Will growing ideological tensions between the EU and US grab investor attention?

Markets

Asian stocks may face geopolitical pressure on Monday, but not from the usual U.S.-China disputes. Instead, rising ideological tensions between the U.S. and the European Union and looming central bank policy decisions are taking center stage. However, if you're looking to sell the China or U.S. tape on this news, history suggests these flare-ups tend to have short legs, especially against the broader backdrop of a global asset rotation.

Investors are gradually shifting away from crowded Trump trades, and the catalyst seems to be twofold: renewed optimism around DeepSeek’s AI-driven momentum in China and a subtle but significant shift in sentiment sparked by Trump’s signals that Ukraine peace talks could be gaining traction. While it's still early days, any real movement toward de-escalation in Eastern Europe could boost global risk appetite.

However, with U.S. stocks still clinging to near-record highs, the real question is whether the era of "U.S. exceptionalism" is finally running out of steam.

While some are eager to paint the war in Ukraine as the primary drag on European stocks, that’s more narrative than reality. Markets, for the most part, have taken the war’s economic toll in stride, adjusting to the new normal rather than treating it as a major shock.

The real game-changer, though, is the potential shift in European energy markets. Natural gas prices, which initially surged when the war began and have climbed roughly 120% over the past year, appear to be turning the corner. TTF, the European benchmark, extended its decline on Friday before stabilizing, with March 2025 contracts (TFAc1) down around $9 since the peace talk headlines broke ($59.35 → $50.685).

If Russian gas were to resume prewar flow levels to Western Europe—assuming policymakers are even willing to reopen that door—gas prices could see an additional 35-40% correction from current levels. This would inject much-needed relief into European industries and consumers alike, potentially shifting the economic balance back in favor of the region. But until a deal is inked and details emerge, markets will tread cautiously, keeping a close eye on both peace negotiations and energy flows.

The elephant in the room

The real elephant in the room isn’t the latest U.S.-EU headline drama—it’s the looming tariff storm that Wall Street has been trying to price in ever since Trump stepped back into the Oval Office. Traders have been stuck in a game of “will he or won’t he” on sweeping tariffs, with geopolitical allies and rivals alike in the crosshairs. The stock market’s initial reaction was caution, but as delays, carve-outs, and saber-rattling mix into an increasingly muddled policy picture, the mood is shifting from calculated hedging to outright confusion.

With roughly six weeks to go until April Fool’s Day—the de facto deadline for Trump’s tariff masterstroke—markets are left parsing through data, speculating on scenarios, and bracing for the fallout. Volatility is almost certain to ratchet higher as we inch toward peak tariff season, and in a historically crowded S&P 500 trade, that could mean some serious downside as nervous investors hit the eject button.

Make no mistake: tariffs remain one of the biggest risk factors for financial markets. But they fall into the dreaded category of ‘known unknowns’—a wildcard that could send shockwaves through equities, currencies, and commodities depending on the size, scope, and sequencing of Trump’s final decision. For now, the only certainty is uncertainty.

Asia’s great rotation

Hedge funds are stampeding into Chinese equities at breakneck speed, riding the DeepSeek-fueled AI boom and betting on Beijing’s next wave of economic stimulus. While markets are fixated on a slow but steady rotation out of crowded Trump trades in European stocks, the real action is happening in Asia, where a seismic shift in capital flows is underway.

The contrast couldn’t be sharper—India, once the darling of global investors, is now bleeding capital at a record pace. Slowing macro growth, fading corporate earnings momentum, and stretched valuations are triggering a mass exodus. The numbers tell the story: over the past month alone, China’s onshore and offshore markets have surged by a staggering $1.3 trillion in total value, while India’s has shrunk by more than $720 billion.

For the first time in two years, the MSCI China Index is set to outperform its Indian counterpart for a third consecutive month, marking a significant inflection point in the region. The message from hedge funds is clear—China is back in favor, and India’s high-flying status is on increasingly shaky ground. The great Asia rotation has begun.

The trade calculus here is clear—India is staring down the barrel of Trump’s reciprocal tariff and VAT adjustments, which could hit its exports across the board. From iron, steel, and auto parts to pearls, stones, and mineral fuels, nine of India’s top 10 exports to the U.S. could face steep additional tariffs ranging from 6 to 24 percentage points. That’s a direct blow to trade flows, corporate margins, and, crucially, the rupee.

Big money doesn’t like assets where the currency is on shaky ground—when a weaker INR eats into dollar-denominated returns, investors pull back fast. And that’s exactly what’s playing out now. Meanwhile, over in China, the AI-fueled rally continues to defy broader macro concerns, closely mirroring the "Teflon" effect seen in U.S. tech. No matter the uncertainty, capital keeps flowing into AI names, and hedge funds are leaning into that trend.

The market rotation isn’t subtle—it’s a sharp pivot. The trade here is to be long China AI, where stimulus and tech tailwinds are in play, while keeping a cautious eye on India as capital outflows and tariff risks mount.