The Plumbing For Vast Defense Spending Needs To Be Set Up

By Michael Every of Rabobank

In response to Iranian strikes on ships using the Omani route in Hormuz, the US has struck Iranian air defense, missile, and drone sites in the Strait and suspended its oil sanctions waiver. These are clear breaches of the MoU, and we will now see if Iran escalates –it says it will take “decisive” action– with the risk of war if the US is also prepared to go that route. We suspect the US will try to step back for now. Even so, it should be clear why our base case is that more war is likely after the midterms. Obviously, oil prices are up today on this news; but crack spreads are already so wide that hardly matters.

Elsewhere in the Middle East, Secretary of War Hegseth is to visit Israel today as PM Netanyahu reiterates that he and Trump align on ”the big things” over Iran; bomb attacks rocked Damascus as France’s Macron visited; Lebanon’s president is to get his first White House visit; and the FT reports Saudi Arabia is blocking private sector payments to Dubai – a sign of rising tensions between those two GCC economies.

At the Ankara NATO summit, Trump struck a friendlier tone towards Turkey than many in Europe, removed sanctions over its purchase of the S-400 Russian antiaircraft system, and saying he’ll “certainly consider” selling them F-35s – setting off alarms in Jerusalem and Athens.

The summit has already seen Secretary General Rutte say, “here? Moreover, the BOE’s new crypto framework regulates GBP stablecoins but allows foreign ones, i.e., USD, to operate under US legislation, opening the door to their adoption.

Not in the same arena (yet), the RBNZ today hiked rates 25bps to 2.50%, as both we and the market had expected. The Bank said that more tightening is needed to bring inflation sustainably back to the 2% midpoint of its target, and RaboResearch maintains a forecast of two more 25bp rate hikes in 2026, with an additional 25bp hike in Q1 next year to bring the OCR to 3.25%.

Meanwhile, German business leaders warned Chancellor Merz that far more is needed to prevent the country experiencing a ‘lost decade’; Airbus is to make its first foray into engine manufacturing with a hydrogen project; and EU border chaos has prompted a delay to a planned pre-authorized travel system.

In the Americas, the White House is pressuring retailers over beef prices; and Canada told the UAE it’s not ready for a planned C$70bn of FDI as it doesn’t have any projects on hand(!)

In Asia, a Chinese policy advisor stated that China has the potential to become the world’s largest consumer market by 2041 – as data show its housing market has reversed 20-years of price gains (not always a bad thing in terms of consumer spending power), and a report has it that hundreds of millions of workers are now in the gig economy. That would imply China’s huge trade surplus will be very hard to eliminate, as a trade war with Europe looms alongside tariffs from the US and an emerging bloc-based NATO architecture.

Indeed, as the IMF appoints former BOE advisor Tenreyro as its next chief economist, the old establishment is on the back foot. See the op-ed today in the New York Times from Mohamed El-Erian arguing ‘Grand Macro Strategy in November 2024, which made the same arguments and showed how it would happen.

Contrast that with the argument made by Adam Tooze in the Financial Times that the USD is no longer a global reserve FX but just a “Tyler Durden Wed, 07/08/2026 – 10:05

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