by Patrick Fearon-Hernandez, CFA, and Thomas Wash

[Posted: 9:30 AM ET] | PDF

Our first Comment of the New Year opens with the same old geopolitical tensions in Asia, this time with reports touching China, Taiwan, and Japan. We next review several other international and US developments with the potential to affect the financial markets today, including the new French government’s decision to ease its deficit-cutting target and news that President-elect Trump will try to pass all of his major policy initiatives in a single bill once the new Congress is in place.

China-Taiwan: Beijing has reportedly launched a new program under which Taiwanese visiting the mainland are being urged to sign up for local resident cards, bank accounts, and mobile-phone numbers, which in total allow them to apply for the identity cards used by Chinese citizens. The program appears to be another effort by Beijing to undermine Taipei’s jurisdiction over Taiwan. In a worst-case scenario, it could also be used as an excuse for Beijing to intervene in the island’s domestic affairs or even to invade.

Japan: New reports say Tokyo will release its first-ever arms export plan sometime this year. Developed with Japanese industrial firms, the plan will lay out medium- and long-term targets for defense equipment exports. Its goal will be to strengthen Japan’s arms makers so they can better support the country’s defense buildup ahead of a potential conflict with China. Development of the plan illustrates how defense is becoming a growth industry worldwide, but especially in Asia and Europe.

• According to the authoritative Stockholm International Peace Research Institute, the world’s 100 largest defense firms boosted their total domestic and foreign arms revenues to $632 billion in 2023, for an inflation-adjusted increase of 4.2% from 2022.
• The five Japan-based companies in that total — Mitsubishi Heavy Industries, Kawasaki Heavy Industries, Fujitsu, NEC, and Mitsubishi Electric — increased their total defense revenues to $10 billion, up 35% on the year.
• As in many other countries, the Japanese budget for reconnaissance and strike drones is rising especially fast, reflecting both their critical role in the Ukraine war and troop recruiting challenges related to Japan’s low birthrate.

France: The new minority government of Prime Minister Bayrou today said it would only try to cut the budget deficit from an estimated 6.1% of gross domestic product in 2024 to a range of 5.0% to 5.5% in 2025. Ostensibly to help protect economic growth, the target would be a bit easier to achieve than the 5.0% planned by the previous prime minister before he lost power in a no-confidence vote. Since it would also require smaller tax hikes and spending cuts, the new target also has a better chance of being passed by parliament and averting a fiscal crisis.

US International Trade Policy: We noticed a headline on Bloomberg television today saying the enormous tariffs that President-elect Trump has threatened to impose on foreign imports will only apply to “critical” inputs. However, we still have not seen the details behind the report. In any case, the news appears to have pushed the US dollar sharply lower against most major foreign currencies so far today. As of this writing, the US Dollar Index is down 0.9% to 107.95.

US Fiscal and Regulatory Policy: President-elect Trump and House Speaker Johnson have reportedly decided to pursue a single mega-bill encompassing all the Republicans’ major policy priorities once the new Congress is in session later this month, rather than the two-bill strategy considered previously. The single bill would include everything from extending and expanding the 2017 tax cuts and cutting spending to cracking down on immigration and deregulating the energy industry.

• Because of the Republican party’s very narrow majorities in Congress, both the strategies have political risks. A single bill covering such a large number of issues may also take much longer to be passed. Observers currently think such a bill couldn’t be signed into law until at least late April or May.
• In any case, the policies covered by the bill would be in sync with a recent research paper by Steve Miran, the incoming chair of Trump’s Council of Economic Advisors. In his paper, Miran argues that boosting growth would best be achieved by slashing regulation to incentivize more investment related to artificial intelligence and other technologies required for military modernization.

US Monetary Policy: In a speech Friday, Richmond FRB President Barkin said the continued strength in the labor market and waning price pressures mean there are more upside risks than downside risks to economic growth in 2025. However, he warned that such a scenario means there are also more upside than downside risks to inflation. Barkin’s statement is consistent with our view that the Federal Reserve may cut interest rates less than expected this year.

US Critical Minerals Mining Industry: The US Forest Service late Friday granted a permit for Perpetua Resources’ “Stibnite” gold and antimony mine in Idaho. When it starts producing in 2028, the mine is expected to supply some 35% of the nation’s demand for antimony, a rare mineral used in armor-piercing ammunition, solar panels, and other high-technology goods. In response to the news, Perpetua’s stock price surged 9.1% in after-market trading.

• Antimony is not currently produced in the US, and Beijing has recently restricted its exports to retaliate for Washington restricting the sale of advanced semiconductor technology to China. Approval of the mine illustrates how US-China tensions and global fracturing have spurred re-industrialization in the US, especially regarding goods critical to national security and advanced technologies.
• Although US industrial firms are often constrained by stringent environmental and other regulations, we think the US’s new prioritization of defense and economic growth could lead to those rules being watered down. If so, we could see many more examples of new mining and other industrial investments related to defense and technology.
• Indeed, the US defense budget and industrial-development programs could provide much of the funding for these investments. In fact, the $1.3-billion Stibnite project has been partly funded by the US Export-Import Bank and the Defense Department.

US Commercial Real Estate Industry: The Wall Street Journal today has an interesting article on the shortage of space at open-air shopping centers and the resulting strong performance of real estate investment trusts (REITs) focused on retail properties. The article notes that the sector has benefitted from reduced construction after the Great Financial Crisis and work-from-home rules that allow people to shop throughout the week. The article illustrates why investors may not want to avoid REITs entirely, despite the current challenges facing the office sector.

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