An opportunity-rich global macro environment

Lately, I’ve focused heavily on Trump’s policies and how they could send risk assets tumbling. But it's time to step back and take a broader look at the global macro landscape. While US markets and Trump’s agenda remain key themes, they are just one piece of a dynamic, opportunity-rich environment. The post-COVID era saw most economies moving in sync with the US, but we are now witnessing unprecedented policy divergences. Let’s take a closer look.

Source: European Defence Agency

The start of European fiscal dominance

It all started when Trump decided to abandon Ukraine, leaving Europe to fund the Russia-Ukraine war on its own doorstep. As much as this was a brutal betrayal, it achieved its intended effect: forcing Europe to invest in its own defense. Soon after, the European Commission proposed the “ReArm Europe” plan, enabling member states to spend €650 billion over four years, supplemented by €150 billion in defense-related loans. The proposal allows member states to exceed the fiscal limits imposed by the Stability and Growth Pact (which caps budget deficits at 3% of GDP and national debt at 60% of GDP).

Germany, long known for its fiscal conservatism, is making even bolder moves. Coalition leaders have proposed a €500 billion infrastructure fund and are reforming the country’s strict Schuldenbremse (debt brake) to exempt defense spending above 1% of GDP—effectively removing spending limits for defense.

For Germany, lifting the debt brake is no small feat. The country's aversion to excessive spending stems from its hyperinflation trauma after World War I. As for the EU, the Stability and Growth Pact was originally enshrined in law to prevent excessive borrowing by any one member state from destabilizing the entire union. The fact that these rules are now being loosened suggests that Europe sees the Russian threat as a greater risk than internal fiscal discipline.

Altogether, this fiscal stimulus amounts to 4.1% of the EU’s GDP over four years and at least 11% of Germany’s GDP over the next decade. This will widen budget deficits and increase the supply of government debt. Unsurprisingly, German 10-year bond yields have surged from 2.4% to 2.9% in response. Despite the rapid move, yields have yet to break their 2023 highs, indicating further upside potential. The last time Germany exercised this level of fiscal dominance—before 2009—yields exceeded 4%.

German yields (white) are going in the opposite direction of US yields (blue)

What makes this even more interesting is the stark policy divergence between Europe and the US. Europe is stimulating its economy while the US is tightening fiscal policy and implementing anti-growth trade measures. German yields are soaring, while the Trump administration is intent on pushing US yields lower—and so far, it’s succeeding. European equities are undervalued, while US equities remain expensive. Historically, Europe has struggled with low inflation, whereas the US has had a higher neutral rate for as long as I can remember. Now, those roles are reversing. This shift presents a compelling trade: long European equities and the euro, short US equities and the dollar.

China’s fiscal support

To support its struggling economy, China has raised its fiscal deficit target to 4% of GDP—its highest level in decades. This includes an increase in ultra-long-term special treasury bond issuance to ¥1.3 trillion, up ¥300 billion, and a rise in local government special bonds from ¥3.9 trillion to ¥4.4 trillion this year. The central bank has also aggressively cut rates, injected liquidity, encouraged credit expansion.

Beyond fiscal stimulus, Beijing is also shifting its stance toward the private sector. In February, President Xi met with China’s top tech leaders, emphasizing government support for private enterprise and stressing the need for self-reliance in critical sectors like semiconductors and AI. This marked a sharp reversal from his previous efforts to rein in tech billionaires in the name of social equality.

Here we have yet another economy stimulating while the US enforces fiscal austerity. Sentiment toward Xi—and by extension, the Chinese stock market—is improving, while confidence in Trump’s economic policies continues to deteriorate. The CSI 300 trades at a modest 13x P/E, compared to the Nasdaq’s lofty 32x P/E.

China holds a significant portion of its sovereign wealth in US equities, but as the US economy cools and tariffs take effect, China's trade surplus with the US will shrink. This will reduce its need to park dollars in US assets, potentially leading to capital outflows.

Xi meeting with business leaders (Source: AP News)

On the tech front, DeepSeek’s breakthrough demonstrated that China can compete head-to-head with the US in AI. Some might even argue that China is on par—or slightly ahead—when it comes to AI, robotics, and drones. CSI 300 earnings are beginning to recover, while Nasdaq earnings are likely to disappoint as Trump’s policies take full effect.

Given these dynamics, I see China tech as a compelling long for a multi-year recovery—both in absolute terms and relative to the US.

Throughout 2023 and 2024, the US boasted both one of the world's best-performing equity markets and the highest-yielding government bonds. This combination attracted massive capital inflows, despite the fact that the rally was fueled by excessive borrowing and spending. Now, the US is facing the consequences, tightening policy to counteract the effects of that stimulus, while Europe and China are leveraging their lower yields and fiscal flexibility to support growth. Capital outflows from the US are only in their early stages, with much more likely to come. This will result in a weaker US dollar, as well as a rerating in P/E multiples of China and Europe relative to US indices.

For how I’m trading these shifts in my global macro trading book, read on past the paywall.