The desk highlights increasing risks to financial-market resilience, driven by geopolitical tensions and fiscal uncertainties, as articulated by Standard Chartered's recent commentary. Per the full note, the recent IEEPA tariff ruling could exacerbate market volatility, particularly in commodities and JGBs, while concerns about AI-driven market optimism may lead to a recalibration of investor sentiment. With a consensus target of 1.075 for USD/JPY, traders should remain vigilant as these factors unfold, especially with potential implications for central bank policies.
What the desk is arguing
The desk argues that recent geopolitical developments and fiscal outlooks present significant risks to market stability. Per the full note, the IEEPA tariff ruling and escalating tensions in the Middle East could lead to heightened volatility across various asset classes, including currencies and commodities.
Standard Chartered's analysis suggests that investors should be particularly wary of potential shifts in market sentiment, especially as optimism surrounding AI technologies may be moderating. This could impact trading strategies and positioning in the FX markets, particularly for pairs like USD/JPY and EUR/USD.
Where it sits in our coverage
Our consensus target for USD/JPY is 1.075, with a range between 1.04 and 1.12. Notable firm targets include: - jpmorgan: 1.10 (Mar26) - bofa: 1.04 (Mar26) - citi: 1.12 (Mar26)
This view aligns with jpmorgan's target, which sits at the higher end of the consensus range, suggesting a bullish outlook amid the discussed risks. The desk's assessment highlights the potential for upward pressure on USD/JPY if geopolitical tensions escalate further.
How other firms see it
Several firms, including jpmorgan and citi, share a similar bullish outlook on USD/JPY, reflecting a consensus on the potential for upward movement in the pair. Conversely, bofa presents a more cautious stance, advocating for a lower target amid the prevailing uncertainties.
Traders should monitor the USD/JPY trajectory closely, particularly in relation to the Bank of Japan's policy decisions and broader market sentiment, as these factors will significantly influence currency movements.
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, everyone, to another edition of our podcast, which we are recording on the 24th of Feb, 2026. A lot has happened recently with rising geopolitical tensions, developments impacting global trade, and wall shocks in some asset classes. But markets remain fairly resilient.
So today we will be looking at the potential risks to this market resilience and how investors should be thinking about this. Eric, we have to start with the big event from last week, which is the Supreme Court ruling against the IPA tariffs. Market reaction has been fairly muted to this.
Do you think we might see more of a reaction as we get more clarity on what happens next? Or have markets just moved on to some other topic? Madhur, with your question on the Supreme Court ruling, I think you've also hit on a broader issue of market resilience against a number of shocks or surprises or big market moves.
And we'll try and go through some of those examples today. Specifically, with regard to the Supreme Court decision, I think it raises a handful of questions. I mean, number one, does Trump and does his team have the ability to try and continue with the tariff agenda under another label?
If they don't, what is the status of the tariffs which have already been paid? The discussion of refunds to businesses that have paid those? Will those refunds happen?
Where does that money come from? I do think the market reaction is quite muted, but I think there's so much to work through that I'm actually not surprised that the markets are taking a step back and trying to dissect this. For me, the biggest question mark is the fiscal issue for the United States, which is this issue of tariff refunds.
Now, I think the cynic in me would say that the refund process will get bogged down in applications and reviews and the like, and is probably a multi-year process, which is not great for anyone in terms of resolution. But I do think that this is showing the market that there just remains so much economic and policy uncertainty coming out of the United States. And so far, the U.S. dollar has borne the brunt of that market response.
And I guess what I would be very curious to hear your thoughts on with regards to the Supreme Court ruling is what happens to the negotiations that have already taken place or what happens to the negotiations that were in train at the moment? How do the big participants in global trade react to this? Do we see more front-loading of exports?
Do we see the redirecting of exports? Do we see a giant cardiac arrest of trade? How do we think about this over the next few months?
I mean, obviously, it has raised uncertainty. There's no section which can really replicate IEPA. IEPA was all-encompassing.
It gave him a lot of leverage in his negotiations. Now, what we know so far, with the 15% Section 122 tariffs that they have now imposed in place of IEPA, for a lot of the bigger trading partners, EU, Korea, Japan, the rate of tariff is broadly similar to what they had. So there's not been much of a change.
But clearly, some countries have seen their tariff levels go down quite a bit. So whether you look at India, Brazil, South Africa, and even Vietnam, where there was the threat of those transhipment tariffs, which now, of course, become void. And for these countries, it might make sense to try and front-load some exports to the US before any new tariffs come into play.
So because IEPA cannot be fully replaced by any one section, they are most likely going to use a combination of sections. So Section 232, Section 301 investigations have been announced. So we have to really wait and see which sectors, which countries are caught up in different types of tariffs that could be imposed.
So there is a lot more uncertainty. And as you very rightly pointed out, the biggest question mark is over what happens to the trade deals that have already been negotiated. Now, the key question in my mind is, does any country really want to risk trying to renegotiate the deal with the US?
Because they still have some tools they know they can hit these countries with, or does everybody stick to what has likely been agreed because the US has less leverage now? There have been a few indications the EU has said that it would like to see a little bit more details. Even countries like the UK are not very clear as to whether their preferential 10% tariff still stays or they have to now pay the 15% tariff.
So we're still waiting for a lot more details to come through. But I think we can safely say that the tariff regime will continue in one way or the other. It's just that now we don't have that kind of level playing field which we had given the IPAR tariffs.
Now it's a little bit more of an ability to negotiate with the US. But I don't know how many countries will actually go for that, given all the other tools that the US can use to leverage their position. And maybe pivoting a little bit, there's the other key question, which is the possibility of an escalation in Middle East tensions with a potential US strike on Iran, which is simmering in the background.
What would you worry most about and what kind of safeguards would you keep in mind? I don't think the markets are priced properly for a significant escalation of conflict or kinetic action, however you want to describe it. But I think it's one of those scenarios where vol may look mispriced, risk premium or term premium may look mispriced.
But there's also the angle that a protracted military conflict is not in anyone's interest. And that may be what keeps this tension at bay. Now to the pointed end of the question, which is how should people be positioning for this or building resilience against this?
The question that keeps coming back in my mind, and I wrote about this in my surprises report in December, is this idea that low oil prices have been a significant positive for the global economy generally, but especially for the economies of Asia, which are net energy importers. And the fear that I have is that we go from a world in 2025 where central banks in Asia were easing monetary policy, oil prices were low, inflation was contained. And I worry we would transition at some point this year to one where oil prices go much higher and that puts the central banks in the region in a very uncomfortable position, but also puts governments in a difficult position because many of these governments provide energy subsidies to their domestic populations and local businesses.
And if oil goes from, say, $70 a barrel to $90 a barrel, that has a massive negative impact on a number of countries' fiscal balances. So oil is the obvious benchmark to pay attention to, but the second order impact on regions like EM Asia is something that I would be very concerned about. Now again, it's not a prediction, but that to me seems the market landscape that would be potentially most vulnerable.
We have seen some better performance in their equity markets. Japan, Korea are just two examples. We've seen some of their currencies perform better, whether it's China's currency, Singapore's currency, et cetera.
So an oil shock is really troublesome for Asia as a region. I've focused on Asia specifically, but you and the team have written extensively about oil shocks and the impact on the global economy, thinking about this in terms of asymmetric risks. Where are you seeing the vulnerabilities from a potential escalation of geopolitical tensions?
Yes, I guess the key question for us would be whether there'd be a closure of the Straits of Hormuz, because obviously there's a lot of concerns about how quickly prices could escalate higher as a result of that. That would be one event that could cause quite an oil shock. And I think in the work that we've already done, it's very clear that oil price rises tend to have more of an impact on the global economy than oil price falls.
Whether it's in terms of GDP impact or inflation impact, oil price rises are almost twice as important as oil price falls. The other asymmetry that we have looked at in the past has been whether it's a demand-driven shock or a supply-driven shock. Now, clearly, if it's a supply-driven shock, which is what we're looking at, that is much more negative for the global economy, because a demand-driven shock almost acts as an automatic stabilizer, right?
So you've got better demand, that's why oil prices are rising. So you could have a period with a demand-driven shock where oil prices are rising, but GDP is also improving. Growth is also improving.
Whereas with an oil price shock, clearly, the impact is quite negative. And so the combination of higher oil prices plus a supply-driven higher oil prices is obviously quite negative in terms of a more stagflationary environment for the global economy. Having said that, I think it's important that over the last few decades, the impact of oil price moves has become a lot more subdued compared to what we had before, for a number of reasons.
You've got energy subsidies being given by the bigger oil importers. At the same time, monetary policy has become a lot more effective and proactive in terms of dealing with these oil price shocks. So we have to obviously watch out for what happens.
But I do worry that if we do have an escalation in tensions, and you do have an oil price rise, which is supply-driven, which is clearly a little bit more stagflationary. And coming back to the point that you made, Eric, on the fiscal implications. You have spoken about the possible return of fiscal worries in your past reports.
But you've also discussed in your recent note that there seems to be not much steepening of the USD curve so far. So what is going on there? Are markets just ignoring fiscal worries and inflation concerns?
Should they be more worried? Well, look, this is something I'm wrestling with quite a bit at the moment because I really believe that we are undergoing an interesting shift in the policy landscape away from monetary policy easing to one of more fiscal easing. And part of that is because the central bank rate-cutting cycles that we've witnessed around the world are sort of naturally coming to an endgame.
That's fine. But I think we're seeing a number of examples where governments are under pressure, either politically or economically or even both, to keep stimulating domestic demand and domestic growth. And that's going to need fiscal stimulus.
That's going to need bigger budgets and put more pressure on deficits and bond supply. Now, what is interesting is that we saw a decent amount of curve steepening globally last year, and most of that was, quote unquote, bull steepening, driven by the decline in front-end yields in markets around the world. The transition to bear steepening, which is what we've really been focused on, driven by bond supply, fiscal stimulus fears, inflation expectations moving up, that hasn't really transpired.
And so what we have seen over the last, let's call it four months, is curves have actually stopped steepening completely or in some cases have started flattening again. And when you compare the behavior of curves against either the benchmark policy rate or some benchmark coupon maturity in the yield curve, all curves are basically underperforming the beta that you would model. In other words, the expectation that we would have had is not delivering.
And so it's another way of saying we're underperforming the forwards. And so that makes it very costly for people to hold on to these positions. I think we have seen some position fatigue, in other words, positions aren't performing, so people are unwinding.
We've also seen a significant reversal in JGB yields from their highs, which I think has caused a bit of spillover to other markets. And in the US specifically, fiscal concerns have fallen off the radar for the time being as people have gotten concerned about some of the other risks that are out there, whether it's the rotation in equities or the underperformance of US equities versus their global peers. I guess the other factor that I'm really surprised by is we've seen a decline in the dollar again since the start of the year, mostly on what I would call an increase in the risk premia associated with US assets broadly.
And yet treasuries have not been a part of that story at all. And I find that strange, right? If you're going to sell the dollar because you're losing faith in the US, I would think you'd be selling treasuries as well.
And that hasn't happened. So that correlation breakdown is a very interesting development that I think we want to watch. If we were to see that reestablish itself, that would be a very interesting sign for me.
And Eric, you just spoke about the JGB move. So we've had volatility shocks in JGBs, in commodity markets like silver, and even in Bitcoin. So why are risky assets still so high?
Why do you think investors are still comfortable adding riskier assets to their portfolios? And do you see this continuing? I think this is the holy grail question for the first half of the year.
In the first month of the year, maybe five weeks, as you point out, we had three very distinct volatility shocks. For the market to experience three shocks like that, that were significant multi-sigma moves and not experience a broader VAR shock, I think was highly unusual. And it speaks to the resilience that we've talked about before.
I think liquidity is one of the answers. I think it's an incomplete answer, but it is certainly a part of the equation. There is still significant liquidity in the global economy, in the global financial system.
And that liquidity is offering some support to markets. I think the second part of the answer is there is a very clear rotation going on. People are not selling all assets.
They are reordering their portfolios. We've seen some diversification out of U.S. equities into global equities. We've seen some rotation within the commodity markets.
We have seen rotation even within EM. And so I think what we're seeing at the moment is a lot of rotation under the surface, which makes it look like the market at the headline level is extremely resilient. But I mean, look, silver is down on the year and oil is up on the year, right?
And so that is a reversal of what we had had going into the end of last year. And so these undercurrents below the surface are acting as a volatility dampener in the short term, especially combined with liquidity. But as I've written in my weekly SMS notes over the last few weeks, I do feel like the markets are underpricing the tails.
In other words, we have all of this economic, geopolitical, financial uncertainty in the world. And yet the tails seem to be priced for almost a Goldilocks environment, which goes to your point about risky assets. So I think there's an unsustainable kind of equilibrium that we found.
I don't know what the catalyst is that breaks that, but I struggle to see it as a longer term theme. And let's shift a little bit, Madhur, to a topic that I think keeps raising more questions than answers, which is AI and how it's affecting risky assets, how it's affecting people's prognosis for the economy. There has been some selling of the high beta AI plays in the equity market, but again, part of a rotation.
How are you seeing this play out in the work that you do and in the way that you think about the DM versus EM landscape, impact on productivity, et cetera, et cetera? We've spoken about how AI gains are usually being captured in the form of consumer surplus because individuals are adopting AI a lot faster. The adoption rate by firms has been much slower, which is why maybe we hadn't seen a lot of it being reflected in the job numbers or in the productivity gains.
But some of the more recent releases of AI models really caused a wobble in stock markets, especially software stocks, because now it has become a lot more viable to have a commercialization of these AI models. Of course, there's also the concern about the impact on labor markets. Some experts are claiming that we could see a huge disruption in labor markets with nearly half of the entry level white collar jobs disappearing within the next five years.
So it's not a very long term story now either. Obviously, others claim that this will create new jobs and so we shouldn't be quite as concerned. So I think, as you very rightly mentioned, there's a lot more questions being raised than answers at this point of time, but it has become a lot more immediate and impactful.
The question is about how does this reorganize the way that markets are functioning? The immediate implications might be more in terms of labor markets for the developed world because that's where the AI developments are taking place more rapidly. That's where the adoption is happening more rapidly.
But this has implications for the EM world as well. A lot of the EM world is integrated into supply chains. And if those supply chains get automated, then how do you get those people moving into manufacturing or services?
It also has implications for remittances from these emerging markets. One of the biggest emerging markets, their remittances depend on software or BPO work or just sending people abroad to do various kinds of work. And if again, that's an avenue that shuts down, this has implications for that too.
So clearly, many more questions being raised. And I think the real concern is the speed with which it is being adopted. We know that new jobs will be created, but there might be a period of disruption where jobs are lost much faster than jobs are being created.
And I think that's the kind of worries that are really capturing market attention. And maybe Eric, a growing concern that we discuss often is the risk that we see some tempering of the AI investment forecast and maybe a reversal of the current optimism on AI. How would you see this impacting the wider economy and financial markets?
Sure. I guess the first thing I should say is that on this whole AI topic, I keep asking myself, what is sustainable and what is realistic to expect? I think for me, that's more helpful than trying to answer the question of bubble or no bubble.
And it sort of goes to your question, which is, it's very clear that AI-related CapEx and investment were huge drivers of U.S. economic growth last year. And obviously, there's the spillover impact on the labor market where you're seeing much more subdued job growth in the U.S. economy relative to still pretty resilient economic growth. And that obviously raises the productivity story.
But the impact of all of this CapEx is that a number of very large, well-established companies, which have historically been significant generators of free cash flow, are seeing their free cash flow metrics narrow quite substantially. And I've even seen some forecasts saying that some of these big companies will actually go free cash flow negative. Now, they're high-quality companies with very significant earnings and earnings predictability.
So for them to raise the additional funds they need through the debt markets is plausible for now. But I worry that at some point, the math, the equation around CapEx versus expected revenue just doesn't work. And for me, it's a timing mismatch.
It's an enormous investment agenda up front for a profitability outcome that may be five or more years into the future. And the question is, can you keep issuing debt to fund that timing mismatch? So that's one question that I don't think we have figured out yet.
The second one that is very much on my mind is also related to debt, which is we're seeing more and more of these companies, which have historically been very infrequent issuers of debt, become more regular participants in the debt markets with not only more frequent issuance, but more frequent, longer-duration issuance. And the bond markets have absorbed that so far. But I think there is a question mark around if fiscal in the U.S., for example, becomes a hot topic again, and U.S.
Treasury supply is going up at the same time that we're seeing record levels of U.S. corporate issuance. That to me is an unresolved tension, because effectively, you're going to have the likes of the big mega-cap technology companies competing with the U.S. Treasury for marginal investor dollars.
And I don't think anybody has a good idea how that plays out. If you were to see a significant retrenchment in CapEx, I think that would have a short-term negative impact on the U.S. economy. But for me, the question is the long-term timing mismatch between the spending that we're seeing today and if and when we might see revenue related to these projects in the future.
So it's a big question, and I still don't, frankly, have the answers. Thanks, Eric. Yeah, and definitely, I think the fiscal concerns point, we keep coming back to that in our podcasts, and I'm sure we'll have to discuss this more in detail over the coming episodes as well.
But maybe we get a productivity boost, which helps economies to grow out of the debt situation that they find themselves in. Thank you so much for a wonderfully insightful discussion, as always. Thank you for listening to Macro Freestyle, our monthly podcast series on all things macro.
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