by Patrick Fearon-Hernandez, CFA, and Thomas Wash

[Posted: 9:30 AM ET] | PDF

Our Comment today opens with some key observations on Friday’s disastrous summit meeting between President Trump and Ukrainian President Zelensky. We next review several other international and US developments with the potential to affect the financial markets today, including key reports on consumer price inflation from the eurozone and Turkey and signs that the paused US tariffs on Canada and Mexico will finally take effect tomorrow.

United States-Russia-Ukraine: By now, we assume that those who care about global affairs and understand that international relations can profoundly affect their personal lives have already started to digest President Trump’s failed meeting on Friday with Ukrainian President Zelensky. We therefore won’t try to rehash all the details here. Rather, we provide a quick summary of the meeting and then focus on what it says about Trump’s evolving foreign policy and what it portends for US investors.

• To recap, the meeting was set for the two leaders to sign a preliminary deal in which the US would get a cut of Ukraine’s future mineral profits to repay the US’s past support and, supposedly, to cement the US’s interests in Ukraine and deter further Russian aggression. The meeting devolved into acrimony when Zelensky warned that Russian President Putin can’t be trusted. It broke up with Zelensky evicted from the White House and the deal left unsigned.
• Neither Trump nor any top administration official has provided a comprehensive statement of the president’s global goals and strategy. As we’ve written before, one thrust so far has been to punish traditional US allies – especially Canada, Mexico, and the European members of the North Atlantic Treaty Organization – for supposedly taking advantage of the US since World War II. But unleashing brutal rhetoric, tariffs, and military threats against the allies doesn’t seem to be the whole story.
• One great mystery about Trump’s foreign policy is why he has seemed relatively soft on China so far and why he seems so intent on excusing Putin – a dictator who essentially aims to recreate the Russian Empire and, therefore, is a threat to Western Europe’s wealth, economic potential, territory, technology, democratic institutions, and cultural development, all of which have made the region such a valuable ally for the US over decades.
• In the Trump-Zelensky meeting, it’s striking that the point at which it “went south” was when Zelensky said that Putin can’t be trusted. After a quarter-century of evidence pointing to Putin’s brutality and duplicity, the question arises as to why that statement would so easily set off Trump and Vice President Vance. It also highlights how administration officials and nominees have apparently been instructed to avoid any criticism of Putin and to parrot Russian talking points on global affairs.
• As we’ve noted before, some observers think Trump is trying to pull a “reverse Nixon” or “reverse Kissinger” by splitting Russia away from China. Secretary of State Rubio, a relatively traditionalist Russia hawk, even articulated this view recently. However, there are many reasons to doubt this possibility, from the lack of any obvious Chinese-Russian political tensions to exploit to the paucity of economic advantages the US could gain from closer relations with Russia.
• Another potential reason for Trump’s embrace of Russia is the possibility that he aims to divide the world into spheres of influence, with the US taking the Americas (possibly with outposts in Greenland, the Middle East, and some Pacific islands), Russia taking Europe, and China taking Asia up to the “first island chain.” If so, it seems like a bad deal for the US to trade Europe for a freer hand in the Americas. This strategy would also require trusting Beijing and Moscow to respect the US sphere.
• A final potential reason that we explore here is political affinity. Alliances often are built on a common political outlook, so Trump’s embrace of big, authoritarian, strong-man countries such as Russia and Saudi Arabia could simply signal his comfort level with that style of government. Since Trump has positioned himself as a champion of the US’s conservative working class, who are looking to him to break the political and economic hold of the elites, such an embrace of assertive politics may be well received by his base.
• In sum, it’s true that Europe has lost some luster as a political, military, and economic partner for the US. However, surrendering the region to the China/Russia geopolitical bloc potentially sets the stage for further international chaos. Even if peace in Ukraine and the reopening of Europe to Russian energy gives a boost to European stocks in the near term, greater Russian influence on the Continent could constrict US economic opportunities over the longer term.

United Kingdom-France-Ukraine: British Prime Minister Starmer hosted French President Macron, Ukrainian President Zelensky, and other European leaders yesterday to try to hash out their own peace plan for Ukraine. According to Starmer, the Europeans’ aim is to develop a plan that would entice President Trump to commit the US to help provide security guarantees for Ukraine.

• Late yesterday, Macron indicated that the Europeans are working on a one-month ceasefire that would stop Russia and Ukraine from conducting air and sea assaults and attacks on each other’s infrastructure. The ceasefire proposal would not apply to ground attacks due to the difficulty in policing them.
• A second part of the developing plan would involve Ukraine signing a mineral deal with the US, similar to the one that was supposed to be signed at Friday’s Trump-Zelensky meeting.
• However, it’s important to note that the UK and Ukraine today have both distanced themselves from the plan Macron suggested.

Eurozone: The February consumer price index was up just 2.4% from the same month one year earlier, not quite as tame as the expected 2.3% but better than the 2.5% recorded for the year to January. Stripping out the volatile food and energy components, the February core CPI was up 2.6% compared with 2.7% in the year to January. The decline in inflation last month should help bolster the case for further interest-rate cuts when the European Central Bank holds its next policy meeting later this week.

Turkey: The February consumer price index was up “just” 39.1% from the same month one year earlier, matching expectations and cooling from the 42.1% increase in the year to January. The data marked the ninth straight month in which Turkish inflation has cooled, likely setting the stage for the central bank to keep cutting the country’s sky-high interest rates in the coming months.

United States-Canada-Mexico-China: Commerce Secretary Lutnick yesterday said the paused US tariffs against Canada and Mexico will indeed go into effect on Tuesday, but President Trump is still deciding whether to apply them at the originally planned 25% rate or at some lower rate. Lutnick said the new 10% additional levy against China is “set” and will also go into effect on Tuesday.

• The big, new tariffs against the US’s largest trading partners could disrupt economic activity, but it’s still too early to know if they’ll worsen consumer price inflation.
• In any case, tariff risks continue to drive investors into stock market sectors that are more domestically oriented and therefore are perceived to be more insulated from Trump’s new trade policies. The Health Care, Consumer Staples, Real Estate, and Financials stock sectors are all up more than 5% so far this year versus a gain of just over 1% for the overall market.

US Public Lands Policy: President Trump on Saturday signed an executive order directing federal agencies to examine ways to bypass environmental regulations that control timber production in US national forests and other public lands. The directive suggests Trump will try to boost domestic timber output to offset planned restrictions on imported wood. If so, any quick boost in domestic production could help reduce the costs of newly built homes and other buildings as labor and other costs keep going up.

US Cryptocurrency Market: President Trump yesterday named five cryptocurrency tokens that will be included in his new US digital-currency reserve. The tokens included will be Bitcoin, ether, solana, Ripple-linked XRP, and cardano. As might be expected, overnight prices for the tokens jumped, with the increases ranging from about 9% for Bitcoin to more than 60% for cardano. Nevertheless, prices for Bitcoin and other major cryptocurrencies remain far below their most recent highs.

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by Patrick Fearon-Hernandez, CFA, and Thomas Wash

[Posted: 9:30 AM ET] | PDF

Good morning! Markets are reacting to the latest inflation data. In sports, Steph Curry joined Wilt Chamberlain and Elgin Baylor as the only players with 45+ point games on the same date. Today’s Comment explores the factors behind the Fed’s aggressive policy shift, the strategic importance of a US-UK trade agreement, and other market-moving events. Plus, we’ll provide a comprehensive overview of today’s key economic data releases.

Close to Neutral? On Thursday, two Federal Reserve officials offered contrasting perspectives on the tightness of monetary policy, underscoring the persistent uncertainty surrounding the path to the neutral interest rate. Despite their differing views, both officials agreed that the Fed should maintain current interest rates for the time being.

• Cleveland Fed President Beth Hammack has indicated that the Fed’s policy rate is no longer meaningfully “restrictive,” suggesting that the central bank may be approaching its neutral rate — the level at which monetary policy neither stimulates nor constrains economic growth. Her comments mark one of the first signals that some Fed officials are growing comfortable with the idea of concluding the current easing cycle by the end of the year.
• On the same day, Philadelphia Fed President Patrick Harker noted that he believes the current policy rate remains sufficiently restrictive to maintain downward pressure on inflation over the long term. While these remarks do not indicate how many rate cuts he expects for the year, it does suggest that he may not agree that the Fed is close to finishing its easing cycle.
• Although both officials still support keeping rates steady at the upcoming meeting and neither has pushed for a near-term rate hike, the widening divergence in their views highlights a growing hawkish tilt among committee members in recent months. This shift signals that the Fed may be closer to ending its easing cycle than markets initially expected at the start of the year.
• Market expectations have shifted significantly. Before the latest inflation data, Fed futures contracts showed that many participants had largely dismissed the possibility of 50 bps of rate cuts this year. As of now, the likelihood of a rate hike has surpassed that of a cut. Current pricing suggests a 35% probability that rates will remain unchanged by the end of 2025, a 25.2% chance of a 25 bps increase, and a 23.1% chance of a 25 bps cut.

• As we have emphasized over the past few months, the Fed will be closely monitoring inflation data early in the year. The first few months present the best opportunity for the Fed to make progress toward its 2% target, given that inflation readings during this period have historically been elevated compared to their long-term average. While a sudden rate hike is not currently the base case scenario, it remains a potential unexpected headwind for risk assets.

UK Trade Deal: UK Prime Minister Keir Starmer visited Washington this week to discuss strengthening trade ties between the two nations. While no final agreement was announced, both sides expressed a commitment to maintaining positive relations. The potential US-UK trade deal is expected to serve as a benchmark for what allies can achieve when they align closely with US interests.

• Following the discussion, President Trump announced that his administration had begun working on a deal with the UK, which could help both nations avoid being swept into a trade war. The deal was a welcome development for Starmer, as his country has been seeking a breakthrough amid recent budget cuts and unpopular tax reforms. However, it appears that Trump may have a broader strategy in mind.
• The president’s decision to pursue a trade deal with the UK may signal to other countries considering breaking away from the EU that they, too, could negotiate their own agreements with the US. Under current EU rules, individual member states are not permitted to negotiate independent trade deals. Additionally, the president has mentioned that he prefers bilateral trade deals with countries as opposed to multilateral agreements.
• That said, this is not the first time the president has expressed interest in working on a trade deal with the UK. In 2019, his administration was actively negotiating an agreement, but progress stalled due to the pandemic. This time may differ slightly, as the administration appears to have a clearer vision of its objectives. However, it’s important to note that trade agreements typically require years of negotiation to finalize.

• One advantage the UK holds is that it currently runs a trade deficit with the US, meaning — by the President Trump’s metric — it is not exploiting the system. As a result, the UK may become an attractive destination for those seeking to avoid countries that could be negatively impacted by a trade war with the US.

Open AI Strikes Back: The latest version of Open AI’s model has been released, aiming to reassure investors that it remains on track following DeepSeek’s recent breakthrough. This new technology marks a significant shift for the company as it moves away from language learning models (LLMs) that rely on chain-of-reasoning approaches.

• The new GPT-4.5 is different from its predecessor models in that it is able to engage with users more naturally, therefore creating a more improved customer experience. The update is unlikely to create the same level of buzz as GPT-4 did when it was released in 2022, but it does show the focus of AI research has started to shift.
• When the technology was first introduced, it faced criticism for its capability to solve only straightforward problems while struggling with more complex ones. As a result, generative AI models have proven to be valuable tools for experts with a strong grasp of a subject, aiding them in completing tasks more efficiently. However, their unreliability in handling nuanced or intricate challenges has made them less suitable for beginners or those starting from scratch.
• Improvements in these models are expected to enhance AI’s ability to tackle more complex tasks, potentially boosting overall economic productivity. However, this advancement could, over time, undermine worker bargaining power as AI becomes increasingly capable of performing roles traditionally held by humans. Consequently, while the technology holds immense promise, it may also face significant political resistance as its broader societal and economic implications come to the forefront.

China Vows Response: Beijing has responded to President Trump’s threat to raise tariffs on Chinese goods, stating that it will take necessary measures if additional tariffs are imposed. This follows Trump’s announcement of a planned 10% tariff increase on Chinese imports, set to take effect on March 4.

• While Beijing has avoided detailing specific measures, its response signals a readiness to counter US threats. Export growth has been a bright spot for the Chinese economy, providing momentum as it seeks to break out of its current slowdown.
• That said, any response is likely to be measured, as both leaders are expected to meet soon to negotiate a trade agreement, making an aggressive reaction improbable.

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by Patrick Fearon-Hernandez, CFA, and Thomas Wash

[Posted: 9:30 AM ET] | PDF

Good morning! The market is digesting the president’s recent tariff announcements. In sports news, Real Madrid secured a victory against Real Sociedad in the first leg of their Copa del Rey semifinal clash. Today’s Comment will explore why the trade deficit may not be the Trump administration’s sole concern, analyze the Magnificent 7’s weak start to the year, and cover other market-related developments. As usual, the report will also include a roundup of key international and domestic data releases.

Trump Tariffs: President Trump has pledged to proceed with tariffs on Mexico, Canada, and the European Union starting next week, though he left room for a potential extension that could delay them until April. The announcement sent shockwaves through markets, as uncertainty grows over how far his administration will escalate this global trade war.

• Originally, Trump planned to impose these levies on March 4, proposing a 25% tariff on goods from Mexico and Canada due to concerns that the countries were not taking sufficient actions to curb the flow of fentanyl into the United States. Simultaneously, the EU was targeted over allegations of unfair trade practices, which have placed the US agriculture and automotive industries at a competitive disadvantage.
• That said, his threats have caused some confusion, particularly for Mexico and Canada, as it remains unclear whether they will receive an extension. The president’s team has been evaluating various goods that could potentially be targeted by tariffs, which were also set to take effect on April 2. As a result, the president may consider imposing additional tariffs on Mexican and Canadian goods a month after implementing 25% tariffs, rather than extending the March deadline.
• Regardless of whether tariffs take effect in March or April, the uncertainty surrounding how events will unfold has already contributed to volatile equity markets. The US is expected to start with relatively low tariffs, with the possibility of increasing them if trading partners retaliate. Meanwhile, other countries have been preparing contingency plans in case their goods face tariffs, potentially targeting swing-state economies as part of their response.
• One key area of focus in analyzing the trade war will be the current account balance. While the US trade deficit has been widely discussed in the media, far less attention has been given to the deficit in primary income. For the first time in recorded history, American residents are earning less on their overseas assets than foreigners are earning on their US assets. This suggests that the US is paying more to the rest of the world in dividend and interest than it is receiving from them in return.

• The concern with having both a trade deficit and a primary income deficit is that it indicates other countries are not only gaining an advantage in trade but also demanding higher returns on their investments. In the long run, this dynamic is unsustainable, as it could lead to a rapid increase in US debt or a currency crisis.
• It is important to note that the president may be using the current account as a scorecard to assess whether the US is being taken advantage of. As a result, the Trump administration’s pressure on the rest of the world could extend beyond trade and potentially into financial flows if these imbalances persist. This could introduce additional uncertainty into equity markets while simultaneously strengthening the case for gold as a safe-haven asset.

Magnificent 7: Nvidia was unable to provide a boost for the group of seven mega cap tech stocks, which have slipped into correction territory this week. Their collective weak start to the year comes as investors continue to assess the potential of AI and other emerging technologies.

• The chipmaker posted another strong earnings report in the fourth quarter of 2024. The company’s sales surged by 78% in the final three months of the year, reflecting robust demand for its chips. Additionally, it was able to counter concerns that demand for its products was under threat following the release of DeepSeek.
• That said, the strong earnings report failed to excite investors, as the company’s stock price remained relatively flat compared to the previous day, despite rising as much as 3.4% in the lead-up to the announcement. The muted reaction comes as investors have begun rotating away from the Magnificent 7 in favor of other large cap stocks.
• Following two exceptionally strong years in 2023 and 2024, during which the Magnificent 7’s collective stock price nearly tripled the performance of the S&P 500, investors appear to be seeking new leadership. While the Magnificent 7 is down 4.4% year-to-date, the rest of the S&P 500 has gained 4.5% over the same period.

• One of the key uncertainties is whether investors will continue to pressure the companies’ collective capital expenditure (capex) spending, particularly amid growing uncertainty surrounding US policy and geopolitical tensions. As a result, investors may adopt a wait-and-see approach for now, as they assess how these companies navigate emerging challenges.

Taiwan in Danger? Chinese military exercises around Taiwan are growing increasingly assertive, signaling that Beijing may be seriously considering the possibility of an invasion.

• A senior Chinese official responsible for Taiwan relations issued a strong call on Wednesday, urging the island to consider “the inevitable reunification of the motherland.” This bold statement indicates Beijing’s potential for increased action to maintain Taiwan within its orbit.
• This assertive stance, coupled with escalating Chinese military exercises near the island, has fueled concerns of a potential false flag invasion. Furthermore, the severing of undersea cables by Chinese entities has raised fears of hybrid warfare, suggesting a significant escalation in cross-strait tensions.
• While the US has consistently stated its support for Taiwan’s self-governance, President Trump has been reluctant to explicitly promise military defense of the region in the event of an attack by China.

Rubio Russia Pivot: Secretary of State Marco Rubio has warned that the US should not allow Moscow to become a junior partner to China. This strategy, which some have dubbed the “reverse Nixon,” underscores the Trump administration’s willingness to pull Moscow away from Beijing’s influence.

• While the rhetoric may sound appealing, the practicality of this goal appears highly questionable, especially considering Russia’s already heavy economic reliance on China and the growing competition between the US and Moscow over energy markets in Europe.
• That said, the warming of ties between the US and Russia serves as another reminder to the EU that Washington no longer prioritizes its transatlantic relationships. This shift could potentially push Europe to seriously reconsider and accelerate its own defense buildup.

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by Patrick Fearon-Hernandez, CFA, and Thomas Wash

[Posted: 9:30 AM ET] | PDF

Good morning! Markets are closely watching the Republican budget bill, as the likelihood of extended tax cuts grows. In sports news, Alex Ovechkin made history by scoring 30 goals in a season for the 19^th consecutive year, setting a new NHL record. Today’s commentary will delve into the sharp decline in consumer confidence, provide an update on the ambitious efforts by House Republicans to pass a new budget, and highlight other market-moving developments. As always, it will also include a roundup of key international and domestic data releases.

Consumer Sentiment Dips: A sharper-than-anticipated decline in the Conference Board’s Consumer Confidence Index has heightened concerns that the economy may be on the brink of a slowdown. The S&P 500 plunged below 6,000, and the 10-year Treasury yield dropped below 4.30%, as investors sought refuge in bonds.

• The February Consumer Confidence Index dropped sharply from 105.3 to 98.3, marking its largest decline since August 2021. The significant downturn in overall sentiment was primarily driven by growing concerns about the future, as the Expectations Index plunged 9.3 points to 72.9, falling below the critical recession threshold of 80 for the first time since June 2024. Additionally, consumer assessment of the current economic situation also weakened, with the Present Situation Index declining by 3.4 points to 136.5.
• The decline in sentiment was driven mostly by inflation fears. Rising egg prices and the perceived threat of tariffs are key contributors. The Conference Board survey revealed widespread unease about tariff impacts, with both businesses and households expressing heightened concern. Alarmingly, 12-month inflation expectations surged from 5.2% to 6.0%, signaling a growing belief in renewed inflationary pressures.
• Beyond inflation, respondents voiced growing unease about the labor market, particularly in light of recent federal government layoffs. The proportion of respondents saying jobs were “plentiful” dropped from 33.9% to 33.4%, while those reporting jobs as “hard to get” climbed from 14.5% to 16.3%. As a result, the net labor market reading, which measures the difference between “plentiful” and “hard to get” responses, narrowed to 17.1, the lowest level observed since October 2024.

• We believe the recent decline in confidence may partly reflect the initial shock effect of the Trump administration’s policies, particularly around tariffs and layoffs. As markets and consumers adjust to these changes, the negative sentiment could begin to ease in the coming months. However, continued monitoring of economic indicators will be essential to gauge whether this is a temporary dip or the start of a more sustained decline.

The Big Beautiful Bill: House Republicans successfully passed a budget blueprint on Tuesday that paves the way for extending the Trump tax cuts and raising the debt ceiling but is contingent on cuts to the social safety net. However, significant hurdles remain before the proposal can become law. Concerns over its impact on the deficit, coupled with potential revisions in the Senate, pose challenges to its passage.

• The bill passed by a razor-thin margin, 217-215, after last-minute presidential lobbying swayed several moderates. It now heads to the Senate, where it faces further amendments. Republicans aim to use budget reconciliation to extend the tax cuts with a simple majority once the bill is finalized.
• The overall cost of the bill continues to be a significant concern for the incoming administration, which aims to reduce the deficit as a strategy to lower long-term interest rates. According to estimates from the nonpartisan Committee for a Responsible Federal Budget, the new measure would add $2.8 trillion to the deficit by 2034. While this figure is substantial, it represents a notable reduction from the pre-election estimate of $7.5 trillion.
• Most of the projected savings appear to stem from cuts to the social safety net. The budget directs the House Energy and Commerce Committee to identify $880 billion in spending reductions, raising concerns that lawmakers may target Medicaid as a primary area for cuts. Furthermore, the Agriculture Committee has been tasked with reducing $230 billion from food aid programs, specifically the Supplemental Nutrition Assistance Program (SNAP).

• Although the budget resolution offers a nonbinding framework, the combination of tax cuts and a lower-than-anticipated deficit may bolster investor confidence, signaling that the incoming administration is more fiscally disciplined than initially expected. Should lawmakers successfully enact these measures, the resulting stimulus could provide a moderate lift to equities.

Ukraine Agrees to Deal: Officials in Kyiv indicated that Ukraine is prepared to sign an agreement with the US, exchanging access to critical minerals for security assurances. The deal was finalized after Washington withdrew its initial demand for $500 billion worth of mineral resources. However, the agreement does not include any formal, written security guarantees, leaving the specifics of US support unclear.

• The new agreement stipulates that Ukraine will contribute 50% of the proceeds from the “future monetization” of state-owned mineral resources. These funds will also be allocated for investments within Ukraine. However, the agreement excludes mineral resources that directly contribute to the Ukrainian government’s budget, ensuring that the country’s gas and oil companies remain unaffected by the arrangement.
• Ukraine is a resource-rich nation, boasting critical minerals essential for defense technology and electric vehicle production, such as titanium, rare earth elements, cobalt, lithium, and graphite. Access to these resources provides the US with a strong incentive to ensure Ukraine is treated fairly during peace negotiations with Russia.
• The minerals deal will continue to be negotiated by both sides as they work to resolve any disagreements over the specifics of the arrangement. Once finalized, it will require approval from the Ukrainian Parliament before it can take effect. The US, however, does not intend to pursue a formal treaty, as that would necessitate a two-thirds Senate vote, making it politically challenging to achieve.

Joint European Bonds: There is increasing speculation that the EU may turn to the bond market to finance a significant increase in defense spending. This move reflects the region’s growing recognition that it can no longer depend solely on the US for its security.

• This sentiment stems from recent discussions among European leaders regarding the need to enhance the region’s military capabilities. The group of countries is expected to convene on March 6 to develop a bloc-wide defense package, estimated to cost around 500 billion EUR ($524 billion), with the potential for additional funding.
• Additionally, several countries are already planning to increase their defense expenditures. On Tuesday, Irish Finance Minister Paschal Donohoe advocated for higher defense spending at the national level. Meanwhile, in Germany, the likely ruling conservative CDU/CSU party is drafting a bill to approve a 200 billion EUR ($210 billion) special fund for defense spending.
• The decision by European countries to increase defense spending is expected to provide a boost to regional equities, as heightened investment in the sector could stimulate corporate earnings for defense firms. However, this fiscal expansion is also likely to exert upward pressure on bond yields, as governments continue to grapple with the challenge of curbing expenditures in the aftermath of the pandemic.

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by Patrick Fearon-Hernandez, CFA, and Thomas Wash

[Posted: 9:30 AM ET] | PDF

Our Comment today opens with more evidence of the Trump administration’s revolutionary realignment of US foreign policy, which could have big implications for the US economy and financial markets over the longer term. We next review several other international and US developments with the potential to affect the financial markets today, including news that Trump intends to let his big 25% tariffs against Canada and Mexico take effect next week and an important union vote at US ports today.

United States-Russia-Ukraine-Europe: In the United Nations Security Council yesterday, the US voted with China and Russia to approve a measure calling for a swift end to the war in Ukraine but failing to designate Russia as the aggressor. Earlier, in the UN General Assembly, the US voted with the likes of Russia, Belarus, North Korea, Hungary, and Nicaragua to oppose a resolution condemning Russia for its invasion of Ukraine. Finally, President Trump yesterday said he was negotiating an economic development deal with Russia.

• Yesterday’s moves are the latest examples of how the Trump administration appears to be trying to realign US foreign policy in favor of authoritarian powers long recognized as inimical to US interests, and away from the US’s traditional allies.
• One theory for this is that Trump is trying to pull a “reverse Kissinger,” replicating the former Secretary of State’s strategy in the Cold War to cozy up to China and isolate the Soviet Union. However, China and Russia are no longer at odds as they were in the 1960s and 1970s, so there is a risk that Russia will simply pocket any concessions it gets from the US, leaving the China/Russia bloc stronger and splitting the US bloc.
• In any case, any realignment of the US toward Russia and other authoritarian states would be a revolution in the country’s foreign policy. As we’ve noted before, another important risk is that the move could split the US from Western Europe and make the Continent vulnerable to Russian aggression, which would ultimately constrict US economic opportunities and probably undermine US financial markets in the longer term.

United States-Canada-Mexico: President Trump today reportedly said that his 25% tariffs on Canadian and Mexican imports would be put into place as scheduled next week, although at least one administration insider has said the decision isn’t yet final. While the tariffs have been paused for the last month to allow for negotiations, we have seen no details on how the talks proceeded or if they in fact took place. In any case, the big tariffs will be a test case to see how broad duties against whole countries will affect the exporting economies and the US.

United States-Iran: As part of its renewed “maximum pressure” campaign to weaken Iran, the Trump administration yesterday imposed new, targeted sanctions on more than 30 individuals, entities, and ships associated with Iran’s “shadow fleet” for exporting oil. The aim of the new sanctions is reportedly to reduce China’s ability to import cheap Iranian crude. As background, our Bi-Weekly Geopolitical Report for February 24 provides an overview of US sanctions and the risks they create for investors.

Eurozone: Bundesbank President Joachim Nagel, who sits on the board of the European Central Bank, today said the ECB can continue to cut interest rates as consumer price inflation falls towards the policymakers’ 2% target, but since price pressures are proving stickier than expected, it should be cautious and not cut too fast. Separately, ECB executive board member Isabel Schnabel said in a speech that estimates for the neutral rate had moved up recently, and that higher rates were more likely in future.

• The statements by Nagel and Schnabel suggest the ECB’s rate cuts going forward may be slower than investors anticipate.
• The statements have given a modest boost to the euro (EUR) so far today, pushing it up 0.3% to $1.0495.

Germany: While Friedrich Merz, leader of the center-right CDU/CSU party, starts working to form a coalition government with the center-left SPD after Sunday’s elections, he reportedly is mulling a maneuver for the current parliament to ease the constitution’s “debt brake” before the resurgent far-right and far-left parties can be seated for the new parliament. Easing the debt limits is widely seen as necessary for Germany to ramp up its defense spending to counter potential Russian aggression and to boost public investment to support economic growth.

United Kingdom: Setting the stage for his trip to Washington to meet President Trump on Thursday, Prime Minister Starmer announced in parliament that his government will boost the UK’s defense budget from 2.3% of gross domestic product now to 2.5% in 2027 and 3.0% in the longer term. The hike in defense spending responds to both pressure from Trump and the growing threat from Russia. As such, the move exemplifies the rise in general European defense spending, which has ignited European defense stocks over the last couple of years.

China-Taiwan: The Taiwanese coast guard today caught a Chinese freighter in the act of dragging its anchor and cutting a subsea communications cable off the island’s west coast. The incident is the latest example of suspected Chinese and Russian “grey zone” warfare against US allies’ subsea infrastructure. The Taiwanese have reportedly detained the ship, risking increased tensions with Beijing.

South Korea: The Bank of Korea today cut its benchmark short-term interest rate by 25 basis points to 2.75%, as widely expected. The central bank also cut its forecast of 2025 gross domestic product growth to just 1.5% from 1.9% previously, as the economy softens amid uncertainty surrounding President Yoon’s impeachment trial. The country’s growth in recent quarters has also suffered from weak demand in China, but improved prospects there have strengthened the won (KRW) so far this year, including today.

Global Energy Market: In its annual outlook, energy giant Shell predicted that global demand for liquified natural gas in 2040 will be 60% higher than today, up from a 50% jump projected last year. The upward revision stems from expectations for faster economic growth in China and India, increased demand for energy-intensive computing, and continued corporate efforts to cut greenhouse emissions. If correct, the forecasts bode well for further development in the US energy sector, which has become a powerhouse LNG exporter.

US Labor Market: Unionized workers at ports on the East and West coasts will vote today on a new six-year labor contract that includes a total 62% pay hike and limits on automation. The contract is widely expected to be approved, precluding any further strikes or other labor actions at the ports until 2030. Despite the hefty pay hike and automation limits, reports say some port operators are comfortable with the automation investments that they will be allowed under the deal.

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