising domestic supplies in China were outpaced by sluggish consumption, further weighing on prices. Lead (-2.9%) fell as excess supply put downward pressure on the market.

Precious metals (+11.8%) rallied sharply. Silver (+18.2%) and gold (+10.9%) surged to record highs as investors sought safety amid escalating geopolitical tensions alongside growing concerns about tariff-induced inflation. A weaker US dollar and elevated global debt levels also amplified the demand for precious metals as market volatility and macroeconomic uncertainty intensified.

Agriculture and livestock (+0.5%) posted modest gains. Soybeans (+8.9%), wheat (+7.1%), and corn (+2.9%) were propelled by a tightening global supply outlook and rising geopolitical uncertainty. Weather-related risks, particularly drought conditions across the US Plains, positively impacted wheat, while contributors to the broader rally included higher export demand, potential shifts in trade flows with China, lower projected US corn acreage, and ongoing disruptions linked to the Black Sea conflict. In contrast, live cattle (-1.7%) fell due to weak export sales, bearish market reports, and concerns about a potential processing plant strike. Volatility remained high, as tighter cattle supplies were met with lower-than-expected demand. Coffee (-14.1%) fell sharply following forecasts of a record 2026 harvest in Brazil, with Brazil's National Supply Company Conab projecting higher production amid favorable rainfall. Cocoa (-32.0%) plummeted, as better weather in West Africa increased production, while demand from manufacturers softened and expectations of a global surplus emerged. Prior to this, record-high prices for cocoa had curbed demand and led candy makers to shrink bar sizes, change recipes, and use less cocoa in manufacturing.