by Patrick Fearon-Hernandez, CFA, and Thomas Wash

[Posted: 9:30 AM ET] | PDF

Our Comment today opens with a new update on the Summer Olympic Games, which begin on Friday. Importantly, there are reportedly hundreds of thousands of tickets still available. We next review several other international and US developments with the potential to affect the financial markets today, including hints that Mexico is getting ready to crack down on its unbalanced trade relationship with China and several notes on US industry developments.

France: Four days before the opening ceremonies of the Summer Olympic Games in Paris, unwanted tickets posted for resale online have topped 250,000, up from just 180,000 one week ago. Although a record 8.8 million tickets have been sold outright, hundreds of thousands are still available through the initial and resale channels, even for prestigious events such as Friday’s opening ceremonies (starting at 900 EUR) and the 100-meter sprint (ranging from 295 to 980 EUR).

United Kingdom: The new center-left government of Prime Minister Keir Starmer said it will ease and reform certain environmental-protection rules seen as inhibiting home construction and contributing to the UK’s chronic housing shortages. However, homebuilders say they haven’t yet seen details of the plan. It remains unclear whether the changes will indeed lead to greater homebuilding and, eventually, lower housing costs.

Mexico-China: At an event with top officials on Saturday, Mexican Finance Minister Rogelio Ramírez de la O complained that China-Mexico trade has become extremely unbalanced, with China exporting more than 10 times as much to Mexico as Mexico exports to China. The statement was echoed by incoming Economy Minister Marcelo Ebrard, who will take office in October when President-Elect Claudia Sheinbaum is inaugurated.

• The complaints by Ramírez de la O and Ebrard show how even less-developed countries have become alarmed by “China Shock 2.0,” in which Beijing has rechanneled massive resources into manufacturing, effectively flooding the world with exports at disruptive, fire-sale prices.
• Importantly, Ramírez de la O hinted that the Mexican government is considering changes to its foreign investment rules to address the risk that Chinese firms will set up shop in the country merely to export tariff-free to the US — at the expense of Mexican firms.

US Politics: New reports say Vice President Kamala Harris has gained voting commitments from more than half the delegates to the Democratic Party convention in August, putting her on track to lock down her nomination as the party’s official presidential candidate. Separately, the Financial Times today carries an interesting article predicting President Biden, now a lame duck, will use his remaining six months in office to focus on cementing his legacy in foreign policy, with a focus on the Middle East and Ukraine.

US Artificial Intelligence Industry: Nvidia, the AI chipmaker darling, said it is developing a new chip designed to be sold in China without violating the increasingly stringent US export controls against such sales. Nvidia has already designed several chips for the Chinese market, but its sales in China nevertheless dropped to 17% of total revenue in the year to January, versus 26% two years earlier. The new chip aims to boost the company’s Chinese sales, but ever-tighter export rules from the US could derail those plans.

US Cryptocurrency Industry: The Securities and Exchange Commission yesterday afternoon approved the first exchange-traded funds for spot ether, the second-biggest crypto token after bitcoin. The new ether ETFs are expected to be available as early as today.

US Healthcare Industry: The House Committee on Oversight and Accountability has issued a report showing pharmacy-benefit managers steer patients toward higher-priced medicines and affiliated pharmacies, even though they’re supposed to help consumers cut drug costs. The report, issued after a 32-month investigation, will be followed today by a committee hearing on the matter at which top PBM officials will testify.

• The report and hearing suggest Congress could eventually pass new regulations on PBMs.
• That could weigh on the stocks of top healthcare companies, such as UnitedHealthcare, Cigna, and CVS, which have large PBM businesses.

US Auto Industry: According to data firm Motor Intelligence, the average incentive package on a new vehicle sold in June was up 53% from the same month one year earlier. JD Power also said only about 17% of new cars sold above the manufacturer’s suggested retail price in June, versus 35% a year earlier. The weakening price dynamics for new vehicles suggest demand is waning in the face of high prices, high interest rates, and a weaker job market. The bright side is that weaker auto prices should eventually feed into lower inflation and interest-rate cuts.

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by Patrick Fearon-Hernandez, CFA, and Thomas Wash

[Posted: 9:30 AM ET] | PDF

Our Comment today opens with some initial comments on President Biden’s decision over the weekend to withdraw from the November election. We next review several other international and US developments with the potential to affect the financial markets today, including an apparent agreement between China and the Philippines to diffuse their dangerous tensions in the South China Sea and a statement by a former Federal Reserve official predicting that monetary policymakers could still cut interest rates as many as three times this year.

US Politics: Obviously, the key development to watch in the coming days will be the fallout from President Biden’s decision to pull out of the 2024 presidential election in favor of Vice President Harris. Polls suggest Harris might have a modestly better chance at beating former President Trump than Biden did. Keeping the White House in Democratic hands would have big implications for geopolitics, national security policy, international trade, fiscal policy, and other aspects of economic policy. It still seems too early to call a winner.

• Until the dust settles, it wouldn’t be a surprise to see the “Trump trade” temporarily cool or go into reverse. Indeed, both the dollar and US Treasury yields are trading lower so far this morning.
• All the same, the betting markets, which have been reliable predictors of electoral outcomes in the past, are currently showing Harris trailing Trump substantially. Of course, this could change as Harris gets her campaign up and running. Again, it is too early to say who will win in November.
• Much will probably depend on whom Harris chooses as her running mate. A strong choice that helps the Democrats win a key battleground state would help keep the race wide open.
• Another key consideration is whether Harris and her eventual vice-presidential nominee can help the Democrats keep control of at least one chamber of Congress. Investors often look favorably on a divided government, in which no party controls both the White House and all of Congress.

China-Philippines: Manila yesterday reiterated it would not rely on US help to resupply its marines on an outpost coveted by Beijing in the South China Sea. The statement comes despite Chinese coast guard harassment of the resupply missions and an offer by US National Security Advisor Sullivan for the US to do “what is necessary” to make sure they succeed. Keeping the US at arm’s length suggests Manila understands how dangerous the China-Philippine standoff had become and is now trying to keep the dispute under control.

• Indeed, the Philippine Department of Foreign Affairs yesterday said Manila and Beijing have struck a “preliminary” deal allowing resupply missions to the outpost. However, Beijing has not yet confirmed such an agreement.
• If the agreement is confirmed and holds, it could help diffuse a crisis that we believe had become even more dangerous than China’s aggressiveness against Taiwan. After all, the Philippines has a mutual defense treaty with the US, so any armed attack by the Chinese against the Philippines could potentially draw in the US.

Brazil-China: Brazilian President Lula da Silva revealed late Friday that his government is drawing up plans to join China’s controversial “Belt and Road Initiative,” under which Beijing has provided more than $1 trillion in grants and loans to mostly less-developed countries for ports, highways, railroads, and other trade-related infrastructure. The revelation suggests Brasilia is again drawing closer to Beijing, despite the risk that doing so could worsen ties with the US and potentially invite trade or capital retribution.

China: The People’s Bank of China today cut several of its key interest rates in a new effort to spur the flagging economy. For example, the central bank cut its one-year prime interest rate by 0.1%, marking its first such rate cut since last August. The new prime rate is 3.35%. The central bank also cut its five-year prime rate, which is a benchmark for mortgage lending, by 0.1% to 3.85%. The years-long downtrend in interest rates reflects how the wind has come out of the Chinese economy because of challenges such as weak consumption and high debt.

India: As Prime Minister Modi works to develop his proposed budget for the upcoming fiscal year, the two regional parties brought into his coalition in June are reportedly demanding the equivalent of billions of dollars in new funding for their states. The demands threaten to derail Modi’s plan to bring India’s budget deficit back under control after it blew out during the coronavirus pandemic. Failure to rein in the deficit could undermine foreign investors’ faith in the Modi government and reduce foreign investment in the country.

France: We want to extend our condolences to anyone taking a summer jaunt to Paris this week. With the Summer Olympic Games starting on Friday, authorities have begun locking down large sections of central Paris, including installing metal barriers to block car traffic along about 6 km of the Seine. Opening ceremonies begin Friday evening with a procession of athletes in boats along the river — the first such opening ceremony outside of a stadium.

US Monetary Policy:  In an interview, former Federal Reserve Vice Chair Richard Clarida said there is “a real possibility” that the monetary policymakers could cut interest rates three times this year, due to rapidly cooling price inflation. We think that many cuts would be on the aggressive side, given that the Fed officials have expressed extreme caution about cutting too early and allowing inflation to rebound. The consensus among investors is still around two cuts, beginning in September.

US Airline Industry: Large numbers of US flights were canceled again yesterday and today as airlines continue trying to recover from last week’s global cybersecurity software glitch. Delta and United are reportedly the two most affected airlines. The cancellations have compounded the challenge of faltering consumer demand as the post-pandemic travel surge now seems to be petering out worldwide.

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by Patrick Fearon-Hernandez, CFA, and Thomas Wash

[Posted: 9:30 AM ET] | PDF

Good morning! S&P 500 futures are off to a modest start. In sports news, Caitlin Clark broke the WNBA assist record. Today’s Comment will discuss the recent massive tech outage, the overperformance of small caps relative to large caps, and our thoughts on China’s Third Plenum. As usual, our report ends with a roundup of international and domestic economic releases.

Cybersecurity Concerns: A seemingly innocuous software update exposed serious vulnerabilities in our critical infrastructure.

• On Thursday, a massive tech outage caused IT systems around the world to shut down. The system failure impacted companies across many industries, including airlines, banks, and emergency services. The source of the disruption appears to be related to a system update by cybersecurity software company CrowdStrike. The company has since found a fix for the problem, and users of macOS and Linux were not affected. However, it is unclear when all systems will return to normal following the outage.
• Despite CrowdStrike’s assurances that the outage wasn’t caused by cyberwarfare, the event highlights vulnerabilities to cyberattacks. The recent surge in attacks, which picked up around 2020, has shown no signs of slowing down. The hacking of auto software provider CDK Global serves as a stark example of this growing threat. The global cost of cybercrime is expected to surge from $8.15 trillion in 2023 to over $13.8 trillion by 2028. The increase is likely to be shared by governments as they look to prepare for the new form of war that relies less on direct combat and more on sabotage.

• Building on our previous analysis, we expect US government spending to increase regardless of the outcome of the 2024 election. Although Republican presidential candidate Donald Trump has mentioned cuts to foreign aid if he wins, he has consistently advocated for improving US defense spending. We anticipate that his administration could reallocate funds to provide more support for the US Department of Homeland Security. Consequently, defense companies, particularly those specializing in cybersecurity, may have significant upside potential in the coming years.

Shifting Gears: Investors are moving into small caps as the market continues to price in the possibility of a rate cut in September.

• While the S&P 500 has declined 1.0% over the last five days, the S&P SmallCap 600 Index has risen nearly 3.0%. This shift into small-cap stocks reflects investors favoring smaller companies amid expectations of a Fed pivot. Since the Fed started hiking interest rates in March 2022, investors have sought refuge in large companies because of their profitability, pricing power, and ability to absorb large changes in interest rates. Now that it appears that those rates may be moving downwards, investors are ready to go bargain hunting.
• While our views on small caps are bearing out, our concerns now rest with the longevity of the rally. The strong correlation between the S&P 600 and 10-year Treasury rates in the second half of 2023 demonstrates that even though stocks rallied during the period of lower rates, they were unable to maintain momentum when rates reversed course. Therefore, while recent economic data has drawn investors back to small caps, their optimism likely hinges on the Fed maintaining a dovish stance on future rate policy in the form of multiple rate cuts this year.

• While monetary policy uncertainty due to high inflation presents challenges, small-cap stocks still offer attractive opportunities for investors. Our research consistently shows that value investing remains a long-term driver of performance. Since small caps boast lower P/E ratios compared to their mid- and large-cap counterparts, they possess significant upside potential relative to their peers. However, to mitigate risks, we recommend screening for quality factors like profitability, leverage, and solvency.

China’s New Way: The final day of the widely expected meeting ended with a thud as the final statement failed to reassure investors that the worst was behind.

• In short, Beijing plans to continue with its state-driven economic model that focuses on balancing economic development with domestic security. Notably, the statement maintains its ambitious 5% growth target and preference toward long-term investments in technology as it looks to make itself less dependent on the West for resources. There was also a mention of the need to ensure the long-term growth by addressing potential risks associated with the property sector, local government debt, and small and mid-sized financial institutions.
• The market’s reaction to the readout was negative, interpreting it as a sign of the government’s reluctance to intervene and stimulate growth. While China’s economy did manage a 4.7% year-over-year growth rate, this masks a concerning slowdown in domestic consumption. Retail sales have dipped modestly over the past few months and are on course to contract 1% by year-end. At the same time, consumer confidence remains near its pandemic lows, with ongoing market volatility leading households to prioritize saving over making discretionary purchases.

• China’s recent remarks solidify our belief that the nation will continue to grapple with several challenges, often referred to as the five D’s: weak consumer demand, excess capacity and high debt, poor demographics, economic disincentives from the Communist Party’s intervention in the markets, and Western decoupling from trade, technology, and capital flows. These factors will likely make it difficult to identify investment opportunities in China; however, a focus on companies that cater primarily to the domestic market and align with China’s strategic goal could have long-term benefits.

In Other News: Israel is considering transferring control of the Rafah border to the EU, in a sign that the conflict is close to coming to an end. An ECB survey suggests that investors are growing confident that rate setters could lower rates again in September. Also, Ursula von der Leyen easily secured a second term as president of the European Commission, further cementing centrist party control over European affairs[1].

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[1] Yesterday’s Comment mistakenly stated that von der Leyen was the president of the European Parliament.

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by Patrick Fearon-Hernandez, CFA, and Thomas Wash

[Posted: 9:30 AM ET] | PDF

Good morning! S&P 500 futures are improved from yesterday following TSMC’s outlook. In sports news, Team USA crushed Serbia in an exhibition game, just 11 days before their Olympic opener. Today’s Comment dives into three key topics: the growing rivalry between the West and China over semiconductors, the market’s growing belief in a Federal Reserve policy shift, and the enduring power of centrist parties in the EU. We’ll also cover the usual roundup of international and domestic data releases.

Chip War to Trade War: Semiconductors are a flashpoint in the technological rivalry between the West and China, as both powers vie for supremacy in this critical industry.

• The US is looking for ways to undermine China’s semiconductor industry. Earlier this week, the Biden administration announced that it might implement the Foreign Direct Product Rule to prevent companies from selling chip-related technology to China. This rule allows the US to control foreign-made goods containing even minimal American technology. The clampdown is not only limited to sales, as the US has also pushed a top Dutch technical university into not accepting Chinese students.
• The European Union has also taken steps to counter China’s semiconductor industry. On Tuesday, it launched an anti-dumping investigation into imports of low-tech chips (also called legacy chips) from China. EU regulators suspect Beijing of unfairly undercutting prices to gain an advantage in the European automotive market. The investigation comes amidst concerns that China could use its overcapacity to flood foreign markets to the detriment of its competitors. The probe will likely open the door for tariffs, which is likely to further strain the EU trade relationship with Beijing.

• The US and Europe’s recent moves, though in early stages, signal a growing trend of coordinated action to counter rivals in the chip industry. This will likely intensify regulatory scrutiny for chip companies as Western regulators look to close ranks. While TSMC’s latest revenue outlook suggests that firms are confident that they can navigate these headwinds, investors may turn their focus to whether Nvidia can maintain its streak of exceeding earnings expectations. In general, the current lofty valuations of chip companies, especially when compared to peers, suggests that the market rally for chip companies may lose momentum over the coming months.

Fed Soft Landing Near? A potential rate cut appears more likely, with the latest Beige Book and Fed comments offering some dovish hints.

• The July 17  Beige Book, a summary of economic conditions across the Fed’s 12 districts, indicates a slowdown in the economy. According to the report, five districts are experiencing muted or declining economic activity, an increase of three compared to the previous report. This is likely to strengthen the Fed’s case that inflation is cooling, and that it should shift its focus toward protecting economic growth. On Wednesday, Richmond Fed President Thomas Barkin hinted that Fed officials may drop their assessment that inflation is elevated and suggested that a 25 bp cut may be inconsequential.
• Investors are betting heavily on a September rate cut, with the CME FedWatch Tool indicating a near-certain likelihood at 99%. However, the prospect of additional cuts remains unclear. While the latest economic projections suggest that the Fed will only cut its policy rate once this year, it appears that the estimate was heavily influenced by the acceleration in inflation in the first quarter. In contrast, traders project that the recent rise in the unemployment rate and persistent disinflationary pressures may persuade Fed officials to cut rates 2-3 times this year.

• There has been a significant shift in the expectations for rate cuts following the Fed’s hawkish turn at its June 11-12 meeting. The implied policy rate curve, which tracks expectations for up to three years ahead, now suggests that the Fed could lower rates to as low as 3.5% by 2026. This level implies policymakers are expected to bring interest rates down to a neutral zone, neither tightening nor loosening the economic grip. If this holds true, it suggests the market, despite recessionary fears, remains confident in a soft landing. This bodes well for value stocks, which should outperform in such a scenario.

European Centrists Fight On: As right-wing populists gain ground, European centrists still have the edge in gaining power.

• Today, the European Commission is set to hold a vote on who will lead as president. The front-runner appears to be current head Ursula von der Leyen, and there does not seem to be anyone standing in her way. However, because the vote is done in secret, it gives party members the ability to vote against party lines. She has attempted to mediate tensions by appealing across party lines and vowing to push prosperity and security throughout the bloc. She will need 361 of 720 votes to win another five-year term.
• Her potential victory would likely be viewed as a triumph for centrist parties after the recent parliamentary elections. Earlier this month, far-right parties saw a major increase in seats, with their share growing from 14.8% to 26.0%. However, they were unable to secure enough seats to take power. Recent elections in France also suggest that these groups are not necessarily making significant inroads domestically. Despite their growing influence, their lack of success suggests they will struggle to enact meaningful changes to European policies.

• That said, even though the far right doesn’t sit in the driver’s seat, they still have a hand on the wheel. This victory will likely give these groups a larger platform to voice their concerns, which could potentially lessen some of the anti-establishment resentment. Roberta Metsola’s landslide victory for president of the European People’s Party illustrates the continued dominance of centrist forces in the European Parliament. As a result, this could lead to a somewhat more favorable environment for investment in Europe, particularly since centrists seem likely to retain control.

In Other News: The Democratic National Convention’s decision to delay the procedural roll call for the party nominee is yet another indication that the party apparatus is losing confidence in President Biden’s ability to win in November. The European Central Bank opted to hold interest rates steady at its recent meeting, a cautious move reflecting its concern about lingering inflationary pressures. Meanwhile, UK Chancellor Rachel Reeves hinted at tough choices ahead, suggesting the country is gearing up for debt control measures.

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by Patrick Fearon-Hernandez, CFA, and Thomas Wash

[Posted: 9:30 AM ET] | PDF

Good morning! S&P 500 futures are off to a slow start as investors look for more confidence in the data. In sports news, the players of the American League were able to beat the National League in the MLB All-Star game. Today’s Comment starts with a summary of how former President Donald Trump and incumbent President Joe Biden are strategizing to win over supporters. We follow with discussions on the bitcoin and gold rivalry and the potential shift in US foreign policy. As always, the report concludes with a roundup of domestic and international news.

Political Re-Brand: Republican presidential candidate Donald Trump seems to be moving toward the center, while President Joe Biden has shifted further toward the left.

• During an interview with Bloomberg Businessweek, Trump outlined his vision for a second term. He made concessions such as allowing Fed Chair Jerome Powell to complete his term, despite previous reports suggesting he might challenge the Federal Reserve’s legal independence. Additionally, he is reportedly considering Jamie Dimon for Treasury Secretary, a position Dimon declined in 2016 but may be open to taking now that he is mulling retirement. Another newsworthy announcement was Trump’s expectations that his unreleased economic agenda would be implemented quickly after his victory.
• Meanwhile, President Biden has sought support from progressives as he looks to beat back calls to drop out of the election. In an effort to address concerns about inflation impacting everyday households, he unveiled a list of re-election promises on Tuesday. These include capping rent hikes for large landlords at no more than 5%, forgiving medical debt, and raising the minimum wage. Shelter prices and costs associated with healthcare have been significant drivers of inflation throughout his term, and these proposals aim to directly target those areas.

• Less than four months away from the election, betting markets show that former President Donald Trump has about a 67% chance of winning. These odds are likely to fluctuate in the coming months. While Trump’s current lead is significant, he may encounter resistance from his opponents, especially if Biden unexpectedly withdraws from the race. A major point of concern is Trump’s lack of a detailed economic plan, which is likely to make investors nervous given some of his positions. The uncertainty could introduce volatility into financial markets leading up to the November election.

New vs. Old School Hedges: Investor confidence in a potential Trump victory has driven a surge in gold and bitcoin prices over the past few days.

• Gold prices have skyrocketed 4% over the past week, while bitcoin has surged an even more impressive 12%. The surge in demand for these assets reflects investor concerns about the US Treasury’s safe-haven status. They fear the potential deregulation of cryptocurrencies and rising government spending, leading to ballooning deficits, could weaken the attractiveness of US dollar-denominated assets. Trump recently added to those concerns after he complained that the US dollar remains too strong compared to the Japanese yen (JPY) and Chinese yuan (CNY).
• A second Trump term is likely to ramp up the competition between precious metals and cryptocurrencies. Gold’s established reputation makes it a go-to for traditional investors, but younger generations are drawn to bitcoin’s potential. This digital asset’s allure stems partly from its innovative technology, which streamlines trading and purchases. However, its significant price swings raise concerns about its viability as a long-term store of value. As the chart illustrates, bitcoin’s volatility is roughly four times higher than gold’s, potentially making it a riskier option for long-term investment strategies.

• The coming years could see high-risk investors experiment with bitcoin, but for most, gold remains a more reliable choice. Central banks’ preference for gold diversification will likely bolster its value, especially as the world breaks into blocs. While bitcoin offers the potential for higher returns, its lower trading volume makes it a more volatile investment. We recommend gold for most investors due to its stability. However, bitcoin’s popularity may rise as the cryptocurrency market matures. Thorough research is essential before investors enter this market.

No More Mr. Nice Guy: The Republican populist wing appears to advocate a more transactional approach to foreign policy as it looks to pivot inward.

• There are growing signals that President Trump could dramatically shake up US foreign policy in his second term. In a letter to the European Council president, Hungarian Prime Minister Viktor Orbán claimed that if reelected, Trump would force Ukraine to accept a peace deal with Russia. The comment comes after Viktor Orbán held separate in-person meetings with Russian President Vladimir Putin and Trump earlier this month to discuss the matter. In that same vein, Trump also mentioned that Taiwan should pay the US for protection in a sign that he may not be willing to deter a Chinese invasion.
• The abrupt shift in stance regarding security assistance likely represents a significant reversal in American foreign policy. Traditionally, the US has advocated shielding allies from threats posed by Russia and China; however, now it appears that these countries will have to protect themselves. This newfound hesitation to provide security guarantees, specifically to smaller allies, comes amid growing anxieties that the US needs to do more to provide security domestically. This was shown as both Trump and his running mate J.D. Vance criticized US efforts to prioritize aid to foreign conflicts over securing the southern border.

• If Trump wins the office, one of the most intriguing developments will be how he handles defense spending. Although US defense spending is at an all-time high, its share of GDP has dramatically decreased from the levels seen during the late Cold War. That said, while we expect that he will likely favor less spending abroad, we remain confident that overall spending for national security will stay at current levels or could even increase. This is due to the US’s need to develop deterrents to foreign threats and enforce strict immigration policies. As a result, we believe that defense companies could perform well under his leadership.

In Other News: China’s suspension of nuclear arms talks with the US further strains their already tense relationship. Meanwhile, a ceasefire agreement remains elusive in the Israel-Hamas conflict, despite hints of willingness from both sides. Additionally, there are concerns in Japan that its intervention in currency markets is becoming less effective, in a sign that the central bank may be forced hike rates soon.

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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 recent plunge in global cotton prices, which has been driven by surging output in Brazil. We next review several other international and US developments with the potential to affect the financial markets today, including a major new tax reform in Turkey and a few words on US political developments.

Global Commodity Market: Global cotton prices have plunged to about $0.69 per pound so far in July, reaching their lowest levels since October 2020 and less than half their 10-year peak in May 2022. The decline largely reflects surging exports from top-producer Brazil, where low corn prices have pushed farmers to plant cotton instead. The drop in cotton prices will hurt farm incomes in other major cotton-producing countries, but it could also help boost margins for clothing manufacturers.

China: The Communist Party yesterday opened its latest “Third Plenum” meeting, which takes place every five years and often focuses on new economic reforms. Reports in state media say General Secretary Xi will use the meeting to push China’s “self-confidence and self-reliance,” in part by supporting the development of “new productive forces,” such as the increased production and export of advanced technologies like electric vehicles and solar panels.

South Korea: New polling shows 66% of South Koreans now support or strongly support their country developing its own nuclear weapons, up from 60% in a poll from last year. Prime Minister Han Duck-soo recently said the government isn’t in a position to develop nukes “for now,” but Seoul’s conservative mayor, Oh Se-hoon, who is seen as a likely presidential candidate in 2027, last week called for South Korea to go nuclear immediately.

• The developments are consistent with our view that rising geopolitical tensions and foreign doubts about US security commitments could spark a new nuclear arms race around the world.
• Our Bi-Weekly Geopolitical Report from February 12, 2024, provides a detailed discussion of this possibility.

France: As politicians keep jockeying for power after this month’s inconclusive parliamentary elections, the left-wing New Popular Front alliance that came in first is being riven by infighting. Its most radical faction, the far-left France Unbowed, has pulled out of the alliance’s negotiations on a candidate for prime minister after its leader, anti-capitalist firebrand Jean-Luc Mélenchon, was blocked by the Socialists.

• If the leftists within New Popular Front can’t agree on a candidate, it raises the chance that President Macron’s centrists could retain the prime minister’s post.
• That would likely be a relief to investors, as it would probably ensure at least some continuity with Macron’s pro-business policies, but the fractured nature of the new parliament would still leave French politics unstable in the near term.

Turkey: President Erdoğan’s government is reportedly prepping a major tax reform aimed at broadening the tax base, cooling economic growth, and helping reduce consumer price inflation. Among other measures, the reform would introduce a minimum corporate tax rate of 10% and toughen tax audits. The moves would complement last year’s hike in the value-added tax and cuts in fuel subsidies, as well as the central bank’s recent boost to interest rates. Those moves have yet to rein in Turkey’s big post-election surge in prices.

Canada: In a release yesterday, the Bank of Canada’s quarterly business-outlook survey showed many businesses expect softer demand and reduced cost pressures going forward. The survey results have increased expectations that the central bank will cut interest rates again at its policy meeting on July 24, despite recent data showing a re-acceleration in consumer price inflation in May. The renewed expectations for a rate cut have put pressure on the Canadian dollar, which is now trading at about 1.37 per greenback, a depreciation of 0.7% from one week ago.

US Politics: Former President Trump, the presumptive Republican nominee for president in the November elections, chose Senator J. D. Vance of Ohio as his running mate yesterday. Vance, who will turn 40 in August, is expected to shore up Trump’s support among younger white males, especially in the industrial Midwest, who are a critical group supporting Trump-style populism.

• The politically savvy move is likely to further cement expectations that Trump will win in November. It will also probably increase expectations that the Republicans will win added seats in the Senate and the House of Representatives.
• In turn, that will likely add to the revived “Trump trade,” which is reflected in falling bond prices, higher bond yields, increased prices for many equities, and stronger valuations for bitcoin and other cryptocurrencies.

US Monetary Policy: At an event in Washington yesterday, Fed Chair Powell said recent economic data “do add somewhat to confidence” that inflation will return to the Fed’s target after price pressures remained elevated earlier in the year. However, he declined to provide any hint as to when the monetary policymakers will start to cut interest rates. We continue to expect the Fed will start cutting rates at its September policy meeting, potentially following that with one more rate cut later in the year.

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