Daily Comment (June 4, 2024)

by Patrick Fearon-Hernandez, CFA, and Thomas Wash

[Posted: 9:30 AM EDT] | PDF

Our Comment today opens with shipping data that points to strong global demand and high freight rates worldwide. We next review several other international and US developments with the potential to affect the financial markets today, including a testing scandal in the Japanese auto industry, surprise results in India’s official vote counting, and a preview of new immigration policies expected to be announced in the US today.

Global Shipping Industry: Shipping giant A.P. Møller-Mærsk yesterday raised its full-year earnings guidance for the second time in barely over a month. The upward revisions illustrate how shipping rates have increased amid strong global demand and disruptions in the Red Sea related to the Israel-Hamas conflict. While increased freight rates are positive for ship owners and operators, they also could buoy price inflation and help keep global interest rates high.

Japan:  An investigation by the Transportation Ministry has discovered multiple cases of erroneous vehicle certification tests by Toyota, Honda, and other top producers. The faulty tests reportedly don’t relate to safety or emissions, but they have been deemed serious enough for the government to suspend some vehicle shipments within Japan. As a result, Japanese auto-industry stocks took a hit yesterday, with top producer Toyota’s stock price falling 2.5%.

India: Contrary to what exit polls had shown during the weekend, official vote counts suggest the coalition led by Prime Minister Modi’s Hindu-nationalist Bharatiya Janata Party won only a narrow parliamentary majority in the recent elections. Vote counting continues, but the results so far point to a Modi who is politically weaker than expected. Amid worries that Modi will be limited in his ability to push through more of his business-friendly policies, India’s benchmark Sensex stock index fell 5.7% today, reversing Monday’s 3.4% gain.

Australia-China: In a new poll by the Lowry Institute, nearly 75% of respondents thought China would become a military threat to Australia within the next two decades. Consistent with that, 65% of respondents expressed support for the AUKUS alliance, in which Australia will buy nuclear-powered attack submarines from the US and the UK. The findings show how rising geopolitical threats from authoritarian leaders have drawn Western countries even closer to the US — not just in military terms, but potentially in economic and financial terms as well.

  • Only 17% of respondents trusted China “a great deal” or “somewhat” to act responsibly in international relations.
  • Only 12% said they were confident that Chinese President Xi Jinping would “do the right thing regarding world affairs,” although that was higher than the number who trusted Russian President Putin or North Korean Paramount Leader Kim.

China: Of course, China is already seen as an economic threat in the developed West, especially now that General Secretary Xi is pushing more investment in “new quality productive forces” such as electric vehicles and solar panels. The Wall Street Journal today carries a useful chart book explaining how this new investment has led to excess capacity and why it threatens to unleash a wave of cheap exports that could harm Western producers.

  • Exemplifying the challenge, new data from Schmidt Automotive Research shows European registrations of Chinese-made EVs in January through April were 23% higher than in the same period one year earlier.
  • As a result, Chinese-made EVs had a market share of about 20% in the period, pointing to strong competition for Europe’s domestic automakers and auto industry workers.
  • The rapid growth in China’s market share goes far toward explaining why the European Union has launched an anti-dumping investigation into Chinese EVs. The results of that investigation are expected to be released next week, leading to the imposition of significant new tariffs against the Chinese vehicles.

Canada: The government and the union representing its 9,000 border agents are racing today to agree on a new labor contract to avoid a “work to rule” strike set to start on Thursday. If the negotiations fail and the Public Service Alliance of Canada members begin working strictly to existing contract rules, the loss of productivity could greatly slow US-Canadian truck and tourist crossings, with potentially significant negative impacts on US and Canadian economic activity.

US Immigration Policy:  President Biden is expected to announce today that he is signing an executive order that would restrict migrants’ ability to request asylum if they have crossed the US border illegally. The move comes as more voters complain about the surge in illegal migration across the southern border, making it a major issue in the November election. However, the order may not withstand scrutiny by the courts, since it is similar to an order by then-President Trump that was later ruled illegal.

  • As we noted in our Bi-Weekly Geopolitical Report of May 20, many of today’s illegal entrants and asylum seekers are probably helping to fill the shortage of lower-skilled workers left over by the coronavirus pandemic.
  • Given the low level of US births and shrinking numbers of high school graduates, immigrants will likely be an essential part of any future growth in the labor force, especially if today’s anti-immigration sentiment dissipates.

US Economy: This year’s Fortune 500 list of the largest US companies by revenue has been published today, with Walmart taking the top spot, followed by Amazon, Apple, and UnitedHealth Group. For the first time since 2013, California is the state with the most firms on the list, clocking in with 57 of the companies. Texas and New York tied for second place, with 52 of the companies each.