A cuckoo in the nest

President Trump is ruffling feathers

The world order is changing.

Trump continues to ruffle many US trading partners feathers, hitting a number of America’s long-standing allies with tariffs. This has also prompted an anti-US backlash which could weaken their economies. Meanwhile, although Israel has damaged Iran’s nuclear capability it has not eliminated it, and the so-called axis of evil remains with North Korea/Iran/Russia.

China continues to muddy the geopolitical landscape and has also been strategically nurturing relations with fellow BRIC nations in a move designed to undermine the global dominance of the US Dollar. China remains a key buyer of Russian oil.

Putin has now thrown a spanner in Trump’s Ukrainian peace talks by insisting that ‘really secure’ guarantees for Ukraine would have to involve Russia’s biggest ally, China.

Meanwhile, Trump has hit India with an extra 25% tariff for continuing to buy Russian oil, while sparing China, where it has further extended a tariff truce for 90-days as trade talks continue. Discussions continue over key areas such as AI chips and rare earth minerals – vital for key US defence kit. Trump’s tariffs have also driven China and India to seek a closer trading relationship.

One of the reasons Trump needs a Ukraine peace deal is to enable the US to focus its military resources on the Pacific.

China is about to use a huge military parade in Beijing to mark the 80th anniversary of victory over Japan in World War II. Chinese leader Xi Jinping will be joined by 26 countries including ‘friends’ from Russia, North Korea and Iran, together with many heads of state from the Global South group of nations. Virtually no western leaders will be present. In a show of military strength China plans to promote a new era of electronic warfare combat capabilities and display new hypersonic and other strategic missiles. The People’s Liberation Army (PLA) has had the YJ-12, supersonic anti-ship cruise missile, for more than a decade. However, the parade is also expected to include four new models of anti-ship super-sonic and hyper-sonic missiles.

The world remains a dangerous place. Iran and North Korea will remain unpredictable. Could Trump’s tariff tantrums backfire and leave the door open to China?

Trump’s Ukraine peace talks look dead in the water given Putin’s ongoing attacks, and he seems to want European NATO nations to fund its defence. Meanwhile, the US and China will continue to square up in the Pacific.

What have we been watching? 

US equities declined at the end of the week, led by losses in US tech shares, including AI chip maker Nvidia and other AI-related companies. This followed fresh doubts about demand for AI datacentre equipment and as China’s tech giant Alibaba unveiled a new AI chip. European equities also fell and the end of last week on growing concerns about the political situation in France.

Then, late on Friday a US federal appeals court ruled that Trump’s tariffs that were introduced under the International Emergency Powers Act were illegal, upholding an earlier legal ruling. However, the appeals court has left the tariffs in place until the 14th of October. This will give the Trump administration time to appeal to the Supreme Court which currently has a 6-3 Republican majority. Were the Supreme Court to back the appeals court then all the reciprocal tariffs would be invalidated although Trump would no doubt attempt to implement more levies via other statutes.

 

US jobs data later this week will be key for the next expected Federal Reserve (Fed) interest rate cut in mid-September. Fed funds futures are currently pricing in around cuts amounting to 1.4% by the end of 2026. This level of easing, since the 1980’s, has only occurred around recessions! Core PCE inflation for August came largely in line with expectations. The second quarter US economic growth data was also revised upwards from 3% to 3.3%. Meanwhile, markets remain focused on Trump’s attempts to remove Fed governor Lisa Cook and the independence of the Fed.   

 

In the UK, rumours continue to swirl ahead of Rachel Reeve’s Autumn Budget. The latest story saw UK banks decline on a new windfall tax proposal from the left leaning Institute for Public Policy Research.

 

In Europe, the political situation in France will remain in focus ahead of the confidence vote scheduled for the 8th of September. The minority government looks likely to lose this with major opposition parties repeating their intent to vote against the government.

Read our latest investment insights from Alpha PM

 

Brent oil was steady at around $67.

Finally, the cost of government borrowing is yet another headache for Chancellor Rachel Reeve’s. While this can be impacted by global developments, such as the cost of US government borrowing, the UK has not been helped by concerns about the accuracy and reliability of economic data. The Office of National Statistics (ONS) delayed the recently expected retail sales data and there are also concerns about the ONS jobs data. This does not help confidence when fixed interest investors are buying UK gilts!

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