by Patrick Fearon-Hernandez, CFA, and Thomas Wash

[Posted: 9:30 AM ET] | PDF

Our Comment today opens with news suggesting the US could soon target Chinese tech services giant Alibaba with sanctions or trade restrictions in a move that could reignite bilateral tensions and weigh on global markets. We next review several other international and US developments with the potential to affect the financial markets today, including worsening military tensions between China and Japan and concerns in Europe about the rise of stablecoins backed by US Treasury bills.

China-United States: In a Friday scoop, the Financial Times revealed the existence of a US national security memo claiming that Chinese technology services giant Alibaba provides support for Beijing’s military cyber operations against the US. Importantly, it appears that the memo could help justify US sanctions or business restrictions against Alibaba, potentially including a forced delisting from the US stock market. However, White House officials declined to tell the FT how they intend to respond to the intelligence.

• As we’ve argued previously, the US-China trade war this year has revealed that China’s comprehensive power — its combined military, diplomatic, economic, and technological strength — is probably more on par with that of the US than people had realized. We think this has been reflected in the US-China trade truce reached last month. If it leads to a broader, longer-term deal, US-China tensions could ease more permanently, reducing the risk of sanctions or other retaliatory actions and giving a boost to US and Chinese stocks.
• However, it’s important to note that such a comprehensive, longer term deal is not yet in place. For now, the US-China trade truce remains fragile, and each side could take actions to upset it. If the US uses the new intelligence report to undercut Alibaba, we suspect bilateral relations could turn south again, putting a damper on stock values.

China-Japan: Late on Friday, Beijing officially warned Chinese citizens to avoid travel to Japan, and Hong Kong authorities issued a similar warning on Saturday. Reports yesterday said a Chinese coast guard vessel also made a provocative patrol through a set of islets claimed by both Beijing and Tokyo but administered by Japan. The moves mark the latest Chinese retaliation for Japanese Prime Minister Takaichi’s statement last week that a Chinese effort to take Taiwan by force would require Japan to intervene militarily.

• As we noted in our latest Bi-Weekly Geopolitical Report, Takaichi’s hawkish approach to China risks prompting Beijing to impose additional economic and trade punishment on Japan going forward.
• Indeed, observers have noted that the next logical step for each country would be to impose economic sanctions on each other. That, of course, would have the potential to weigh on both Japanese and Chinese stock values.

China: At a conference in Beijing on Friday, former Finance Minister Lou Jiwei warned that the country’s slumping real estate sector will likely continue to weigh on economic growth for up to five more years. The warning underscores the massive overbuilding in China’s residential real estate sector until 2021, which resulted in extreme excess capacity, bad debts, and steep losses by builders and buyers alike. If rebalancing the sector really does take until 2030, it will mean nearly a decade of bruised growth for China, on top of several other economic headwinds.

United States-Eurozone: In a Financial Times interview, Dutch central bank chief Olaf Sleijpen warned that the growing private-sector issuance of stablecoins backed by US Treasury bills is a risk for the European Central Bank. Sleijpen warned that a run on a stablecoin could potentially force the ECB to adjust its monetary policy, putting the institution in a position similar to that of central banks in emerging markets that are heavily dollarized.

• Sleijpen’s concern illustrates how the rise of Treasury-backed stablecoins is actually boosting the US dollar’s importance in world financial markets again.
• We still expect the dollar to depreciate in the foreign exchange markets in the coming years, giving foreign equities an advantage, but the rise of Treasury-backed stablecoins will likely offset some investor concerns about the dollar’s influence in the global economy.

United States-Switzerland: US Treasury Secretary Bessent and UBS Chief Executive Officer Colm Kelleher have reportedly had several talks in recent months to discuss the possibility of the giant Swiss bank moving its headquarters to the US. The discussions appear mostly designed to dissuade the Swiss government from imposing tough new capital rules on UBS. All the same, given the White House’s push for more foreign investment and its proclivity to guide corporate investment and operations decisions, such a move may be more than just posturing by UBS.

United States-Venezuela: President Trump yesterday hinted to reporters that the US may be in talks with Venezuelan President Maduro on the possibility of Maduro stepping down in the face of a significant amount of US Navy firepower in the region. That could reduce the risk of some kind of US-Venezuelan conflict in the region. It could also herald a potential resurgence of Western investment in the oil sector and the potential for significant new supplies of oil coming to the market soon.

US Airline Industry: The Federal Aviation Administration this morning lifted the flight curbs imposed at airports across the country earlier this month because of the federal government shutdown. Airlines have warned it could take several days for full operations to resume and for flight crews to get back in place, but it now appears that flight schedules will be back to normal for the big Thanksgiving travel rush next week — good news for both the traveling public and the nation’s airlines.

Russia-Poland: Authorities in Poland yesterday said sections of a railway heavily used to ship arms to Ukraine were blown up, forcing two passenger trains to make emergency stops. After the recent drone intrusions into Polish airspace and other similar incidents across Europe, the Sunday explosions appear to be the latest brazen example of Russian sabotage in member countries of the North Atlantic Treaty Organization. Such sabotage risks going too far and sparking a crisis or conflict that would disrupt the economy and/or financial markets.

Chile: In the first round of presidential elections yesterday, José Antonio Kast of the ultraconservative Republican Party came in first with about 70.0% of the vote. Jeannette Jara of the Communist Party came in second with 26.8%. That makes Kast the frontrunner for the second and final round of voting on December 14. If that transpires, Chile will do a dramatic course correction after six years of leadership by the leftwing President Gabriel Boric. The news is likely to give a boost to Chilean stocks today.

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by Patrick Fearon-Hernandez, CFA, and Thomas Wash

[Posted: 9:30 AM ET] | PDF

Our Comment begins by analyzing the market sell-off on Thursday, which was driven by uncertainty surrounding US monetary policy. We then pivot to the political arena and examine the White House’s coordinated push to mollify anxious voters. On the global stage, we detail the US’s hawkish military stance in the Western Hemisphere, break down the impact of the recent Chilean election, and explore the surprise rise in UK bonds after a major reversal in tax policy. Finally, we include an essential roundup of key international and domestic data releases.

Fed Rate Cut Doubts: A sharp market sell-off ensued on Thursday as Federal Reserve officials cast significant doubt on the timeline for interest rate cuts. The dovish outlook was challenged by several Fed presidents, who voiced a resolute reluctance to ease monetary policy, warning that such a move could compromise the bank’s price stability mandate. This repricing of expectations was immediately reflected in interest rate futures, with the CME FedWatch Tool indicating that the implied probability of a December cut nosedived from 63% to 50%.

• The market sell-off was broad-based across asset classes as investors aggressively deleveraged their portfolios and liquidated overweighted positions. Technology stocks bore the brunt of the decline, with the NASDAQ Composite dropping 2.29%. Crucially, traditional safe-haven assets, such as gold and the US 10-year Treasury bond, also saw simultaneous selling pressure. This counterintuitive move signals that investors were prioritizing liquidity and profit-taking over a classic “flight-to-safety” strategy.
• The unwinding of trades vividly reflects the market’s overconfidence in an imminent rate cut. This optimism was largely rooted in evidence of a cooling labor market, particularly the high-frequency data from the ADP weekly tracker. This tracker showed that in the four weeks ending October 25, private employers were, on average, shedding 11,250 jobs per week, suggesting a notable deceleration in employment growth.
• The Federal Reserve’s renewed commitment to price stability is also tempering economic growth outlooks. A prolonged period of high interest rates would keep borrowing costs elevated, potentially straining household finances and raising the cost of corporate investments. This is particularly relevant for AI expansion, as many firms funding these initiatives have done so through increased debt.
• The Federal Reserve’s recent rhetoric signals a clear prioritization of price stability over maximum employment, dramatically dimming the prospects for a December rate cut. The central bank is now positioning for a pause in its easing cycle, potentially as soon as next month. Nonetheless, any definitive signal that the Fed will resume aggressive easing would serve as a powerful catalyst for a major risk-asset rally.

Affordability Push: The White House is urgently evaluating new proposals to tackle affordability, recognizing this issue as a crucial hurdle ahead of the midterm elections. This intense focus is driven by recent off-cycle elections, which served as a clear bellwether of voter frustration. Analysis of those contests showed a significant portion of the electorate is struggling with stubbornly high inflation and stagnant job growth. As a result, the administration is now compelled to prioritize visible economic relief measures.

• To combat food inflation, which has accelerated in recent months, White House officials are actively engaging with their South American trading partners to negotiate tariff reductions and boost food imports. This initiative is specifically expected to ease price pressures on key commodities such as beef, beans, and fruits, directly supporting the administration’s goal of reducing overall consumer grocery costs.
• The White House is considering several measures to improve housing affordability, including 50-year mortgages and “portable mortgages.” The latter would allow homeowners to transfer their existing loan terms to a new property. Although details are not yet finalized, the initiative signals a proactive effort to provide household relief and is expected to offer some support for the broader economy.
• This flurry of activity signals a strategic pivot toward populist economic measures to bolster public support. Looking further ahead to the 2026 election cycle, the administration is likely to continue this approach, with a new wave of growth-oriented policies already taking shape. The prospect of direct stimulus checks remains a credible tool, and any significant fiscal injection of this kind could serve as a powerful catalyst, igniting a fresh rally in equity markets.

New Monroe Doctrine? Defense Secretary Pete Hegseth has announced the launch of Operation “Southern Spear,” a new initiative to counter alleged drug traffickers in the Caribbean Sea and Pacific Ocean. The operation appears to be part of a broader administration effort to project power in adjacent waterways. In a social media post, Hegseth asserted that “the Western Hemisphere is America’s neighborhood,” a statement that underscores the United States’ ambition to exert stronger influence and secure its interests throughout South America.

Chilean Elections: The South American country will hold a pivotal election dominated by three candidates from political extremes. The frontrunner is Communist candidate Jeannette Jara, who is trailed by far-right leader José Antonio Kast and Libertarian candidate Johannes Kaiser. While Jara is favored to secure the largest share of votes in the first round, she is projected to fall short of an outright majority and is widely expected to lose to the unified right-wing candidate in the subsequent runoff election.

Nvidia Surrounded? While the White House has consistently urged chipmakers to reduce their exposure to China, Microsoft and Amazon have now endorsed this position. The tech giants are prepared to back legislation that would restrict Nvidia’s ability to sell advanced semiconductors to China while ensuring that they receive priority access. This move exemplifies a broader shift in US policy away from traditional laissez-faire principles toward more centralized economic planning, justified on national security grounds.

UK Bonds: A sharp sell-off in UK government bonds occurred after the government abruptly abandoned plans for income tax hikes. Although the decision was officially attributed to improved growth forecasts from the budget watchdog, investors viewed the policy reversal as a signal that the administration was prioritizing political expediency over fiscal responsibility. This erosion of confidence is contributing to negative global sentiment on sovereign debt in developed nations that continue to face challenges in stabilizing their finances post-pandemic.

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by Patrick Fearon-Hernandez, CFA, and Thomas Wash

[Posted: 9:30 AM ET] | PDF

Our Comment begins with an analysis of the bipartisan push for greater government involvement in AI development. We then examine the growing significance of next year’s Federal Reserve reappointments, followed by a focus on the White House’s embrace of high-skill foreign labor and the ongoing strength in credit card spending. As always, the report includes a comprehensive roundup of key international and domestic data releases.

The Artificial Intelligent State: A bipartisan panel formed under both the Trump and Biden administrations has urgently called for greater government involvement in the economy to strengthen the tech sector, citing critical national security concerns. The group highlighted two major risks: a lack of private investment in strategically important industries and an overreliance on rival nations for key supply chain components. The warning underscores how national security concerns are driving a fundamental rethinking of traditional economic norms.

• The proposed policy represents a sharp departure from the mostly laissez-faire framework that has shaped US economic strategy since the Reagan era. While the 2008 financial crisis exposed the limits of free markets, it was the Biden administration that institutionalized a more active industrial policy, channeling targeted stimulus into strategically vital sectors. This shift was later reinforced and broadened by the Trump administration’s reliance on tariffs to shield domestic producers and promote targeted private investment.
• This bipartisan warning could be foreshadowing the potential for the state to provide loan guarantees to strategically vital firms. The concept of government-backed debt was recently raised by AI companies, notably OpenAI, whose executives have cited colossal commitments to funding billions of dollars in equipment. These massive capital expenditures currently outpace the company’s revenue stream, fueling concerns that a potential default could trigger the bursting of the long-speculated AI bubble.
• While increased government involvement can provide strategic support, it inevitably risks market distortions. One significant concern is the crowding out effect, where large public investments in strategic sectors divert capital, talent, and resources away from other productive areas of the economy. Moreover, this intervention may lead to substantial overcapacity in supported industries, making the broader economy more susceptible to speculative bubbles.
• This dynamic creates a perilous incentive for lawmakers. Having staked their policy — and potentially public funds as well — on the success of strategic sectors like AI, the government has developed a vested interest in ensuring the continued growth of the industry, even if it becomes detached from market fundamentals. While it is uncertain whether this decoupling will persist, the state is likely to attempt to manage the market and possibly artificially prop up valuations to prevent a collapse.

A Dovish Tilt: Atlanta Fed President Raphael Bostic has announced he will retire at the end of his term in February. His decision to forgo reappointment means the Federal Reserve could lose another key hawk from the committee. While Bostic has had a reputation for focusing on the maximum employment side of the Fed’s dual mandate, the unprecedented post-pandemic inflation surge positioned him as a leading voice for keeping interest rates elevated to restore price stability. His departure is therefore likely to open a seat for another dove on the committee.

• Bostic’s exit is part of a broader leadership transition, as the terms for several regional Fed presidents are scheduled to expire next year. The selection process for these roles, which carry five-year terms ending in one or six, involves a vote by local boards but requires final confirmation from the Federal Reserve Board in Washington.
• Traditionally an obscure procedural matter, the appointment of Federal Reserve presidents has now entered mainstream political discourse. This shift is driven by the White House’s ambition to exert more control over monetary policy, raising concerns that the administration may attempt to influence the selection of regional bank presidents by reshaping the Federal Reserve Board itself.
• The White House currently has two reliable allies on the Federal Reserve Board in Governors Stephen Miran and Michelle Bowman. A third, Christopher Waller, could also be considered part of this camp, given his nomination by the current president. A pivotal moment will be the Supreme Court’s January hearing, which will consider the president’s authority to remove a Fed governor. If the Court rules that the president can indeed remove Governor Lisa Cook, then the White House could secure a majority on the Board.
• While the US dollar is influenced by a multitude of factors, from economic growth to financial flows, we believe central bank policy is among the most critical. Any perception that the Federal Reserve is losing its independence could significantly weaken the dollar, prompting investors to diversify into gold and other currencies. This scenario would also likely provide a substantial tailwind for international equities.

H1-B Visas Good? President Trump indicated that H-1B visas could help address critical talent shortages in key industries. His comments may signal an imminent trade agreement with India, a key source of skilled immigrant labor, and more strategically, acknowledge that recruiting top global talent is essential for winning the international AI race. This stance aligns with the tech sector’s long-standing argument that a scarcity of skilled domestic workers has hindered its efforts to reshore production and innovate.

Government Data: The White House has announced that the release of October’s CPI and jobs reports will be suspended due to complications from the government shutdown. This absence of official data will hamper the Fed’s data-dependent approach. To fill this void, the central bank will be forced to rely more heavily on private-sector data, which, although readily available, is generally considered less reliable than official government statistics. Our analysis of current alternative data trends indicates that these conditions warrant a rate cut by the Fed in December.

No More Pennies: The US Mint has announced it will cease production of the penny for public circulation as a cost-cutting measure, marking a symbolic endpoint for a coin whose metal value has long exceeded its one-cent face value. While limited editions will continue for collectors, the move is expected to exacerbate an existing penny shortage. This has prompted calls for legislation to allow cash transactions to be rounded to the nearest five cents, a measure retailers and banks support to avoid potential lawsuits and operational headaches.

More Spending: Recent credit card data from Bank of America indicates that consumer spending accelerated to its fastest pace since early 2024. The report revealed that the increase was broad-based across all income classes, driven largely by a combination of higher wages and elevated inflation. The bank also noted that, despite reports of increased financial restraint, consumer deposit levels remain above pre-pandemic levels. This data reinforces the view that household balance sheets remain stable despite economic headwinds.

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by Patrick Fearon-Hernandez, CFA, and Thomas Wash

[Posted: 9:30 AM ET] | PDF

Our Comment begins with concerns regarding new data on the labor market and its impact on monetary policy. Next, we give an overview of the impact that tariffs will have on domestic production with a focus on the auto industry, address US hacking accusations from China, and provide an update on the government shutdown. As always, the report includes a comprehensive roundup of key international and domestic data releases.

ADP Payrolls: According to the latest report from ADP Research, the labor market cooled last month. The payroll firm estimates that private employers cut an average of 11,250 jobs per week over the four weeks ending October 25. This weaker jobs report follows an earlier estimate showing a net gain of 42,000 positions for the month, suggesting that hiring momentum slowed notably in the latter half of the period. The weak report is likely to have an impact on monetary policy.

• The slowdown in job creation comes as the Federal Reserve continues to weigh which side of its dual mandate — maximum employment or price stability — should take priority. Following the latest FOMC meeting, a notable divide emerged among policymakers over the future direction of monetary policy. Two voting members issued opposing dissents on the 25-basis-point rate cut, where one favored leaving rates unchanged, while the other advocated for a deeper, 50-basis-point reduction.
• At the Fed’s upcoming meeting in December, policymakers may have to rely heavily on private-sector data, as government statistics for October might not be released in time. While September figures are expected to become available once agencies reopen, collecting data for October could prove far more challenging. According to White House economic advisor Kevin Hassett, the government shutdown has disrupted data collection for the month, resulting in information that may never be fully recovered.
• That said, the latest inflation data from OpenBrand — which tracks prices across marketplaces, retail websites, and brick-and-mortar stores — showed that prices for consumer durables and personal care goods decelerated for the first time in three months. While the index is not as comprehensive as the CPI, it adds to the growing evidence that inflation may no longer warrant being the central bank’s top priority, especially amid the notable slowdown in the labor market.
• In short, private-sector data on both inflation and employment may be enough to persuade Fed officials to cut rates again at their December 10 meeting. However, this could depend on whether the government manages to release official November data, as the ongoing shutdown, now extending past the data collection period, may make that difficult given the time constraints. A rate cut would likely support risk assets and put downward pressure on the dollar.

Tariffs Taking Hold: Recent reports indicate that firms are adjusting their business practices in response to tariffs. On Tuesday, it was revealed that GM has asked its suppliers to phase out parts sourced from China by 2027, to safeguard against potential geopolitical disruptions. Although the decision was made in late 2024, executives have reportedly accelerated implementation amid rising global trade tensions. The move underscores a broader industry shift from prioritizing efficiency to emphasizing resilience in supply chains.

• As discussed in our report on the “three Rs” of tariffs, the renewed focus on resiliency comes as the White House continues to wield tariffs aggressively under Section 232. The administration has used these national security provisions to push for greater domestic production. This assertive use of tariff authority is already beginning to reshape global supply chains.
• The effects of these policy shifts are beginning to surface in the auto industry, which has been a primary target of recent trade actions. Earlier this month, the administration fully implemented tariffs on medium- and heavy-duty trucks, truck parts, and buses, marking the first time this vehicle class has been subject to such measures. The policy includes a key incentive: automakers that relocate production to the US can qualify for a tariff reduction from 25% to 10%.
• While firms are rapidly adapting their supply chains to prioritize resiliency in response to trade policy, these shifts carry inherent inflationary risks. Although price pressures are not expected to reach pandemic-era highs, they are likely to remain elevated. So far, the demonstrated ability of consumers to absorb these increases has alleviated pressure on companies. We suspect that as long as this trend continues, the economy should remain resilient and provide a supportive environment for risk assets.

US Bitcoin Hack?  China has accused the US of orchestrating a cyberattack to steal billions in bitcoin. The allegation refers to a 2020 security breach that followed the US government’s seizure of cryptocurrency from Cambodian tycoon Chen Zhi, who was charged with money laundering. This claim mirrors a pattern of Chinese allegations against the US that typically lacks evidence to support American indictments. The move signals how the broader geopolitical rivalry is increasingly playing out in the domain of cybersecurity and digital assets.

Shutdown Update: The US House of Representatives is set to vote on legislation to end the government shutdown, following a key procedural victory in the House Rules Committee on Tuesday. Ending the shutdown is expected to boost equities by restoring government services and stability. Politically, the event is likely to shape the upcoming midterm elections, where affordability — driven by concerns over healthcare, tariffs, and housing costs — is set to be a central issue.

More Golden Shares? Indonesia’s sovereign wealth fund is in talks to acquire a “golden share” in the domestic operations of ride-hailing giants Grab and GoTo. This golden share would grant the fund influence over key corporate policies, such as worker pay, mirroring a recent White House decision to secure a similar share in Nippon Steel to facilitate a merger. While still in its early stages, this trend signals a potential shift away from the long-standing principle of shareholder primacy.

Oil Demand Rise: The International Energy Agency now projects rising oil demand for the next 25 years, reversing its earlier forecast of a near-term peak. This revised outlook, detailed in its latest World Energy Outlook, stems from weakened climate commitments and slower-than-expected electric vehicle adoption. Additionally, growing energy demand from advanced manufacturing and data centers has contributed to the change. The report underscores a growing divergence between climate targets and real-world trends, highlighting the political and economic challenges facing the global energy transition.

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by Patrick Fearon-Hernandez, CFA, and Thomas Wash

[Posted: 9:30 AM ET] | PDF

Our Comment today opens with news of potentially shoddy credit ratings being used in the booming private-credit industry. We next review several other international and US developments with the potential to affect the financial markets today, including a bit more detail on the Senate vote last night to fund the federal government again and movement toward a deal that would cut the US’s import tariffs against Switzerland from 39% to about 15%.

Global Private Credit Industry: A useful article in the Financial Times yesterday examined how a plethora of small, start-up credit rating firms has grown up to provide private-letter assessments of private credit deals. The new firms — including Morningstar DBRS, Kroll Bond Rating Agency, HR Ratings, and Egan-Jones — have allowed private capital providers to shop around for the best possible rating with little public transparency.

• As we noted in our Comment yesterday, insurers have become major participants in the private credit industry. They are especially keen to secure positive private letters so they can hold less capital against their loans.
• The risk is that the new start-ups will offer overly positive assessments, contributing to a possible over-extension of private credit that could foster a future debt crisis.
• That risk would harken back to the US housing bubble, when large, established agencies such as Moody’s and Standard & Poor’s competed to grade a finite pool of debt and gave out inflated stamps of approval to risky assets.

US Fiscal Policy: As we flagged in our Comment yesterday, the Senate last night passed a bill to fund the federal government through January. The bill passed by a vote of 60-40, with nearly all Senate Republicans, seven centrist Democrats, and one Independent voting in favor. It now goes to the House, where the Republicans who control the chamber are expected to pass it, most likely on Wednesday. Once the bill has passed both chambers and President Trump signs it into law, the longest ever government shutdown will end.

• The bill includes full-year funding for the Agriculture Department, military construction, and the legislative branch. The temporary funding for other departments and programs is designed to give legislators time to negotiate and pass full-year funding for them.
• As we noted yesterday, the Democrats who backed the bill also secured language reversing any layoffs of federal workers initiated during the shutdown and guaranteeing back pay. However, they only secured promises from the Republicans for a vote on extending enhanced Affordable Care Act health subsidies by mid-December.

US Air Travel Industry: Transportation officials yesterday warned travelers to expect worsening cancellations and delays this week even if the federal government shutdown ends, as the Federal Aviation Administration rolls out deeper cuts to flights at 40 major airports due to staffing shortages. The major airlines scrapped 2,200 flights yesterday and currently plan to do the same with at least 1,000 flights today.

• Even when the government shutdown ends, the airlines expect it will take days for their systems to normalize.
• That suggests that the air travel industry could suffer a significant financial hit, while overall economic growth could also be slowed.

US Artificial Intelligence Industry: Softbank, the bellwether Japanese technology investor, has reportedly sold its entire 32-million-share stake in AI chip maker Nvidia to help fund its ongoing investments in AI modeler OpenAI. The Nvidia sale raised some $5.8 billion, covering almost one-fifth of Softbank’s expected investment of $30.0 billion in OpenAI this year. The shift signals that at least some sophisticated investors may now be seeing better opportunities in the modelers than in the chip makers who have gained so much from the AI boom to date.

United States-Switzerland: Public and private negotiators from Switzerland are reportedly getting close to a deal with the White House to cut the US’s punishing 39% tariff on most Swiss goods to about 15%, equivalent to the US tariffs on most goods from the European Union. President Trump yesterday said he hasn’t settled on a final Swiss tariff but expected it to be somewhat lower than today. If a deal is eventually reached, it would likely be positive for the broader Swiss economy and its many firms that export heavily to the US.

China-United States: Even though China has begun unshackling its exports of rare-earth magnets as promised in the recent US-China trade truce, the Wall Street Journal today says Beijing is developing a validated end user (VEU) program that would keep US defense contractors from acquiring the products. If implemented, the program could apparently also prohibit the magnets from going to Western aerospace and automotive firms that have both civilian and defense businesses.

• It remains to be seen whether the US would see such a program as a violation of the trade truce. As we have warned previously, the truce could be disrupted at any time, leading to a rekindling of US-China tensions.
• In any case, China’s contemplated VEU system means the US is still at risk of not being able to get the rare-earth magnets needed for key weapons systems such as jet fighters and advanced ammunition. That suggests that the strong US effort to develop rare-earth mines and processing facilities will likely continue, creating opportunities for investors.

European Union: Reflecting Europe’s continued concerns about Russian aggression and other global security risks, the European Commission has begun setting up a central intelligence unit to collate information gathered by the EU member countries’ national spy services and make it more useful to counter joint threats. The new unit will reportedly be staffed largely by officials from the member countries who would be detailed to it on a temporary basis.

Germany: After gaining legislative approval earlier this year to suspend the country’s fiscal “debt brake” and channel 1 trillion EUR ($1.16 trillion) into defense and infrastructure, center-right Chancellor Merz and his government have been accused by two key economic institutes of secretly channeling billions of euros into tax cuts and increased welfare payments. The growing scandal illustrates how Europe’s improved economic prospects in the short term aren’t just tied to defense projects, but to a broader fiscal loosening that includes infrastructure and other pent-up spending.

United Kingdom: In the three months to September, the national unemployment rate rose to a seasonally adjusted 5.0%, above the expected rate of 4.9% and the highest level in a decade, excluding the pandemic period. The rise in joblessness reflects a long period of weak hiring as firms react to the new Labour government’s tax hikes and its vows to boost worker rights. Looking forward, the rise in unemployment also potentially increases the likelihood that the Bank of England will cut interest rates again at its December policy meeting.

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