Markets Are Trading As If Every Escalation Automatically De-Escalates

By Michael Every of Rabobank

Everything until now has been a warm-up

As we head deeper into Q4 there is a natural tendency to think about the end of an exhausting year. However, there is a very high probability that the whirlwind of crazy headlines so far in 2025 have just been a warm-up for what is yet to come. After all, the Trump admin is still laying the foundations for a new US and global economy; the reactions to it are at the same stage; the nth order effects haven’t even begun to be felt. However, some of the first pillars are going up.

The Wall Street Journal reports the US has lifted a key restriction on Ukraine’s use of European long-range Storm Shadow missiles inside Russia, a major red line for Moscow. Trump immediately called the story “FAKE NEWS”, yet the story says, “The unannounced US move to enable Kyiv to use the missile in Russia comes after authority for supporting such attacks was recently transferred from Defence Secretary Hegseth to the top US general in Europe, General Grynkewich.” Either the journalists’ chain of comms is wrong or the one between the White House and the Pentagon is – of as vast significance as an attack on Russia using Storm Shadows.

In tandem, the US sanctioned Russia’s Rosneft and Lukoil for the first time, a major economic statecraft escalation that has seen oil prices move around 4% higher in response. That’s as a third European refinery that handles Russian oil, in Bratislava, Slovakia, went up in flames days after ones in Romania and Hungary. That cannot be a coincidence.

Against this backdrop, Putin just oversaw a readiness test of Russia’s nuclear forces. Europe and the UK may be working on a Russia-Ukraine ceasefire option to offer to Trump and Putin, but the real muscles are being flexed elsewhere (or inside Europe by others).

Trump also threatened Spain again for refusing to spend 5% of GDP on defence.

In the Middle East, a new US plan is to split Gaza into two zones, one controlled by Israel and the other by Hamas until it can be disarmed. The former zone will get rapid reconstruction and financial aid from the Saudis and UAE – though PM Netanyahu made clear no Turkish troops will be allowed. Market threats from the region have receded, though Iranian attempts to restart their nuclear plans still linger on. Broader US-backed opportunities may soon arise.

In LatAm, ‘Trump beats the drums of war for direct action in Venezuela’, says the Washington Post, as “some see the ultimate goal as toppling President Maduro.” The US just widened its campaign against alleged drug boats with a strike on the Pacific side of the continent; and if Russian energy is going to be throttled, Venezuela’s looks even more attractive. Meanwhile, the FT says investors are betting on Argentine peso devaluation after this weekend’s elections, with forward contracts indicating a 12% drop despite the $40bn US support package.

The US is considering broad software curbs on China. That would escalate their trade dispute, which becomes a war 1 November when tariffs hit 155%. Markets are trading as if every escalation automatically de-escalates. There is logic to that, but it isn’t a natural law.

Indeed, the South China Morning Post notes ‘As China’s leaders chart the next 5-year plan, they hear echoes from long ago’, where “Growing geopolitical challenges of today resemble those faced in the 1950s as Beijing seeks to navigate a complex new security landscape.” If you think the 1950s was an era in which China de-escalated ‘because markets’, then you really don’t know anything about the place at all.

The same paper notes ‘US fuels brain drain to China with Trump’s anti-science ‘Cultural Revolution’’ as “Chinese-American researchers are finding similarities with chaotic period under Mao Zedong that targeted intellectuals in China’. That’s as Harvard slashes its Ph.D. admission slots rather than firing huge numbers of its own recently hired and highly-paid non-academic admin staff.

With rumors that a US-India trade deal will be struck by end-month, where US tariffs will fall to 15% from 50% and India buy more energy and non-GMO agri, we have an official indication today that Delhi may buy more oil: we have to wait and see about the rest, which would be extremely significant in many contexts.

The US is talking to South Korea about the $350bn investment it pledged with its trade deal. Rather than offering it a dollar swapline, which Seoul had suggested might be needed, the focus is instead on getting the right mix of FDI, loans, and guarantees. This will be the template for Japan (where new PM Takaichi is saying she will buy more US pick-ups, soybeans, and LNG), the Middle East, and Europe. For Australia it’s easier: superfunds are going to invest $1 trillion Stateside by 2035, putting a vast chunk of non-property retirement cash in US hands and ensuring Down Under understands what’s going down, geopolitically.

In Europe, an apt snapshot of France in 2025 is that the Louvre’s surveillance cameras apparently pointed the wrong way, allowing the French crown jewels to be stolen. Equally, the museum’s director offered to resign but Macron refused to accept it: Carry On France. And in Germany, VW is stopping production of some product lines next week and reportedly being short up to €11bn due to Chinese competition, as Airbus opens a new assembly line… in China. Meanwhile, Von der Leyen gave another Gaullist speech about green tech, pledging:

• To introduce a “made in Europe” criteria for public procurement worth 14% of EU GDP: that’s a huge non-tariff barrier.
• To ensure new FDI is “truly in Europe’s interest”, not for others or elsewhere: but what about outbound FDI?
• Stepped up support for some strategic sectors to say “You are critical to Europe’s future. And your future will be made in Europe. That is critical for us.”: but does this mean tariffs and subsidies?

That was as the EU was forced to plan immediate changes to its sustainability law requiring firms operating there to address human rights and environmental issues in their supply chains or face fines of 5% of global turnover following the US and Qatar making clear their vital LNG exports to Europe would be at risk under that legislation. “Strategic autonomy” anyone?

Meanwhile, after the last surprising set of budget data, US Treasury analysis finds the country is on course to narrow its fiscal deficit ahead – though that projection clashes with IMF estimates.

That possibility, plus the picture of higher geopolitical tensions on multiple fronts, upside risks to energy prices, worries over a US-China trade war choking off dollar flows to it with a lag, massive inward investment into the US from multiple sources, bubble warnings from key figures, and the looming change at the helm in the Fed all point to markets primed for significant volatility ahead – and not necessarily on the easy-to-follow path seen in 2025 so far. Indeed, even gold was down for a third day yesterday, though it held the key $4,000 level.

Like I said, in a great many respects we are just getting warmed up.