by Patrick Fearon-Hernandez, CFA, and Thomas Wash

[Posted: 9:30 AM ET] | PDF

Our Comment today opens with news that the US is now slowing down its plans to impose big, new tariffs on foreign semiconductors to avoid spoiling the US-China trade truce. We next review several other international and US developments that could affect the financial markets today, including a new speech by European Central Bank President Lagarde on what’s causing Europe’s slow economic growth and a hawkish forecast of Federal Reserve interest-rate cuts by the head of Vanguard’s fixed-income investing.

United States-China: According to Reuters, several officials have said the administration is slow walking the 100% tariffs on foreign semiconductor imports that it announced in August, largely to avoid provoking China into another clampdown on its critical minerals exports. The officials say the administration could still announce the tariffs at any time, but for now, the new imposts are on hold.

• President Trump said in August that the US would impose a tariff of about 100% on imports of semiconductors but exempted companies that are manufacturing in the US or have committed to do so.
• The decision to put the tariffs on ice to avoid another cutoff of Chinese critical minerals illustrates how the trade war earlier this year revealed the immense leverage China has gained from its near monopoly on key minerals and products made from them.
• In our view, that realization has helped convince many US leaders that China’s comprehensive power — military, diplomatic, economic, and technological — has now increased to the point where it is essentially on par with that of the US.
• We think that has forced the US to become more circumspect in its competition with China, possibly heralding the end of the long era of sole US hegemony. On the other hand, the more-or-less equal balance of power could force a coexistence deal that would reduce US-China tensions and potentially give a boost to US and Chinese stocks.

United States-Russia-European Union-Ukraine: As flagged in our Comment yesterday, the US’s new proposed peace deal to end the war in Ukraine is generating intense resistance from leaders in Europe. The Ukrainian government has been more circumspect, but after text of the proposal was leaked yesterday, the major concessions it requires from Kyiv would suggest there is little chance that President Zelensky’s government would approve it. Even though financial markets were buoyed by news of the plan, we now suspect it will be another false dawn.

United States-Argentina: According to reports late yesterday, major US banks including JPMorgan Chase, Bank of America, and Citigroup have shelved an administration-driven plan to provide a $20 billion bailout to the Argentine government. Instead, the banks will just help Buenos Aires handle a $4-billion debt payment in January. The US’s separate currency swap of $20 billion for Argentina remains in place, but since President Milei’s party scored a decisive victory in Argentina’s recent Congressional elections, the private funding is no longer needed.

United States-Brazil: President Trump yesterday lifted a 40% import tariff against certain Brazilian food products, including coffee, beef, and nuts, citing “initial progress” in trade negotiations with the country’s leftist government. The move comes less than a week after the president cut import tariffs on a wide range of food imports in an effort to bring down prices and diffuse criticism that he hasn’t done enough to reduce the cost of living. The move should be beneficial to a range of Brazilian food exporters.

US Monetary Policy: Sara Devereux, the chief of Vanguard’s $2.8-trillion fixed-income portfolio, warned in an interview with the Financial Times earlier today that the Fed probably won’t cut US interest rates as aggressively as investors expect over the coming year. Devereux said she expects only one or two more 25-basis-point cuts from the Fed over the next year, while investors generally expect four or five.

• Devereux’s forecast largely reflects her expectation from continued good economic growth in the US, driven by AI investment.
• In contrast, we continue to believe that strong political pressure and the replacement of current Fed officials with more dovish policymakers argues for faster rate cuts in 2026 than in 2025.

Eurozone: In a scathing speech today, ECB President Lagarde accused European leaders of being too wedded to an export-driven economic model at a time of global fracturing with more competitive exporters elsewhere. Instead, Lagarde urged European officials to focus on boosting the bloc’s domestic economy, which she said has plenty of latent strengths and could grow faster with fewer hurdles to internal trade.

• Coupled with former ECB President Draghi’s big report last year, which tied Europe’s lethargic economy largely to investment hurdles, Lagarde’s major new speech adds to the expanding body of major analyses aimed at sparking faster growth in the region. However, her focus on easing domestic trade suggests there still isn’t a strong consensus on what’s causing the problem.
• As we’ve noted before, the geopolitical threat from Russia over the last three years has spurred stronger defense spending, which has helped encourage looser fiscal policy more generally and even some modest steps toward deregulation. Combined with the decline in the value of the dollar, that has given a boost to European stocks so far this year.
• All the same, we’re still looking for deeper, more fundamental economic reforms before we can be certain that Europe is on the path to faster growth and better stock performance over the longer term.

United Kingdom: The November GfK consumer confidence index dropped to -19.0, worse than both the expected reading of -18.0 and the October reading of -17.0. The figure was also far worse than the 2014-2019 average of -5.6. The reading suggests British consumers are worried about their prospects amid continued high inflation and expectations that the Labour government of Prime Minister Starmer is about to announce a new round of tax hikes.

Japan: As the government continues to reopen nuclear power plants shut down after the Fukushima disaster of 2011, today it approved the restart of Tokyo Electric Power’s enormous Kashiwazaki-Kariwa nuclear plant in Niigata prefecture. The plant is the world’s largest facility for generating electricity from nuclear power. Japan has now approved restarting 14 of the 54 nuclear generating stations shut down after Fukushima, with four more awaiting approval by local governments and eight awaiting national regulatory approval.

• Japan’s re-embrace of stable, affordable nuclear power is increasingly giving it an economic advantage over Europe. Coupled with the weaker dollar and the likelihood of more stimulative economic policies under the new prime minister, that helps explain the good returns from Japanese stocks over the last year or more. The re-embrace of nuclear energy is probably also a positive for uranium and uranium miners.
• Regarding Prime Minister Takaichi’s economic program, her government today unveiled a massive fiscal stimulus package worth the equivalent of $135.4 billion, consisting largely of tax cuts, increased public investment in national security and infrastructure, cash handouts to parents, and gas and electricity subsidies for consumers. The package isn’t quite as big as some bond investors feared, so Japanese government bonds have rallied modestly so far today, driving the yield on 10-year JGBs down to 1.788%.

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