H1 dominated by TACO trades
It has been a strange first half of 2025. Despite unprecedented American policy upheavals, US stocks – albeit after wild gyrations – are back to where they were. Bond yields have climbed a bit, but not too worryingly. Arguably, the only major financial development is a continuous slide of the dollar.

The main reason for this eerie resilience of the stock market is that market actors seem to be totally preoccupied by tariff war headlines. When Trump escalates, markets fall; when he steps back, markets rebound. Thus, the dominant sanguine mood presupposes new TACO trades: Trump always chickens out.

We are not so sure this holds also for H2.

New American challenges
Firstly, there are still many trade deals to sign, and ample opportunities for new nerve-rattling negotiations. We don’t see the deals signed with China so far as very convincing. Tariff levels are still high (40-50 per cent compared to around 10-20 in January), while ambitions are low. US controls on exports to China are in place in a number of sectors. China’s control of critical mineral supply gives it leverage. And, of course, there are still long and strenuous negotiations between USA and EU ahead.

Secondly, new storms are approaching. Trump’s “Big Beautiful” budget bill is strongly contested. Democrats are opposing the welfare cuts, in particular on Medicaid, while Republican deficit hawks want even larger cuts.

Assuming the bill will pass the Senate, while tariffs will generate some new federal revenue, the US budget deficit (according to the Congressional Budget Office) will remain largely at today’s levels (some 6 per cent of GDP). This means government debt will continue to rise. A large portion must be rolled over in the next year – at interest rates considerably higher than when the bonds were issued.

Consequently, risks are rising. Bond markets are getting nervous, the term premium on long treasuries has been rising. There is a risk of a vicious circle.

Unsavoury budget and debt options
What are the options?

• DOGE has collapsed and there does not seem to be any political will to slash expenditure to the extent necessary to reverse the debt trajectory.
• The White House is leaning heavily on the Fed. The President has publicly stated his view that the Fed Funds rate should be cut by a full percentage point. However, we don’t see the Fed giving in.
• Then we have the half-brained proposals aired by advisor Stephen Miran about eternal zero-coupon bonds replacing a chunk of today’s treasuries; i.e in essence making a haircut of the federal debt. Such an attempt would, of course, create havoc in bond markets globally.
• Finally, there is the proposal in the budget bill to impose a tax or fee on foreign ownership of American assets. In essence, such a move would be a re-introduction of capital controls. That would certainly result in a sharp decrease of capital flow into the US.

Obviously, some of these measures would be a dangerous escalation of international conflicts. The trade war would evolve into tax and currency wars. We don’t envisage them becoming reality in the near future. Most likely the Fed will have to work on damage control and massage the yield curve with new variations of QE. But it all comes down to the mercurial president to decide…

We conclude that political uncertainty will continue to haunt American credibility. The USD’s position will continue to be gradually undermined as investors seek alternatives.

Make Europe great again?
Some of the flows out of the US have gone to Europe, as investors are re-appraising the medium-term European outlook. Germany has scrapped its hard budget restriction and is rearming aggressively, as do several other European nations like Poland and Sweden. This means increasing government borrowing, also on the supra-national EU level, and somewhat higher GDP growth, kicking in from next year.

The European commission is working frantically to deepen co-operation also in other areas such as infrastructure investment and capital markets union. They have had some limited successes, as Europe fears the threat from Russia as well as a pull-back from the US. However, there is also a growing popular resentment of Brussels power. Nationalist parties are on the rise, and some countries in Eastern Europe would prefer warmer relations with Russia. Thus, it is still an open question whether Europe will succeed in making the continent more dynamic and resilient.

Nordics are doing well
The Nordic region has been doing relatively well during this period, with the exception of Finland. Denmark is a beacon of strength, and both Norway and Sweden are now reaping the rewards of strong public finances.

As inflation is coming down and the Swedish economy is still sluggish, we believe the Riksbank will cut its key rate now in June. There may be one more – last – cut later this year. So, the Riksbank and the ECB will continue to shadow each other.

The SEK still has some momentum and may strengthen for a while yet. But most of the improvement has run its course.

Grey swans
Obviously, there are several huge uncertainties out there. President Trump’s whims and negotiating tactics are one. But we also want to highlight the war in Ukraine. Russia is on the offensive, and while Ukraine has heroically defended itself – also with innovative military tactics – pressure is mounting. We see geopolitical dangers along Europe’s Eastern front. And, of course, the confrontation between Israel and Iran entails a multitude of political and economic risks, including higher oil prices and several dangerous geopolitical repercussions.

In this climate, we see more downside risks on stocks than we see upsides. Bond markets in Europe are well-behaved, but American budget risks may rock the boat even here. The dollar will be hurt by White House antics.

The summer may be quite eventful…