by Patrick Fearon-Hernandez, CFA, and Thomas Wash

[Posted: 9:30 AM ET] | PDF

Our Comment today opens with new developments regarding the global and US equity markets, as well as gold. We next review several other international and US developments that could affect the financial markets today, including a dangerous military standoff between Japan and China northeast of Taiwan and a preview of the Federal Reserve’s latest policy meeting coming up this week.

Global Public and Private Equity Markets: Reflecting the push to allow everyday investors to take positions in private equity markets, MSCI has launched a new index to track the returns on a combined portfolio of global stocks and private equity funds. The new MSCI All-Country Public + Private Equity Index blends stocks and unlisted assets into a single benchmark, with unlisted assets set at 15% of the portfolio. The new index could further fuel investors’ interest in private equity and debt investments and new funds to meet that interest.

US Stock and Precious Metals Markets: The Bank for International Settlements, often called the “central banks’ central bank,” today issued a report warning that both US stocks and gold are showing signs of being in a bubble. The report notes that the current period is the only instance in the last 50 years when both US stocks and gold have appreciated rapidly at the same time. Of note, the BIS said its research shows the rapid price gains are being driven by “exuberance” among retail investors.

• Clearly, US stock and gold prices are very high and are trading at extraordinarily high valuations. Whether or not they are in a bubble, there is probably a growing risk of a sharp re-pricing at some point in the coming year or two. In addition, US stock prices would be at risk of a correction if corporate profits begin to falter in the face of issues such as tariff disputes, supply chain disruptions, excess investment, or consumer caution.
• We discuss all these issues in our Economic and Financial Market Outlook for 2026, which we expect to publish this week.

China-Japan: Amid the growing tensions over Prime Minister Takaichi’s recent comments that a Chinese blockade of Taiwan would prompt Japan to intervene militarily, Tokyo said Chinese jet fighters on Saturday twice locked their fire-control radars on Japanese fighters northeast of Taiwan. The radar locks could have potentially been a prelude to firing missiles at the Japanese jets. Beijing responded on Sunday by saying the Japanese planes had come too close to a Chinese aircraft carrier.

• Beijing’s responses to Takaichi’s statements so far have focused on sharp rhetoric and various trade and travel restrictions, but it has avoided deploying its most powerful economic sanctions and has kept a lid on military responses.
• Nevertheless, the incident on Saturday is a reminder that the current tensions carry a risk of boiling over. Investors have seemed complacent over the China-Japan tensions, but they should remember that it would only take a small miscalculation or accident to spark a more serious crisis or even conflict between the two nations, which would almost certainly disrupt the global economy and financial markets.
• As the US continues to shift its foreign policy away from the global hegemony it practiced for decades, and as the rise of revisionist states such as China and Russia continues to spur global fracturing, we have long asserted that geopolitical tensions will worsen over time. This new, tension-filled backdrop to the global investment environment is a key reason we favor assets such as Asian and European defense stocks and gold.

Japan-Australia: Underscoring the geopolitical tensions mentioned above, the Japanese and Australian defense ministers announced a new “framework for strategic defense coordination” between their respective countries on Sunday. Although short of a full mutual defense treaty, the new program aims to boost national security coordination between Japan and Australia as the two countries face the challenge of China’s rising geopolitical aggressiveness and a cooler commitment from the US.

China-Southeast Asia: Research by the Financial Times shows that Chinese exports to the Southeast Asian countries of Indonesia, Singapore, Malaysia, Thailand, Vietnam, and the Philippines in the first nine months of 2025 were up 23.5% from the same period one year earlier, about double the growth rate in the previous four years. The figures suggest the new US import tariffs against China are indeed prompting Chinese firms to dump or reroute their goods to nearby countries, which could weigh on those nations’ economies and firms.

Thailand-Cambodia: The Thai military today launched airstrikes against positions in Cambodia, claiming Cambodian troops had fired across the disputed border in violation of a truce brokered by the US in July. Thailand has evolved in recent decades as an important manufacturing hub in the region, and China is now routing many final goods and manufacturing components to it (see discussion immediately above). The fighting therefore has the potential to disrupt local and international supply chains, possibly affecting Thailand’s economy and stock market.

US Monetary Policy: The Fed holds its latest policy meeting this week starting on Tuesday, with its decision due on Wednesday at 2:00 PM ET. This meeting will also include the policy committee’s updated economic and financial projects (the “dot plots”). Based on futures prices, investors are virtually unanimous in expecting the policymakers to cut their benchmark fed funds short-term interest rate by 25 basis points to a range of 3.50% to 3.75%.

US National Security Policy: In a speech to the Ronald Reagan Defense Forum in California on Saturday, Secretary of Defense Hegseth said the US government is now prioritizing defense of the homeland and the Americas region. The statement is consistent with the administration’s new National Security Strategy released last week, which de-emphasized the military threats from Great Powers such as China and Russia or rogue nuclear states such as Iran and North Korea.

• The new, regionally focused security strategy likely implies major changes in the size of the US armed forces, what weapons the armed forces buy, and how they operate.
• For example, prioritizing the interdiction of drug-running boats or immigrants close to US shores while maintaining a smaller deterrent force for non-regional threats could potentially require fewer troops, less expensive operating tempos, and fewer major weapons systems. That is one reason why we think foreign defense stocks may offer better returns than US defense firms in the coming years.

US Food Industry: Amid rising political pressure over the cost of living, President Trump yesterday signed an order creating task forces to probe price-fixing and other anticompetitive behaviors in the food supply chain. The order calls for a particular focus on the market behavior of foreign-controlled companies. We suspect such an effort will have little direct effect on food prices. However, it could present regulatory risks for consumer staples firms, especially if they are headquartered abroad.

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by Patrick Fearon-Hernandez, CFA, and Thomas Wash

[Posted: 9:30 AM ET] | PDF

Our Comment opens with an assessment of the US effort to guarantee smooth economic relations with China. Next, we turn to the fine that the EU levied against X for violating its controversial new tech rules. We then provide an overview of critical global developments, including Japan’s bond market concerns, US lawmakers’ attempt to curtail advanced chip exports to Russia and China, and the latest indicators of a regional arms build-up in the Indo-Pacific. Finally, we close with a roundup of the essential domestic and international data releases.

Tensions Cool: The US and China trade tensions appear to have cooled after extending the deadline for trade talks last month. US Trade Representative Jamieson Greer stated that the US is prioritizing a stable trade dynamic with China as it seeks to prevent a new conflict. His comments are likely to reinforce the view that the White House is looking to calm fears of ongoing trade disruption as they seek to reduce uncertainty that could potentially hinder growth in a midterm election year.

• Greer’s comment comes as the US and China work to fully implement an understanding reached during trade talks in early November. While a written agreement has not been formalized, the US announced plans to lower certain trade tariffs. In a reciprocal move, China committed to suspending export restrictions on rare earth elements vital for technology manufacturing, and the White House confirmed that China also promised to increase its purchases of US soybeans and other farm products.
• Following the talks, Chinese officials called on the US to honor commitments to curb rhetoric related to Taiwan’s independence. This has complicated the regional security landscape and has forced the US to navigate heightened tensions stemming from Japan’s claim that a Chinese takeover of Taiwan poses a national security risk. Also, similar concerns were voiced by Taiwanese leader Lai Ching-te regarding President Xi Jinping’s rumored desire for the Chinese military to be ready for an invasion by 2027.
• Stable relations with China are likely crucial for the White House’s goal of retaining control of both houses of Congress in the upcoming election year. To avoid voter backlash, the administration must ensure no disruptions in trade — such as the loss of rare earth elements that has historically caused a pull-back in equities — while also securing China’s continued purchases of US agricultural products.
• That said, we view the US stance of prioritizing stability and avoiding tensions with China as particularly favorable for domestic equity markets heading into next year. The suspected resumption of trade consistency and the avoidance of new tariffs are expected to bolster corporate confidence, encouraging companies to pursue expansion, especially given the considerable tax incentives provided by recent legislation.

EU Fines: The European Union imposed a penalty on Elon Musk’s X for failing to comply with its Digital Services Act (DSA). Despite the fine being less than anticipated, estimated at 120 million EUR ($140 million), it provoked swift criticism from the White House. The US administration asserted that the EU’s action unfairly targets American tech firms and encroaches upon principles of free expression. The divergent approaches to tech regulation continue to pose a significant challenge to transatlantic relations even as both sides work toward resolving trade disputes.

Japan Bond Problems: Prime Minister Sanae Takaichi is closely monitoring the bond market as she attempts to chart a course for restoring growth in Japan. Her concern has intensified due to rising bond yields and a weakening yen, both driven by skepticism that her proposed $137 billion stimulus package will adequately boost growth without triggering inflation. This concern has prompted a renewed effort to cut government waste and support tight monetary policy. Should these initiatives prove successful, they could put downward pressure on the US dollar.

Canada Pushes Back: The Canadian government has served a default notice to Stellantis after the automaker announced its intention to move its manufacturing plant from Ontario to Illinois. This relocation may constitute a breach of the loan agreement under which Stellantis received forgivable financing to maintain operations in the region. Canada’s enforcement action may, in turn, provoke a US reaction as Washington seeks to remove barriers to its national reindustrialization agenda.

Block AI Chips: A day after Nvidia successfully lobbied to defeat a provision that would have required it to prioritize American firms for its chip sales, the Senate introduced a separate, bipartisan piece of legislation. This new bill proposes to halt export licenses for selling advanced chips to US adversaries China and Russia for a minimum of 30 months. This legislative action is a reminder that even as trade tensions between the US and China have cooled, there remains little tolerance for American chip companies aiding Beijing’s AI ambitions.

Macron and Xi Talk: French President Emmanuel Macron and Chinese President Xi Jinping met on Thursday to discuss ongoing relations between Europe and China, a talk held ahead of France taking over the G7 presidency in 2026. France reiterated its position that China needs to boost its investment in Europe. Meanwhile, Beijing stressed that France should not align with US efforts to contain China. Xi maintained that Europe could be included in its anticipated five-year plans, but the talks ultimately ended without a formal agreement.

Indo-Pacific Arms Race: Following White House approval, South Korea has decided to proceed with the development of its own nuclear-powered submarine. This military initiative is expected to strengthen South Korea’s ability to counter threats from North Korea. However, the move is also likely to heighten tensions with China and place pressure on Japan to develop similar capabilities. This pursuit of advanced military technology by South Korea underscores the growing importance of defense companies as the world continues to fragment into blocs.

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by Patrick Fearon-Hernandez, CFA, and Thomas Wash

[Posted: 9:30 AM ET] | PDF

Our Comment begins with a discussion of the setbacks challenging the White House’s AI industrialization push. Next, we turn to the increasing influence of the Treasury Department over the Federal Reserve. Our global coverage provides a deeper look into the escalating tensions between Venezuela and the US, the recent stabilization in China-Japan relations, and the latest developments concerning the AUKUS security alliance. We conclude with our essential roundup of key domestic and international data releases to keep you informed.

White House AI Push: The White House has faced setbacks this week in their efforts to gain greater control over AI adoption. On Tuesday, two key initiatives were halted: a bid to expand federal influence by prioritizing American AI firms for contracts, and an attempt to preempt state-level regulation of AI development. Compounding this, a recent Microsoft report revealed that the pace of AI adoption is significantly slower than anticipated. These setbacks represent the obstacles hindering efforts to integrate AI more broadly into the economy.

• The annual defense policy bill currently moving through Congress includes two key AI-related measures. The first is the GAIN AI Act, which would mandate that US chipmakers prioritize domestic customers over China and other countries subject to US arms embargoes when allocating advanced AI chips. The second measure is a provision that would preempt states from passing their own legislation to regulate AI.
• The inability of these provisions to pass into law is a clear setback for the White House’s efforts to create conditions favoring domestic reindustrialization. The administration had hoped to ensure America’s lead by preventing technology firms from prioritizing sales to rivals over US customers. Concurrently, it aimed to prevent state-level regulation from interfering with the industry’s planned expansion.
• On the corporate side, there are mounting signs that AI industrialization may be losing momentum. A recent report indicated that the slow pace of AI adoption has forced Microsoft to reduce sales quotas for certain AI products after staff missed previous targets. Meanwhile, Morgan Stanley announced that it is exploring options to offload some of its data center debt through off-balance-sheet financing structures.

• While government support for the AI sector is expected to continue, we anticipate significant political resistance from both corporations and voters. This pushback could significantly slow the rate of AI adoption across the economy, creating potential volatility within the high-flying tech sector. Although we believe key AI companies retain substantial growth potential, this increased regulatory uncertainty warrants greater portfolio diversification as a necessary risk management strategy.

More Fed Scrutiny: US Treasury Secretary Scott Bessent is actively trying to reshape the Federal Reserve. On Wednesday, Bessent announced a specific plan to push for a residency requirement for the next regional Fed presidents, a reform he argues will better connect the central bank to local districts. This move, combined with Bessent’s pivotal role in selecting the next Fed chair, signals a broader trend toward increased Treasury influence over the historically independent central bank.

• This desire for greater control taps into a long-standing tension, particularly in the period before the 1951 Fed-Treasury Accord. During this time, the Fed was not technically under the Treasury but was compelled to peg interest rates on government debt to keep financing costs low, effectively ceding control over monetary policy. The formal separation of these functions was established after a public dispute over inflation between then Fed Chair Thomas B. McCabe and President Harry S. Truman.
• Even after achieving formal autonomy from the Treasury, the Federal Reserve remained a target for presidential influence. Notable examples include Lyndon B. Johnson’s clashes with Fed Chair William McChesney Martin Jr. and Richard Nixon’s pressure on Arthur Burns. This dynamic only changed when Paul Volcker’s resolutely hawkish stance finally tamed inflation. His success did not just lower inflation; it vindicated the principle of an independent Fed, making political interference far costlier for future presidents.
• This trend has become more apparent today. The Federal Reserve’s loss of credibility, following the inflation surge brought on by the pandemic, continues to generate market skepticism. While the central bank has made headway in taming inflation from its 2022 peak, major concerns persist that it could prematurely abandon its price stability mandate to prioritize maximum employment.
• These concerns have manifested in the bond market, where investors remain skeptical of the Fed’s commitment to maintaining restrictive policy long enough to fully curb inflation. This skepticism is clearly evident in the 10-Year Treasury yield, which has remained stubbornly elevated, refusing to fall below its 2024 lows despite the Fed having lowered its benchmark interest rate by 100 basis points this year.
• Bond investors have reportedly already informed Treasury Secretary Bessent of their opposition to Kevin Hassett, citing his close ties to the White House as a primary concern. While the impact on the nomination is uncertain, this resistance may bolster the chances of former Fed Governor Kevin Warsh, who is seen as a centrist alternative to Hassett and a compromise to the market’s clear preference for current Fed Governor Christopher Waller.

Maduro Stepping Down: Brazilian billionaire Joesley Batista travelled to Venezuela to privately urge President Nicolás Maduro to step down, which coincided with aggressive US counternarcotics pressure on the regime. While Maduro sought to de-escalate with an offer of resignation in exchange for amnesty, the White House reportedly rejected the terms. We view this escalating US pressure as part of a longer-term strategy aimed at containing China’s expanding influence in South America.

Japan-China Tensions Cool: Japanese Prime Minister Sanae Takaichi has attempted to appease Beijing by reiterating Japan’s conventional stance on Taiwan. This move follows a significant diplomatic rift triggered by Takaichi’s earlier remarks that a Chinese military takeover of Taiwan could constitute a “survival-threatening situation” for Japan. While this repetition of the official position is expected to temporarily cool tensions, the underlying security concerns she raised suggest that the possibility of conflict remains elevated.

AUKUS Confirmed: Australian Prime Minister Anthony Albanese announced the US will maintain its commitment to the AUKUS security pact with the UK. His remarks followed the conclusion of the White House’s six-month review of the agreement’s nuclear powered submarine sale (Pillar 1). The pact’s continuation clears the way for the three nations to proceed with building crucial defense capabilities and enhance interoperability in the Indo-Pacific.

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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 president’s forthcoming decision for the next Federal Reserve chair. We then examine the growing trend of state-level intervention in the national economy and provide insights on the Tennessee special election as well as the potential alliance between the UK’s Reform and Conservative parties. We conclude with an essential roundup of key domestic and international data releases to keep you informed.

Fed Chair Nominee Delay: The White House has delayed the announcement of the president’s nominee to lead the Federal Reserve until early 2026. This decision follows reports that National Economic Council Director Kevin Hassett was the frontrunner to succeed current Fed Chair Jerome Powell when his term expires next May. The postponement suggests the president has yet to finalize his selection for the central bank’s leadership, as he seeks a candidate who can simultaneously respect market sensibilities while fulfilling his desire for interest rate cuts.

• The White House had previously narrowed the shortlist for the Federal Reserve chair to three officials: former Fed Governor Kevin Warsh, current Fed Governor Christopher Waller, and Kevin Hassett. While Hassett and Warsh have enjoyed particular favor with the president — having both served as key economic advisors — financial markets have generally expressed a preference for Waller to lead the central bank.
• The White House’s delay in naming a nominee is likely a ploy to build political momentum for Kevin Hassett, who faces intense scrutiny over his reputation as a partisan loyalist. This strategic caution is warranted by the president’s failures during his first term, where polarizing candidates like Marvin Goodfriend and Judy Shelton both failed to secure confirmations due to bipartisan concerns over their ideological beliefs.
• While the president successfully confirmed Stephen Miran to the Federal Reserve Board this term, the chairship faces a substantially higher hurdle. The nominee’s role is critical given the central bank’s current internal division. Recent FOMC meeting minutes revealed a sharp debate among officials over whether to prioritize maximum employment or price stability within the dual mandate. As a result, the new chair could potentially serve as the crucial swing vote determining the Fed’s near-term policy direction.
• US equities remain highly focused on monetary policy, particularly as big tech companies pivot from cash-funded to debt-funded capital expenditures. Recent market pessimism regarding a likely Fed pause in December, which keeps borrowing costs high, has resulted in a broad sell-off of tech stocks, driven by worries over the viability of their large-scale financing plans.
• Federal Reserve policy and the specter of political interference have significantly influenced fixed income and international equity investors. Concerns over a potential loss of Fed independence — and the resulting threat of rising inflation — have reduced the appetite for US Treasurys and the dollar. This pivot toward foreign markets is a major factor in the outperformance of international versus domestic equities that has been observed this year, as investors seek refuge from presidential influence over monetary policy.

Government Support: The US government continues to demonstrate a growing willingness to intervene directly in the economy as it works to strengthen domestic supply chains. On Tuesday, officials announced up to $150 million in funding for chip-technology startup xLight. The administration also awarded $800 million to two energy companies to support the development of new nuclear power plants. Together, these actions reinforce the view that equities tied to strategically important industries stand to benefit from sustained government support.

• Investment in xLight is a strategic move and reflects the US goal of fostering a domestic competitor to the advanced lithography equipment produced by the Netherlands’ ASML. These highly specialized machines are crucial for manufacturing the cutting-edge, nanoscale semiconductors that power modern technology. Developing an alternative to an allied nation’s dominant technology underscores the US commitment to supply-chain resilience and technological self-sufficiency.
• The US is strategically investing in energy companies to ensure the scalability of domestic power production. Specifically, funding for nuclear power plants is being prioritized to meet the steep rise in electricity demand driven by the proliferation of data centers. By expanding supply through nuclear reactors, the US aims to satisfy this industrial demand surge and mitigate potential increases in household utility costs.

• Direct US intervention stabilizes businesses but restricts new owners. Nippon Steel, for example, reported a net loss months after acquiring US Steel in June. The firm’s ability to implement profitability boosting changes is limited because the US holds a “golden share,” which provides veto power over key decisions and inhibits swift restructuring.
• We maintain our view that the US economy is gradually shifting away from the laissez-faire model of the past four decades. This trend toward greater state intervention will likely support corporate earnings stability but may reduce incentives for efficiency gains. Consequently, while equity valuations could continue to rise, corporate focus on long-term profitability may wane. Investors should therefore prioritize portfolio diversification to mitigate potential future volatility.

 Tennessee Special Election: Republican Matt Van Epps defeated Democrat Aftyn Behn for a House seat on Tuesday with a 9-point margin (54% to 45%), in a contest viewed as a barometer for 2026. While the victory offers the White House confidence, Behn’s strong performance in a deep-red district indicates a mixed signal. This political backdrop continues to suggest the likelihood of further stimulus measures, such as tariff rebate checks, which should boost near-term economic growth and market performance next year.

Protectionist EU: Brussels is preparing to significantly increase domestic sourcing requirements for companies operating within the bloc. The proposed law, which would require up to 70% of content in certain products (such as cars) to be sourced domestically, could cost companies an estimated 10 billion EUR ($11.6 billion) annually. Though the final draft is pending (expected December 10), this measure strongly signals the EU’s heightened commitment to boosting its own industrial competitiveness and reducing reliance on foreign, particularly Chinese, exports.

Populist Acceptance: In a reflection of the global rise of populism, the UK Reform Party has announced it may agree to an electoral deal with the Conservative Party ahead of the next general election. This move underscores the growing international support for fringe parties, as voters increasingly seek alternative policies focused on cracking down on immigration and combating high inflation.

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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 example of how building tensions between China and Japan have boosted the risk of conflict between the two countries. We next review several other international and US developments with the potential to affect the financial markets today, including key developments in the US artificial intelligence and air travel industries and a potential risk to the Italian central bank’s independence.

China-Japan: Amid heightened tensions caused by Japanese Prime Minister Takaichi’s recent comments that Tokyo would intervene militarily if China tried to blockade Taiwan, Japan said two Chinese coast guard patrol ships entered Japan’s territorial waters around the disputed Senkaku Islands in the East China Sea today and only left after being chased away by Japanese coast guard vessels.

• The incident is a reminder that the new tensions pose some risk of a potential military conflict between China and Japan.
• Of course, that in turn would risk drawing in the US and perhaps its other allies, all of which would likely cause global economic disruptions and weigh on global financial markets.

US Artificial Intelligence Industry: In the latest examples of circular investment in the AI space, chip giant Nvidia yesterday said it will invest $2 billion in chip design software maker Synopsys, one of its customers. Separately, AI model developer OpenAI said it will help fund startup investment vehicle Thrive Holdings, which was established by Thrive Capital, an investor in OpenAI. The deals are likely to further raise concerns about circular investment flows driving up valuations in the sector and helping create a bubble that will at some point pop.

 US Air Travel Industry: The Transportation Security Administration yesterday said it will start charging a $45 fee to travel on a domestic flight without a Real ID form of identification starting February 1. The fee would have to be paid in advance and would be valid for 10 days, after which another fee would be charged. The purpose of the charge is to cover enhanced biometric screening for those without Real ID. The new rule could potentially cause major disruptions to the airlines if people continue to put off getting a Real ID.

US Cryptocurrency Market: Leading cryptocurrency bitcoin yesterday lost some 6% of its value, marking its worst day since mid-2021 and leaving the asset’s price below $86,000. Other key cryptocurrencies and related stocks have also sharply depreciated in recent weeks. The market rout reflects growing concern about market concentration, technical issues, and reduced enthusiasm among investors. Just as important, the rout appears to have stemmed in large part from rising bond yields in Japan and other developed markets.

 US Commercial Real Estate Market: The Wall Street Journal today carries a useful article showing how commercial properties such as office and apartment buildings are perhaps the only major US asset class that is fairly valued right now. The article examines whether those fair prices would help make the asset class a relatively safe place for investors to hide in the event of a market downturn for other, high-flying assets classes, especially now that the commercial real estate market is starting to show nascent signs of a rebound.

Global Bond Market: After Bank of Japan Governor Ueda yesterday hinted at another hike in his central bank’s benchmark interest rate, bond prices fell not only in Japan but also in key developed countries. The yield on the US’s 10-year Treasury note jumped to 4.092%, while the yield on Germany’s 10-year government bonds jumped to 2.756%. The market action appears to reflect growing concern about government debt burdens. As noted above, rising government bond yields are likely to push down the value of riskier, non-yielding assets.

Eurozone: The November consumer price index was up 2.2% from the same month one year earlier, unexpectedly accelerating from the 2.1% rise in the year to October. That means eurozone inflation has now been above the European Central Bank’s target of 2.0% for three straight months. The acceleration stemmed in part from a jump in German prices and continued high services inflation. The figures will help solidify expectations that the ECB will keep its benchmark interest rate steady at its upcoming December policy meeting.

Italy: Prime Minister Meloni’s right-wing coalition is pushing a parliamentary bill declaring that, “the gold reserves managed and held by the Bank of Italy belong to the Italian people.” The central bank sees its gold reserves — the world’s third-largest at 2,452 tons — as a foundation of its credibility, but observers fear that declaring the gold as the people’s property might tempt the government to force its sale to fund fiscal spending. The move is therefore an example of how some major governments are chipping away at central bank independence.

United Kingdom: The Bank of England today said it will roll back the stringent capital rules it imposed on banks following the Global Financial Crisis. Under the new requirements, the institution’s benchmark ratio of capital to risk-weighted assets will fall to 13% from 14%. The change is expected to encourage British banks to lend more and potentially return more profits to investors in the form of dividends and share buybacks. It is also expected to encourage the ongoing efforts toward a similar cut to bank capital requirements in the US.

India: New Delhi yesterday ordered that all smartphones sold in the country come preloaded with a government-developed cybersecurity app that would give officials access to the phone’s call log, memory, and camera. The rule is likely to generate pushback by US cellphone giants such as Apple and Google, potentially putting them into conflict with the government and risking their access to the Indian market.

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by Patrick Fearon-Hernandez, CFA, and Thomas Wash

[Posted: 9:30 AM ET] | PDF

Our Comment today is dominated by Asian and other international developments, as might be expected after the long Thanksgiving holiday weekend in the US. Our coverage includes several important political and economic developments in Japan, as well as some economic and foreign relations stories related to China. We end with a few lower-profile items from the US and beyond that could also affect the financial markets today.

Japanese Politics: On Friday, Prime Minister Takaichi’s Liberal Democratic Party (LDP) and its junior coalition partner, the Japan Innovation Party, gained a majority in the lower house of parliament when three independent lawmakers agreed to vote with the LDP. That gives the ruling coalition 233 of the 465 seats in the Diet, meaning Takaichi won’t need to rely on opposition parties to approve her budget or other legislation.

• Takaichi also continues to score unusually high approval ratings in public opinion polls.
• We believe that Takaichi’s solid political position will be supportive of Japanese stocks going forward and help them reverse their price pullback from November, so long as the current China-Japan dispute doesn’t worsen (see next section).

Japanese Fiscal Policy: Prime Minister Takaichi’s cabinet on Friday approved a supplementary budget equal to about $117 billion for the fiscal year ending March 2026, with the additional spending requiring about $75 billion in new bond issuance. The plan, which reflects the near-term stimulus program laid out by Takaichi the week before, is likely to put additional upward pressure on Japanese interest rates and consumer price inflation in the coming months.

• On a related note, Finance Minister Katayama on Sunday said it is “clear” that the yen’s depreciation over the last few months hasn’t been “based on fundamentals.” Her statement marks the latest expression of the government’s frustration over the currency.
• In contrast to Katayama’s assertion, the weakness in the roughly 6% depreciation in the yen versus the dollar over the last three months and the pullback in Japanese stock prices since the end of October do appear to reflect fundamentals, in the sense that investors are increasingly worried about Prime Minister Takaichi’s willingness to boost debt issuance in order to put into place more stimulative fiscal policy.
• Katayama’s statements raise the specter of impending government action to support the yen. We think that would be even more likely if the US government takes note of the yen’s dropping value and begins to pressure Tokyo to do something about it.

Japanese Monetary Policy: Consistent with concerns that more stimulative fiscal policy will not only boost government debt issuance but also exacerbate price inflation, Bank of Japan chief Ueda hinted in a speech today that he is prepared to hike the central bank’s benchmark interest rate at the next policy meeting this month. Futures trading now suggests there is about a 75% chance that the BOJ will hike rates at the meeting. In response, the yen has appreciated about 0.6% versus the dollar so far today, while Japanese stock and bond prices have retreated.

China-Japan: Diplomatic sources say China has now frozen all youth exchange programs with Japan, marking the latest in a long string of retaliatory measures for Japanese Prime Minister Takaichi’s statement earlier in November that Tokyo would intervene militarily if Beijing tried to take over Taiwan by force. China still hasn’t taken its most disruptive possible steps, such as cutting Japan off from its rare-earth magnets. Nevertheless, the continuing dispute raises risks for the Japanese economy and financial markets if it worsens.

Taiwan-China: Last Wednesday, President Lai touched off an international and domestic political storm with a statement that China is prepping for “complete unification with Taiwan by force by 2027.” Lai’s office later clarified that he meant Beijing is preparing for such an option, but the statement still brought a strong rebuke from China and political attacks by opposition parties back home. The row marks the latest example of Lai’s aggressive rhetoric against China, which likely raises the risk of a dangerous military conflict across the Taiwan Strait.

China: The government’s official purchasing managers’ index for manufacturing rose to a seasonally adjusted 49.2 in November, meeting expectations and improving from 49.0 in October. Still, that marked the eighth straight month in which the index was below the 50.0 level that indicates expansion. Moreover, the November PMI for services merely rose to 50.1 from 50.0 in the previous month, suggesting that sector is barely growing. The data suggests that China’s economy continues to struggle against factors such as trade curbs and excess capacity.

United States-Venezuela: In a Thanksgiving call to US service members, President Trump warned that his administration’s military campaign against Venezuelan drug traffickers would “very soon” expand from attacking drug boats to hitting land targets. With the big US military force that has been assembled in the region, the administration could easily launch such attacks. However, it’s less clear that it can achieve its goal of ousting President Maduro in the near term or avoid anger among the isolationists in Trump’s political base.

• In a more recent development, President Trump on Saturday issued a warning to airlines and private pilots that they should consider Venezuelan airspace “closed.”
• The warning could be just another tactic to heap pressure on President Maduro to resign, but it could also be aimed at laying the groundwork for US air attacks on Venezuelan ground targets.

US Labor Market: In response to last week’s shooting of two national guard members as they patrolled in Washington, DC, President Trump said he’ll ban migration from less-developed nations and push for “reverse migration,” even deporting legal migrants. By late Friday, officials had already begun to follow through on those goals.

• From an economic perspective, a further tightening of immigration policy will likely cut the number of available non-native workers even as firms slow their hiring. That could boost employment opportunities for native workers, at least if they have required skills.
• In turn, that could help keep the unemployment rate low, potentially encouraging the Fed to go slower in cutting interest rates.

European Artificial Intelligence: Since US and Chinese firms are so prominent in the AI space, it’s tempting to think that Europe isn’t a player at all. However, the Financial Times today has a useful article on Germany’s privately held Black Forest, which has quickly become a big player in the exploding market for image-editing AI models. The firm’s valuation has reportedly tripled in just the last year. The article suggests that European AI firms such as Black Forest and France’s Mistral could eventually be attractive opportunities when they have their IPO.

Note: The next and final Asset Allocation Bi-Weekly for 2025 will be published next Monday, December 8.

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by Patrick Fearon-Hernandez, CFA, and Thomas Wash

[Posted: 9:30 AM ET] | PDF

Our Comment today opens with a sudden shift in the US’s proposed new peace deal to end the war in Ukraine. We next review several other international and US developments with the potential to affect the financial markets today, including a statement by another influential Federal Reserve policymaker supporting a further interest rate cut in December and new Chinese economic retaliation against Japan for Prime Minister Takaichi’s recent comments suggesting Japan would intervene militarily against a Chinese blockade of Taiwan.

United States-Russia-Ukraine: Press reports last night said US and Ukrainian negotiators have reached a tentative 19-point peace deal to end Russia’s invasion of Ukraine, intending it to replace last week’s 28-point, Russian-inspired proposal. The reports say several points from the original proposal have been left for President Trump and Ukrainian President Zelensky to hash out. Nevertheless, the revised plan is much more palatable to the Ukrainians, confirming our view that the original plan was likely a non-starter.

• Now, however, the question is whether the Russians will find the revised proposal acceptable. The Financial Times today reports that Russian Foreign Minister Lavrov has already complained that the revised plan overrides “key understandings” that President Putin believed that he had reached with President Trump.
• If the Russians do reject the revised plan, as they have rejected previous proposals that didn’t meet their maximalist goals, it seems likely that the war will continue.

United States-European Union: US Commerce Secretary Lutnick said on a visit to Brussels yesterday that the EU must relax its digital commerce regulations before the US would consider lowering its 50% import tariffs on EU steel and aluminum. The statement is consistent with the US administration’s longstanding effort to increase business for its allies in the technology sector.

United States-Venezuela: President Trump yesterday reportedly told his advisors that he is planning to talk directly with Venezuelan President Maduro, even as the State Department designated Maduro as the head of a terrorist organization, and even as the US continues its big military buildup off Venezuela’s coast. Trump’s statement suggests that any attack on Venezuela to force Maduro from power isn’t necessarily imminent.

US Monetary Policy: San Francisco FRB President Daly yesterday said she supports cutting the benchmark fed funds interest rate again at the Fed’s policy meeting early next month, citing her fear that weakened labor demand is more likely than worsening price inflation. Daly doesn’t sit on the policymaking committee this year, but she usually reflects the views of Chair Powell. Her statement, therefore, will likely help raise expectations for a new rate cut in December. Per futures trading, investors now see an 85% chance of a rate cut at the meeting.

US Fiscal Policy: Faced with White House plans to extend the Affordable Care Act’s enhanced tax credits for two years in return for tighter eligibility rules, which we flagged in our Comment yesterday, House Speaker Johnson has warned the administration that most Republicans in his chamber wouldn’t support the move. Even though the White House wants to avoid spiking health insurance premiums once the current subsidies expire at the end of the year, Johnson’s warning shows that extending the subsidies will be a political challenge.

US Artificial Intelligence Industry: OpenAI CEO Sam Altman has reportedly told company staffers to brace for “rough vibes” and “temporary economic headwinds” as the company suddenly faces an intense challenge from Google’s latest AI program, Gemini 3. Analysts, users, and industry insiders say Gemini 3’s superior benchmarks, integration into Google’s ecosystem, and cost efficiencies are poised to help it grab market share from OpenAI’s Chat-GPT, especially after the underwhelming August release of GPT-5.

US Travel Industry: In its annual pre-Thanksgiving projections, AAA said 81.8 million US residents will travel at least 50 miles from home from November 25 to December 1, up from just over 80.0 million last year. According to AAA’s forecast, 73 million people, or about 90% of Thanksgiving travelers, are expected to travel by car. The good growth in travelers is a reflection of continued economic expansion, which we expect to keep supporting stock values in 2026.

China-Japan: Reports today say the Chinese government has told the country’s airlines to cut their flights to Japan through March 2026. Beijing had already warned its citizens against travel to Japan and taken other measures to retaliate for Prime Minister Takaichi’s recent comments suggesting Japan would intervene militarily against a Chinese effort to blockade Taiwan. The prolonged flight cuts are being taken as a signal that Beijing is bracing for a protracted spat between the two nations, which could potentially weigh on Japan’s economy and stocks.

Global Demographics: According to new research by the European Bank for Reconstruction and Development (EBRD), falling birthrates and shrinking workforces will reduce per-capita gross domestic product in Eastern Europe and the Caucasus by about 0.4% per year between 2025 and 2050. The expected hit to per-capita GDP is expected to be even greater in South Korea, at 1.7%, Italy and Spain, at 0.7%, and 0.6% in Japan and China.

• The EBRD research echoes a study earlier this year by the Organization for Economic Cooperation and Development.
• Both studies show how low birth rates and population aging are putting upward pressure on government budget deficits and debt. However, the studies suggest that politically powerful older people are resisting efforts to tackle the fiscal fallout, such as raising retirement ages, cutting social spending, and allowing more migration.
• As a result, the demographic pressures are likely to keep pushing government debt loads higher in key developed and emerging countries alike, raising the risk of eventual debt crises.

The Daily Comment will go on hiatus beginning Wednesday, November 26, and will return on Monday, December 1. Confluence wishes everyone a Happy Thanksgiving!

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