by Patrick Fearon-Hernandez, CFA, and Thomas Wash

[Posted: 9:30 AM ET] | PDF

Our Comment today opens with further evidence that factors such as high energy costs and heavy regulation are stifling European economic activity. We next review several other international and US developments with the potential to affect the financial markets today, including a warning by the UK government that it could force British pension funds to invest more domestically and new signs that President-elect Trump is committed to big tariff increases once he is inaugurated.

European Union: In a new sign of Europe’s declining competitiveness, industry association Plastics Europe said the Continent’s production of virgin plastics fell 8.3% in 2023, even as global output rose 3.4%. Mechanical plastics recycling in Europe also fell last year for the first time since 2018. The fall in output largely stems from broader challenges identified by former European Central Bank chief Draghi in his recent report on European competitiveness, i.e., high energy prices, restrictive regulations, and lower production costs abroad.

United Kingdom: In an interview with the Financial Times, Pension Minister Emma Reynolds warned that the government may force pension funds to invest more in British assets if the reform proposals it made last week don’t channel enough funding to UK infrastructure and companies. The proposals called for the country’s 86 local-government pension schemes to transfer their assets into one of eight pools.

• Expanding the eight pools into larger, more professionally managed pension funds is expected to channel more resources to local assets.
• Currently, Britons invest very little at home. For example, the existing local-government pension funds only invest about 10% of their portfolios in UK stocks or infrastructure.

Japan: Bank of Japan Governor Ueda today said the central bank remains open to further interest-rate hikes, despite uncertainties regarding the global, US, and Japanese economies. Because of the yen’s (JPY) sharp depreciation following the US election earlier this month, we think the BOJ could well hike interest rates again at its next policy meeting on December 18-19.

China: In a mass stabbing attack on Saturday, a disgruntled former student killed eight people and injured 17 others at a vocational school in Jiangsu province. That marked China’s second mass killing in less than a week, after a man killed 35 people by deliberately driving his car into a crowd outside a stadium. General Secretary Xi himself has decried the attacks and ordered local officials to identify such risks earlier and take steps to stop them.

• Given Xi’s longstanding effort to strengthen the Communist Party’s ideological work, including by emphasizing its responsibility to clamp down on dissidents and social disrupters, then the spate of mass killings over the last year is likely to prompt stronger surveillance, proactive arrests, and other social-control initiatives.
• Since some of the recent attackers seem to have been motivated by economic and social frustrations, there is also some chance that the attacks could convince Xi to adopt stronger economic stimulus measures than he has been willing to accept so far.

United States-Ukraine-Russia: According to administration officials, President Biden has finally authorized Ukraine to use its US-supplied long-range missiles for strikes within Russia. The decision was reportedly spurred by the Kremlin’s decision to supplement its forces with troops from North Korea.

• The missiles, known as the Army Tactical Missile System, or ATACMS, will initially be used by Ukrainian forces to defend their salient in the Russian region of Kursk. The missiles could be used against both Russian and North Korean troops, in part as a warning to Pyongyang not to insert more military resources into the fight.
• The decision runs the risk of spurring a stronger response against the US or its NATO allies in the weeks running up to President-elect Trump’s inauguration in January. For example, it could prompt the Kremlin to ramp up its on-going sabotage operations against NATO countries in Europe — a move that could potentially spark a destabilizing security crisis and drive down asset prices.

US Economic Policy: As President-elect Trump continues to mull his nominee for Treasury Secretary, reports indicate that hedge-fund manager Scott Bessent and Cantor Fitzgerald co-chair Howard Lutnick remain at the top of the list. Officials with the presidential transition say they have sought assurances from both Bessent and Lutnick that they would fully implement Trump’s proposed import tariffs of 60% against China and up to 20% against other nations.

• The demand suggests that full support for the tariffs has become a litmus test for Trump’s economic nominees. The demand was probably targeted mostly at Bessent, who has panned the 60% and 20% figures as merely “maximalist” goals.
• Trump observers and supporters often assume his more far-reaching policy proposals are merely negotiating ploys. However, just because a proposal is far-reaching and outside the norm of what other politicians might propose, that doesn’t necessarily mean it’s just a ploy. It could well be that Trump sees his proposed import rates as bottom-line figures, especially after insisting on them so often and consistently on the campaign trail.

US Transportation Policy: Reports this morning say advisors to President-elect Trump are preparing regulatory changes that would make it easier to introduce self-driving autos. The changes are expected to be a boon to electric-vehicle giant Tesla, which is controlled and run by Trump advisor Elon Musk. In response, Tesla shares have surged some 8% in pre-market trading so far today.

US Immigration Policy: As the presidential transition team continues to signal that President-elect Trump will launch mass deportations of illegal immigrants, businesses ranging from food producers and manufacturers to hotels are reportedly hiring lawyers to audit their staffs and train them on how to handle visits from immigration authorities. Industry associations are also warning that large-scale deportations and tighter restrictions on legal immigration will worsen labor shortages, force some businesses to close, and drive up prices.

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