The 'War Economy' Trade: Global Defense Spending Surges as Geopolitical Fractures Widen

New York/London — The first trading weeks of 2026 have delivered a sombre message to global asset managers: geopolitical instability is no longer a tail risk—it is the central macro theme. Amidst conflicts in Eastern Europe and fresh escalations in South America, the defense sector has decoupled from broader equity trends, driven by expectations of a prolonged global rearmament cycle.

Fiscal Expansion: The $500 Billion Question

The centerpiece of this shift is President Trump's latest call to increase the US defense budget by $500 billion. If passed, such an expansion would have profound implications for the US fiscal trajectory, potentially influencing Treasury yields and the long-term strength of the US Dollar.

“Defense has become the ultimate long-term macro play,” noted Michael Hartnett, a strategist at Bank of America, highlighting a rotation of capital that prioritizes security over growth. However, the proposed budget limits on share buybacks for US contractors have tempered enthusiasm domestically, pushing some capital allocations toward European counterparts.

Europe and Asia Pivot to Hard Power

The urgency is not confined to Washington. European defense indices have extended their 2025 rallies, driven by a consensus that the continent must accelerate its “strategic autonomy.”

Forex & Macro Sentiment

For currency traders, this militarization of fiscal policy complicates the central bank landscape. Increased government spending raises inflationary potential, likely forcing the Federal Reserve and ECB to maintain higher-for-longer interest rate baselines.

Analysts warn that while the defense sector rallies, the broader “risk-off” sentiment triggered by events in Venezuela, Ukraine, and rhetoric concerning Greenland continues to support the Swiss Franc (CHF) and Gold, serving as critical hedges against an increasingly fractured global security architecture.