by Patrick Fearon-Hernandez, CFA, and Thomas Wash

[Posted: 9:30 AM ET] | PDF

Our Comment today opens with an update on the US’s evolving foreign trade policy now that the Supreme Court has invalidated much of the administration’s tariffs. We next review several other international and US developments that could affect the financial markets today, including moves that will likely boost Japan’s defense industry and a spike in violence in Mexico after its government killed a major drug lord.

US Tariff Policy: Responding to the Supreme Court’s decision on Friday invalidating the import tariffs that President Trump had based on an emergency law, the president on Saturday said he will impose a blanket 10% tariff on all countries based on a different law that would allow them to stay in place for 150 days, effective Tuesday. He later said he would raise that tariff to 15%. For some countries that would actually be higher than the rate they had previously negotiated with the US.

• We had long argued that if the Supreme Court ruled against the original tariffs, the administration would pivot to other legal justifications for them. The new legal basis isn’t as advantageous as the one initially used, but the administration is still likely to use it to its maximum effect.
• As a result, we expect that trade policy uncertainty will increase again, especially since the court ruling now raises a question about rebates of the previous tariffs and the validity of foreign countries’ investment pledges to the US.
• Indeed, the renewed trade uncertainty appears to be weighing on global equity prices so far today.

US Nuclear Energy Industry: In a weekend interview with the Financial Times, the CEO of enriched uranium firm Centrus Energy warned that the US nuclear energy industry will face a shortage of the fuel when new sanctions outlaw sourcing it from Russia beginning in 2028. The CEO, Amir Vexler, said his firm is racing to build new enrichment capacity but may not be able to keep up with the demand from planned reactor installations or restarts.

• Vexler’s warning is consistent with our view that increased demand for nuclear energy around the world is likely to put upward pressure on uranium prices at different stages of the fuel’s supply chain. That alone should support robust pricing for uranium going forward.
• In addition, investors should keep in mind that China’s effort to rapidly build up its arsenal of nuclear weapons will also demand a significant chunk of global uranium mine output. That will likely put added upward pressure on uranium prices.

US Airline Industry: The Department of Homeland Security yesterday said it would suspend the TSA PreCheck and Global Entry expedited security programs at US airports due to the partial government shutdown, but later backtracked and said only Global Entry would be suspended. On top of the blizzard that has already canceled or delayed hundreds of flights in the Northeast, the news points to painful, if temporary, disruptions for the US airline industry in the coming weeks.

Japan: The ruling Liberal Democratic Party at the weekend approved a draft law that would scrap the current rules limiting Japan’s defense equipment exports and allow lethal arms shipments. The party is expected to present the draft bill to the government as early as this week. Prime Minister Takaichi can then use her supermajority in parliament to push it into law. In our view, the legislation is likely to spur the development of an important new industry for Japan, potentially helping improve economic growth and boost stock market opportunities.

• Under Japan’s current rules, defense equipment exports are limited to five categories: rescue, transportation, vigilance, surveillance, and minesweeping.
• The proposed rules would assign defense equipment to two categories: arms such as tanks and howitzers, and non-arms equipment such as bulletproof vests. The National Security Council, attended by the prime minister and relevant ministers, would have the authority to approve or disapprove arms exports.

China: New satellite photos analyzed by Janes show that China has launched the first of its next-generation Sui-class attack submarines. The photos show that the nuclear-powered Type 095 sub exhibits advanced acoustic stealth and strike technologies, such as an X-tail rudder configuration and pump-jet propulsion. The new sub illustrates how China continues to rapidly build and improve its armed forces in an effort to dominate at least the Indo-Pacific region and force the US into economic and geopolitical retreat.

Mexico: Under pressure from the US, the Mexican military yesterday killed the country’s top drug lord, Nemesio “Mencho” Oseguera. In response, his Jalisco New Generation Cartel has begun lashing out with a series of attacks on civilian and government targets. It isn’t clear whether the cartel will continue trying to get revenge against President Scheinbaum for her cooperation with the US, or whether it will devolve into an intra-cartel power struggle. Either way, the resulting violence could be a headwind for Mexican stocks in the near term.

United States-Israel-Middle East: In a weekend interview, the US Ambassador to Israel, Mike Huckabee, said Israel has a right to seize vast swaths of land from “the Wadi of Egypt” to the Euphrates, based on the biblical verse in which God granted it to the descendants of Abraham. Huckabee later backtracked, but the statement raises concerns that the US could be working to extend Israeli sovereignty beyond its borders. If so, the policy would likely portend renewed tensions or even war between Israel and the rest of the Middle East in the coming years.

United States-Iceland-European Union: Even though the US administration’s push to take over Greenland has cooled a bit recently, the government in neighboring Iceland is reportedly considering a vote to restart EU membership talks as early as August in order to bolster its security. The move illustrates how the US’s new, more forward-leaning foreign policy is forcing dramatic realignments between countries around the world.

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