by Patrick Fearon-Hernandez, CFA, and Thomas Wash

[Posted: 9:30 AM ET] | PDF

Our Comment today opens with a report confirming our view that the US administration will try to find fallback options even if the Supreme Court eventually rules against its broad use of import tariffs. We next review several other international and US developments with the potential to affect the financial markets today, including important new articles on the growing use of debt and creative financing in the artificial intelligence boom and the latest on the new peace proposal being pushed by the US to end the war in Ukraine.

US Tariff Policy: Reports at the weekend said the Department of Commerce and the Office of the US Trade Representative are quietly working on fallback options in case the Supreme Court invalidates the administration’s broad tariffs. Such a negative decision now seems like a distinct possibility, given that the judges sounded skeptical of the administration’s argument in favor of its tough trade policies at the court’s recent hearing on the matter. As we’ve argued previously, we think the administration is committed to its tariff policies no matter what the court rules.

• The administration’s possible options include switching the legal basis of its tariffs to Sections 122 or 301 of the Trade Act.
• Those provisions are slower and less flexible than the emergency provisions currently relied on, but we think the administration would use them aggressively if necessary as it seeks to rebalance US trade.

US Healthcare Policy: As President Trump works to defend himself against political attacks over cost-of-living issues, the White House is reportedly preparing to unveil a health care plan that would extend the Affordable Care Act’s enhanced tax credits for two years in exchange for new eligibility limits and other changes. Extending the tax credits to avoid spiking health insurance premiums was a key demand of Democrats in the recent budget standoff, so they are likely to support it. However, it’s not clear whether they would support the other changes.

US Artificial Intelligence Industry: A report in the Wall Street Journal yesterday said AI “hyperscalers” Amazon, Alphabet, Meta, and Oracle have issued a total of $90 billion in investment-grade bonds just since September 1, and firms such as TeraWulf and Cipher Mining have issued at least $7 billion in junk bonds. The figures show how tech firms have suddenly turned strongly toward debt financing to build out their AI infrastructure, raising investor concerns about potential defaults if the AI boom suddenly goes into reverse.

• Separately, the Journal today also has an article that takes a deep dive into the creative financing that Meta has used for its new $27-billion data center in Louisiana.
• Coupled with the increasing use of debt for AI infrastructure, the newly revealed signs of creative financing will likely feed into investors’ growing concerns about the AI boom turning into an unsustainable bubble. However, it’s notoriously difficult to predict when a boom or a bubble will run out of steam and go sharply into reverse. Indeed, we don’t see clear signs of such a turn being imminent at the moment.

US Motion Picture Industry: Sources say Wicked: For Good, the second part of the popular Broadway show’s film adaptation, earned a record-smashing $150 million in North America and $226 million globally during its opening weekend. As usual, the strong opening for the Universal Pictures movie is likely to revive hopes for a revival of the US theater and film-studio industries, and perhaps even give a boost today to the stock of Comcast (which owns Universal). At any rate, it provides a must-see movie for this week’s Thanksgiving holiday weekend!

United States-Russia-Ukraine: Secretary of State Rubio said on Saturday that the 28-point peace plan that the administration forwarded to Ukraine last week was actually drafted by the Russians, and the US merely passed it on to Ukraine in its role as an intermediary. The statement went far toward explaining why the plan was so tilted in favor of Russia. However, Rubio later issued a contradictory statement that the US had authored the plan.

• The back-and-forth on the plan suggests it has little chance of being implemented as drafted.
• White House reports today say talks with European and Ukrainian officials over the weekend were “constructive” and have led to some modifications of the proposal. However, no details have been released as of this writing.

China-Russia: New research by the Bank of Finland shows that the average price of Chinese export-controlled military products sold to Russia rose by an average of 87% from 2021 to 2024, while the price of similar products sold to other countries rose only 9%. A Western sanctions official interviewed about the report by the Financial Times said it would be better if Russian defense firms were totally cut off from their suppliers, but Chinese companies “ripping them off” is perhaps the next best thing, as it limits what the Russians can buy.

Libya: A delegation from the Tripoli-based Libyan government has been in Washington this week to drum up interest in Libya’s first oil exploration licenses in 18 years. Oil giants Shell, Chevron, TotalEnergies, Eni, and Repsol are all pre-qualified to bid on the tracts, while Exxon signed a deal in August to explore for gas off Libya’s coast. The major oil firms’ interest reflects recent analyses suggesting global oil demand will remain robust far longer than previously predicted.

European Union-China: Facing a wave of Chinese imports and investment into the EU, the European Commission is reportedly planning to tighten its foreign investment rules to ensure the new capital spending doesn’t give Chinese firms an advantage in the bloc. The rules will seek to ensure that new Chinese investment bolsters the EU’s overall supply chains and provides broad benefits for EU workers. We see the likely new rules as more evidence of global fracturing, which will produce less efficient supply chains, higher price inflation, and higher interest rates.

Netherlands-Russia: Unidentified drone sightings yesterday prompted officials to shut down Eindhoven airport in southern Netherlands, marking the latest incident in which presumed Russian provocations shut down a major European airport. On Friday, the Dutch military opened fire on unidentified drones over its air force base at Volkel, although no drones were brought down. As we have noted before, the likely Russian provocations probably aim to unsettle NATO countries but run the risk of sparking a kinetic conflict at some point in the future.

United Kingdom: Chancellor of the Exchequer Reeves will release her proposed budget for the coming year on Wednesday, raising the risk of volatility in British asset prices over the next few days. In recent weeks, many details of the proposed budget have come out, including plans for broad new income tax hikes, but market reaction forced the government to retract that measure. The incident illustrates how Reeves is struggling to get control over the UK’s enormous borrowing without imposing economically disruptive tax hikes or spending cuts.

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by Patrick Fearon-Hernandez, CFA, and Thomas Wash

[Posted: 9:30 AM ET] | PDF

Our Comment today opens with news that the US is now slowing down its plans to impose big, new tariffs on foreign semiconductors to avoid spoiling the US-China trade truce. We next review several other international and US developments that could affect the financial markets today, including a new speech by European Central Bank President Lagarde on what’s causing Europe’s slow economic growth and a hawkish forecast of Federal Reserve interest-rate cuts by the head of Vanguard’s fixed-income investing.

United States-China: According to Reuters, several officials have said the administration is slow walking the 100% tariffs on foreign semiconductor imports that it announced in August, largely to avoid provoking China into another clampdown on its critical minerals exports. The officials say the administration could still announce the tariffs at any time, but for now, the new imposts are on hold.

• President Trump said in August that the US would impose a tariff of about 100% on imports of semiconductors but exempted companies that are manufacturing in the US or have committed to do so.
• The decision to put the tariffs on ice to avoid another cutoff of Chinese critical minerals illustrates how the trade war earlier this year revealed the immense leverage China has gained from its near monopoly on key minerals and products made from them.
• In our view, that realization has helped convince many US leaders that China’s comprehensive power — military, diplomatic, economic, and technological — has now increased to the point where it is essentially on par with that of the US.
• We think that has forced the US to become more circumspect in its competition with China, possibly heralding the end of the long era of sole US hegemony. On the other hand, the more-or-less equal balance of power could force a coexistence deal that would reduce US-China tensions and potentially give a boost to US and Chinese stocks.

United States-Russia-European Union-Ukraine: As flagged in our Comment yesterday, the US’s new proposed peace deal to end the war in Ukraine is generating intense resistance from leaders in Europe. The Ukrainian government has been more circumspect, but after text of the proposal was leaked yesterday, the major concessions it requires from Kyiv would suggest there is little chance that President Zelensky’s government would approve it. Even though financial markets were buoyed by news of the plan, we now suspect it will be another false dawn.

United States-Argentina: According to reports late yesterday, major US banks including JPMorgan Chase, Bank of America, and Citigroup have shelved an administration-driven plan to provide a $20 billion bailout to the Argentine government. Instead, the banks will just help Buenos Aires handle a $4-billion debt payment in January. The US’s separate currency swap of $20 billion for Argentina remains in place, but since President Milei’s party scored a decisive victory in Argentina’s recent Congressional elections, the private funding is no longer needed.

United States-Brazil: President Trump yesterday lifted a 40% import tariff against certain Brazilian food products, including coffee, beef, and nuts, citing “initial progress” in trade negotiations with the country’s leftist government. The move comes less than a week after the president cut import tariffs on a wide range of food imports in an effort to bring down prices and diffuse criticism that he hasn’t done enough to reduce the cost of living. The move should be beneficial to a range of Brazilian food exporters.

US Monetary Policy: Sara Devereux, the chief of Vanguard’s $2.8-trillion fixed-income portfolio, warned in an interview with the Financial Times earlier today that the Fed probably won’t cut US interest rates as aggressively as investors expect over the coming year. Devereux said she expects only one or two more 25-basis-point cuts from the Fed over the next year, while investors generally expect four or five.

• Devereux’s forecast largely reflects her expectation from continued good economic growth in the US, driven by AI investment.
• In contrast, we continue to believe that strong political pressure and the replacement of current Fed officials with more dovish policymakers argues for faster rate cuts in 2026 than in 2025.

Eurozone: In a scathing speech today, ECB President Lagarde accused European leaders of being too wedded to an export-driven economic model at a time of global fracturing with more competitive exporters elsewhere. Instead, Lagarde urged European officials to focus on boosting the bloc’s domestic economy, which she said has plenty of latent strengths and could grow faster with fewer hurdles to internal trade.

• Coupled with former ECB President Draghi’s big report last year, which tied Europe’s lethargic economy largely to investment hurdles, Lagarde’s major new speech adds to the expanding body of major analyses aimed at sparking faster growth in the region. However, her focus on easing domestic trade suggests there still isn’t a strong consensus on what’s causing the problem.
• As we’ve noted before, the geopolitical threat from Russia over the last three years has spurred stronger defense spending, which has helped encourage looser fiscal policy more generally and even some modest steps toward deregulation. Combined with the decline in the value of the dollar, that has given a boost to European stocks so far this year.
• All the same, we’re still looking for deeper, more fundamental economic reforms before we can be certain that Europe is on the path to faster growth and better stock performance over the longer term.

United Kingdom: The November GfK consumer confidence index dropped to -19.0, worse than both the expected reading of -18.0 and the October reading of -17.0. The figure was also far worse than the 2014-2019 average of -5.6. The reading suggests British consumers are worried about their prospects amid continued high inflation and expectations that the Labour government of Prime Minister Starmer is about to announce a new round of tax hikes.

Japan: As the government continues to reopen nuclear power plants shut down after the Fukushima disaster of 2011, today it approved the restart of Tokyo Electric Power’s enormous Kashiwazaki-Kariwa nuclear plant in Niigata prefecture. The plant is the world’s largest facility for generating electricity from nuclear power. Japan has now approved restarting 14 of the 54 nuclear generating stations shut down after Fukushima, with four more awaiting approval by local governments and eight awaiting national regulatory approval.

• Japan’s re-embrace of stable, affordable nuclear power is increasingly giving it an economic advantage over Europe. Coupled with the weaker dollar and the likelihood of more stimulative economic policies under the new prime minister, that helps explain the good returns from Japanese stocks over the last year or more. The re-embrace of nuclear energy is probably also a positive for uranium and uranium miners.
• Regarding Prime Minister Takaichi’s economic program, her government today unveiled a massive fiscal stimulus package worth the equivalent of $135.4 billion, consisting largely of tax cuts, increased public investment in national security and infrastructure, cash handouts to parents, and gas and electricity subsidies for consumers. The package isn’t quite as big as some bond investors feared, so Japanese government bonds have rallied modestly so far today, driving the yield on 10-year JGBs down to 1.788%.

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by Patrick Fearon-Hernandez, CFA, and Thomas Wash

[Posted: 9:30 AM ET] | PDF

Our Comment today opens with a few words on Nvidia’s third-quarter earnings release and its broader implications. We next review several other international and US developments that could affect the financial markets today, including the minutes from the Federal Reserve’s October policy meeting and more details on the administration’s new plan to end the war in Ukraine.

US Artificial Intelligence Sector: After market close yesterday, Nvidia said its third-quarter revenues and profits reached new record highs, amid what CEO Jensen Huang called “off the charts” demand for its advanced Blackwell artificial-intelligence chips. Revenues were up 62% year-over-year, while earnings were up 65%, in both cases beating expectations. Looking forward, the results could well give a new rush of momentum to Nvidia’s stock price and the broader AI sector.

• Separately, the Commerce Department late yesterday approved the sale of up to 70,000 advanced AI chips to two firms based in the United Arab Emirates and Saudi Arabia, reversing a decision earlier this year that rejected the application over security concerns.
• The earlier security concerns focused on the risk that the state-owned firms receiving the chips could give China or other adversarial countries access to them, potentially undermining the US lead in the technology.
• In our view, the decision to allow the sale illustrates how the administration is now clearly favoring the so-called “tech bros” element of President Trump’s political coalition over its “China hawk” element.

US Fiscal Policy: As President Trump continues to push his idea of using new tariff revenues to provide a $2,000 “dividend” payment to low- and moderate-income households, reports today say legislators are politely pushing back on the idea. One key theme of the reporting is that Republicans in the Senate and House prefer to use the new revenues to lower the US’s yawning budget deficit. The Republicans’ willingness to push back against the White House could also reflect a subtle shift of power toward Congress after the recent Epstein files controversy.

US Monetary Policy: Minutes released yesterday from the Fed’s October policy meeting showed that the policymakers were deeply divided and expressed “strongly differing views” on the need to cut interest rates for a third time this year at the meeting in December. Recent public statements by policymakers had already made it clear that there is disagreement on the policy committee about how quickly to cut rates. However, the minutes suggest the disagreement is even deeper than previously known.

• The deep divisions on the policy committee suggest that if the White House is able to replace Chair Powell and perhaps other committee members with more dovish officials next year, as expected, it could dramatically shift the Fed’s policy stance.
• Futures trading currently suggests there is more than a 70% chance that the officials will keep the benchmark fed funds rate steady at a range of 3.75% to 4.00% at the meeting in December, despite administration pressure for another rate cut.

US Labor Market: The Bureau of Labor Statistics yesterday said it won’t produce a monthly employment report for October, when the federal government was shut down because of the Congressional budget dispute. However, the agency said the November report will be released on December 16 — 11 days later than normal — and it will include nonfarm payroll data for October.

• The news means that the Federal Reserve officials meeting to update their monetary policy on December 9-10 will have no employment data for either October or November to work with.
• As shown in our Economic Releases section below, the BLS today released its monthly labor market report for September.

United States-Russia-Ukraine: Reports yesterday said the Trump administration has been in direct talks with Russia about a new 28-point plan to end the war in Ukraine. Russian officials are reportedly delighted with the proposal because it addresses their key concerns. The plan would apparently require Ukraine to make unpalatable concessions, but White House officials believe President Zelensky’s weakened political position would prevent him from resisting. The US officials have given some details to allies and believe it could be publicized by month’s end.

• The plan would reportedly require Ukraine to cede the remainder of its eastern Donbas region — including land currently under Kyiv’s control — and cut the size of its armed forces by half. The plan also calls for Ukraine to abandon key categories of weaponry and would include the rollback of US military aid that has been vital to its defense. In return, the US would offer Europe and Ukraine security guarantees. Russia would be required to stop its current aggression against Ukraine.
• The details so far imply the plan is lopsided in Russia’s favor and would leave Ukraine open to renewed Russian aggression in the future. That suggests it will be resisted by the US’s allies in Europe and by Ukraine itself. Indeed, reports this morning say European officials are already pushing back against the plan.
• News of the plan helped give a boost to global stocks yesterday, but the likely resistance from Europe and Ukraine suggests it is far from a done deal.
• Even if the plan is put into place, it appears unlikely to diffuse Russia’s political and military aims in Eastern Europe. We therefore believe that European defense firms will continue to benefit from rearmament efforts on the Continent, giving a boost to European defense stocks.

United States-Saudi Arabia: President Trump and Crown Prince Muhammad bin Salman yesterday reached a deal in which US rare-earths miner MP Materials will partner with the Department of Defense and Saudi Arabia’s state-owned mining company to build a rare-earth processing facility in the kingdom. The deal reflects the continuing frenzy for Western rare-earth investment to help reduce vulnerabilities from relying on China for supplies.

China-Japan: In further retaliation for Japanese Prime Minister Takaichi’s recent statement that a Chinese blockade of Taiwan would require Japan to intervene militarily, Beijing has now reinstituted its ban on Japanese seafood imports, suspended talks on resuming Japanese beef imports, and threatened more countermeasures. As we have noted before, the key risk in the escalating crisis is that Beijing could reimpose a ban on exporting Chinese critical minerals to Japan, a move that could severely crimp Japan’s auto production and other industries.

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by Patrick Fearon-Hernandez, CFA, and Thomas Wash

[Posted: 9:30 AM ET] | PDF

Our Comment today opens with a preview of Nvidia’s key earnings release after market close today, as well as some related news involving the company and infrastructure investor Brookfield. We next review several other international and US developments that could affect the financial markets today, including a move to ease Dutch-Chinese tensions and a new European Union body to shore up the bloc’s access to critical minerals.

US Artificial Intelligence Boom: AI chip giant Nvidia will release its quarterly earnings after market close today, setting the stage for either continued investor enthusiasm for the sector or, potentially, a major selloff if the results are disappointing. Given that Nvidia accounts for such a large share of US stock market capitalization — about 10% of the NASDAQ 100 — a significant upside or downside surprise would likely have a major impact on the broader stock market in the coming days.

• Separately, reports say Canadian investment giant Brookfield Asset Management is raising $10 billion for a new fund dedicated to AI infrastructure, with Nvidia and sovereign-wealth fund Kuwait Investment Authority as founding partners. Utilizing additional co-investments and debt, Brookfield plans to build and acquire as much as $100 billion worth of AI infrastructure
• It isn’t clear how much Nvidia is investing in Brookfield’s new fund. Nevertheless, the news could exacerbate growing investor concerns about circular investments in the AI space, where major players essentially invest in their customers to help fund their own sales.

US Technology Industry: A federal judge yesterday ruled that tech giant Meta didn’t break antitrust laws by illegally stifling competition through its purchases of Instagram and WhatsApp. The ruling means the company won’t have to divest the two apps, which should be positive for the broader tech sector.

Netherlands-China: The Dutch government today overturned its recent seizure of Nexperia, the Netherlands-based manufacturer of automotive semiconductors owned by Chinese company Wingtech Technology. Officials said the return of control to Wingtech was an act of “goodwill” toward Beijing, which had retaliated by banning the export of chips from Nexperia’s operations in China. The decision should be a relief to major automakers, which had warned of major chip shortages that could disrupt global car production, weigh on sales, and hurt profits.

China: In a little noticed report at the end of October, the Chinese government mandated that on-line influencers must possess recognized degrees or demonstrate relevant training before discussing professional topics such as law or medicine. The regulation is designed to stamp out misinformation, but it has sparked opposition over concerns about freedom of speech. In any case, given global concerns about misinformation undermining everything from politics to health, a key question is whether the rule might spark copycat regulations in other countries.

Singapore: At a Bloomberg event today, the chief of Singapore’s sovereign wealth fund, Temasek, said the dollar’s depreciation this year has hurt its returns from US assets compared with foreign assets, which will likely prompt the fund to increase its non-US allocations. The statement is consistent with our view that the falling dollar is making it more attractive to invest in foreign stocks than in US stocks. Indeed, we have recently increased our exposure to foreign stocks in our Confluence Asset Allocation strategies.

European Union: Stéphane Séjourné, the EU’s executive vice president for industrial strategy, said today that the bloc will set up a central body to coordinate the purchasing and stockpiling of critical minerals. One key aim of the new organization will be to stop the US from buying up and hoarding the assets. The plan is consistent with our view that amid today’s geopolitical tensions and economic issues, countries and companies will have greater incentives to hoard key resources. In turn, we think that will buoy commodity prices going forward.

United States-Venezuela: President Trump has reportedly approved a CIA plan for covert measures inside Venezuela to pave the way for a potential US military attack on the country. At the same time, the president has authorized a new round of back-channel negotiations that at one point resulted in President Maduro offering to step down after a delay of a couple of years, a proposal the White House rejected. If either strategic prong is successful, the result could ultimately mean a resurgence of Venezuelan oil production and exports.

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by Patrick Fearon-Hernandez, CFA, and Thomas Wash

[Posted: 9:30 AM ET] | PDF

Our Comment today opens with the latest sign of disagreement among Federal Reserve policymakers on the direction of interest rates. In the latest statement, Fed board member Waller argues for cutting rates again in December. We next review several other international and US developments that could affect the financial markets today, including the first US government economic reports since the end of the shutdown and signs that the new US import tariffs are weighing on economic growth in Asia and Europe.

US Monetary Policy: Fed board member Christopher Waller yesterday said his reading of the available data suggests the central bank should cut its benchmark short-term interest rate at its next policy meeting in December “as a matter of risk management.” According to Waller, his stance was based on a sense that the US labor market is “still weak and near stall speed,” while the US’s new import tariffs have put little upward pressure on consumer prices.

• Despite Waller’s comments, which may be aimed at bolstering his chance of being appointed as the Fed’s next chair, other monetary policymakers continue to call for slower, more cautious rate cuts.
• The conflicting opinions from the Federal Open Market Committee members suggest it is now essentially a coin toss whether the Fed will cut rates again in December. If it doesn’t, the risk is that the recent sell-off in stocks could continue, pushing prices even lower.
• Separately, a lawyer for Fed board member Lisa Cook yesterday provided the first detailed defense of her mortgage applications, which administration officials have claimed are fraudulent and justify her removal. If the report sways the courts, government officials, and the public, it would deny the administration an opportunity to replace Cook with a more dovish policymaker.

US Stock Market: Even though the increased volatility in the US stock market this month has only resulted in a 3.0% decline in the S&P 500 price index, including a 0.9% drop yesterday, there is growing concern about excess investment in artificial intelligence and the Fed’s continued reluctance to cut interest rates quickly. This suggests that investors should consider what technical analysis is saying about the near-term prospects for the market. On that score:

• As of yesterday’s close, the S&P 500 stands at 6,672.41, its lowest level since late October. We would put the next significant support levels at about 6,555 and 6,350.
• Last year at this time, we had projected in our Outlook for 2025 that the S&P 500 would end 2025 between 6,500 and 6,800. We continue to believe that such a range is a reasonable expectation for the index’s level at the end of the year.
• As of yesterday’s close, the index sits just below its 50-day moving average. It remains far above its 200-day moving average of 6,151.63.
• Reflecting today’s narrow market, only 53.8% of the stocks in the S&P 500 are now trading above their 200-day moving average, far below the 70% or so that traders often consider indicative of a market with strong upward momentum.

US Economy: The federal government finally began to release major economic data series yesterday, including a report on construction activity that came out after our Comment was published. The catch-up report showed construction spending rose by a seasonally adjusted 0.2% in both July and August, mostly driven by private housing construction. Still, construction spending in August was down 1.6% from the same month one year earlier, mostly on weakness in commercial construction. (Data so far today is in our Economics Releases section below.)

• August construction spending on public works was up 1.8% year-over-year, while spending on private residential construction was down 1.5%. August construction spending on private commercial construction was down a sharp 4.3% on the year.
• The weakness in private commercial construction may seem odd against the backdrop of massive spending on data centers and other artificial-intelligence infrastructure. We think the year-over-year decline in total commercial construction reflects significant weakness in corporate building outside the AI space.

United States-Japan-Switzerland: Data yesterday showed Japanese gross domestic product declined at an annualized rate of 1.8% in the third quarter, reversing most of the growth in the first and second quarters of the year. Separately, Swiss GDP fell at a rate of 0.8% in the same period. In both cases, the main culprit for the declines was reduced exports to the US. The data illustrates how the US’s new, higher import tariffs are dragging on economic growth in key countries, which will likely be a headwind on their companies’ sales, profits, and stock prices.

US Agriculture Market: Soybean futures prices surged 3.2% yesterday on reports that China has finally started ramping up its purchases of US crops as promised in the recent US-China trade truce. According to broker AgResource Co., importers in China have bought seven to 10 cargoes from the US, some for shipping in January and others set for June or later. Beans are trading slightly higher today, with near futures currently trading at 1157.5, a 17-month high.

 Japan-China: Bilateral tensions continue to spiral in response to Japanese Prime Minister Takaichi’s recent statement about Japan intervening militarily against a potential Chinese blockade of Taiwan. A meeting between mid-level diplomats yesterday seemingly made no progress, and Japan has been warning its citizens about their safety when traveling in China. We remain concerned that the tensions could lead to Chinese economic sanctions or other punishments against Japan, which could be a negative for Japanese stocks.

European Defense Sector: According to the Financial Times, several small defense contractors across Europe are considering initial public offerings to capitalize on today’s intense investor interest in the sector. The firms include British metal engineer Doncaster Group, Franco-German tank maker KNDS, and Czech defense firm Czechoslovak Group. The new listings would follow a plethora of European defense IPOs since 2024. Given the geopolitical threat from Russia, US policy changes, and the weaker dollar, we remain very optimistic about Europe’s defense stocks.

Ecuador: Official data from Sunday’s referendum show voters overwhelmingly rejected conservative President Noboa’s plan to allow a US military base, re-write the constitution, and cut state funding for political parties. The results may force Noboa to give up on some of his conservative, pro-business program, potentially crimping Ecuador’s economic prospects going forward.

Investment Strategy: CALPERS, the giant public pension fund for California, officially adopted a new strategic asset allocation policy yesterday. Starting July 1, the fund will use a “Total Portfolio Approach” that measures its performance against a single benchmark consisting of 75% global stocks and 25% US Treasurys, rather than individual benchmarks for each of its 11 asset classes. The change will immediately boost the fund’s exposure to stocks and allow greater flexibility in letting exposure to individual asset classes drift from target.

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by Patrick Fearon-Hernandez, CFA, and Thomas Wash

[Posted: 9:30 AM ET] | PDF

Our Comment today opens with news suggesting the US could soon target Chinese tech services giant Alibaba with sanctions or trade restrictions in a move that could reignite bilateral tensions and weigh on global markets. We next review several other international and US developments with the potential to affect the financial markets today, including worsening military tensions between China and Japan and concerns in Europe about the rise of stablecoins backed by US Treasury bills.

China-United States: In a Friday scoop, the Financial Times revealed the existence of a US national security memo claiming that Chinese technology services giant Alibaba provides support for Beijing’s military cyber operations against the US. Importantly, it appears that the memo could help justify US sanctions or business restrictions against Alibaba, potentially including a forced delisting from the US stock market. However, White House officials declined to tell the FT how they intend to respond to the intelligence.

• As we’ve argued previously, the US-China trade war this year has revealed that China’s comprehensive power — its combined military, diplomatic, economic, and technological strength — is probably more on par with that of the US than people had realized. We think this has been reflected in the US-China trade truce reached last month. If it leads to a broader, longer-term deal, US-China tensions could ease more permanently, reducing the risk of sanctions or other retaliatory actions and giving a boost to US and Chinese stocks.
• However, it’s important to note that such a comprehensive, longer term deal is not yet in place. For now, the US-China trade truce remains fragile, and each side could take actions to upset it. If the US uses the new intelligence report to undercut Alibaba, we suspect bilateral relations could turn south again, putting a damper on stock values.

China-Japan: Late on Friday, Beijing officially warned Chinese citizens to avoid travel to Japan, and Hong Kong authorities issued a similar warning on Saturday. Reports yesterday said a Chinese coast guard vessel also made a provocative patrol through a set of islets claimed by both Beijing and Tokyo but administered by Japan. The moves mark the latest Chinese retaliation for Japanese Prime Minister Takaichi’s statement last week that a Chinese effort to take Taiwan by force would require Japan to intervene militarily.

• As we noted in our latest Bi-Weekly Geopolitical Report, Takaichi’s hawkish approach to China risks prompting Beijing to impose additional economic and trade punishment on Japan going forward.
• Indeed, observers have noted that the next logical step for each country would be to impose economic sanctions on each other. That, of course, would have the potential to weigh on both Japanese and Chinese stock values.

China: At a conference in Beijing on Friday, former Finance Minister Lou Jiwei warned that the country’s slumping real estate sector will likely continue to weigh on economic growth for up to five more years. The warning underscores the massive overbuilding in China’s residential real estate sector until 2021, which resulted in extreme excess capacity, bad debts, and steep losses by builders and buyers alike. If rebalancing the sector really does take until 2030, it will mean nearly a decade of bruised growth for China, on top of several other economic headwinds.

United States-Eurozone: In a Financial Times interview, Dutch central bank chief Olaf Sleijpen warned that the growing private-sector issuance of stablecoins backed by US Treasury bills is a risk for the European Central Bank. Sleijpen warned that a run on a stablecoin could potentially force the ECB to adjust its monetary policy, putting the institution in a position similar to that of central banks in emerging markets that are heavily dollarized.

• Sleijpen’s concern illustrates how the rise of Treasury-backed stablecoins is actually boosting the US dollar’s importance in world financial markets again.
• We still expect the dollar to depreciate in the foreign exchange markets in the coming years, giving foreign equities an advantage, but the rise of Treasury-backed stablecoins will likely offset some investor concerns about the dollar’s influence in the global economy.

United States-Switzerland: US Treasury Secretary Bessent and UBS Chief Executive Officer Colm Kelleher have reportedly had several talks in recent months to discuss the possibility of the giant Swiss bank moving its headquarters to the US. The discussions appear mostly designed to dissuade the Swiss government from imposing tough new capital rules on UBS. All the same, given the White House’s push for more foreign investment and its proclivity to guide corporate investment and operations decisions, such a move may be more than just posturing by UBS.

United States-Venezuela: President Trump yesterday hinted to reporters that the US may be in talks with Venezuelan President Maduro on the possibility of Maduro stepping down in the face of a significant amount of US Navy firepower in the region. That could reduce the risk of some kind of US-Venezuelan conflict in the region. It could also herald a potential resurgence of Western investment in the oil sector and the potential for significant new supplies of oil coming to the market soon.

US Airline Industry: The Federal Aviation Administration this morning lifted the flight curbs imposed at airports across the country earlier this month because of the federal government shutdown. Airlines have warned it could take several days for full operations to resume and for flight crews to get back in place, but it now appears that flight schedules will be back to normal for the big Thanksgiving travel rush next week — good news for both the traveling public and the nation’s airlines.

Russia-Poland: Authorities in Poland yesterday said sections of a railway heavily used to ship arms to Ukraine were blown up, forcing two passenger trains to make emergency stops. After the recent drone intrusions into Polish airspace and other similar incidents across Europe, the Sunday explosions appear to be the latest brazen example of Russian sabotage in member countries of the North Atlantic Treaty Organization. Such sabotage risks going too far and sparking a crisis or conflict that would disrupt the economy and/or financial markets.

Chile: In the first round of presidential elections yesterday, José Antonio Kast of the ultraconservative Republican Party came in first with about 70.0% of the vote. Jeannette Jara of the Communist Party came in second with 26.8%. That makes Kast the frontrunner for the second and final round of voting on December 14. If that transpires, Chile will do a dramatic course correction after six years of leadership by the leftwing President Gabriel Boric. The news is likely to give a boost to Chilean stocks today.

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