Global markets are showing signs of stabilization after a volatile stretch driven by geopolitical uncertainty. President Donald Trump stepped back from earlier aggressive rhetoric around potential tariffs and military action tied to Greenland, easing investor nerves. During a meeting with NATO Secretary General Mark Rutte in Davos, President Trump suggested negotiations with NATO allies are moving forward on a longer-term framework focused on Arctic defense, access to critical minerals, and countering Russian and Chinese influence. At the same time, expectations for strong U.S. economic growth are making near-term interest rate cuts by the Federal Reserve appear unlikely, particularly as inflation remains above the 2% target and questions persist around political pressure on the Fed.
Speaking Friday morning from the New York Stock Exchange, ING Chief International Economist James Knightley offered perspective on the shifting landscape. While acknowledging recent geopolitical volatility, Knightley said markets appear encouraged by signs of de-escalation between Europe and the United States, especially as discussions involving Denmark progress. He noted that investors are now turning their attention to the Federal Reserve’s first meeting of 2026 next week. Although no rate changes are expected, comments from Fed Chair Jerome Powell will be closely watched for clues about the policy path ahead.
Inflation and labor conditions remain central to the outlook. Knightley said the U.S. economy continues to perform well overall, with unemployment still low, but inflation remains stubbornly above target. He also flagged concerns about the narrow concentration of job growth. Over the past three years, more than five million jobs have been added in the U.S., with 93% of those gains coming from just three sectors: government, leisure and hospitality, and private education and healthcare services. That lack of breadth raises questions about the durability of the labor market.
As the World Economic Forum in Davos wraps up, Knightley said attention is shifting toward global bond markets and diversification opportunities. For years, global markets largely moved in step with the U.S. economy. Now, different regional stories are emerging, particularly in Japan, where interest rates are rising, in contrast to expected cuts in the U.S. and Europe. This divergence could reshape bond market dynamics and create new opportunities for investors.
Precious metals are also drawing increased interest. Gold and silver have reached record highs amid fluctuating Treasury yields and changes in the U.S. dollar. Knightley explained that the traditional role of U.S. Treasuries and the dollar as safe havens during periods of uncertainty appears to be shifting, prompting investors to look elsewhere for protection. That shift has helped fuel demand for precious metals as part of broader diversification strategies.
Looking ahead, Knightley expects the U.S. dollar to face downward pressure in 2026 as interest rate differentials widen. Anticipated Federal Reserve cuts, steady rates in Europe, and hikes in Japan point to potential dollar weakness. That environment could support emerging markets, while parts of Europe and Japan may benefit from greater policy stability.
Overall, the discussion underscores the delicate balance between geopolitics and economic policy as markets move deeper into the year. As Knightley suggested, investors are entering a period defined by shifting narratives, greater diversification, and evolving global dynamics, making flexibility and close attention to policy signals increasingly important.