Markets have started the year on a high note, with both equities and credit securities delivering positive returns. Impressive fourth-quarter earnings, potentially lower interest rates in the United States, abundant liquidity, capital parked in money market funds—investors have focused their attention here, overlooking geopolitical flashpoints for the time being.

The notably absent response highlights an important feature of investing—markets self-determine what matters, occasionally mistaking signal for noise and vice versa. As midterm election rhetoric heats up, we can expect volatility to climb as well.

And it appears to have begun as early as January. Having led equities in recent years, technology stumbled into the new year with falling share prices. Precious metals experienced the largest single-day decline since the 1980s—this comes after a historic rise and before a swift partial recovery.

The fluctuations seem to stem from Kevin Warsh’s nomination as the chairman of the U.S. Federal Reserve (“Fed”), which was met with mixed reactions. Although likely to be more supportive of interest rate cuts, we anticipate that he should uphold the institution’s credibility if confirmed by the Senate.

Change rarely comes without company. Beyond a central bank shuffle and technology companies reversing course, we’ve seen a significant shift in market leadership. Energy, Consumer Staples, Industrials—previously out of favour, these sectors have leapt to the top of indices.

This marks an improvement in market breadth and performance distribution, which can partially be attributed to lower global interest rates—the benefits of which may have a delayed onset but move with force once in motion.

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