by Patrick Fearon-Hernandez, CFA, and Thomas Wash

[Posted: 9:30 AM ET] | PDF

Our Comment today opens with further evidence that the Bank of Japan is likely to hike its benchmark interest rate again later this month. We next review several other international and US developments with the potential to affect the financial markets today, including an effort by the European Parliament’s biggest political group to scrap the EU’s ban on selling autos with internal combustion engines by 2035 and President-elect Trump’s weekend threat to impose 100% tariffs against countries that try to stop using the US dollar for trade.

Japan: In an interview published Saturday, Bank of Japan Governor Ueda hinted that the central bank could hike its benchmark short-term interest rate again when its policy board next meets on December 18-19. According to Ueda, the timing of the next rate hike is “approaching” as the data on Japanese wage growth, consumer spending, and price inflation continues to move in line with the central bank’s forecasts. The statement will act as confirmation for the modest majority of market participants who already expected a rate hike this month.

• The BOJ’s benchmark interest rate currently stands at just 0.25%. If the central bank hikes rates in December, it would be the first policy change since a rate hike in July.
• The BOJ’s slow pace of rate hikes and the continuing wide disparity between Japanese rates and the major Western rates have weighed on the yen (JPY) over the last couple of months. Despite Ueda’s statement, the currency has weakened about 0.2% today and is currently trading at 150.00 per dollar ($0.0067).

China: The yield on long-term Chinese bonds fell below Japanese yields for the first time on Friday. China’s 30-year government bond declined to just 2.21% versus 2.27% on 30-year JGBs. The fall in Chinese yields reflects investor concerns that China faces years of slow economic growth, deflation, and ultralow interest rates similar to what Japan faced starting around 1990. The concern is generally consistent with our view that the Chinese economy has hit several big structural headwinds, such as high debt and poor demographics.

• Despite the Chinese economy’s unfavorable long-term outlook, the government’s recent modest stimulus program has given a small boost to the factory sector.
• The government on Saturday said its official November purchasing managers’ index for manufacturing rose to a seasonally adjusted 50.3, up from 50.1 in October. Like most major PMIs, the Chinese one is designed so that readings over 50 indicate expanding activity. The figures therefore suggest China’s factory sector has now grown modestly for two straight months. Before that, however, the index had shown that the sector had declined for five straight months.

European Union: On Friday, the Financial Times scooped that the largest political group in the European Parliament, the center-right European People’s Party, is working to scrap the EU’s planned 2035 ban on selling automobiles with internal combustion engines. Working with aligned national leaders, it also wants to reverse the EU’s interim rules imposing fines on carmakers that exceed certain emissions limits.

• The auto industry is a huge part of the EU economy, but it is struggling with challenges ranging from threatened US import tariffs and electric-vehicle dumping by China to high energy costs and the EU’s own stringent regulations.
• The new initiative to soften the regulatory burden likely stems at least in part from the recent political shift to the right in the US and the EU. Since the regulatory burden isn’t the only headwind for Europe’s automakers, the EPP initiative isn’t a silver bullet. However, if successful, it could ease some of the pressure on the auto industry.

France: Prime Minister Barnier’s minority government today is on the brink of collapse after the far-right populist National Rally (RN) signaled it might trigger a no-confidence vote over the austerity policies in the proposed 2025 budget. Barnier is desperately trying to control France’s ballooning budget deficit, which has started to spook investors, but he responded to RN by dumping a proposed hike in electricity taxes. Now, RN insists that he restore cost-of-living adjustments for pensions and reverse other spending cuts, which may be a bridge too far for Barnier.

• On a more positive note, President Macron on Friday was given a tour of Notre Dame cathedral, which has finally been repaired and refurbished after its 2019 fire. Initial reports say the new stonework and cleaned older stone have brightened its interior, giving viewers a sense of what it must have been like when it first opened in 1260.
• The cathedral is due to be reopened to the public on December 7.

Ireland: After elections on Friday, centrist party Fianna Fáil appears on track to win the largest number of seats in parliament and continue its coalition with the center-right Fine Gael. To gain a majority, however, it will have to strike a deal with some small parties and independents after the Greens, a former coalition partner, suffered a dramatic loss of support. The results make Ireland a rare island of relative political stability in Europe.

Romania: In yesterday’s parliamentary elections, initial tallies suggest the center-left PSD party came in first with about 22.5% of the vote, while two center-right parties got about 15% each. The nationalist far-right AUR group garnered 18%, and another far-right group, SOS Romania, got about 5%. If confirmed, the results mean Romania will also continue to be governed by mainstream parties, despite a populist right-wing nationalist winning the first round of the presidential election last week.

• The parliamentary election came exactly one week after pro-Russia, NATO-skeptic candidate Călin Georgescu came out of nowhere to win the first round of the presidential election. Liberal candidate Elena Lasconi came in second.
• Under law, Georgescu and Lasconi would normally compete in the presidential run-off election scheduled for next Sunday. However, the run-off election is now in limbo after the country’s top court on Thursday ordered a recount of the first round.
• The court and election officials are suspicious of Georgescu’s sudden rise from obscurity after only campaigning on the Chinese-owned social media platform TikTok. The authorities are probing whether Georgescu’s first-round win was the result of a covert Russian interference operation utilizing thousands of fake TikTok accounts, perhaps with the connivance of TikTok’s Chinese owners and/or the Chinese government.
• There are also suspicions that widely followed social media influencers in Romania were paid off to channel viewers to Georgescu’s posts. Several influencers had reportedly admitted to being paid for those services. However, Georgescu’s campaign filings have shown no expenses whatsoever.
• Officials from the European Union have also been brought in to investigate whether TikTok violated its new Digital Services Act, which requires big social media platforms to take action against disinformation and electoral interference.

Georgia: In another sign that Russia is managing to bring some Eastern European countries back into its orbit, Prime Minister Irakli Kobakhidze on Thursday said he will suspend Georgia’s process of EU accession until 2028 and decline all grants from the bloc. The announcement has sparked mass protests and clashes with police in the capital of Tbilisi every night since then.

Russia-Ukraine: While it’s now widely acknowledged that the Kremlin’s forces are gradually reducing the Ukrainians’ salient in the Russian region of Kursk, new reporting shows the Russians have also suddenly started to take more territory in eastern Ukraine. The Russian momentum will likely put further pressure on Kyiv to start peace negotiations, even beyond the pressure that is likely to come from the US once President-elect Trump is back in office.

Syria-Russia-Turkey: The rebels who have been battling the Assad government for years staged a surprise offensive over the weekend, capturing much of the major city of Aleppo and wide swaths of western and northwestern Syria. Underlining the international dimension of the civil war, the rebels are reportedly being aided by Turkish-backed fighters. In return, the Assad government and its Russian allies are fighting back with airstrikes, and Iran has sent its foreign minister to Damascus in a show of support.

• The offensive is yet another spark that could lead to a broader conflict in the Middle East and threaten its energy output.
• Importantly, the meddling by outside powers such as Russia, Iran, and Turkey has the potential to spark fighting between major powers.

United States-China: The outgoing Biden administration today imposed new restrictions on sending advanced semiconductors and related equipment to China. Under the new initiative, the US’s previous export curbs will be extended to cover memory chips used in artificial-intelligence applications and certain types of chipmaking equipment. The move also adds 140 Chinese companies to the US export blacklist. Even though the administration has taken a flexible approach to applying the rules, the new move is likely to further exacerbate US-China tensions.

US Trade and Currency Policy: President-elect Trump on Saturday warned the BRICS group of developing countries that he will impose 100% import tariffs against them if they keep trying to create their own currency to use in place of the dollar. The warning appears to reflect concerns that reduced use of the greenback for trade would undermine its value or its role as the world’s reserve currency. However, Trump and his advisors have also floated the idea of weakening the dollar to help eliminate the US trade deficit.

• As we noted in our Bi-Weekly Geopolitical Report from September 9, 2024, the dollar’s share in global central bank currency reserves has been falling gradually for more than two decades as countries make greater use of non-dollar currencies in trade. Nevertheless, the dollar remains in a bull market and is trading close to a record high. It has appreciated the most against major BRICS currencies, even as those countries try to reduce their use of the greenback.
• In our view, the value of the dollar is more driven by international capital flows than by its use in trade. Given the US economy’s superior growth, deep and well-regulated financial markets, and better protections for private property, capital flows into the US are likely to keep supporting the dollar in the near term.
• All the same, some public policy observers note that the strong dollar exacerbates the US trade deficit by making US exports more expensive and imports less expensive. That’s probably why some politicians have suggested taking steps to weaken the dollar, perhaps by imposing a tax on foreign capital inflows. Trump now appears to be siding with the strong-dollar advocates, which may make it harder to achieve his goal of bringing US trade back into balance.

US Postal System: The US Postal Service has finally started rolling out its new delivery trucks, and initial reports suggest mail carriers are happy with them. The new trucks, which will replace the current boxy vehicles introduced in the 1980s, are not only electrified, but they also finally have air conditioning and are designed for better access to parcels stored in the back. Sadly, however, they’re also being panned as extremely ugly!

(Source: US Postal Service)

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by Patrick Fearon-Hernandez, CFA, and Thomas Wash

[Posted: 9:30 AM ET] | PDF

Our Comment today opens with President-elect Trump’s latest vow to impose steep import tariffs on key trade partners once he is inaugurated to his new term. We next review several other international and US developments with the potential to affect the financial markets today, including signs that Germany may be ready to relax its government debt rules to spur economic growth and a few observations on the recent surge in US small cap stock prices.

United States-Canada-Mexico-China: President-elect Trump yesterday said he’ll impose 25% tariffs on all imports from Canada and Mexico on his first day in office to push them to crack down on illegal immigrants and drugs crossing their borders into the US. He also said he would impose an additional 10% tariff on imports from China, on top of existing levies. The threats are likely to deepen concerns that foreign countries, including key US allies, could face devastating tariffs once Trump is inaugurated, and not just for economic or protectionist reasons.

• In response, both the Canadian dollar (CAD) and the Mexican peso (MXN) are trading down about 0.8% versus the greenback so far today.
• Canadian and Mexican stock price indexes are also lower today. In addition, stock values for major foreign exporters to the US are also trading down, including Japanese automakers.

China: New reports based on satellite imagery and public documents suggest the Chinese military has built a prototype nuclear reactor to power its upcoming aircraft carriers. That means the country’s fourth carrier, under development now, could be its first to have the advantages of nuclear propulsion, including global range, faster speeds, greater capacity for carrying aircraft and munitions, and faster aircraft launch tempos — all of which would help make the Chinese navy an even greater challenge for Western naval forces.

China-United States: Apple CEO Tim Cook is in China today for the third time this year as he seeks government approval to add artificial-intelligence to the iPhone offerings in the country. However, a high-ranking government official has warned that Apple and other foreign firms wanting to bring AI to China would face long and complex approval processes if they don’t partner with a local company. The statement suggests China is turning back to a technology-transfer tactic it previously used to steal innovations from foreign firms.

Russia-North Korea: South Korean security officials say Russia has delivered advanced air defense systems to North Korea in return for the 10,000 or more troops and other military aid that Pyongyang has sent to Russia for its war against Ukraine. The air defense systems and potentially other military goods are on top of the energy and food deliveries that Russia has also reportedly sent to North Korea to pay for its aid. North Korea is also expanding a key factory that produces missiles for itself and Russia, possibly with Russian financing.

• The air-defense transfers illustrate the growing internationalization of the Russia-Ukraine conflict. They also reflect the increasing cooperation and coordination among the major countries in the China-led geopolitical and economic bloc, including China itself, Russia, Iran, and North Korea.
• As we’ve noted before, we think the trend of growing cooperation and coordination in the China-led bloc will become increasingly evident in 2025. Indeed, the commander of US forces in the Indo-Pacific region last week warned that Russia is likely to transfer critical submarine technology to China, helping make its naval forces an even bigger threat. The trend will likely strengthen the China-led bloc, sharpening tensions with the US-led bloc.

Germany: Former Chancellor Angela Merkel, who helped introduce the country’s controversial “debt brake” into the constitution in 2009, has written in her memoir that she now thinks it should be relaxed. The news comes just days after Friedrich Merz, now the leader of Merkel’s center-right Christian Democratic Union, said he could support making the rule more flexible. Since the CDU is currently in the pole position to win February’s parliamentary elections, the statements suggest the politics are moving toward a change in the brake in 2025.

• The debt brake caps new borrowing by the federal government at 0.35% of GDP, adjusted for the economic cycle. It also bars Germany’s 16 individual states from taking on any new debt at all.
• The debt brake has come to be seen as shackling the German economy. For example, some economists believe it has inhibited needed investment in high-return public goods such as infrastructure. Amending the rule could help reinvigorate German economic growth, which in turn would likely give a boost to the broader European Union economy.

Italy: Banking giant UniCredit yesterday launched an all-stock, 10.1 billion EUR ($10.6 billion) takeover bid for domestic rival Banco BPM. If successful, the takeover would create Europe’s third-largest lender by market capitalization. It could also potentially spark a wave of much needed consolidation and efficiency gains in the sector. The takeover bid comes as UniCredit’s effort to buy German lender Commerzbank has gotten a frosty reception.

US Stock Market: The Russell 2000 price index of small capitalization stocks yesterday jumped to a new record for the first time in three years, closing at 2,442.03. The index is now up 10.1% since election day and 20.5% for the year-to-date. The recent jump largely reflects optimism over the future impact of President-elect Trump’s likely economic policies. As we have argued in the past, we also think small caps are benefiting as the world fractures into relatively separate geopolitical and economic blocs — a trend that is fostering US re-industrialization.

US Economy: The American Farm Bureau has released its annual estimate of the cost of a Thanksgiving dinner for 10 people, and the figure comes to just $58.08, down 5% from last year. Adjusted for inflation, that’s one of the cheapest Thanksgiving dinners since 1982. The estimate assumes a dinner of turkey, cranberries, sweet potatoes, pumpkin pie mix, and more. Apparently, the estimate doesn’t include the nice wine, like a Zinfandel or German Riesling, that this author will be sipping alongside his turkey and stuffing!

Global Health: New research shows global rates of HIV infections and deaths related to the virus dropped sharply between 2010 and 2021. New infections fell almost 22% globally in the period, to 1.65 million, and HIV-related deaths decreased nearly 40%, to 718,000. The declines are largely attributable to new drugs and better prevention methods against the disease, which has killed some 40 million people since 1980 and was once seen as a virtual death sentence.

The Daily Comment will go on hiatus beginning Wednesday, November 27, and will return on Monday, December 2. Confluence wishes everyone a Happy Thanksgiving!

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by Patrick Fearon-Hernandez, CFA, and Thomas Wash

[Posted: 9:30 AM ET] | PDF

Our Comment today opens with news that the US military has been more involved in the recent China-Philippine tensions than was previously known. We next review several other international and US developments with the potential to affect the financial markets today, including another unexpectedly strong showing by a far-right party in a European election and President-elect Trump’s latest nominees for his top economic cabinet positions.

United States-Philippines-China: Late last week, the US Navy revealed it has a new task force deployed to the Philippines to help Manila defend its sovereignty in the South China Sea. The US personnel are not directly involved in the Philippine navy or coast guard operations that often come into dangerous contact with Chinese forces, but they do provide reconnaissance and intelligence assets to those operations. They are also training Philippine sailors and helping them integrate US-supplied military equipment into their operations.

• The Navy’s forward deployment and close cooperation with Philippine forces had not been disclosed previously. We have often reported on incidents in which Chinese navy, coast guard, and maritime militia forces engage in physical clashes with Philippine forces trying to sail through disputed waters. During those operations, it is now known that US Navy aircraft and drones were somewhere in the vicinity supporting the Philippine forces, although it isn’t clear how close.
• The presence of US personnel may be intended to dissuade the Chinese from taking stronger action against the Philippine forces. However, it probably also raises the risk of an accidental clash between US and Chinese personnel.
• The development helps confirm that China’s aggressiveness against Manila’s territorial waters in the South China Sea is perhaps even more dangerous than the tension between China and Taiwan. At some point, China’s territorial pressure on the Philippines could conceivably lead to a scary US-China conflict that would likely have huge negative impacts for the global economy and financial markets.

United States-China-Russia: At the Center for Strategic and International Studies on Friday, outgoing US Deputy Secretary of State Kurt Campbell warned that Beijing and Moscow are increasingly coordinating and cooperating in their foreign policies, in a way that will eventually pose a major threat to US interests. According to Campbell, the Biden administration has tried to keep China and Russia apart, but the effort has been thwarted by their leaders’ profound mistrust and conviction that the US is in sharp decline.

• Campbell’s statement is consistent with our recent warnings that China and key members of its geopolitical bloc (Russia, Iran, and North Korea) are increasingly cooperating to undermine the US bloc. Acting in a more coordinated, organized way should enhance the China bloc’s power, even if its members don’t build formal alliances or sign mutual defense treaties. If Beijing and its partners can accept ceding some of their autonomy to act in concert, they can increase their overall power and/or cut their total defense costs.
• At the same time, the US bloc stands at risk of splintering over issues such as tariffs and trade barriers, defense spending, migration, and energy policy. If these issues undermine the US bloc’s cohesion, or even if they are merely interpreted as signs of weakness by the China bloc, we think China-bloc leaders will act even more aggressively in places like the South China Sea, the Middle East, Ukraine, Western Europe, and the US.

China: The China Population and Development Research Center has issued a report warning that population declines in the rural provinces bordering Central Asia will lead to security and economic problems if they are not reversed. The report notes that the Central Asian countries along the border still have fast-growing populations. It also suggests that population declines in China’s trade hubs along the border could slow its ground-based exports and imports. The report therefore calls for a range of new subsidies to draw workers to the border regions.

• For example, the report notes that the port town of Alashankou in Xinjiang province handles fully half of China’s overland trade, and yet its population is only 17,000, of which only 3,423 are permanent residents.
• Similarly, the city of Manzhouli in Inner Mongolia accounts for over 60% of China’s overland trade with Russia, and its registered population dropped from 128,900 in 2020 to just 88,800 in 2023.

European Union: As EU leaders continue working on their proposal for a centralized fund to help member countries rebuild their defense forces, France has dropped its demand that any funds provided for weapons purchases be spent in the EU. Instead, France will reportedly support a rule that up to 35% of any such funds can be channeled to non-EU suppliers. The French climbdown increases the chance that the proposal will be approved. It also likely means that major US defense contractors will get a significant slice of any new EU military funding.

France: As usual, the first wines of the new grape harvest, the Beaujolais nouveau, were released last week on the third Thursday of November. Le Beaujolai nouveau c’est arrivé! This author tried in vain to enjoy them, as he usually does, but he found them way too young and under-developed. Life is too short to drink bad wine, so for your Thanksgiving turkey, we recommend a nice, big, well-cellared Zinfandel, or perhaps a Riesling from Germany or the US.

Lithuania: A DHL cargo plane crashed into a house today during an attempted emergency landing near the capital city of Vilnius. The crash killed one crew member and injured several people on the ground. Authorities are investigating the incident and haven’t ruled out terrorism. Given the recent string of suspected Russian sabotage attacks across Europe, including an effort to start a fire on DHL planes, it would be no surprise if the attack is ultimately tagged to the Kremlin. If it is, the incident would further worsen European-Russian tensions.

Romania: Călin Georgescu, a pro-Russia candidate formerly associated with the right-wing populist AUR party, won yesterday’s first-round presidential elections with 23.0% of the vote. Liberal leader Elena Lasconi came in second with 19.2%, slightly ahead of leftist Prime Minister Marcel Ciolacu, who had led the polls ahead of the election. If the results are confirmed, voters will choose between Georgescu and Lasconi in a run-off election in two weeks.

• The results are the latest in a long string of surprisingly strong performances by pro-Russia, right-wing nationalist parties across Europe. At some level, it is likely that the Russian intelligence services have tipped the scales with clandestine influence campaigns and political interference. Nevertheless, the results point to a strong backlash against the European Union and its traditional economic, political, and social policies.
• Whoever wins the run-off election will become the most powerful politician in Romania, with the right to name the prime minister and make key decisions on national security and foreign affairs. If Georgescu wins the presidency, Romania could become a less reliable member of not only the EU, but also of the North Atlantic Treaty Organization.

US Economic Policy: President-elect Trump on Friday and Saturday announced his nominees for most of the remaining top posts in his administration. Among his most key economic-policy nominees, he said he wants Scott Bessent, a hedge-fund manager and protégé of billionaire philanthropist George Soros, to be Treasury secretary. Trump also named Russell Vought to head the White House Office of Management and Budget, just as he did in his first term.

• Bessent’s nomination is likely to be well received by investors, considering his strong understanding of the bond and currency markets, focus on bringing down the federal budget deficit and regulation, and intent to help balance US foreign trade. The investor-friendly pick helps explain why US stock prices are up approximately 0.5% so far this morning.
• Vought, who became a key leader in the Heritage Foundation’s “Project 2025” program, has championed not only tight fiscal spending, but also quick, aggressive action to bring independent agencies such as the Federal Reserve and the Securities and Exchange Commission under tighter control by the White House.
• More broadly, commentators to date have focused mostly on the idea that Trump’s cabinet nominees have been marked mostly by their loyalty to him and their willingness to disrupt the status quo in Washington. We actually think the key aspect of the nominees is that they represent a broad range of ideologies, from leftist to right-wing. That reflects the wide nature of Trump’s coalition. Going forward, the big issue may be how Trump will hold such a wide coalition together, given their divergent interests.

US Defense Industry: The Wall Street Journal today says President-elect Trump is also mulling two financiers who have invested in start-up defense technology firms to be his deputy defense secretary. The two are Trae Stephens, a partner at the Founders Fund venture capital firm, and Stephen Feinberg, a billionaire investor.

• Consideration of the two private-equity leaders reflects the fact that much of the new defense spending that we expect around the world will probably flow into small, newly established firms specializing in advanced technologies such as autonomous weapons, quantum computing, hypersonics, and specialized materials.
• Indeed, Defense Department leaders have already recognized the importance of such new technologies in rebuilding and renewing the US military. The department has already launched various initiatives designed to help nurture and support small firms providing those innovations.
• We still see new business for big, well-established traditional defense firms, especially in Europe and Asia. Nevertheless, the new flow of funds into smaller defense start-ups could spur an exciting rush of innovation that will lead to many interesting initial public offerings in the coming years.

US Movie Industry: On its opening weekend, movie musical “Wicked” racked up strong theater ticket sales of $114 million, setting the stage for a potentially long and lucrative run worldwide. Meanwhile, on its opening weekend, “Gladiator II” pulled in almost $56 million. The good results suggest the nation’s movie studios and theaters could be turning the corner after a long period of weak sales.

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by Patrick Fearon-Hernandez, CFA, and Thomas Wash

[Posted: 9:30 AM ET] | PDF

Good morning! The market is eagerly awaiting fresh consumer sentiment data to assess the strength of the US economy post-election. In sports, Shohei Ohtani of the Los Angeles Dodgers and Aaron Judge of the New York Yankees have been named MVPs of their respective leagues. Today’s Comment begins with an overview of Trump’s supply-side economics. We then provide an analysis of regulators’ increasing scrutiny of Big Tech and take a look at Mexico’s sudden policy shift. As always, the report concludes with a roundup of key international and domestic data releases.

Trumpian Supply Side: The Trump administration plans to reshape supply-side economics to align with a more populist agenda.

• The incoming administration intends to stimulate economic growth through a series of tax cuts and deregulation. Businesses anticipate a corporate tax rate reduction from 21% to 15%, while individual taxpayers also expect tax relief. As far as deregulation is concerned, the financial industry, in particular, has already seen some benefits. In preparation for the transition, federal regulators under President Biden announced on Thursday that they would not finalize any new bank capital rules. Additionally, SEC Chair Gary Gensler, a villain in cryptocurrency circles, has also agreed to resign from his position.
• A key distinction between the original supply-side economists and their contemporary counterparts lies in their approach to trade policy. The current group advocates for the imposition of trade barriers, arguing that this strategy will attract more foreign direct investment. By erecting barriers to trade, they believe that foreign firms will be compelled to establish operations within the US to avoid tariffs, thereby facilitating the transfer of goods into the country duty-free. Japanese automakers used this strategy to avoid tariffs (also called “tariff jumping”) in the 1980s by building factories across the southern US.

• While tariff jumping can stimulate domestic manufacturing, it often leads manufacturers to prioritize countries with US free trade agreements. Mexico and Vietnam are prime examples of this, and could benefit significantly from increased US-China trade tensions. This trend may explain the support for blanket tariffs to prevent any country from exploiting loopholes. However, given the administration’s other priorities — tax cuts for households and businesses and deregulation — a broad-based tariff policy may not take precedence.

Google Breakup: US regulators have requested that the court force Google to sell its Chrome web browser business.

• Following a court ruling that found the company guilty of monopolizing the search engine industry, the Department of Justice has requested that it sell its Chrome browser business. The DOJ had sued the tech giant, alleging that it used unfair trade practices to harm competitors. While the Android business was also considered for divestiture, regulators ultimately decided against it. They reasoned that the threat of future divestiture could be sufficient to deter the company from further anti-competitive behavior.
• If successful, this would mark the first time a major company has been forced to undergo an antitrust breakup since AT&T in 1982. Over the past three to four decades, the court system has adopted the so-called “Bork standard,” which allows companies to form monopolies as long as they can demonstrate consumer benefits. In essence, the government has permitted major companies, particularly in the tech industry, to consolidate, provided that it leads to increased efficiency. This shift played a role in the disinflationary trend we have seen in recent decades as it forced many firms to prioritize cost leadership.

• The “Bork Standard,” a once-dominant antitrust framework, has increasingly become outdated. In today’s tech-driven economy, mature, inefficient firms are rare. Now, mergers and acquisitions often target innovative startups or smaller competitors. This trend can lead to heightened market concentration, stifling competition, and ultimately harming consumers. While we expect Google to appeal the recent antitrust ruling, both Google and other tech giants may face intensified regulatory scrutiny. As a result, the Magnificent 7 remain vulnerable to antitrust risks.

Mexico Backtracks: Mexico’s recent court system reforms may face implementation delays as the government seeks to temper potential backlash from both investors and the US.

• To ensure compliance with the USMCA agreement, the lower house of Congress has proposed modifying recent reforms. These changes that originally aimed to dismantle multiple regulatory bodies, including the transparency institute, the antitrust body, and the telecom overseer, have faced significant scrutiny. The elimination of the telecom overseer, in particular, has been identified as a potential violation of the agreement. To address this issue, lawmakers propose merging the antitrust and telecom regulators into a single entity, which has been viewed positively by investors.
• The Mexican peso (MXN) has depreciated 7% against the dollar over the past three months. Investors are increasingly concerned about the country’s recent constitutional reforms, which would empower the ruling Morena party to appoint favorable judges. This has raised fears of unchecked power and potential policy overreach. Additionally, the incoming US administration’s increased scrutiny of Mexico’s policies, particularly its openness to Chinese investment, has added to investor worries. Last week, Moody’s downgraded Mexico’s outlook from stable to negative, citing these policy concerns.

• The market will be closely watching the relationship between the new US and Mexican presidents in the coming years. With the USMCA up for review in 2026, Trump is expected to push for changes to protect US interests from Mexico’s constitutional reforms and to close loopholes that allow other countries to bypass tariffs by operating in Mexico to export to the US. However, Mexican President Claudia Sheinbaum has yet to signal her stance on Trump’s concerns. This uncertainty surrounding potential revisions to the agreement is likely to introduce volatility to the Mexican peso and equity markets.

In Other News: NATO and Ukraine will convene emergency talks to discuss the use of Russian hypersonic missiles as concerns grow over escalating tensions. Meanwhile, President-elect Donald Trump’s nominee for Attorney General, Matt Gaetz, has withdrawn from consideration, highlighting resistance from Republican senators to some of the president’s appointees.

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by Patrick Fearon-Hernandez, CFA, and Thomas Wash

[Posted: 9:30 AM ET] | PDF

Good morning! Markets are digesting Nvidia’s earnings report. In sports, Caitlin Clark has declined an offer to play in the Unrivaled three-on-three basketball league. Today’s Comment will cover Nvidia’s impact on the AI rally, the unintended consequences of trade restrictions, and updates on the Ukraine war. We’ll wrap up with a roundup of international and domestic data releases.

Nvidia’s Momentum: Spending on building AI-related infrastructure by Big Tech companies remains strong but is showing signs of waning.

• On Wednesday, Nvidia reported earnings that were nearly double the previous year’s, but still disappointed investors as it barely beat expectations. Fourth-quarter sales of $47.5 billion slightly exceeded estimates of $47.1 billion. While the modest beat suggests continued strong demand for the company’s products, concerns have emerged about the sustainability of its current growth trajectory. As investors assess the outlook for the AI-fueled rally that has propelled the S&P 500 to new highs, doubts have grown about its ability to carry over to next year.
• As a leading AI player, Nvidia has significantly benefited from the technology’s rapid adoption and is now a key industry barometer. Big Tech companies like Google, Amazon, Meta, and Microsoft rely on Nvidia’s high-performance chips to build and maintain their vast and complex data infrastructures. As a result, strong Nvidia earnings are often seen as a positive indicator of these tech giants’ continued investment in AI and cloud computing. According to Bloomberg Intelligence, capex spending by Big Tech firms is on pace for $165.2 billion this year, up from $120 billion last year.

• While AI advancements have been a catalyst for the Magnificent 7’s growth, a significant portion of their recent momentum can be attributed to investor demand for higher returns. In an environment of elevated interest rates, investors have sought out large, established companies with strong growth potential. These tech giants, with their substantial financial resources and low risk of insolvency, are perceived as attractive investments capable of capturing market share through aggressive spending. As these stocks become more expensive, small and mid-cap stocks could become more appealing to investors.

Imports, Tariffs, and Yields: Firms have started to ramp up their purchases of imports as they look to get ahead of potential tariffs from the incoming administration.

• West Coast ports, such as Long Beach and Los Angeles, have experienced a significant increase in activity as investors and businesses seek to mitigate the potential impact of future trade restrictions. Last month, the Port of Long Beach handled nearly 1 million containers, surpassing records set two months ago. Together, the ports of Long Beach and Los Angeles account for approximately one-third of all US container imports and are expected to remain busy through the end of the year as companies build up inventory to safeguard against potential supply chain disruptions.
• Firms are increasing foreign purchases to preempt potential tariffs from the incoming administration. Deficit nations rely on foreign capital, while surplus nations provide it. Consequently, resolving a trade dispute involves altering the flow of capital. This could manifest in the US borrowing less from the rest of the world by issuing fewer Treasurys or global investors reducing their Treasury holdings. We observed the latter dynamic in October when markets began to anticipate a Trump victory, leading to increased Treasury yields as foreign investors, particularly in Japan and China, reduced their holdings.

• Although Treasury yields are influenced by various factors, including monetary policy, economic outlook, and inflationary expectations, we believe a potential trade war could significantly impact the bond market. Increased tariffs could strengthen the US dollar, making it more expensive for foreign countries to purchase US goods. To acquire the necessary dollars for these imports, these countries may be forced to liquidate their US Treasury bond holdings. The lack of demand for US Treasurys could exacerbate an existing supply-demand imbalance, potentially leading to higher Treasury yields in 2025.

Tensions on the Rise: As Ukraine’s defensive efforts against Russia intensify, the geopolitical implications of the conflict are broadening.

• A Danish naval encounter earlier this week revealed that the ships involved in severing two undersea communication cables in the Baltic Sea were of Chinese origin. Notably, the crews aboard those vessels were reportedly Russian. While China’s support for Russia’s war effort has been widely speculated, this incident provides concrete evidence of direct Chinese involvement, including the supply of critical equipment. The sabotage comes amongst threats from Russia that it views NATO’s assistance to Ukraine as proof of its involvement in the war.
• After Ukraine employed US-supplied weapons in attacks within Russian territory, Moscow intensified its rhetoric, including explicit nuclear threats. Last night, Russia escalated further by launching an intercontinental ballistic missile at Ukraine. While armed with conventional explosives, the missile’s nuclear capability underscores the growing risk of nuclear escalation. In response to this attack, Ukraine deployed specialized UK-supplied missiles to target military installations in the region.

• The escalating geopolitical tensions present a significant risk to global markets. As hostilities intensify, commodity markets, particularly crude oil, are experiencing heightened volatility. Brent crude oil prices have surged 3.1% over the past five days, driven by concerns of potential supply disruptions. Should the conflict escalate further, oil prices could climb toward $80 per barrel by December, exerting inflationary pressure on global economies and weighing on economic growth. Additionally, European equities may face downward pressure due to the region’s proximity to the conflict.

In Other News: The International Criminal Court has charged Israeli President Benjamin Netanyahu with war crimes, a move likely to spark conflict with the US, which has threatened sanctions in response. The Department of Justice has requested that Google sell its Chrome browser in what is shaping up to be one of the biggest anti-trust fights of this century. Bitcoin exceeded $98,000 after news that the Trump administration is considering the appointment of a cryptocurrency czar.

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by Patrick Fearon-Hernandez, CFA, and Thomas Wash

[Posted: 9:30 AM ET] | PDF

Good morning! Markets are eagerly awaiting Nvidia’s earnings report, due to be released later today. In sports, the Boston Celtics ended the Cleveland Cavaliers’ winning streak. Today’s Comment will cover potential candidates for US Treasury secretary, the role of high-income earners in driving US consumption, and our insights on the escalating conflict in Ukraine. As always, we’ll include a comprehensive roundup of international and domestic data releases.

The Battle for the Treasury: While Scott Bessent is viewed as the front-runner to take over the Treasury, the market is hoping that former Fed Governor Warsh will get the job.

• While Trump has been naming candidates for key roles in his administration, market attention has largely centered on who will lead the US Treasury. Howard Lutnick, previously a top contender, is out of the race after accepting the Commerce secretary role, narrowing the field to Kevin Warsh and Scott Bessent. Warsh, once considered for the Federal Reserve chair, is a key advisor to Trump’s economic transition team. Bessent, a major supporter of the president-elect, has faced criticism for his “business as usual” approach, particularly after describing tariffs as merely a bargaining tool.
• The debate over the next Treasury secretary — tasked with managing the nation’s $28 trillion debt — carries significant market implications. Growing uncertainty surrounding future debt management strategies has raised concerns among fixed-income investors, especially given the persistent US deficit. This has dampened demand for US Treasurys, as seen in recent auctions where investor appetite for longer-term securities has waned. In recent years, Treasury auctions have increasingly resulted in “tails,” indicating that investors require higher yields to absorb the supply of government debt.

• The selection of the next Treasury secretary is likely to hinge on loyalty, which would potentially give Scott Bessent an advantage. However, the inclusion of Kevin Warsh in the discussion — widely considered a contender to succeed Fed Chair Jerome Powell when his term ends in May 2026 — could serve as a trial balloon to gauge market reactions to his potential leadership of the central bank. President-elect Donald Trump is rumored to be exploring naming a new Fed chair up to a year before Powell’s term ends. If true, this could spark market volatility as investors grapple with uncertainty over leadership.

High Earners Save the Day: The nation’s largest retailers reported mixed earnings, signaling that the economy remains strong but is gradually slowing.

• Target reported sluggish growth in the third quarter as the retailer failed to match the revenue gains of its peers Costco and Walmart. The slowdown in sales growth comes as more shoppers prioritize value, showing less willingness to absorb price increases. Its main competitor, Walmart, performed better, driven by strong performance from households earning over $100,000 annually. These consumers, seeking to offset rising prices, have been more willing to trade down to lower-cost options.
• While overall consumption has slowed in recent years, higher-income households have remained relatively unaffected. According to the Bureau of Labor Statistics, households in the top two income quintiles contributed to over 70% of the total spending increase in 2023. This represents a substantial rise from the previous two years, when their share was 62% in 2022 and 61% in 2021. Conversely, lower-income households have moderated their spending due to financial strain. Having depleted much of their pandemic savings, these households have been forced to curb their expenditures.

• The slowdown in spending is likely due to cumulative inflation and a cooling labor market. This dynamic could complicate the Fed’s efforts to communicate a clear monetary policy path, as it aims to balance price stability and its maximum employment mandate. Lowering interest rates could alleviate financial pressure, particularly for debt-dependent households, and potentially stimulate consumption. However, it could also exacerbate inflationary pressures. As a result, we expect the Fed may moderate its easing cycle, especially if the labor market shows signs of heating up.

Ukraine War Escalation: Investors turn to safe-haven assets as Ukraine escalates its efforts to defend against Russia by taking greater risks on the battlefield.

• Ukraine has utilized US-supplied weapons to target locations within Russia, following President Joe Biden’s decision to lift previous restrictions. This significant escalation marks a turning point in the war, as Russian President Vladimir Putin has previously warned that such actions would be interpreted as NATO involvement and suggested that this could lead to a broader conflict beyond Ukraine’s borders. In response to the attack, Putin lowered the threshold for using nuclear weapons to include critical threats to the territorial integrity of Russia or Belarus.
• The deployment of these weapons comes as Ukraine takes greater risks on the battlefield, while Western support for the war shows signs of waning. German Chancellor Olaf Scholz, who recently held his first talks with Putin in two years, is centering his reelection campaign on a more cautious approach to supporting Ukraine, firmly ruling out the supply of long-range missiles. Meanwhile, US President-elect Donald Trump has proposed a peace plan that could involve Ukraine ceding some of its territory. The escalation of the war is prompting investors to seek safety in US-denominated assets.

• As geopolitical tensions escalate in 2025, we anticipate that the US will be perceived as a relatively safer investment haven. The US economy, while facing significant fiscal challenges, appears more resilient compared to its global peers. In particular, the EU and China are grappling with their own systemic issues. While China’s debt concerns are well-documented, the EU is now facing increasing scrutiny due to its high debt levels and slow growth. The ECB recently warned that these factors could potentially trigger a eurozone crisis.

In Other News: The EU is expected to push Chinese EV makers to transfer intellectual property to access subsidies, in another sign that the bloc plans on getting tougher with China in regards to trade. The US is recognizing Edmundo González Urrutia as president-elect, a decision likely to reignite tensions with Venezuela. Iran has expressed a willingness to curb its nuclear program as it looks to avoid tough sanctions under the new US administration.

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by Patrick Fearon-Hernandez, CFA, and Thomas Wash

[Posted: 9:30 AM ET] | PDF

Our Comment today opens with the latest sign of further global fracturing: a new Chinese policy further restricting the export of critical minerals with dual military and civilian uses. We next review several other international and US developments with the potential to affect the financial markets today, including an apparent new instance of Russian sabotage against members of the North Atlantic Treaty Organization in Europe and a Walmart earnings report that suggests US consumer spending remains strong enough to support overall economic growth.

China: The Ministry of Commerce has announced it will begin restricting the export of more critical minerals with dual military and civilian uses, including tungsten, graphite, magnesium, and aluminum alloys. The new restrictions, which will be effective December 1, will supplement current export restrictions on dual-use minerals such as germanium and gallium.

• All the restricted minerals are important to certain advanced technologies, such as semiconductors and electric vehicles.
• As we have argued many times before, China is likely to keep weaponizing its mineral resources to retaliate for the West’s new trade and technology barriers, which in turn aim to thwart China’s growing geopolitical, military, and economic power.
• As a result, we believe tensions between China and the West will continue to spiral, creating ever more risks for the global economy and financial markets.

Russia-Hezbollah-Israel: Israeli forces battling Islamist Hezbollah militants in southern Lebanon are reportedly finding they have large amounts of modern, powerful Russian weapons. Some of the weapons apparently came from Syria, which itself buys Russian weapons but also hosts Russian military bases. The findings suggest the Iran-backed Hezbollah fighters have access to more and better-quality Russian weapons than was previously known.

• Hezbollah’s unexpectedly large and modern arsenal of Russian weapons illustrates the increasing inter-connectedness and internationalization of today’s major wars. In Israel’s fight against Hamas in Gaza and Hezbollah in Lebanon, for example, those militants are being supported by Iran and Russia. In Ukraine’s effort to defend itself against Russia’s invasion, the Russians are being supported by China, Iran, and North Korea.
• In our latest Bi-Weekly Geopolitical Report, published on Monday, we wrote in more detail about the North Korean troops in Russia.
• This inter-connectedness and internationalization of conflicts seems to be a symptom of the way the world is fracturing into relatively separate geopolitical and economic blocs. The development seems to be progressing most strongly within the US bloc’s most powerful rival: the China bloc. Greater geopolitical and military cooperation by China, Russia, Iran, North Korea, and the rest of Beijing’s bloc is another reason to expect worsening global tensions and investment risks going forward.

Russia-Germany-Finland-Sweden-Lithuania: In another potential sign of conflicts becoming more inter-connected and internationalized, two undersea communications cables under the Baltic Sea have been cut so far this week. One of the cables connected Germany and Finland, while the other connected Sweden and Lithuania.

• The German defense minister has stated unequivocally that the damage was deliberate sabotage, rather than an accident.
• That implies the perpetrator was Russia, which has staged increasingly brazen attacks on defense, industrial, and infrastructure targets in NATO countries over the last year. Those attacks apparently aim to punish NATO countries for helping Ukraine fend off Russia’s invasion.
• For investors, the key risk is that Russia’s increasingly aggressive sabotage attacks could eventually draw NATO or at least Western European countries more deeply into the Russia-Ukraine conflict.

European Union: As part of a new program supporting the EU’s advanced battery industry, the European Commission reportedly plans to provide subsidies to Chinese manufacturers only if they open new factories in the EU and share technological know-how with local partners. The policy would turn the tables on Beijing, which long took the same approach to Western firms investing in China. It also represents a further hardening of the EU’s stance against Chinese economic competition.

US National Security Policy: The Office of the Director of National Intelligence and the Central Intelligence Agency both said their inspector generals (IG) have announced an intention to resign before President-elect Trump is inaugurated again. The announcements come as Trump is widely expected to fire existing IGs and replace them with loyalists, as called for in the Heritage Foundation’s “Project 2025” plan.

• Although appointed by the president, each IG is supposed to investigate cases of waste, fraud, and abuse of power independently and impartially and report them to their agency chief and Congress.
• Observers fear that if an agency’s IG is overly deferential to the president, it could operate less efficiently, and its officials would have a free hand to violate the law or otherwise abuse their power.

US Economic Policy: President-elect Trump has broadened his search for a Treasury secretary after getting irritated by the rivalry and jostling of his two initial candidates: hedge-fund manager Scott Bessent and Cantor Fitzgerald co-chair Howard Lutnick. Trump is now also considering former Federal Reserve board member Kevin Warsh, private-equity CEO Marc Rowan, Tennessee Sen. Bill Hagerty, and former US Trade Representative Robert Lighthizer. Betting markets currently give Warsh the nod, with a 43% chance of winning the nomination.

US Retail Industry: Retail giant Walmart this morning said sales from its digital channels and stores that were open at least 12 months were up 5.3% from one year earlier in its fiscal quarter ended on October 25, beating the expected rise of 3.9%. According to the company, the sales gain came from growth across a wide range of products and customer income levels. Adjusted earnings in the quarter came in at $0.58 per share, also beating estimates, and the company boosted its outlook for the full fiscal year.

• Given its enormous size and footprint, Walmart is a bellwether for US consumer demand. Its healthy sales, profit, and outlook in the latest quarter suggest consumption spending will continue to boost the overall US economy in the near term.
• Nevertheless, because of Walmart’s competitive pricing, its sales gains may also reflect trading down by some consumers stressed by high costs and continued inflation pressures at other retailers.

US Stock Market: According to VerityData, executives at firms in the Wilshire 5000 stock index have been selling equities in their own companies at a record place amid the run-up in prices after President-elect Trump’s victory in the November election. The strong insider selling suggests at least some corporate managers see their stock price as inflated and want to take profits.

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