by Patrick Fearon-Hernandez, CFA, and Thomas Wash

[Posted: 9:30 AM ET] | PDF

Note to readers: the Daily Comment will go on hiatus after today and will return on January 5, 2026. From all of us at Confluence Investment Management, we hope you enjoy your holiday and have a Happy New Year!

Our Comment today opens with an important summary of the US’s new foreign policy delivered late Friday by Secretary of State Rubio. We next review several other international and US developments that could affect the financial markets today, including signs that the US is ratcheting up its military pressure on Venezuela and a hawkish statement from Cleveland FRB President Hammack, who will be a voting member of the Federal Reserve’s policymaking committee in 2026.

US Foreign Policy: Secretary of State Rubio on Friday provided a detailed briefing on the administration’s foreign policy, confirming several dramatic changes that we think will have big implications for investors. Rubio’s review fleshed out many ideas in the White House’s recent National Security Strategy, which will be the focus of our first Bi-Weekly Geopolitical Report after the New Year.

• Among Rubio’s most important messages was a call for the US to de-escalate tensions with China in favor of “mature” management of the bilateral relationship. According to Rubio, “China is going to be, is, and it will continue to be a rich and powerful country and a factor in geopolitics. Our job is to find opportunities to work together with the Chinese Communist Party and the Chinese government.” Rubio instead stressed threats from Latin America and the US’s dependency on foreign supply chains.
• Rubio had been a leading China hawk before joining the administration, so his statement confirms that the tough-on-China segment of President Trump’s political coalition has now been sidelined.
• Over time, that could create political risk for the White House. As we’ve shown in many reports, the Chinese Communist Party’s political and strategic interests will likely spur it to keep building its overall power — economic, technological, diplomatic, and military, including the massive buildup of its arsenal of nuclear missiles aimed at the US. Strategic logic suggests China’s interests will expand globally, forcing it to work to undermine the US. If China someday is seen to dominate the US, voters in the US could be angered.
• On the other hand, a US decision to pursue détente with China would probably be bullish for US and Chinese stocks. After all, such a decision to tamp down tensions would remove a lot of bilateral geopolitical risks. However, if US foreign policy continues to retrench into a focus on the Western Hemisphere and supply-chain security, the power vacuum abroad would probably ensure continued good returns for foreign defense stocks and precious metals.

Japan: Former Defense Minister Itsunori Onodera of the ruling Liberal Democratic Party said in an interview Sunday that Japan must take a fresh look at its policy to never possess, manufacture, or host nuclear weapons, suggesting that the country is too reliant on the US’s uncertain pledge to defend Japan. That marks the latest in a string of comments by people close to the government that show Tokyo is getting tempted to develop its own nuclear arms, as are South Korea and several key countries in Europe.

China-European Union: Beijing today imposed anti-dumping tariffs of 21.9% to 42.7% on certain dairy products from the EU, claiming EU subsidies on the goods hurt Chinese producers. However, since China opened the dumping probe shortly after the EU opened one against Chinese electric vehicles, Beijing’s action appears to be retaliation aimed at forcing the EU into a compromise on its electric vehicle tariffs. Beijing also has ongoing dumping probes into EU pork and brandy, suggesting EU producers of those products could also be at risk.
Argentina: Deregulation Minister Federico Sturzenegger said in an interview over the weekend that President Milei’s libertarian government will use its increased seat count in the legislature to make much faster progress on key reforms in 2026 than in 2025. According to Sturzenegger, Milei’s government will work toward cutting taxes, reducing government spending, and deregulating the economy, all of which would confirm investors’ greater enthusiasm for Argentine stocks since the autumn elections.

United States-Venezuela: The US on Saturday said it stopped an oil tanker in international waters off the coast of Venezuela, days after President Trump announced a “blockade” of all sanctioned tankers entering and leaving Venezuela. That marks the second US interception of a tanker traveling from Venezuela in the last few weeks. The move suggests the US intends to continue ratcheting up pressure on Venezuelan President Maduro to resign. In turn, that keeps alive the risk of an armed conflict that could be destabilizing to global financial markets.

• The US Coast Guard today is also reportedly trying to chase down another tanker as it moves away from Venezuelan waters. Importantly, the US is justifying some of the interdictions by saying the tankers are flying false flags and aren’t necessarily under formal US sanctions.
• In any case, the rising tensions are buoying precious metals prices so far today. Near gold futures are currently trading at $4,430.2, up 1.3% for the day.

United States-Denmark-Greenland: President Trump yesterday named Louisiana governor Jeff Landry to be his special envoy for Greenland, after which Landry issued a statement saying that he will be honored to work “to make Greenland a part of the US.” In response, the Danish government called in the US ambassador to issue a formal protest. The appointment suggests the US administration now intends to renew its pressure on Denmark to cede Greenland. In turn, that will likely further worsen US-EU tensions and could weigh on EU stock prices.

US Monetary Policy: In an interview with the Wall Street Journal, Cleveland FRB President Beth Hammack said she sees no need to change interest rates for several months now that the central bank cut rates at its last three meetings. According to Hammack, there is still too much risk of resurgent price inflation to cut rates again at the moment. Hammack’s statement is consistent with our view that while the Fed will likely cut interest rates more aggressively in 2026 than in 2025, most of the cuts will likely come in the second half of 2026.

US Fiscal Policy: In a big policy reversal for Gov. Gavin Newsom, the California state Medicaid program said it will stop accepting adults with “unsatisfactory” immigration status and will require immigrants already in the program to pay a $30 monthly premium to keep their health coverage starting in mid-2027.

• The move reverses a 2022 policy of providing state-supported healthcare to all low-income Californians on the belief that it would reduce costly emergency-room visits and be good for the economy. However, the policy sparked rapid cost increases and strong pushback from conservatives.
• The new move will likely help reduce California’s healthcare costs but will put added economic pressure on immigrants, potentially pushing many to leave the country and further crimping the US labor market.

US Aerospace and Aviation Industries: The Wall Street Journal today carries a long article highlighting the growing incidence of “fume events” on airliners, where toxic fumes from synthetic engine oils and other fluids are siphoned into the cabin. The article shows how the fumes sometimes lead to serious illness or even death, leading to big lawsuits against firms such as Boeing. The article, which follows an initial report by the Journal in September, could spark increased lawsuits, regulation, and reputational damage for aircraft makers and airlines.

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by Patrick Fearon-Hernandez, CFA, and Thomas Wash

[Posted: 9:30 AM ET] | PDF

Our Comment begins with an assessment of the latest CPI data and its implications. We then turn to critical geopolitical and legislative developments, including the proposed US-TikTok joint venture, the Bank of Japan’s pivotal rate decision, and the progress in French budget negotiations. Finally, we include a roundup of essential domestic and international data releases to monitor.

Foggy CPI: November’s CPI report outperformed forecasts, with headline and core inflation cooling to 2.7% and 2.6%, respectively, down from September’s 3.0%. This slowdown was primarily driven by easing price pressures in hotels, airlines, and apparel, which offset the increase in energy costs. However, the report’s reliability is being debated; data collection hurdles stemming from the government shutdown suggest these figures might not reflect the full economic reality.

• The primary concern stems from significant data gaps within the report. Due to the lapse in appropriations, the BLS was unable to retroactively collect price data for October and November, leaving several categories incomplete. The October index was calculated by carrying forward September’s figures — consistent with standard contingency procedures — while the November index was derived using those October carry-forwards as the baseline. 
• Speculation is mounting that these data gaps have artificially suppressed the headline CPI figures. Particular scrutiny has fallen on the shelter component, which accounts for nearly one-third of the total index weight. Because the BLS lacked primary data for this category over the two-month period, the index remained virtually unchanged. This stagnation suggests that the reported cooling may be a byproduct of missing inputs rather than a genuine shift in the housing prices.
• Financial markets offered a mixed response to the shutdown-impacted report. Stocks performed well, buoyed by hopes that the 2.7% reading would secure a January rate cut. However, the bond market was far less convinced. Investors there largely stood pat, wary that the “missing” data may have artificially lowered the result. For bondholders, the report seemed to be more of a non-event that will require further verification from the upcoming December release.
• While the recent data is a positive signal for inflation, it likely will not justify a rate cut as early as January given the current composition of the FOMC. We believe Fed officials will require further softening in the labor market in order to feel comfortable allowing rates to fall meaningfully. However, the Fed’s overall stance on rates could shift significantly with the appointment of a new Fed chair.

TikTok Partnership: The US has reached an agreement regarding TikTok that allows its Chinese parent company, ByteDance, to maintain direct control over US operations through a partnership with Oracle, MGX, and Silver Lake. For now, this deal resolves the standoff sparked by legislation that threatened a nationwide ban. However, because ByteDance retains ownership, the arrangement may still face future legal or political challenges. Ultimately, we view this compromise as a significant sign of easing tensions between Washington and Beijing.

China’s AI Maneuvers: China has successfully scaled its AI chip production by retrofitting legacy ASML lithography systems. This strategy will allow Beijing to circumvent stringent export restrictions intended to stifle its semiconductor development. By repurposing older equipment to manufacture advanced chips, China is demonstrating a growing capacity for self-reliance as it competes with the US in the AI race. This breakthrough will likely compel the US to further prioritize AI within its national security strategy.

Bank of Japan: The yen (JPY) slid against the dollar on Friday despite the Bank of Japan raising interest rates to 0.75% — the highest level in nearly 30 years. Although the central bank signaled a willingness to continue the hikes into next year, Governor Kazuo Ueda’s reluctance to provide specific guidance on the terminal rate has sparked market concern. Investors fear the tightening cycle may be shallower than anticipated, fueling worries that monetary conditions will remain accommodative for longer than expected.

FedEx Positive Result: The shipping giant, widely considered a barometer for global trade and broader economic health, has raised its full-year outlook. This upward revision follows a surge in revenue driven by robust US shipment volumes and improved margins on international freight. Such a spike in logistics activity is traditionally viewed as a leading indicator of economic expansion, reinforcing expectations for a strong rebound in the coming quarter.

EU Lending to Ukraine: The European Union has committed to a 90 billion EUR ($105.6 billion) loan for Ukraine to bolster its defense against the Russian invasion. This pledge arrives as the bloc continues to debate the legalities of seizing frozen Russian assets. The timing is critical and is occurring as Russia, Ukraine, and the US engage in negotiations to end the conflict, with the EU eager to secure its influence in the process. Notably, the loan is structured to be repaid only once Russia provides war reparations, a condition intended to grant Kyiv significant leverage in upcoming peace talks.

French Budget Talks: The French government will not reach a budget agreement before the end of the year. Prime Minister Sébastien Lecornu has struggled to secure sufficient parliamentary support for his fiscal plan, prompting the government to prepare a “special law” — essentially an emergency rollover of the 2025 budget — to prevent a shutdown in 2026. This prolonged fiscal impasse is expected to exert upward pressure on French bond yields and deepen the country’s climate of political uncertainty.

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by Patrick Fearon-Hernandez, CFA, and Thomas Wash

[Posted: 9:30 AM ET] | PDF

Our Comment opens by assessing the president’s 2026 policy shift and its potential market impact. Following a deep dive into the AI-related volatility surrounding Oracle, we will then evaluate high-stakes geopolitical and legislative developments, specifically the US healthcare bill, Tricolor’s fraud crisis, and US arms shipments to Taiwan. Finally, we include a roundup of essential domestic and international data releases.

 The President Speaks: With next year’s midterm elections approaching, President Trump is seeking to frame his first year as a success. In a recent address, he highlighted his key achievements, including a crackdown on illegal immigration, policies that lowered the cost of essentials like groceries and travel, and the negotiation of new trade deals to secure foreign investment. He also announced a symbolic $1,776 Christmas bonus for active-duty troops. His address reflects a strategic shift from an offensive to a defensive posture, as he looks to protect his agenda.

• The president’s current strategy seems designed to circumvent the lame-duck syndrome that historically afflicts second-term presidents. As we noted in our earlier piece on managing an economic slowdown, presidents typically lose popularity heading into their second term. In fact, historical trends show that approval ratings most often bottom in year six, which, for the incumbent, will be next year.

• The administration’s drop in popularity comes at a critical time as key policies are currently stalled in court. The Supreme Court is skeptical of the president’s authority to impose broad tariffs, and his move to nationalize AI standards has triggered a backlash from state governments. These legal and political challenges threaten to leave much of his first-year agenda unresolved.
• Despite the threat posed by recent Democratic gains, the president is currently struggling with a “war within.” His recent move to impose 50% tariffs on Brazil was blocked by the Senate, while his plan to centralize AI regulation has repeatedly failed to gain Republican support. Adding to the friction, moderate Republicans have joined forces with Democrats to bypass leadership and advance an extension of healthcare subsidies, further complicating the administration’s year-end agenda (see more below).
• That said, the outlook is not entirely negative for the president. As the net approval ratings chart above illustrates, his popularity is projected to stabilize in the coming months, allowing him to build momentum ahead of the election. Furthermore, although his approval rating at 43.6% can improve, he is currently outperforming his two most recent predecessors — Barack Obama (42.7%) and George W. Bush (43.6%) — at the same point in their presidencies.
• As we look toward 2026, we anticipate that the president will push for policies designed to stimulate growth and enhance affordability. This may also mean that the president may be less aggressive in imposing new tariffs. This more predictable, defensive posture should be a net positive for equities, offering businesses a stable regulatory environment and households the confidence to increase consumption.

 Oracle Problems: Concerns regarding the rapid expansion of AI infrastructure are intensifying following a shift in Oracle’s financing. On Wednesday, it was reported that Blue Owl, a longtime financier of cloud computing firms, has withdrawn its backing for Oracle’s Michigan data center project. While the project is still expected to proceed, Blue Owl’s departure has sparked fresh anxieties regarding Oracle’s debt levels and the long-term sustainability of the AI build-out.

• Oracle has recently become a proxy for the burgeoning AI bubble. The market began paying close attention to the company following a reported jump in orders that wildly exceeded expectations, triggering a 36% single-day stock surge. However, since that peak, concerns have emerged regarding the company’s ability to meet those targets. Questions remain surrounding the profitability of these deals, as well as the company’s rumored reliance on a handful of suppliers.
• Growing skepticism toward AI is increasingly weighing on the technology sector. The central concern is the industry’s structural pivot from a traditionally capital-light model to one that is highly capital-intensive. This escalation in investment has fueled fears that the cost of infrastructure may erode future profitability. According to estimates from Apollo Global Management, capital expenditures for the Magnificent 7 have skyrocketed, rising from just over 40% of operating cash flow in 2024 to more than 60% today.
• The tech sector’s growth story is far from over. Recent market trends show a clear preference for companies with robust balance sheets that avoid the high costs of the debt market. Large cap tech stocks, in particular, maintain an edge over smaller firms by better managing economic volatility. Moreover, because the US government views AI leadership as a matter of national security, the sector likely benefits from an implicit “federal backstop” if growth were to falter significantly.
• We view sector diversification as essential for navigating current market turbulence. Drawing a parallel to the post-tech bubble era, value stocks are again offering a vital outlet for capital preservation. Recent data confirms this shift, with investors rotating heavily into defensive plays, most notably healthcare, which have outperformed to close the year.

 Affordable Care: House Republicans have passed the Lower Health Care Premiums for All Americans Act, framing it as a market-based alternative to the expiring Affordable Care Act (ACA) subsidies. While the bill faces steep opposition in the Senate, its passage signals that healthcare affordability will be a defining political flashpoint heading into the 2026 midterm elections. We believe this issue has the potential to significantly influence the congressional landscape next year.

Tricolor Holdings: The founder and top executives of the now-bankrupt Tricolor have been charged with fraud following allegations that they misled lenders. The company reportedly falsified records to portray delinquent auto loans as current, a move that is expected to intensify scrutiny of subprime consumer debt. As investors assess the potential for rising defaults — particularly within the private credit markets — this crackdown serves as a warning sign. While we do not see immediate systemic risks, we remain vigilant.

Taiwan Weapons Sale: The US government has approved the potential sale of over $10 billion in arms to Taiwan. While still subject to congressional approval, the weapons package would be the largest ever offered to the island. The move is likely to provoke a strong reaction from China, which views such sales as interference in its internal affairs, and signals that underlying tensions between the two superpowers remain high despite a recent period of calm.

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by Patrick Fearon-Hernandez, CFA, and Thomas Wash

[Posted: 9:30 AM ET] | PDF

Our Comment opens with the implications of the Venezuelan shipping blockade. Next, we discuss why weak labor data might not trigger a Fed rate cut in January. We then highlight critical market events, including US pressure on Russia for a peace deal, France mediating EU-China tensions, and US efforts to roll back European digital regulations. Finally, we include a roundup of essential domestic and international data releases to monitor.

Venezuelan Blockade: The US president has announced a total blockade of sanctioned oil tankers entering and leaving Venezuela, alongside the formal designation of the Maduro regime as a Foreign Terrorist Organization (FTO). This move marks a sharp escalation in tensions following months of friction between the two nations. The blockade appears to be part of a broader trend in US foreign policy, characterized by a renewed effort to exert influence over South America and a need to project power to the rest of the world.

• These recent White House actions represent a significant and dangerous escalation in a months-long campaign against Venezuela. This strategy has already included lethal strikes on vessels accused of drug trafficking and provocative incursions by US fighter jets into Venezuelan airspace. Additionally, the administration has also signaled its willingness to expand these operations to include land-based strikes.
• While the blockade of Venezuela is the most visible sign of increased US engagement in South America, it is not an isolated case. The administration has intervened both punitively and supportively across the region. For example, the US imposed tariffs on Brazilian goods and sanctioned a Brazilian Supreme Court justice in response to their treatment of former President Jair Bolsonaro. Conversely, the US has acted as a financial backstop for Argentina, following concerns about its currency.
• We believe the United States’ intensified focus on South America — what we term the “Modern Monroe Doctrine” in our 2026 Geopolitical Outlook — is primarily driven by the perception that expanding Chinese influence constitutes a direct national security threat. A central concern is the region’s deepening integration into China’s supply chains, especially through investments in mining for the critical resources required for China’s technological advancement.
• Moreover, Washington’s assertive posture toward Venezuela is a strategic signal to the global community, demonstrating its readiness to employ military force to secure its foreign policy objectives. This confrontational approach has a tactical similarity to both Russia’s military aggression in Ukraine and China’s coercive actions against Taiwan, underscoring a troubling pattern of using power to resolve international disputes.
• While our baseline forecast does not anticipate direct military conflict between the United States and its rivals within the next 12 months, the recent escalation of tensions has significantly increased that risk. We assess that rising instability in this region, in particular, will likely provide support for commodity prices — most notably for oil — and should create a bullish environment for precious metals.

Labor Market: Recent employment data suggests a labor market that has cooled significantly but has not collapsed. Over the past two months, the economy lost 41,000 jobs while the unemployment rate rose sharply to 4.6%, its highest level since 2021. This marked deterioration has likely strengthened the argument for the Federal Reserve to keep the possibility of an imminent rate cut on the table, even as some officials continue to signal a preference for maintaining the current policy stance.

• The latest payroll figures underscore a period of high volatility, as the labor market bounces between expansion and contraction. Although November saw a gain of 64,000 jobs, recovering from October’s job loss of 105,000, the broader trend remains inconsistent. In fact, we haven’t seen sustained growth for two consecutive months since May.
• A greater concern is that recent job creation has been overwhelmingly concentrated in a single sector. When private education and healthcare are removed from the calculation, the data reveals that the broader private sector has contracted, posting net job losses in five of the last six months.

• Although current labor market indicators are weak, optimism persists for a broader improvement next year. This expectation is one reason some Fed officials remain hesitant to commit to further rate cuts. As Atlanta Fed President Raphael Bostic noted, he anticipates the economy will benefit from the end of the government shutdown and supportive new tax legislation, both of which should bolster conditions.
• While the Federal Reserve’s current projection signals only one rate cut next year, we believe its ultimate decision will likely hinge on labor market conditions. Should the job market show further signs of deterioration, we expect the Fed will be compelled to enact more cuts than are currently signaled in order to support the faltering economy.

Putin Ultimatum: The White House is preparing a fresh round of sanctions against Russia should it reject a peace agreement with Ukraine later this week. These new measures will primarily target the energy sector by cracking down on “shadow fleet” tankers — vessels used to disguise the origin of cargo to evade international authorities. This move comes as the US nears a potential breakthrough in ending the regional conflict.

France Plea: French President Emmanuel Macron has attempted to ease EU-China tensions, cautioning Brussels against imposing tariffs and quotas on Chinese goods. He warned that such measures would undermine cooperation on building balanced trade. This move follows Macron’s visit to China last week, where he discussed the bilateral relationship. While talks were positive, no final agreement was reached. His latest remarks signal a clear preference for a softer, more diplomatic approach toward Beijing.

US Digital Grievance: The White House has threatened to impose new restrictions and fees on EU firms in an effort to pressure the bloc to drop its regulations on Big Tech, which Washington views as being unfairly targeted toward US companies. The administration is preparing a Section 301 investigation under the Trade Act of 1974, a tool that would allow it to pursue trade remedies against perceived unfair practices. This escalation is likely to further strain transatlantic relations.

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by Patrick Fearon-Hernandez, CFA, and Thomas Wash

[Posted: 9:30 AM ET] | PDF

Our Comment today opens with several public statements made yesterday by Federal Reserve policymakers, all of which suggest the policymaking committee remains split on whether to cut US interest rates further in the coming months. We next review several other international and US developments with the potential to affect the financial markets today, including a significant rollback in the European Union’s environmental regulations and a dangerous incident involving an out-of-control drone from Russia or Ukraine that was shot down as it approached Turkey.

US Monetary Policy: Fast on the heels of last week’s interest rate cut, remarks by Fed officials yesterday showed the policymakers remain split on further rate cuts. New York FRB President Williams said the Fed’s policy stance is now “well positioned as we head into 2026,” and Boston FRB President Collins said she wants to wait for more data on price inflation before cutting rates further. However, board member Stephan Miran argued that true inflation is at target after stripping out distorting prices, warranting more rate cuts.

• Miran argued that tough-to-measure housing costs, portfolio management prices, and other distorting figures are making the inflation rate look higher than it really is. After stripping out those costs, Miran said true inflation is only a hair above the Fed’s target rate of 2.0%.
• Miran is widely seen as the White House’s representative on the Fed’s policymaking committee, and he is expected to keep pushing for more aggressive rate cuts. Indeed, we still think the Fed will ultimately cut rates more aggressively in 2026 than in 2025. However, the faster rate cuts may have to wait until current Chair Powell is replaced in mid-2026.

US Automobile Market: Auto giant Ford said yesterday it will take $20 billion in charges through 2027 to abandon much of its planned shift to all-electric vehicles. Instead, the firm will focus future investment on hybrid vehicles and energy storage equipment. Ford tagged its retreat to customer demand for cheaper vehicles that don’t compromise on performance, but the move also shows the impact of dramatic policy shifts from the Biden administration to the new Trump administration – costly shifts that have become more common with political polarization.

European Union Automobile Market: The European Commission today will reportedly propose scrapping the EU’s complete ban on manufacturing cars with internal combustion engines by 2035. Instead, it will allow EU automakers to sell vehicles representing 10% of their 2021 greenhouse gas emissions. If approved by the EU’s member countries and the European Parliament, the move would dismantle a key plank of the bloc’s “Green Deal” program.

• The change would also be consistent with our view that the EU is in the early stages of an important deregulation phase aimed at boosting economic growth and precluding more electoral gains by right-wing political parties.
• If such a deregulatory program is carried out widely, it would likely help boost Europe’s economic growth and potentially support European industrial stocks.
• We discuss this thesis in our new Geopolitical Outlook for 2026, which we published yesterday.

Turkey-Russia-Ukraine: Turkish military jets today shot down an out-of-control aerial drone approaching the country’s airspace, bringing it down over the Black Sea. At this writing, it isn’t clear whether the drone was Russian or Ukrainian. Nevertheless, amid a spate of unidentified drone incursions that have shut down European airports, the incident highlights the risk that armed or unarmed drones could malfunction and cause unintended damage in noncombatant nations, potentially sparking an international crisis that would disrupt financial markets.

• Despite the risk from rogue drones, global oil prices have fallen 1.5% so far today, extending their recent declines as traders become increasingly convinced that the US will force Russia and Ukraine into a peace deal. Investors are betting that any such deal would involve eased sanctions on Russian energy exports.
• As of this writing, Brent crude is trading at $59.66 per barrel, and West Texas Intermediate is trading at $55.89 per barrel.

Estonia: In a little noticed development last week, Estonia installed the first of 600 military bunkers planned for the “Baltic Defense Line” being built by Estonia, Latvia, and Lithuania to deter invasion by Russia. The expensive string of bunkers illustrates how Eastern European countries have become especially worried about future territorial grabs by Russia once the Ukraine war winds down. Continued defense investment to deter Russia is one reason we expect strong returns from European defense stocks in the coming years.

Japan: Starting Thursday, Tokyo will begin enforcing its new “Act on Promotion of Competition for Specified Smartphone Software,” which aims to curb the dominance of technology giants and foster competition in Japan’s digital services market. Since the law is partly patterned on the European Union’s Digital Services Act, which has drawn Washington’s ire due to its impact on US technology firms, it could lead to renewed bilateral tensions and potentially even put Japan at risk of US sanctions despite the recent improvement in relations.

• The new law could have an especially big impact on US tech giants Apple and Google as it requires them to allow third parties to run independent app stores and offer their own payment options, while ensuring search engines other than those they run are immediately visible to the user.
• On the other hand, consumers would enjoy a wider range of options for apps and payments, while developers, in principle, will have more leeway showcasing their products and expanding their presence in digital markets.

Global Demographics: New research by the Census Bureau finds that Africa’s continued high birth rates compared with other regions will make it the world’s demographic center of gravity by 2100, with several “mega-nations,” more geopolitical power, and potentially the fastest economic growth of all regions. Coupled with Africa’s valuable mineral resources, we think the continent’s population growth could also help make it a rising investment destination, especially if African nations can improve their political and economic institutions.

China: According to state media, the Chinese government will expand its national healthcare insurance next year to fully cover all out-of-pocket expenses related to childbirth. The move will be China’s latest effort to lift birth rates and avert a looming demographic crisis that threatens to undermine long-term economic growth. However, since childbirth costs are only a small fraction of the resources needed to raise a child, it seems unlikely that the policy change will spur enough new births to significantly support population growth.

Argentina: The central bank yesterday said it will accelerate the widening of the peso’s exchange-rate band, allowing it to increase in line with monthly consumer price inflation instead of the current 1.0% per month. The move is set to bolster the central bank’s effort to quickly rebuild the country’s foreign currency reserves now that it has survived the October political crisis. However, many observers are skeptical that investors will be willing to accumulate significant Argentine assets in the near term.

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by Patrick Fearon-Hernandez, CFA, and Thomas Wash

[Posted: 9:30 AM ET] | PDF

Our Comment today opens with key takeaways on monetary policy from an interview President Trump did with the Wall Street Journal on Friday. We next review several other international and US developments with the potential to affect the financial markets today, including a preview of tomorrow’s off-cycle reports on the US labor market, a new US investment in a critical-minerals facility, and a conservative’s victory in Chile’s run-off presidential election over the weekend.

US Monetary Policy: In an interview with the Wall Street Journal on Friday, President Trump said he wouldn’t put anyone on the Federal Reserve board who would raise interest rates as economic growth is accelerating. Just days after the Fed cut its benchmark fed funds rate to a range of 3.50% to 3.75%, he also said he would like to see the rate at 1.00% or lower one year from now. The statements are consistent with our view that the Fed will be under strong pressure to cut interest rates more aggressively in 2026 than in 2025.

• In our 2026 Outlook, published last week, we discuss our projections for interest rates and longer-term bond yields. After cutting the fed funds rate three times in 2025, we would expect the central bank to cut rates at least four times in 2026, and potentially more.
• More aggressive rate cuts could unsettle the bond market, but we would expect the administration to keep taking steps designed to cap longer-term bond yields. By implication, that means the yield curve may only steepen modestly in 2026.

US Labor Market: As a preview, the Department of Labor tomorrow will release a combined report on the job market in October and November. The unusually timed report will come out on Tuesday morning at 8:30 AM ET. Analysts currently expect the data to show that November payrolls rose by 50,000 while the unemployment rate rose to 4.5%. However, Fed Chair Powell last week said actual hiring might be much weaker than the recent available data showed, so investor concerns could keep the US financial markets volatile today.

United States-South Korea: Korea Zinc, the world’s biggest zinc-smelting company, announced a deal today in which the US government will enter a joint venture with the firm and back its $7.4-billion investment in a new critical-minerals processing plant in Tennessee. The plant will produce rare earths and other critical minerals. The deal is further evidence that the US is intent on building up its own critical minerals industry to end its reliance on China, even as China builds up its artificial intelligence industry to cut its reliance on the US.

• The news also shows how the US administration appears to be much more willing to work with Asian partners than European ones. Such deals could strengthen US ties to key foreign countries, such as South Korea, even as US ties to Europe fray.
• The news has also given a big boost to Korea Zinc’s share price today. The price reportedly surged as much as 27% when the deal was announced earlier this morning.

United States-United Kingdom: According to confidential sources, the US has told the UK that it will stop implementing a May technology agreement between the two countries to retaliate for Britain being slow to lower its trade barriers. The frozen tech deal was part of the US-UK trade agreement reached in May and called for collaboration on artificial intelligence and nuclear energy. The development is a reminder that the quickly negotiated, relatively vague deals spawned by the US tariff war can carry a lot of implementation risk and may not be final.

Chinese Industrial Policy: Shandong province has released a plan to sharply improve and increase its copper-smelting sector, in part to help boost Chinese exports of the metal. Now that the world has seen in 2025 how China has nearly monopolized the production of rare earth minerals and is willing to embargo them to undermine Western economies, the Shandong plan will likely raise concerns that Beijing wants to do the same with copper. Once concern would be if China were willing to use predatory pricing to put foreign copper producers out of business.

Chinese Economy: Several data releases today showed Chinese economic growth continues to slow, in part because of its massive excess production. November retail sales were up just 1.3% year-over-year, compared with a rise of 2.9% in the year to October. November industrial output was up 4.8% on the year, compared with an increase of 4.9% in the year to October. Fixed-asset investment in January through November was down 2.6% compared with the same period one year earlier, and had an annual decline of 1.7% in the January through October period.

• As reported last week, Chinese exports continue to surge, producing a record trade surplus of more than $1 trillion so far in 2025. All the same, the weakness in China’s domestic demand helps confirm that the country’s producers are likely dumping product on the global markets because they can’t sell them at home.
• That is likely to continue causing trade frictions between China and its trade partners, including the US. Even if the US and China reach a long-term trade truce, Beijing’s need to keep exporting could make any such deal tenuous.

European Union-France-South America: Paris yesterday urged the European Parliament to delay a vote aimed on the proposed free-trade agreement between the EU and the Mercosur grouping of Argentina, Brazil, Uruguay, and Paraguay. If France is successful in delaying the vote, it would increase the odds of the deal being rejected. Any rejection of the deal would likely help shield European agribusiness firms from a wave of cheaper imports from South America and further signal the end of the post-Cold War period of globalization.

Chile: In yesterday’s presidential run-off election, hardline conservative José Antonio Kast came in first with approximately 58% of the vote, heralding Chile’s most right-wing government in more than a decade. Kast’s success has largely been tagged to his tough positions on crime and illegal immigration. However, he has also championed government spending cuts, lower taxes, and deregulation, all of which will likely be taken well by investors.

Kenya: As foreign aid falls and its people become more resistant to tax increases, Nairobi this week is planning its biggest sell-off of state assets in nearly 20 years to finance a new infrastructure fund. The plan includes selling a $1.58-billion stake in telecom and fintech firm Safaricom, considered the crown jewel of Nairobi’s state-owned assets, to South African telecom firm Vodacom.

• The deals illustrate how the US aid pullback will likely put economic pressure on many less-developed countries.
• Some of the affected countries may respond with better fiscal and regulatory policies, but a key risk is that Beijing might step into the breach with its own aid to curry favor with them and draw them closer to China.

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by Patrick Fearon-Hernandez, CFA, and Thomas Wash

[Posted: 9:30 AM ET] | PDF

Our Comment begins with our examination of growing concerns for an AI bubble. We then provide an update on the strategic dynamics of the Ukraine conflict. The analysis continues with key market-moving stories, including reappointment of Federal Reserve governors, corporate partnerships to build supply chains independent of China, and the Bank of Japan’s hawkish policy shift. Finally, we include a roundup of essential domestic and international data releases to monitor.

Tech Tight Rope: Investor sentiment in the tech sector is fragile, underscoring the high tension between the AI boom’s potential and inherent risks. Broadcom’s earnings fueled this pessimism as its $75 million order backlog missed analyst targets. The company further created uncertainty by withholding 2026 guidance. This disappointment amplified earlier concerns raised by Oracle. The software giant reported weak earnings alongside accelerated capital spending plans, sparking doubts about Oracle’s long-term debt servicing capacity.

• Since October, the market has been plagued by valuation anxieties. This sentiment shift stems from a growing body of evidence indicating that widespread AI adoption is progressing much more slowly within firms than originally anticipated. The resulting disconnect between lofty stock prices and the actual speed of business integration has led investors to scrutinize whether companies can deliver the earnings growth required to sustain their elevated stock valuations.
• This shift has been evident in recent market performance as small and mid-cap stocks have demonstrated strong outperformance relative to their large cap counterparts during this period. Simultaneously, the Health Care sector, which contended with headwinds for much of the year, has generated the majority of its annual gains over the last three months, underscoring the market’s rediscovered appetite for defensive value.
• We maintain the view that AI momentum still has room to run, but we strongly recommend investors broaden their portfolio exposure beyond concentrated growth sectors. Adopting this strategy of diversification will serve to mitigate potential downside risk stemming from any future setbacks or valuation concerns within the AI sector.

Ukraine-Russia Peace Deal? While there appears to be momentum toward ending the conflict, the White House is reportedly struggling to secure unified support for a proposed peace deal. Reports emerged earlier this week that US officials are pressing Ukrainian President Volodymyr Zelensky to agree to a deal with Russia by Christmas. The main sticking point is reportedly the White House’s push for Ukraine to accept territorial concessions in exchange for unspecified security guarantees.

• The European Union is deeply skeptical of the peace deal, fearing Russia’s broader territorial ambitions in Europe. NATO’s leader recently stated that Russia is back in the “empire building business,” while provocations, such as surveillance balloons from Belarus drifting into Lithuania that forced it to shut its airspace and declare a state of emergency, continue.
• In order to calm fears, the White House does plan to offer some security support for Ukraine. It has been suggested that the assistance would come in the form of intelligence or possibly even air support; however, the administration has stated that it is still negotiating between the two sides.
• While Ukraine has succeeded in resisting Russia’s full-scale invasion, Moscow has secured incremental territorial gains that have weakened Kyiv’s negotiating position. However, Ukraine has resisted conceding land to the Kremlin. In a gesture to Western partners, President Zelensky has indicated an openness to holding a referendum in the Donbas region on its future status.
• We assess that active hostilities in Ukraine are likely to conclude by the first half of 2026. The end of this conflict is expected to compel European nations to significantly accelerate their military modernization efforts in response to the enduring Russian threat, providing a substantial and sustained tailwind for the Continent’s defense industry.

Fed Presidents Approved: The Federal Reserve Board of Governors unanimously reappointed the presidents in 11 out of 12 Federal Reserve Banks to new five-year terms. The only exception was Raphael Bostic of the Atlanta Fed, who did not seek reappointment. This action is expected to alleviate worry that the White House would attempt to reshape the Fed’s structure, a concern raised by Treasury Secretary Scott Bessent’s suggestion of a new residency requirement for bank presidents. This should calm fears of the Fed losing its independence.

EU-Mercosur Deal in Jeopardy? The landmark EU-Mercosur trade deal faces significant delays due to European agricultural concerns. France and Poland are leading the opposition, arguing that lower South American production standards would give those farmers an unfair competitive advantage. This ratification failure complicates the EU’s strategic goal of diversifying its economic partnerships away from over-reliance on the US and China.

Supply Chain Resilience: Two US firms have partnered to develop domestically manufactured iron nitride magnets that do not require rare earth elements. This collaboration reflects a growing effort within the American defense sector to lessen dependence on Chinese rare earth supplies. We believe such partnerships signal a broader trend of US innovation aimed at building resilient supply chains, aligning with the White House’s industrial policy goals.

AI Executive Order: The president signed an executive order establishing federal primacy in AI regulation to accelerate innovation by US tech firms. The order empowers the Attorney General to challenge state laws that conflict with the national goal of AI leadership. This move, which follows the failure of Congressional legislation, addresses the tech industry’s complaint that a “patchwork” of state regulations stifles development with complexity and red tape. The order aims to unify regulations and bolster US tech competitiveness.

Hawkish BOJ: Senior Bank of Japan officials have signaled that its benchmark interest rate could exceed 0.75%, and potentially surpass 1.00%, by the end of the current tightening cycle. This guidance provides further evidence of the central bank’s decisive shift toward a more hawkish policy stance, as it moves interest rates from stimulative levels toward a more neutral setting. This projected path for higher rates is expected to strengthen the yen, which would likely place downward pressure on the US dollar in 2026.

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