Summary: "In 2023 it becomes clearer than ever that Europe needs to get the union’s defensive posture in order." - John Hardy & Christopher Dembik
Any real economic and political union must rank national security as one of its highest priorities, particularly when war looms on that union’s very borders. Since the end of World War II, Western Europe found itself under the comforting umbrella of the US Armed Forces, both directly and via widespread participation in NATO. Since the end of the Cold War, national defence priorities faded further. They mostly only focused on the ‘war on terror’, a diffuse and immaterial threat in real terms even if it loomed large in the public’s imagination, while the active theatres of that war were far-flung, chiefly in Iraq and its environs, and in Afghanistan.
But Russia’s invasion of Ukraine brought the largest hot war to Europe since 1945, and the 2022 US midterm elections saw a strong surge in the right populist Republican representation in Congress, with former president Trump likely set to declare his candidacy for president for 2024. In 2023 it becomes clearer than ever that Europe needs to get the union’s defensive posture in order, being less able to rely on the increasingly fickle US political cycle and facing the risk that the US will entirely withdraw its old commitment to Europe, perhaps after a Ukrainian-Russian armistice.
In a dramatic move in 2023, all EU members move to establish the EU Armed Forces before 2028, with the aim of establishing a fully manned and deployable land, sea, air and space-based operational forces, to be funded with EUR 10 trillion in spending, backloaded over 20 years. An EU Rapid Deployment Capacity force is designated for readiness before 2025, with participation from over 20 EU member countries. To fund the new EU Armed Forces, EU bonds are issued, to be funded based on keys of each member country’s GDP. This drastically deepens the EU sovereign debt market, driving a strong recovery in the euro on the massive investment boost.
Market impact: Leading European defense companies outperform broader European market by 25%, and new popular European defense ETFs are formed and enjoy strong investor interest.
2024: The wasted year
Markets are driven by election optimism, overshadowing growing debt and liquidity concerns. The 2024 elections loom large, but economic fundamentals and debt issues warrant cautious investment.
As US economic slowdown hints at a shift away from exceptionalism, USD faces downside with looming Fed cuts. AUD and NZD set to outperform as their rate cuts lag. JPY gains on carry unwind bets and BOJ pivot.
Amid AI and obesity drug excitement, equities see varied prospects: neutral on overvalued US stocks, negative on Japan due to JPY risks, positive on Europe. European defence stocks gain appeal.
With the economic slowdown, quality assets will gain favour, especially sovereign bonds up to 5 years. Central banks' potential rate cuts in Q2 suggest extending duration, despite policy and inflation concerns.
Commodities poised for rebound. The "Year of the Metal" boosts gold and silver, copper awaits rate cuts. Grains may recover, natural gas stabilises. Gold targets $2,300-$2,500/oz, copper's breakout could signal growth.
