by Patrick Fearon-Hernandez, CFA, and Thomas Wash

[Posted: 9:30 AM ET] | PDF

Our Comment today opens with a few words on the Trump-Putin summit in Alaska late Friday. We next review several other international and US developments with the potential to affect the financial markets today, including a new intra-day record high for Japanese stock prices and a short preview of the Federal Reserve’s annual symposium in Jackson Hole, Wyoming, which starts later this week.

United States-Russia-Ukraine: President Trump today will meet Ukrainian President Zelensky and top European leaders at the White House to hash out next steps to end Russia’s war against Ukraine, after Friday’s summit between Trump and Russian President Putin yielded meager results. Reports over the weekend suggested the main goal of the White House meeting will be to flesh out the US security guarantees for Ukraine that Trump seems to have embraced of late. The leaders are also expected to discuss possible land swaps as the basis for a peace deal.

• All presidents and their administrations continually learn as they conduct US foreign policy, even in their second term. Recent months have highlighted President Trump’s evolving awareness of the relative power and goals of China and Russia, the world’s other two “Great Powers.”
• Although Trump and his administration had rightly focused on China’s dependence on exports to the US as a source of leverage, the US-China trade war in recent months has shown that China also has an important source of leverage in its near-monopoly over critical mineral supplies. Putin’s intransigence in prosecuting his war against Ukraine has brought into high relief his maximalist geopolitical goals and duplicity.
• As US officials come to terms with these learnings about the other Great Powers and their relative leverage versus the US, it is possible they will partially back off their populist, isolationist inclinations. If Trump really has swung behind US security guarantees for Ukraine, we would have strong evidence of such a shift, even though his abandonment of a ceasefire goal and embrace of land swaps may look like he has embraced Putin’s perspective on the war.
• Any such shift back toward a more traditional US foreign policy focused on support for allies would likely help ensure the survival of the US geopolitical and economic bloc, which we have argued is an attractive investment space for US investors. However, such a shift would also likely generate plenty of pushback from much of the administration’s political base.

United States-European Union: A planned joint US-EU statement fleshing out the terms of the two sides’ July 27 trade deal continues to be delayed by disagreements over reforms to the EU’s Digital Services Act, which US officials claim is an unfair hinderance of US tech companies. The joint statement was originally expected to be issued within days of that trade deal.

Japan: The Nikkei 225 stock price index today reached its third all-time high in the last five trading days, illustrating how factors such as market momentum, a renewed weakening of the yen, decent economic growth, and optimism over the war in Ukraine have been boosting Japanese stock values.

China: As Chinese economic officials seek new resources to fund fiscal stimulus measures, they are reportedly starting to crack down on domestic investors’ foreign investment income. Chinese residents investing onshore are currently exempt from tax. However, foreign investment income is subject to a 20% tax, and many individuals fail to report their gains. A new crackdown could theoretically limit Chinese demand for a range of investments around the world, hurting returns.

Bolivia: In the first round of the presidential election yesterday, centrist Senator Rodrigo Paz came in first with about 32% of the vote, and conservative former President Jorge Quiroga came in second with 27%. Paz and Quiroga will now compete in the October run-off, ensuring that Bolivia will once again be led by a pro-US, market-friendly president after 20 years of almost uninterrupted rule by the leftist Movement Toward Socialism party. The prospect of better economic policies has given a further boost to Bolivian bond values and other assets.

Canada: The Canadian Union of Public Employees, which represents 10,000 of Air Canada’s flight attendants, launched a strike against the airline over the weekend, ignoring a government order for binding arbitration and grounding hundreds of flights. The main issue for the union is compensation. Since Air Canada is tightly integrated with the Star Alliance (which also includes United Airlines, Lufthansa, Turkish Airlines, and Singapore Airlines), the strike threatens to disrupt air travel and freight shipments across North America and beyond.

US Monetary Policy: The Fed’s annual symposium in Jackson Hole, Wyoming, starts this Thursday, with the official theme of “Labor Markets in Transition: Demographics, Productivity, and Macroeconomic Policy.” Chair Powell will give his keynote speech on Friday, and investors will be looking for confirmation that the central bank will cut its benchmark fed funds interest rate in September as expected. Investors will also be hoping that Powell will provide guidance on future rate cuts through the end of the year.

US Corporate Bond Market: Little noticed amid the recent rally in stock prices, surging prices for company bonds have driven the corporate yield spread over 10-year Treasurys to a 27-year low of just 0.75%. The ultra-low credit spread appears to reflect investors’ continued strong optimism about the US economy, even as they also expect slowing economic growth and cooler inflation to allow the Fed to cut interest rates multiple times before the end of the year.

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