Daily Comment (June 18, 2024)

by Patrick Fearon-Hernandez, CFA, and Thomas Wash

[Posted: 9:30 AM ET] | PDF

Note: There will be no Daily Comment tomorrow due to the holiday.

Our Comment today opens with a new World Gold Council survey showing global central banks are likely to keep buying large amounts of gold, supporting prices for the yellow metal. We next review several other international and US developments with the potential to affect the financial markets today, including unexpected business support for the far-right party ahead of France’s June 30 parliamentary election and several notes on US political and economic developments.

Global Gold Market: According to a new World Gold Council survey, 81% of central bankers think reserve managers will continue to increase their gold holdings in the coming year. That share is the highest since the group’s 2019 survey and reflects growing interest in gold reserves as a hedge against geopolitical and economic risks and as a source of good investment performance. The figures are consistent with our positive outlook on gold and our view that central bank buying is more than offsetting the headwinds from high interest rates.

China: In its latest review of global nuclear arsenals, the Stockholm International Peace Research Institute (SIPRI) highlighted how China is now expanding its arsenal of nuclear weapons faster than any other country. According to SIPRI, China built some 90 new nuclear warheads last year, bringing its total arsenal to 500. It is also rapidly expanding its fleet of intercontinental ballistic missiles to deliver those warheads, and it may have started deploying its weapons at a higher state of readiness.

  • The SIPRI figures regarding China’s growing arsenal are consistent with the estimates we made in our Bi-Weekly Asset Allocation Report from April 15, 2024, where we attempted to calculate the incremental global demand for uranium related to weapons.
  • Not only is China’s rapid nuclear buildup an unheralded reason for the recent jump in spot uranium prices, but it is also likely to intensify tensions between China and the West. As more Western leaders and voters come to appreciate the growing nuclear threat from China, we think there is a good chance that they will push for stronger defense spending.

China-Philippines: The Chinese government yesterday accused the Philippines of trying to deliver construction materials to the Sierra Madre, a Philippine navy ship grounded on a disputed shoal in the South China Sea to assert Manila’s claims to the area. In turn, Manila denied the accusation and said a Chinese coast guard ship rammed a Philippine vessel during the incident. The worsening Chinese-Philippine tensions remain a key risk for investors, as discussed in our Mid-Year Geopolitical Outlook, published yesterday.

France: As the June 30 parliamentary elections draw closer, business leaders are racing to embrace the surging far-right National Rally (RN), both to express their support and to influence the party. The development is a reaction against the far-left New Popular Front (NFP), which has issued a radical tax-and-spend agenda and is RN’s main competitor in the race.

US Foreign Policy: In a new poll by the Ronald Reagan Institute, 54% of respondents said US leaders should be more involved in international affairs, up from only about 40% in each of the previous three years. The share saying the US should be less engaged internationally remained at 33%, close to where it has been for the last several years.

  • We continue to believe US voters have become weary of the costs of global hegemony over the last decade and a half, leading to increased populism, isolationism, and “America First” attitudes. One key question is whether those attitudes will continue to strengthen and ultimately force the US to give up its global leadership role, or whether the resulting challenge from China/Russia geopolitical bloc will spur a recommitment to international engagement.
  • Now that US hesitation on the global stage has encouraged the authoritarian states of the China/Russia bloc to become more assertive, the Reagan Institute poll suggests US voters may indeed be embracing a stronger international stance again. If so, it will likely lead to even more tensions between the US bloc and the China/Russia bloc, as well as continued increases in US defense spending.

US Immigration Policy: President Biden has announced a new program that will give legal status to the spouses of US citizens who are in the country illegally, provided that they have been in the US for at least a decade and meet other criteria. The program is expected to help up to several hundred thousand people get work permits, deportation protection, and a path to citizenship. The announcement comes just two weeks after the president imposed a blanket ban on illegal immigrants claiming asylum after crossing the southern border.

  • The apparently contradictory goals of the spousal program and the blanket asylum ban reflect the contradictory political and economic environment for immigration policy.
  • Politically, large numbers of Americans want the government to clamp down on the flow of new immigrants and the lack of control over migration at the southern border, but there are still many in Biden’s Democratic Party base who prioritize immigrant rights and the ability of immigrants to bring family members to the US.
  • Economically, as we mentioned in our Bi-Weekly Geopolitical Report from May 20, 2024, the post-pandemic labor shortages, especially in lower-skilled jobs, have been an important driver of consumer price inflation. Giving more immigrants the right to work would likely help fill those labor shortages and cap wage rates, bringing down price pressures.

US Apartment Market: While overall apartment rental rates in the US are nearly unchanged from the previous year, new data shows a surprising upswing in rents outside the Sunbelt. Brokers and property owners say the rent hikes in places such as Kansas City and Washington, DC, reflect a dearth of new supply and renters’ inability to buy a home because of sky-high prices and elevated interest rates.

  • The figures suggest US rents have already reached a bottom and may be turning up again. Since apartment rents have a big weight in the key gauges of consumer price inflation, any upswing in rents could keep inflation from falling to the Federal Reserve’s target.
  • In turn, that would likely force the Fed to keep interest rates higher for longer.

US Electric Vehicle Market: The number of US electric-vehicle startups that have filed for bankruptcy has now risen to three after Fisker threw in the towel yesterday. Fisker’s filing follows the earlier bankruptcies of truck maker Lordstown Motors and bus maker Arrival. While press reports indicate the failures stemmed largely from operational and financial problems specific to the failed companies, they also reflect unexpectedly soft demand for EVs in the US market.