by Patrick Fearon-Hernandez, CFA, and Thomas Wash

[Posted: 9:30 AM EDT] | PDF

Our Comment today opens with some notes on the rising power of far-right political parties in Europe and the implications for European economic policy. We next review several other international and US developments with the potential to affect the financial markets today, including the UK Labour Party’s vow not to substantially raise taxes after Britain’s July 4 elections and today’s move to T+1 trade settlement in the US financial markets.

European Union:  Ahead of the European Parliament elections to be held June 6 to 9, French far-right leader Marine Le Pen has proposed that her Identity and Democracy (ID) group of national conservative parties cooperate with Italian Prime Minister Meloni’s European Conservatives and Reformists (ECR) to form the second-largest grouping in the legislature and force EU policy to the right. Meloni has expressed interest in the idea, even though she had been negotiating to support European Commission President von der Leyen’s center-right group.

• Political parties in the various EU member countries typically ally themselves with like-minded parties from other countries to boost their power in the European Parliament.
• President von der Leyen’s European People’s Party (EPP) is currently the legislature’s biggest cross-national group, with 176 of the 703 seats. The leftist Progressive Alliance of Socialists and Democrats is the second-largest group, with 144 seats. The far right is fractured between four different parties, the largest of which are the ECR, with 66 seats, and the ID, with 62 seats.
• Current opinion polls suggest the far-right parties will make significant gains in the elections. If so, a combination of the ECR and ID likely would make it the second-most powerful group in the parliament and force the EPP to adopt more conservative positions in key issues such as immigration and environmental policy.

Eurozone: In an interview with the Financial Times, European Central Bank Chief Economist Philip Lane strongly hinted that the institution will start cutting interest rates at its next policy meeting on June 6. Describing the central bank’s read on the eurozone’s current output and price data, Lane said, “Barring major surprises, at this point in time there is enough in what we see to remove the top level of restriction.”

United Kingdom: Shadow Chancellor Rachel Reeves of the opposition Labour Party has promised that if Labour wins the July 4 elections, it will not raise taxes beyond the handful of modest measures it has already proposed (i.e., extending the windfall tax on energy company profits, applying the value-added tax to private school fees, and ensuring private equity bonuses are “taxed appropriately”). The statements by Reeves appear to be aimed at maintaining Labour’s current lead of 20+ percentage points in public opinion polls.

China: Ma Jiantang, the former Communist Party secretary at the State Council’s Development Research Center, warned that China is facing severe economic problems because of its low birth rate and falling population. Ma argued China must adopt an “urgent” response, but policies are still focused on family planning rather than encouraging births. Ma called for new initiatives such as promoting assisted reproductive technology, registering children born out of wedlock, improving birth insurance, extending maternity leave, and building more childcare centers.

Japan: Bank of Japan Governor Ueda said at a central banking conference that his institution will continue raising interest rates toward a “neutral” level, but because it’s hard to know what that level is for the Japanese economy, the central bank will move cautiously. The statement confirms expectations that the BOJ will likely hike interest rates only slowly in the coming months and quarters. With the Federal Reserve likely to hold US interest rates higher for longer, the BOJ’s approach is likely to continue weighing on the value of the yen (JPY).

New Zealand: The Reserve Bank of New Zealand said it will impose new restrictions on mortgage lending to preserve financial stability in the face of rising home prices and increasing consumer debt. The new rules will cap the amount of new loans going to borrowers with high debt-to-income and loan-to-value ratios. Since rising home prices and worsening debt burdens are now a problem in many countries, the New Zealand moves could potentially portend similar moves in other countries.

Israel-Hamas Conflict: An Israeli airstrike in Gaza on Sunday night killed two senior Hamas military commanders, but it also killed some 45 Palestinian civilians. The high level of civilian casualties to take out just two Hamas leaders has further stirred world anger at Israel and deepened Prime Minister Netanyahu’s isolation. It also promises to further undermine support for President Biden ahead of the US elections in November.

• Separately, Israeli forces got into a shootout with Egyptian troops as they took control of a border crossing between Gaza and Egypt, killing an Egyptian officer.
• The incident once again likely raises the risk of the conflict broadening into a regional war that could disrupt key energy supplies.

US Financial Markets: As of today, trades in equities, corporate bonds, exchange traded funds, mutual funds, and options will all settle the day after the trade, i.e., T+1 versus the previous standard of T+2. The move aims to cut brokers’ collateral requirements and reduce price volatility in time of market stress. Several other countries also shifted to T+1 this week, and similar moves are being considered in the UK, Switzerland, and the European Union.

US Commercial Real Estate Market: New data shows that the vacancy rate for retail properties has fallen to a near-record low of 4.1%, versus 5.0% during the coronavirus pandemic and 7.1% shortly after the Great Financial Crisis of 2007-2008. The low vacancy rate reflects strong economic growth and more disciplined construction in recent years. Although financial difficulties for office properties continue to scare investors out of real estate funds, the retail data serves as a reminder that other areas of commercial real estate are in a strong position.

PDF

by Patrick Fearon-Hernandez, CFA, and Thomas Wash

[Posted: 9:30 AM EDT] | PDF

Our Comment today opens with an interesting observation on the Chinese market by JPMorgan CEO Jamie Dimon. We next review several other international and US developments with the potential to affect the financial markets today, including a new program in South Korea to promote its semiconductor industry, data pointing to a falling population in Europe, and approval for new spot cryptocurrency funds in the US.

China-United States: JPMorgan CEO Jamie Dimon admitted on Thursday that part of the firm’s investment banking business in China has “fallen off a cliff” in recent years. The statement is important because Dimon has been a poster child for the US business elites in technology, finance, and other industries who have vocally resisted US-China decoupling in the interest of national security. His statement suggests JPMorgan may now be suffering from the same abusive Chinese economic policies that have helped spark the calls for decoupling.

• Those policies include China’s long-standing effort to attract top foreign firms, learn from them, and then strangle them while the government helps promote China’s own “national champions.” If that’s what is happening, it seems that Dimon and the rest of JPMorgan’s leadership should have seen it coming.
• But even if that’s not happening yet, China’s new goal to become a “financial superpower” suggests it could happen soon. The new goal calls for China to clean up, broaden, and deepen its financial markets to support cutting-edge industries such as electric vehicles and semiconductors. The plan also calls for China to foster several of its own world-class investment banks, which would naturally take Chinese market share from foreign firms such as JPMorgan.

Russia-Finland-Lithuania: The Russian defense ministry’s website this week temporarily showed a plan to unilaterally move Russia’s maritime border in the Baltic Sea at the expense of Finland and Lithuania. Although the plan was quickly deleted, Finnish and Lithuanian officials condemned it as a serious provocation or hybrid attack. At any rate, the incident could mean the Kremlin is becoming more confident in provoking the North Atlantic Treaty Organization as Russia regains momentum in its invasion of Ukraine while NATO members slow their support.

Tunisia: Autocratic President Kais Saied has launched another crackdown on political dissent ahead of elections planned for later this year. The clampdown appears to focus on lawyers, journalists, and social activists, some of whom have already been jailed. This raises the risk of social upheaval in an important energy producer and conduit for African migration into Europe.

South Korea: The government yesterday unveiled a plan to provide about $19 billion to Korean manufacturers of non-memory semiconductors. Aimed at chipmakers such as Samsung and Hynix, the money will subsidize the construction of new facilities to produce cutting-edge processors. The program is yet another example of how countries around the world are now embracing “industrial policy” to incentivize the domestic production of key goods.

European Union: New data suggests Europe’s population may have already started a long, drawn-out decline, about two years earlier than demographers had anticipated. The expected decline largely reflects falling birth rates. Until now, the rising participation of immigrants and women in the labor force has offset the accelerating loss of older workers. However, soon those factors will not be enough, and the EU’s total work force will begin an extended decline that will make it harder to achieve economic growth.

 

France-New Caledonia: On an emergency trip to France’s overseas territory of New Caledonia, President Macron agreed with local leaders to suspend a new law that would have expanded voting rights for non-indigenous people. The new law has sparked more than a week of rioting by indigenous Kanaks on fears that it would dilute their political power and make it harder to eventually win independence. As of this writing, it is not clear whether Macron’s suspension of the law will quell the violence.

US Cryptocurrency Market: In a surprise move yesterday, the Securities and Exchange Commission approved the US’s first exchange-traded funds for spot ether, the second-biggest cryptocurrency after bitcoin. The 10 or more asset managers that applied to offer the ETFs now must have their individual funds approved before they can offer them to the public. Given that existing futures-based ether funds haven’t garnered much interest, it is unclear whether any of the upcoming spot ether ETFs will attract much buying.

US Sports Market: Yesterday, the National Collegiate Athletic Association and five of the nation’s top athletic conferences agreed to drop their century-old policy that saw college athletes as strictly amateur and not entitled to share in the revenue they generate for their school. The deal, which settles a lawsuit filed in 2020, follows a separate settlement from several years ago in which athletes gained the right to profit from their name, image, and likeness. A final deal will allow colleges and universities to directly pay their college athletes.

View PDF

by Patrick Fearon-Hernandez, CFA, and Thomas Wash

[Posted: 9:30 AM EDT] | PDF

Our Comment today opens with several new indicators pointing to a possible further worsening in tensions between the US bloc and the China/Russia bloc. We next review several other international and US developments with the potential to affect the financial markets today, including signs of better economic growth in Europe, a snap election in the UK, and minutes of the Federal Reserve’s most recent meeting on US monetary policy.

China-Russia: Following on the UK defense minister’s assertion yesterday that the US and UK have intelligence showing that China is sending or preparing to send lethal aid to Russia for its invasion of Ukraine, US National Security Advisor Sullivan said he has not seen such evidence and would have to discuss the matter with his British counterparts. At this point, it isn’t clear whether the disagreement reflects differences over how to interpret the same intelligence or perhaps is due to the Biden administration’s extreme reluctance to push China or Russia too far.

• In any case, the US-UK disagreement seems to be based on some kind of intelligence showing China’s support for Russia is more substantial than previously known.
• As we noted in our Comment yesterday, such substantial support for Russia’s invasion would potentially be quite incendiary and could lead to sanctions directly against China. Obviously, broad Western sanctions against China would likely exacerbate the current spiral of tensions and present greater risks for investors.

China-Taiwan: While China draws closer to authoritarian allies such as Russia, it continues to ramp up its aggressiveness against Taiwan and other democracies. In an apparent effort to intimidate Taiwan’s newly inaugurated, independence-minded president, the Chinese military today has launched large-scale exercises practicing encirclement of the island. The drills are planned to last two days and will include air, navy, ground, and rocket forces.

• According to a Chinese military spokesperson, the exercises are intended to “serve as a strong punishment for the separatist acts of ‘Taiwan independence’ forces and a stern warning against the interference and provocation by external forces.”
• We still believe that the biggest near-term risk involving China’s geopolitical aggressiveness is in the Philippines. Nevertheless, exercises such as the ones China is launching today around Taiwan raise the risk of accidental confrontation or miscalculation that could escalate into a bigger conflict and draw in the US.

China-Australia: Australian wine exports to China jumped to $10.4 million in April after removal of the tariffs Beijing imposed in 2021 to punish Australia for questioning China’s role in the coronavirus pandemic. Australian wine exports to China in April were about eight times greater than in the same month one year earlier and are expected to keep growing in the near term. The improvement shows how China sometimes does back down after imposing punitive trade barriers on countries that anger it.

China-European Union: In contrast with the improved China-Australia relationship, a top Chinese auto market expert who works closely with the government said in an interview that China should hike import tariffs against foreign internal-combustion autos with large engines. With the European Commission (EC) expected to release its decision on possible import tariffs against Chinese electric vehicles in the next two weeks, the remark has been widely interpreted as a warning that Beijing is prepared for a trade war if the EU puts up barriers to Chinese EVs.

• Europe’s large auto industry is a juicy target for Chinese attack in a trade war, and European nations have often proven timid when faced with threats to their sales in China.
• Nevertheless, the EC has exclusive responsibility for the region’s trade policies, and its priority is to avoid another decimation of a key European industry at the hands of China. Individual countries can’t block any anti-China tariffs the bureaucrats in Brussels might impose, so the risk of an EU-China trade war is rising.
• Any such trade war would further the process of global fracturing, in which countries are coalescing into relatively separate geopolitical and economic blocs. Since many large European companies are dependent on exporting to China, a trade war could weigh heavily on European stock markets.

Eurozone: The composite purchasing managers’ index for May rose to a seasonally adjusted 52.3, beating expectations and improving from 51.7 in April. Like most such indexes, the eurozone’s composite PMI is designed so that readings over 50 indicate expanding activity. The May data adds to the evidence that the European economy is recovering a bit from its recent contraction, which stemmed from factors such as high energy prices and rising interest rates.

United Kingdom:  Prime Minister Sunak yesterday called a snap election for July 4, even though the ruling Conservative Party is trailing the leftist Labour Party by about 20 percentage points in recent opinion polls. Sunak and the Conservatives are hoping, perhaps against hope, that a string of positive data points on economic growth and price inflation will overcome voter fatigue with the Conservatives and perceptions that the party is too chaotic and divided to govern.

US Monetary Policy: The minutes of the Fed’s April 30-May 1 policy meeting, released yesterday, show that the policymakers as a group continued to believe the benchmark fed funds interest rate is high enough to slow economic activity and bring down price pressures, but the process is likely to take longer than originally thought. Importantly, the minutes show some officials “mentioned a willingness to tighten policy further should risks to inflation materialize in a way that such action became appropriate.”

• Even though Fed board member Waller said separately yesterday that the probability of rate hikes is currently “very low,” the reference to potential policy tightening drove stock prices lower.
• By market close, the S&P 500 was down 0.3% to 5,307.01.

US Antitrust Policy: The Justice Department and several state governments today are expected to file an antitrust suit against entertainment ticketing giant Live Nation. Based on allegations that Live Nation has a monopoly that leads to higher ticket prices, the suit will essentially ask that the 2010 merger between Live Nation and Ticketmaster be reversed.

• The suit against Live Nation is another example of the Biden administration’s effort to toughen US competition policy. To date, that effort has had a mixed record.
• Coincidentally, Bloomberg’s latest “Odd Lots” podcast, published just today, carries an interview with the top DOJ economist, who explains how the department identifies and analyzes potentially uncompetitive behavior that could lead to an antitrust suit.

US Stock Market:  After market close yesterday, artificial intelligence darling Nvidia said sales in its latest quarter rose to $26 billion, three times greater than one year earlier, while its net income rose to $14.88 billion, nearly 7.5 times more than in the year-earlier period. Moreover, the firm lifted its sales forecast for the current quarter, and its CEO pronounced a bullish outlook for its products in the coming years.

• The company also announced a 10-for-1 stock split effective June 7 and more than doubled its dividend.
• In after-hours trading, the stock jumped approximately 6%. So far this morning, Nvidia’s stock is up about 6.7% to $1,013.40.

View PDF

by Patrick Fearon-Hernandez, CFA, and Thomas Wash

[Posted: 9:30 AM EDT] | PDF

Our Comment today opens with a potentially incendiary revelation that the US and UK have intelligence showing China is now sending, or preparing to send, lethal aid to Russia for its invasion of Ukraine. We next review several other international and US developments with the potential to affect the financial markets today, including signs of stickier-than-expected consumer price inflation in the UK and a couple of notes on the US financial markets.

China-Russia: At a defense conference in London today, British Defense Secretary Shapps said new US and UK intelligence shows that China is currently sending, or will soon be sending, lethal aid to Russia for its invasion of Ukraine. Shapps said the new intelligence shows that China and Russia have recently developed what he called a “deeper relationship.” This report comes just a week after Russian President Putin visited Chinese General Secretary Xi in Beijing, and as the two are planning another meeting this summer.

• The revelation by Shapps is potentially incendiary. US and other Western leaders have repeatedly warned Beijing not to provide lethal aid to Russia for its illegal invasion of Ukraine. Leaders in Washington have warned that the US would impose sanctions directly on China if it provided such aid to the Kremlin.
• As a reminder, our objective, quantitatively driven methodology for classifying countries by geopolitical bloc places Russia squarely in the China-led camp. More generally, we see Russia as the junior partner in that camp, which explains why we often refer to it as the “China/Russia bloc.” If China has now decided to accept the geopolitical and economic risk of providing lethal aid to Russia despite Western warnings, it suggests the relationship really has deepened, as Shapps suggests.
• Going forward, the new intelligence could potentially force Western leaders to live up to their warnings against Beijing. If that leads to substantial sanctions directly on China, then the current spiral of tensions between the West and China would likely worsen, creating further risks for the global economy and investors.

United Kingdom-Hong Kong-China:  A former Royal Marine and UK immigration official who had been arrested for spying for Hong Kong was found dead in a park west of London. The incident is likely to spark concern that China, through its Hong Kong operatives, is working to silence Westerners who have been coopted to work for its intelligence services. Such concern would heighten the existing tensions between the US and China/Russian geopolitical blocs.

United Kingdom: The April consumer price index was up just 2.3% from the same month one year earlier, after increases of 3.2% in the year to March and 3.4% in the year to February. Consumer price inflation in the UK is now well below its cycle peak of 11.1% in October 2022. Nevertheless, the slowdown in April wasn’t quite as dramatic as investors were expecting. The data has therefore reduced expectations that the Bank of England could cut interest rates at its June policy meeting.

France: President Macron has embarked on an emergency trip to France’s overseas territory of New Caledonia, an island some 900 miles northeast of Australia, to help quell the rioting touched off by a new French law, which gives nonindigenous citizens in the territory more voting rights. Importantly, the unrest is threatening Macron’s vision of leveraging New Caledonia’s vast nickel supplies to make Europe a leader in green technologies.

Israel: The Israeli government today recalled its ambassadors to Ireland, Spain, and Norway over the trio’s plan to formally recognize a Palestinian state effective May 28. Several other European countries have recognized a Palestinian state for years, but the move by Ireland, Spain, and Norway appears to have touched a nerve in Tel Aviv amid growing international criticism of Israel over its war against Hamas in the Gaza Strip.

• Of course, Israeli leaders are also angry about an International Criminal Court (ICC) prosecutor’s recent request for arrest warrants for Israeli and Hamas leaders over their conduct in the conflict.
• Reflecting the US’s largely bipartisan support for Israel, Secretary of State Blinken yesterday said the Biden administration will work with Congress to craft sanctions on the ICC to punish it for the prosecutor’s call to arrest the Israeli leaders.

Japan: As investors increasingly expect the Bank of Japan (BOJ) to further tighten monetary policy, the yield on 10-year Japanese government bonds (JGB) rose above 1% today for the first time in 11 years. The most recent leg up in yields began on May 13, when the BOJ surprised investors by buying a smaller-than-expected amount of 5-year and 10-year JGBs.

• Despite the rise in 10-year yields, however, the yen (JPY) has continued to weaken.
• The currency is trading down 0.25% to 156.57 per dollar ($0.0064) so far this morning.

US Stock Market:  One key event for the stock market today will be Nvidia’s earnings release, due shortly after market close. Given that Nvidia and other artificial-intelligence darlings have been key drivers of the overall stock indexes recently, anticipation of the release could have a significant impact on trading today.

US Commodity Markets: In another note on the financial markets, we’ve noticed that there’s a new acronym being used to describe a fast-rising appreciating set of assets. The new acronym, BEGS, refers to Bitcoin, Ethereum, Gold, and Silver. The common threat in these assets is that they have no associated cash flow, so they should in theory be struggling against today’s high interest rates.

• For bitcoin and Ethereum, it appears that their recent upward trajectory mostly reflects expectations of more cryptocurrency deregulation.
• For gold and silver, the upward momentum reflects rising geopolitical tensions and strong buying by Chinese central bankers and consumers.

View PDF

by Patrick Fearon-Hernandez, CFA, and Thomas Wash

[Posted: 9:30 AM EDT] | PDF

Our Comment today opens with a note on Russian President Putin’s decision last week to replace his defense minister with an economist. We next review several other international and US developments with the potential to affect the financial markets today, including a major taxi driver strike in Italy and signs of change in the US labor market.

Russia: After President Putin’s decision last week to replace Defense Minister Shoigu with economist Andrei Belousov, we’ve been hoping to see more evidence of what drove the move, but nothing concrete has shown up. All the same, we agree with the various Russia experts who think the move probably reflects both Putin’s concern about rampant corruption in the military and his realization that the war against Ukraine and its Western backers will be taxing on the Russian economy over the long term.

• In its respected estimates of military spending, the Stockholm International Peace Research Institute (SIPRI) believes Russia boosted its military outlays to the equivalent of about $126.5 billion in 2023, some 70% higher than in the three years right before the coronavirus pandemic (excluding price inflation).
• Based on SIPRI’s estimates, Russian military spending last year equaled 5.86% of gross domestic product. That’s Russia’s biggest “defense burden” in its modern history, and it far exceeds the current US defense burden of 3.36% of GDP.
• CIA analysis, which has been replicated by private analysts, indicates economic growth begins to falter at defense burdens above about 10% of GDP. As estimated by SIPRI, the Russian defense burden isn’t quite at that level, but if Russia has large amounts of hidden defense spending like the USSR did, it could be approaching the danger zone. At the very least, even at SIPRI’s calculated defense burden of 5.86% of GDP, we suspect Russia is facing resource constraints and inflation pressures.
• From this perspective, it makes sense for Putin to want an economist at the helm of the Defense Ministry. Chief of the General Staff Gerasimov will still run the war against Ukraine, but by installing an economist as defense minister, Putin is signaling that Russia will keep spending large amounts on its military into the future and will need a defense minister who can manage the defense industry’s interplay with the overall economy.
• Importantly, Belousov has a reputation for favoring heavy state intervention in the economy to promote economic growth and boost particular industries. He therefore could launch a new Russian industrial policy aimed at broadening and improving the country’s ability to produce high-tech weapons en masse. Such a move might convince Western countries to adopt similar measures to expand their defense industries.

Russia-Poland: The Polish government today said it has arrested nine Belarusian, Ukrainian, and Polish citizens for carrying out acts of intimidation and sabotage at the direction of the Russian intelligence services. According to Polish Prime Minister Tusk, the nine were also preparing to conduct sabotage in Lithuania, Latvia, and possibly Sweden. The arrests highlight how Russian intelligence is now on a war footing and aggressively operating across the West.

• Over the weekend, the Polish government also said it would spend about $2.5 billion to build fortifications against Russian attack along Poland’s borders with Belarus and the Russian exclave of Kaliningrad.
• Along with other countries building fortifications, Poland’s effort shows just how serious the Eastern European countries consider the military threat from Russia.

Italy: If you’re heading off to Italy to begin the summer, beware of travel chaos. The country’s politically powerful taxi drivers, who have already greatly limited the operations of ride-hailing apps, have launched a nationwide strike to protest a government minister’s meeting with representatives from Uber. Amid consumer anger over insufficient taxi service, the meeting was taken as a sign that the government may be planning to lower restrictions on firms like Uber and Lyft.

China: A review of earnings reports from top Chinese electric vehicle makers shows they have dramatically slowed their payments to suppliers in recent quarters. For example, top EV maker BYD took an average of 275 days to settle its accounts payable in 2023, versus 219 days in 2022 and 198 days in 2021. Analysts believe the drawn-out payments reflect increasing liquidity problems as EV sales slow. Importantly, weaker domestic demand raises the risk that Chinese EV makers will dump their excess output on global markets, hiking trade tensions.

• Separately, the Wall Street Journal today carries an article showing Chinese mining firms are dramatically boosting their global investment and output, pushing down prices for some minerals (such as nickel) and driving some Western producers out of the market.
• The article suggests that China’s tried-and-true strategy to grab global market share in manufacturing is now being used to grab market share in mining. Key elements of that strategy include making massive investments in new, modern facilities to gain scale and cut costs, leveraging cheap labor, and flooding the market with ultra-low cost output to put Western competitors out of business.
• If so, the strategy could make the West even more dependent on the China/Russia bloc for minerals critical to national defense and the new, more electrified economy of the future. That would be consistent with our often-stated belief that the China/Russia bloc will try to weaponize its mineral holdings against the West to achieve global dominance.

Australia: Ahead of elections next year, the ruling center-left Labor Party government has proposed a budget for the coming fiscal year that includes tax cuts and about $5.3 billion in energy rebates and rent subsidies to ease the cost of living for renters and mortgage borrowers. The fiscal help, along with stickier-than-expected consumer price inflation, is expected to preclude the central bank from cutting interest rates anytime soon.

Mexico: With the ruling Morena Party in the pole position to win the July presidential election, the government is reportedly considering a tax hike on banks to rein in the surging budget deficit. Such a move could have big implications for major Spanish banks, which dominate the Mexican market. For example, BBVA reportedly gets almost 50% of its profit from its Mexican operations, while Banco Santander gets about 13% of its profit there.

US Labor Market: The Wall Street Journal carries an article today showing a big shift in the tenor of corporate job postings aimed at new college graduates. Rather than listing a litany of responsibilities and requirements, the listings now emphasize high salaries, opportunities for professional advancement, and perks. The change is consistent with the shortage of younger, relatively lower-skilled workers that we describe in our latest Bi-Weekly Geopolitical Report, “The Great COVID Labor Reform,” published yesterday.

US Housing Market: Axios today carries a useful article laying out how the disparity in new versus existing mortgage rates is handcuffing home sellers. The following chart lays out the situation in stark terms.

US Transportation Industry: The containership that rammed Baltimore’s Francis Scott Key Bridge and made it collapse in March was finally towed away from the crash site yesterday, allowing most cargo traffic in the important port to start flowing again. However, replacing the bridge will take many more months or years.

View PDF

by Patrick Fearon-Hernandez, CFA, and Thomas Wash

[Posted: 9:30 AM EDT] | PDF

Our Comment today opens with several items related to artificial intelligence, the electrification of the global economy, and the resulting impacts on commodity prices. We next review several other international and US developments with the potential to affect the financial markets today, including new signs of economic decoupling between the US and China and several notes on the US labor market.

Global Copper Market: Copper prices today have reached yet another record high, with near futures trading at $5.0910 as of this writing. Copper prices are now up more than 30% from the start of the year, reflecting investor expectations for increased demand from electrification (especially for artificial intelligence), re-industrialization, and higher defense spending, as well as potential supply shortages. The surge in copper prices is consistent with our oft-stated view that ongoing geopolitical tensions will likely be positive for commodities going forward.

Global Artificial Intelligence: The UK-based multinational engineering firm Arup said it was duped out of millions of dollars in a sophisticated, innovative new deep-fake scam. The scam was based on a digitally generated version of the company’s chief financial officer that the criminals deployed in a video conference. The fake CFO convinced a Hong Kong employee to send the criminals more than $25 million. The incident shows how deep fakes could be used not just for political manipulation, but also for fraud against companies or individuals.

France-New Caledonia: Large-scale rioting broke out late last week in France’s overseas territory of New Caledonia, which lies in the Pacific Ocean northeast of Australia. The rioting, fueled by hardline, pro-independence leaders of the territory’s indigenous Kanak people, began after the French parliament approved a bill giving more voting rights to the territory’s nonindigenous population. Paris has sent additional police to the territory, but the rioting reportedly continued throughout the weekend.

• The tensions in New Caledonia also reflect today’s global trend toward electrification, especially the growth of the global electric vehicle market. New Caledonia has large reserves of nickel, which is important to a range of electrification technologies.
• Besides the electoral changes from Paris, the territory’s pro-independence parties have been fighting French President Macron’s proposal to lift restrictions on exporting unprocessed nickel from New Caledonia and give priority to shipments to European electric-vehicle battery factories.

China-United States, et al.: The Chinese Ministry of Commerce yesterday said it has launched an anti-dumping probe regarding polyoxymethylene copolymer, a thermoplastic widely used in the consumer electronics and automotive industries, from the US, the EU, Japan and Taiwan. The move is being seen as retaliation for recent US and EU anti-dumping probes against Chinese electric vehicles and other strategic Chinese exports. The tit-for-tat move illustrates how tensions between China and the West continue to spiral, with no easing in sight.

China-Philippines: To counter China’s effort to assert sovereignty over waters claimed by the Philippines, Manila has begun building military and civilian infrastructure on the country’s barely populated island of Pag-asa in the South China Sea. Manila also plans to maintain a support corridor running out to the island, in which it hopes frequent military and civilian operations will deter China from trying to intervene.

• The Philippine government has long used a calibrated military presence in disputed areas of the South China Sea to block China’s territorial aims. For example, it has grounded a World War II-era navy ship on Scarborough Shoal and keeps a contingent of Philippine marines there around the clock.
• With its new facilities on Pag-asa, which will reportedly include both military barracks and a civilian health clinic for the island’s 400 inhabitants, it appears that Manila is broadening its approach. By encouraging a bigger civilian presence, it could make China more hesitant about trying to attack or isolate the island but will also likely worsen tensions between Beijing and Manila.
• As we have noted before, aggressive Chinese operations against Philippine assets in the South China Sea are now probably more dangerous than the situation around Taiwan, especially given that the US and the Philippines have a mutual defense treaty. Under that treaty, the US could be required to come to Manila’s aid if it is attacked by China.

China: In a sign that General Secretary Xi’s plan to make China a “financial superpower” is being implemented, a new press tally shows 30 regulators, bankers, and other financial executives have been arrested for corruption so far this year. Under Xi’s plan, China will use tightened financial regulation to reduce risks and build a world-leading capital market that can support favored manufacturing industries and insulate China from US financial sanctions.

• Naturally, Xi has argued that large, deep, corruption-free capital markets should help support industries he has identified as “new productive forces,” such as electric vehicles, batteries, solar panels, and semiconductors.
• Cleaner financial markets probably would help support Chinese stocks to some extent. However, we suspect the market will continue to struggle in the face of problems such as China’s slowing economic growth, Communist Party intrusion into the private sector, and reduced interest from foreign investors.

Iran: State media has now confirmed that President Raisi died in a helicopter crash in northwestern Iran over the weekend. Supreme leader Ayatollah Khamenei has named First Vice President Mokhber as interim leader of the government until the constitutionally required elections can be held, probably in late June or early July. In Iran’s theocracy, the president serves mostly to execute the clerics’ national strategy, so Raisi’s death isn’t likely to change Iran’s overall strategic direction.

• Even though Raisi’s helicopter went down in bad weather, there will inevitably be some suspicions in the region that Israel, or even the US, was behind the crash.
• If they arise, such suspicions could further stir up tensions in the area, which are already high because of Israel’s war against Iran-backed Hamas militants in Gaza.

Israel-Hamas Conflict: Benny Gantz, a centrist former military chief and rival of Prime Minister Netanyahu, has threatened to pull his party from the national unity government conducting Israel’s war against Hamas by June 8 if Netanyahu doesn’t develop a credible post-war plan for governing the Gaza Strip. In addition, current Defense Minister Yoav Gallant, from Netanyahu’s conservative Likud Party, has backed Gantz’s call.

• Netanyahu’s right-wing coalition alone has the majority of seats in the Knesset, so even if Gantz pulls his party out of the government, the prime minister would likely stay in power.
• However, the demands from Gantz and Gallant lay bare the growing divisions in Israel’s unity government. If Gantz pulls his party out, Netanyahu would likely become even more isolated on the world stage and even more reliant on his far-right coalition members.
• Reflecting Netanyahu’s isolation, the International Criminal Court’s prosecutor has formally requested arrest warrants for Netanyahu and other Israeli and Hamas leaders. To back up his call, the prosecutor says he has reasonable grounds to believe Netanyahu and the other leaders are responsible for war crimes and crimes against humanity.

US Regulatory Policy: New research from Axios suggests President Biden’s recent flurry of new regulations is designed to cement his agenda in government policy even if former President Trump wins re-election in November. Under the Congressional Review Act of 1996, rules that have been in place for a certain period would be much harder for Trump to kill unilaterally. Legal scholars disagree on the minimum period, but the Axios research estimates that Biden would have to institute his rules by this Wednesday or by September at the latest.

US Labor Market-Unions: The National Labor Relations Board said workers at a Mercedes-Benz plant in Alabama voted against joining the United Auto Workers by a vote of 56% to 44%. Coming just weeks after the UAW won a vote at a Volkswagen plant in Tennessee, the result suggests it will remain difficult for unions to organize workers in the South. Although today’s labor shortages have boosted wage rates and workers’ bargaining power, it appears the economy could avoid the kind of mass unionization that hamstrung the labor market decades ago.

US Labor Market-Immigration: An article in the Financial Times today compiles statements from various US business organizations and firms warning that new restrictions on immigration or mass deportations would be costly and weigh on economic growth. The statements come from organizations ranging from the Associated General Contractors of America to the National Retail Federation and the National Restaurant Association.

• The businesses have issued their warning as both President Biden and Former President Trump adopt stronger anti-immigration rhetoric ahead of the November elections.
• The businesses are concerned because COVID-era changes in the labor market have left a large “hole” in the supply of relatively less-skilled workers. We describe that situation in depth in our latest Bi-Weekly Geopolitical Report, due to be published later today.

View PDF