by Patrick Fearon-Hernandez, CFA, and Thomas Wash

[Posted: 9:30 AM ET] | PDF

Our Comment today opens with the latest on President Trump’s tariff program, including a one-month delay in the tariffs against Canada and Mexico, while China has launched a series of its own tariffs, export curbs, and other measures against the US. We next review several other international and US developments with the potential to affect the financial markets today, including a plan by the European Union to begin enforcing its new artificial-intelligence regulations and a Trump executive order to set up a US sovereign wealth fund.

US Tariff Policy: Yesterday, President Trump said he had extracted sufficient concessions from the leaders of Canada and Mexico on illegal immigration and drug trafficking that he would postpone his big import tariffs on the countries until early March. For example, Canadian Prime Minister Trudeau and Mexican President Sheinbaum both agreed to deploy about 10,000 troops to their US borders to clamp down on fentanyl trafficking. In contrast, China retaliated today with a series of tariffs on US products and export curbs on some Chinese goods.

• In reality, the Canadian and Mexican concessions are less than meets the eye. For example, Mexico has previously surged troops to the border to meet US concerns, and almost no fentanyl enters the US from Canada.
• Canadian and Mexican officials have also complained that different high-ranking officials in the Trump administration have given them different stories on what Trump is aiming for with his trade policies. The statements suggest Trump is making the decisions largely on his own, perhaps more tactically than strategically. That underscores how US trade policy in the new administration will remain unpredictable and volatile.
• In any case, we continue to believe that Trump’s aggressive, bullying tactics may well yield progress on issues such as illegal immigration, drug trafficking, economic resiliency, and the US balance of trade, but at the risk of unnecessarily alienating important US allies and undermining economic efficiency. Based on China’s greater economic heft and strong rivalry with the US, there is also a possibility that it will be harder for Washington and Beijing to reach a lasting deal.
• In terms of market responses, we note that global equity prices have held up relatively well to the tariff kerfuffle, suggesting that stock investors expect the tariffs to be minimized, temporary, or otherwise not overly economically damaging. However, investors have also bid gold prices up to record levels, suggesting more substantial concerns. So far today, near gold futures are pricing at $2,866.50/oz, up 0.3% from yesterday and up more than 40% from one year ago.

(Source: The Wall Street Journal)

European Union-United States: The European Commission today will release its implementing rules for the EU’s 2023 Artificial Intelligence Act. The Commission plans to release the regulations despite President Trump’s threat of retaliation for any moves that affect US technology firms, which have become a key part of his governing coalition. The new rules are the world’s most comprehensive set of AI regulations, affecting activities such as model development and data privacy.

United Kingdom: For the first time, a YouGov opinion poll shows the right-wing populist Reform Party with more public support than either the governing Labour Party or the Conservative Party. The poll puts support for Reform at 25%, versus 24% for Labour (within the poll’s margin of error) and 21% for the Conservatives. The data illustrates how European politics continue to move toward the right, potentially setting the stage for more tax cuts, deregulation, curbs on immigration, and isolationist foreign policies.

United States-Ukraine: President Trump yesterday said he was looking for a deal under which Ukraine would provide the US with rare-earth mineral resources in return for continued military aid. According to Trump, the Ukrainian government is open to the deal. Nevertheless, it isn’t clear whether Kyiv can keep fighting off the Russian invasion force until such a deal is in place. New reports suggest the Ukrainian military could be starting to buckle because of the recent slowdown in Western support and its own manpower shortfalls.

US Rule of Law: In recent days, Secretary of State Rubio has said President Trump named him as acting director of the US Agency for International Development, which by statute is set up to administer foreign aid programs to build goodwill toward the US. Trump, Elon Musk, and Rubio then largely shuttered the agency. Similarly, Trump named Treasury Secretary Bessent as acting chief of the Consumer Financial Protection Bureau, after which Bessent essentially ordered a freeze on the agency’s activities.

• The Trump administration’s moves with USAID and the CFPB aim to cut what the president sees as wasteful spending and excessive regulation.
• Nevertheless, both agencies are overseen by Congress, so the moves by Trump could well set up a constitutional crisis. If the judicial system allows Trump’s moves to stand, Congress could conceivably be neutered, and the president could be left with relatively unfettered power to implement whatever policies he wants.
• Shutting down or severely reducing USAID’s foreign aid programs also presents an opening for China and the key member of its geopolitical bloc to step into the breach and replace the US’s funding. Doing so would allow Beijing to capture the goodwill previously earned by the US and further enhance Chinese diplomatic power.

US Sovereign Wealth Fund: President Trump yesterday signed an executive order for the US to create a sovereign wealth fund to facilitate public investments in long-term assets. The fund, which would presumably require Congressional approval and appropriations, is to be up and running within one year. Although Trump didn’t provide specifics on his goal for the fund, he did suggest that it could be of use in taking over the US operations of Chinese social media app TikTok.

• Countries ranging from Norway to Saudi Arabia have sovereign wealth funds, some of which are enormous.
• Today’s sovereign wealth funds not only operate in arms-length asset purchases, but they are sometimes used to provide strategic, long-term capital to favored sectors or companies. Therefore, the risk is that a US fund could be deployed for uneconomic projects or to support politically favored firms.

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by Patrick Fearon-Hernandez, CFA, and Thomas Wash

[Posted: 9:30 AM ET] | PDF

Our Comment today opens with President Trump’s decision over the weekend to impose big, new import tariffs against Canada, Mexico, and China. The move is dominating the financial media this morning, as it has the potential to spark a long, painful trade war and leave the US isolated from its traditional allies. We next review several other international and US developments with the potential to affect the financial markets today, including new revelations on the biased answers that can be generated by China’s DeepSeek artificial-intelligence platform and news that Elon Musk has gained access to the US Treasury Department’s sensitive payments platform.

United States-Canada-Mexico-China: The Trump administration on Saturday imposed 25% import tariffs on most goods from Canada and Mexico, 10% tariffs on Canadian energy imports, and additional 10% tariffs on all imports from China, effective Tuesday. For legal basis, the White House cited emergency economic authority based on fentanyl trafficking from the countries. The administration said the tariffs will have no exemptions and will be in place until officials are satisfied that illicit fentanyl trafficking across the US border has ceased.

• The new tariffs on Canada, Mexico, and China would affect imports with a total value of about $1.3 trillion in 2023, making them much more significant than the tariffs against China in Trump’s first term. Those tariffs applied to about $360 billion of Chinese imports at the time.
• President Trump indicated on Friday that any tariffs against Canada, Mexico, and China would only be the first of many. He vowed to also slap broad tariffs on semiconductors, pharmaceuticals, steel, aluminum, copper, oil and gas imports as soon as mid-February.
• Beijing said it would file a WTO action against the tariffs and take retaliatory measures. Canadian Prime Minister Trudeau called the new US tariffs a “betrayal” and imposed 25% tariffs on $107 billion of US-made products going to Canada, the first phase of which will affect products including motorcycles, cosmetics, wine, and orange juice.
• In addition, the imposition of the tariffs will now likely accelerate efforts to get around them. For example, Chinese electric-vehicle battery maker CNGR Advanced Material last week opened a new battery materials plant in Morrocco to take advantage of that country’s free-trade agreements with the European Union and the US.
• Even though the members of the United Steelworkers broadly supported President Trump in his 2024 election campaign, the union criticized the new tariffs as overly broad. However, the union’s opposition was not enough to derail the tariffs.
• For US consumers, the big tariff hikes could well result in higher prices for automobiles, electronics, winter produce, and many other products in the coming weeks and months.
• Finally, the tariffs have rippled through all major markets today, sending US stock futures down, upending many foreign stocks, and especially weighing on global auto makers. The dollar has also appreciated, with the US Dollar Index currently at 109.19, up 0.8% on the day. The VIX has also spiked above 20, and cryptocurrency prices have fallen sharply.

 (Source: Wall Street Journal)

US-China Artificial Intelligence: As investors continue to digest last week’s news that Chinese firm DeepSeek has built a cheap, powerful AI model, a study by a disinformation watchdog has found that DeepSeek’s model often spouts the Chinese Communist Party’s line when queried about international controversies. The slanted results appear when the model is accessed from China-based servers. Other reports say US firms such as Nvidia, Microsoft, and Amazon are supporting uncensored versions of the DeepSeek model for customers outside of China.

• While it’s tempting to think that DeepSeek’s censored output would be a liability, that may not necessarily be the case. Other Chinese tech products, such as Huawei telecom equipment and the TikTok social media app, also present surveillance or propaganda risks, but many Westerners still covet them because of their low cost and ease of use.
• The decision by Nvidia, Microsoft, and other US firms to support the DeepSeek model likely reflects their realization that its low cost and ease of use stand to greatly expand the use of AI, boosting demand for their products.
• A key question going forward is whether Western governments will eventually try to restrict or ban the use of Chinese models on national security concerns.

Japan-China: Following on US efforts to curb Chinese access to advanced technologies, Japan is reportedly preparing to tighten its export controls on advanced semiconductors, chipmaking equipment, and quantum-computing technology. It is also preparing to put dozens more Chinese firms on its “entity list,” which names companies restricted from receiving certain Japanese exports that have both civilian and military uses.

• In some respects, Japanese Prime Minister Ishiba in recent months has seemed eager for warmer ties with China, sparking worries about the strength of the US-Japanese security alliance. The tougher curbs on Japanese exports to China could help ease those concerns.
• Of course, the flip side is that Beijing will certainly be perturbed by the new Japanese rules. The move therefore could worsen Japan-China relations again and potentially prompt China to impose retaliatory trade barriers against Japan.

China-Philippines: Late last week, Manila arrested five more Chinese nationals on suspicion of spying, after arresting the group’s apparent ringleader in mid-January. Among other activities, the spies had allegedly set up cameras and other surveillance equipment to monitor Philippine coast guard ships en route to resupply marines on the Second Thomas Shoal, a disputed outcrop in the South China Sea. The shoal is claimed by both Beijing and Manila.

• The spies’ activities help explain how the Chinese navy and coast guard have been so successful in intercepting Philippine vessels trying to resupply the marines and assert Manila’s territorial claims in the South China Sea.
• More broadly, the arrests suggest that the Philippines has become a hotbed of espionage activity as China tries to take control of Philippine territory and the US deploys more military assets to the region.

Germany: Friedrich Merz, the center-right Christian Democratic Union’s (CDU) candidate for chancellor in this month’s election and the current leader in opinion polls, suffered a humiliating defeat in parliament for his tough anti-immigration bill on Friday, as his controversial reliance on the far-right Alternative for Germany (AfD) party for an earlier procedural vote backfired spectacularly.

• It’s now clear that Merz’s flirtation with the AfD has irritated many legislators and citizens from the center-left to the center-right.
• Even if Merz remains the frontrunner and wins the election, there is now an increased chance that he may turn to the AfD to form a government. That would give the far-right its strongest position in German politics since World War II.

United States-Denmark-Greenland: After a poll last week showed that 85% of Greenland’s residents reject President Trump’s plan for the US to take over the autonomous Danish island, a new poll shows 78% of Danish citizens also oppose selling to the US. The new poll also found that 46% of Danes now see the US as a “very big threat” or “fairly big threat” to Denmark, exceeding the share who say the same about Iran or North Korea.

• If foreign citizens increasingly see the US as a threatening country, foreign political leaders may come under pressure to reduce their cooperation or support for Washington.
• As we discussed in our Bi-Weekly Geopolitical Report from January 27, such a development could potentially undermine the US alliance structure and weaken the country’s security position against China, Russia, Iran, and North Korea.

United States-Panama: Secretary of State Rubio visited Panama over the weekend to talk with Panamanian President José Raúl Mulino about US concerns over Chinese involvement with the Panama Canal. Mulino reportedly offered several concessions, such as ending a 2017 deal for Chinese infrastructure funding, but he insisted Panama would not return the facility to the US. In response, President Trump reiterated that if Panama does not return the canal, “something very powerful is going to happen.”

US Politics: The Democratic National Committee has selected Ken Martin to be its new party chairman, charged with making the party competitive again after its broad losses in the 2024 election. Martin is the long-time chair of Minnesota’s Democratic-Farmer-Labor Party and has said he wants to push the party back toward a focus on helping working class voters.

US Fiscal Policy: Despite resistance from career employees, Treasury Secretary Bessent on Friday gave associates of Elon Musk and the so-called Department of Government Efficiency access to the Treasury Department’s electronic payments system, which handles most federal payments to individuals, businesses, educational and medical agencies, and states. The move is quickly becoming controversial because it could theoretically allow Musk and his team to stop federal spending even if it has been appropriated by Congress.

• Allowing Musk’s team into the payments system will also likely rekindle concerns that he and many of his Silicon Valley recruits to the DOGE have conflicts of interest.
• For example, companies that serve as contractors for the federal government and compete against Musk’s businesses could theoretically see their payments shut off. The payment system also carries a lot of sensitive information on companies and individuals, which helps explain why access to it has been closely restricted until now.

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by Patrick Fearon-Hernandez, CFA, and Thomas Wash

[Posted: 9:30 AM ET] | PDF

Our Comment today opens with news of a massive new command complex being built for the Chinese military — a move the portends further US-Chinese geopolitical and economic tensions over time. We next review several other international and US developments with the potential to affect the financial markets today, including more signs of political and economic change in Germany and a warning from a major hedge fund that the US cryptocurrency market is in a dangerous bubble.

China: According to the Financial Times, the Chinese military is building a massive command center and bunker complex on the outskirts of Beijing. The complex will apparently be some 10 times bigger than the Pentagon and should facilitate China’s effort to better integrate the various branches of its armed forces. The deep bunkers also underline China’s intention to become a more credible nuclear power. In sum, the new facility reflects China’s rapid, on-going military expansion and the likelihood of continuing US-China geopolitical tensions.

German Politics: Ahead of next month’s elections, the center-right Christian Democratic Union this week won parliamentary approval for a nonbinding resolution to drastically restrict immigration, but only with the support of the far-right Alternative for Germany (AfD) party. The move broke Germany’s longstanding taboo against cooperating with the AfD and sets the stage for a possible right-wing coalition after the February 23 elections.

German Economy: German defense contractor Hensoldt, which makes air defense radars, is reportedly negotiating with auto suppliers Bosch and Continental to hire almost 200 of their workers facing layoffs. The talks reflect the changing dynamics in Germany’s industrial sector, where defense firms are booming amid today’s geopolitical tensions and increased defense budgets, while automotive firms are struggling amid stagnating exports and foreign competition. The talks also help affirm our positive view on European defense stocks.

• On a related note, data today showed Germany’s registered unemployment rate rose to a seasonally adjusted 6.2% in January, up from 6.1% in December.
• Excluding the pandemic period, the registered unemployment rate is now at its highest since 2016.

Sweden-Iran: After an anti-Islam campaigner famous for public burnings of the Koran was shot and killed near Stockholm on Wednesday, the Swedish government has indicated it is probing whether the murder was instigated by a foreign power. The most likely government that might attempt such an assassination is probably Iran.

• In any case, if such a connection is confirmed, it would underline the increased aggressiveness of the top authoritarian countries in the China-led geopolitical bloc, including China, Russia, Iran, and North Korea.
• If the murder is linked to a foreign power such as Iran, it would worsen the current geopolitical tensions between Western countries and countries in the China bloc.

Israel-Hamas: While the ceasefire between Israel and Hamas in Gaza continues, Hamas is increasingly making the daily release of Israeli hostages a humiliating, televised spectacle. For example, the militant group is releasing hostages into angry mobs in front of the demolished homes of Hamas leaders killed in the fighting. The tactic creates a risk that Tel Aviv will bring the ceasefire to an end and rekindle fighting around the region.

United States-Canada-Mexico: Even though President Trump yesterday reiterated his intention to slap broad tariffs on imports from Canada and Mexico by Saturday, administration officials are reportedly still talking with Ottawa and Mexico City and may impose only targeted levies. Whether the tariffs are universal or targeted, they could include a grace period before they are formally imposed, and they may rely on existing authorities rather than the novel approaches that officials have floated.

• According to the report, the Mexican government has already agreed to set up a joint task force with the US to tackle cross-border migration and fentanyl trafficking.
• The Canadian government is reportedly still in negotiations with the US to set up a similar task force.

US Fiscal Policy: In the wake of the fatal collision between an American Airlines plane and an Army helicopter in Washington on Wednesday, President Trump yesterday implied that the cause was lax standards and diversity, equity, and inclusion policies under Presidents Biden and Obama. According to Trump, the Federal Aviation Administration under Biden was “actively recruiting workers who suffer severe intellectual disabilities and psychiatric problems and other mental and physical conditions” under DEI initiatives.

• When asked to provide evidence for his assertion, Trump merely replied, “Because I have common sense.”
• Coupled with the new administration’s many executive orders against DEI programs and firings of personnel related to DEI initiatives, the statement suggests that DEI has become an all-purpose epithet to justify personnel or program cuts across government.
• We mention this strictly because it could have implications for investors: It now appears that political rhetoric focusing on DEI complaints could well be a useful signal of where the hammer may next fall in terms of top officials about to be fired, program reductions, or broad layoffs under the new administration.

US Cryptocurrency Policy: In an investor letter, hedge fund Elliott Capital Management warns that cryptocurrencies have become the most dangerous asset bubble in today’s investment frenzy, not only because of the size that the crypto market has attained, but also because of the Trump administration’s support of it. Elliott criticizes crypt assets as having “no substance” and warns that the “inevitable collapse” of the crypto bubble “could wreak havoc in ways we cannot yet anticipate.”

• While it’s true that many assets have extremely high valuations today, it’s notoriously difficult to identify which assets are in a true bubble, and when any such bubble might burst.
• A key issue is whether a retrenchment in the crypto market would spread to other areas of the financial system. A particular risk would be if banks or other traditional parts of the system have provided leverage to crypto buyers. The crypto winter a couple of years ago revealed only limited problems, but we continue to monitor the markets for any sign that such risky linkages have become more significant now.

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by Patrick Fearon-Hernandez, CFA, and Thomas Wash

[Posted: 9:30 AM ET] | PDF

Our Comment today opens with several notes on the weak economic situation in Europe, which helped spur the European Central Bank to cut interest rates again today. We next review several other international and US developments with the potential to affect the financial markets today, including a new reform of the pension system in Chile and a review of the Federal Reserve’s decision yesterday to hold US interest rates steady.

European Union: European Commission President von der Leyen yesterday unveiled the bloc’s new “Competitiveness Compass” program, which is aimed at reducing regulations and spurring increased innovation, investment, and economic growth. The plan is geared toward improving the EU’s competitiveness in comparison to the booming but increasingly protectionist US economy and the threatening Chinese economy. The plan particularly aims to boost EU activity in cloud computing and artificial intelligence.

• The plan would also reportedly include “Buy European” provisions for public procurement, much the same as the rules that the US and China have implemented favoring domestic producers.
• That would risk running afoul of World Trade Organization rules. However, given Europe’s need to compete with the US and China, the EU is prepared to take the chance.

Eurozone Economic Growth: Highlighting the broader EU’s economic stagnation, new data shows that the eurozone’s fourth-quarter gross domestic product was flat with the third quarter, short of the expected rise of 0.1% and much weaker than the 0.4% gain in the previous period. Compared with the fourth quarter of 2023, the region’s GDP was up just 0.9%. The weak growth largely stems from tepid corporate investment and a deteriorating trade balance.

 

Eurozone Monetary Policy: Consistent with eurozone’s stagnant economic growth, the European Central Bank today cut its benchmark short-term interest rate to 2.75% from its previous level of 3.00%, as widely expected. That marked the ECB’s fifth rate cut in its last six policy meetings. In addition, since the Fed held its benchmark fed funds rate steady yesterday (see below), the ECB’s move increased the rate differential between the eurozone and the US. The euro is nevertheless roughly flat on the day, trading at $1.0410.

Chile: Both houses of the legislature have now approved a major reform of the country’s pensions system, whose meager payouts helped prompt mass demonstrations six years ago. The reform will boost employer contributions to the system and promote competition between private-sector pension fund managers. The increase in the system’s funds may also help boost activity in the Chilean financial markets.

US Monetary Policy: The Fed yesterday decided to hold its benchmark fed funds short-term interest rate steady at 4.25% to 4.50%. The policymakers also decided to keep reducing the central bank’s holdings of Treasury securities, agency debt, and mortgage-backed obligations. Both decisions were widely expected. Importantly, Fed Chair Powell said in his post-decision press conference that the Fed would need to see “real progress on inflation” or unexpected weakness in the labor market before considering further rate reductions.

• The policy statement and Powell’s press-conference remarks support our view that the monetary policymakers will probably implement only a limited number of rate cuts in 2025. They may even hold rates steady or potentially raise them if inflation pressures rebound.
• In response to the Fed’s action, President Trump castigated the policymakers for keeping interest rates too high, suggesting that he will continue to pressure the Fed for more rate cuts in the coming months, even if they would risk a rebound in inflation pressures.

US Fiscal Policy: The federal government’s Office of Personnel Management has reportedly been surprised that its anti-diversity directive last week has turned up so few employees to discharge. The directive had required agencies to identify all employees working full-time on diversity, equity, inclusion, and accessibility and prepare to fire them. The Department of Veteran Affairs has identified only 60 such employees, and other agencies have identified far fewer. OPM is now expanding its definition of employees subject to the directive.

• The failure to identify legions of DEI workers could mean that officials in the new administration had a false understanding of how many such workers were on the federal payroll. It could also reflect some lower-level officials trying to protect their employees. Perhaps more likely, it could be a combination of such factors.
• In any case, the situation suggests that the new administration may find it harder to purge large numbers of federal workers than it expected, especially given the political and legal issues such an effort could entail.

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by Patrick Fearon-Hernandez, CFA, and Thomas Wash

[Posted: 9:30 AM ET] | PDF

Our Comment today opens with new developments related to Chinese artificial-intelligence firm DeepSeek and its market-disrupting new AI model. Importantly, new evidence suggests that DeepSeek’s success may have depended on stolen intellectual property from the US’s top AI developer. We next review several other international and US developments with the potential to affect the financial markets today, including political pressure on the Japanese government to provide more tax breaks and new developments on the Trump administration’s effort to pause federal grants and loans.

DeepSeek and Global Semiconductor Industry: As investors continue to digest the implications of the cheap, powerful new artificial-intelligence model from Chinese firm DeepSeek, the CEO of Dutch semiconductor-equipment giant ASML insisted the development would be positive for chip makers because it would lead to even more demand for their products. The statement has boosted ASML’s stock price by about 8.8% so far this morning, and other European tech stocks have rallied as well.

• The all-in cost of DeepSeek’s new model was almost certainly much higher than reported. Nevertheless, the company’s success does suggest that the future AI industry won’t necessarily involve the super expensive advanced chips and huge electricity requirements that Western firms had been banking on. Thus, much of their AI-related investment to date may not pay off.
• On the other hand, cheaper and easily accessible AI models probably would lead to wider adoption of the technology, increasing the demand for basic chips and potentially boosting productivity across a wide range of industries.

DeepSeek and US-China Relations: OpenAI, maker of the US’s advanced ChatGPT AI model, said it has evidence that Chinese firm DeepSeek used the US company’s proprietary models to cheaply train its own open-source model, in violation of ChatGPT’s terms of service. The Trump administration’s AI czar, David Sacks, had also raised concerns earlier that DeepSeek’s apparent success relied on intellectual property theft from the US, as so many other Chinese technological advancements have.

• If true, DeepSeek’s ability to leverage ChatGPT’s model illustrates how hard it may be for cutting-edge AI firms to maintain their advantage.
• In any case, if DeepSeek illegally used ChatGPT’s intellectual property to gain its edge and wipe hundreds of billions of dollars off the value of key US technology firms, it seems certain that the development will further worsen US-China tensions. For one thing, it would likely encourage the Trump administration to be even more aggressive on imposing trade barriers with China.

Japan: Key opposition parties are reportedly demanding expensive new tax breaks to support Prime Minister Ishiba’s budget for the fiscal year beginning April 1. The Democratic Party for the People is demanding a hike in the amount of income exempt from tax, while the Japan Innovation Party is asking for free elementary and secondary education. The disputes could potentially undermine the minority Liberal Democratic Party/Komeito government’s prospects in the elections expected this summer and/or further worsen Japan’s budget deficit.

United Kingdom: As part of its drive to boost British economic growth, the government of Prime Minister Starmer has announced a series of infrastructure investments, including support for a third runway to ease severe capacity constraints at Heathrow Airport, the country’s largest. The new runway will likely face a long planning period and litigation, but it is expected to boost UK economic growth by more than 0.4% per year when it is finally completed.

United States-Greenland-Denmark: In the first survey of Greenlanders since President Trump expressed his interest in buying the autonomous island from Denmark, some 85% of respondents said they didn’t want to become part of the US. About 9% were undecided, and only 6% wanted Greenland to be bought by the US. The results echo the view of Greenlandic Prime Minister Múte Egede, who has also said his citizens reject the idea of a US takeover.

US Monetary Policy: The Fed will wrap up its latest policy meeting today, with the decision due at 2:00 PM ET. The policymakers are widely expected to hold the benchmark fed funds interest rate unchanged at its current range of 4.25% to 4.50%, but surprises are possible given that the annual rotation of committee members will bring new officials to the panel. Investors will be looking to Chair Powell’s post-meeting news conference for guidance on the future path of rates and for his reaction to President Trump’s demand for rate cuts.

US Fiscal Policy: A federal judge late yesterday afternoon temporarily blocked the Trump administration’s order to freeze the disbursement of federal grants, loans, and other aid, which we described in our Comment yesterday. The injunction lasts until Monday, when an in-depth hearing is scheduled. A key legal issue is whether the president can stop the disbursement of funds appropriated by Congress, which has the power of the purse under the Constitution.

• Separately, to ensure all federal workers are on board with Trump’s back-to-the-office mandate, the administration has offered buyout packages to every full-time job holder. Under the buyout, workers who don’t want to give up remote work and resign by February 6 would be paid through the end of the fiscal year on September 30, with benefits.
• The buyout offer applies to all full-time federal employees except for military personnel, the Postal Service, and those working in immigration enforcement or national security.
• If implemented, the administration expects 5% to 10% of the federal workforce to quit, saving the federal government around $100 billion per year. Of course, the result would likely be a degradation of government services, especially if the offer is taken up disproportionately by the most capable and productive workers, who may have the best prospects in the private sector.
• In any case, if the program is implemented, it could potentially cause at least temporary distortions in the labor market and economic data.

US Labor Market: The National Assessment of Educational Progress from the Department of Education showed that only 67% of US eighth graders were reading at a “basic” or better competency for their grade level in 2024. Only 60% of fourth graders were at that standard. Math scores were flat to slightly better but the nearly continuous slide in reading scores over the last decade raises concern about the quality of the US workforce in the coming years.

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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 observations on yesterday’s rout in Western technology stocks related to artificial intelligence. We next review several other international and US developments with the potential to affect the financial markets today, including signs that China’s property slump is starting to weaken even its strongest developers and a White House order last night that could potentially disrupt federal payments to a wide range of businesses and nonprofits.

Global Technology Stock Sell-Off: Yesterday’s sell-off in Western artificial-intelligence stocks erased some $589 billion of Nvidia’s market value alone. The previously high-flying stock closed down about 17% for the day, and other AI-related firms closed down almost as much. As a reminder, the sell-off was sparked by a realization that Chinese AI firm DeepSeek was able to produce a top AI model without expensive Nvidia chips and far more cheaply than Western firms have been able to create competing models.

• Since AI stocks had gotten so richly valued, they were probably susceptible to a correction at the sign of any bad news. As we’ve written recently, investors had even begun looking at the Magnificent 7 as a sort of safe haven. The reality is that stock prices can be volatile, and while it can be tempting to chase the momentum plays, keeping diversified can be a safer approach.
• Looking forward, it’s probably too early to gauge exactly how DeepSeek or other Chinese AI models could affect the US firms. As the US-China “AI race” heats up, there is a chance that the US government will limit access to Chinese tools for national security purposes. That could leave America’s AI-related firms in pole position to serve the US geopolitical bloc and maybe even beyond, while keeping them out of the China bloc.
• At the same time, even if the US and Chinese AI markets are walled off from each other, investors should remember that increased competition within the US bloc’s market could weigh on profits as the market develops. There are also positive trends in other sectors of the US economy. That’s a key reason why we think investors shouldn’t forget the importance of diversification and the potential for better future performance from smaller cap stocks and value stocks.

United States-China: After years of saying it didn’t have enough data to say whether the COVID pandemic occurred naturally or from a lab leak in China, the Central Intelligence Agency has released an updated assessment saying it now favors the lab-leak theory, although with only a low level of confidence. The reassessment, ordered by former President Biden last year and released by the new CIA director last week, will likely exacerbate US-China tensions and encourage further economic decoupling between the US and Chinese economies.

China: Yesterday, major property developer Vanke, until now considered the most stable of China’s major housing firms, reported a massive fourth-quarter loss of approximately $6.2 billion and announced the resignation of several top officials. Company figures showed the firm suffered a massive drop in new residential sales and falling margins — data that suggests China’s housing crisis has now spread to even its strongest developers. A key question going forward is whether the government will step in to help Vanke stay in business.

United States-India: According to the White House, President Trump has told Indian Prime Minister Modi that he wants New Delhi to buy more US weapons to help rebalance trade between the two countries. The request comes as India, the world’s biggest arms importer, is trying to diversify its buying away from Russia. That creates a potential opportunity for US defense contractors. However, it’s important to note that New Delhi is also trying to expand its own defense industrial base so that it is less reliant on foreign suppliers.

• As we’ve noted previously, President Trump has reportedly told newly confirmed Defense Secretary Hegseth to prepare for smaller defense budgets, potentially presenting a risk for US defense firms.
• However, Trump’s conversation with Modi suggests he may be looking to offset lower US arms orders with increased orders from abroad. That is likely also a reason why Trump is pushing other US allies to spend more for their own defense, since a lot of that new spending could well be channeled to US suppliers.
• We note, however, that many US allies are still resisting increased defense budgets and/or purchases from the US. In Germany, for example, the namesake leader of the radical left-wing Sahra Wagenknecht Alliance has vowed to block any increase in military spending if her party gains representation in the Bundestag in next month’s election. According to opinion polls, the party currently has about 5% support, just enough to enter parliament.

US Monetary Policy: The Fed begins its latest policy meeting today, with the decision due out tomorrow at 2:00 PM ET. The policymakers are widely expected to hold the benchmark fed funds interest rate unchanged at its current range of 4.25% to 4.50%, but surprises are possible given that the annual rotation of committee members will bring new officials to the panel. Chair Powell’s post-meeting news conference will be especially important, as investors will be looking for more guidance on the future path of rates.

US Fiscal Policy: The White House’s Office of Management and Budget last night ordered executive departments and agencies to pause federal grants, loans and other financial-aid programs pending a review by the new administration. Because of the broad nature of the order, departments and agencies are reportedly confused about what disbursements must be stopped and how long they will be frozen.

• Footnotes to the memo exempted Social Security, Medicare, and other payments made directly to individuals.
• However, that would still leave a vast array of federal payments that could potentially be frozen, from small-business loans to highway funding. A disbursement freeze of that magnitude could be disruptive to the economy and undermine business confidence.

US Trade Policy: According to a Financial Times article yesterday, Treasury Secretary Bessent is pushing the Trump administration to back a gradual increase in US import tariffs. Under Bessent’s plan, the universal tariffs would rise 2.5% per month until they reach 20.0%, giving firms more time to adjust and creating the opportunity for the US to strike trade deals with foreign countries. Our latest Bi-Weekly Geopolitical Report discusses how Bessent’s trade policies fit into the overall Trump program of shifting security and prosperity costs to US allies.

US Health Policy: New reports say Robert Kennedy Jr. is struggling to convince senators to confirm him as Secretary of Health and Human Services because of his controversial stand against vaccines and his support for abortion rights. If Kennedy fails to win confirmation in a vote later this week, healthcare stocks would likely rally, at least until a new nominee is named.

US Commercial Real Estate Industry: According to data providers such as MSCI, sales of US office buildings jumped approximately 20% in 2024 to a total of $63.6 billion. Sales are still much weaker than the annual average of $142.9 billion from 2015 to 2019, but the rebound last year provides further evidence that investors have started trying to take advantage of the distressed industry.

• As we’ve noted over the last few months, we are seeing increased evidence that buyers are scooping up properties burdened by excessive debt, high interest rates, and low occupancy rates.
• As companies impose more back-to-the-office policies, the new sales could bode well for office-sector real estate investment trusts (REITs) going forward.

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