by Patrick Fearon-Hernandez, CFA, and Thomas Wash

[Posted: 9:30 AM EDT] | PDF

Our Comment today opens with several notes on China’s worsening relations with the U.S. and other members of the U.S. geopolitical and economic bloc.  We next review a wide range of other international and U.S. developments with the potential to affect the financial markets today, including news of an inconclusive election in Spain, growing protests against a judicial reform in Israel, and a blockbuster weekend at the movies in the U.S.

China-United States:  The Chinese government has opened an anti-dumping investigation into U.S. propionic acid, an important preservative for products ranging from foods to medicines.  The probe will last for one year, but it could be extended to as late as January 2025, at which point the government could take steps to block or reduce U.S. sales of the chemical in China.

• The anti-dumping investigation follows fast on the heels of the government’s recent move to require a license for the export of gallium and germanium, key metals for the production of high-technology goods such as semiconductors. It also follows an enforcement action that limited the Chinese sale of products from U.S. technology firm Micron Technology (MU, $65.65).
• Along with those actions, the anti-dumping probe appears to be retaliation for last year’s U.S. clamp down on sending advanced semiconductor technology to China.
• In any case, the Chinese move is just the latest evidence that U.S.-China tensions continue to worsen, presenting challenges and risks for investors.

China-Canada:  The Canadian government on Friday charged a retired Royal Canadian Mounted Police officer with foreign interference, saying he helped China “identify and intimidate” someone in Canada at the behest of the Chinese government.  The case appears to be another example of China trying to secretly extend its policing power and Communist Party discipline against Chinese people living abroad, sometimes through secret foreign police stations.

• Just as China’s Ministry of State Security often pressures ethnic Chinese abroad to spy for it, the latest Canadian case also involved an ethnic Chinese.
• The charged RCMP officer reportedly emigrated to Canada from Hong Kong.

China-Taiwan:  New satellite imagery of Chinese military bases and defense industry factories shows the country has been rapidly replacing its short-range missile arsenal on the southeastern coast facing Taiwan with much more capable medium-range missiles.  The new missiles being deployed include the DF-17 and DF-24, which can not only travel more than 1,000 miles, but are also fitted with hypersonic glide vehicles that could evade U.S. air defense systems.

• If the Chinese military launches an effort to take control of Taiwan, analysts suspect its first step will be to send waves of these missiles to take out U.S. and allied bases in places like Guam and Japan. The missiles could also be used to take out capital warships, such as aircraft carriers.
• The reports also indicate the new medium-range missiles are sometimes being deployed in close proximity to China’s strategic nuclear bases. That likely aims at discouraging the U.S. from any effort to destroy the missiles preemptively, since any such attack might damage Chinese strategic forces and increase the risk of a counterattack against the U.S.
• As with China’s aggressive build-up of its inter-continental ballistic missile force, which looks set to give China as many strategic nuclear weapons as the U.S., the roll-out of more medium-range missiles is likely to increase the bipartisan U.S. effort to address China’s growing military threat.

Russia-Ukraine War:  Following fast on Russia’s withdrawal last week from the deal allowing Ukraine to export grain from its southern ports, Russian forces have redoubled their missile attacks on Ukraine’s grain storage and export facilities.  The Russian strikes today hit a key terminal close to the border with NATO member Romania, raising the risk of escalation.  Meanwhile, the Ukrainians apparently launched a number of drone strikes against targets in central Moscow and in Crimea.  So far this morning, the result has been a further boost to global grain prices.  At this writing, U.S. wheat prices are up 5.2% to $7.34 per bushel.  Corn prices are up 4.0% to $5.56 per bushel.

European Union:  Hamburg Commercial Bank said its “flash” HCOB purchasing managers’ index for the eurozone fell to an eight-month low of 48.9, well below the expected reading of 49.7 and the June reading of 49.9.  Like all major PMIs, the HCOB index is designed so that readings below 50 indicate contracting activity.  Today’s release showed that the main weakness in the eurozone is in the manufacturing sector.  The subindex on factory activity fell all the way to a 38-month low of 42.7.

• The reading points to worsening recessionary conditions in the eurozone in the coming months. In turn, that could convince the European Central Bank to halt or pause its interest-rate hikes following an expected 25-basis point increase this Thursday.
• Reflecting that, European bond yields are dropping today, and the value of the euro has declined 0.3% to $1.1088.

Spain:  In elections yesterday, Alberto Núñez Feijóo and his center-right People’s Party won the most seats in parliament, but not enough to give it a clear shot at forming a governing coalition even if it teams up with the far-right Vox Party.  In contrast, Prime Minister Pedro Sánchez and his Socialist Party out-performed expectations and won enough seats to give it a fighting chance at a forming a majority grouping.  The results are an unexpected setback for right-wing populism in Europe and will set the stage for a period of inter-party wrangling and potential new elections in Spain.

Israel:  Prime Minister Netanyahu and his right-wing coalition in parliament will press ahead with a vote on a controversial judicial reform today.  The renewed push to limit the supreme court’s power to nix legislation has sparked mass protests and strikes.  The potential for political unrest and economic disruptions could weigh on Israeli assets in the coming days and weeks.

U.S. Monetary Policy:  Officials at the Federal Reserve will hold their latest two-day policy meeting this week, with their decision due to be released at 2:00 PM EDT on Wednesday.  Along with most other analysts, we suspect that continued strong wage gains and price pressures will prompt them to hike the benchmark fed funds interest rate further after pausing last month.  All the same, some other analysts think recent signs of modest economic slowing could convince them to hold rates steady again and simply signal the potential for more rate hikes later.

U.S. Stock Market:  After an 18-month drought in initial public offerings, a wildly successful IPO last week is raising hopes for a revival of deals in the coming months.  Based on last week’s strong performance of Oddity Tech (ODD, $52.56), the parent of direct-to-consumer beauty brand Il Makiage, it appears that investor demand for new companies is strong.  Moreover, the group of companies looking to come to market appears to be stronger than usual, since the hiatus in deals allowed many small firms to focus on consolidating their business and cutting costs.

U.S. Movie Theater Industry:  Despite ongoing concerns that the movie theater industry may never recover from the pandemic, the latest data suggests Barbie generated gross revenues of $155 million and Oppenheimer grossed $80 million over the weekend.  That would mark the first time in history that a three-day weekend has seen one movie open to $100 million or more and another to $50 million or more. It would also mark the fourth-biggest weekend of all time at the domestic box office.

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