Europe’s Big Issue

Given Donald Trump’s comprehensive presidential election win, one of the key issues for Europe, alongside potential US trade tariffs, will be the war in Ukraine.

The Trump-Putin bromance appears back on, with Putin reportedly having praised Trump’s courageous election victory. No wonder PM Sir Keir Starmer is seeking to hold urgent talks with President Macron of France.

Donald Trump has repeatedly claimed he could end Russia’s war in Ukraine “in one day.” That sounds like his usual blustering, but we expect his new administration to make a determined push to end the war. Indeed, he is reported to have spoken to Putin, reminding him of America’s sizable military presence in Europe. However, Donald Trump Jr. has recently mocked President Zelensky,  saying ‘his allowance is running out.’

Trump could feasibly attempt to coerce Putin to freeze the war on terms that Ukraine can accept by threatening that the US will send Ukraine all the weapons that Kyiv has asked for to strike within Russia. Trump could also exert trade pressure on China to nudge Putin toward a peace deal. However, this scenario feels unlikely.

An alternative nightmare scenario for Europe and NATO is that Trump simply pulls the plug, stopping most, if not all, US support for Ukraine. Europe could not fill the breach, meaning that Russia would win the war of attrition, forcing Ukraine into submission.

However, Trump is unpredictable, and the simple answer is we do not know what he will do, and perhaps an outcome somewhere in between these two scenarios may be possible.

Stopping the war makes sense. However, a peace deal would be challenging. This would need to come with clear guarantees for a free Ukraine that reliably deters future Russian aggression. Putin does not want Ukraine to join NATO. The West would also have to ensure that the country remains pro-EU and pro-NATO instead of becoming bitter at being betrayed by the West. An unstable Ukraine could be easy prey for Putin in the future.

Depending on what action Trump takes in Ukraine, it may also embolden the likes of China with Taiwan and North Korea if they were to interpret a Putin victory as US weakness.

For Europe and the West, a sustainable Ukrainian peace deal would be welcome news. Allowing global attention to refocus on resolving the Middle East conflict.

However, EU defence spending needs to remain high to replenish weapon stocks diminished during the war and to bolster NATO forces to deter future Russian aggression. Given reports of Russian interference in recent elections in former EU hopeful Moldova and Georgia, as well as the US presidential election, then the omens are not good.

 

What have we been watching?

 

Donald Trump‘s election victory, UK budget pain, German political upheaval, disappointing Chinese stimulus and interest rate cuts in the US and UK.

Yet again, the polls got it wrong and, it was a clean sweep victory for Donald Trump. While the presidential inauguration is not until 20^th January 2025, markets have already responded with lightning speed in deciding the likely winners and losers from a Trump administration. Amongst the winners were Bitcoin (Trump is a crypto-currency fan), while US equities hit another record high bolstered by US investment banks (deregulation), US small cap (lower corporate tax/competitor trade tariffs), oil (drill, baby, drill!) and big tech/AI (Elon Musk has Trump’s ear!). Amongst the losers were European wind turbine manufacturers, as Trump is not a fan of offshore wind power. Gold fell from its recent record high as bond yields climbed. The US dollar strengthened and Sterling edged lower to $1.29.

However, while US equities climbed higher, US bonds sold off with the 10-year US Treasury yield climbing to 4.3% on concerns about ballooning US government debt under a Trump administration and concerns that if he imposes trade tariffs, these would be inflationary. As a reminder, Trump is looking to increase government spending by $7.5trillion over the next ten years.

Trump was unpredictable last time around and is likely to be even more unpredictable this time. Will he impose 10% trade tariffs and up to 60% tariffs against China, or will he be more selective and use the threat of tariffs to get what he wants, as with Mexico last time? From a geopolitical perspective, there are many possible outcomes and we highlighted just one of these, Ukraine, in our introduction. Previously, Trump was able to get European countries to increase defence spending commitments by just simply threatening to withdraw support from NATO. As far as the UK is concerned, Trump has a special relationship with Nigel Farage, but it is unclear if this would extend to the Labour government, even though Sir Keir Starmer is no doubt hopeful of the US and UK continuing the historic ‘special relationship.’

From a business investment perspective, Trump will cut corporation tax and keep energy prices lower by exploiting US oil and gas reserves.  By comparison, Rachel Reeves – or as she is now known in the City -Rachel Thieves, has added significant costs to UK businesses via the National Insurance hike. Remember, it was only a few weeks ago that Labour invited global business leaders – but not Trump’s shining star, Elon Musk! – to its International Investor Summit during which they were told the UK would be among the most attractive places in the world to do business. However, UK businesses now face an ‘avalanche of costs.’  Given the US will have lower taxes, lower energy costs and may impose trade tariffs, manufacturers will be more inclined to invest in the US rather than the UK – not encouraging for Labour’s economic growth plans. Furthermore, a potential global trade war, if Trump introduced blanket trade tariffs, would inevitably have an adverse impact on Labour’s economic growth forecasts. In addition, the long-wished for post-Brexit UK-US free trade deal is unlikely to be near the top of Trump’s to-do list! Nigel Farage has offered his services, in the national interest, to help the UK get on Trump’s right-side but it is unlikely Sir Keir Starmer will take this up.

In a further sinister twist arising from the war in Ukraine, Russia has been accused by European security officials of planting incendiary devices on cargo planes in Poland, Germany and the UK bound for the US.

Iran’s Supreme National Security Council has authorised a new military strike on Israel. Iran’s supreme leader warned of a ‘crushing response’ in retaliation for Israel’s recent air assault. Israel would inevitably respond, but would it limit itself to just military targets the next time? Meanwhile, Iran has been implicated in an assassination attempt on Donald Trump! Israel’s PM Benjamin Netanyahu said he and Donald Trump ‘see eye to eye’ on Iran.  

Another sign of the ongoing US/China trade war? During the third quarter US earnings season, many companies have been highlighting softer Chinese demand, but one suggests this may be political as much as economically driven. US auto parts supplier Aptiv said ‘our Chinese customers are demanding only Chinese-sourced products.’ Tit-for-tat following tariffs on Chinese EVs?

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In the UK, budget uncertainty hit UK retail sales in October, with the BRC reporting retail sales growth slowed from a three-month average of 1.3% to 0.6%. The Bank of England (BoE) cut the interest rate by 0.25% to 4.75% as widely expected. The BoE thinks the budget will add materially to inflationary pressures in a way that will slightly slow the pace of interest rate cuts. The BoE raised its UK economic growth forecast for 2025 from 1% to 1.5% but also increased its inflation forecast from 2.25% to 2.75%. The 10-year gilt yield is now up to 4.5%. The chances of rates staying on hold in December are increasing.

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In Europe, Germany’s governing coalition collapsed after SDP leader Olaf Scholz dismissed his Finance Minister, paving the way for a vote of confidence in mid-January and new elections by March 2025. This development comes as Germany’s manufacturers face the prospect of possible Trump trade tariffs, while its car manufacturers are already struggling with sluggish exports to China and increased competition from Chinese EVs!

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In the US, Trump is back! Trump is expected to extend his first-term tax cuts and lower business taxes. His leeway to do so may be constrained by the need not to rock the bond market too much. Trump policies should result in a temporary boost to US economic growth and more inflation as additional tariffs raise prices for consumers and businesses. In the longer term, however, higher US tariffs, retaliatory measures by trading partners and labour shortages due to less immigration could see economic growth slow. The US fiscal shortfall in 2025 could be an even less sustainable 7.5% of GDP! Even so, Trump policies and their consequences for US interest rates and bond yields will likely support the US Dollar.  Meanwhile, the Federal Reserve (Fed) cut interest rates by 0.25% to a range of 4.5% – 4.75%. Fed Chair Jerome Powell avoided any signalling ahead of the Fed’s December meeting, although the tone of the press conference was considered to be slightly more ‘hawkish’ compared with last time.

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China’s service sector grew at a faster pace in October, with the Caixin business activity indicator reading increasing to 52.0. China’s exports grew by 12.7% in October, well ahead of expectations and the fastest growth in over two years. This news was countered by China’s inflation rate, which slowed in October to 0.3%.  The government announced a $1.4trillion fiscal stimulus programme through which the debt ceiling for local authorities will be raised and funds provided to swap ‘hidden debt.’ Markets were disappointed by the stimulus measures, but much also rests now on potential Trump tared tariffs against China.    

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Brent oil edged up to $74 on fears of escalation of the Middle East conflict, even though the US is likely to produce more oil under Trump.

 

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Finally, anyone hit by a parking or speeding fine spare a thought for Google, one of the world’s largest companies with a value of over $2trillion.  A Russian court has fined Google two undecillion roubles-that’s a two followed by thirty-six zeros for restricting Russian state media channels on YouTube. The fine is even greater than the world’s total GDP which the IMF estimates to be $110trillion.

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Alpha Portfolio Management is a trading name of R C Brown Investment Management PLC which is authorised and regulated by the Financial Conduct Authority.