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China barely hit its growth target in 2024 by shifting back to its old model of exports, racking up a record trade surplus with the world – right as Donald Trump walks back into the White House. Tariffs will elicit larger fiscal stimulus even as China rolls out innovations such as DeepSeek to meet its 2025 industrial goals, creating a volatile mix this year.

Simple games allow us to model several of the Trump administration’s most disruptive policies in 2025. We find that markets face an increase in volatility as Congress expands the budget, Trump implements tariffs on the world, China retaliates, and Taiwan tensions persist. A ceasefire in Ukraine is a marginally positive outcome for Europe, although it is not a long-term peace treaty. 

Every year we highlight five low-odds scenarios that would have a major impact on global financial markets if they happened. This year we contemplate a total reversal of Chinese policy, a US-Iran nuclear deal, a breakdown of NATO, US military action across the Americas, and an internationally coordinated FX intervention.

In this week’s report, we present our key takeaways from China's two notable adjustments recently implemented: an upward revision to its 2023 GDP and the reduction of the USD weighting in the RMB Exchange Rate Index.

In most developed economies, rising inflation expectations will lift them further above the 2 percent target, limiting the scope for further interest rate cuts. But in Japan, rising inflation expectations will lift them up to the BoJ’s 2 percent target, removing the BoJ’s justification for its zero-interest rate policy. The normalisation of Japan’s monetary policy poses a big structural risk to stocks because Japan has been the main source of financial market liquidity, and thereby, of rising stock market valuations. From a timing perspective though, wait until the complexities of the price trends in USD/JPY and/or Nasdaq versus 30-year T-bond have collapsed. Plus: go tactically long copper.

• Congress will pass tax cuts by end of 2025 producing a fiscal thrust of about 0.9% of GDP in 2026. 
• Trump will count on that stimulus as a basis for slapping tariffs on leading trade partners.
• China will retaliate against Trump and stimulate its domestic economy, while pursuing stronger trade ties with other countries. Europe will also retaliate. 
• Geopolitical risk will shift from Ukraine-Russia to Israel-Iran, where the conflict will continue to escalate until a crisis point is reached within 2025.