By Michael Every of Rabobank

We got black smoke from the Vatican and the Fed yesterday showing no new Pope and no rate cut. Yet in both cases, smoke doesn’t come without fire. 

*CARDINALS FAIL TO ELECT POPE, BLACK SMOKE RISES OVER VATICAN

Black smoke also rising above the Marriner Eccles building

— zerohedge (@zerohedge) May 7, 2025

As our US Strategist Philip Marey put in in his FOMC review ‘Clueless’, “essentially Powell spent the press conference telling us nothing new and dodging questions about Trump.” Even so, he made clear economic risks are rising: if US tariffs remain as now, unemployment and inflation will both go up. A year ago, Powell was saying he didn’t see any stagflation. True, he didn’t know who the winner of the 2024 presidential election would be, or their policy platform: but didn’t stop Philip getting both right back then. Today, he’s calling for a solitary rate cut in June, then the Fed on hold as the trade war impact is felt.

Surprisingly, Powell suggested he isn’t tracking live ports data to see the pipeline impact of ongoing shifts in global trade flows. Even if this isn’t one of the backwards-looking ‘big numbers’ supposed to capture the complexities of modern economies (and failing to), one would still have expected him to be poring over logistics reports rather than macro models that can’t possibly capture what’s going to happen as well or as rapidly.

Relatedly — and underlining that even the Fed is now cargo– Trump said he’s unwilling to pre-emptively cut tariffs on China to jump-start more substantive talks in Switzerland this week. Opinions are deeply divided on what those talks will produce: optimists expect a climb-down from one side or the other, so “rate cuts!” Realists aren’t. 

Indeed, while the US will overhaul its looming Biden-era May 15 curbs on AI chip exports, which markets take as bullish, this shouldn’t necessarily be read as looser policy stance. Indeed, Treasury Secretary Bessent is working with Congress on new outbound investment rules for China via a “red light or green light, and not having a yellow zone.” Clarity is good: but expect a lot of red and not so much green – and in more senses than one. 

After all, in the background, Uncovering Chinese Academic Espionage at Stanford, states: “After interviewing multiple anonymous Stanford faculty, students, and China experts, the Stanford Review can confirm that the CCP is orchestrating a widespread intelligence-gathering campaign there.” Similar allegations have swirled for years, and not only at Stanford, but were waved away like unwanted cigarette smoke because too much ‘Red!’ gets in the way of some people’s green.

Meanwhile, the US is reportedly to announce its first trade deal with the UK today – or at least a “MAJOR TRADE DEAL” with a “big and highly respected country,” which doesn’t scream the UK to some Britons.

That’s as The Times reports the Treasury’s own analysis of the UK-India FTA shows it losing £200m a year in taxes and making it cheaper for Indian firms to bring workers to the UK. So, the deal costs £3bn to boost GDP by £4.8bn over 15 years, meaning a net gain for the average Brit of three pence a week – or less, if Indian services firms open UK subsidiaries to rotate staff who don’t have to pay National Insurance rates on three-year secondment contracts, “because markets.” Ironically, that’s as The Guardian says, ‘Keeping Farage from No 10 is ‘a battle for UK’s future, heart and soul’, Labour MPs told’, adding – “In face of ‘economic doom loop’, Labour factions call for reset and demand party tackle populist nationalism head on.” 

As I saying yesterday on a podcast, one could only posit that either Labour thought an Indian FTA was a riposte to economic nationalism rather than a boost to the political opposition championing it; or there was a larger imminent plan to get the UK, India and the US closer. It seems perhaps to be the latter. Indeed, all it would now need is a US-India trade deal to complete that triangle, and the odds of that happening must surely just have shortened further.

Elsewhere on trade, the European Parliament maintained its block on restarting Turkey accession talks, which clarifies its response to Ankara’s offer of military protection for EU entry. That was as Europe’s last manufacturer of ingredients for some vital antibiotics is closing its biggest factory and shifting some production to China. Is this the derisking and strategic autonomy that Europe keeps talking about? Or perhaps that’s the EU planning to tariff Boeing if it doesn’t get the US trade deal it wants? 

However, as new trade geographies emerge, old realpolitik does too – and not by coincidence.

India – Pakistan military clashes are continuing, with Pakistan’s PM calling for “avenge each drop of blood”, not de-escalation. Those who just announced they were shifting supply chains to India now have to scan the headlines for geopolitics. 

At the same time, with some (questionable) reports that up to 125 fighter jets –a huge number– may have been involved in a ‘dog fight’ for hours while staying within their own national airspace, which is hardly a dog fight, and claims of up to five of India’s being shot down, military tech analysts are scrutinising who is using which weapons to what effect. Where that was once Russian vs US tech it’s now French vs Chinese, and what is revealed can also potentially impact on trade flows and geopolitics, especially if far cheaper (Chinese) systems are seen triumphing over more expensive (Western) ones.

In the Middle East, Trump said the options on Iran’s centrifuges are “Blow them up nicely or blow them up viciously.” That obviously blows for Iran if it wants to keep them. 

Something certainly seems to be brewing in that region ahead of the Trump visit next week: hopefully not an echo or repeat of the October 7, 2023, Hamas attack on Israel which many link to then looming Israel-Saudi normalisation that would have opened up a new trade corridor from Europe to India.

Indeed, with the sudden US – Houthi ‘ceasefire’, rumoured secret Israel-Syria talks, as its former jihadi president is officially received in France, and suggestions the US may take over administration of Gaza, is Trump’s upcoming “earth-shattering” positive announcement to be Saudi-Israel peace? Or Syria-Israel? Or an Iran nuclear deal? Or Gaza-Lago? Or Trump Tower Tehran? 

We have to wait to see – but this could be pivotal to energy markets, so to everyone, including central banks: it’s already one of the key factors pushing oil prices down via Saudi actions, which are geopolitical, not “because markets.” 

Moreover, this is pivotal to the broader US approach towards the Russia-China-Iran-North Korea axis that cuts across geographies and disciplines, including both geopolitics and trade, and markets. Just don’t let the smoke get in your eyes.

Chinese leader Xi Jinping and Russian President Vladimir Putin put on a big show Thursday as the Chinese president was welcomed in Moscow, where he’s attending Russia’s 80th anniversary Victory Day parade and events in Red Square. 

The two signed a show of solidarity statement “further deepening” their partnership following talks which lasted about four hours. Chinese state media called it a “joint statement on further deepening China-Russia comprehensive strategic partnership of coordination for a new era.” They are beefing up the already ‘no limits’ friendship and strategic partnership.

The two leaders once again hailed the powerful cooperation as underpinning a multipolar world order in the face of Western hegemony. 

“In today’s challenging geopolitical situation and global uncertainty, the Russia-China foreign policy partnership is a key stabilizing factor on the international stage,” Putin said, per the Kremlin readout. “Together, we defend the formation of a more just and democratic multipolar world order.”

The Russian president came close to referencing the Ukraine conflict, albeit indirectly, in the following:

“Together with our Chinese friends we firmly stand guard over the historical truth, protect the memory of the war years and counter modern manifestations of neo-Nazism and militarism,” Putin said.

Xi, for his part offered after Putin’s opening words that the two countries remain “stable, positive, and progressive forces in the international community” – something Western capitals would certainly take issue with.

The two presidents greet each other once again in the halls of the Kremlin on the eve of Victory Day events:

Putin at the meeting with Xi Jinping:

“It gives me great pleasure to welcome all of you to Moscow. I’m very glad we have the chance to meet again and I sincerely value the opportunity to speak with you personally and directly. I’m grateful that, just as you did ten years ago… pic.twitter.com/JKP3F81MVs

— Russian Market (@runews) May 8, 2025

The Chinese leader called for the two countries to “lead global governance in the right direction, and promote inclusive economic globalization that benefits all” – a subtle shot at the fact that the US has under the Trump administrated exited several United Nations bodies, and injected deep uncertainty in global markets with tariffs and a brewing trade war.

The closest Xi came to criticizing Washington directly was when he asserted that Russia and China have “special responsibilities” in the face of “an international countercurrent of unilateralism and the hegemonic practices of the powerful.”

Amid a number of mutual issues, the two at one point discussed Russia’s Power of Siberia 2 gas pipeline project; however Russia’s Deputy Prime Minister Alexander Novak specified the two leaders avoided the somewhat contentious question of avoiding the pipeline’s transit through Mongolia. Russia plans to boost supplies of oil, gas, and LNG to China, Bloomberg has noted Thursday.

Putin & Xi wrap up almost four hour long direct talks in Moscow. Here is what the Russian president said afterwards:

— Exchanges were “productive”; bilateral ties strong enough to weather global turbulence.
— Joint pledge to defend WWII victory memory.
— Trade booming: ruble &… pic.twitter.com/eyh2XYANQJ

— Brian McDonald (@27khv) May 8, 2025

Trump officials have meanwhile made no secret of desiring to undermine Putin-Xi ties. Ongoing Western sanctions have alongside the recent four-year low in oil prices become devastating for Russia’s budget revenue, which in turn has only deepened Moscow’s reliance on its trade with China.

Moscow is bracing to potentially face drone threats from Ukraine on Friday, and into the weekend marking WW2 commemorations. Moscow has accused Ukraine’s Zelensky of threatening world leaders who will be in attendance for the Red Square parade, given the unprecedented cross-border drone activity this week.