Money is a coward. It hates unpredictability and when it sees one it runs. This has happened to equities, the dollar, and oil as the laws of economics clash with ideology and capriciousness. In the latest twist of the tariff saga US stock indices dropped sharply yesterday with the Nasdaq Composite index down more than 10% in less than 3 weeks. The sell-off continues despite President Trump exempting goods covered under the USMCA from tariffs for another month, until April 2. It would appear that the admonishment from investors about incoherent policymaking is being tacitly acknowledged, particularly that the recent dollar weakness has thrown the greenback’s reserve currency status into doubt.

Is the latest pause then an admission of guilt? Hardly. A certain kind of calmness will probably be re-instated but one must remember that the more salient Chinese tariffs remain in place, for now, as the world’s second-biggest economy demanded a diminishing volume of foreign goods in the January-February period, and it is simply impossible to foretell whether the Canadian and Mexican excise duties will be re-imposed after March.
Similarly, it cannot be envisioned if the OPEC+ producer group will go ahead with the announced gradual easing of supply constraints from next month. The potential move is likely to be price dependent and in turn, one factor that influences the price of oil, directly and indirectly, is tariffs. They hurt demand but have a bullish connotation when imposed on traditional US oil suppliers. Risk assets might stabilize throughout the current month (admittedly it is a big leap to come to this conclusion in the current erratic trading environment), however, one could stare into the abyss once again after March.

Peace is Near and It is Worrying

The US President is doing his best to turn his campaign pledge of stopping the Ukrainian war into action. The grotesque scenes from the Oval Office last Friday leave no doubt about that. The question of the past three years has always been how the hostilities might end. The premeditated, brazen and public humiliation of the Ukrainian president lifted the veil of secrecy if there was any. It will take shape by aligning US interests with that of Russia, which was incomprehensible last year. 

The motivations are manifold. Mr Trump’s acrimonious attitude towards the Ukrainian President is well known ever since the infamous phone call between the two in 2019 when the latter refused to dig up dirt on Joe Biden’s son’s dubious business interests in Ukraine. Secondly, only God knows what incriminating information Russia has on the US President about his business dealings from before 2016. Thirdly, the current US foreign policy regarding the Ukrainian war perfectly fits the narrative about the sphere of influence, a trade-off, if you will, where Russia would be able to roam free in Europe, at least in the eastern part of it. It is the 21st-century Yalta. Fourthly and in a related manner, some commentators speculate that the rapprochement between the two former adversaries also aims to isolate China, the US public enemy No. 1.

Whether there is a US agreement with Russia over Ukraine with or without the latter or the EU is not obvious. Some light will be shed on the issue next week, when Ukrainian and US officials meet in Saudi Arabia. Considering that the current US administration is losing interest in its former allies it would not be surprising to see Ukraine forced to capitulate; no US security guarantees are part of any proposed deal and intelligence sharing has also been withdrawn or at least constrained. Should this scenario prevail, the saying of the chieftain of the ancient Caledonian tribe, Calgacus, about the Romans will come into mind: they make a desert and call it peace.
It is still feasible that Ukraine and the EU will try to mend ties with the US. Those close to the White House are suggesting in numerous podcasts that the US administration now expects a public apology from Volodymyr Zelenskiy on Fox News after he was unjustly accused of disrespect. He may also be demanded to resign and replaced by a puppet. The EU might also offer to purchase US arms from frozen and potentially seized Russian assets. These attempts, however reasonable they seem, will be most plausibly to no avail.

Coercing Ukraine back under the Russian yoke after 35 years of freedom will probably be deemed the greatest and most beautiful peace in history and will undeniably lead to calls for a Nobel Peace Prize for President Trump from the man himself and from malleable US lawmakers from the GOP. The medium to long-term repercussions, on the other hand, will cause a great amount of anxiety throughout the globe.

The US will become ever more isolated and possibly lonely and not great. Europe is adjusting to the new realities and is ramping up defence spending at a time when governments have been contemplating tightening the purse string. As discussed in yesterday’s note Germany is planning to lift its debt brake and is suggesting exempting EU defence spending from the fiscal rules for a long, but undefined period. The embryonic plan would precipitate the launch of a joint debt instrument where money is borrowed in the open market against the EU budget as collateral and lent to EU countries at a cheaper rate to re-arm. According to Ursula von der Leyen, as much as €650 billion could be spent on defence over four years. The initial reaction to the plan was a massive stock market rally in Europe as investors envisage considerable growth due to the possible fiscal stimulus.

Energy and oil will inevitably be affected and might mitigate the economic consequences of increased defence spending. The potential lifting of sanctions on Russia might re-re-align oil flows to Europe rather hastily much to the disappointment of China and India, although re-gaining lost trust as a reliable political and trade partner will take much longer to re-establish, if at all. Carpe Diem, Russia thinks after the unequivocal US volte-face and is pushing to make the Nord Stream 2 pipeline operational with US backing. The move would hurt US interests as American LNG exporters have been the biggest beneficiaries of the Russian sanctions. It shows the complexity of the newly found love between the US and Russia and its chaotic nature. Current US attitude insinuates that the default scenario, whether from the political, economic or energy perspective, is that Ukraine will be thrown under the bus, and Russian sanctions, at least from the US side will be lifted. But again, the world now functions at the whim of an unpredictable US President. Whereas pre-Trump 2.0, borrowing the phrase from the Financial Times, life might have been shockingly boring, it is now boringly shocking.

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