European stocks rise after EU’s ‘mother of all deals’ with India; Dr Martens shares drop 12%

UK Prime Minister Keir Starmer has declared that his government will not be forced to pick a side between the United States and China, emphasizing a dual approach of maintaining close ties with Washington while actively engaging with Beijing. His comments signal a key foreign policy direction ahead of his planned visit to China.

Starmer confirmed that the UK will preserve its strong security, business, and defense relationship with the U.S. However, he argued that "sticking your head in the sand and ignoring China" is not a viable strategy.

A Push for Economic Ties with Beijing

The Prime Minister's planned state visit to China—the first by a UK leader in eight years—is framed as a move to unlock major economic benefits. Starmer stated the trip could create "significant opportunities" for British companies and is expected to include a delegation of UK business leaders for stops in Shanghai and Beijing.

Addressing potential security concerns, Starmer insisted that building a relationship with China "does not mean compromising on national security – quite the opposite."

This diplomatic outreach follows the UK government's recent and controversial approval for China to establish a new embassy in London. The decision proceeded despite opposition concerns that the facility could be used for espionage activities against the United Kingdom.

Navigating US Trade Friction

Starmer’s balanced approach comes amid a backdrop of global trade tensions, particularly involving the United States under President Trump. The Prime Minister's visit to China could risk friction with Washington, which has previously threatened allies over their economic ties with Beijing.

Trump's Tariff Threats on Allies

President Trump has shown a willingness to use tariffs to enforce his foreign and economic policy goals. In one instance, he threatened to impose tariffs on allied nations that opposed the U.S. acquisition of Greenland, stating, "we need Greenland for national security." While tensions later subsided after Trump clarified he would seek negotiations rather than use force, the episode highlighted his transactional approach.

More directly, Trump threatened Canada with a 100% tariff after the country reached a "strategic partnership" trade deal with the Chinese government. The threat emerged after Canadian Prime Minister Carney's speech in Davos was perceived as critical of the U.S. world order.

The Canada-China agreement included several key tariff reductions:

• China would lower levies on Canadian canola oil from 85% to 15%.

• Canada would cut taxes on Chinese electric vehicles from 100% to 6.1%.

Pressure on South Korea

The U.S. has also applied economic pressure on other key partners. Trump threatened to raise tariffs on South Korean goods from 15% to 25%, targeting products like automobiles, lumber, and pharmaceuticals. He accused South Korea of failing to honor a trade deal struck the previous year.

The announcement caused a sharp reaction in South Korea's stock market, particularly affecting carmakers. In response, Seoul urged Trump to reaffirm his commitment to their trade agreement, under which President Lee Jae Myung had agreed last July for South Korea to invest $350 billion in the United States.

China total crude available vs refinery throughput

Source: reuters

OPENING CALL

Stocks to Watch

Economic Insight

MARKET WRAPS

Source: morningstar

The European Union’s competition chief has issued a sharp warning against becoming overly dependent on liquefied natural gas (LNG) from the United States as the bloc works to secure its energy future.

"We know that we cannot rely on Russian gas, and that we should pay attention not to rely too much on American gas," Teresa Ribera said in a radio interview on Tuesday.

This cautionary stance comes as Europe rapidly pivots away from its former primary supplier, Russia, following the invasion of Ukraine.

The Scale of the Shift to US Energy

To replace lost volumes of Russian gas, European nations have increasingly turned to US LNG. This shift is solidified by a major trade agreement with Washington, which includes a commitment to purchase $750 billion in American energy by 2028.

The momentum is significant. A recent report from the Institute for Energy Economics and Financial Analysis (IEEFA) projected that if current supply deals are fulfilled and gas demand reduction efforts lag, the US could account for as much as 80% of Europe's gas imports by 2030. This would be a substantial increase from a projected 57% in 2025.

Even as the EU diversifies, Russia remains a key player, currently providing about 15% of the bloc's LNG supplies and standing as its second-largest provider after the United States.

Concerns Over a New Dependency

Top officials are openly cautioning that trading one dependency for another is not a sustainable long-term strategy.

"One of the reasons why we need to produce much more of our own energy is that it is not good to be reliant on any country in the world fundamentally for our energy supply," EU energy chief Dan Jorgensen told reporters. He added, "we need to be very careful that now we're moving out of Russian energy, that we're not replacing that dependency with other dependencies."

These concerns are amplified by geopolitical uncertainties. Past actions by former US President Donald Trump, including his interest in Greenland's mining rights and threats of tariffs against European nations, serve as a reminder of the political risks associated with over-reliance on a single partner.

Europe's Broader Energy Strategy

The EU's overarching goal remains a complete phaseout of Russian gas. To achieve true energy security, the bloc is focused on a two-pronged approach: seeking a diverse range of alternative suppliers while simultaneously accelerating its own transition to renewable energy.

This strategy is designed not only to secure its energy supply chain but also to meet the continent's ambitious climate target of achieving zero emissions by 2050.

The National Bank of Hungary has held its benchmark interest rate at 6.5%, opting for a wait-and-see approach as it looks for more conclusive evidence that slowing inflation is sustainable.

This marks the 16th consecutive month the rate has remained unchanged, tying with Romania for the highest in the European Union. The decision, announced on Tuesday, was in line with the forecasts of 22 out of 23 economists surveyed by Bloomberg.

A Cautious Shift in Monetary Policy

Hungary's central bank recently adjusted its policy guidance. After previously ruling out rate cuts, policymakers now state that decisions will be made on a meeting-by-meeting basis, driven entirely by incoming economic data. The bank's projections indicate that inflation is expected to return to its 3% target, plus or minus a one percentage point tolerance band, over the monetary policy horizon.

However, despite headline inflation slowing in December and moving closer to the target, officials remain cautious. Deputy Governor Zoltan Kurali highlighted a key concern on January 14, pointing to "stubborn" price increases in the services sector, a critical indicator of underlying inflation expectations.

At an annual rate of 6.8%, services inflation was more than double the headline figure last month. Kurali noted that policymakers would need "a lot of conviction" before they could begin cutting rates.

All Eyes on February Inflation Data

With the central bank holding firm for now, market focus is shifting to the next policy meeting in February. A crucial factor in that decision will be the January inflation report, scheduled for release by the statistics office on February 12.

This data will provide the first clear picture of how businesses, particularly in the services industry, have repriced their offerings at the start of the new year.

Market Expectations and Currency Headwinds

Money market traders are already positioning for a change in policy. According to forward rate agreements, investors are anticipating one or two quarter-point rate cuts within the next three months, with the first potentially coming as soon as February.

Adding another layer to the bank's decision-making is the strength of the Hungarian forint. The currency is trading near a two-year high against the euro, buoyed by a broader emerging-market rally and a weaker U.S. dollar. A stronger forint helps to lower the cost of imported goods, including energy, which eases inflationary pressures and gives the central bank more room to consider rate cuts.

This economic maneuvering occurs ahead of parliamentary elections scheduled for April 12, where Prime Minister Viktor Orban's party is reportedly trailing in most polls after 16 years in power.

Recent headlines about Iran’s internal turmoil and potential military confrontations obscure a more fundamental shift in the Middle East. Tehran is no longer the primary force shaping the region’s strategic direction. Instead, a new era is dawning, defined by competition between two emerging coalitions: an Abrahamic bloc and an Islamic bloc. The evolution of this rivalry—not Iran's next move—will determine the future of the region and America's role within it.

The Rise of the Abrahamic Coalition

Though not yet a formal alliance, the first bloc is becoming increasingly coherent. Centered on Israel and the United Arab Emirates, this group extends to include Morocco, Greece, and even India. This coalition aims to reconfigure the region through a combination of military power, technological partnership, and economic integration.

Core members believe the existing Middle Eastern order has failed to stop militant Islam, whether the Shiite version backed by Iran or the Sunni variant supported by Turkey and Qatar. They argue that true stability can only be achieved by intervening in regional conflicts to support more secular forces. Capitalizing on President Donald Trump's push to broaden the Abraham Accords, these nations are prioritizing the expansion of Arab-Israeli normalization, regardless of progress on Palestinian self-determination or a two-state solution.

This Abrahamic coalition is gaining momentum. Israel's military operations following the Oct. 7, 2023, Hamas attack have bolstered its deterrence and power projection capabilities. The UAE, known as "Little Sparta," continues to use its economic might and diplomatic agility to expand its influence far beyond the Gulf. United Nations experts and international NGOs suspect the UAE of supplying weapons to the Rapid Support Forces in Sudan, the Southern Transitional Council in Yemen, and Libyan strongman Khalifa Haftar.

Greece has become a vital partner in the Eastern Mediterranean, collaborating with Israel on military drills and energy projects to counter their shared competitor, Turkey. Further east, India’s growing ties with both Israel and the UAE—through bilateral agreements and multilateral platforms like I2U2 and the India-Middle East-Europe Economic Corridor—give the bloc strategic depth far beyond the region itself.

The Islamic Bloc Forms a Counterweight

Opposing the Abrahamic axis is the Islamic coalition, a counterbalancing effort led by Saudi Arabia and including Turkey, Pakistan, Qatar, and a more cautious Egypt. These nations view the Israel-UAE axis as a source of instability, arguing that its support for separatist groups worsens fragmentation in conflict zones. They see the narrative of pushing back against Islamists as a self-serving excuse to project power.

This group prefers to preserve and operate within existing structures, however flawed. In Yemen, Sudan, and elsewhere, they are backing weak states struggling to maintain sovereignty and territorial integrity.

Over the past year, Saudi Arabia has bolstered its defense relationship with Pakistan, creating a mutual security pact after an Israeli airstrike on Qatar. Its military cooperation with Turkey has also grown, with a more formal defense agreement seemingly on the horizon. Egypt, concerned by Israeli and Emirati activities in the Horn of Africa, is also discussing closer coordination with Riyadh on Sudan and Somalia. Together, these states are forming a loose but expanding counterweight across the region.

The Saudi-UAE Rivalry at the Center

At the heart of this realignment is the most critical bilateral rift in the Middle East today: the escalating rivalry between Saudi Arabia and the UAE. Once close partners, the two Gulf powers are now strategic competitors. This divergence was highlighted in Yemen, where Saudi Arabia struck the Port of Mukalla to stop Emirati arms shipments, ultimately forcing a UAE withdrawal.

If left unchecked, this competition could escalate from proxy conflicts to direct confrontation. Threats of airspace restrictions, border closures, and even a UAE withdrawal from Saudi-led institutions like OPEC+ have already been voiced by senior officials. Such moves, once unthinkable, would disrupt energy markets, regional travel, and cross-border business. While Gulf diplomacy has contained the friction so far, the underlying divide is structural, not merely personal.

U.S. Strategy in a New Regional Order

This new competition complicates a key U.S. foreign policy goal: Saudi-Israeli normalization. Riyadh still sees the value in a deal that would grant it a U.S. security treaty in exchange for integrating Israel into the region. However, without significant changes in Israeli policy, especially regarding Gaza and the West Bank, the kingdom is more likely to align with Turkey and Pakistan than with Israel.

For the United States, the primary challenge is no longer countering an Iranian regime that appears critically weakened. The new task is managing the damaging rivalries among its own partners to prevent further fragmentation. This is made more difficult by divisions within Washington, where officials reportedly have diverging views and independent business interests in the region, leading to a hands-off approach.

To achieve a breakthrough, the Trump administration must take two steps. First, it needs to actively manage the rivalries among its partners and its own aides, perhaps by appointing a special envoy to coordinate a unified regional strategy. Second, it must preserve a viable path to Saudi-Israeli normalization by influencing political outcomes in Jerusalem after upcoming elections. The next Israeli government cannot be beholden to radical elements opposed to Palestinian self-determination.

Saudi Arabia is the Middle East's crucial swing state. A senior Saudi official described the kingdom's policy as pragmatic, guided by "maximum flexibility at a time of maximum uncertainty." If President Trump can secure Saudi-Israeli normalization, he could steer Riyadh and the wider region away from its current path of rivalry. This would fold both coalitions into a broader American-led framework, stabilizing the post-Iran Middle East for decades to come.