by Patrick Fearon-Hernandez, CFA, and Thomas Wash

[Posted: 9:30 AM EST] | PDF

Our Comment today opens with some notes on a major Communist Party economic conference in China.  We next review a wide range of other international and U.S. developments with the potential to affect the financial markets today, including some new details on Argentina’s economic reforms under newly inaugurated libertarian President Milei and a preview of the Federal Reserve’s likely action as it wraps up its latest policy meeting today.

China: Wrapping up their annual economic work conference yesterday, Communist Party officials said they would launch additional growth-enhancing initiatives and work to ensure economic stability.  Echoing a statement from the Politburo on Friday, the officials vowed to focus on “establishing the new before abolishing the old,” which is widely interpreted as easing up on the recent rules limiting property developers’ debt.

• The summary statement is pretty opaque, but most observers seem to be reading it as a sign that Chinese economic policy will become only modestly more stimulative in 2024 as General Secretary Xi continues to resist the Party’s traditional policy of debt-fueled investment.
• The problem is that China’s various structural economic headwinds are probably too strong for modest stimulus to make much of a difference. If policy remains too weak to spur growth, global economic growth and financial markets could struggle in 2024.

European Union-China: Trade chief Valdis Dombrovskis yesterday announced that the European Commission in January will propose a set of rules designed to de-risk the EU’s trade and investment ties with potential adversaries, such as China.  The rules will include restrictions on outbound investment to ensure that key technologies and know-how aren’t available to an adversary’s defense and intelligence suppliers.  They will also call for screening inbound direct investment to prevent critical assets from being bought by hostile or monopolistic forces.

• While the EU remains behind the U.S. in limiting trade and investment ties with the China/Russia bloc, the rules coming in January will help get it on the same page with Washington.
• The EU’s coming rules are another example of how China’s rising power and aggressive geopolitical moves are fracturing the world into relatively separate blocs and imposing significant limits on cross-bloc trade, investment, technology, and travel flows.
• As we have argued many times before, the resulting de-globalized supply chains will be relatively less efficient, leading to higher average inflation and interest rates.

Japan: Prime Minister Kishida, who had already been dealing with abysmally low polling support, now appears likely to be implicated in a fundraising scandal engulfing the long-ruling Liberal Democratic Party.  The scandal involves unreported political fundraising by several government and party officials, including some in Kishida’s parliamentary faction.  A key risk is that increased political turmoil could undermine the Japanese stock market’s recent big uptrend.

Australia: To combat sky-high home prices, the government has unveiled new measures aimed at cutting immigration by 14% from what otherwise would be expected over the coming four years.  The move comes after the country of 26 million people absorbed about 510,000 net new immigrants in the latest fiscal year.  Despite global concerns about slowing birth rates, declining populations, and rising average ages, anti-immigration voters in countries ranging from Australia and the U.K. to the U.S. continue to drive policy toward less immigration rather than more.

Israel-Hamas Conflict: Illustrating another way the Israeli-Hamas fighting could broaden, Iranian-backed Houthi rebels in Yemen, who support Hamas and Palestinians in the Gaza strip, have continued to launch retaliatory missile and drone strikes at ships in the Red Sea.  At least one missile struck a Norwegian-flagged tanker carrying palm oil to Italy, setting it ablaze.  When a French frigate positioned herself between the Yemeni coastline and the stricken tanker to protect it, the frigate was forced to shoot down two incoming drones.

• Meanwhile, the Israel Defense Forces have reportedly begun pumping water from the Mediterranean Sea to flood Hamas’s extensive underground tunnel network under Gaza, hoping to flush out the group’s fighters and destroy any military equipment there.
• One key risk for Prime Minister Netanyahu is that the flooding could kill Israeli hostages if they are being held in the tunnels.

Argentina: Just days after radical libertarian Javier Milei was inaugurated as president, his economy minister, Luis Caputo, yesterday outlined key economic initiatives aimed at bringing down inflation, cutting the budget deficit, and averting a debt crisis.  According to Caputo, the government will devalue the peso by about half, slash government spending, and reduce energy and transportation subsidies.

• Now that the Milei government seems to be putting some of his policies into place, investors have been driving Argentine stocks higher.
• The Global X MSCI Argentina ETF (ARGT, 51.31) has appreciated approximately 23.5% since Milei was elected in mid-November. It is currently posting a total return of 52.0% year to date.

COP28 Climate Change Conference: As the annual United Nations climate change conference came to an end in Dubai today, the delegates issued a compromise statement that calls for “transitioning away from fossil fuels in energy systems, in a just, orderly, and equitable manner.”  That’s tougher than the draft statement we discussed in our Comment yesterday, which, under pressure from major oil producers, omitted any reference to phasing out fossil fuels such as oil, natural gas, and coal.  Nevertheless, the politicking on the issue at the conference and in national capitols recently still seems to reflect growing pushback to climate change rules.

U.S. Monetary Policy: The Fed today wraps up its latest policy meeting, with its decision due at 2:00 pm ET.  The policymakers are widely expected to keep their benchmark fed funds interest rate at the current range of 5.25% to 5.50%.  The question is what they’ll say about future policy moves.  Many investors are hoping for a signal of near-term rate cuts, but as we’ve stated before, we think officials remain focused on rebuilding their inflation-fighting credentials and are more likely to repeat their “higher for longer” mantra.

U.S. Financial Regulation: Yesterday, the House Committee on the Chinese Communist Party released a report suggesting the Fed should stress test U.S. banks’ ability to “withstand a potential sudden loss of market access to China.”  The report said the Fed should also assess how U.S. financial markets might be affected by potential sanctions against Chinese firms in the event of a conflict between the U.S. and China.  As we have written before, the growing U.S.-China geopolitical rivalry will likely lead to stronger state intervention in each country’s economy.

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