Morning Update

Premiere Xi Jinping has today met President Vladimir Putin in Moscow. This marks the third such meeting between the two leaders in under a year and comes amid the two’s evolving relationship given the conflict in Ukraine, international sanctions, and an increasingly turbulent geopolitical environment.

Headlines from the two’s meeting include Putin’s remarks that: “We are deepening peaceful nuclear cooperation” and Xi’s statement that “the China-Russia relationship today is hard-earned, and the two sides need to cherish and nurture it”.

Since the Russian full-scale invasion of Ukraine Chinese-Russian trade has grown, not least because Western sanctions on Moscow have forced Russia to look eastward to import and export. As such, in 2023, bilateral trade between the two counties grew to $240bn.

Much of this increase has been brought about by the rise in Chinese imports of Russian Urals crude, thought to be sold at a discount of some $20 per barrel. Given that China accounts for some 25% of the world’s total crude oil imports, the scale at which Beijing imports from Moscow has been described as a ‘lifeline’ in enabling the Kremlin to continue to fund its military operation.

The increase in bilateral trade also comes as the two increase their reliance on yuan and rouble payments, thus moving away – in part at least – from the dollar and euro. According to Natasha Kuhrt from Kings College for example, 70% of trade between the two countries is settled in yuan.

Nevertheless, the Whitehouse has made it clear that they intend to be more hostile towards foreign banks which deal with groups associated the Russian war effort. Accordingly, sources have recently told APF news agency that some Chinese banks are halting dealing with Russian clients. Indeed, France24 led with the headline earlier this week that such sanctions were “testing the “no limits” friendship between the two countries.”

Sticking with trade, Europe not only faces challenges with China from a Russian perspective, but now could be an unintended victim of the fallout between Washington and Beijing.

On Tuesday, the White House slapped tariffs of 100% on Chinese EV’s coming into the US, put 50% on solar panels and tripled the steel tariffs! A very bullish move from the US and one that clearly supports domestic manufacture of these products at huge expense to the Chinese export market.

With domestic consumption in China much weaker than Beijing would like, there’s no way they’re going to be able to absorb much of the product surplus that is bound to be created, which means they need a new market… enter Europe!

Europe already runs a massive trade deficit with China and that will only widen as China targets European markets, which might lead Brussels to apply tariffs of its own. This then turns from a bilateral trade war to a multilateral mess.

Additionally, the EU will be concerned that with the US having dished out such punitive levies on China, there would be nothing to stop Trump doing similar to Europe if he were to return to office.

Yesterday, the latest inflation printed from the US indicated that CPI eased 10bps from March’s figure, coming in line with expectations.

The consumer price index slowed to 3.4% on an annualised basis as food price inflation eased alongside accommodation costs and new vehicle prices.

While easing inflation will serve as positive sign for policy makers in their battle to bring inflation back to the Fed’s 2% target, inflation still remains higher than that seen in February and March, indicative of how pressures remain.

That said, the fact that US retail sales came in flat suggests that consumer spending in the worlds largest economy may be losing momentum, which may therefore ease demand-side inflation.

Despite coming broadly in line with expectations, money markets raised their expectations at the rate at which the Fed would cut rates. For example, yesterday’s end, money markets were implying that that was around a 55% chance of a cut by September while fully pricing in a cut by November.

Yesterday’s attempted assassination of Slovakian prime minister, Robert Fico, is likely to have significant repercussions across Europe.

The shooting of the PM will raise concerns about the polarisation of European politics amid the run up for the European elections next month.

Mr Fico is a populist politician that is back in the role as PM relatively recently, winning on a campaign to stop aid to Ukraine, is critical of sanctions on Russia and isn’t a fan of LGBTQ+ rights either. While his stance on many such matters like Ukraine broadly aligns with that of Victor Orban, unlike Hungary’s leader Fico is a left-wing nationalist (as opposed to Fidesz’ right wing nationalism).

The assassination attempt thus raises concerns that growing polarisation in Europe could pose an ever greater threat that national or supranational powers won’t be able to control.