by Patrick Fearon-Hernandez, CFA, and Thomas Wash

[Posted: 9:30 AM EDT] | PDF

Our Comment today opens with notes on the global energy market. We next review several other international and US developments with the potential to affect the financial markets today, including a cut to France’s sovereign debt rating, election results in several key emerging markets, and another Federal Reserve policymaker’s statement suggesting US interest rates will remain high for an extended period.

Global Energy Market: The Organization of the Petroleum Exporting Countries and its Russian-led allies agreed to keep most of their current output cuts in place until late 2025, as they try to boost prices in the face of weak global demand and rising non-OPEC production. The cuts that will remain in place amount to more than three million barrels per day of potential output. With little change in production for now, the announcement has had almost no impact on the oil markets. So far today, Brent crude is trading virtually unchanged at $78.91 per barrel.

• Separately, European natural gas prices have surged some 13% so far today, following an outage at a Norwegian gas processing facility. Sources say the outage could eventually reduce Norway’s gas exports to Europe by about one-fifth.
• The outage is important because Norway has now become the single-largest supplier of gas to Europe, accounting for about 30% of the Continent’s total supply. The outage compounds other recent problems driving up European gas prices, such as a court ruling that could cut the remaining supplies of Russian gas through Austria and hot weather and high demand in Asia, which have diverted global supplies there.

France: On Friday, S&P cut France’s long-term sovereign credit rating from AA to AA-, with a stable outlook. According to S&P, the country’s weak economic growth is a key reason why it will be hard to cut its debt/GDP ratio in the coming years. The firm warned that political polarization will likely preclude passing economic reforms that could boost growth and/or reduce the budget deficit.

China-Australia: Based on national security concerns identified by its Foreign Investment Review Board, Canberra has ordered funds linked to a Chinese businessman to divest or cut their stakes in an Australian rare-earths miner. The move illustrates how growing frictions between China and the West continue to sever trade, capital, and technology flows around the world. The move could also anger Beijing and reverse the recent improvement in Chinese-Australian relations.

China: The private Caixin/S&P Global purchasing managers’ index for manufacturing rose to a seasonally adjusted 51.7 in May from 51.4 in April. That’s in contrast with the official PMI last week, which dropped to 49.5 from 50.4. Like most major PMIs, both these are designed so that readings over 50 indicate expanding activity. Since the index from Caixin/S&P Global puts a higher weight on smaller firms, its outperformance suggests that China’s smaller companies are now doing better than its bigger enterprises.

India:  With official election results due out tomorrow, exit polls over the weekend showed the coalition led by Prime Minister Modi’s Hindu-nationalist Bharatiya Janata Party is on track to control at least 353 of the 543 seats in the lower house of parliament. If confirmed, the results would put Modi in a position to win a third consecutive term as the nation’s leader and continue his business-friendly economic policies, including strong infrastructure spending. That prospect has driven India’s stock market indexes up some 3.5% so far today.

South Africa: Official results from last week’s elections show the African National Congress has failed to garner a majority of votes for the first time since the end of apartheid in 1994. According to the results, the party won only about 40% of the votes, down from 58% in the 2019 elections, reflecting perceptions that it has become corrupt and arrogant. The ANC will therefore have less than a majority in parliament, forcing it to form a coalition with opposition lawmakers to form a government and potentially scaring off investors concerned about political stability.

Mexico: In elections yesterday, former Mexico City mayor and environmental scientist Claudia Sheinbaum of the ruling Morena party won the presidency with about 60% of the vote, although the final count isn’t expected until later today. It appears Morena will also have a two-thirds majority in the legislature, which would allow it to push through unfinished constitutional changes favored by outgoing President Andrés Manuel López Obrador.

• Those changes include moves to increase state control over the energy industry and weaken the electoral oversight agency.
• Faced with the prospect of continued leftist policies in Mexico, investors have driven down the value of Mexican stocks and the Mexican currency. So far today, the peso (MXN) is 2.4% weaker, trading at 17.4205 per dollar ($0.0574).

US Monetary Policy: In a podcast released today, Minneapolis FRB President Kashkari said the Fed should keep interest rates high for an “extended” period, given the current strength in the economy and Americans’ “visceral” aversion to consumer price inflation. The statement fits with many other recent statements by Fed policymakers indicating they are inclined to keep interest rates high for much longer than investors initially expected.

US Artificial Intelligence Industry: In a surprise move yesterday, Nvidia announced the next generation of its market leading AI processors, codenamed “Rubin,” just three months after announcing its previous generation, known as “Blackwell.” Amid concern about the energy consumed by Nvidia’s chips, the company noted that the Rubin processors have been designed to increase energy efficiency. Nvidia’s aggressive move and apparent success in innovating reduced energy consumption could well boost its stock price and the overall market today.

US Postal Service: The Postal Regulatory Commission late last week approved a five-cent hike in the price of a first-class stamp. Starting July 14, sending a first-class letter will cost $0.73, or 7.8% more than the current price. The price increase is the nineteenth since the year 2000, and the fifth in the last two years.

PDF

by Patrick Fearon-Hernandez, CFA, and Thomas Wash

[Posted: 9:30 AM EDT] | PDF

Good morning! Equity futures are trading higher after the PCE price index showed that inflation continues to stay in line with expectations. In sports news, the Dallas Mavericks defeated the Minnesota Timberwolves, setting up a final’s matchup with the Boston Celtics. Today’s Comment dives deep into Thursday’s GDP report and explores reasons for our continued economic optimism. We’ll also analyze the West’s further crackdown on chip exports and offer a primer on the upcoming elections in Mexico this weekend. As usual, our report concludes with a round-up of domestic and international data releases.

GDP Breakdown: While GDP revisions confirmed a first-quarter slowdown, uncertainty lingers about whether it’s a temporary dip or a sign of more significant trouble.

• US economic growth in the first quarter was weaker than initially estimated. GDP was revised downward to an annualized rate of 1.3%, down from 1.6%. Both consumer spending and inflation were lower than previously reported, with consumer spending growth revised down to 2.0% from 2.5% and the PCE price index for the quarter coming in at 3.6%, down from the initial estimate of 3.7%. While underlying fundamentals suggest the economy isn’t in immediate danger of recession, there are signs of waning economic momentum.
• Gross Domestic Income (GDI), released only after the second GDP estimate, confirmed potential weakness in economic output. The report showed that growth slowed from an annualized growth rate of 3.6% in Q4 2024 to 1.5% the following quarter. While both reports should theoretically reflect similar trends, they can actually tell different stories. The GDP report, which is focused on production activity, reveals a drag from declining inventories and rising imports. In contrast, GDI, which measures income earned by residents, suggests corporate profits also took a hit, contracting 1.7% in the first three months of the year, down from the previous quarter’s rise of 3.9%.

• While recent data suggests slowing growth, it’s important to consider the historical context. The past four recessions were all triggered by unforeseen events: the 2020 pandemic, the 2008 Lehman Brothers collapse, the 9/11 attacks in 2001, and the Gulf War in 1990. Hence, a slowdown doesn’t necessarily foreshadow an immediate downturn. While the economy faces challenges, we remain cautiously optimistic that it can weather these headwinds, absent any major disruptions such as a mass mobilization war, commodity supply shock, or pandemic. That said, a period of subpar growth is still a possibility for 2024.

More Export Controls on Chips: The West’s crackdown on semiconductor sales to its adversaries has been extended to the Middle East, reflecting concerns about potential leaks.

• US regulators are scrutinizing the national security implications of artificial intelligence (AI) development. As a precaution, they’ve tightened export controls on AI accelerator chips specifically for certain Middle Eastern countries. These chips are in high demand because they excel at processing large datasets while consuming less energy. The technology has become crucial for companies and governments looking to build out their AI infrastructure. Companies like Nvidia, AMD, and Intel Corp have been waiting on the sideline for approval to sell these chips to countries such as Saudi Arabia, Qatar, and the United Arab Emirates.
• This national security scrutiny comes amid a surge in AI stocks. For instance, Nvidia, the third-largest chipmaker by revenue, has fueled more than 30% of the S&P 500’s total returns this year, highlighting the booming AI market. Bloomberg analysis suggests that this is the largest share of a market leader at this point of the year in at least a decade. This dominance highlights the tech sector’s increasing concentration within the index. While concentration isn’t new, the current level is unprecedented. The “Magnificent Seven” tech companies now account for over 30% of the S&P 500, a significant jump from 20% in 2020.

• The tech industry faces heightened scrutiny due to growing geopolitical tensions, which is why we closely monitor the landscape. As countries form blocs, trade restrictions could disproportionately impact the revenue of large tech companies heavily reliant on foreign markets, particularly those with significant exposure to China. While these companies aren’t facing immediate risks, the future holds uncertainty due to geopolitical tensions. To mitigate portfolio risk, investors might consider small and mid-cap companies, which generally have attractive valuations relative to their large cap counterparts but also tend to have a more domestic focus that can make them less vulnerable to shifting trade patterns.

Mexican Elections: Elections in Mexico are set to take place over the weekend as the country looks to replace its controversial but fiscally prudent leader.

• Current polls indicate that Claudia Sheinbaum, the chosen successor of President Andrés Manuel López Obrador (AMLO), is heavily favored to win the election. Sheinbaum is leading her opponents, Xóchitl Gálvez and Jorge Álvarez Máynez, by a wide margin. The latest data suggests that she is poised to secure more than half of the vote, with Gálvez projected to receive around a third and Máynez anticipated to garner the remainder. Despite her lead, there have been talks that high voter turnout for the opposition may lead to an upset, as her popularity has shown signs of waning during the run-up to the election.
• Sheinbaum is expected to carry on the legacy of her predecessor, AMLO. Under his administration, the country’s inflation rate has stabilized, returning to its long-term average in a relatively short time. Additionally, the government exhibited fiscal prudence during the pandemic’s onset, incurring smaller deficits than most Latin American nations. This fiscal responsibility, coupled with an increase in foreign investment, has benefited the Mexican peso (MXN), which has largely outperformed its peer currencies. However, the next administration will face challenges, including rising gang violence, a sluggish economy, and concerns about border security.

• The success of the next administration will likely hinge on how the next president handles relations with their northern counterpart. Despite border security disputes, AMLO maintained relatively good relationships with both former President Donald Trump and current President Joe Biden. However, concerns are growing that Mexico has become too close to the United States’ rival, China. Several Chinese automakers are exploring the possibility of building factories in Mexico. These facilities would strategically position them to sell electric vehicles in the US market, bypassing hefty tariffs. Should this come to fruition, the US might seek to update or renegotiate the USMCA trade agreement.

In Other News: Former President Trump was found guilty in the hush money trial. Although his conviction does not impact his eligibility to run for office, it may damage his perception among voters. Meanwhile, President Biden has permitted Ukraine to use US-made weapons to strike military targets in Russia; this marks a significant escalation in tension and could pave the way for a broader war.

PDF

by Patrick Fearon-Hernandez, CFA, and Thomas Wash

[Posted: 9:30 AM EDT] | PDF

Good morning! Equity futures, though down overall, edged higher ahead of the opening bell as downward revisions to GDP data fueled optimism about a potential policy shift by the Federal Reserve. In sports news, the Edmonton Oilers were able to keep their NHL championship hopes alive by defeating the Dallas Stars on Wednesday. Today’s Comment will discuss the latest Beige Book and how it might impact Fed policy, why housing markets are showing early signs of troubles, and our opinion about elections in South Africa. As usual, our report will conclude with a roundup of domestic and international data releases.

Bad News on the Ground: The Federal Reserve’s latest survey of its 12 districts points to a slowing economy.

• The U.S. economy saw continued slow growth in early April to mid-May according to the Federal Reserve’s Beige Book. While most regions reported slight to modest expansion, some sectors showed signs of weakness. Auto sales were a particular concern, with dealerships resorting to adding more incentives to move cars. Additionally, there was a notable slowdown in hiring with the survey showing a modest increase in employment and firms reporting that they are finding it easier to fill positions. This suggests that demand is slowing, and the labor market is cooling down.
• This report is unlikely to sway policymakers to cut rates, but it should dissuade members from pushing for a rate hike. Economic data continues to show that the economy is growing at a stable pace. The latest consumer confidence report rebounded from April as households expressed more optimism about the economy, even as they worry more about rising prices. Similarly, the May Purchasing Manager Index (PMI) by S&P Global showed that output picked up in May, with services activity experiencing its best month in a year. However, the Beige Book suggests the recent slowdown in hiring and the weak Q1 GDP number might not be temporary.

• This Friday’s PCE price index, the Fed’s preferred inflation gauge, is a critical indicator of progress towards its 2% target. Markets anticipate that the core index will hold steady at 0.3% growth from March and 2.8% year-over-year. A higher-than-expected reading could push back investor hopes for a rate cut to September or later. Conversely, a softer inflation reading could keep a July rate cut on the table. While we remain optimistic about one to two rate cuts this year if inflation meets the Fed’s 2.6% year-end projection, the possibility of no cuts is becoming increasingly likely.

A Cool Summer: The supply of homes is starting to increase, but it appears that potential buyers are reluctant to purchase.

• Redfin data reveals a sharp increase in the number of US home sellers slashing prices to attract buyers. Nearly 6% of listings have undergone price cuts within just 12 weeks of hitting the market, a significant rise heading into the traditionally hot summer season — a time typically known for a surge in buyer demand. This data adds to growing evidence that the housing market may be losing momentum. Last week, the National Association of Realtors reported that existing home sales in April fell 1.9% year-over-year, despite expectations of a slight increase and an uptick in supply.
• Rising interest rates appear to be finally hitting the residential real estate market, as evidenced by the recent slowdown in demand. Homeowners, who locked in historically low rates during the pandemic, have been reluctant to sell. However, this trend may shift as new buyers face significantly higher borrowing costs. This could be especially impactful for a small group of homeowners who chose adjustable-rate mortgages during that period. According to a Bloomberg report, these homeowners could see a sharp rise in their monthly payments in the coming months, potentially contributing to current market headwinds.

• The surge in home-price drops presents a double-edged sword for the economy. While it’s welcome news for potential buyers and could lead to lower shelter price inflation (particularly rents and owner-equivalent rent), it might also dampen consumer confidence. Homeownership often represents a significant portion of a household’s wealth. Falling home prices could erode this wealth, especially for those without a diversified investment portfolio. As a result of this wealth effect, consumers may start to delay major purchases like cars or appliances and look to rebuild their savings first instead.

South African Sea Change: This week’s election is expected to see the ruling African National Congress (ANC) party lose its majority for the first time in 30 years.

• While the party is still expected to win the most seats, early results show that the ANC is slated to receive 42.5% of the vote. The opposition Democratic Alliance (DA) party should receive 26% of vote and the far-left Economic Freedom Fighters (EFF) will collect 8.4%. The official results won’t be known for several days but must be released within a week by law. If confirmed, the ANC will be forced to form a coalition government in order to maintain control, potentially requiring them to make compromises to their platform, which could lead to political infighting.
• This year’s election saw a large turnout, as voters looked to register their displeasure with the status quo. The country’s job market faces a significant challenge, with unemployment rising to 32.8% in the first quarter. While this is an improvement from the pandemic peak of 35%, it remains considerably higher than the pre-COVID level of 28%. Adding to the economic woes, the country is grappling with persistent power outages due to insufficient supply of electricity. To manage the strain on the power grid, the government has implemented load shedding. While this measure has been effective in reducing the load, it has also negatively impacted economic activity.

• Despite the ANC maintaining a strong plurality of seats following the election, there is still much political uncertainty. If the results hover around 40% of the vote, party members might seek to replace President Cyril Ramaphosa. Additionally, the rise of the controversial EFF could pose problems for investors. The party’s leader, Julius Malema, might leverage his influence for a greater role in government. In the past, he has advocated for the nationalization of the country’s gold and platinum mines and the seizure of land from white farmers.

In Other News: Goldman Sachs continues to supply talent to the Federal Reserve System, with Beth Hammack set to replace Loretta Mester as the President of the Cleveland Fed. Other notable Goldman alumni include former New York Fed President William Dudley and current Minneapolis Fed President Neel Kashkari. A report revealed that NATO only has 5% of the defenses needed to protect its eastern flank, a sign that Western governments are likely to ramp up spending on security.

PDF

by Patrick Fearon-Hernandez, CFA, and Thomas Wash

[Posted: 9:30 AM EDT] | PDF

Our Comment today opens with a discussion of how right-wing parties have finally consolidated power in the Netherlands. We next review several other international and US developments with the potential to affect the financial markets today, including increased signs that the Bank of England may be inadvertently laying the groundwork for new financial instability and a discussion of US polling trends as the nation begins to focus more on the November elections.

Netherlands:  After months of post-election horse trading, a right-wing coalition has nominated career civil servant Dick Schoof to be prime minister. Formerly, Schoof was chief of the Dutch intelligence agency, the top civilian in the ministry of justice, and the head of the national immigration service. That made Schoof especially attractive to Geert Wilders, the anti-immigrant firebrand whose far-right Freedom Party won the most votes in the November election. Wilders was forced to abandon his goal of becoming prime minister to secure a right-wing coalition.

• With Schoof in place as prime minister, the Freedom Party will rule in coalition with the conservative New Social Contract, the populist Farmer-Citizen Movement, and the conservative liberal VVD party of outgoing Prime Minister Mark Rutte (who is expected to become the new head of the North Atlantic Treaty Organization).
• Among its chief aims, the new government plans to cut immigration, reduce foreign development aid, freeze government salaries, and roll back some environmental policies.

United Kingdom: Upward pressure on short-term interest rates has raised concern that the Bank of England is being too aggressive in its quantitative tightening program. Unlike most other major central banks, the BOE isn’t just letting its government bond holdings run off as they mature, but it is also selling them outright. The volatile, surging short-term rates are a concern because they could portend a broader financial crisis at some point.

Russia-Ukraine War: French President Macron said he will approve Ukraine’s use of its French-supplied Scalp cruise missiles to strike targets in Russia, so long as they are used against sites that have launched attacks on Ukraine. The move by Macron, who has also supported sending North Atlantic Treaty Organization troops to Ukraine, is another small step raising the risk of an eventual direct clash between NATO and Russia. Steps on the Russian side include increasingly aggressive sabotage and influence operations by Russian intelligence agencies.

• In the latest case of Russian activity, French and Belgian police today searched the offices of an employee of the European Parliament on suspicion that he has been working for the Russians.
• In any case, President Biden and other NATO leaders continue to impose tough restrictions on the weapons they have provided to Ukraine in order to limit the risk of escalation.

Taiwan: Despite popular protests, the opposition-controlled legislature has passed legislation giving it increased control over newly inaugurated President Lai and his government. The measures give the legislature extensive authority to investigate government policies and projects, including powers to summon military officials and review classified documents.

• The measures, passed by the relatively pro-Beijing Kuomintang and the Taiwan People’s Party, could heavily hamstring the independence-minded Lai as he seeks to strengthen Taiwan’s defenses against a potential Chinese invasion or blockade.
• Of course, it is highly possible that the opposition effort to tie Lai’s hands was supported by Beijing.

North Korea-South Korea: To retaliate for pro-democracy leaflets released over North Korea by activists in the south, Pyongyang has reportedly sent over 150 balloons carrying garbage and animal feces into South Korea. Of course, the North Koreans have much more dangerous weapons that they could send southward. Nevertheless, the incident illustrates how the relationship between North Korea and South Korea just keeps getting crappier (sorry).

US Politics:  A new slide deck by pollster Bruce Mehlman contains an interesting graphic showing the share of voters who think the US is “on the wrong track” has now reached a record high of 73%. Perhaps most interesting, the graphic shows that percentage has actually been climbing since 2002, albeit with a flat period during the Obama presidency.

• The 2002 date is significant because it is just about the time when the shock of China’s entry into the World Trade Organization began to be felt. That’s consistent with our view that the growing malaise and populism since then can be traced largely to the US effort to maintain global hegemony in the face of the Chinese onslaught.
• With the US trying to maintain hegemony by keeping its economy open to trade and providing the world’s reserve currency, the result was intense foreign competition for US producers, de-industrialization, and reduced opportunity for relatively less-skilled workers.
• To the extent that is true, we expect government policy in the US will likely remain populist in the coming years, no matter who wins the November election. For example, the US will likely see even more trade protectionism, industrial policy initiatives, near-shoring of production, and reindustrialization.

US Energy Industry: Oil giant ConocoPhillips has struck a deal to acquire Marathon Oil in an all-stock transaction valued at $17.1 billion. The takeover is the latest sign of sweeping consolidation in the nation’s oil and gas industry after years of capital discipline and good pricing have provided the financial resources to scrape together new assets for increased efficiency.

PDF

by Patrick Fearon-Hernandez, CFA, and Thomas Wash

[Posted: 9:30 AM EDT] | PDF

Our Comment today opens with some notes on the rising power of far-right political parties in Europe and the implications for European economic policy. We next review several other international and US developments with the potential to affect the financial markets today, including the UK Labour Party’s vow not to substantially raise taxes after Britain’s July 4 elections and today’s move to T+1 trade settlement in the US financial markets.

European Union:  Ahead of the European Parliament elections to be held June 6 to 9, French far-right leader Marine Le Pen has proposed that her Identity and Democracy (ID) group of national conservative parties cooperate with Italian Prime Minister Meloni’s European Conservatives and Reformists (ECR) to form the second-largest grouping in the legislature and force EU policy to the right. Meloni has expressed interest in the idea, even though she had been negotiating to support European Commission President von der Leyen’s center-right group.

• Political parties in the various EU member countries typically ally themselves with like-minded parties from other countries to boost their power in the European Parliament.
• President von der Leyen’s European People’s Party (EPP) is currently the legislature’s biggest cross-national group, with 176 of the 703 seats. The leftist Progressive Alliance of Socialists and Democrats is the second-largest group, with 144 seats. The far right is fractured between four different parties, the largest of which are the ECR, with 66 seats, and the ID, with 62 seats.
• Current opinion polls suggest the far-right parties will make significant gains in the elections. If so, a combination of the ECR and ID likely would make it the second-most powerful group in the parliament and force the EPP to adopt more conservative positions in key issues such as immigration and environmental policy.

Eurozone: In an interview with the Financial Times, European Central Bank Chief Economist Philip Lane strongly hinted that the institution will start cutting interest rates at its next policy meeting on June 6. Describing the central bank’s read on the eurozone’s current output and price data, Lane said, “Barring major surprises, at this point in time there is enough in what we see to remove the top level of restriction.”

United Kingdom: Shadow Chancellor Rachel Reeves of the opposition Labour Party has promised that if Labour wins the July 4 elections, it will not raise taxes beyond the handful of modest measures it has already proposed (i.e., extending the windfall tax on energy company profits, applying the value-added tax to private school fees, and ensuring private equity bonuses are “taxed appropriately”). The statements by Reeves appear to be aimed at maintaining Labour’s current lead of 20+ percentage points in public opinion polls.

China: Ma Jiantang, the former Communist Party secretary at the State Council’s Development Research Center, warned that China is facing severe economic problems because of its low birth rate and falling population. Ma argued China must adopt an “urgent” response, but policies are still focused on family planning rather than encouraging births. Ma called for new initiatives such as promoting assisted reproductive technology, registering children born out of wedlock, improving birth insurance, extending maternity leave, and building more childcare centers.

Japan: Bank of Japan Governor Ueda said at a central banking conference that his institution will continue raising interest rates toward a “neutral” level, but because it’s hard to know what that level is for the Japanese economy, the central bank will move cautiously. The statement confirms expectations that the BOJ will likely hike interest rates only slowly in the coming months and quarters. With the Federal Reserve likely to hold US interest rates higher for longer, the BOJ’s approach is likely to continue weighing on the value of the yen (JPY).

New Zealand: The Reserve Bank of New Zealand said it will impose new restrictions on mortgage lending to preserve financial stability in the face of rising home prices and increasing consumer debt. The new rules will cap the amount of new loans going to borrowers with high debt-to-income and loan-to-value ratios. Since rising home prices and worsening debt burdens are now a problem in many countries, the New Zealand moves could potentially portend similar moves in other countries.

Israel-Hamas Conflict: An Israeli airstrike in Gaza on Sunday night killed two senior Hamas military commanders, but it also killed some 45 Palestinian civilians. The high level of civilian casualties to take out just two Hamas leaders has further stirred world anger at Israel and deepened Prime Minister Netanyahu’s isolation. It also promises to further undermine support for President Biden ahead of the US elections in November.

• Separately, Israeli forces got into a shootout with Egyptian troops as they took control of a border crossing between Gaza and Egypt, killing an Egyptian officer.
• The incident once again likely raises the risk of the conflict broadening into a regional war that could disrupt key energy supplies.

US Financial Markets: As of today, trades in equities, corporate bonds, exchange traded funds, mutual funds, and options will all settle the day after the trade, i.e., T+1 versus the previous standard of T+2. The move aims to cut brokers’ collateral requirements and reduce price volatility in time of market stress. Several other countries also shifted to T+1 this week, and similar moves are being considered in the UK, Switzerland, and the European Union.

US Commercial Real Estate Market: New data shows that the vacancy rate for retail properties has fallen to a near-record low of 4.1%, versus 5.0% during the coronavirus pandemic and 7.1% shortly after the Great Financial Crisis of 2007-2008. The low vacancy rate reflects strong economic growth and more disciplined construction in recent years. Although financial difficulties for office properties continue to scare investors out of real estate funds, the retail data serves as a reminder that other areas of commercial real estate are in a strong position.

PDF

by Patrick Fearon-Hernandez, CFA, and Thomas Wash

[Posted: 9:30 AM EDT] | PDF

Our Comment today opens with an interesting observation on the Chinese market by JPMorgan CEO Jamie Dimon. We next review several other international and US developments with the potential to affect the financial markets today, including a new program in South Korea to promote its semiconductor industry, data pointing to a falling population in Europe, and approval for new spot cryptocurrency funds in the US.

China-United States: JPMorgan CEO Jamie Dimon admitted on Thursday that part of the firm’s investment banking business in China has “fallen off a cliff” in recent years. The statement is important because Dimon has been a poster child for the US business elites in technology, finance, and other industries who have vocally resisted US-China decoupling in the interest of national security. His statement suggests JPMorgan may now be suffering from the same abusive Chinese economic policies that have helped spark the calls for decoupling.

• Those policies include China’s long-standing effort to attract top foreign firms, learn from them, and then strangle them while the government helps promote China’s own “national champions.” If that’s what is happening, it seems that Dimon and the rest of JPMorgan’s leadership should have seen it coming.
• But even if that’s not happening yet, China’s new goal to become a “financial superpower” suggests it could happen soon. The new goal calls for China to clean up, broaden, and deepen its financial markets to support cutting-edge industries such as electric vehicles and semiconductors. The plan also calls for China to foster several of its own world-class investment banks, which would naturally take Chinese market share from foreign firms such as JPMorgan.

Russia-Finland-Lithuania: The Russian defense ministry’s website this week temporarily showed a plan to unilaterally move Russia’s maritime border in the Baltic Sea at the expense of Finland and Lithuania. Although the plan was quickly deleted, Finnish and Lithuanian officials condemned it as a serious provocation or hybrid attack. At any rate, the incident could mean the Kremlin is becoming more confident in provoking the North Atlantic Treaty Organization as Russia regains momentum in its invasion of Ukraine while NATO members slow their support.

Tunisia: Autocratic President Kais Saied has launched another crackdown on political dissent ahead of elections planned for later this year. The clampdown appears to focus on lawyers, journalists, and social activists, some of whom have already been jailed. This raises the risk of social upheaval in an important energy producer and conduit for African migration into Europe.

South Korea: The government yesterday unveiled a plan to provide about $19 billion to Korean manufacturers of non-memory semiconductors. Aimed at chipmakers such as Samsung and Hynix, the money will subsidize the construction of new facilities to produce cutting-edge processors. The program is yet another example of how countries around the world are now embracing “industrial policy” to incentivize the domestic production of key goods.

European Union: New data suggests Europe’s population may have already started a long, drawn-out decline, about two years earlier than demographers had anticipated. The expected decline largely reflects falling birth rates. Until now, the rising participation of immigrants and women in the labor force has offset the accelerating loss of older workers. However, soon those factors will not be enough, and the EU’s total work force will begin an extended decline that will make it harder to achieve economic growth.

France-New Caledonia: On an emergency trip to France’s overseas territory of New Caledonia, President Macron agreed with local leaders to suspend a new law that would have expanded voting rights for non-indigenous people. The new law has sparked more than a week of rioting by indigenous Kanaks on fears that it would dilute their political power and make it harder to eventually win independence. As of this writing, it is not clear whether Macron’s suspension of the law will quell the violence.

US Cryptocurrency Market: In a surprise move yesterday, the Securities and Exchange Commission approved the US’s first exchange-traded funds for spot ether, the second-biggest cryptocurrency after bitcoin. The 10 or more asset managers that applied to offer the ETFs now must have their individual funds approved before they can offer them to the public. Given that existing futures-based ether funds haven’t garnered much interest, it is unclear whether any of the upcoming spot ether ETFs will attract much buying.

US Sports Market: Yesterday, the National Collegiate Athletic Association and five of the nation’s top athletic conferences agreed to drop their century-old policy that saw college athletes as strictly amateur and not entitled to share in the revenue they generate for their school. The deal, which settles a lawsuit filed in 2020, follows a separate settlement from several years ago in which athletes gained the right to profit from their name, image, and likeness. A final deal will allow colleges and universities to directly pay their college athletes.

View PDF