Global Markets Turmoil: Four Key Themes Driving Market Action in Early 2026

Japan’s long-duration government bond market experienced a dramatic yield surge that rattled global fixed-income markets at the start of 2026 [1][3]. The 40-year JGB yield crossed the psychologically significant 4% threshold, reaching 4.0784% on Tuesday, representing a 29.7-basis-point jump in a single day—the largest single-day increase since April 9, 2023 [3]. The 30-year benchmark rose over 25 basis points to 3.87%, its highest level since the bond’s launch in the late 1990s, while the 10-year yield reached 2.34%, approaching levels not seen in nearly three decades [3].

This surge reflects investor concerns over fiscal sustainability as Prime Minister Sanae Takaichi’s administration proposed new tax cuts, including a food sales tax reduction to 0%, ahead of a snap election on February 8 [3]. The implications extend far beyond Japan’s borders, as Japanese yields influence global borrowing costs and yen-carry trade dynamics. The extraordinary moves in 30-year and 40-year maturities were multiples of normal daily trading ranges, signaling a fundamental repricing of Japanese sovereign risk that could potentially spread to other developed markets [3]. The Bank of Japan’s two-day meeting on January 23-24 could provide guidance on yield curve control adjustments amid this turbulence [3].

The Russell 2000’s performance represents one of the most significant rotation events in recent market history, with the index outperforming the S&P 500 for 14 consecutive trading sessions—the longest such streak since May 1996 [1][4]. The small-cap index has recorded seven record closing highs in 2026 and outperformed the NASDAQ Composite by nearly 3% year-to-date [4]. This extraordinary run has captured investor attention and sparked debate about whether this represents a structural regime change or a short-to-medium-term tactical rotation.

Goldman Sachs analysis identified eight prior instances since 1928 where the Russell 2000 outperformed the NASDAQ-100 by more than 2% at the start of a year, with tech stocks typically outperforming one year later [4]. This historical pattern suggests the current small-cap leadership may be a rotation phenomenon rather than a fundamental shift in market leadership. The rally reflects speculation around potential regulatory relief, tax policy changes, and “America First” economic policies favoring domestic small businesses [4]. However, the sector rotation pattern reveals that much of the small-cap rally has been driven by multiple expansion rather than earnings growth, raising questions about sustainability [4].

Natural gas futures experienced an historic rally driven by extreme winter weather and supply concerns, with the front-month Nymex contract for February delivery rising 62.6% in three days to $5.05/MMBtu—the largest three-day percentage gain for natural gas futures on record [1][2][5]. Prices continued climbing, reaching $5.362 per MMBtu on Thursday, as an extreme winter storm and Arctic blast gripped the nation [5]. February delivery futures rose for a fourth consecutive day, with analysts warning of “monster” storage withdrawals potentially reaching 350+ billion cubic feet [2][5].

The surge is particularly significant given natural gas accounts for approximately 47% of U.S. heating demand [2]. The IEA noted that while LNG supply growth is expected to accelerate in 2026, weather volatility has created short-term dislocations that can produce extreme price movements [6]. Energy companies such as EQT and Antero Resources saw shares rise 4-6% on the momentum, with Kinder Morgan gaining 2.8% on record pipeline performance [2]. The extreme winter storm’s duration and severity will determine natural gas storage withdrawals and price sustainability going forward [5].

Gold and silver continued their extraordinary rally, with silver achieving a historic milestone by topping $100/oz for the first time in history on January 23, 2026 [1]. Silver surged to a record $99.20/oz before breaking the $100 barrier, gaining 2.6% in a single session [7], while gold reached a record $4,988 per ounce, approaching the $5,000 milestone [7]. The gold-to-silver ratio plunged toward 50, its lowest level in approximately 14 years, and silver has gained 40% since the beginning of 2026 and 147% over the full year 2025 [1][8].

Analysts attribute the precious metals rally to diminished confidence in U.S. assets amid geopolitical tensions, including tariff threats over Greenland, economic uncertainty, and diversification flows [7][8]. The Gold & Silver Club declared 2026 “The Year of Hard Assets,” with gold now the best-performing major asset of the 2020s on an annualized basis [8]. Silver’s industrial applications have added a dual-demand driver, while its smaller market capitalization amplifies price moves during speculative buying waves [8]. However, both metals are now in record territory with elevated positioning, suggesting the potential for profit-taking or sharp reversals.

The convergence of these four market themes reveals several interconnected dynamics shaping early 2026 financial markets. First, there is a clear divergence between risk assets, with small-cap domestic equities benefiting from policy speculation while bonds and currencies face pressure from fiscal concerns and policy uncertainty. Second, hard assets—including precious metals and energy commodities—are experiencing synchronized strength driven by both fundamental supply constraints and speculative flows. Third, Japanese bond market turbulence highlights how fiscal policy decisions in one major economy can have outsized spillover effects on global capital markets through the carry trade and yield curve dynamics.

The sector rotation pattern reveals a preference for hard assets and materials, with basic materials (+1.73%) outperforming while financial services (-1.65%) lags significantly [0]. Defensive positioning is evident in the strength of consumer staples and communication services, suggesting investors are hedging against potential economic weakness while simultaneously betting on domestic policy tailwinds. This complex positioning underscores the uncertainty surrounding the trajectory of U.S. economic policy and its global implications.

Japanese bond market turmoil could spread to other developed markets if fiscal concerns broaden globally. Both gold and silver are trading in record territory with elevated positioning, increasing vulnerability to rapid profit-taking. The extraordinary 62.6% three-day gain in natural gas may be unsustainable, with potential for sharp reversals once weather conditions normalize. Small-cap valuation concerns persist, as much of the rally has been driven by multiple expansion rather than fundamental earnings growth. Geopolitical risks including Greenland tensions, trade policy developments, and ongoing WEF/Davos outcomes could shift sentiment rapidly [4].

The historical precedent for small-cap outperformance followed by tech recovery suggests tactical positioning opportunities for diversified equity approaches. Natural gas producers and related energy infrastructure companies may benefit from sustained higher price levels if winter weather persists. Precious metals miners and related equities could see continued momentum, though timing remains challenging given the rapid price appreciation. The Bank of Japan’s policy meeting and Japan’s February 8 snap election introduce volatility that could create tactical entry points for fixed-income investors.

Natural gas prices face immediate weather-dependent volatility over the coming days. Japanese bond market dynamics will be closely tied to election developments through early February. Precious metals momentum may be tested as silver breaches $100/oz and gold approaches $5,000/oz—psychological milestones that historically trigger increased selling pressure.

Market data from January 23, 2026 shows the S&P 500 closing at 6,915.62 (+0.11%), NASDAQ at 23,501.24 (+0.26%), Dow Jones at 49,098.72 (-0.34%), and Russell 2000 at 2,669.16 (-1.61%) [0]. Sector performance favored Basic Materials (+1.73%) while Financial Services (-1.65%) lagged most significantly [0]. The Russell 2000’s remarkable 14-session winning streak against the S&P 500 represents the longest such period since May 1996, while natural gas futures posted their largest three-day percentage gain on record at 62.6% [1][2]. These developments underscore a market environment characterized by unusual cross-ass-class correlations and elevated volatility expectations as investors navigate an increasingly complex policy landscape.

The Bank of Japan’s ongoing policy meeting and Japan’s February 8 snap election introduce continued policy uncertainty that could maintain volatility in JGB markets [3]. Winter storm duration will determine natural gas storage withdrawals and price sustainability, while silver’s unprecedented breach of $100/oz and gold’s approach of $5,000/oz represent psychological milestones that could trigger profit-taking or accelerated buying depending on market sentiment dynamics [1][5][7].