The extraordinary spectacle of the US negotiating with Russia, without Ukraine (or Europe) involved, is only surpassed by Trump accusing President Zelensky of being a dictator. If there is anyone who has behaved like a dictator since taking office, it is him, but either way the US has said it will no longer protect Europe against its enemies nor underpin world trade by running a trade deficit. He does have a point that Europe has collectively underinvested in defence, but the language employed by his vice president at the Munich conference was unequivocal and has caused consternation.

The next tremour came from talk about a ‘Mar a Lago’ accord. The idea of forcing your foreign creditors to switch their US Treasury holdings into ultra long term bonds to weaken the dollar and lower borrowing costs might seem powerful but how it could be achieved without a flight from US bonds is incomprehensible and the effects on the global financial system are unfathomable, not least as it most likely would be seen as a credit event. The US has enough problems with their debt ceiling negotiations again coming onto the global radar, T-Bill rates have ticked up as a result.

European bonds reacted strongly to the notion and reality of huge funds being needed to finance increased defence spending, Eurozone yields rose across the board. Not helpful when you have a central bank committed to a further series of rate cuts. The Bloc remains in a fragile position economically, there were signs of life for the German economy in recent PMI’s, but countermanded by those of France which remains very shaky. The whole area remains in a state of dreaded anticipation on the tariff front, and it doesn’t look good.

Gilt yields reacted strongly in tandem with US and Eurozone yields, we now have the 30 yr Gilt back out to 5.20%. The UK doesn’t run the same level of trade deficit with the US, so maybe we will get away with it, but we haven’t remotely spent enough on defence either. UK growth escaped contraction but still only came in at 0.1% and with inflation just printing at 3%, the Bank has a fair task to escape stagflation.

Amongst all of this, risk assets have shown little sensitivity, so far. Stock indices may have just woken up to the moment and some of the recent leadership has definitely stalled but credit spreads have remained stable and there has been no interruption to the primary market which continues to pump out new issuance across all currencies with precious little NIP, new issue premium. We remain selective.
 

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