Global
Central banks close 2025 with diverging policy paths
Last week’s key macro data reinforced expectations that the Federal Reserve (Fed) will continue cutting rates in 2026. Inflation eased more than anticipated to 2.7% year-on-year, while unemployment rose to 4.6%, confirming a softer labour market. So far, markets have welcomed this slowdown as it gives the Fed room to ease further. As long as unemployment does not rise sharply, we remain confident that markets can absorb a gradual softening in labour market conditions.
In the UK, the Bank of England (BoE) cut rates by 0.25%, bringing its key policy rate to 3.75%. Short-dated gilt yields rose in response and 10-year yields edged higher, too, though not to the same extent. The reaction likely reflects two factors: first, the narrow vote on the decision; and second, the BoE’s communication that the bar for additional cuts is now higher. We expect UK rates to decline through 2026, which would benefit our position in UK gilts (hedged for EUR portfolios), though the pace of easing may slow as inflation nears the 2% target.
Meanwhile, the European Central Bank (ECB) kept its policy rate unchanged. With euro area inflation now close to target, the central bank is likely to remain on hold. We see limited scope for additional rate cuts unless material signs of renewed disinflation or growth weakness emerge.
In contrast, the Bank of Japan raised its policy rate to 0.75% — a 30-year high — marking another step away from decades of ultra-loose monetary policy. Japanese 10-year yields climbed above 2% for the first time since 1999, exerting upward pressure on global bond yields.
What could surprise markets in 2026?
As 2025 draws to a close, we look back on an eventful year. The “Liberation Day” tariff shock and the subsequent US dollar decline initially rattled markets, but the global economy proved resilient. Growth held up despite higher tariffs, supported by AI-driven investment, easing trade tensions and early Fed rate cuts — fuelling a strong equity market rally from the April lows.
Looking ahead, what might surprise markets in 2026? In the spirit of year-end reflection, we present five hypothetical scenarios. These are not forecasts, nor are they reflected in our positioning. Rather, they are intended as light-hearted, forward-looking reflections to challenge prevailing market assumptions.
1. Accelerated rate cuts under a new Fed Chair
A new Fed Chair speeds up rate cuts even as US growth remains solid. Cheaper borrowing costs lift interest-rate-sensitive companies and sectors such as small caps, real estate and durable goods. Market leadership broadens beyond “big tech”, with value stocks leading equity markets higher. Longer-term yields rise faster than short-term ones, and the dollar weakens further.
2. Supreme Court reverses broad US tariffs
The Supreme Court rules against President Trump’s use of emergency powers to impose sweeping tariffs without congressional approval. The loss of tariff income raises concerns about government finances, pushing Treasury yields higher. Share prices fall as investors demand more compensation for risk, and the dollar weakens.
3. German fiscal stimulus fails to boost growth
Germany’s big spending on defence and infrastructure doesn’t lift growth to any meaningful extent. High energy costs, strict rules and pressure from Chinese competitors hold the economy back. The ECB responds with more rate cuts, which weaken the euro, while improved export competitiveness leads to a rally in European equities.
4. The return of US exceptionalism
AI adoption accelerates beyond expectations, lifting productivity, profits and economic growth. Tax cuts and deregulation add to optimism on US growth. With the Fed holding rates, stronger earnings expectations fuel US equity outperformance. Treasury yields climb and the dollar strengthens.
5. China takes the lead in the AI race
Chinese AI models from firms such as DeepSeek and Alibaba overtake US competitors, helped by lower costs and demand for open-source technology. Investment shifts towards China, boosting growth and lifting emerging market shares. US stocks struggle as large tech names lose ground.
Whatever 2026 brings, we’ll stay focused on diversification across asset classes, regions, sectors and styles — a strategy that has served us well this year and will guide us in the next.
We thank you for your trust throughout the year and wish you and your family happy holidays and a prosperous 2026.