by Patrick Fearon-Hernandez, CFA, and Thomas Wash

[Posted: 9:30 AM ET] | PDF

Our Comment today opens with news that the White House this week will launch a major rollback of environmental regulations. We next review several other international and US developments that could affect the financial markets today, including an announcement of performance reviews for US defense contractors and growing investability issues for the Indonesian stock market.

US Environmental Policy: In an exclusive report this morning, the Wall Street Journal says the Trump administration this week will repeal the 2009 scientific finding that serves as the legal basis for federal greenhouse-gas regulation. The move will reverse the “endangerment finding” under which the federal government has limited emissions from power plants and autos. It will also end the regulatory requirements to measure, report, and certify compliance with emission standards.

• According to EPA chief Lee Zeldin, “This amounts to the largest act of deregulation in the history of the United States.”
• Whether or not that’s true, we would agree that the planned change, if implemented as reported, would be a significant deregulation with potentially far-reaching economic impacts.
• Given the US’s large political constituency favoring policies to address climate change, especially among younger voters, the move could also increase polarization and affect the midterm Congressional elections in November.

US Housing Policy: Lawmakers are reportedly refusing to include the administration’s proposed ban on institutional investors buying single-family homes in either of the two major housing bills currently making their way through Congress. The ban is generally opposed by free-market advocates, the financial industry, and the housing industry. Therefore, lawmakers reportedly may fear that tacking it onto either of the housing bills would scuttle the legislation that they have spent months developing. For now, financial and housing interests appear to be having their way.

US Defense Industry: Late last week, the Pentagon reportedly sent a letter to major defense contractors warning them to brace for sweeping performance reviews to identify companies that aren’t fulfilling their contracts. The reviews apparently are to implement President Trump’s January order threatening to cancel the contracts of underperforming defense companies that buy back their shares or pay dividends.

• The administration’s approach to the defense industry has been complex. Shortly after President Trump’s second inauguration last year, for example, he ordered significant cuts to the defense budget. The new order demonstrates his intent to squeeze efficiencies, improvement in quality, and faster turnaround times for weapons purchases — all at the expense of defense industry investors, if necessary. On the other hand, the president has recently called for a massive 50% increase in US military spending.
• As our longtime readers know, we have had a positive view of global defense stocks for the last few years. Because of the administration’s tough stance toward the defense industry, we have been more positive on defense firms outside the US. The Pentagon’s new warning seems to validate that stance. All the same, we are closely watching to gauge whether a big increase in the defense budget will offset any of the financial challenges implied by the tougher contract scrutiny.

United States-Taiwan: The Financial Times late yesterday scooped that the White House’s forthcoming tariff plan for advanced computer chips will include exemptions for chips from Taiwan Semiconductor Manufacturing Co. based on how much the firm invests in new US fabrication facilities. The plan would aim to strike a balance between imposing tariffs to encourage domestic chip manufacturing and removing obstacles to US hyperscalers building new data centers for artificial intelligence.

United States-Canada: In a post on social media yesterday, President Trump said he will block the opening of the new Gordie Howe International Bridge linking Canada and Detroit unless the US “is fully compensated for everything we have given them, and also, importantly, Canada treats the United States with the Fairness and Respect that we deserve.”

• The bridge, which is reportedly close to completion and has been paid for fully by Canada, was supported by the president during his first term as a way to relieve congestion in the vital US-Canada trade corridor.
• The president’s last-minute demands likely constitute an effort to squeeze concessions from the Canadian government ahead of this year’s renegotiation of the USMCA trade agreement, despite the risk of worsening frictions between the US and its longstanding ally.

United States-Cuba: The Cuban government has reportedly told international airlines that it won’t be able to supply them with jet fuel starting today. As a result, Air Canada has announced that it will suspend flights to the island, and other foreign airlines are likely to be affected as well. The disruption suggests that the US effort to cut fuel supplies to the island are having their intended effect of strangling Cuba’s economy. However, it is still too early to know if the effort will force political change in Havana as intended.

China: The China Media Project, a research group, has issued a report showing that Alibaba’s popular Qwen model has been built to say only positive things about China. The report is the latest in a series examining how China’s increasingly popular open-source AI models have been manipulated for apparently political purposes. As China’s models become more widely used, the result is likely to be a skewed portrayal of China around the globe.

Indonesia: Two weeks after index provider MSCI said it will downgrade Indonesia to a “frontier market” from an “emerging market,” over investability and transparency issues, index provider FTSE Russell today said it has postponed a review and update of its Indonesia exposures over uncertainty in determining the free float of the country’s stocks. The blemishes on the Indonesian stock market threaten to limit how much it can benefit from investors’ growing interest in international stocks.

United Kingdom: Following our note yesterday about Prime Minister Starmer being pressed to resign over scandals including the naming of an Epstein associate as ambassador to the US, a meeting of Labour Party lawmakers yesterday reportedly offered him strong support, reducing the risk of a forced resignation for the time being. Nevertheless, Starmer’s political position continues to weaken, suggesting it will be increasingly difficult for him to drive policy initiatives in the near term.

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