June 25 – Stock futures were mixed to firmer in quiet trade overnight as hopes for peace to hold in the Middle East began to gradually grow roots. Traders will be monitoring a second day of Federal Reserve Chair Jerome Powell testimony before Congress today, although his comments thus far suggest that the central bank is quite content to hold the line on monetary policy for now. The VIX is trading near 17 this morning, its lowest level since prior to the 12-day war, while the dollar index sits just above three-year lows near 98.2. Yields on 10-year Treasuries are trading near 4.32%, while yields on 2-year Treasuries are trading near 3.81%. Crude oil prices are modestly higher this morning, bouncing following big losses the past two sessions, while the grain and oilseed sector has a weaker bias to it once again today.
The world’s focus shifts back north to the Black Sea conflict, with the 12-day war between Iran and Israel seemingly coming to an end. NATO began its meetings today, with a clear focus on Russian aggression, as it continues its war in Ukraine. As such, members restated their commitment to protect one another from outside aggression, while also raising their financial commitment to do so. President Trump made NATO’s financing a core issue in Trump 1.0, as the United States was the only NATO member meeting its commitment of funding the organization at the required 2% of GDP level. That was before Russia attacked Ukraine three years ago. This week, NATO members voted to raise their financial commitment to 5% of GDP, although it will be measured differently. Member countries are committing to spend 3.5% of GDP on troops, weapons, and other core defense needs, while another 1.5% is committed to broader related measures, such as cybersecurity, protecting essential pipelines, adapting roads and bridges to handle heavy military equipment, etc.
Russian President Vladimir Putin thought that Ukraine would fall in a matter of days when he invaded it in February 2022 – two weeks at the most. He’s still mired in that war. Russia’s economy is dependent on trade with Europe and the United States, but he thought that any hard feelings would be quickly smoothed over if Ukraine’s fall was quick, allowing everyone in the West to quickly forget his aggressions. But that didn’t happen. Instead, the long war reopened old wounds in Europe, which has created a big distaste for doing business with Russia. Europe in particular is learning how to live without trade with Russia, leaving the aggressor country on the cusp of a significant recession. Part of Putin’s reasons for his move on Ukraine is Russia’s history. Russia has been invaded more than 50 times over the century’s – often from the West. Its greatest days of security came when its borders extended to the European mountains, which Putin sought to achieve once again, moving quickly on Ukraine as the next step. But his failure to quickly absorb Ukraine created a heightened awakening in Europe of the risks of Russia, resulting in its resistance to doing business with Russia, while also increasing its commitment to resist it, as illustrated by its move this week to dramatically increase defense spending. Meanwhile, the 12-day war in the Middle East has significantly weakened one of Putin’s allies who was supplying drones and other military weaponry to him.
The annual BRICS summit is scheduled for Rio de Janeiro, Brazil next week, but Chinese President Xi Jinping will not attend. Instead, he’ll send Premier Li Qiang to sit in his place. This raises questions about BRICS’ loss of effectiveness in pushing its anti-West agenda. It all started when last year’s BRICS meeting in Moscow failed to support Xi’s initiative to set up a timeline for establishing a non-dollar payment system to replace the SWIFT banking system. Then, a BRICS foreign ministers meeting in Brazil earlier this year failed to approve an anti-West statement being pushed by President Xi. This suggests that BRICS is struggling to unite around Xi’s objectives, and he doesn’t want to risk another embarrassment at this time of being present in person when it happens.
What if this is Trump’s strategy? The S&P 500 stock index is currently trading less than 1% from its all-time high, with the Nasdaq just behind it, despite the fact that we lack evidence of being even close to resolving the tariff war. The markets, and the economy, are learning to live with the status quo. The biggest obstacle for the economy currently is the uncertainty of how it will end. That’s the primary concern for the consumer as well, keeping both from investing in the future due to the uncertainty. What if President Trump extends the current pause on his reciprocal tariffs – keeping them at 10% across the board – for a full year while working on trade agreements? I’m not arguing for or against – but instead asking, what if that’s his strategy. What would be the anticipated impact? Suddenly, the uncertainty holding back businesses and consumers would be replaced with a sense of certainty, especially if the tax bill is passed, which contains incentives for businesses to expand. That combination would be expected to see a surge in economic growth that grows revenues without significant inflation, particularly if energy prices remain relatively low. The next two weeks will likely tell us a lot about what Trump’s strategy truly is.
