Friday’s talks between President Trump and President Zelensky derailed, leaving Europe effectively at a crossroad. Also, a look at global trade, US economics and the European Central Bank.
Ukraine – Pivotal moment for Europe
Friday’s talks between President Trump and President Zelensky derailed, leaving Europe effectively at a crossroad. Either European countries strengthen their resolve via higher defense allocation in individual and common budgets and stronger sanctions enforcement, or the continent’s role will turn more marginal from a global geopolitics perspectives, plus the economy and security will find themselves in vulnerable positions. Over the weekend, UK and France took the lead in peace brokering initiatives, and German media floated the idea of almost EUR 1tn in defense and infrastructure spending (vs EUR 200bn previously discussed). The next month will be key to the discussion, as a potential peace deal should come at short notice and the new German Parliament takes office in early April.
Global trade – Tariffs are coming
Last week, President Trump announced an additional 10% tariff on all Chinese imports, effective Tuesday, citing China’s insufficient efforts to curb fentanyl trafficking. These 10% are on top of previously announced 10% on February 4th, bringing total tariffs now to 20% and increasing pressure on China. Additionally, the U.S. will go ahead and impose a 25% tariff on imports from Canada and Mexico, also starting Tuesday, due to concerns over drug smuggling. Both countries are seeking to demonstrate progress in combating fentanyl flow to avert these tariffs. The announcement led to a broader risk off price action in markets, as equity prices and yields fell. For the EU, Trump announced 25% tariffs on EU autos effective from April 2nd, citing the trade imbalance given the EU’s 10% tariffs on US cars.
US Economics – Tariffs hurt growth
The markets interpretation of US tariffs has changed over the past weeks, away from inflationary but instead to growth concerns. Sentiment data was strong last year as consumers and corporates front-loaded consumption post US elections and ahead of tariffs, but now the uncertainty over upcoming policy changes weighs on the economy. Citi’s economic surprise index fell from +40 in November to -16 in the latest reading, as prints across consumer sentiment, ISM, PMIs, housing starts, and factory orders missed expectations. This week we’ll see new readings for the labour market, where recent government job cuts by Trump/DOGE may feed into weaker readings. Consensus expectations are for 158k jobs added, slightly more than 143k in January.
ECB Preview – Cut but how deep?
The ECB will cut rates on Thursday by 0.25% to 2.5%, and new projections will likely show a downgrade to growth and upgrades to headline inflation amid higher energy prices. The ECB debate evolves around the restrictiveness of policy and what the path beyond this week’s meeting looks like. The April meeting will likely be left open, as the ECB continues with its meeting-by-meeting guidance. The divergence among the ECB is growing, as hawkish members e.g. Schnabel/Nagel argue for a slowing of rate cuts whereas dovish members see further room for cuts. The base case is a cutting cycle towards a terminal rate of 2%, but amid US tariff threats, rising unemployment and defence spending likely directed towards the US we cannot exclude rate cuts below neutral.
Algebris Investments’ Global Credit Team
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