The euro has strengthened alongside Eastern European currencies as European leaders work swiftly to offer Ukraine support in the face of concerns surrounding potential US pullbacks. The common currency rose 0.4% against the US dollar, outperforming many of its global counterparts. The Polish zloty and Romanian leu also saw gains, while European equity-index futures pointed to a stronger open, tracking positive moves in Asian stock markets.
Geopolitical developments have become the dominant theme for the markets this week, with European leaders forming what the UK has termed a “coalition of the willing” to ensure Ukraine’s security. The recent Oval Office confrontation between US President Donald Trump and Ukrainian President Volodymyr Zelenskiy has highlighted the uncertain stance of the US on Ukraine, making Europe’s response increasingly critical.
In light of the shifting US position, Christopher Dembik, senior investment manager at Pictet Asset Management, noted that Europe could seize a historic opportunity to explore an autonomous European defense system. This could yield significant economic benefits, with military innovations often having civilian applications, such as the development of the internet. However, Dembik cautioned against excessive optimism.
The rally in European markets coincides with rising expectations in China, where traders are hopeful that an increase in fiscal spending will be announced during the country’s National People’s Congress. This could help counterbalance the ongoing trade tensions with the US and sustain the country’s recent stock market momentum.
Meanwhile, Bitcoin dipped slightly following a Sunday rally, as President Trump spoke about his plan to establish a strategic cryptocurrency reserve. Cryptocurrency market dynamics remain volatile as geopolitical events continue to influence investor sentiment.
In Europe, the prospect of increased defense spending has sparked a surge in the stocks of companies involved in the defense sector, including Rheinmetall AG, BAE Systems Plc, Rolls-Royce Plc, and Leonardo SpA. However, concerns over rising debt issuance have weighed on German and French bond futures.
A significant focus remains on Ukraine’s reconstruction efforts, with the World Bank estimating the costs to rebuild the country at nearly $500 billion. The restoration of critical infrastructure, including steel and cement needs, is expected to be a long-term challenge. However, Goldman Sachs economists forecast that a potential peace deal could lead to a significant increase in Russian gas supply to Europe, potentially reducing gas prices by 15% to 50%.
The broader European shift towards self-reliance in defense is already causing a rotation away from the US in some investment portfolios, according to Kieran Calder, head of equity research at Union Bancaire Privée SA.
Meanwhile, markets are also awaiting developments on the US-China trade front. Investors are looking for any last-minute breakthroughs to avoid additional tariffs on Chinese goods, which are due to be imposed this week. In Asia, stocks in Australia and Japan experienced gains, and Hong Kong’s Hang Seng Index continued its strong momentum, bolstered by retail success stories like Mixue Group, China’s largest bubble tea chain.
Key economic events to watch this week include the European Central Bank’s policy decision, along with the release of several economic indicators from the Eurozone, the US, and China, including GDP and employment data.
