Written by Elwin de Groot, head of macro strategy at Rabobank
Latest Market Developments
US equity markets saw a continuation of losses yesterday, triggered by a decline in US regional bank shares which led to a drop in bond yields. The S&P index experienced a 0.6% decrease, while the yield on 10-year UST’s fell by over 5 basis points. The market attributed these movements to the collapse of subprime auto lender Tricolor Holdings, highlighting the vulnerability of the equity market at its current high levels. Furthermore, the IMF expressed concerns about “significant downside risks” to global growth following renewed tensions between the US and China.
Reports from Bloomberg indicated that Argentinians are divesting from the peso in anticipation of an inevitable devaluation. This trend could undermine the rescue package, including a $20 billion swap line, orchestrated by US Treasury Secretary Scott Bessent. Matters escalated when President Trump linked the success of Argentinian leader Javier Milei in the upcoming midterm elections to US backing, stating, “If he wins we’re staying with him, and if he doesn’t win we’re gone.” This statement raises questions about the US strategy towards Argentina.
French Prime Minister Lecornu managed to survive two confidence votes yesterday, earning him the title of “I’m a survivor.” However, his fate in the upcoming budget debate hinges on the support of MPs. Should the government refrain from invoking Article 49.3, a majority vote in favor is necessary.
Meanwhile, socialist leader Olivier Faure issued a warning: “If parliament is not respected and the pension reform isn’t suspended, we would censure immediately.” Market indicators show a reversal to previous levels with the 10-year yield spread narrowing to 76 basis points from 86 basis points last week, and the CAC-40 index recovering losses from October, although spreads remain wider since Bayrou’s confidence vote announcement in August. According to MNI, EU officials mentioned that the “New Fiscal Rules provide Lecornu Budget leeway,” echoing familiar sentiments.
Despite buying time, Macron and Lecornu are confronted with ongoing fiscal and economic challenges in France.
On the global stage, the landscape appears increasingly competitive, favoring those with robust statecraft capabilities. Successful navigation in this arena demands economic strength, financial reach, strategic resources, administrative efficiency, political flexibility, and military prowess.
Notably, smaller yet affluent economies such as Switzerland face challenges, evident in the 39% tariff imposed on Swiss goods since August 7—excluding generic drugs and Ticino-refined gold. Weaker economies, particularly in Africa, encounter difficulties due to inadequate frameworks and enforcement against dumping practices. Several Asian nations opted to reduce tariffs on US goods in exchange for enduring high US tariffs. Even the economically potent but politically and militarily vulnerable EU encounters constraints. In a recent development, Qatar issued a warning, suggesting a potential halt in business with the EU, including LNG supplies, unless Brussels revises its corporate sustainability regulations, as reported by Reuters.
The US exemplifies effective statecraft through recent actions acknowledged by our global strategist Michael Every. On the flip side, China exhibited its own statecraft capabilities by introducing port fees for US vessels and reinforcing control over critical raw materials, notably rare earths. The interplay between these two superpowers underscores a shifting global landscape, marked by rapid and profound changes.
The US endeavors to draw its allies into its statecraft framework, as evidenced by recent statements from Treasury Secretary Scott Bessent. The proposed strategy involves imposing a 500% levy on imports from China to fund weapons for Ukraine, signaling a shift towards ‘decoupling’ rather than ‘de-risking.’
For Europe, the prospect of decoupling appears challenging unless faced with critical raw material blockades from China. Europe finds itself in a precarious position, caught between competing interests. Despite this, the EU is not stagnant, as seen in intensified trade defense measures and strategic shifts towards statecraft.
Energy independence remains a top priority for Europe, with plans to phase out Russian oil imports by early 2026 and gas by 2027, pending parliamentary approval. Recent discussions at the Copenhagen summit highlighted efforts to strengthen EU defense capabilities, including proposals for a “European Drone Wall” and initiatives to promote domestic procurement. However, disagreements persist over defining ‘European.’
The EU recently unveiled a five-year defense roadmap aimed at addressing critical capability gaps and modernizing security architecture. This roadmap emphasizes coordinated defense spending, joint coalitions, and a target of 40% joint procurement by 2027. The upcoming Brussels summit is expected to showcase these initiatives prominently.
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