by Patrick Fearon-Hernandez, CFA, and Thomas Wash

[Posted: 9:30 AM ET] | PDF

Our Comment today opens with news suggesting the US could soon target Chinese tech services giant Alibaba with sanctions or trade restrictions in a move that could reignite bilateral tensions and weigh on global markets. We next review several other international and US developments with the potential to affect the financial markets today, including worsening military tensions between China and Japan and concerns in Europe about the rise of stablecoins backed by US Treasury bills.

China-United States: In a Friday scoop, the Financial Times revealed the existence of a US national security memo claiming that Chinese technology services giant Alibaba provides support for Beijing’s military cyber operations against the US. Importantly, it appears that the memo could help justify US sanctions or business restrictions against Alibaba, potentially including a forced delisting from the US stock market. However, White House officials declined to tell the FT how they intend to respond to the intelligence.

• As we’ve argued previously, the US-China trade war this year has revealed that China’s comprehensive power — its combined military, diplomatic, economic, and technological strength — is probably more on par with that of the US than people had realized. We think this has been reflected in the US-China trade truce reached last month. If it leads to a broader, longer-term deal, US-China tensions could ease more permanently, reducing the risk of sanctions or other retaliatory actions and giving a boost to US and Chinese stocks.
• However, it’s important to note that such a comprehensive, longer term deal is not yet in place. For now, the US-China trade truce remains fragile, and each side could take actions to upset it. If the US uses the new intelligence report to undercut Alibaba, we suspect bilateral relations could turn south again, putting a damper on stock values.

China-Japan: Late on Friday, Beijing officially warned Chinese citizens to avoid travel to Japan, and Hong Kong authorities issued a similar warning on Saturday. Reports yesterday said a Chinese coast guard vessel also made a provocative patrol through a set of islets claimed by both Beijing and Tokyo but administered by Japan. The moves mark the latest Chinese retaliation for Japanese Prime Minister Takaichi’s statement last week that a Chinese effort to take Taiwan by force would require Japan to intervene militarily.

• As we noted in our latest Bi-Weekly Geopolitical Report, Takaichi’s hawkish approach to China risks prompting Beijing to impose additional economic and trade punishment on Japan going forward.
• Indeed, observers have noted that the next logical step for each country would be to impose economic sanctions on each other. That, of course, would have the potential to weigh on both Japanese and Chinese stock values.

China: At a conference in Beijing on Friday, former Finance Minister Lou Jiwei warned that the country’s slumping real estate sector will likely continue to weigh on economic growth for up to five more years. The warning underscores the massive overbuilding in China’s residential real estate sector until 2021, which resulted in extreme excess capacity, bad debts, and steep losses by builders and buyers alike. If rebalancing the sector really does take until 2030, it will mean nearly a decade of bruised growth for China, on top of several other economic headwinds.

United States-Eurozone: In a Financial Times interview, Dutch central bank chief Olaf Sleijpen warned that the growing private-sector issuance of stablecoins backed by US Treasury bills is a risk for the European Central Bank. Sleijpen warned that a run on a stablecoin could potentially force the ECB to adjust its monetary policy, putting the institution in a position similar to that of central banks in emerging markets that are heavily dollarized.

• Sleijpen’s concern illustrates how the rise of Treasury-backed stablecoins is actually boosting the US dollar’s importance in world financial markets again.
• We still expect the dollar to depreciate in the foreign exchange markets in the coming years, giving foreign equities an advantage, but the rise of Treasury-backed stablecoins will likely offset some investor concerns about the dollar’s influence in the global economy.

United States-Switzerland: US Treasury Secretary Bessent and UBS Chief Executive Officer Colm Kelleher have reportedly had several talks in recent months to discuss the possibility of the giant Swiss bank moving its headquarters to the US. The discussions appear mostly designed to dissuade the Swiss government from imposing tough new capital rules on UBS. All the same, given the White House’s push for more foreign investment and its proclivity to guide corporate investment and operations decisions, such a move may be more than just posturing by UBS.

United States-Venezuela: President Trump yesterday hinted to reporters that the US may be in talks with Venezuelan President Maduro on the possibility of Maduro stepping down in the face of a significant amount of US Navy firepower in the region. That could reduce the risk of some kind of US-Venezuelan conflict in the region. It could also herald a potential resurgence of Western investment in the oil sector and the potential for significant new supplies of oil coming to the market soon.

US Airline Industry: The Federal Aviation Administration this morning lifted the flight curbs imposed at airports across the country earlier this month because of the federal government shutdown. Airlines have warned it could take several days for full operations to resume and for flight crews to get back in place, but it now appears that flight schedules will be back to normal for the big Thanksgiving travel rush next week — good news for both the traveling public and the nation’s airlines.

Russia-Poland: Authorities in Poland yesterday said sections of a railway heavily used to ship arms to Ukraine were blown up, forcing two passenger trains to make emergency stops. After the recent drone intrusions into Polish airspace and other similar incidents across Europe, the Sunday explosions appear to be the latest brazen example of Russian sabotage in member countries of the North Atlantic Treaty Organization. Such sabotage risks going too far and sparking a crisis or conflict that would disrupt the economy and/or financial markets.

Chile: In the first round of presidential elections yesterday, José Antonio Kast of the ultraconservative Republican Party came in first with about 70.0% of the vote. Jeannette Jara of the Communist Party came in second with 26.8%. That makes Kast the frontrunner for the second and final round of voting on December 14. If that transpires, Chile will do a dramatic course correction after six years of leadership by the leftwing President Gabriel Boric. The news is likely to give a boost to Chilean stocks today.

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