Upending the global order at blinding speed

It’s an almost impossible task to discuss developments for a mere one quarter ahead when the backdrop is one of a once-in-a-lifetime shredding of the old global order as a new one is taking shape.

The long-term questions are all quite clear. The answers? Far from it. Can the Trump transactional approach, even with the US’ traditional allies, and long-term goals of pulling off a re-industrialisation of the US, while also keeping the US dollar and US debt markets stable, possibly work? Does Europe stand a chance with its stance that multilateral institutions are still relevant, while it scrambles to assemble hard power to maintain its relevance despite massive demographic challenges and an over-regulated and expensive welfare state? And then there is China, suffering mightily economically from two decades of over-investment domestically in production capacity and real estate. But China is now very powerful, both militarily and above all industrially. How can China reinvent itself and continue to grow when the old global order that supercharged its mercantilist model is rapidly receding?

Rest assured, we won’t find the answers to these momentous questions in the next quarter or even the next year, but themes are already emerging that will lead us towards the eventual answers.

US policy under Trump: everything, everywhere, all at once.
The stakes are enormous as the US withdraws from maintaining the old global order. That old order was one of a de facto US hegemony operating under the pretense of multilateral institutions, with the US dollar acting as the global currency for reserves and trade transactions. That global role of the US dollar inflated its value, which helped drive enormous US trade deficits and a hollowing out and deindustrialisation of the US economy. Massive incoming capital flows aggravated the financialisation of the US economy, doubling down on inequality in the US, and the pain for the middle and lower US classes. Cue the rise of populism and Trump.

In his first weeks in office, Trump and his team are moving at blinding speed to reverse everything about the old order, while suggesting they can maintain stability in the US dollar and US Treasury market. Trump has quietly ratcheted tariffs viciously higher against China in what looks like a move to completely decouple the two economies over time. Trump has also threatened tariffs against even its closest neighbours Canada and Mexico in what may prove an effort to encourage more investment in the US, “or else”, rather than that these large tariffs will be sustained. Note Apple announcing a USD 500 billion investment in the US (Apple is the largest single driver of the US trade deficit with China) and Honda announcing it will construct a new factory in the US rather than the originally planned Mexico. A geopolitical angle there is likely as well, as the US may require Canada and Mexico to adopt similar anti-China trade barriers, or they will be tariffed. The EU is also in the US sights due to VAT structures that favour European goods in Europe over American ones.

 Beyond Trump’s tariffs on manufactured goods, the most intense area of speculation is on the potential for a "Mar-a-Lago Accord", some form of agreement between the US and its major trading partners on how the latter can pay for the privilege of accessing the US dollar system and accumulating USD reserves. This would help to weaken the US dollar, making US products more competitive globally, as well as helping the US to restructure its sovereign debt. The FT's Gillian Tett has framed it as "tariffs on goods may be a prelude to tariffs on money". We’re talking something matching the scale of the Bretton Woods arrangement in a world that is turning multi-polar. Can the US pull this off, assuming that access to the US consumer’s willingness to spend and the US dollar is so great that it is willing to pay a far steeper price? Or will it fail miserably, leading to huge market dislocations? Already, Trump’s style is rapidly eroding US soft power in the world, a risk to his entire agenda outside of North America, at least.

It is all an incredibly risky, go-for-broke gambit. In the coming quarter we’ll have a better sense of whether the Musk-led DOGE has any chance of material reduction of fiscal spending, while a growth slowdown and even recession appear likely by year-end, and possibly much sooner, on the fiscal slowdown and a tapped-out US consumer. The first Republican spending bill to avoid a government shutdown does not suggest a government that is willing to swallow tough budget cuts, it should be noted!

Bottom line: the political cycle in the US is critical as a lens, and the Trump administration is likely aiming to maximise the front loading of economic pain and disruption to pin the blame on Biden. The hope is that hefty deregulation, tax cuts, and inbound investment from the tariff threats will have the economy on the upswing by the November 2026 mid-terms. The US dollar will likely remain under considerable pressure this year, not only on the US economic performance and fiscal drag, but also as the world rebalances its portfolios away from their excessive allocation to US equities. Significant risk of continued US equity market underperformance this year and even a bear market in US equities on the index level after seeing the most concentrated market in history. A retrenchment in AI-linked spending this year is a wild card downside risk.

Europe: the implications of US withdrawal
The Trump withdrawal of the US from its security commitments to Europe has been a wrenching blow, even if Europe should have seen the writing on the wall on 5 November.  The US appears ready to normalise relations with Russia as long as the latter is willing to sign a peace deal on quite favourable terms to Russia, many theorise in an attempt to keep Russia facing west and not become a “junior partner” of Russia in what has been billed a “reverse Nixon” (Nixon made friendly with China in the early 1970s to drive a wedge between it and the Soviet Union). Even the very status of the transatlantic NATO alliance seems at stake as Trump airs the idea of annexing Greenland and even pulling the US out of NATO if members fail to raise military spending.

The unease in the first weeks of Trump’s administration has prompted a swift response in Europe. EU Commission President Ursula von der Leyen said that the EU maintains the lofty intention to be a “promoter of freedom, democracy, and the rules-based order.” More directly in response to the Trump administration’s evolving stance on Russia and Ukraine, an EU summit that included the UK in early March saw discussions of Europe needing a new security arrangement that doesn’t presume the US is willing to defend it.

Most impressive of all, Germany’s coming chancellor Friedrich Merz is suddenly taking Germany away from its decades-long policy of fiscal prudence, negotiating a massive EUR 500 billion infrastructure fund (more than 11% of GDP in nominal 2024 GDP terms) and moving to skirt constitutional “debt brake” rules on deficit spending as long as that spending is on defence. He has even called for the EU to scale up its ambitions on defense initiatives after the EU proposed a EUR 150 billion rearmament plan. Europe’s bond yields have jolted higher in recognition of the magnitude of this attitude change from Germany as much as due to the absolute size of the coming investment.

To help fund the new investment priorities, EU countries may eventually incentivise or even require its vast pension funds to allocate more of their holdings in European instruments, both debt and equity, reinforcing the strength of the euro and keeping long rates orderly, if still somewhat high. This has huge implications.

Bottom line for Europe and the euro: The coming massive fiscal expansion, together with the factors we see weakening the US dollar, looks set to drive EUR/USD to 1.1500 and even 1.2000 this year, and could see EUR/GBP back in the 0.8600–0.8800 range this year as well, with EUR/CHF possibly hitting parity and higher. European long rates look set to rise, while the ECB will keep a relatively accommodative policy as overheating risks may prove limited, with interest-rate sensitive sectors challenged by the higher rates and investment priorities shifting to national security priorities. European equities to outperform, with everything defence-related and many things infrastructure-related possibly somewhat richly valued in the near term, if deservedly so for the longer term.