After more than twenty years of crafting quarterly market outlooks, John J. Hardy has never encountered a period quite like this. The Global Head of Macro Strategy at Saxo Bank admits he’s grappled harder than ever before with assembling any coherent base case for how the first quarter of 2026 might unfold.
The challenge, Hardy explains, isn’t so much uncertainty about eventual outcomes but rather the timing of anticipated developments. And for traders, that distinction makes all the difference between profit and loss.
Facing his quarterly deadline, Hardy turned to a weekly chat group of market professionals he regularly consults. The network goes by the acronym “MQTA” – standing for “more questions than answers” – a fitting moniker for discussions that typically generate more uncertainty than conviction. Drawing inspiration from these exchanges, he’s assembled five fundamental questions that markets must answer in the months ahead, alongside three geopolitical wild cards he’s dubbed grey swans.
**Precious Metals Surge Reflects Structural Shifts**
Despite a remarkable run-up through 2025, Hardy maintains a constructive outlook on metals markets. Gold’s transformation from cyclical macro trade to strategic asset appears irreversible, underpinned by relentless central bank accumulation and mounting geopolitical fragmentation.
The precious metal faces a scenario where it wins regardless of economic direction. Weak growth would likely trigger fresh rounds of reflationary policy excess. Strong growth aimed at inflating away existing debt burdens would prove equally supportive. Against this backdrop, Saxo Bank projects gold could reach USD 5,000 as a base case, with considerably higher levels possible if central banks resort to measures like yield-curve control.
Silver has stolen some of gold’s thunder, particularly in the latter half of 2025. A brutal acceleration beginning in late November pushed the gold-silver ratio to its lowest level in years, settling near the midpoint of ranges seen since the 1970s. Both silver and platinum may actually outperform gold on a percentage basis, supported by structurally constrained supply and growing demand from solar energy, electric vehicles, artificial intelligence infrastructure and data centres. In many applications, industrial demand proves inelastic – there simply aren’t alternatives available in the medium term.
**Europe’s Strategic Pivot Could Sustain Market Momentum**
It seems almost counterintuitive to discuss a European comeback when many Eurozone equity markets delivered banner years in 2025. Some markets posted returns exceeding double those of US indices in currency-adjusted terms. The STOXX Eurostoxx 600 handily outperformed the S&P 500 in dollar terms through mid-December, indexed from the final trading day of 2024.
Yet bright spots in Spain, Italy and Greece, combined with a firmer currency and portfolio reallocations into previously neglected continental markets, drove much of that outperformance. Valuations have now normalized considerably. Further gains will require broader and more robust economic growth.
At Europe’s core sit two struggling economies. France grapples with debt and political gridlock. Germany – the real “sick man” of Europe according to Hardy – just posted its 30th consecutive month of manufacturing contraction in December’s PMI survey. Europe’s largest economy has sputtered since losing access to cheap Russian gas, then faced US tariffs of 15% in 2025, and now confronts intensifying direct competition from China. German automakers trade at single-digit price-to-earnings ratios, reflecting dismal sentiment about their prospects.
The continent is responding, however. Europe appears set to erect higher barriers against Chinese imports in strategically important sectors – not just automobiles but across supply chains critical to economic security. This echoes the awakening triggered by the Trump administration’s trade stance. For Germany and the broader Eurozone, rebuilding defensive industries ranks as an urgent priority, alongside measures to raise military personnel compensation and develop comprehensive physical and cybersecurity infrastructure.
Saxo Bank expresses a preference for European equities over US markets on a headline basis, identifying compelling opportunities in sectors linked to the continent’s new strategic imperatives around defense and supply chain security.
**The AI Bubble Question Looms Over US Markets**
Three consecutive years of spectacular equity returns have pushed US market valuations to record highs. The “K-shaped economy” concept went viral in the fourth quarter of 2025, aptly capturing how lower-income earners increasingly struggle with rising living costs and debt servicing whilst the wealthiest 10% reportedly drive up to half of all American consumption through wealth-effect dynamics.
This supports the notion that “the stock market is the economy” in today’s United States – a tail wagging the economic dog. Within US equities, artificial intelligence has been the primary performance driver. The dominant top 10 stocks by market capitalisation represent roughly 40% of the overall market and overlap significantly with AI development. In essence, where AI and the Mag7+ stocks go, the US economy follows, at least near-term.
Momentum for AI stocks hit a wall during the fourth quarter of 2025, though considerable rotation occurred within the space. Shortly after Oracle’s earnings announcement in September, Saxo assembled a basket of 24 US stocks heavily associated with AI, including all of the Mag7 save for Apple. Whilst aggregate AI momentum stumbled, some hardware sectors – especially memory chips – continued powering forward.
Investors punished companies perceived as spending too lavishly (Oracle and Meta drew particular scrutiny) or moving too slowly to demonstrate profits. Meanwhile, those supplying the spending frenzy thrived – that classic “picks and shovels” gold rush dynamic benefiting memory semiconductor makers like Micron and SK Hynix, plus hard disk manufacturers Seagate and Western Digital.
These rotation patterns evoke parallels with the dot-com, tech and telecom boom-and-bust cycle of the late 1990s and into 2000. Given current bubbly valuations and speculative fervor, Hardy anticipates an AI version of that earlier cycle may materialise. AI development and implementation will continue advancing strongly even as profit momentum lags the excessive spending characteristic of early-stage transformative technology. Should US megacaps and AI stocks hit a speed-bump or worse, the resulting negative wealth effect could ripple through the economy, potentially overwhelming Trump administration efforts to stimulate growth through bank deregulation and aggressive re-industrialization policies. Those initiatives may only begin boosting the broader economy in the second half of the year.
Saxo’s working base case maintains a defensive posture on US market indices for the first quarter, as conditions favour a meaningful correction.
**Japan’s Currency Crisis Threatens Dramatic Volatility**
Throughout the third and fourth quarters of 2025, Hardy pushed back against the sharply weakening Japanese yen. His structural argument emphasized Japan’s position holding the world’s largest pool of private savings and the longest sovereign debt maturity profile, suggesting significant room for yen appreciation given its historically cheap real purchasing-power valuation.
Yet despite possessing the most firepower to defend its currency – should it muster the political will – Japan has thus far failed to mobilize those resources effectively. The new fiscal expansion package under LDP Prime Minister Takaichi seemed almost purposefully to neglect the yen, perhaps hoping supply-side measures and stronger import revenues from higher USDJPY would boost economic growth. Currency devaluation offers one route to reducing the real value of Japan’s national debt.
But there’s a political cost. Real wages have fallen and inflation ranks as Japanese voters’ primary concern – the key reason the incumbent LDP ruling coalition suffered its worst electoral outcome since 1955.
The EURJPY exchange rate has rocketed to its highest level in euro history, and even versus euro-equivalent rates stretching back into the 1990s. EURJPY above 180.00 nearly constitutes a trade war in itself. The weak yen could represent a rearguard action supporting Japanese export industries relative to Chinese competitors.
Late 2025’s yen weakness demonstrated the Bank of Japan will respond to currency depreciation with policy tightening. However, the immediate reaction to the BoJ’s December 19, 2025 rate hike – its first since January – was a sharply weaker yen despite rising Japanese government bond yields. A weaker currency despite higher yields represents emerging market dynamics.
Heading into 2026, the situation appears spring-loaded. Japan’s Ministry of Finance may mount classic intervention against “excessive” yen weakness should USDJPY continue challenging modern highs above 160.00. But if elevated JGB yields don’t fade or fail to inspire widespread repatriation of Japanese savings, a more permanent solution might require far heavier medicine from Japanese officials, possibly even coordinated action with the US Federal Reserve in the form of a massive dollar currency swap. Such a swap may prove necessary anyway if the US hopes to see the inbound investment Japan promised as part of its trade deal with the Trump administration.
Saxo warns USDJPY and other yen pairs could experience monumental volatility in the first quarter – eventually in both directions, though the base case anticipates resolution lower.
**Oil Markets May Be Setting Up Contrarian Opportunity**
Amidst persistent global inflation, one cornerstone economic input trades near multi-year lows. Oil prices around USD 60 and lower, in inflation-adjusted terms, sit at the low end of a two-decade range. This has awakened Saxo’s contrarian instincts for a possible major bottom in crude during 2026.
Current prices reflect near-term oversupply concerns but also discourage investment precisely when global energy demand remains structurally robust. High natural decline rates across all oil fields mean producers must invest heavily simply to maintain output, raising questions whether today’s prices can secure future supply. This imbalance could begin tightening markets as early as the second half of 2026, but more likely into 2027 and beyond.
Spot prices could certainly move lower in the first half given the supply overhang, but a major low may establish itself during this timeframe as prices have already reached levels that destroy forward supply. For longer-term traders and investors, it’s notable that forward oil prices don’t even reflect interest costs – as of mid-December, year-forward prices virtually matched spot levels.
Saxo identifies scope for oil to establish a major bottom in coming months, with oil majors and select services companies potentially delivering better-than-expected shareholder returns if the cycle turns upward later in the year.
**Three Grey Swans Circling Markets**
Hardy acknowledges several well-known unknowns clouding geopolitical forecasts. Dramatic pivots in any could prove decisive for market outcomes. Here are three.
First, will major players accept Trump’s terms of trade? The US and China appear committed to the “Busan Truce” agreement from November 2025, which has a twelve-month horizon. China flexed leverage on rare earth metals, likely instrumental in reducing US tariffs on Chinese imports. Washington may prefer keeping things quiet with China to maintain benign market and economic conditions heading into November’s mid-term elections. But flashpoints remain elsewhere. Will Europe insist on enforcing its Digital Services Act, risking US retaliation and deepening transatlantic divisions? Will South Korea and Japan remain fully committed to their US trade deals and “show Trump the money” on agreed US-bound investment whilst their currencies face enormous pressure?
Second, what shape will peace take in Ukraine, if any, and what becomes of NATO? This question looms large not just for Europe but the entire transatlantic alliance. The US wants out and wants Europe backing away from its confrontational stance against Russia. The concern is that absent a peace deal, with the Eurozone pushing its case too far supporting Ukraine, another NATO member could face Russian attack, triggering appeals for support Washington won’t want to honour. Whether or not a deal materialises, NATO itself appears at risk. Regardless, Europe’s commitment to building credible deterrence against all warfare forms will continue.
Third, how thoroughly will the Trump administration push its renewed “Monroe Doctrine”? The new US National Security Strategy made waves spelling out doctrine to keep even foreign economic interests out of the Americas. Venezuela’s Maduro regime and its China-Russia alignment is the first target in what may become an attempt to make the Gulf of Mexico and Caribbean entirely US-dominated regions, possibly including Cuba. Questions also surround Greenland and the Arctic. In Canada, pivotal talks are scheduled for January – Carney is reaching out to alternative trade partners to reduce Canadian economic reliance on the US, but will Trump resort to strong-arm tactics again? How events unfold country by country and how China responds – given its enormous presence and deep regional trade relationships – remains to be seen.