Operation Spiderweb

Putin is spitting blood after Ukraine’s audacious drone strike on Russia’s bomber fleet, Operation Spiderweb.

On the 1st of June more than 100 Ukrainian drones struck Russian air bases, specifically targeting nuclear-capable long-range bombers. If ever an example was needed for how drones have transformed warfare, then this must surely be it.

In retaliation, Russia launched a major drone and missile strike on Kyiv and other regions.

This latest evolution in warfare coincides with the UK government’s Strategic Defence Review. Besides an ambition to enhance the UK’s nuclear deterrent and ramp up ammunition production, funds will be set aside for drone warfare. The MoD is to invest £1bn in a new Digital Targeting Web at its UK cyber command in Corsham, Wiltshire. Defence Secretary John Healey recently stated, “ways of warfare are rapidly changing – with the UK facing daily cyber-attacks on this new frontline, we will give our Armed Forces the ability to act at speeds never seen before”.

Meanwhile, the UK government has committed to raise defence spending to 2.5% of GDP from April 2027 but is unable to confirm this will rise to 3% in the next parliament. The Conservatives and Reform UK state the increase to that level should happen by the end of the decade.

However, Labour may come under pressure to accelerate this level of investment. This is because NATO Secretary General and former Dutch PM Mark Rutte, has said he believes the NATO alliance will commit to a new defence spending goal of 3.5% of GDP at its next summit in June. His predecessor Jens Stoltenberg has also been urging European members of NATO to increase ‘hard military spending’ to 3.5% of GDP, together with a further 1.5% of GDP on ‘infrastructure and cybersecurity.’ Trump has been demanding European NATO members raise defence spending to 5% of GDP. Not surprisingly, the closer NATO members are to Russia, the higher their defence spending tends to be, with Poland the highest at 4.7%. However, there is a catch, in that European countries have very different levels of debt and some such as Germany are far better placed to increase defence spending than say France, Italy or the UK.

In another sign of the changing nature of global warfare, Trump has recently announced plans for America to develop its own version of Israel’s Iron Dome missile shield. America’s Golden Dome is expected to cost $175bn!

Meanwhile, Trump still cannot give up his dream of making Canada the 51st state. “I told Canada, which very much wants to be part of our fabulous Golden Dome System, that it will cost $61bn if they remain a separate, but unequal Nation, but will cost ZERO DOLLARS if they become our cherished 51st State”.

Sadly, the only way the UK could ever afford a missile shield is by becoming the cherished 52nd State!

What have we been watching?

After the previous weeks, tariff mayhem a relatively quieter week on the trade front while markets once again fell into ‘bad news is good news’ mode as softer US economic data raised hopes that the US Federal Reserve (Fed) would be more inclined to cut interest rates!

With just over a month until the end of the 90-day extension for the reciprocal tariffs which runs out on 9th July, the Trump administration is trying to negotiate lots of deals before that date. There were positive noises from US-EU trade negotiations with suggestions that talks were ‘advancing in the right direction at pace.’ However, it is still far from plain sailing as Trump said that China’s President Xi Jinping was ‘very tough, and extremely hard to make a deal with.’

 

Softer US economic data initially drove a rally in US Treasuries, which in turn supported risk assets. Investors became more hopeful that the Fed would still cut interest rates this year, and the 10-year US Treasury yield dropped back under 4.4%. The ISM services index fell back into contraction, with new orders falling, suggesting a loss of momentum in the services sector. The slide in US Treasury yields also suggested that bond investors were less worried about America’s fiscal situation, following the previous week’s concerns about the $4tillion that might be added to US debt because of Trump’s ‘Big Beautiful Bill.’ To cap of the week, May nonfarm payrolls beat expectations, and whilst prior months were revised lower, average hourly earnings actually increased.    

 

European markets were also supported by the above developments but also defence stocks in anticipation of a significant hike in defence budgets, while German equities touched a new high as the cabinet approved a new package of corporate tax breaks. As expected, the ECB cut interest rates by 25 basis points to 2%. The key focus was the lowering of the 2025 CPI forecast to 2% (from 2.3%) and the 2026 forecast to 1.6% (from 1.9%).

 

China’s export growth slowed to 4.8% in May from 8.1% in April, missing expectations. Notably exports to the US plunged 34.4%, while shipments to the rest of the world rose 11%, suggesting China is increasingly finding alternative markets to offset the decline in US demand.

Read our latest investment insights from Alpha PM

 

Brent oil was steady around $65 given there was no further tangible trade news.

Finally, there are lies, damn lies and statistics. The Office for National Statistics (ONS) has admitted that April’s inflation data was wrong as it spotted an error in the vehicle excise duty data provided to it by the Department for Transport. April’s error was only 0.1% but given how sensitive markets are to inflation data given the importance for interest rates, government borrowing costs and the housing market, cock ups like this are unhelpful!

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