The meeting between US President Trump and Ukrainian President Zelensky didn’t go as planned—no mineral deal was signed, and the talks ended in a clash. In contrast, Zelensky’s meeting with UK Prime Minister Starmer was more productive. Starmer urged European companies to form a ‘coalition of the willing’ to support Ukraine with military aid and security guarantees. Later, Macron announced plans to pursue a one-month truce.
Overall, tensions between the two continents have worsened. Oil prices initially rose in early Asian trading amid concerns that the Trump-Zelensky conflict could delay any path to lasting peace. However, selling pressure outweighed geopolitical risk perception, as last Friday’s US economic data fueled concerns about slowing growth—Atlanta Fed’s GDPNow tanked to -1.5%!
The EURUSD started the week on a positive note after slipping below its 50-day moving average on Friday.
The European will to stand with Ukraine means more military spending. Increased defense spending from the ‘coalition of the willing’ should provide a short-term economic boost but also accelerate technological advancements in the medium to long run. The whole situation is a wake-up alarm for the sleeping European beauty.
On the budget side, higher spending also means increased borrowing, which could push European yields higher. The latter doesn’t impact optimistic mood among investors this monday morning with DAX futures leading gains. Appetite for the European defense stocks will certainly remain solid. Gold has given back early session gains, while the US dollar is broadly softer even against the Loonie although the US is supposed to go ahead with 25% tariffs on Mexican and Canadian imports, while levies on Chinese products would be doubled to 20%.
Speaking of China, the CSI and HSI kicked off the week on a negative note despite a stronger-than-expected Caixin data that suggested the manufacturing activity in China grew faster than expected in February. Chinese bubble tea giant Mixue made a strong debut in Hong Kong trading—something to take your mind off geopolitics for a moment.
On the data front
Friday’s economic data was bitter-sweet. The core PCE index, the Federal Reserve’s (Fed) favourite gauge of inflation, came in line with expectations. But the combination of higher-than-expected personal income but lower-than-expected – and unexpectedly negative – spending growth in January raised worries regarding US growth prospects. On top, Atlanta Fed’s GDPNow forecast tanked to -1.5% from above 2% printed previously. As such, the US growth expectations are deteriorating – and they are deteriorating fast. The latter could boost the dovish Fed expectations – which could be an encouraging development for risk appetite – but for the Fed to go ahead with further support to the economy, inflation should remain under control. And with tariffs due to materialize starting from this month, controlling inflation won’t be a walk in the park.
Anyway, this week, the market will focus on January employment numbers. A consensus of analyst expectations on the latest Bloomberg survey suggests that the US economy may have added 156K nonfarm jobs in January and slightly slower wages growth. Investors will also be looking at the impact of mass firings at the federal government offices in the coming months. Soft data is good for boosting Fed doves, pushing the yields lower and improving sentiment in risk assets, but if inflation doesn’t allow, the ‘bad news is good news’ trade could be limited.
In Europe
The geopolitical developments are perceived with optimism among investors on hope that the clash with the US will finally awaken the sleeping European economies, shift focus from financial control to more spending without asking too many questions on whether the extra spending is justified – because it is. In the past, war and military spending have accelerated technology advances and served to the broader economy.
On the trade front, the next step in Trump’s tariff threats is the actual implementation, with levies set to increase. The latter will certainly have a negative impact on growth prospects and call for a decent support from the European Central Bank (ECB) to the underlying economies. Here, as well, the inflation’s trajectory is important to assess the extent to which the ECB could ease financial conditions to boost growth. The CPI updates for February released last week pointed at a mixed picture across the major eurozone countries. But the aggregate CPI update due this morning is expected to print a softening headline and core inflation in February. If that’s the case, the impact on the euro is not certain. In one hand, soft inflation numbers back the expectation of a more dovish ECB stance and could weigh on the euro, but on the other hand, the geopolitical tensions boost growth prospects and the idea that monetary and fiscal support would lead to a stronger growth across Europe – and that’s positive for the euro outlook. The combination of deteriorating growth prospects for the US and improved growth prospects for Europe could help the EURUSD regain confidence and appreciate sustainably beyond the 1.06 mark, the major 38.2% Fibonacci retracement on September to January Trump selloff, and reverse the Trump-led bearish trend.
