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Should markets worry about the west and Russia?

John Redwood, Charles Stanley’s Chief Global Strategist, looks at the looming NATO meeting.

by
John Redwood

in Features

05.07.2018

Next week NATO meets. US President Donald Trump will want more progress with increasing spending by European allies. Many members are still well below the 2% of GDP minimum spend they are asked to achieve to contribute to collective security. NATO will argue that members together have been increasing their spending in real terms since 2015, and have in place plans to raise it further. Markets will watch to see how far President Trump pushes his case, and whether he follows up on a suggestion that if a country does not meet the target it cannot rely on the NATO guarantee of protection and support. This would be seen in Europe as an unfriendly attack on the European allies and seen by many in the US as a logical way to ensure fairer burden sharing of the costs of defence. It is crucial to the continued success of the alliance that any doubts about the collective guarantee are cleared up.

On July 16 in Helsinki, President Trump will have a meeting with Russian President Vladimir Putin. NATO is concerned about what President Trump may offer to his Russian counterpart. The takeover of Crimea was seen in the west as an illegal act and led to sanctions against Russia and resulted in a strengthening of military dispositions and exercises by the Alliance in eastern Europe. If President Trump is prepared to accept that Crimea is now Russian in an effort to move the Russian relationship on, it will require adjustments in the stance of NATO and the main European alliance members. President Trump has floated the idea of returning Russia to the G7/G8. NATO itself has always said it needs to be engaged with Russia and has a complex relationship with that country. Italy and others within the EU are also keen to thaw relations more with Russia.

How will markets react to all this? The pressure for more defence spending is beneficial to the defence industries and to general economic output. The uncertainty over US/NATO/Russia relations is less helpful. Any resolution of the disagreements which led to a reduction in trade barriers and tariffs imposed against Russia would be marginally helpful on the economic front, though not welcomed by many in the European establishment who wish to maintain a firm stance against Russian conduct. Some US/Russian rapprochement would also help reduce tensions within the Middle East. The two powers can agree in wishing to see the end of ISIS and other extremist terrorist groups, but have otherwise been in disagreement about what other forces and governments should be supported. President Trump has so far been keen to downplay US military intervention in Middle Eastern religious and civil wars.

President Trump seems to like dealing with difficult and contentious leaders around the world on a one-to-one basis. He is less happy with multilateral arrangements, whether on trade or defence, even where they are with natural friends and allies of the US. The next few days are likely to produce some exciting headlines as these meetings unfold. What central and commercial banks do is likely to have more bearing on markets. Here there are still no signs that the main authorities of the world wish to end the cycle, but there is some sluggishness appearing as the financial system adjusts to the withdrawal of quantitative easing (QE) in the US and the slowing of QE in the euro area.

Nothing on this website should be construed as personal advice based on your circumstances. No news or research item is a personal recommendation to deal.

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