Global Markets React as U.S. Policies Drive 'Middle Powers' to Collaborate

Impact of U.S. Policies on Global Markets

LONDON, Feb 12 (Reuters) - The global order once championed by Washington across economics, trade and security is being upended by U.S. President Donald Trump, galvanising allies to action. Financial markets are taking note. 

Investor Sentiment and Opportunities

For investors, signs of more pro-active policies and trade deals that extend beyond those made with the United States are an incentive to increase exposure to non-U.S. equity markets, energy stocks, and take a bullish view on the likes of the euro and Canadian dollar, they said.

Emerging Markets and Earnings Growth

Canadian Prime Minister Mark Carney struck a chord with his January Davos speech, noting how "middle powers" might act together to avoid being victimised by American hegemony, while a European Central Bank plan to bolster the euro's international role is anticipated at this week's Munich Security Conference. 

Strategic Autonomy and Trade Agreements

"Trump has separated the U.S. from the rest of the world, but in doing so he has encouraged a strengthening of the rest of the global macro picture and investors are responding to that," said Seema Shah, chief global strategist at Principal Global Investors, which manages roughly $594 billion of assets. 

Sector-Specific Growth: Defense and Energy

"This is not about sell the U.S., but about remembering that there are other opportunities outside the U.S.."

Principal Global Investors' focus on international equities had become more concentrated, she said, adding that earnings momentum in Europe and Asia is good.

Major equity markets and emerging markets are set for double-digit earnings growth in 2026 as a shift away from U.S. exceptionalism takes hold, said Madison Faller, global investment strategist at JPMorgan Private Bank.

Of the 52 companies in Europe's STOXX 600 index that have so far reported fourth-quarter earnings, over 73% have beaten expectations, according to LSEG I/B/E/S, compared with 54% in a typical quarter.

London's internationally-focused FTSE 100 stock index has crossed the 10,000 milestone for the first time and is up 5% this year, easily outperforming a 1.4% rise in the S&P 500.

BNP Paribas said its European Strategic Autonomy fund launched last May and worth 600 million euros ($713.3 million) invests in themes that include defence, industrial resilience, resource independence and technology, fuelled by Europe's massive investment plans.

Still, U.S. trade will be hard to replace, and beyond the meaningful signalling effect, non-U.S. trade agreements, such as the EU's with India and the Mercosur bloc, and Canada and China's initial deal, will need time to have an impact.     

COME TOGETHER, RIGHT NOW

The COVID crisis, Russia's war in Ukraine and the U.S. approach to ending it, and Trump's tariffs have driven cohesion by highlighting a vulnerability to global supply chains and economic dependency.

Recent developments, notably the U.S. President's threats over Greenland, could hasten this shift, strengthening the case for more fiscal stimulus around the world and possibly more joint EU bond issuance.

Defence stocks have been one winner, up 200% since February 2022. Britain is now considering joining a second possible multi-billion-euro EU fund for defence projects. 

Ross Hutchison, head of euro zone market strategy at Zurich Insurance Group, said that although long-term geopolitical structural changes were hard to trade, one area he saw gaining more traction in markets was energy production, given the focus on critical resources and the AI build out.

"There is a big sense that there's a lot of this build out that's going to take place in lots of individual nations, from a resilience perspective," he said, noting rises in European energy stocks, which are near their highest levels since 2008.

Europe might also make a broader push for greater sovereignty in other sectors such as digital services and security and health, Allianz Global Investors chief economist Christian Schulz said.     

MADE IN EUROPE

Europe needs to protect its own industries with a "Made in Europe" strategy, EU industry chief Stephane Sejourne said in a recent newspaper article co-signed by the CEOs of steelmaker ArcelorMittal, drugmaker Novo Nordisk and tyre maker Continental, among others.

The strategy would set minimum requirements for European content in locally manufactured goods, but has split EU countries.

However, the long-term effort to bolster growth - whether via trade or increased spending - is a theme that is here to stay, analysts said. 

Canada's dollar, Japan's yen and the euro could benefit if deregulation, de-bureaucratisation, and pro-growth fiscal policies materialise, said Thierry Wizman, Global FX & Rates Strategist at Macquarie Group. 

"Middle powers are seizing strategic autonomy, forging partnerships that align with their interests and the demands of the moment," said JPMorgan Private Bank's Faller.

($1 = 0.8411 euros)

(Reporting by Dhara Ranasinghe and Sophie Kiderlin; Additional reporting by Yoruk Bahceli, Samuel Indyk, Danilo Masoni; Editing by Nell Mackenzie and Kirsten Donovan)