We Are Drifting To A 2-G World, One US-centric, Another Chinese

The Federal Reserve cut rates by 25 basis points and stopped quantitative tightening, but disappointed markets by questioning the extent of future rate reductions, despite an expected series of cuts through 2026. Simultaneously, European leaders, including the ECB President, are pushing for structural changes such as majority voting within the EU, signaling increasing political and economic pressure. Geopolitically, global tensions are escalating, evidenced by Russia's nuclear torpedo test, US counter-tests, alleged Iranian rearmament with Chinese assistance, and planned US "show of force" in the South China Sea. Geoeconomic shifts are also underway, with Nvidia reaching a $5 trillion market cap and Saudi Arabia refocusing its sovereign wealth fund toward critical minerals and AI, amidst US-China rivalry in technology and resource control. The US acknowledges it risks losing a war with China due to production capacity advantages, sparking efforts to revitalize domestic rare earth processing and secure alternative supply chains, though Europe faces similar resource limitations. The changing global political economy is reflected in the shift towards state capitalism, with US investment flows reversing from Europe back to the US due to perceived European political gridlock and greater AI gains in the US and China. The critical Trump-Xi meeting resulted in a short-term ceasefire, with China agreeing to soybean purchases and fentanyl control in exchange for a 10% tariff reduction, though many other tariffs remain and key issues like Taiwan were reportedly avoided. This temporary truce does not signal a long-term settlement, reinforcing the view of a drift toward a two-bloc, 2-G world—one US-centric and one Chinese—rather than a US-China G-2 CoDominium. Other significant, though overshadowed, news included Trump conceding he cannot run for a third term and political developments in the UK and Netherlands. Both the Fed’s action and the Trump-Xi meeting provide only tactical pauses, offering little change in the broader, escalating global picture. The pursuit of rare earth elements, particularly, highlights the global scramble for resources vital for both defense and advanced technology production. European concerns about rearming and securing chip supplies underscore their vulnerability in the intensifying global competition.