Escalation Dilemma: Is This Permanent Ceasefire Too Good to Be Believed?

In the ever-evolving global economy, various factors are shaping the financial landscape. Let's delve into some key developments across the world.

Our economists have maintained their forecasts for gas and crude oil prices, predicting an average of $63 to $65 per barrel by the end of the year. Meanwhile, the trade landscape has been significantly impacted by tariffs imposed by the Trump administration, which have amplified economic vulnerabilities and hindered global trade. The number of trade barriers has increased from 310 in 2010 to over 3,300 in 2023.

Europe, on the other hand, is bracing for increased defense spending. Currently, research and development accounts for only 5% of the total budget, a figure that is significantly lower compared to the U.S.'s 16%. By 2035, Europe will likely need to allocate 5% of its GDP to defense spending, up from the current NATO target of 2%. Key players financing this defense ambition include EU institutions allocating around 150 billion euros via the SAFE program and national governments increasing defense budgets, with plans for combined EU-wide armament expenditures reaching hundreds of billions of euros.

The European defense sector is becoming an investable segment due to historic rises in spending, regulatory facilitation, and industrial cooperation. This growing strategic and financial importance in the market is expected to benefit large European defense industries and suppliers, although the sector currently benefits US defense firms due to procurement dependencies.

Economic growth prospects vary across the globe. The United States has revised its GDP growth forecast from 2.7% to a mere 1.2%. However, Europe is well-positioned to benefit from a rebalancing of investor portfolios due to its favorable growth prospects and interest rate differentials. The euro is expected to strengthen to 1.18.

Latin American countries heavily reliant on exports to the U.S., such as Mexico, could be significantly impacted. The USMCA treaty is expected to survive, allowing all USMCA-compliant products to be exported at zero tariff rates. Argentina and Brazil should be able to export agricultural products to China, potentially offsetting some of the losses from reduced U.S. trade.

China, meanwhile, is projected to have growth rates around 4%, bolstered by increased exports to other Asian nations and Europe. Countries are increasingly pursuing bilateral trade agreements in local currencies, potentially diminishing the dollar's predominance in global transactions.

The World Trade Organization predicts a decline in global trade growth of 0.5%, contrasting its previous forecast of +2.7% last year. A weaker dollar combined with U.S. political risks is likely to encourage investors to diversify away from U.S. equities. Gold has been steadily appreciating since the 2009 financial crisis and is considered a long-term protective strategy for diversification.

Looking ahead, a webinar and a comprehensive special report on supporting industrials in the defense effort will be dedicated next week. The United States is expected to face a deficit of 7% by 2026, which may further drive the need for economic diversification and investment opportunities in other regions.