The 51st state of America?

This week Donald Trump becomes the 47th President of the United States of America. So far, Trump has threatened to retake the Panama Canal, proposed making Canada the 51st state, and said that he wants to acquire Greenland!

Being a property developer, Trump no doubt believes everything has a price, particularly land. He may recall history, such as when America acquired Alaska in 1867 from Russia for $7.2 million, or 1916, when it acquired the Virgin Islands in the Danish West Indies from Denmark for $25 million.

Greenland is a semi-autonomous territory of the Kingdom of Denmark. While it was fully integrated into the Danish state in 1953, Greenland has governed itself since 1973.

So why is Trump interested in Greenland? Climate change, something that Trump does not believe in, means that the Arctic Ocean could soon see an ice-free summer for the first time in recorded history. As the seaways become navigable, a route between the Atlantic and the Pacific opens the fabled Northwest Passage between Greenland and northern Canada. This would replace the Panama Canal, and Trump would want to control it.

Besides its key geographic location between the US and Russia, Greenland also has 43 of the 50 ‘critical minerals’ that are necessary for ‘technologies that produce, transmit, store, and conserve energy.’ That includes EVs, so Elon Musk may well have stressed the importance of securing the supply of these key minerals given China’s control over many rare earth commodities.

The US already has a strategically vital early-warning base in Greenland, which tracks Russian nuclear submarines.

Denmark’s PM has told Trump that it is up to Greenland to decide its own future, while Greenland’s PM has said the country is not for sale. A referendum on independence is likely, and Denmark has said that it would respect any result. In the meantime, Denmark has informed Trump that it is prepared to increase its responsibility for security in the Arctic.

More significantly, what will China make of Trump’s Greenland ambitions given its own long-term goal to assimilate Taiwan into the mainland? Donald Trump’s nominee for Secretary of State, Marco Rubio, has said he anticipates the US ‘will have to deal with’ China invading Taiwan before 2030, unless there are dramatic changes.

What have we been watching?

A sigh of relief on both sides of the pond? Both US and UK government bond yields pulled back slightly, and equities moved higher last week as inflation numbers came in slightly below forecasts. Indeed, the value of the UK’s top 100 companies hit a record intraday high. Markets continued to second-guess just what Trump will do on trade tariffs when he takes office today. The latest view is that Trump’s economic advisers are considering gradual hikes in tariffs of between 2-5% a month to increase leverage in future trade discussions and to minimise the inflationary impact. During his election campaign, Trump had argued for minimum tariffs of between 10-20% on all imported goods and 60% on shipments from China.

Outgoing US president Joe Biden is leaving with a bang. Following stricter Russian oil sanctions, he has issued new restrictions on the export of US AI chips in a final effort to prevent rivals like China from accessing the advanced technology. The global export framework creates three tiers of countries. There are no restrictions for American allies such as Australia and Japan. A second tier, including China and Russia, are already banned. The biggest challenge will be for the third tier, which will have caps imposed on the amount of AI chips that can be bought. This is designed to stop China from accessing AI chips via the Middle East. The EU has expressed concerns that the new rules may affect some member states.

A ceasefire and hostage-release deal were announced between Israel and Hamas, and the first prisoner exchange has been completed. The long-overdue ceasefire may stop the killing but will not end the conflict.

German Chancellor Olaf Scholz dismissed Trump’s call for NATO members to increase defence spending to 5% of GDP saying this would require expenditure of €200bn a year, compared with a federal budget of under €500bn. However, given Germany’s defence spending only hit 2% of GDP last year, expect Trump to keep applying pressure for a higher contribution from Germany.

 

There was a sigh of relief on UK inflation for Chancellor Rachel Reeves and the Bank of England (BoE). Inflation came in just below expectation, ticking down to 2.5% in December. Core inflation (excluding food and energy) and service sector inflation were also lower than expected at 3.2% and 4.4%, respectively. Against this, November GDP was slightly disappointing with UK economic growth of just 0.1%, while December retail sales volumes were poor. In his maiden speech, the newest member of the Bank of England committee, Alan Taylor, said it needs to take the possibility of a weaker economic outturn more seriously. The BoE meets next on 6th February, and the market is now expecting a 90% chance of a 0.25% interest rate cut. Meanwhile, there was good news and bad news for Rachel Reeves. The good news: the IMF upped its UK economic growth forecast to 1.5% and 1.6% for 2025 and 2026. The bad news: a leading investment bank suggested she could be facing a £20bn black hole in the public finances due to weaker economic growth and higher borrowing costs. What is it about ‘Rachel from accounts’ and £20bn black holes?

 

Germany’s economy contracted for the second consecutive year, shrinking by 0.2% in 2024, following a drop of 0.3% in 2023. Given the challenging European economic outlook and uncertainty from Trump trade tariffs, markets now expect a 99% chance of a further 0.25% interest rate cut from the European Central Bank in January and a 95% chance of a similar cut in March.

 

US inflation for December came in below forecast at 2.9%, albeit up slightly from the previous month with core inflation at 3.2%. The Federal Reserve is less likely to cut interest rates compared with its European counterparts given the uncertainty from Trump’s political policies, particularly trade tariffs.   

 

China’s exports in December grew at a faster pace than expected as factories rushed to fulfil orders amid uncertainty over Trump tariffs. Exports grew by 10.7%. By comparison, Chinese imports increased by just 1%.  China’s economy expanded by 5.4% in the fourth quarter of 2024, helped by government stimulus and the front loading of export orders.

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Brent oil climbed above $81 as analysts estimated that the latest US sanctions on Russian oil could remove up to 800,000 barrels a day from the market. India is reported to have decided to ban entry to its ports for tankers carrying Russian oil due to the latest sanctions.

Finally, how many Gen Z’s does it take to change a lightbulb? Research by Halfords has found that a quarter of those aged 18-27 and 22% of Millennials, those aged 28-43, would call a professional to change the bulb on a ceiling light in their home. In addition, almost half of those Gen Z surveyed did not know how to add air to a car tyre, or could identify a car jack. The results suggest that the ability to do basic, practical tasks is being lost amongst the younger generations. However, this sounds like good news for those businesses supplying car maintenance or DIY services to Gen Z!

 

Read Last Week’s Alpha Bites – You don’t know what you’re doing

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