by Patrick Fearon-Hernandez, CFA, and Thomas Wash

[Posted: 9:30 AM ET] | PDF

Our Comment today opens with the latest in the US-China trade war, with a focus on an apparent effort by China to drive a wedge between the US and its allies. We next review several other international and US developments with the potential to affect the financial markets today, including further evidence that defense rebuilding is affecting the broader European Union economy and more pushback against the punitive foreign-investment taxes in President Trump’s budget bill.

China-European Union-United States: In a new sign that Beijing is trying to split the US from its traditional allies, the Chinese commerce ministry announced over the weekend that it is exploring a mechanism to accelerate the approval of rare-earth exports to the EU and some other countries. The move comes as Beijing has imposed strict licensing requirements for rare-earth exports to retaliate for the Trump administration’s tough tariff policies against China.

• The crimped supply of rare-earth materials continues to threaten the output of global auto makers and other firms, including US companies.
• One of Washington’s goals is to get US allies to present a tough, coordinated wall against Chinese exports. By potentially providing more rare-earth supplies to the EU, it appears that Beijing is trying to discourage the Europeans from taking that stance.
• If Beijing indeed favors EU countries as it releases more rare-earth materials, US auto makers and other firms could find themselves at a further disadvantage in the US-China trade war, putting their stocks at risk.
• Whether that happens could largely depend on the US-China trade talks opening in London today.

China-Russia: As a reminder of on-going tensions between Beijing and Moscow, despite the friendship professed by General Secretary Xi and President Putin, a new report shows Russian counterintelligence officials are increasingly worried about Chinese spying. According to a report in the New York Times, the Kremlin has even set up a dedicated counterintelligence cell to fight against the Chinese espionage. The report suggests that the US and its allies could potentially find ways to weaken Russia’s adherence to Chinese geopolitical and economic plans.

European Union: In an interview with the Financial Times, Chief Market Strategist Malin Norberg of Norway’s enormous and highly influential sovereign wealth fund has implored the EU to urgently reform its capital markets to boost the bloc’s economic competitiveness. According to Norberg, the key reforms would be to harmonize the EU’s tax, bankruptcy, and regulatory rules. She also said that the lack of those reforms has been one reason why the fund’s allocation to European equities has fallen from 26% to 15% in just the last decade.

• As we have noted in the past, fractured and shallow financial markets are a key impediment to the EU’s competitiveness.
• However, reform proposals such as Norberg’s have been made in the past, and there appears to be little significant new momentum toward achieving them.

France: Showing the rising importance of drone production for modern military operations, the French government announced it has asked automaker Renault to help a small French drone firm mass-produce drones for Ukraine. The “completely unprecedented partnership” would have Renault building defense equipment for the first time since World War II. Although a deal hasn’t been finalized, we think it is yet another example of the growing impact of defense rebuilding on the European economy.

United Kingdom: Ahead of her annual budget review today, Chancellor of the Exchequer Rachel Reeves announced she will restore the government’s winter fuel subsidy for all but the UK’s two million or so pensioners with incomes above 35,000 GPB ($47,500). The move is estimated to cost 1.25 billion GPB ($1.69 billion), marking a reversal from the Labour Party government’s original austerity effort. It will therefore further weaken the UK’s fiscal position and add to the pressure for higher taxes and/or spending cuts in other budget accounts.

India: State-owned energy champion Coal India has said it will reopen 32 shuttered mines and start five new ones to feed the country’s electricity generating plants as the renewables sector fails to keep up with rising demand. The news amounts to further evidence that the global coal sector is getting a new lease on life as policymakers and investors begin to back away from investing in renewable systems such as solar and wind.

Colombia: Conservative Senator Miguel Uribe Turbay was shot in the head at a campaign event on Saturday and was rushed to a hospital in critical condition. The shooting has sparked fears of renewed political violence in Colombia as leftist President Gustavo Petro tries to push through controversial labor market reforms amid strong resistance by conservatives. Uribe Turbay is the grandson of a former president and is likely to be a candidate in next year’s presidential election.

US Fiscal Policy: According to the Financial Times, executives from about 70 of the world’s biggest companies will travel to Washington this week to lobby Congress against Section 899 of President Trump’s “big, beautiful” tax and spending bill. That section would allow the federal government to impose punitive taxes on foreign-owned companies in the US if their home countries impose what the administration considers unfair taxes on US companies abroad.

• The foreign companies are arguing that Section 899 would disincentivize foreign investment in the US and could even lead to foreign-owned companies shutting down.
• However, it’s important to remember that reduced investment from abroad is the logical corollary to the administration’s drive to hike import tariffs and cut the US trade deficit. Indeed, some economists have long argued that the most efficient way to rebalance US trade would be to tax incoming foreign investment, including investments in US Treasury obligations. Probable downsides would be higher US interest rates and a weaker dollar.

US Immigration Policy: While most of the focus today will likely be on the big Los Angeles protests against President Trump’s immigration raids, we note that press reports show an increasing number of restaurant firms are worrying about a loss of workers. According to the National Restaurant Association, more than 20% of the US’s restaurant workers were born abroad, though most are legal citizens. Still, the immigration raids at food-service firms have made both legal and illegal restaurant workers reluctant to go to their jobs.

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