European debt concerns grow as Trump withdraws military support

• European debt concerns grow as Trump withdraws military support.

• War resolution could help drive disinflation.

• Japanese growth bump helps drive JPY strength.

A mixed start to trade in Europe comes amid growing fears that the new US President seems to show little interest in strengthening ties with their transatlantic partners. Talks over an end to the Ukraine-Russia war could take place in Saudi Arabia, but incredibly this could take place without Europe and even Ukraine itself. An interesting strategy considering the US will likely expect Europe to be the central pillars to any post war security arrangement. With European leaders heading to Paris in a bid to structure their response, there is a fear that the breakdown in military ties between the US and Europe will necessitate a huge ramp-up in defence spending, thus pushing debt and borrowing costs higher once again. With the FTSE 100 being led by BAE Systems, and European bond yields on the rise, concerns over the shifting narrative around Ukraine, Russia, and the US looks provide key drivers of sentiment in Europe this week.

Nonetheless, the potential resolution of the Ukraine-Russia conflict does provide the basis for optimism given the possible implications for commodity prices. With Russian oil and gas exports currently heavily sanctioned, the potential easing of trade relations could help lower energy inflation globally. With Europe having been particularly impacted by the rise in energy costs as they diversify away from Russian imports, this could be hugely beneficial for energy-intensive manufacturers. Ukraine is also a major exporter of grains, and thus food disinflation could be on the cards in the event that the region focuses on economic development rather than war. 

Elsewhere, the Japanese yen finds itself on the front foot in early trade this week, following a welcome GDP release that saw fourth quarter growth surge to 0.7%. Coming in a week that also sees Japanese inflation released, today’s improved metric of economic activity does highlight the bullish yen case in the event that CPI pushes higher as forecast.

Looking ahead, this week is set to be dominated by inflation and central banks, with RBA and RBNZ rate decisions accompanied by CPI metrics out of the UK, Canada, and Japan.