GRAPHIC-Markets' 2026 watch list: Fed succession, political risk and AI of course

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Analysts see risks from US midterms and rate cuts

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Stock markets to rise, albeit at slower pace than in 2025

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Borrowing costs in key markets to remain high

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Dollar expected to fall, yen to strengthen

By Canan Sevgili, Alessandro Parodi, Paolo Laudani and Vera Dvorakova

GDANSK, Jan 6 (Reuters) - Geopolitics, U.S. midterm elections and diverging monetary policies are among key drivers for world markets in 2026, alongside an artificial intelligence boom that has raised concerns about a tech share bubble.

"The true black swan, then, could lie elsewhere," said Swissquote Bank senior analyst Ipek Ozkardeskaya, referring to a rare, high-impact event that jolts markets.

"It may emerge from an overlooked corner ?of the market: an unexpected macro shock or a sudden policy shift."

Here's how some key market themes are taking shape for 2026.

PLENTY OF RISKS LINING UP

The nomination of a new Federal Reserve chair in early January is a key event. Incumbent Jerome ?Powell's term expires in May.

U.S. President Donald Trump has pressured the Fed to cut rates, bringing central bank independence into question.

"The most under-appreciated tail risk for 2026 is that ?the Fed eases monetary policy more than economic conditions justify, inadvertently reigniting inflation," said eToro global market strategist Lale Akoner.

He said further rate cuts ?could lead to aggressive easing, pushing up inflation ?and forcing a disruptive policy reversal.

The U.S. Supreme Court is poised to rule on the legality of Trump's sweeping emergency tariffs, while U.S. midterm elections take place in November.

Geopolitics is also taking centre stage after the U.S. captured Venezuelan President ?Nicolas Maduro.

Trump warned of possible military action in Colombia and Mexico and said Cuba's communist regime "looks ready ?to fall". Canada and Greenland, targets of Trump rhetoric, are likely watching how developments in Venezuela unfold.

It's a big year for emerging market elections from Hungary to Brazil and Colombia, a potential headwind after a strong 2025.

Hungary's Viktor Orban faces a race against time before April's election to turn the stagnating economy ?around enough to extend his grip on power.

Latin American elections will fall under the shadow ?of events in Venezuela, but ?wins by conservatives in Brazil and Colombia could bring the tighter budget policies and streamlined regulations that investors want.

CHECKING IN ON STOCKS

Stock markets in the U.S., Japan and Europe should rally this year, but will struggle to match 2025's blistering gains, a recent Reuters poll suggests. It showed 56% of those surveyed forecasting a correction ?in the coming months.

A potential sell-off in AI-related shares could also hurt broader sentiment. AI excitement has boosted valuations, feeding expectations for massive spending on infrastructure.

But doubts about the returns from AI investments and levels of debt some firms are taking on are starting to creep in.

Analysts see the S&P 500 at 7,490 points by end-2026 and Europe's STOXX 600 at 623, implying gains of just over 9% and 5% respectively from end-2025.

eToro's Akoner said he expected markets to be less concentrated in U.S. mega caps as rotation continues.

CENTRAL BANKS WALK A TIGHTROPE

Central banks start 2026 on differing paths, having broadly been on an easing trend.

The Fed cut rates three times last year and markets forecast two more 25-basis-point reductions by year-end. The European Central Bank ?is seen on hold, ?while traders price in a rate hike in Australia and Japan is expected to lift rates to 1% this year.

"The ECB has a single mandate - inflation. Therefore, it will continue to prioritize price stability. The Fed, however, has a dual mandate and political pressure for easier policy, giving it more flexibility - but inflation above 3.5% ?would be a clear barrier," said Swissquote Bank's Ozkardeskaya.

STICKY DEBT

While Trump hopes rate cuts will lower mortgage rates, longer-term borrowing indicators, such as 30-year Treasury yields, more sensitive to long-term government finances, ended 2025 little changed.

Bond yields and debt levels across major economies are expected to remain elevated given fiscal stimulus.

Analysts polled by Reuters forecast 10-year Treasury yields to rise to 4.25% by end-2026 from around 4.17%. German Bund yields are forecast to rise to 2.97% from 2.89%.

British and Japanese yields, by contrast, are expected to fall.

FORECASTING CURRENCIES

The consensus trade for a weaker dollar this year contrasts with a year ago, when stronger dollar expectations faded following the April 2 tariff turmoil.

The dollar index, which just had its worst year since 2017, is forecast in a Reuters poll to weaken to 95.7 by year-end, implying a 2.5% fall from current levels.

"The dollar's dominance is ?intact, but no longer unquestioned," said Akoner.

The yen is expected to strengthen, leaving the dollar at 145 yen from around 157 over that period, according to a Reuters poll. Sterling and the euro are seen broadly stable.

Cryptocurrencies remain a high-risk segment and a strong correlation with tech shares should keep volatility elevated, said Ozkardeskaya.

Bitcoin hit a record high above $125,000 in October before sliding. It ended 2025 down over 6%.

Institutional adoption, exchange-traded funds, and integration with energy and AI markets ?could bolster long-term demand, added Akoner.

(Reporting by Canan Sevgili, Alessandro Parodi, Paolo Laudani and Vera Dvorakova in Gdansk; Additional reporting by Libby George in London, Editing by Amanda Cooper, Dhara Ranasinghe and Mark Potter)