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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