A new year is here – with geopolitical scares and a moment of truth for financial markets. The geopolitical risks are obvious: The war in Ukraine drags on, and despite what President-elect Trump says, there will not be peace anytime soon. A new axis of rogue states is coalescing. US-China trade war looms. South Korea is in flux, the previous two engines in Europe – France and Germany – are both in political crisis – and Trump&Musk are provoking countries as diverse as Canada, UK and Denmark.

In this world where a rules-based global order has been replaced by the Law of the Jungle, stock markets have been breaking records. But the hausse has mainly been concentrated to big American tech, whose valuations now are looking stretched, irrespective of metrics. Their dominance has reached historical peaks, also meaning that US dominance over global equity has broken all previous records.

We do not believe this process will continue. “If something cannot go on forever, it will stop” (Herb Stein). And there are, indeed, powerful brakes. American bond yields have risen sharply in recent months, for several reasons: American economic strength and sticky inflation in the service sector, plus fears of rising government debt and higher costs from tariffs. Market expectations of more Fed cuts have all but evaporated. The Fed will stay high for longer.

At the same time, growth in Europe has stalled. Inflation is lower than in the US, and the ECB needs to cut rates. Consequently, a wide yield gap has opened up between the US and the Euro zone, carrying the US Dollar to ever higher levels. This, in turn, is hurting dollar-depending emerging markets. We foresee many depreciating currencies in the coming months.

Not least in China. Chinese bond yields have collapsed as the result of sluggish growth and deflation. The American and Chinese economies are totally out of synch. Should President Trump launch his tariff avalanche against China, the Chinese will let the Yuan fall further, while they strike back with measures calculated to hurt American industry. The combination will hurt US stocks.

So far, it is easy to see this scenario play out during the coming months. But then what?

Our guess is that President Trump and his Tech Bros do not want the stock market to tank. The chances are therefore good that he will back down from some of the tough actions promised. In order to calm the bond vigilantes, the administration may cut back on some of the expansionary tax proposals issued during the election campaign.

If and then this will happen, nobody knows today (probably not even Mr Trump himself). Our point is rather that political uncertainty will be monumental, and that market volatility hence probably also will be high.

Some of this will spill on to Sweden, but we believe the Swedish economy should be able to weather the storm better than many others. The economy will pick up speed as real income and private consumption recover, low inflation will enable the Riksbank to lower the key rate a little bit more – and strong government finances and a trade surplus will dampen the bond yield uptick. Nonetheless, also for Sweden it is obvious that the days of ultra-low interest rates are over and will not come back.