The military spending in Europe is becoming a major investment theme – unfortunately – and should also be complemented with massive spending in technology and industry. As such, BAE systems gained nearly 4% yesterday, the German Rheinmetall jumped more than 6.40% (and has doubled in value since the election). Overall, the defence themed funds are amassing an increasing amount of funds since the war in Ukraine started and inflows are seen accelerating as European countries face limited options to rebuild their militaries.

But...

Every penny spent on defence is one less penny spent elsewhere, and the latter could accelerate rotation toward the European equities. We agree that the US technology stocks – and their products – are much more exciting than military output. But even there, things are getting pretty political. Apple’s Tim Cook announced yesterday to spend as much as half a trillion USD domestically over the next four years and hire 20’000 workers in the US to produce AI servers. Apple eked out a meager 0.63% - in quite a bearish session for the rest of the market – BUT geopolitically-backed investment motives could destroy investor value in the medium to long run.

Zooming out, the major US indices traded in the red on Monday, and selloff accelerated into the session end. The S&P500 slipped below the 50-DMA and closed below the 6000 mark. Nasdaq 100 also cleared its own 50-DMA. Microsoft fell more than 1% on news that they cancel some leases for US data center capacity raising concerns that the company could be in an oversupply position – and overestimated demand previously. That obviously casts a terrible doubt in AI investors’ minds given that the past two years’ rally is mostly based on the expectation that the demand will explode, and the companies would rather struggle with limited capacity rather than overcapacity. As such, Nvidia took a 3% hit yesterday. The company will report its Q4 earnings tomorrow.

Inside China

As the US tech companies announce plans to invest in the US to please Trump, Chinese equivalents do the same. Alibaba announced that it would spend more than $50bn in AI infrastructure in the next three years. The shares dropped 10% in New York yesterday. Yet dips could be interesting opportunities to strengthen long positions in Chinese technology giants. Alibaba’s cloud service will certainly benefit from the latest developments, while Cambricon Technologies – the leading AI chip designer in China – continues to push higher. The stock is up by more than 280% since September. By judging on how Nvidia performed over the past two years, the rally could develop further. Zooming out, the CSI 300 index recovered a part of early losses on news that Donald Trump told a government committee to crack down on Chinese investment in US tech, energy, and other critical sectors and is pushing Mexico to slap tariffs on Chinese imports too after Chinese firms have shifted production there to dodge the very duties Trump put in place during his first term.

Overall

The worsening geopolitical and trade outlook boost appetite for safer pockets of the market. The US 10-year yield pushed below the 4.40% mark, gold advanced to a fresh record high while the US dollar rebounded from the lowest levels since December. The EURUSD returned below the 1.05, while Cable failed to clear offers near1.2650, that matches the 100-DMA and the major 38.2% Fibonacci retracement. In the actual geopolitical setup, gold is certainly a better hedge than the US dollar and Treasuries.

Speaking of geopolitics, US crude extends rebound after approaching the critical $70pb support last Friday on news that Trump government imposed new sanctions on oil brokers and ships that were linked to illicit Iranian crude. But the worsening global economic outlook on rising trade tensions will likely keep the upside limited.