The desk anticipates that unexpected scenarios outlined by Standard Chartered's Eric Robertsen could lead to significant market disruptions in 2025, challenging prevailing consensus views. Per the full note, Robertsen highlights the potential for geopolitical tensions and economic shifts that could catch investors off guard, suggesting a need for heightened vigilance in portfolio positioning. Current consensus targets for major currency pairs reflect a more stable outlook, but the desk believes that these forecasts may not adequately account for the volatility that could arise from such surprises. As traders navigate these waters, the upcoming economic indicators will be crucial in shaping market sentiment.
What the desk is arguing
The desk posits that the scenarios discussed by Standard Chartered's Eric Robertsen could create substantial volatility in the financial markets by 2025, diverging from the current consensus. The insights shared in the podcast suggest that unexpected geopolitical events or economic shifts could lead to significant market corrections, which are not fully priced in by current market expectations.
Supporting this view, Robertsen emphasizes that the interplay of global economic factors and political uncertainties could create an environment ripe for surprises. This aligns with historical patterns where markets have often underestimated the impact of geopolitical events, suggesting that traders should prepare for a wider range of outcomes than currently anticipated.
Where it sits in our coverage
Our consensus target for the EUR/USD stands at 1.075, with a range between 1.04 and 1.12. Notable firm targets include: - jpmorgan: 1.10 (Mar26) - bofa: 1.04 (Mar26)
The desk's outlook aligns with jpmorgan, which is positioned at the higher end of the consensus range, while bofa presents a more conservative view. This divergence underscores the potential for volatility if the scenarios outlined by Robertsen materialize.
How other firms see it
Several firms, including jpmorgan and citi, share a similar outlook, anticipating stability in the near term but acknowledging the potential for unexpected shocks. Conversely, bofa and deutsche maintain a more cautious stance, focusing on the risks associated with geopolitical tensions and economic slowdowns.
Traders should keep an eye on the EUR/USD trajectory, as it may reflect the broader implications of the scenarios discussed, particularly in relation to ECB policy decisions and U.S. economic indicators.
What the calendar says
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stanchart
Hello, and a warm welcome. I'm Manisha Tank. Thank you so much for joining us for this very special look at Standard Chartered's financial market surprises of 2025.
It is the 10th anniversary of the report, no less. And it's a unique opportunity to explore the rare events that have a more than zero chance of impacting markets, even if they're far off the curve of expectations. We all know that markets today are priced for a U.S. soft landing, but economic and geopolitical uncertainties remain.
Also, generally low levels of risk premia across asset classes leave the markets vulnerable. So what else is our author considering for 2025? Here he is, it's Standard Chartered's head of global research and chief strategist, Eric Robertson.
Why is it worth considering all of these possibly rare scenarios for markets? Why does the team come up with these eight possibilities? I think it's really important to highlight that we and our clients spend a lot of time in the fourth quarter of the year thinking about the outlook for the following year.
And everybody tries to bed down their forecasts and try and come up with what they think are the most likely scenarios. Embedded in that is some consideration for those events or those possible scenarios that come out of left field. And we all know that it's the surprises that may have a low probability of occurring, but when they do happen, they tend to have a large market impact and in many cases, a large economic impact.
And so I think it's worth having a list of them to at least keep on our radar screen as the year progresses. You've reminded me, this is the 10th anniversary of the surprises report, which I think is a big moment. Are there any surprises that you recall, perhaps over 2024, but even in previous years then where you got it right?
Well, look, I guess one of the ones to highlight from just last year was with regards to U.S. politics. And we proposed the idea that Joe Biden might drop out or might resign his presidency. Now that wasn't exactly right.
He didn't resign the presidency, but he did drop out of the race. And I remember when we published the report a year ago, we got quite a few curious emails from clients and colleagues saying, gosh, you really think that's at all possible. And this is the sort of the essence of why we do this.
Yes, it may be a low three, five, 10% probability event. But what we find is that these are the sort of the interesting scenarios worth considering. This brings us to the big themes reaching into 2025.
Donald Trump is coming back for another round as president of the United States of America. What does that mean for the global economy? That's a question everyone's asking.
You're saying this could open the door to many surprises and a number of them we're going to explore now. After a year of rate cuts, you're exploring rate hikes. Why?
Well, look, let me be really clear. We anticipate further rate cuts from the Fed and we anticipate further rate cuts from a number of central banks around the world. But if we look at Donald Trump's campaign suggestions or his economic policies, and that includes tariffs, that includes fiscal stimulus, it includes deregulation, that really comes out as a very strong pro-cyclical collection of policies.
And it wouldn't surprise me if the U.S. economy turned around in the second half of the year. Now, again, our base case is that the U.S. economy is slowing. Inflation is moving closer to target that's going to allow the Fed to ease.
But we have to take into account the fact that the U.S. may re-stimulate and re-flate. China is stimulating more and re-flating. And so if the two biggest economies in the world are actually successful in engineering this economic recovery, then there's a chance that the Fed may be reversing course at some point.
And with that, of course, other central banks will be looking at any surprise move of that kind. Let's make a little bit of a segue into a related topic, which is this idea of policy divergence. Now, this is a theme that seems to come up in every year's global outlooks and not just ours.
And for the last couple of years, we've seen policy divergence in a variety of shapes and forms, but it hasn't really had a major impact on markets. But if Donald Trump executes on what he has talked about, the market has figured out quite rightly that those combinations of policies would be dollar supportive and push U.S. interest rates and the U.S. dollar higher. And so the question for an institution like the European Central Bank is, our economy is slowing.
We need to cut interest rates to support growth. But if we keep cutting interest rates, our currency is going to keep getting weaker, and that risks some form of financial instability. Now, that may not be a huge concern for a major developed economy like the euro area, but if you're an emerging market central bank and you're facing currency weakness, interest rate divergence, etc., the decision of whether or not to ease monetary policy, I think, becomes a lot more complicated.
And so this idea of policy divergence being a source of volatility, I think, is critical. Let's start with U.S. Treasuries because you've got a surprise.
It's number two on your list. And this is the idea that yields could surge to five and a half percent. Walk us through it.
Yeah, this is a combination, actually, of two themes. It's the idea that inflation has been conquered again. There's quite a bit of confidence in the market that inflation rates in the U.S. and globally have not quite come back to target but are close.
And I think people have moved on from the idea of that fear of inflation. Now, I think there's a reasonable chance that that comfort may be complacent. And especially if Donald Trump's fiscal agenda, his tariff agenda all come into play at the same time, I think there's a real risk of a resurgence in inflation.
Now, that would be bad for long-term bonds. But when you add to that the possibility of more aggressive fiscal stimulus, that raises the risk that the budget deficit in the United States, which is starting to look really uncomfortable, actually starts to get materially worse. And so if you have a deteriorating sovereign or fiscal trajectory for the U.S. government and higher inflation, that's really a disaster for long-term yields.
And I think there's a risk that long-term interest rates in the U.S. may experience fairly significant volatility at some point. And then meanwhile, something where we might also see volatility, of course, is in the currency markets. Let's have a look at the idea that the broad U.S. dollar index could fall.
You've pitched a double-digit number for this. Yeah, of course. Look, one of the themes that has come back very aggressively in the market narrative is this idea of U.S. exceptionalism.
If we look at 2024, U.S. growth was still largely outperforming many of its developed market peers, but the gap between the two was narrowing. And so there were some periods of dollar weakness that reflected that. Now, as Donald Trump has been elected, this idea that he would pursue policies that are, as he calls it, America first oriented, and you might see a resurgence of not only U.S. growth, but a widening of the growth differential in favor of the U.S.
Now, what I think this discussion misses is the idea that if growth in the U.S. picks up significantly and inflation picks up significantly, that has to bring a policy response from the Fed. So there's a risk the Fed may have to tighten aggressively in response to that. That's point number one.
Point number two is that when people look at the global outlook, there's this assumption that Trump's policies are good for the U.S., bad for growth in the rest of the world, but they view it as a zero-sum game. And I guess what I'm wondering about is if growth in the rest of the world really suffers because of another trade war and the combination of policies that we're seeing, I think we have to anticipate that there might be some blowback to the U.S. economy. And if the rest of the world is slowing, I don't see how the U.S. doesn't slow.
And if we move to a world where China is slowing, the euro area is slowing, global emerging markets are slowing, and actually the U.S. is falling back towards a harder landing, I think that's horrible news for the dollar. Now, again, that's not our base case scenario, but I think the markets are a little bit naive at the moment to not assign that a higher probability. A lot of what you've been speaking about, all of these different factors, whether it's treasuries or we're talking about the currencies or the possibility for rates, it is all dependent on these Trump policies.
What if there is an about face on tariffs or something like that? Then what? Look, we're moving into a different kind of a political and let's call it geo-strategic world.
I mean, the Biden administration was in some ways very principles focused. In other words, they talk a lot about democracy versus autocracy. It's very much sort of political principles based, whereas the Trump administration, I think, is much more transactional.
Now, the markets, I think, are assuming that his discussion of moving to 60% tariffs on China, moving to 10% or 20% universal tariffs on all the other imports into the U.S., markets are assuming that that's a negotiating ploy and that he will back away from that. I think that's probably the right assumption, but imagine Trump going 100% all in with the tariffs that he's proposed. So 60% tariffs on China is going to hit China's GDP by close to two percentage points.
Exports to the U.S. would decline by nearly 70% in our opinion. So if he does decide to go 100% forward with his tariff plan, I think we're going to see a very erratic and volatile economic environment. I'd like us to circle back to rates because something else that you bring up is expectations for the Eurozone.
There is a potential surprise of the ECB cutting rates below 1% in the face of us earlier talking about the U.S. hiking. Walk us through the scenario. So this isn't a good example of a quote unquote surprise that's probably not far away from the consensus in terms of the direction of travel, but we're just talking about a surprise scenario that's much more extreme.
In other words, the consensus is that the Euro area is slowing in some cases significantly. The expectation in the market is that the ECB cuts rates to about 1.6%, 1.65%. So everybody acknowledges and buys into the idea of an economic slowdown.
Now, what we're proposing with this surprise scenario is that actually the slowdown in the Euro area is not just a benign deceleration but a really significant hard landing. We have both France and Germany suffering political uncertainty that is going to have a major impact on their economies. I think the idea that that economic weakness spreads to the rest of the Euro area would not be a surprise to anyone.
So I guess my consideration on this is if we're also negative on the Euro area's economic prospects, I think we need to be a lot more open-minded to the idea that the ECB may have to get aggressive. I don't think going below 1% is that hard to imagine. It would require them to cut rates by 50 basis points at a couple of meetings and boom, there you go.
You're talking at rates back to nearly zero again. So an interesting exaggerated view of what I think is already the consensus. So speaking of the more macro prospects for economies, we have to talk about China.
You've already mentioned it, of course. It comes into the firing line in terms of the tariff expectations. How does China deal with it?
What are some of the surprises that could be on the horizon there? Look, this is a surprise where I think many people would look at this and say, is that really such a surprise? So far, China has withheld a commitment to aggressive fiscal stimulus, and I think they're probably waiting to see what they get from the new Trump administration.
That's point number one. Number two is that for the last couple of years, they've been very reluctant to pursue stimulus programs that put money directly in the pockets of consumers and private businesses. Considering that the economic recovery has so far been elusive, I think so far you can say that maybe sentiment and growth have stabilized, but if they feel that Trump's economic policies and tariff policies are going to provide a real threat to growth in China, they will need to stimulate.
Then the question is how much? The stimulus that we saw in 2008 during the financial crisis was 4 trillion RMB, and as a percentage of GDP was around 12%. Now, we don't think they do that much this time around, but I think an interesting surprise scenario is what if they said, okay, we're going to throw the kitchen sink at the problem, and we're going to provide 10 trillion RMB of fiscal stimulus.
We're going to support consumers, small businesses, etc. I don't think people are prepared for that, and I think that that would have all kinds of implications for the rest of Asia, for emerging markets, for commodity markets, definitely. So I think it's certainly worth considering.
In 2024, we didn't see an oil price surge despite the heightened geopolitical tensions, which were very much a theme of the year. Why are you talking about a surprise oil jump above $100 per barrel with a sort of minimum level you're looking at $70 per barrel? You have the Russia-Ukraine conflict, the Middle East conflict has always been kind of a dominant theme, and yet neither of those two themes were able to really produce much of a sustained increase in oil prices.
So clearly, in 2024, geopolitics mattered a lot less than people's economic pessimism. And what I tried to do with this particular surprise is flip that upside down and say, what if we have a scenario in 2025 where the geopolitics becomes much less threatening, but the economic outlook becomes actually much better than expected? Maybe you get a surprise where really good economic outcomes bring back a demand for commodities, a demand for real assets.
And look, if we go back to the topic from earlier of the potential inflation resurgence, I think the idea of demand for real assets, including energy, is going to come back on the radar for people very, very quickly. So I think that the idea of oil staging a significant rally is severely underpriced by the market. So if we did see this, and you're saying there's a non-zero possibility of it, what does that mean for markets?
One of the things that has come up in market discussions for the last handful of years is have we moved to a world where inflation is now structurally higher than we had all gotten used to pre-COVID? Now, inflation statistics say that inflation has moderated quite a bit, but we all know that the cost of living is up significantly from five years ago. And if the inflation statistics start to tick up again, I think the fear around inflation has the potential to come back with a vengeance.
And I think this is one of the inconsistencies or contradictions of Donald Trump's economic agenda. He has talked a lot during his campaigning about how inflation was low during his first term, and that was a victory of his administration. And yet he's talking about very aggressive tariffs, which should be, in theory, highly inflationary for the United States.
So what is the new inflation landscape going forward? What is Donald Trump's impact on that inflation landscape? I think that's one of the key question marks and potential sources of volatility for 2025.
This brings me to my final question, Eric. Surprise number eight. What famous accolade could Malala Yousafzai and President Donald Trump have in common one day, according to your report?
Well, sticking with the idea of the eighth surprise tends to be a political surprise, I thought about the assumption that seems to be embedded in the popular and market narrative, which is that Trump will be highly destabilizing because of his transactional approach to both politics and economics. And I think there's an assumption that his approach will always prioritize American interests over the rest of the world. That may or may not be true.
But I thought, okay, what would be the ultimate out of consensus surprise here? And the eighth surprise is that he manages to secure a ceasefire in the Middle East and progress towards the normalization of relations with Israel amongst other GCC countries. He manages to achieve a ceasefire between Russia, Ukraine, and the surprise is that he wins the Nobel Peace Prize.
One thing that I think is important to highlight is that as a second term president, Donald Trump will be very focused on his legacy and on what lasting impact he has not only on the US, but the global economy and the global outlook. And he has said very clearly that he wants to bring an end to some of these conflicts. And I don't doubt his desire to try and do that.
Now, whether he can achieve any of this is up for a lot of debate. But I thought it was an interesting way to fly against the consensus on a potentially contentious issue. Definitely.
And the end of conflicts, if he does manage it, that's ultimately good for markets, isn't it? It's great for markets. For those of us who've been around for a little while, we remember the Berlin Wall coming down.
We remember the end of the Cold War. And there was a period there for, I don't know, let's call it 10 to 15 years where we talked about the peace dividend. And the peace dividend was real.
We saw a decline in global market volatility. We saw a decline in the volatility of business cycles. And that led to a general decline in volatility of various asset prices.
And look, we've obviously moved into a world where that's very different now. We have a number of geopolitical hotspots in the world today. And we've moved into a more fractured world, both politically and economically.
And that tends to be an environment with higher levels of volatility. But what's interesting is that even with all of this reversal of the peace dividend, if you look at some of the, quote unquote, fear measures in the marketplace, something like the VIX, which is a measure of equity volatility in the US, it's incredibly low, right? And so the markets have this kind of prove it mindset.
Okay, we know there's lots of uncertainty out there. But until you show me something that is really going to be destabilizing, I'm going to assume that everything's going to be stable enough that I can continue to do what I need to do. So let's see how it plays out.
We're going to find out potentially if the art of the deal can deliver for us or not. It's your 10th anniversary. Congratulations to you and the whole team on this particular report.
I think it's always worthwhile to really kind of push the envelope as much as you can with some of these outlier scenarios. I think it makes you better prepared when the unusual things do happen. Thank you again.
It's always a pleasure. To our audience, wherever you are, thank you all for listening. Bye for now.