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In an uncertain world, the concept of ‘peace through strength’ has evolved through history but, would appear to be where the members of NATO are currently sat.
The original phrase ‘if you want peace, prepare for war’ is attributed to Roman general Vegetius. Believing a strong army during peace prevents vulnerability in the eyes of potential aggressors. NATO’s European members recently agreed to increase defence spending to 5% of GDP by 2035. Within this, 3.5% will be on core defence requirements and security related spending and 1.5% on infrastructure. This seems to have appeased Trump for now and underpinned US military support given the ongoing war of attrition in Ukraine and threat to Europe from Putin.
However, it does raise the big question of how countries will pay for this, amongst them the UK, France and Italy.
So, what about the other side?
Russia’s defence spending is estimated to be running at over 7% of GDP. Since its invasion of Ukraine in 2022, Russia has become the most sanctioned country in the world, yet its economy has been remarkably resilient if figures are to be believed. In 2024, the economy was ‘officially’ reported to have grown by 4.3% – outgrowing the G7 group of countries, helped by record military spending!
Russia – look beneath the surface however and it’s not so rosy a picture. Interest rates have soared to 20% and inflation almost hit 10% in April. Western sanctions have pushed up the price of imports while worker shortages have driven wage inflation. Russia also has a massive man-power shortage due to men going to fight in Ukraine and others having fled the country. Russia’s oil and gas revenues have also fallen materially due to sanctions and lower oil prices have contributed to a widening budget shortfall which has left less in the pot for infrastructure and public services. The EU is also due to phase out Russian gas imports by 2027.
Russia’s economy minister, Maxim Reshetnikov, recently warned that the country was on the verge of recession. However, this is unlikely to seriously impede Russia’s ability to wage war in the short-term and Putin will just ‘suck it up.’ Will he be thrown a lifeline by Trump and a Ukraine/Russian peace deal? This might see a normalisation of US/Russia relations and possible new economic partnerships. However, given the threat to Europe, the UK and EU would no doubt maintain their own sanctions in the event of any peace deal.
The end of the ’12-day war’ and fall in oil prices will not help Putin. However, while Iran will now focus on its own defence, Russia is believed to have ramped up domestic Shahed 136 production capacity to over 2,500 drones per month, as Iran previously provided it with the technology.
Last week, Russia launched the most extensive drone attack on Ukraine since the start of the war. Sadly, such attacks are unlikely to end anytime soon, unless Trump gets more aggressive with Putin as he has with the leaderships of Israel and Iran. Unfortunately for Ukraine, the US has halted shipments of US Patriot air defence systems as its own stockpile is running low. Is Putin gaining the upper hand?
What have we been watching?
What a Wednesday! While it was a shorter trading week due to the 4thJuly holiday in the US, nonetheless, it was still an eventful one. There was positive news on the trade front with a US-Vietnam trade deal but negative news, with a sell-off in the UK triggered by Sir Keir Starmer’s welfare vote in parliament. Trump also got his ‘Big Beautiful Bill’ voted through and markets will now focus upon the end of the reciprocal trade tariff deadline later this week although there are increasing suggestions that the 1stAugust might be the new deadline as opposed to the 9thJuly.
US equities climbed to a new high on positive employment data and as hopes mounted about potential trade deals ahead of the 9thJuly reciprocal tariff deadline. This was driven by Trump’s announcement of a deal with Vietnam, which he said would see them pay a 20% tariff on goods exported to the US, whilst the US would pay a zero tariff on their own exports. However, transhipping will attract a 40% tariff on goods passing through Vietnam which is likely to upset those Chinese companies endeavouring to circumnavigate US sanctions on China by using Vietnam.
Trump said that tariff letters had been sent out over the weekend and will apply from 1st August if no deal has been agreed. Tariffs would be ‘fully covered and they’ll range from maybe 60% or 70% tariffs to 10% and 20%.’ So, it sounds as if some countries may be granted a three-week extension to finalise a trade deal with the US. For example, the EU is reported to be willing to accept a 10% tariff if cars and steel are exempted.
However, Trump struck a negative tone on the trade deal with Japan, saying ‘they should pay 30%,35%, or whatever the number is we determine.’ Trump has also lashed out at the China/Russia BRIC alliance saying, ‘Any country aligning themselves with Anti-American policies over BRICs, will be charged an ADDITIONAL 10% tariff’, This followed the BRICs summit in Rio over the weekend that condemned the US and Israeli airstrikes on Iran.
There was further good news for Trump as his ‘Big Beautiful Bill’ finally passed the Senate with V.P. JD Vance casting the tie-breaking vote and then was voted through by the House of Representatives by 218 to 214. However, this will raise the US debt ceiling and raises questions over US debt sustainability. The Trump feud with Elon Musk continued to escalate over this issue with Musk announcing his intention to form a new American political party. Trump also continued his attacks on Fed Chair Jerome Powell saying he ‘should resign immediately’. This, yet again raises concerns over the future independence of the Federal Reserve.
While a good week for Trump and US equities, the same could not be said for Sir Keir Starmer and UK assets- equities, gilts or Sterling. The government’s significant U-turn over cuts to welfare spending, raised doubts about fiscal discipline which, triggered a UK sell-off. The potential £5bn of welfare cost savings have been wiped out, so halving the Chancellor’s £9.9bn fiscal headroom and making some form of tax increases in the Autumn Budget almost a certainty to fill the hole.
The sell-off gathered pace last Wednesday due to growing question marks around whether Chancellor Rachel Reeves would remain in post, especially as she appeared in tears in the Commons. PM Sir Keir Starmer refused to confirm the Chancellor would stay in post but much later said that she would remain Chancellor for ‘many years to come.’
Given Rachel Reeves has been the key defender of the fiscal rules and that there have been growing calls for these rules to be eased and for government borrowing to increase it was no wonder markets were suddenly alarmed. Higher borrowing would push interest rates up further.
Domestically focused, interest rate sensitive UK equities such as housebuilders fell. Ten-year gilt yields saw their biggest daily jump since Trump’s Liberation Day turmoil in April while Sterling dropped to just above $1.36. By selling Sterling assets, investors have probably kept Chancellor Rachel Reeves in her role – fiscal rules are not just for show!
Brent oil remained steady at $68. Over the weekend, OPEC+ agreed to another production hike, this time even larger than before, at 548,000 barrels-a-day from August.
Finally, ‘artificial’ intelligence? Builder.ai, once valued at $1.5bn and backed by some US tech giants recently filed for bankruptcy after misleading investors about its AI capabilities. The company allegedly used Indian engineers to manually code apps while marketing them as AI-generated!
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