by Patrick Fearon-Hernandez, CFA, and Thomas Wash

[Posted: 9:30 AM ET] | PDF

Our Comment today opens with a couple of notes on Japanese monetary policy and the Japanese stock market. We next review several other international and US developments with the potential to affect the financial markets today, including signs that the European Union will impose steep tariffs on imported aluminum in response to the impending US tariffs, as well as a couple of notes on monetary and regulatory policy at the Federal Reserve.

Japan Monetary Policy: The Bank of Japan today starts its latest policy meeting, with its decision due to be released tomorrow. Even though strong Japanese wage growth and continuing price pressures would seem to argue for higher interest rates, uncertainty regarding US trade policy is expected to convince the policymakers to hold their benchmark rate unchanged at 0.50%, after they hiked it by 25 basis points at their last meeting in January.

Japan Stock Market: According to a report in the Financial Times yesterday, Warren Buffett’s Berkshire Hathaway has increased its shareholdings in five Japanese trading houses after negotiating to lift a 10% limit on Berkshire’s investments in the companies. Buffett’s willingness to hike his exposure to the firms will likely be taken as a vote of confidence in them. It will also probably be seen as a sign that overall Japanese stock valuations remain attractive, at least in the eyes of one of the world’s most admired value investors.

European Union: The European Commission today is expected to announce a probe into the EU aluminum market and whether third countries are dumping the metal in Europe to get around the Trump administration’s high tariffs. The investigation suggests that the EU is prepping its own tariffs to protect domestic producers. If so, the action would help validate fears that the US-EU trade war could widen to affect other economies and roil global economic growth.

United Kingdom: Struggling to contain the UK’s growing debt, the Labour Party government of Prime Minister Starmer today will propose a series of welfare reforms aimed at cutting about one million people from the health and disability programs to save some 5 billion GBP ($6.5 billion) per year. The proposed reforms would require a vote of parliament, but many junior Labour lawmakers are threatening to oppose them. If they do, it will mark a major rebellion against the center-left party and potentially limit any further efforts at fiscal consolidation.

Russia-Ukraine War: According to the Wall Street Journal today, Ukraine in December launched what appears to be the world’s first large-scale, drone-only military attack. The attack involved dozens of coordinated land robots and aerial drones to successfully destroy a Russian position in northern Ukraine. The attack illustrates the rapid development of robot warfare in the Russia-Ukraine war.

• The rapid development of autonomous vehicles in the war is likely to have massive implications not only for future military force structure, strategy, and tactics, but also for military budgets, industrial structure, economic growth, and even national educational systems.
• If a peace agreement is reached, the war could well leave both Russia and Ukraine as leaders in the new military capability. For example, when the Pentagon’s “Artemis” program awarded contracts on Friday to four companies to build prototypes for the next generation of long-range aerial attack drones, two of the contracts went to US firms and the other two went to Ukrainian companies.

Israel-Hamas War: After the Hamas militants governing the Gaza Strip halted the release of more Israeli hostages and rejected US pressure to extend the recent two-month ceasefire, Tel Aviv today launched a large campaign of airstrikes across Gaza. The airstrikes have reportedly killed hundreds of Gazans and threaten to rekindle the full-scale war that Israel launched against Hamas following its attack on Israel in October 2023. If the war resumes, it would threaten to again destabilize the energy-rich Middle East after a short period of calm.

United States-Canada: In a little-noticed provision in one of President Trump’s recent orders, about one million Canadian seniors or “snowbirds” who spend their winters in the US will be required to first register with the US government. The rule will apply to all Canadians aged 14 years and older who plan to stay in the US for 30 days or longer. Economists estimate that Canadian snowbirds spend billions of dollars in the US each year, so if the new regulation deters many of them, it could weigh on popular snowbird destinations, such as Arizona.

US Monetary Policy: Like the Bank of Japan, the Fed starts its latest policy meeting today, with its decision due to be released tomorrow at 2:00 PM ET. The policymakers are widely expected to hold their benchmark fed funds interest rate unchanged at 4.25% to 4.50%. Futures trading suggests that investors are now expecting two or three additional rate cuts of 25 basis points by the end of this year, but the policymakers may hold their fire until consumer price inflation cools further, economic growth slows sharply, or both.

US Financial Regulation: President Trump yesterday nominated Michelle Bowman, a member of the Fed’s governing board, to be the new vice chairman for supervision. If confirmed by Congress, Bowman would become one of the federal government’s key bank regulators, along with the heads of the Federal Deposit Insurance Corp. and the Office of the Comptroller of the Currency. Indeed, her confirmation by Congress appears highly likely.

• Bowman is seen as friendly to banking interests and supports lighter bank regulation.
• Therefore, her nomination has been heralded by both the American Bankers Association and the Independent Community Bankers of America.

US Stock Market: According to Bank of America’s closely watched survey of investment-fund managers, investors have reduced their exposure to US stocks this month by the largest amount ever. The survey showed that the average allocation to US stocks plunged by 40 percentage points, from 17% overweight in February to 23% underweight in March. The big drop reportedly reflects investor concerns about factors such as the Trump administration’s global trade war, the potential for US stagflation, and changing domestic economic policies.

• In our 2025 Economic and Financial Market Outlook, we projected that the S&P 500 price index would rise about 10.5% for the date of publication to end the year at approximately 6,735. We flagged the possibility of even stronger returns, based on factors such as investors’ large holdings of money market funds “on the sidelines,” but we also noted the potential for increased volatility.
• This month’s correction in the US stock market is consistent with the potential volatility that we saw, so it has not yet prompted us to adjust our projection. However, we continue to monitor important evolving issues, such as the administration’s unexpectedly aggressive moves in foreign and domestic policy. If there are any major adjustments to our forecasts, they would likely be published in a mid-year update to our Outlook.

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by Patrick Fearon-Hernandez, CFA, and Thomas Wash

[Posted: 9:30 AM ET] | PDF

Our Comment today opens with a note on the Russia-Ukraine war, where Kyiv’s forces appear to be on the brink of losing their toehold in the Russian territory of Kursk ahead of planned peace talks. We next review several other international and US developments with the potential to affect the financial markets today, including new details on China’s latest economic stimulus plan and several new Trump administration initiatives in the realms of national security and foreign policy.

Russia-Ukraine War: Continuing their accelerated push over the last week, Russian forces this weekend nearly succeeded in reclaiming the Kursk region that the Ukrainians seized last summer to gain leverage in peace negotiations. It appears that Ukrainian forces could be pushed totally out of the Russian region at any moment. In addition, the Russians are reportedly threatening to surround an unknown number of Ukrainian troops remaining in Kursk, which would put Kyiv at a disadvantage during any talks.

South Korea: Shortly before the end of his term in January, President Biden reportedly put South Korea on a special list of countries that the US deems at risk of acquiring nuclear weapons. The Department of Energy confirmed the designation on Friday, suggesting that the Trump administration has endorsed the move. The news comes one month after South Korean Foreign Minister Cho Tae-yul said that Seoul has not taken nukes “off the table,” but that it has no specific plans to develop them right now.

• As we’ve noted before, rising geopolitical tensions and the US’s growing reluctance to meet its mutual defense promises under various treaties have begun to prompt a range of countries to consider developing their own nuclear weapons.
• In recent polls, some 70% of South Koreans have said they want their own nukes. To block such a move, the Biden Administration in 2023 struck a deal under which Seoul would put any such effort on ice in return for stronger US security guarantees.
• Biden’s designation of South Korea as a proliferation-sensitive state suggests that some political or military leaders in Seoul are still tempted by the possibility, which in turn would likely destabilize the Asia-Pacific region.

China: The State Council today provided a few more details on how the government will implement General Secretary Xi’s vow to “vigorously boost consumption” and “expand domestic demand in all directions.” According to State Council officials, the government will focus on raising incomes, stabilizing the real estate and stock markets, and improving medical and pension services. However, the officials gave few details on the actual planned spending, suggesting the latest stimulus program will again be too modest to truly boost growth.

• Separately, the state statistics agency said retail sales in January and February were up 4.0% from the same period one year earlier, accelerating from the 3.7% increase in the year to December.
• In response to the stimulus program and retail sales data, Hong Kong stocks today have posted a modest rise, while stocks in mainland China declined slightly.

United States-Yemen: The Trump administration on Saturday launched a series of strong airstrikes against the Iran-backed Houthi rebels in Yemen. According to military officials, the strikes are an escalation from those of the Biden administration and are expected to last up to several weeks to degrade the rebels’ ability to attack shipping in the Red Sea. Along with the strikes, President Trump also warned Iran that it must cease providing aid to the rebels.

• The US strikes came after the Houthis last Tuesday said that they would resume attacks on Israeli ships in the Red Sea, the Arabian Sea, the Bab el-Mandeb Strait, and the Gulf of Aden, ending a period of relative calm that began in January with the Gaza ceasefire.
• The strikes also came just days after Iran’s supreme leader, Ayatollah Ali Khamenei, rejected a Trump suggestion of talks aimed at stopping the country’s nuclear program.

US Military: Late last week, Defense Secretary Hegseth directed that the Pentagon’s storied Office of Net Assessments be dismantled. Under the order, military personnel working in ONA will return to their service and be reassigned, civilians will be moved to “mission critical” offices, and ONA contracts will be cancelled. The deputy secretary will then be tasked with developing a plan to rebuild ONA in a manner consistent with Hegseth’s priorities.

• Since being established in 1973, the ONA has operated as a kind of Pentagon think tank to identify and analyze long-term national security trends and lay the groundwork for strategies to respond to them.
• Hegseth’s dismantling of the ONA seems to adopt a “burn it down, then rebuild” approach to reforming the office. While the move is likely to produce near-term cost savings, it is also being panned for potentially creating a period when military planners won’t have an authoritative, deeply researched perspective to rely on.
• Coupled with other recent moves, such as directing large cuts in the defense budget and ordering massive job cuts at the Pentagon and CIA, pulling the plug on the ONA adds to the evidence that fiscal consolidation and bureaucratic reforms are President Trump’s highest priorities — perhaps much higher than even near-to-medium term national security.

US Foreign Policy: Over the weekend, President Trump announced that he has signed an executive order to slash funding and essentially shut down the US Agency for Global Media, which runs the Voice of America, Radio Free Europe/Radio Liberty, and Radio Free Asia. Those Cold War-era organizations were designed to beam uncensored information to closed societies, such as China and Russia, and to promote US values globally.

• According to Trump, the move to close down USAGM was necessary to save US taxpayers from supporting “radical propaganda.”
• In the latest federal fiscal year, USAGM’s budget was about $890 million.

US Trade Policy: The American Chamber of Commerce to the European Union today warned that the Trump administration’s draconian tariffs could hamper up to $9.5 trillion in US-European transactions. According to the Chamber, the developing trade war threatens not only the $1.3 trillion or so in trans-Atlantic goods trade, but also the $750 billion in trans-Atlantic services trade and some $7.5 trillion in sales by US and European cross-border affiliates.

• For example, the Chamber warns that either the US or the Europeans could retaliate for the other side’s goods tariffs by slapping tariffs on the other side’s services.
• Potentially more problematic, US companies with affiliates in Europe could find their European operations hindered by any tariffs on imported US inputs, and vice versa. That could discourage further foreign direct investment by the US firms in Europe or by European firms in the US.

US Visa Policy: The New York Times over the weekend said that the Trump administration is considering a list of 43 countries whose citizens would be barred or restricted from visiting the US. The long list includes countries such as Cuba, North Korea, Afghanistan, Belarus, and Somalia. The extensive list is even broader than the list of countries that Trump used to bar foreigners in his first term.

US Monetary Policy: Tomorrow, the Federal Reserve starts its latest two-day policy meeting, with its decision scheduled to be released on Wednesday at 2:00 PM ET. The policymakers are widely expected to hold their benchmark fed funds interest rate unchanged at its current range of 4.25% to 4.50%. Futures trading suggests that investors are now expecting two or three rate cuts of 25 basis points each this year, but the policymakers may hold their fire until consumer price inflation cools further, economic growth slows sharply, or both.

US Stock Market: In an interview yesterday, Treasury Secretary Bessent downplayed the significance of the US stock market slipping into a correction last week, saying simply that, “corrections are healthy . . . They’re normal.” The nonchalant tone of Bessent’s statement adds to the evidence that President Trump isn’t nearly as concerned now about market downturns as he appeared to be in his first term.

• Rather, it increasingly looks like the administration is willing to tolerate even steep declines in stock prices for what it sees as long-term economic benefits.
• Reflecting that realization, stock futures as of this writing are pointing to another day of falling prices.

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by Patrick Fearon-Hernandez, CFA, and Thomas Wash

[Posted: 9:30 AM ET] | PDF

Good morning! Markets are reacting to the news that a government shutdown was averted. In sports, Steph Curry made history by hitting his 4,000^th 3-pointer in the Warriors’ victory over the Kings. Today’s Comment will explore the market’s recent correction, how a PPI subcomponent could shed light on the trade war’s effects, and other key market-moving developments. As always, we’ll also provide a summary of international and domestic data releases.

S&P 500 Correction: The market plunged 10.1% from its all-time high on Thursday, driven by mounting fears of a government shutdown and escalating trade war tensions. The sharp sell-off underscores just how sensitive investors have become to any signs of uncertainty.

• On Thursday, President Trump escalated trade tensions with the EU by threatening to impose tariffs of up to 200% on European wine, retaliating against proposed EU tariffs on American goods. This move sent a strong signal of escalating trade uncertainty, revealing a further decline in relations and the increasingly erratic nature of the dispute.
• Meanwhile, House Speaker Chuck Schumer (D-NY) fueled further uncertainty by initially declaring that his party would not support the legislation needed to avert a government shutdown. Although he later walked back this threat and expressed support for the bill, his initial reluctance underscored growing concerns that deepening partisanship is making effective governance increasingly difficult.
• Heightened uncertainty has prompted investors to reduce their exposure to risk assets, particularly the mega cap tech stocks. The divergence in year-to-date performance — a 1.6% decline for the S&P 500 excluding the Magnificent 7 versus a 14.4% drop for those stocks — indicates a significant rotation. This shift reflects potential investor fatigue with the persistent tech-led market leadership of the preceding two years.

• Trade tensions are creating a “wait and see” market. A prolonged conflict risks a significant market sell-off due to increased volatility. However, a rapid resolution could fuel a market surge, with mega cap tech leading the way, given their exposure to trade sentiment and growth. In the interim, commodities could provide a potential buffer against market uncertainty.

Producer Prices Ease: Following a report of easing consumer inflation in February, producer prices also showed a slowdown in supplier price pressures. However, the ongoing trade war raises concerns that this relief may be temporary.

• The overall Producer Price Index (PPI) showed a year-over-year slowdown, easing from 3.7% to 3.2%, while core PPI, which excludes food and energy, also moderated, falling from 3.8% to 3.4%. This deceleration was largely attributed to a decline in trade services, which tracks changes in profit margins between wholesale and retail businesses. The report indicates that businesses may be hesitant to pass on higher costs to consumers.
• Trade services are expected to remain a critical indicator to monitor as the trade war persists. Changes in margins between retailers and wholesalers reflect the pass-through effects of price increases, making this metric particularly sensitive to the impact of tariffs. As a result, it could provide valuable insights into how businesses are navigating the challenges posed by ongoing trade tensions.
• This indicator proved particularly useful in assessing the impact of supply chain disruptions and surging demand on businesses during the pandemic. As the gap between retail and wholesale margins widened, inflationary pressures intensified. Conversely, as these margin differentials began to narrow, price pressures started to ease for consumers.

• In short, as long as trade services remain relatively subdued, the inflationary impact of tariffs is likely to be contained. As highlighted in previous reports, while many argue that taxes on imported goods are inherently inflationary, we believe the effects may vary significantly depending on the type of good. In fact, we contend that earnings compression — where businesses absorb higher costs rather than passing them on to consumers — could also emerge as a realistic outcome of the trade war.

Benefits on the Chopping block? President Trump is open to allowing Republican lawmakers to explore cuts to certain social spending programs as part of efforts to secure funding for his priorities, including tax cuts, border security, and defense spending.

• The president is reportedly permitting Senate Republicans to identify instances of “waste and fraud” within Medicaid as part of an effort to curb spending and reduce costs. This development follows reports that Elon Musk’s cost-cutting taskforce, DOGE, has been examining inconsistencies in entitlement disbursements as part of its broader initiative to address the deficit. Both efforts highlight a growing focus on fiscal responsibility, though such measures are likely to draw scrutiny and debate.
• The heightened focus on spending comes as Republicans seek to finance an ambitious tax bill, with several conservative lawmakers insisting they will not support any legislation that exacerbates the fiscal deficit. Recently, Senator Rand Paul (R-KY) has been vocal about his concerns, vowing to oppose the stopgap bill due to its potential impact on spending. Similarly, Kentucky Representative Thomas Massie voted against the legislation in the House, citing the same reservations.
• The ongoing debate over how to fund the proposed tax cuts indicates that conservatives remain determined to pass the legislation. Efforts to target waste and inefficiency may offer some financial flexibility, but so far, these measures have not yielded substantial savings. While we anticipate that the tax bill will likely be passed before the end of the year, we remain skeptical about its ability to be deficit-neutral.

Ceasefire Close? The Russian president appeared to downplay the possibility of agreeing to a temporary ceasefire with Ukraine, instead expressing a preference for pursuing a long-term resolution. That said, there does seem to be progress.

• Putin has indicated openness to the proposed arrangement but emphasized that further discussions are necessary before he would agree to the plan. A central point of contention revolves around the allocation of territory between Ukraine and Russia, which remains a highly sensitive and unresolved issue. Additionally, negotiations would need to address the critical question of control over a large power plant, a matter of strategic and symbolic importance for both sides.
• Despite the lack of clarity, President Trump seems optimistic that a deal will be done between the two sides as Ukraine has already agreed to the terms of the truce. While there is no timeline as to when an agreement will be reached, it is clear that Russian and US officials are in contact to get something done over the next few months.

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by Patrick Fearon-Hernandez, CFA, and Thomas Wash

[Posted: 9:30 AM ET] | PDF

Good morning! The market is currently weighing the possibility of a government shutdown. In sports news, Real Madrid secured a victory over cross-town rivals Atlético Madrid and advanced to the quarterfinals of the Champions League. Today’s Comment will delve into the bond market’s subdued reaction to the latest CPI report, explore why Senate Democrats are engaging in a high-stakes standoff over the stopgap funding bill, and cover other key market-related news. As always, the report includes a summary of domestic and international economic data releases.

CPI Down, Market Shrugs: While the Bureau of Labor Statistics Consumer Price Index (CPI) indicated a better-than-expected inflation reading for February, the bond market’s muted response is signaling ongoing investor apprehension regarding tariffs.

• Annual inflation in February surprised to the downside, declining from 3.0% to 2.8%, while core inflation also slowed, dropping from 3.3% to 3.1%. Both figures came in below expectations, as headline inflation was forecast to fall to 2.9% and core inflation was projected to ease to 3.2%. The moderation was driven by cooling shelter costs and declines in the prices of airfare and gasoline. Although egg prices surged 58% year-over-year, they had a negligible overall impact on the index.
• Despite the positive inflation news, concerns over tariffs took center stage. On Wednesday, the US imposed tariffs on steel and aluminum products, a move expected to significantly impact automakers and homebuilders. Furthermore, the prospect of additional tariffs, set to take effect on April 2, raises the risk of renewed price pressures in the near future.
• Despite inflation posting its strongest two-month start since the pandemic, the potential disruption from tariffs has led many investors to refrain from concluding that the fight against inflation will end anytime soon. The 10-year Treasury yield ended the day roughly 3 basis points higher, reflecting growing skepticism that inflation will reach the 2% target this year.

• One area we will be closely monitoring during the trade war is the labor market. We anticipate that firms may attempt to offset profit losses caused by tariffs by reducing their workforce. Such a move could help exert downward pressure on inflation. However, if the labor market remains tight or tightens further due to tariffs, inflation is likely to stay stubbornly elevated.

Polish Nuclear Power? Polish President Andrzej Duda has proposed that the US station nuclear warheads in Poland, reflecting growing global interest in nuclear arsenals amid perceived US reluctance to provide security guarantees.

• Duda believes that President Trump should consider relocating US nuclear warheads currently stored in Western Europe or the United States to Poland as a strategic deterrent against Russian aggression. His proposal aims to revive discussions around nuclear sharing, a dialogue initiated during the previous administration. This initiative comes at a critical juncture, as Eastern European nations seek enhanced security measures to counter potential threats from Russia.
• While it is unclear whether Trump will entertain such a proposal, the idea highlights the deepening anxieties among Eastern European nations regarding the potential fallout from the ongoing Russia-Ukraine conflict. Duda’s remarks align with his recent push to increase Poland’s military spending to a minimum of 4% of GDP, reflecting a broader effort to strengthen regional security and deterrence capabilities in response to heightened geopolitical tensions.

• Poland’s proposal to request nuclear weapons from the US highlights a growing trend among nations seeking to fill the security void left by America’s apparent reduction in global military engagement. While such a move would be politically untenable in most countries, it reflects a broader strategy for self-preservation, as possessing nuclear capabilities could deter potential invasions and eliminate the prospect of unconditional surrender in the face of aggression.
• This trend may extend beyond Europe, as regions like the Middle East also seek nuclear capabilities for security. A US military pullback could spur nuclear proliferation, risking a global arms race. For investors, this instability could boost commodities, as demand for safe-haven assets like gold and raw materials often rises amid geopolitical uncertainty.

On Second Thought: While it was widely anticipated that Senate Democrats would approve the stopgap measure to fund the government for the next six months, the group ultimately failed to support the legislation. This unexpected setback has significantly increased the likelihood of a government shutdown over the weekend.

• Senate Democrats are advocating for a short-term 30-day stopgap bill, prioritizing their push for specific legislative measures over the longer-term funding proposal put forward by their counterparts. Their refusal to support the extended bill heightens the risk of a government shutdown, which could be averted only if they reconsider their stance before the critical Friday deadline.
• The ongoing standoff between Democrats and Republicans underscores the deepening partisan divide, as both sides struggle to find common ground on reducing the government deficit. In the first five months of fiscal year 2025, government spending soared to a record $1.147 trillion, including $307 billion from President Trump’s first month in office.

• This mounting fiscal challenge underscores the pressing need for bipartisan cooperation, yet the persistent deadlock casts doubt on the government’s ability to effectively address its escalating financial obligations. While Democrats currently oppose the measure, there remains a possibility that they could ultimately support it in order to avert the political fallout and economic disruption that would accompany a government shutdown.

Europe’s Borrowing Costs: As EU countries move to significantly increase military spending, the resulting pressure on government budgets is driving up bond yields, compelling the bloc to explore drastic measures to prevent debt from escalating into a long-term economic challenge.

• The potential downgrade by Fitch Ratings has pushed France’s 30-year government bond yields to their highest levels in 14 years, as investors react to heightened fiscal concerns. Last month, the ratings agency warned that France might scale back its planned fiscal consolidation following the passage of its budget. These concerns have only intensified since the government pledged to increase defense spending, further straining its financial outlook and raising questions about its long-term debt sustainability.
• France is not alone in facing fiscal pressures, as Germany is also experiencing a sharp rise in long-term bond yields amid plans to significantly increase spending. The yield on Germany’s 10-year bund has surged the most in a single week since 1990, following efforts to revise the country’s budget rules to accommodate higher defense expenditures.
• One of the key developments to monitor as these countries aim to strengthen their defense capabilities is the potential shift toward a more integrated fiscal union. Recently, Italy has proposed the creation of a European guarantee mechanism, which would enhance the marketability of bonds issued by countries seeking to increase debt to fund defense initiatives. This implicit backing could make European bonds more attractive to foreign bondholders.

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by Patrick Fearon-Hernandez, CFA, and Thomas Wash

[Posted: 9:30 AM ET] | PDF

Good morning! Markets are digesting the latest inflation data. In sports, Gonzaga clinched a victory over Saint Mary’s in the West Coast Conference Finals. Today’s Comment will cover key developments, including the ongoing US-Canada trade tensions, Ukraine’s proposed 30-day ceasefire, and other market-moving stories. As always, the report will also feature a summary of recent domestic and international economic data releases.

Tariff Uncertainty: US equities swung sharply on Tuesday amid fears of a US-Canada trade war. The S&P 500 briefly dipped into correction territory, rebounded, then fell again as trade concerns lingered, keeping markets on edge.

• Market volatility surged as tensions escalated between the US and Canada over retaliatory tariffs. The day began with President Trump imposing 50% tariffs on Canadian steel and aluminum products as a response to Ontario’s threat of a 25% surcharge on electricity exports to Michigan, Minnesota, and New York. The standoff eased after Ontario agreed to drop the surcharge in exchange for a meeting with the US Secretary of Commerce Howard Lutnick to discuss the USMCA trade agreement.
• Following the arrangement, President Trump scaled back the tariff on Canadian steel from 50% to 25%, alleviating some market concerns but failing to fully ease fears over ongoing trade uncertainty. While Ontario has withdrawn its electricity surcharges, Canada has opted to maintain its tariffs on US goods and has signaled that it will only reconsider once it believes the Trump administration is prepared to be respectful in its approach. The situation remains fluid, leaving markets wary of further developments.
• At midnight, universal tariffs on aluminum and steel products were imposed without exemptions, marking a significant escalation in trade policy. The European Union retaliated with its own tariffs that are expected to take place mid-April, while the UK is expected to maintain its current stance and refrain from immediate action. Meanwhile, Chinese tariffs on US agricultural products have also gone into effect.

• The ongoing trade war is expected to keep equities highly vulnerable to midday swings, as investors attempt to assess the potential economic impact of tariffs. While there have been preliminary signs of an economic slowdown — such as major airlines reporting weaker demand for both leisure and business travel — these indicators remain anecdotal. For now, there is no concrete evidence of a broader economic downturn, but the uncertainty continues to weigh on market sentiment.

Ukraine Peace Deal: US officials successfully persuaded Ukraine to back a ceasefire agreement with Russia. Although the deal still requires Putin’s approval, it includes provisions for the US to share military intelligence with Ukraine and restore military aid, underscoring the continued strong relationship between the two nations.

• The proposal outlines a 30-day ceasefire that would encompass the entire front line, expanding beyond the initially proposed restrictions on air and sea operations. This development comes at a critical juncture, as Ukraine’s recent territorial losses in Russia’s Kursk region have weakened its negotiating position, diminishing a key bargaining chip tied to territorial control. The agreement represents a potential shift in the conflict’s dynamics, though its broader implications remain uncertain.
• With Ukraine agreeing to the ceasefire, the focus now shifts to Moscow. Russian President Vladimir Putin has consistently justified the continuation of the war as a means to achieve the country’s long-term strategic goal of preventing NATO expansion near its borders. While the conflict has likely stalled Ukraine’s bid to join the military alliance, Russia has yet to secure full control of the Donbas region — a key objective that would mark a significant success in its campaign.

• That said, the ceasefire agreement signals a potentially positive development, suggesting that the Russian invasion may be nearing its conclusion. This would be a significant boost for risk assets, particularly in Europe, as the resolution of the conflict could pave the way for the return of Russian energy supplies to the global market. Such a scenario would likely accelerate Europe’s efforts to revitalize its industrial sector, with Germany standing to benefit considerably.

Shutdown Avoided: The House of Representatives has passed a bill to fund the government for the next seven months. The legislation is now headed to the Senate, where it is expected to pass with bipartisan support, as Democrats are likely to back the measure to ensure government operations continue uninterrupted.

• The proposed legislation, featuring a $6 billion boost to defense spending, additional funding for border security, and a $13 billion reduction in non-defense programs, has become a lightning rod for controversy. Republican lawmakers argue that the bill fails to adequately address government overspending, while Democrats express deep concern over the targeted cuts to crucial programs they are aiming to protect.
• While the bill ultimately passed, the vote was not without its share of drama, as there were defections in both the Republican and Democrat camps. Notably, conservative Kentucky Representative Thomas Massie, a staunch deficit hawk, voted against the measure, while Maine Democrat Jared Golden broke ranks with his party to support it. This lack of unity on both sides underscores emerging intraparty tensions, suggesting that ideological and strategic rifts may be deepening within each camp.
• The interparty divisions appear to be more pronounced within the Democratic Party, as lawmakers continue to grapple with the shifting political landscape following Trump’s victory. While many Senate Democrats view the stopgap bill as insufficient, they are reluctant to oppose it outright, fearing the potential fallout from a government shutdown.
• The passage of the budget resolution to fund the government through the rest of the year is likely to set the stage for a more contentious battle over the president’s tax bill. While Republicans have largely supported the measure, there is increasing pressure within the party to ensure the bill is as deficit neutral as possible. On the other side, Democrats remain united in their efforts to shield key programs from cuts, though it is evident that many are open to compromise. The passage of a tax bill this year seems highly likely.

Greenland Speaks: The center-right Demokraatit Party secured a surprising victory, as voters demonstrated strong support for the region’s independence. This outcome followed controversial overtures from Trump, who had previously expressed interest in acquiring the territory from Denmark.

• The Demokraatit Party was not the only pro-independence group to experience a surge in support, as the Naleraq Party also secured a strong second-place finish. Their successes underscore the depth of voter concern over the perceived threat of US annexation and highlight a growing desire among the electorate to have a greater say in shaping the region’s future.
• That said, it is important to note that the election results also revealed a preference among voters for a more gradual approach to independence, indicating that the population is not yet ready to fully sever ties with Denmark. While support for pro-independence parties has grown, the cautious pace advocated by some factions suggests a desire to balance aspirations for self-determination with the stability and benefits provided by the current relationship with Denmark.

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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 about yesterday’s steep sell-off in the US stock market. We next review several other international and US developments with the potential to affect the financial markets today, including increased investment in the European and Australian defense industries and the latest on the US stopgap spending bill to avoid a partial government shutdown starting at the weekend.

US Financial Markets: Futures trading so far today suggests that stock prices could stabilize or even rebound modestly after their steep declines yesterday, when the S&P 500 index fell 2.7%, and other indexes fell even more. Yesterday’s plunge appeared to stem largely from statements by President Trump and his administration suggesting that they are willing to tolerate short-term economic disruptions or even a recession for their longer-term goal of economic restructuring. Investors today will continue to digest those concerns.

• As we noted in our Bi-Weekly Geopolitical Report from January 27, the evolving Trump economic strategy is probably more consistent and coordinated than many observers realize. Many of the strategy’s components are classic pro-growth measures that investors should like. We think the key risks are in the administration’s effort to suddenly and sharply cut spending and push many of the costs of economic adjustment onto other countries, potentially sparking a trade war and shattering the US alliance system.
• Investors are likely to keep focusing on those risks in the coming days and weeks, especially if incoming economic data continues to soften. For example, since market close yesterday, both Delta Airlines and American Airlines have reported softening consumer and business demand. Similar reports could push stock prices lower again.
• From a technical perspective, we note that yesterday’s plunge pushed the S&P 500 below its 200-day simple moving average for the first time since October 2023. The share of the S&P 500 stocks trading above their 200-day SMA is now down to 46.8%, coming closer to the 30% or so that many traders consider a weak market. If the S&P 500 continues to fall, its next major support level is probably at about 5,433, at which point it would be in correction territory.

Japan: Revised figures showed that fourth-quarter gross domestic product expanded at an annualized rate of just 2.2%, far below the initial estimate of 2.8%. Nevertheless, the growth in the fourth quarter was an acceleration from the 0.6% rate in the previous quarter, and it marked the third straight period of expansion. The data will probably help prompt the Bank of Japan to keep raising interest rates after boosting its benchmark rate to 0.5% in January.

Australia: The government has unveiled a roughly $19-billion investment plan to upgrade the country’s defense industrial base so it can support future nuclear-powered submarines built through the AUKUS security pact with the US and the United Kingdom. The new investments in Australia’s industrial plant and workforce, coupled with regulatory reforms, show how rising defense spending around the world is likely to spur broader economic development and boost economic growth in the coming years.

North Korea: For the first time, state media over the weekend showed images of what it called “a nuclear-powered strategic guided missile submarine” under construction. South Korean analysts believe the sub would be able to carry about 10 nuclear missiles, potentially threatening the US mainland. The development has the potential to reignite tensions between Pyongyang and the governments of the US, Japan, and South Korea.

European Union: At the European Parliament today, European Commission President von der Leyen said the EU’s new 150-billion EUR ($164 billion) loan program for member states to boost their armed forces can only be used for purchases from European producers, including those in the UK, Norway, and Switzerland. According to von der Leyen, the rule aims to not only help EU nations rebuild their militaries, but also to strengthen Europe’s defense industry. The rule is likely to add even more fuel to European defense stocks and help boost Europe’s economy.

Denmark-Greenland-United States: Greenland today is holding parliamentary elections, the outcome of which could determine whether and when the territory will hold a referendum on independence and whether the US can acquire it, as President Trump wants. According to a January poll, about 85% of Greenlanders don’t want to be taken over by the US. In addition, the legislature has passed laws clamping down on foreign governments attempting to influence the island’s elections.

US Fiscal Policy: As the Friday deadline approaches for Congress to pass a stopgap spending bill to avoid a partial government shutdown, 21 House Republicans have signed a letter to their leadership opposing the elimination of clean-energy tax benefits in the Biden administration’s Inflation Reduction Act. The signatories have threatened to vote against any spending package that eliminates the IRA funding to help pay for President Trump’s tax-cut extension.

• As we’ve noted before, Biden’s signature IRA programs have ironically channeled billions of dollars of manufacturing subsidies and other funds into districts dominated by Republicans. The signatories to the letter all represent districts that have received significant funding from the IRA.
• The letter illustrates how the IRA has created a constituency for green-energy facilities even in Republican-dominated areas. Nevertheless, it isn’t clear whether their resistance will prevent planned cuts to the IRA funding or disrupt passage of the stopgap bill.

US Military: Even as the US Army appears to be reversing its recent recruitment crisis, new data shows that almost 25% of enlistees are washing out and leaving the service before their initial two-year contract is up. Army officials suggest much of the problem stems from a poor recruiting pool, with few young Americans able to meet the service’s stringent physical and educational standards. Today’s healthy labor market and rising civilian wages could also be pulling new recruits away. The data points to potential problems in US military readiness.

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