European leaders have rushed to Washington ostensibly to throw a protective arm around President Zelensky and head off any repeat of February's Oval Office bust-up. But their real aim is to stop US President Donald Trump from threatening long-term European security after his abrupt change of course over how best to end the war in Ukraine. Not only did Trump drop calls for a ceasefire as a prerequisite for talks about long-term peace, he also – diplomats say – made clear he had no intention of imposing further economic sanctions on Russia. In short, the travelling European heads of government – plus EU and Nato leaders – want to avoid not just confrontation, but also capitulation.

It takes a great deal for heads of government to upend their schedules at short notice – especially in August – when some are on holiday. The French leader was enjoying water sports on the Riviera. The Italian leader, Georgia Meloni, had been in Greece. But such was the scale of President Trump's change of strategy after meeting President Putin – and the consequent potential threat to Europe – that the European leaders changed their plans fast. Officials say Meloni was first to invite herself along, followed closely by Macron, after which it became inevitable others would have to go too. The leaders spent the weekend working the phones, holding no fewer than five separate group chats. Their concern was Trump's decision to change the diplomatic goalposts after meeting the Russian leader in Alaska. Some officials think the huge impact of these two decisions – which overturned months of western strategy – has been under-priced. Both moves shifted the US position more closely in Russia's favour.

Market Signals

Defense Sector Boom: European defense stocks have seen significant gains, with companies like Germany's Rheinmetall and Italy's Leonardo experiencing triple-digit percentage increases year-to-date, driven by increased urgency for defense spending across NATO member states.
Sector-Wide Implications: The increased focus on European defense spending suggests a shift in investment towards companies involved in armaments, military equipment, and related technologies.
Competitor Positioning: While European defense firms are benefiting, U.S. defense companies might see a shift in demand if U.S. involvement in European security diminishes.
Currency Impact: The Euro and Pound have shown volatility, with the Euro sliding against the dollar due to expectations of increased U.S. tariffs on European goods.
Commodity Prices: Potential shifts in U.S. policy towards Russia could impact energy markets, potentially leading to a "deep energy bear market."

Winners & Losers

Winners: European defense companies such as Rheinmetall, Leonardo, Thales, BAE Systems, and Saab. U.S. energy sector firms like ExxonMobil and Chevron. U.S. technology firms with government ties, such as Intel and ASML. Losers: European automakers like BMW and Porsche, with significant sales exposure to the U.S., are vulnerable to potential U.S. tariffs. The renewable energy sector could face reduced investment. Supply Chain Impacts: Disruptions due to international sanctions and conflicts are forcing businesses to secure alternative sources and routes.

Action Timeline

Immediate: Invest in European defense companies; diversify cloud providers to mitigate reliance on U.S. companies.
Short-term: Monitor geopolitical risk indices and valuations of defense stocks; secure alternative supply chain sources.
Long-term: Capitalize on reconstruction opportunities in Ukraine; strengthen the EU's defense industrial base.

Risk Assessment

Geopolitical Tensions: The ongoing conflict in Ukraine and broader geopolitical rivalries create significant market volatility and uncertainty.
Regulatory Risks: European organizations face challenges navigating overlapping and potentially conflicting U.S. and EU compliance frameworks, particularly in cloud services.
Trade Policy Uncertainty: Aggressive U.S. tariff proposals and potential trade wars can disrupt global trade flows and increase production costs.
Market Volatility: High valuations in the defense sector, coupled with geopolitical uncertainties, could lead to market corrections.
Supply Chain Disruptions: Geopolitical events and sanctions can disrupt global supply chains.

Key Indicators

NATO Spending Commitments: Continued adherence to and potential increases in NATO's defense spending targets will be a key indicator.
U.S. Trade Policy Developments: Monitoring potential tariff increases and the U.S. approach to trade with China and Russia.
Progress in Ukraine Peace Talks: The outcome of negotiations and the specific terms of any peace deal will significantly influence defense spending and reconstruction efforts.
EU Defense Industrial Base: Developments in the EU's efforts to strengthen its domestic defense industry will be crucial.

Regional Perspective

European leaders are urgently seeking to influence U.S. policy on Ukraine, prioritizing long-term European security and the strengthening of the continent's defense industrial base. They aim to prevent any peace deal perceived as a capitulation by Ukraine and emphasize that security guarantees must be robust and extend beyond mere verbal assurances.

Immediate Implications

Investment Opportunities: Increased defense spending in Europe presents opportunities in defense companies.
Trade Risks: European companies, particularly in the automotive sector, face risks from potential U.S. tariffs.
Supply Chain Challenges: The need to secure alternative sources due to geopolitical disruptions.

What to Watch

NATO Commitments: Any shifts in defense spending targets.
U.S. Trade Policy: Developments regarding tariffs and trade agreements.
Peace Talks: Progress or setbacks in Russia-Ukraine peace negotiations.
European Defense Production: EU efforts to boost domestic manufacturing of military equipment.

Analysis

This urgent trip by European leaders to Washington represents a strategic response to escalating geopolitical risks and potential shifts in U.S. policy. European leaders aim to safeguard their long-term security and economic interests by bolstering the continent's defense capabilities and diversifying partnerships to reduce reliance on external actors. Europe's ability to influence U.S. policy will be critical in shaping the future security and economic landscape.