The Tariff Week speculation continues, and at the time of writing, it is unclear whether the Tariff Hammer falls on Canada/Mexico (deadline tomorrow). I just want to comment on the Ukraine blow up, which was far stupider than I expected.
There are a few broad scenarios I see going forward, one of which will have hard to predict side effects.
Return to Status Quo Ante (i.e., Thursday)
One possibility is that the entire ganging up on Zelenskyy episode will largely be memory-holed by the Americans, and other than ritualistically calling for an “apology,” the Trump White House will continue to pretend to searching for a peace deal. Trump has visions of rare earths stuck in his head, and walking away from the negotiations means that he accomplishes diddly squat.
Although many Europeans will be happy to pretend that the Americans are their allies, it is unclear that it makes sense to pretend that the Americans are useful intermediaries. Therefore, I do not think this is a very durable scenario, and so this would just be a temporary situation before evolving into one of the other scenarios.
Americans Walk Away, But Somehow Avoid Major Rupture
Another possibility is that name calling continues and Trump walks away from the negotiations. However, there are no drastic actions that poison the well diplomatically with other non-Russian American “allies.”
Other than increasing European (and probably other democracies like Canada and Japan) defence expenditures (which is already being priced into European defence stocks), this scenario’s macroeconomic impact is likely to be limited outside of affected countries.
Major Rupture
Trump diplomatically allying with Russia and finally implementing tariffs on NATO members could cause a major break in trade and regulatory patterns. Relations are already heavily strained (especially online), and cycles of retaliatory tariffs would destroy everyone’s patience with the situation.
It is hard to predict how bad things could get. Relations with the rest of NATO have already been torched even though very little has been done with respect to those countries. (USAID was gutted, destroying American soft power, but that is not a direct attack on NATO country interests. It is unclear how foreign intelligence communities see developments in the US intelligence agencies.) If tariffs start flying or the United States directly goes after Ukrainian military capability, tempers would likely run much hotter. Capital flows between developed countries will have to take into account geopolitical risk — a situation that developed market portfolio managers are not accustomed to.
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