By Michael Every of Rabobank
With the much-vaunted ‘Fed Put’ under discussion —is it still there, and if not, how can markets do their job without knowing they will get bailed out for egregious errors of judgement?– the Fed’s March meeting was closely watched: see Phil Marey’s take, ‘Inertia’. As expected, the Fed did nothing: except lower growth and raise inflation expectations; move closer to suggesting no cuts this year; and still see everything reverting to mean in 2027 (“because neoclassical economics”, which has no home in the White House). In short, they are in wait-and-see mode.
A Trump-Putin meeting seems close – but is a workable peace deal? After a “very good” call with President Zelensky, the US says if it takes ownership of Ukraine’s nuclear power plants it would provide the “best protection for that infrastructure.” Again with the US assets, not boots, on the ground.
Some voices point out an obvious argument: Russia can’t stop its war economy because it has its own momentum, powerful vested interests, and there’s no plan B. Whether that alone motivates President Putin or, as others allege, he genuinely enjoys a return to 18th, 19th, and first-half-of-the-20th century-style statecraft remains to be seen. Regardless, it’s bad news for Europe.
For the EU, the worst possible scenario is the US waking away with Russia walking forwards. In that case, what’s already been agreed on new defense spending is nowhere near enough – as we warned. Militarily, the “four-year” scheme promised would have to be more like 14, say experts.
Europe’s new €150bn centralised military fund also won’t buy US, British, or Turkish arms. Yes, it’s an EU fund and national governments can still spend as they please. Yet this sits awkwardly alongside “Can we get a defence guarantee for our troops in Ukraine, President Trump?”; “Can we have your nuclear umbrella, PM Starmer?”; and “Protect us and Ukraine, President Erdogan.” (As Turkey’s markets collapse following the leading opposition presidential candidate, and current Istanbul mayor, being detained.) Canada –whose military makes Europe’s look good– will cooperate with the EU on a defence build-up, not just the US, but not from that €150bn pot, nor doing anything to help US-Canada relations.
Summarising, a Financial Times op-ed, ‘Europe is only half awake from its long sleep’, points out current europhoria could age like milk given its arms build-up is likely to split it: Spain and Portugal are out, as those closer to Moscow are in. That pressure can build to a fissure if not watched. (Elsewhere in the FT, Martin Wolf has yet to follow up on his promise to dissect the ‘Mar-a-Lago Accord’: presumably he’s still trying to poke holes in it before publishing.)
Europe also doesn’t have the bandwidth to cope well with more than one geopolitical issue at once as many conflate besides Russia-Ukraine. However:
On the EU’s doorstep in the Balkans, Bosnia could be on the brink of conflict. The former US NSA Balkans director states, “Any world-weary Austro-Hungarian functionary from over a century ago could be briefed up on Bosnia’s current problems in under five minutes. Only some names have changed. Without seeming alarmist, I recommend that no archdukes, or their current European Union equivalents, journey to Sarajevo this season.”
Trump’s letter to Iran reportedly has a 2-month deadline to strike a nuclear deal – or else, and local reports suggest Tehran may prefer US strikes to submitting. Markets may opt to shrug until bombs drop, but the fat tail risk just got fatter and more fixed in terms of timing.
Watching closely, Israel’s PM attacked “the leftist Deep State” in his country and the US as he prepares to fire the head of the Shin Bet internal security service today, against the instruction of his attorney general, who might also be fired, setting up a constitutional crisis. The local take is that traditionally risk-averse Netanyahu is now ‘all in’. (To be clear, the PM can fire the SB head; just not when the latter is investigating allegations the PM, already on trial over corruption charges, had a top aide who received cash from Qatar, which the opposition is calling “treason”.)
Congo is offering the US a trade deal – kick out rebels in the country and get critical minerals. This is the new (old!) realpolitik of key supply chains Europe doesn’t get when it talks about making “upstream investment in third countries’ critical minerals.” You have to fight for them at times – and, for now, the EU still can’t.
Copper prices are leaping as huge quantities of the metal flow to the US ahead of the start of feared 25% tariffs. In some cases, this is leaving other markets physically short. Possession is nine tenths of the law, as they say. And rearmament does require copper.
So does more spending, as Chinese banks are told to offer ultra-cheap consumer loans. If that strategy works, it means even higher consumer debt and higher global inflation and global rebalancing of sorts.
Elsewhere, China or Hong Kong could potentially block the recently-agreed sale of CK Hutchinson’s stake in Panama’s two ports and 43 other facilities in 23 countries to BlackRock – if so, that would set up a US-China geopolitical clash over this key issue at a time when the US military is reportedly already drafting plans for an invasion. That’s as US steps to try to reclaim the seas for itself commercially see the ‘Maritime Industry Warn USTR’s China Port Fees Could Sink US Economy’ – and that process kicks off Monday.
Talking of sudden inflation (and hedges), Trump is to speak on crypto today, to a traditionally libertarian crowd. That’s as Le Monde reports a French scientist, who came to the US for a scientific conference, was expelled after a random search turned up electronic messages highly critical of Trump, which were deemed as a “potential terrorism” threat.
Meanwhile, as Trump will reportedly also close the US Department of Education, Harvard has been forced to offer a remedial algebra course to its maths undergrads for the first time.
There is so much going on, so much of it is so radically different from what most are used to, and collectively it can be so transformative, that it can be easy to stick to old narratives, cherry pick data and headlines, and presume things will turn out the way that suits our book. Or to assume through all this there will still be the Fed Put. I’m not saying there won’t: but relying solely on it rather than looking more broadly risks you being the Fed Putz.
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