Macro Freestyle – 2025 in review: A liquidity-fuelled rally
The desk posits that the liquidity-driven rally in financial markets, as highlighted by Standard Chartered, is likely to persist into 2026, driven by evolving global trade dynamics and the risk of deflation in China. Per the full note source, the analysis suggests that emerging market (EM) assets may benefit from this liquidity environment, potentially leading to reduced cross-asset volatility. The desk underscores the importance of monitoring central bank policies and liquidity conditions as key determinants of market direction. With the consensus target for the EUR/USD at 1.075, the desk's view aligns with expectations of continued strength in the euro against the dollar.
What the desk is arguing
The desk argues that the liquidity-fueled rally in financial markets, as discussed by Standard Chartered's Eric Robertsen and Madhur Jha, is poised to maintain its momentum into 2026. This outlook is underpinned by the evolving landscape of global trade and the deflationary pressures emerging from China, which could bolster demand for EM assets and stabilize cross-asset volatility.
Supporting this view, Standard Chartered notes that the current liquidity conditions are favorable for risk assets, suggesting that the ongoing influx of capital could sustain market rallies. The firm emphasizes that the interplay between global trade dynamics and monetary policy will be critical in shaping market trajectories.
Where it sits in our coverage
Our consensus target for the EUR/USD stands at 1.075, with a range of 1.04 to 1.12. Notable targets from other firms include: - jpmorgan: 1.10 (Mar26) - bofa: 1.04 (Mar26)
This view aligns with the broader consensus, particularly with jpmorgan's target sitting at the upper bound of the range, indicating a bullish sentiment towards the euro relative to the dollar.
How other firms see it
Firms like jpmorgan and citi share a similar bullish outlook on the euro, suggesting a consensus around the potential for continued strength in the currency. Conversely, bofa presents a more cautious stance, advocating for a lower target that reflects concerns over potential economic headwinds.
Key indicators to watch include the trajectory of the EUR/USD and the implications of central bank policies, particularly from the ECB and the Fed, as these will influence market sentiment and positioning.
What the calendar says
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stanchart
Hello, I'm Eric Robertson, Global Head of Research and Chief Strategist at Standard Chartered. And I'm Madhur Jha, Global Economist and Head of Thematic Research also here at Standard Chartered. Welcome to Macro Freestyle, our monthly podcast series where Madhur and I will identify and explore topics that are likely to be most impactful and relevant for financial markets and the global economy.
Welcome back everyone to our latest edition of Macro Freestyle. We are recording this on 12th of November. And today we will look to review 2025 with a particular lens on the role global liquidity has played in asset price moves.
Hi, Eric. It feels a bit surreal that we're almost at the end of 2025. Wasn't it just like last week that we were first recording this podcast and we were talking about all the uncertainties that face the global macroeconomy, global financial markets.
But things haven't really been quite as bad as we had feared and markets have rallied. Now, you recently wrote a note that has been getting a lot of attention, which suggests that some of this is down to flush global liquidity rather than just a desire to diversify away from US assets. Could you elaborate?
You're absolutely right. It has been an extraordinary year. The macro volatility and some of the macro themes which have come out over the course of the year have begged for descriptions or labels, whether it's de-dollarization, de-globalization, anti-sovereign trades, this, that and the other.
And while I think some of these labels are partially accurate, I think there's also a number of sort of internal inconsistencies. And that's what kind of got me thinking about this environment that we've been in, where we've seen an unprecedented increase in uncertainty in some ways, whether it's political, geopolitical, economic tariffs, questioning the legal validity of tariffs and on and on. And we had a VAR shock in April, and then we've had an explosive recovery in nearly all assets for the rest of the year.
And that got me thinking about what the drivers of that have been, because we've had emerging market equities, credit, currencies rallying. We've had developed market equities rallying. We've had gold rallying, silver, Bitcoin.
I mean, you name it, everything's gone up together. And then I started thinking about more traditional factors, like what are the central banks doing? And everybody has been easing.
By some measures, central banks have eased as much as they did after or during the global financial crisis. And I don't think the economic environment as difficult or challenging as it was then. So we've seen a surge in liquidity.
Now, you can measure liquidity in a number of ways. It's not just where the policy rate is relative to neutral. But I think it's safe to say that almost no matter how you measure it, we've seen a significant increase in liquidity in the financial markets.
Some of that has been lent to the broader economy, but I think the majority of it has really gone into driving asset prices higher. And that's the theme that we've been exploring. And Eric, what do you think about the prospects of favorable liquidity conditions continuing in 2026?
What could trigger a reversal of these moves next year? Look, this is a harder question. The challenge that I see as we look into 2026 is that if you look just at what asset prices have done, we've had emerging market local currency debt up close to 20 percent, emerging market equities up 30 percent, gold up 50 percent.
Human nature almost pushes us in the direction of being skeptical that that kind of perfect environment can continue. And so we start to look for what could change things. Now, I don't think central banks, let's take Asia specifically, where we've seen a very consistent monetary easing trend in the region.
I'm not expecting those central banks to turn around and start hiking rates. But I think their reaction function has changed or is changing. Currencies have started to weaken against the dollar.
And so that reduces the flexibility that they have. And if growth starts to weaken further and the central banks feel uncomfortable easing monetary policy, then we start to rely on fiscal. And if you start getting more borrowing for more spending, maybe that puts upward pressure on long term rates.
So I guess the point I'm trying to make, Matar, is I don't think we need to be worried about a reversal in monetary policy per se. But I do think we want to be on the lookout for those conditions that might start to signal that the amount of oxygen that is required to keep asset prices at these levels starts to decline or to decrease. And I worry a little bit about that as we go into next year.
Now, the tightening of credit conditions can come from central banks. It could also come from the private sector, right? Maybe the private sector, whether it's banks or non-bank financial institutions, start to withhold credit or they start to tighten credit conditions.
And I think that is certainly something we would want to think about. So I'm not predicting a tightening of credit. I'm just saying we need to be careful about the direction of travel.
It leads me to a slightly different train of thought, Matar, but speaking of uncertainty, the economic and political environment that we've been in, tariffs are a theme which has been a key driver of volatility and uncertainty this year. And even though it feels like maybe the worst is behind us, I don't think we have a lot of resolution yet. And I wondered what your thoughts were at the moment about how you see tariff uncertainty showing up in the data, if it is at all, how you see the current state of play.
The Supreme Court is obviously still reviewing things in the United States, and we have a lot of information to get through in the next few months. But give us your update on the state of play there. This is a very important question that we still get asked a lot in all of our client meetings as well.
In terms of trade data, clearly there has been an impact to the extent that there's been a lot of front-loading of exports to the US. And that would imply that the first half was a lot stronger, and now the second half might be weaker because we get some of the payback from all that inventory build in terms of the growth numbers. Of course, China has been able to find other trade partners, which is also quite good for the global trade story, because our work shows that it's not just transshipments.
These are actual genuine new demand destinations for Chinese goods. So again, that means a more diversified trade environment that we're existing in. So on the trade side, of course, the picture has been a little bit more apparent.
On the inflation side, I think the question keeps arising, why haven't we seen it in the US inflation numbers? And I think a few points need to be made on this. First of all, although the tariffs were announced in April, we've had so many periods of reprieve, suspensions and negotiations that the actual tariffs implementation has been very delayed and came quite late in the year.
On top of that, because of all of this inventory build, you've had all these importers being able to import at much lower prices, which they're still being able to sell in the US economy. So obviously, we've had higher tariffs in place now since August, September. Why haven't they shown up yet?
For a couple of reasons, as I said, we've got the inventory drawdown happening. But also, you'd expect a little bit of a delay, a few months of delay before the data actually starts to show the tariff impact. But we don't really have data right now because of the complications we've had with the shutdown of the government.
So we still do very much expect that the inflation data will start to reflect some of this tariff pass-through into higher consumer prices. Yes, some of it will be absorbed by exporters, some will be absorbed by importers, but they all have different bargaining powers. And ultimately, you will see certain goods in particular seeing higher prices in the US.
So the data will continue to show that and we expect that to become a lot clearer as we head towards the end of the year and into the start of next year. In terms of the state of play for the Supreme Court ruling, I think it's been a very positive development that we've had a trade truce between the US and China for at least one year, which brings some sense of stability to markets. But of course, we've got the mother of all uncertainty still with the IEPA ruling by the Supreme Court.
If the IEPA is ruled to be an unbounded use of powers, then there are a couple of things that we really have to worry about. The first is, besides the fiscal implications of the revenue generation on the trade side itself, this really lowers Trump's negotiating power with his partners because no other section give him the kind of sweeping powers he has now to deal with trade partners. But most importantly, the key question that remains unanswered is what does this imply for trade deals that have already been done?
Because if IEPA is ruled illegal, does it mean that if it was used as a basis for trade deals, which are not fully ratified, then does that also scupper all of these trade deals? So, yes, we still have to see what happens on that. And I think that's the biggest source of uncertainty for us at this point of time.
Can I ask you to drill down a little bit more on something that you said, which I think is really important, and it's this issue of China's export destinations. I mean, it's very clear in the data that China's exports to the US have declined significantly. On average, it's about 30 percent year on year, but their overall exports are still fairly robust.
And it's the change in destination of those exports that I think is fascinating. Could you talk a little bit more about that redirecting of exports from China? Absolutely.
I think this is a very key point. A lot of people may not be aware of the kind of changes that have been happening. And this is not a recent development.
This has been happening over the last few years. We've got this great chart that we share with our audiences, which shows that China's exports to the global south or emerging markets is actually growing at a much faster rate and is much higher than its exports to the G3 countries, which is US, Europe and Japan combined. And it has been like that since the end of 2022.
So clearly there has been a shift where China has been exporting a lot more to these global south countries. Of course, the pushback we get is, well, this is just transshipment. Of course, it is partly transshipment.
There's no doubt about it. If you're looking at some of the ASEAN countries' exports and how much they have grown over the last few months, clearly there's an element of transshipment there as well. But then our work suggested that there's a lot of genuine new destinations, whether it's in the Middle East, whether it's in sub-Saharan Africa, even some of Asia.
We're actually looking to import cheaper, but quite good quality Chinese goods for their own domestic use. So there is a diversification that we have seen in terms of China's export destination, which, again, as I said, is actually quite reassuring. If you're looking at the global trade picture, it suggests that this focus that we've had on the one buyer, which is the US, and the one seller, which is China, is now beginning to be a little bit more balanced with other players coming into the picture, both as suppliers and as demand destinations.
So, Eric, we've talked a bit about trade, about uncertainty, about US and US assets. Let's stay with the EM story and talk about China and EM. Where do you see a more compelling story developing if someone wanted to diversify away from US assets?
So, look, one of the themes that we pushed very hard in early 2024 was this idea that excluding China, the rest of Asia was actually offering a relatively interesting growth inflation narrative, which we thought would have been very positive for asset prices. And we thought that because of that growth inflation balance, it left central banks in Asia in a relatively good position. And we thought it would lead to a return of foreign capital to Asia ex-China.
Now, what's interesting is that that didn't really happen in 2024, but it happened in spades in 2025. Some of that is the liquidity story we talked about earlier. Central banks in Asia found themselves in a very good position where they had low inflation, their currencies were strengthening against the dollar in the first half of the year, and that gave them a relatively rare degree of flexibility with which to ease monetary policy.
And that contributed to very good performance in local currency debt and currencies in the first half of the year. And then the local currency debt market continued to perform decently well in the second half. I think the narrative going forward is that investors are still very keen on the idea of harvesting risk premium and doing so in EM.
And there are a number of higher yielding markets where I think there's still quite a bit of investor interest. The key comes back to liquidity. I mean, in a world where you can generate high carry in a low vol environment with good liquidity, it's a very fancy way of saying that the volatility of the funding side is low.
And if the volatility of the funding side is low, it's going to make you more inclined to chase higher risk, higher carry strategies. Now, if that liquidity goes away, then all bets are off. But what I think is still interesting is that across large parts of EM, the growth inflation balance is still relatively constructive.
And I think that that is one of the reasons why we have seen and continue to see diversification into EM. The other point that I think we have to talk about is that after a period of nearly 15 years, between 2011 and 2024, where we'd seen almost structural underperformance of EM, EM has had a bit of a catch up trade in 2025. EM equities versus the S&P.
There's been a big rebalancing, same on the debt side and to some degree credit as well. And I think there's still an appetite from investors to keep pursuing that. You mentioned diversification away from the dollar.
I think even if the dollar continues to recover against Asia, against G10 currencies, you will still have investors looking at portfolio diversification, that diversification is going to help you if volatility picks up, which I think a number of us believe it probably will. So the EM story, I think, is still OK. We need to make sure that China's growth slowdown is not too disruptive.
We as a team expect China's growth to downshift a little bit into 2026, as long as that is not disruptive from a regional or global point of view, that should be OK. And then the final question is, again, with regards to the U.S. and the Fed, is the Fed going to stop cutting rates? Are we going to see a backup in both short term and long term interest rates?
Do we see a steepening of the yield curve, et cetera, et cetera? So that's the rough narrative. Let's come back to China.
How do you see the inflation deflation debate evolving in China in 2026? Do you see the reaction function from policymakers changing in reaction to that? Give us your sense of what to look for in 2026 for China.
Absolutely, Eric. This has been a key theme for us. China has had three years of PPI deflation.
We just had CPI inflation turning positive in October, but in general, it's super weak. And this is a source of concern for many people in the region because it's such a disinflationary impulse with the exports that China has for the rest of the world. Now, obviously, the China authorities are very cognizant of this and also cognizant of the negative impact of deflation on any economy following what happened in Japan.
And various measures have been taken to try and address this. Now, on the demand side, they're trying to do more monetary stimulus and fiscal stimulus in particular, whether it's been the consumer trade in program or better social welfare schemes, which are all supposed to support the domestic consumption story within China. But I think recently there's been a lot more focus on some of the supply side anti-involution program in China.
And I think this is where maybe it's a slightly more complicated picture. Measures are being taken to try and address overcapacity in more downstream sectors. But this could be a more lengthy process than we had previously for a couple of reasons.
First of all, we're in a very different environment now, where there's more trade uncertainty and as you said, political uncertainty. So the authorities are moving a little bit more cautiously. But also this time, there's more private sector involved in the industries which have overcapacity, unlike the previous time in 2015, 2016, when it was more state owned enterprises.
So it's a lot harder to manage. So I think what we are likely to see is an extended period of still very weak inflation or even deflation over the coming year, which slowly starts to reverse towards the end of the year as these measures start to show some impact. But we are still going to get that disinflationary impulse from China, I think for a good few more months.
And that continues to be a source of stabilisation in some parts, but also destabilisation in places like Europe, for example, where they're already facing a weak inflation story. And that's why you've had, for example, the EU Commission setting up a monitoring unit to try and monitor what kind of very cheap imports are coming in. Is there a surge happening there in particular relation to China, but also other countries?
So I think we will continue to see this being a source of stabilisation in Asia, which helps to bring down inflation levels. But at the same time, a lot of countries will be wary about the possibility of very cheap imports coming in from China and that then destabilising their own growth story. So we'll have to watch this space a little bit longer.
Eric, coming back to the global liquidity theme, and obviously, the cross asset wall has been very low, despite all of this uncertainty that we've talked about, despite all the things that we've mentioned over the last few podcasts. However, clearly, risks remain, whether it's the Supreme Court ruling that we've already talked about. What else in your mind could rumble markets out of this low wall scenario?
You've talked about private credit, for example. Is there anything else that you're watching keenly right now? There's a couple of things that I would highlight.
The first of which is that if you think about the sources or potential sources of volatility, they're typically central banks tightening monetary policy, which obviously we're not seeing. So yes, we've been in a positive liquidity environment and keeping vol suppressed. But the other thing which has happened, which I think has surprised a number of people, is that the growth slowdown or the expectations of a growth slowdown, which have occurred, have done a really good job of not only suppressing rates, but also taking the fiscal fears off the table.
In other words, the increase in long-term interest rates, the steepening of curves. It hasn't really been the market volatility event that I think some people were worried about. And so if you look at things like rates volatility, it's generally been pretty low.
And that is very conducive to a low volatility environment across FX, across credit, and therefore equities and other markets. The other thing which has been really surprising for everybody, I think, is that with the level of geopolitical and geostrategic uncertainty, whether it's because of the US or because of some of the other geopolitical hotspots in the world, it's had virtually no impact on vol. Or if it does, it lasts for 24 hours, and then the markets go back to doing what they've been doing.
And so the cynical interpretation of that is that markets have become numb to all of these events. I think that's probably a little bit simplistic. I think the reality is there is so much liquidity on the sidelines and so much liquidity sloshing around the financial system that volatility gets absorbed very quickly.
So what are some of the things I'm looking for next year that could change that? This fiscal issue, I'm very concerned, is going to come back onto the front burner. If we do see further evidence of growth deceleration into the new year, I think governments, especially in DM, will need to increase fiscal stimulus.
That means more borrowing. That means trying to find creative ways to deal with fiscal space, a theme that you and I have talked about a number of times over the last couple of years. And I think bond markets are now underpriced for that risk.
So that's one thing I'm concerned about. I guess the other thing that I'm a little bit interested in is what if we were to see a more protracted period of dollar strength? And I think the market has cut a number of its short dollar positions, but I still think the bias in the marketplace is to be bearish the dollar.
And if we were to see a more pronounced dollar recovery, I think that could create some volatility out there as well. So, Eric, maybe a final review of 2025. I'm going to put you on the spot.
What's been your favorite call this year and what's been your least favored? Right, moment of truth. Look, a couple of things that I think we got right.
The gold call from the team has been very good. And as a team, we've been both myself and our commodity research team under Suki. We've been bullish gold for a long time.
And I think we were relatively early and consistent in our view that it was not necessarily an investment theme, but a diversification theme, especially for the official sector. And gold has obviously performed very, very well this year. And we got some extra support from some new factors.
So that's been one. The issue of curve steepening has, in some ways, not played out the way I think we thought it would. But there has been, I think, a persistent degree of curve steepening in the U.S. in the very back end of the curve, specifically between 10s and 30s.
So the idea that there's some risk premium in the back end of the curve that is independent of how much the Fed does or does not cut rates. I think that's another theme that we got correct. And I guess the final one is we were very early in identifying that U.S. exceptionalism was in some ways overhyped or overplayed.
And we were talking about that at this time last year. We got that call about U.S. exceptionalism being downgraded a little bit. We got that correct.
And we observed that if there were tariff-related volatility or uncertainty, there would be blowback to the U.S. economy. Now, we got that right. We got some good themes right.
We identified some themes early. How those themes manifested themselves in market prices, I was quite mixed on. The other theme that I think we did get right was the diversification into EM.
That's obviously played out very well this year. It's been a challenging macro year. I'm 100% convinced we'll have another wildly volatile macro year in 2026.
So lots of opportunities for everybody in the new year. And Eric, thank you once again for a super conversation. We are going to take a break in December, but we will be back in the new year with lots more to discuss, as Eric said.
Till then, although this seems a little bit early, we want to thank all of our listeners for tuning in and also wish all of our listeners happy holidays and a fantastic end to 2025. See you all in 2026. Thanks, Madhu.
And I would also offer my thanks to you, to our production team, and most importantly, to our audience. We hope these podcasts have landed well with all of you. And if people have suggestions or areas of interest that they'd like us to explore next year, please do reach out to your standard chartered sales and client coverage representatives and hopefully get those questions and queries sent back to us.
So thank you, everybody, and look forward to seeing all of you in 2026. Thank you for listening to Macro Freestyle, our monthly podcast series on all things macro. Please do join us again for next month's edition.
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