by Patrick Fearon-Hernandez, CFA, and Thomas Wash

[Posted: 9:30 AM ET] | PDF

Our Comment today opens with more evidence of the Trump administration’s revolutionary realignment of US foreign policy, which could have big implications for the US economy and financial markets over the longer term. We next review several other international and US developments with the potential to affect the financial markets today, including news that Trump intends to let his big 25% tariffs against Canada and Mexico take effect next week and an important union vote at US ports today.

United States-Russia-Ukraine-Europe: In the United Nations Security Council yesterday, the US voted with China and Russia to approve a measure calling for a swift end to the war in Ukraine but failing to designate Russia as the aggressor. Earlier, in the UN General Assembly, the US voted with the likes of Russia, Belarus, North Korea, Hungary, and Nicaragua to oppose a resolution condemning Russia for its invasion of Ukraine. Finally, President Trump yesterday said he was negotiating an economic development deal with Russia.

• Yesterday’s moves are the latest examples of how the Trump administration appears to be trying to realign US foreign policy in favor of authoritarian powers long recognized as inimical to US interests, and away from the US’s traditional allies.
• One theory for this is that Trump is trying to pull a “reverse Kissinger,” replicating the former Secretary of State’s strategy in the Cold War to cozy up to China and isolate the Soviet Union. However, China and Russia are no longer at odds as they were in the 1960s and 1970s, so there is a risk that Russia will simply pocket any concessions it gets from the US, leaving the China/Russia bloc stronger and splitting the US bloc.
• In any case, any realignment of the US toward Russia and other authoritarian states would be a revolution in the country’s foreign policy. As we’ve noted before, another important risk is that the move could split the US from Western Europe and make the Continent vulnerable to Russian aggression, which would ultimately constrict US economic opportunities and probably undermine US financial markets in the longer term.

United States-Canada-Mexico: President Trump today reportedly said that his 25% tariffs on Canadian and Mexican imports would be put into place as scheduled next week, although at least one administration insider has said the decision isn’t yet final. While the tariffs have been paused for the last month to allow for negotiations, we have seen no details on how the talks proceeded or if they in fact took place. In any case, the big tariffs will be a test case to see how broad duties against whole countries will affect the exporting economies and the US.

United States-Iran: As part of its renewed “maximum pressure” campaign to weaken Iran, the Trump administration yesterday imposed new, targeted sanctions on more than 30 individuals, entities, and ships associated with Iran’s “shadow fleet” for exporting oil. The aim of the new sanctions is reportedly to reduce China’s ability to import cheap Iranian crude. As background, our Bi-Weekly Geopolitical Report for February 24 provides an overview of US sanctions and the risks they create for investors.

Eurozone: Bundesbank President Joachim Nagel, who sits on the board of the European Central Bank, today said the ECB can continue to cut interest rates as consumer price inflation falls towards the policymakers’ 2% target, but since price pressures are proving stickier than expected, it should be cautious and not cut too fast. Separately, ECB executive board member Isabel Schnabel said in a speech that estimates for the neutral rate had moved up recently, and that higher rates were more likely in future.

• The statements by Nagel and Schnabel suggest the ECB’s rate cuts going forward may be slower than investors anticipate.
• The statements have given a modest boost to the euro (EUR) so far today, pushing it up 0.3% to $1.0495.

Germany: While Friedrich Merz, leader of the center-right CDU/CSU party, starts working to form a coalition government with the center-left SPD after Sunday’s elections, he reportedly is mulling a maneuver for the current parliament to ease the constitution’s “debt brake” before the resurgent far-right and far-left parties can be seated for the new parliament. Easing the debt limits is widely seen as necessary for Germany to ramp up its defense spending to counter potential Russian aggression and to boost public investment to support economic growth.

United Kingdom: Setting the stage for his trip to Washington to meet President Trump on Thursday, Prime Minister Starmer announced in parliament that his government will boost the UK’s defense budget from 2.3% of gross domestic product now to 2.5% in 2027 and 3.0% in the longer term. The hike in defense spending responds to both pressure from Trump and the growing threat from Russia. As such, the move exemplifies the rise in general European defense spending, which has ignited European defense stocks over the last couple of years.

China-Taiwan: The Taiwanese coast guard today caught a Chinese freighter in the act of dragging its anchor and cutting a subsea communications cable off the island’s west coast. The incident is the latest example of suspected Chinese and Russian “grey zone” warfare against US allies’ subsea infrastructure. The Taiwanese have reportedly detained the ship, risking increased tensions with Beijing.

South Korea: The Bank of Korea today cut its benchmark short-term interest rate by 25 basis points to 2.75%, as widely expected. The central bank also cut its forecast of 2025 gross domestic product growth to just 1.5% from 1.9% previously, as the economy softens amid uncertainty surrounding President Yoon’s impeachment trial. The country’s growth in recent quarters has also suffered from weak demand in China, but improved prospects there have strengthened the won (KRW) so far this year, including today.

Global Energy Market: In its annual outlook, energy giant Shell predicted that global demand for liquified natural gas in 2040 will be 60% higher than today, up from a 50% jump projected last year. The upward revision stems from expectations for faster economic growth in China and India, increased demand for energy-intensive computing, and continued corporate efforts to cut greenhouse emissions. If correct, the forecasts bode well for further development in the US energy sector, which has become a powerhouse LNG exporter.

US Labor Market: Unionized workers at ports on the East and West coasts will vote today on a new six-year labor contract that includes a total 62% pay hike and limits on automation. The contract is widely expected to be approved, precluding any further strikes or other labor actions at the ports until 2030. Despite the hefty pay hike and automation limits, reports say some port operators are comfortable with the automation investments that they will be allowed under the deal.

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by Patrick Fearon-Hernandez, CFA, and Thomas Wash

[Posted: 9:30 AM ET] | PDF

Our Comment today opens with yesterday’s parliamentary elections in Germany, which will make center-right politician Friedrich Merz the country’s new chancellor. We next review several other international and US developments with the potential to affect the financial markets today, including a US proposal to slap big new fees on Chinese shipping firms and Chinese-built ships accessing US ports and what appears to be a new effort by the Trump administration to cull the federal workforce.

Germany: In national elections yesterday, the center-right CDU/CSU party came in first with about 29% of the vote, putting leader Friedrich Merz in position to become chancellor if he can cobble together a coalition. The far-right Alternative for Germany came in second with about 21%, but because of its controversial positions, Merz is more likely to form a coalition with the outgoing center-left SPD, whose support fell below 17%. The environmentalist Greens garnered about 11%.

• Merz has vowed to reignite economic growth by rolling back Germany’s tough environmental and climate-stabilization regulations and cutting taxes, but the SPD may resist that effort. Even if Merz can cut Germany’s environmental regulations and taxes, the economy would still face challenges from issues such as high energy costs, poor demographics, tough competition from China, and legal limits to fiscal spending.
• More broadly, a Merz government is likely to be much more aggressive in European policymaking. As we will note below, Merz has also strongly pushed for Europeans to stop trusting the US to support their national security, arguing instead for Europe and Germany to build their own military capabilities (and this from a country whose militarism arguably led to two world wars).

United States-Germany: In a Friday interview ahead of Germany’s elections, Merz warned that Europeans shouldn’t trust President Trump to live up to the US’s mutual defense commitments under the North Atlantic Treaty Organization. Rather, Merz said European nations need to prepare to defend themselves against Russian aggression, perhaps by developing and broadening their own nuclear weapons strategy.

• The statement by Merz shows how the US’s new embrace of revanchist, authoritarian Russia, and its threats to abandon Western European democracies, have made the US geopolitical and economic bloc more fragile.
• The US’s new pro-Russia stance is often excused as a mere negotiating tactic to force the Europeans into taking greater responsibility for their own defense. However, the risk is that European leaders might lose so much trust in the US that they go their own way, potentially with countries such as Germany, Poland, and the Baltics developing their own nuclear weapons.
• The increased fragility of the US bloc can be seen using the scoring methodology we use to categorize countries into the US bloc, the China bloc, or several intermediate blocs. Based on 13 criteria ranging from trade relationships to military alliances, our method assigns each country a score ranging from +12 (for countries adhering to the US) to -12 (for countries adhering to China).
• If we eliminate all scoring for NATO membership (reflecting the alliance breaking up) and assume that tariffs and other protectionist moves eliminate all the US’s bilateral trade deficits, our method suggests only a handful of countries would leave the US bloc outright. However, the average score for the US bloc would fall from 4.70 to 3.75, suggesting weaker ties. (The average score for the China bloc would be little changed, going from -3.11 to -3.08.)

United States-Poland: After a meeting between President Trump and Polish President Duda on Saturday, the White House said it “reaffirmed” the US-Polish alliance and Duda said there was “no fear that the American presence in Poland will decrease.” However, given that the meeting was downgraded to just 10 minutes after Trump arrived late, and given that neither side detailed a firm US commitment to keeping troops in Poland, the positive comments may not ease European concerns that Trump will further reduce the US military presence in the region.

Russia-Ukraine War: Ahead of today’s three-year anniversary of the start of Russia’s invasion, Ukrainian President Zelensky yesterday offered to resign if necessary to secure Western security guarantees and ensure long-term peace for his country. The statement came as US officials claimed they were closing in on a deal in which the US would get a stake in Ukraine’s natural resources and infrastructure in return for its past support of Kyiv. However, Ukrainian officials were less positive, saying they still needed to see changes in the deal.

United Kingdom-India: The UK’s center-left Labour Party government today is launching a renewed effort to strike a free-trade deal with India. The two sides have already agreed on several key issues, but they are still at odds on a number of points, including reciprocal tariffs and short-term employment rights for Indians in the UK. If a deal is ultimately reached, it could boost trade and investment opportunities for both counties.

China: The government earlier this month said it would allow 10 of the country’s top insurers to invest up to 1% of their assets in gold as a way to improve their portfolio diversification. The move could create a significant new source of demand for the yellow metal, on top of today’s strong buying by central banks and the recent safe-haven buying related to US policy changes. We remain positive on the outlook for gold prices even as they stand near record highs.

US-China Investment: President Trump on Saturday signed a new executive order directing the federal government to “use all necessary legal instruments” to block Chinese investments in US “technology, critical infrastructure, healthcare, agriculture, energy, raw materials or other strategic sectors.” The order also called for applying new legal tools to stop US citizens from investing in China’s defense industrial sector. The Chinese government quickly vowed retaliatory measures “to defend its legitimate rights and interests.”

• The new order expands the investing bans already put in place by Trump in his first term and by President Biden in his.
• The previous bans focused on cross-border investments related to technology and defense. By broadening the bans far beyond those sectors, the new order has the potential to sharply accelerate the decoupling of the US and Chinese economies.

US-China Trade: The US Trade Representative on Friday proposed massive new fees on Chinese shipping firms and Chinese-built ships accessing US ports. The proposal is open to public comments until a March 24 hearing, when the Trump administration will decide whether to go ahead with the fees.

• The proposed fees are the result of a US probe launched last year that found China engages in unfair trade practices in the maritime, logistics, and shipbuilding sectors.
• Together with the new US-China investment restrictions mentioned above, the shipping fees suggest the administration is ratcheting up its pressure on China despite initially seeming to be softer than expected on Beijing.

United States-Japan-South Korea-Taiwan: New reports say the Trump administration is pushing Japan, South Korea, and Taiwan to ramp up their purchases of liquified natural gas from the US. According to the sources, the administration is also pushing the Asian allies to invest in new LNG export facilities on the US West Coast, including a $44-billion project in Alaska that some observers believe is uneconomic because of high costs. The administration is reportedly using its tariff threats as a cudgel to push the allies toward a deal.

• As we’ve noted before, the administration’s evolving trade policy is largely geared toward eliminating the US trade deficit, if not to generate large trade surpluses. Energy and other commodity exports are expected to be a big part of any such rebalancing.
• The reports say the administration is arguing to the allies that greater reliance on LNG from the US would help insulate them from Chinese and Russian geopolitical pressure. According to the reports, the administration also hopes that making the allies more dependent on the US will force them to bow to Washington’s policy goals.
• However, as we noted in our Bi-Weekly Geopolitical Report from January 27 and in our discussion above, there is a risk in employing sharp threats and saddling the allies with big, new economic burdens, such as potentially uneconomic energy purchases or investments. Even if the tactics make the allies more dependent on US energy, resentment over the cudgeling to get there and the high costs involved may make the alliances more fragile.

US Fiscal Policy: At the apparent urging of Elon Musk, the Office of Personnel Management over the weekend sent an email to legions of federal workers directing them to reply with approximately five bullet points saying what they accomplished over the previous week. Even though the emails didn’t include Musk’s warning on X that anyone who didn’t reply would be out of a job, and even though some agency chiefs told their employees not to respond, the move has reportedly further rattled federal workers.

• Since many federal workers have already been laid off, and since Musk has aggressively pressed several other tactics to push employees out of their jobs, the new move is nearly certain to prompt more federal contractors, workers, and those who depend on them to rein in their spending and prepare for the worst.
• Incoming analyses suggest the $55 billion or more in spending cuts that Musk has claimed for his Department of Government Efficiency, so far, are highly inflated. Nevertheless, substantial cuts have occurred, and given that federal workers are distributed widely throughout the country, consumer spending and investment could be affected nationwide, raising the risk of an economic slowdown.

US Industrial Policy: Apple today said that it will invest more than $500 billion in the US over the next four years to expand its domestic footprint in research and development, engineering, software development, and manufacturing. According to Apple, the investment will create about 20,000 new jobs, including a major new factory for artificial-intelligence servers in Houston. The news suggests that the cajoling of President Trump is accelerating US re-industrialization, building on the industrial policies of the Biden administration and his own first administration.

US Stock Market: In his annual letter to shareholders on Saturday, famed Berkshire Hathaway CEO Warren Buffet assured investors that the firm hasn’t changed its management approach and is still looking to use its $321-billion cash pile to buy equities. However, he suggested that rich valuations are the main obstacle to doing so, saying, “Often, nothing looks very compelling.” The statement is consistent with the high valuations we see in the market, but we note that momentum could still drive stock prices higher.

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by Patrick Fearon-Hernandez, CFA, and Thomas Wash

[Posted: 9:30 AM ET] | PDF

Good morning! The market is on hold as investors await the release of US PMI data, which will provide insight into the strength of the economy. In sports news, Canada secured a victory over the US in the 4 Nations Face-Off. Today’s Comment will cover key highlights, including our analysis of Scott Bessent’s recent interview with Bloomberg, an overview of the upcoming German elections this weekend, and discussions of other important market developments. As always, the report will also feature a summary of the latest international and domestic data releases.

Scott Bessent Speaks: The US Treasury Secretary spoke with Bloomberg, outlining the Trump administration’s key objectives as it advances its policy agenda. The interview occurred just one day before his scheduled meeting with China’s top financial official, where the two were set to discuss the evolving dynamics of US-China relations.

• During the discussion, Bessent reaffirmed the US’s commitment to maintaining a strong dollar policy and upholding Federal Reserve independence, though not without a few pointed remarks. He noted that while the US prefers a strong currency, it also wants other countries to avoid currency manipulation, specifically calling out China and the European Union. He also criticized the Fed for suggesting that tariffs could contribute to inflation, implying that even if such an effect occurred, it would likely be transitory.
• Bessent also addressed and dispelled rumors surrounding gold. He emphasized that the US holds all the gold reported on its balance sheet and noted that these reserves are subject to regular audits. Additionally, he dismissed speculation that the US might revalue its gold holdings as part of its efforts to establish a sovereign wealth fund, saying that it was not something he had considered.

• Additionally, he discussed the Trump administration’s efforts to reduce long-term bond yields. Bessent indicated that the Treasury might maintain the current duration of bond issuances until the Federal Reserve halts its quantitative tightening program. He also suggested that cost-cutting measures could play a role in helping to bring yields down further.
• Although the interview did not provide significant new insights, it did highlight the Trump administration’s preference in avoiding extreme measures while pursuing its agenda. Despite the provocative rhetoric often seen in headlines, the administration has shown a reluctance to adopt interventionist policies, such as devaluing the dollar or revaluing gold, that could severely destabilize financial markets. This suggests a more cautious approach than the bold claims might imply.

German elections: The country is holding parliamentary elections on Sunday, with the two leading parties, the Union parties (CDU/CSU) and the far-right Alternative for Germany (AfD), expected to secure the most votes. However, neither is projected to win a majority.

• Recent polls suggest that CDU/CSU is likely to secure around 30% of the vote, while AfD is expected to garner 21%. Although the combined support for both parties would be enough to form a government, CDU/CSU has categorically ruled out entering into a coalition with AfD. That said, the race remains highly unpredictable, with roughly a fifth of the electorate still undecided.
• The battle for control of the government is expected to be highly contentious. While the CDU/CSU holds an advantage, a strong performance by AfD could significantly undermine their leverage. Meanwhile, the other two parties likely to gain seats — the Social Democratic Party (SPD) and The Greens — are polling at 16% and 13%, respectively. However, neither party is close to securing the number of seats required to form a coalition.
• If the polls are accurate, CDU/CSU may have to rely on smaller parties to form a government. These include the left-wing Sahra Wagenknecht Alliance (BSW), The Left party, and the fiscally conservative Free Democratic Party (FDP). While FDP is ideologically closer to CDU/CSU, polls suggest the party is trending below the 5% threshold required to secure parliamentary seats. As a result, CDU/CSU may be forced to make concessions to one of the left-wing parties to achieve a governing majority.

• Year-to-date, the German equity market has been one of the world’s best-performing markets, rising nearly 12%. This growth has been fueled by optimism surrounding a potential economic rebound, expectations of increased fiscal spending following the election, and the possibility of an end to the war in Ukraine. We suspect this trend could continue as long as there are no surprises in the election.

The Great Rebalance: US and Chinese officials are set to discuss measures aimed at addressing trade imbalances, particularly by encouraging China to reduce its reliance on exports for growth and boost its domestic consumption. 

• Ahead of the talks, Chinese Premier Li Qiang emphasized the need for the country to expand its services sector, particularly in areas such as healthcare, sports, and entertainment. His comments come as the country struggles to deal with crippling deflation due to the lack of domestic demand for goods and services.
• While Li’s remarks suggest a willingness to engage in dialogue, China is unlikely to change its course of action without sustained pressure from the US. China has a history of making promises and not delivering on them.
• We believe a crucial step for the government to reduce its reliance on export growth and stimulate domestic consumption is the creation of a comprehensive social safety net. This would empower households to spend more freely on discretionary items.
• The US effort to improve its savings and trade balance may rely on convincing China to boost welfare spending. While Chinese leaders have discussed strengthening the social safety net, little action has been taken. If reforms materialize, increased consumer confidence could make China a more attractive investment destination by driving domestic consumption and reducing export reliance.

Zelensky-Trump Rivalry: Ukrainian President Volodymyr Zelensky and US President Donald Trump have been embroiled in a heated exchange over Ukraine’s valuable mineral resources. The tension arose after Zelensky reportedly refused to cede more than 50% of the rights to these resources without firm guarantees of security and stability for Ukraine.

• The Trump administration has argued that the proposed deal would strengthen bilateral ties by aligning the interests of both countries. It believes that such an arrangement would foster mutual benefits and long-term cooperation. However, President Zelensky has emphasized that any agreement must include concrete commitments and guarantees from the US administration to ensure Ukraine’s sovereignty and security are safeguarded in exchange for access to its valuable resources.
• The dispute over Ukraine’s mineral resources is particularly significant, as many of these valuable materials, which include rare earth elements and titanium that are critical for weapons development and advanced technologies like semiconductors, are located in regions currently occupied by Russia.
• While the friction between Zelensky and Trump is unlikely to cause a complete breakdown in relations, it could strain their partnership and complicate efforts as peace talks move forward.

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by Patrick Fearon-Hernandez, CFA, and Thomas Wash

[Posted: 9:30 AM ET] | PDF

Good morning! The market is currently digesting the latest comments from President Trump regarding China. In sports news, reigning champions Real Madrid secured a dominant victory over Manchester City in the UEFA Champions League playoffs. Today’s Comment will cover our insights on the recent FOMC meeting minutes, provide an update on the Republican effort to advance President Trump’s agenda, and discuss other market-related developments. As usual, we will also summarize key international and domestic data releases.

Fed Cuts On Hold: The minutes from the January FOMC meeting revealed that Fed officials remain cautious about adjusting monetary policy. Their hesitation stems from concerns over the recent uptick in economic activity and uncertainties surrounding recent policy proposals. Additionally, officials started discussions about their plans for further quantitative tightening.

• In January, the committee unanimously voted to hold rates steady as it awaits clearer signs of progress on inflation. Fed officials highlighted concerns about upside risks to inflation, citing potential trade restrictions, a slowdown in immigration, and geopolitical tensions that could disrupt supply chains. Additionally, they noted that seasonal factors might further complicate the assessment of inflation trends.
• Their comments came ahead of the latest CPI report, which showed a stronger-than-expected acceleration in inflation for January. While factors such as auto and tenant insurance, along with egg prices, drove much of the increase — likely on a temporary basis — goods inflation moderated notably. This has raised concerns that progress on inflation may be stalling.
• Regarding the Fed’s balance sheet, the central bank believes that reserves remain abundant but cautioned that the debt ceiling may be obscuring underlying issues. Consequently, there is concern that once the debt limit is lifted, reserves could decline more rapidly to levels deemed “appropriate.” As a result, officials also discussed temporarily suspending the balance sheet runoff until the debt limit issue is resolved.

• The potential end of the balance sheet runoff is likely to provide a much-needed boost for US government bonds, as it is expected to increase demand. That said, a moderation in inflation and additional Fed rate cuts could also push long-term yields lower.

Trump Picks a Side: President Trump has thrown his support behind the House Republican tax cut bill, aiming to consolidate all his priorities into a single comprehensive piece of legislation, which he has famously described as “one big beautiful bill.”

• The president’s decision comes amid escalating tensions between Senate and House Republicans, who are struggling to align on a cohesive strategy to advance the Trump administration’s agenda. The primary divergence lies in their approaches. The Senate bill seeks an early victory by prioritizing immigration reform and raising the debt ceiling, thereby creating breathing room to deliver on tax reform. In contrast, the House bill adopts a more comprehensive approach, aiming to tackle all pressing issues simultaneously.
• The differing approaches stem from concerns that the House bill may lack the necessary support to pass through Congress. While it includes tax cuts, it also proposes reductions to certain social spending programs, which are likely to face significant pushback from moderate lawmakers. Moreover, such opposition could delay lawmakers’ ability to meet the March 14 government funding deadline, potentially exacerbating market uncertainty.
• So, while the president has indicated a preference for the House bill, he has also expressed willingness to support the Senate bill to ensure the legislation moves forward. Furthermore, the White House has shown openness to reducing defense spending as another avenue for achieving savings. We remain optimistic that a new tax bill will be passed this year, which would be highly bullish for US equities.

China Deal Possible? President Trump believes he can still secure a trade deal with China, despite rising tensions. His comments come just a few weeks before tariffs on Mexico and Canada, which the administration plans to impose, are set to take effect on March 4.

• Trump imposed a 10% additional tariff on imports from China shortly after taking office in January, citing concerns that China was not doing enough to curb the flow of fentanyl into the US and to address its unfair trade practices. While his decision was widely expected, the tariff rate was significantly lower than the 100% tariffs he had promised during his campaign, suggesting a potential moderation in his stance.
• That said, his true intentions remain unclear. The president may be using China as a signal to other countries that he is open to negotiating deals. Notably, his comments come just a day after he pledged to impose 25% tariffs on autos, pharmaceuticals, and semiconductors.
• So far this year, the dollar has weakened significantly amid signs that the president is less willing to pursue aggressive tariff measures than many had feared before he took office. This trend could continue if he steps back from other trade-related threats.

Canadian Elections: The Conservative Party’s once-insurmountable lead has narrowed significantly in recent weeks, raising doubts about its ability to form a strong coalition in the upcoming election.

• Recent polling reveals a decline in voter trust in the US, likely influenced by trade disputes and jokes about the country’s potential statehood. Voters express greater confidence in the Liberal party’s ability to advocate for them in dealings with the US.
• Additionally, Prime Minister Justin Trudeau’s decision to step down has contributed to the party’s surge in support, as he had become deeply unpopular with the public. His departure has been a central theme in the Conservative Party’s messaging, particularly due to his support for a carbon tax.
• The latest polls show that the Conservative Party’s advantage has narrowed significantly, dropping from an 18% lead over its Liberal rivals to just 7%. The survey indicates that the Conservatives now hold 39% of public support, compared to 32% for the Liberals.
• The rise of the Liberal party could compel the Conservatives to adopt a more confrontational trade policy toward the US to win sufficient parliamentary support. Such a strategy increases the risk of escalating trade tensions between the two nations.

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by Patrick Fearon-Hernandez, CFA, and Thomas Wash

[Posted: 9:30 AM ET] | PDF

Our Comment today opens with a recap of the big diplomatic meetings on the Russia-Ukraine war that have taken place over the last two days. We next review several other international and US developments with the potential to affect the financial markets today, including surprisingly good economic growth in Japan in the fourth quarter, a sudden scandal for Argentina’s president, and a Federal Reserve official’s statement that further interest rate cuts should not be off the table.

US-Russia-Ukraine-Europe: At a meeting today in Saudi Arabia, high-level US and Russian officials agreed to establish diplomatic teams to work on wrapping up Russia’s war against Ukraine and improving US-Russian bilateral relations. According to the State Department, the teams will “lay the groundwork for future cooperation on matters of mutual geopolitical interest and historic economic and investment opportunities which will emerge from a successful end to the conflict in Ukraine.”

• Yuri Ushakov, the Russian president’s foreign affairs advisor, gave only a muted assessment of the talks, calling them “not bad” and insisting that it was too early to say that US-Russian relations were improving. Ushakov’s statements are consistent with other signs that Russia will take a tough line on negotiations.
• Indeed, the Kremlin today issued a statement that it would not accept any role for European countries in the Ukraine peace talks and is “categorically opposed” to a European peacekeeping deployment as part of any deal. The Kremlin also insisted that the North Atlantic Treaty Organization (NATO) rescind its open-ended 2008 invitation for Ukraine to join NATO.
• Meanwhile, Ukrainian President Zelensky, who was not allowed to attend the meeting, warned that Kyiv will not abide by any agreement negotiated between Russia and the US without its involvement.
• Finally, we note that the US-Russia meeting today followed a Monday summit of leaders from NATO, Germany, France, Italy, Spain, Denmark, Poland, and the UK, in which the leaders discussed how they should respond to being frozen out of the US-Russia talks on Ukraine and how they should help end the war. At the meeting, France and the UK supported sending European peacekeeping troops to help guarantee Ukraine’s security, but the other attending countries pushed back on the idea.

Israel-Hamas: Israeli Foreign Minister Gideon Sa’ar today said Tel Aviv will start negotiations with the militant Hamas government in Gaza to end the war there, despite a two-week delay because of disputes over the ceasefire constituting the first phase of the talks. Those disputes had called into question the peace process itself. The foreign minister’s statement is likely to be taken as reassurance that the war can wind down and the energy-rich region can be stabilized.

Japan: Data yesterday showed gross domestic product grew at a seasonally adjusted, annualized rate of 2.8% in the fourth quarter, almost three times the expected rate and enough to mark the third straight quarter of healthy expansion. The key contributor to growth in October through December was international trade, while consumer spending came in on the soft side. The data will likely encourage the Bank of Japan to consider more interest rate hikes in the near term, prompting a modest appreciation in the yen over the last day.

China: New reports say the Chinese government has transferred its stakes in five national investment firms from the country’s sovereign wealth fund to Central Huijin Investment, a subsidiary of the fund with experience in arranging mergers and workouts for underperforming companies. The move suggests that creating big, consolidated “national champion” investment firms will be the next step in Beijing’s effort to make China a “financial superpower.”

Australia: The Reserve Bank of Australia today cut its benchmark short-term interest rate by 25 basis points to 4.10%, marking its first rate cut since November 2020. Although the central bank has come under pressure to ease rates ahead of national elections, RBA chief Bullock warned after the decision that policy will have to remain restrictive in the near term because of continuing inflation. Nevertheless, the Australian dollar so far this morning is trading down 0.2% at $0.6343.

Argentina: Libertarian populist President Milei today is caught up in a snowballing scandal after he went on X to promote a new cryptocurrency called $LIBRA on Friday night, apparently prompting the price to surge. The price then plunged suddenly, leaving investors in the lurch. Milei claims that he was not a part of any effort to defraud investors and has said he will cooperate with any investigation. Nevertheless, the scandal may undermine the trust Milei has earned by helping bring down Argentina’s consumer price inflation.

US Monetary Policy: In a speech today, Fed board member Christopher Waller said US monetary policymakers shouldn’t be reluctant to keep cutting interest rates if price pressures start cooling again, despite uncertainty about new policies from the Trump administration. While some observers have called for the Fed to stay on the sidelines until the administration has rolled out more of its economic program, Waller’s statement is a reminder that some Fed officials are still looking for an opportunity to cut rates further.

US Labor Market: Utah’s governor has signed into law a bill that bars public employee unions from negotiating wages and other terms of employment. Pushed by Utah’s Republican-led legislature and signed by its Republican governor, the new law shows how the populism of today’s Republican Party doesn’t necessarily align with traditional populist economic policies, such as protecting organized labor. From President Trump downward, the form of populism pursued by today’s Republican leaders often focuses more on cultural issues.

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