1, 2, 3, 4, 5 And 5, 4, 3, 2, 1

By Michael Every of Rabobank

Depressingly, today marks the start of the fifth year of the Ukraine War: a battered Ukraine is still standing against a bruised Russia; the US is still aiming for a peace deal so it can pivot to Asia; and Europe –even as it knows it has to look after both Ukraine and its own conventional defenses after decades of having this provided for it– is still trying to get its act together.

Despite its rhetoric, with a few notable exceptions European rearmament isn’t happening with appropriate scale and speed. Is Ukraine supposed to hold on until 2035, when EU defense budgets will be at the promised 3.5% of GDP? 

EU ministers also just failed to agree their 20th sanctions package on Russia, and Hungary is blocking the €90bn loan to Ukraine the EU had thrashed out. As such, the EU’s Kallas is reopening the controversial Russian frozen assets option shelved in December, which Belgium refused to go along with it. That’s as the UK Telegraph reports that “Kremlin spies” are acquiring ‘Trojan horse’ networks of sites in residential homes near European military bases that could be used to launch sabotage campaigns.

Meanwhile, we appear very close to a new war in the Middle East. Forget Bloomberg headlines and Iranian sabre-rattling. Look to: the USS Ford steaming towards Haifa; US troops removed from bases in Qatar; US staff removed from the embassy in Lebanon; former senior Israeli officials told to return home from abroad immediately; Israel preparing to shutter its embassies; a major underground hospital being opened in Tel Aviv; US Secretary of State Rubio postponing his planned meeting in Israel to next week; Indian PM Modi to speak in the Knesset tomorrow as part of what is claimed will be the announcement of a new extremist coalition (which will also have some EU members); and PM Netanyahu telling the Knesset: “This is not a time to engage in arguing. I am setting that aside. We are in very complex and challenging days. No one knows what tomorrow will bring. We have our eye open and are prepared for every scenario. I have made it clear to the ayatollah regime that if they make an error, perhaps the severest error in their history, and attack Israel, we will respond with force that they cannot imagine…. we must rally the ranks of the nation and stand shoulder to shoulder.”  

Importantly, what looms is not a repeat of the Iran-Israel clashes we correctly predicted following October 7: logically, if it’s to happen, it will be an endgame. The Iranian regime’s response will be appropriate, as seen vs its own people, up to 30,000 of whom may have died while protesting against it. In that respect, if Iran feels it’s going to lose control –which is never has until now– it will do whatever it can to fan the global flames as high as possible for as long as possible.

In the recent Greenland Crisis, we stressed that in 2026 Europe is the Egypt of 1956’s Suez Crisis and the US is still the US. Iran’s goal will be to try to make the US into the UK and France of 1956 via markets telling Trump to pack up and go home rather than play grand macro strategy in the Middle East.

Of course, that involves energy flows – and it’s Iran’s physical ability to stop them that matters more than the politics or “because markets” of it. Could Hormuz be mined or see suicide attacks on tankers? Could missile attacks hit Saudi oil given reports Iran will have heard that Riyadh now backs a US strike? Could there be terror attacks from sleeper cells across the region and the West against civilians or key infrastructure? None of this is available on Bloomberg, so are you sure?

Look to the cartel violence in Mexico as an example of how one can be relaxing one minute and fleeing from gunfire the next. There, following President Shenbaum’s evacuation to a naval vessel for her own safety, the WSJ reports, ‘Mexico Races to Prevent Cartel War’.

That’s plenty of ‘risk off’ for markets. But there’s far more afoot.

Stocks were rocked by a viral report underlining the devastating impact of AI on the economy as another claimed UK unemployment will rise above its pandemic high within months: you think the UK by-election on Thursday shows a fragmented and polarized polity now? Such views overlook the need for resources to power AI but are worth considering – so is the struggle for those resources, which hardly says we are all going to sit and sing kumbaya together.

The US is leaning on Anthropic to get with the (military-industrial) program or be on the outs; and Anthropic is reporting China set up 16,000 fake accounts to use Claude to train DeepSeek. That effectively allows China access to Nvidia chips indirectly. Again, no kumbaya here but rather more controls on who can get access to US AI ahead – and notably that’s as India is strategically looped into the US AI ecosystem. If we are developing separate supply chains from critical minerals up to chips, how does that allow for a “because markets” free trade in the end product AI? Answer: it doesn’t. Walls will go up. Which/whose side you are on will dictate what AI you can use as a consumer.

Relatedly, Trump eviscerated the ‘supreme court’ (no capital letters) and stressed —correctly— that their ruling allowed him to “use Licenses to do absolutely “terrible” things to foreign countries,” and that tariffs can “be used in a much more powerful and obnoxious way, with legal certainty.” He later added another point also clear to us: any country that thinks it can wriggle out of US trade deals will face even higher tariffs. Moreover, the WSJ reports Trump is considering new 232 and 301 national security tariffs on large-scale batteries, cast iron and iron fittings, plastic piping, industrial chemicals and power grid and telecom equipment.

Yet as France bans the US ambassador from talking to its government, the EU Parliament put the US trade deal on ice. Expect US-EU tensions to rise further, it seems. By contrast, Japan has underlined that it’s sticking with its trade deal and the $550bn of pledged, and guided, investment into the US. The contrast between the two is stark – and markets should take note.

More so given the Nikkei Asia reports the marked swing we saw in USD/JPY in January was initiated by FX intervention from US Treasury Secretary Bessent not Tokyo, even if Washington, D.C. is open to coordinated forex moves if requested by Japan. In short, FX markets don’t get to focus on simple risk on/off and the likes of rate differentials anymore: they have to focus on the geopolitics of geoeconomics and who wants to help, and hurt, whom, and how.

Similarly, the WSJ reports that crypto firm Binance fired staff who flagged $1bn moving to sanctioned Iran entities, which sounds like something the Treasury and Pentagon might also like a word about. Moreover, the Trump-backed crypto group World Liberty’s stablecoin says it was the subject of a deliberate attack. Bitcoin is also having a bad time of it rather than rallying on all the above uncertainty. And as those at the leading edge of markets thrash around for what the emerging global architecture may be, China is pushing Hong Kong as its global gold trading hub.

All of this is the backdrop to President Trump’s State of the Union address tonight at 9PM US eastern time. Start the countdown clocks to that piece of political theatre – with what surprises for the viewing audience?

Five, four, three, two, one…