Then, not much progress has been made on the European front—aside from growing frustration in Brussels after the US doubled steel and aluminium tariffs to 50%, effective mid-June. Remember, the deadline for US–EU negotiations is July 9th—almost too soon to be optimistic. Meanwhile, tensions between the EU and China are also rising, with the EU deciding not to purchase medical equipment from China, citing ‘reciprocity of purchasing.’ If Europeans start playing by Trump’s rules, the next four years could turn into a global nightmare. At least everyone will get a slice of the horror pie—apparently, that’s what global politicians are aiming for.

Cherry on top, trade tensions are now accompanied by military tensions. The British PM announced yesterday at the government’s Strategic Defense Review that £15bn will be spent to bring Britain up to ‘war-fighting readiness’. Needless to say, European defense stocks cheered the news: Babcock—which makes submarines and warships—rallied more than 8% to a fresh all-time high. The Select Stoxx Europe Aerospace & Defense ETF gained another 1.63%, also reaching a new record, while the rest of the Stoxx 600 remained muted.

Gold rallied to a three-week high on the back of renewed geopolitical jitters, while USDCHF sank below the 0.82 mark amid flight to safety—toward the Swiss economy, which expanded by 2% in Q1. That growth was largely driven by a surge in exports to the US ahead of tariff implementation, suggesting it could be temporary. Swiss inflation data will likely show the first negative print since April 2021—fueling expectations that the Swiss National Bank (SNB) could cut rates back to 0% this month.

Elsewhere, the latest PMI figures signaled continued contraction in German manufacturing but a surprise improvement in Italy and Spain. Overall, the Eurozone’s manufacturing PMI beat expectations, while ISM data in the US hinted at slowing activity. That wasn't enough to stir the Federal Reserve (Fed) doves, though—the US 2-year yield rebounded 4bp on Monday, and the dollar is now poised to retest its YTD lows from April.

Most investors remain bearish on the US dollar, expecting continued debasement due to lackluster growth and a Fed unwilling to offer support amid an uncertain inflation outlook. As a result, EURUSD is consolidating gains above the 1.14 mark. The next natural target for bulls is 1.1573—the level reached on April 21, when the dollar index also touched its 2025 low. The euro outlook remains positive on expectations that near-target inflation will allow the European Central Bank (ECB) to deliver a comfortable 25bp cut this week—and possibly another one this summer. Euro traders will be watching closely for confirmation in today’s flash CPI update for May.

Across the Channel, persistent inflation remains a headache for Bank of England (BoE) doves. But many economists and investors worry that the BoE has fallen behind the curve, and that fiscal measures pose a serious risk to UK growth—demanding closer attention. Either way, dollar weakness is the primary driver of GBPUSD, which has climbed above 1.35 and could extend gains if the greenback continues to slump, as many expect. Interestingly, the FTSE 100 has remained resilient despite sterling’s strength. Defense stocks and gold miners are thriving in this climate—Fresnillo rose 6% yesterday and has been rising exponentially since the start of the year.

In commodities, US crude closed above its 50-day moving average for the first time since March 31. But weaker-than-expected Caixin manufacturing data from China is weighing on sentiment this morning. Copper futures—seen as a barometer of global economic health—are also under pressure. Meanwhile, VanEck’s rare earth and strategic metals ETF is stuck at multi-year lows. Appetite is depressed by Chinese export restrictions, which frustrate Trump’s USA, which needs these materials for its tech sector—and may not get them if trade tensions continue down their current destructive path.

In the US, however, the S&P500 managed to shrug off trade anxieties: steel and aluminium stocks rallied on the extra tariff news, Big Tech remained in demand, and large banks cheered reports that the Trump administration may ease regulations for major lenders. Traders may be explicitly betting that Trump will soften his tariff stance during the 90-day pause—now dubbed the “TACO” trade (Trump Always Chickens Out)—or they may simply be ignoring the trade risks out of FOMO. In either case, the rally looks fragile and risks remain.

Final note: the Japanese 10-year auction saw stronger-than-expected demand and pulled the 10-year JGB yield below the 1.50% mark. Notably, increased demand for Japanese government bonds has tended to coincide with selling pressure in the S&P500 since last summer—largely due to the unwinding of Japanese carry trades, which sent shockwaves through global financial markets. As such, relatively high Japanese yields increase the risk of reverse carry trades and should be watched closely.