By Michael Every of Rabobank
Everything right now remains in flux, and there are more shocks for those who thought they could see what 2025 would bring, even based on assumptions from a few weeks ago.
In geopolitics, Ukraine agreed the US minerals/economic security deal after its most onerous terms were dropped. President Trump, when asked what they get for that, replied: “$350bn, lots of military equipment, and the right to fight on." Is that the abandonment of the country? “Dictator” President Zelenskyy arrives in the White House to sign on Friday. True, some claim Ukraine doesn’t have these resources, and others that the real issue is where not-so-rare earths are processed, which is filthy; but that hasn’t stopped the EU offering Ukraine the same deal – how that can run alongside the US one remains to be seen.
European Commission President Von der Leyen wants Ukraine, with territorial integrity, in the EU as soon as 2030: the EU’s grand strategy just got far grander, and its grand macro strategy far more expensive, and requiring far larger EU structural changes and hard choices.
Turkey will militarily support Ukraine and Europe, and “rejuvenate” the EU’s economy and “demography”, if it gets EU entry, in President Erdogan’s own proposed grand macro strategy. That’s an interesting offer pointing to another radically different European future, if one the current right-wing trend in its politics seems incompatible with.
The UK is to boost defence spending if not by anywhere near as much or as fast as the government portrays, still to a far lower total than Trump wants (3% of GDP by the next Parliament), and by cutting foreign aid budgets. Spinning this, PM Starmer claimed defence spending helps the world's poor because they are 'hit hardest' by war, but this is a ‘guns-not-others’-butter’-or-rich-aid-workers’ bread-and-butter choice. Yet it won’t spread that far vs. what the UK might needed ahead in some gloomy scenarios.
Germany is still serious about rearming, apparently, and next-Chancellor Merz also seems keen on returning to deeper mercantilism, which will raise global tensions just as much as any rearmed Germany. (See here for our post-election take: we remain sceptikal on German fiscal promises.)
Elon Musk agreed with a call for the US to urgently rebuild its navy, requiring a vast increase in its defence industrial base. That’s as: there is a Gulf of Tonkin incident, where Vietnam found oil, involving China; China says it has the right to sail warships through the Tasman Sea whenever it wants; the Cook Islands deal with Beijing could lead to a PLA-N presence on Australia and New Zealand’s doorstep, a Harbin-ger (given where it was signed) that the Kiwis may join AUKUS and spend on defence, even if for now their government is still doing a good impression of European ones before the last US presidential election; and a Chinese civilian ship is caught deliberately cutting a communications cable in Taiwan’s western waters.
Iran is preparing for Israeli strikes on its nuclear sites, says one source. The US prefers a deal, but its roll-back from Europe may lead to Tehran feeling emboldened, and the White House is seen as leaving the choice to Israel of if/when it needs to act militarily. Oil markets may be able to work their way round sanctions, but bombs – not so much. Yet for now markets aren’t worried and oil is lower.
In geoeconomics, the US may introduce a Gold Card visa where $5m and a promise to invest means residency, as many other countries already have: “Give me your retired, your rich, your coddled masses yearning to breathe free markets.” Expect serious population flows out of some parts of the world if so – if their populations are allowed to leave.
President Trump has “freed” US trees so less Canadian lumber is needed – but what of the wood mills? Reportedly, if subsequently denied, US economic advisor Peter Navarro has pushed for Canada to be removed from the Five Eyes Western intelligence network to try to pressure it to accede to Trump demands on tariffs, etc.
Trump also flagged possible US national security tariffs on copper, seeing prices for that key industrial metal leap.
US consumer confidence slid again as inflation expeditions jumped from 5.2% to 6% on sticky inflation, the recent jump in staples like eggs and the expected impact of tariffs.
However, US bond yields are sliding on DOGE-induced recession fears and weak data. Do also recall the Treasury are now looking at the 10-year part of the curve rather than Fed Funds.
Fed speakers overnight backed remaining “moderately restrictive” on rates; and that it would be appropriate, in the medium term, to purchase more shorter-term securities than longer-term so its portfolio can more quickly mirror the composition of Treasury issuance. The Fed buying T-bills just because the Treasury is issuing vastly more? And that’s even before we get to the Financial Times noting, “If Trump wanted to take control [of the Fed], its constitutional protections are far from secure.”
The House of Representatives passed a Republican budget blueprint 217 – 215 with $4.5 trillion in tax cuts and $2 trillion in spending reductions, with more, not less, for the Pentagon and border security, and raising the debt ceiling by $4 trillion. The non-partisan Committee for a Responsible Federal Budget estimates federal deficits would average 6.8% of GDP vs. 5.8% under current law, would add $2.8 trillion to cumulative US deficits by 2034, $3.4 trillion including interest, and US debt-to-GDP would rise from 117% to 124%. Now talks begin with the Senate for the bill’s next stage.
Crypto is plunging, perhaps due to a recent hack, or the latest celebrity pump and dump in Argentina,… or the emerging realisation that Trump pro-crypto legislation could exclude foreign issued/created stablecoins from accessing the US Treasury market: he wasn’t joking when he said he wanted crypto “Made in America”. Whether this blows up the national security dollar-gateway-to-crypto-assets > stablecoins-levitate-so-more-T-bill-buying > fund-the-Pentagon-Fartcraft-to-Warcraft dynamic or forces the old crypto to pivot to new, remains to be seen.
Bloomberg says, “German Bond Appeal Hits Record Low With More Borrowing Expected” on concerns a €200bn defence fund might really happen at the second time of promising - a zweitenwende. And, of course, that would just be the initial €200bn.
The US dollar is drifting lower with its yields, while a Europe involved in an existential crisis is seeing a positive sentiment shift on key stocks and EUR.
Geopolitical tensions in the Pacific aren’t really new. The call to rebuild the US Navy is no surprise, but the US Ukraine flip-flop might be to some. And how many in markets were positioned for lower US yields and a lower dollar as inflation expectations rise and tariffs are set to follow? Or seriously higher European defence spending? Or the EU being offered multiple, radically different futures in the same week? Or a slower pace of US debt increases ahead than in the recent past despite huge tax cuts? Or oil drifting lower even before we “Drill, baby, drill” and despite Middle East tensions? Or crypto collapsing after the election of a pro-crypto president?
I can assure you, there is more to come as economic statecraft pushes out economic policy.