Daily Comment (October 11, 2023)

by Patrick Fearon-Hernandez, CFA, and Thomas Wash

[Posted: 9:30 AM EDT] | PDF

Our Comment today opens with a warning from the International Monetary Fund about global public finances.  We next review a wide range of other international and U.S. developments with the potential to affect the financial markets today, including the latest on the Israel-Hamas war, a potentially important corruption scandal at a Chinese electric vehicle firm, and some thoughts on the U.S. bond market.

Global Fiscal Policy:  In its latest Fiscal Monitor report, the International Monetary Fund warned that governments around the world must take steps to address their worsening fiscal deficits and burgeoning debt.  According to the IMF, government leaders seeking to tackle those problems should consider both revenue increases and spending cuts.  While painful, the organization said taking the medicine would help preserve financial stability and reduce the need for central banks to keep hiking interest rates.

Israel-Hamas-United States:  President Biden yesterday confirmed that more than a dozen U.S. citizens were killed in the Hamas attack on Israel over the last several days.  According to the White House, 20 or more U.S. citizens are also missing, suggesting that some or all of them could be among the hostages that Hamas has taken back to the Gaza Strip.  The announcement likely ensures that the U.S. will have to get more involved in the conflict as it plays out in the coming days, weeks, and potentially months.

Japan-China:  In a recent opinion poll conducted in both Japan and China, fully 92% of surveyed Japanese said their impression of China was “not good,” up from 87% last year and the second-highest since the annual survey began in 2005.  In contrast, only about 63% of Chinese respondents said they had a negative view of Japan, almost the same as last year.  The results help rationalize the Japanese government’s recent ratcheting up of rhetoric against China and its increased investment in military capabilities.

China-Australia:  The Chinese government today released an Australian citizen it had been holding for three years on suspicion of disclosing state secrets.  The release of journalist Cheng Lei is another step in the ongoing easing of tensions between China and Australia, which has already led to reduced Chinese barriers to some Australian exports.  If the cooling of tensions continues, a broader range of Australian companies could regain access to the Chinese market.

China:  Fast-growing electric vehicle firm Xpeng (XPEV, $16.94) said it has suspended its vice president of supply chain procurement on suspicion of corruption.  Xpeng is seen as a potential threat to Tesla (TSLA, $263.62) and BYD (BYDDY,$ 61.75), so it is a high-profile firm in China.  The accusation raises concerns that the government may be turning its anti-corruption sights to the rapidly advancing EV industry.

  • China’s EV industry seems poised to take the world by storm with its inexpensive, high-quality vehicles, at least if the European Union and other markets don’t impose trade restrictions to protect domestic jobs.
  • All the same, it’s important to remember that President Xi’s past anti-corruption initiatives have seriously tripped up other key sectors. If the Xpeng move is only the tip of an anti-corruption iceberg, it would be a further red flag for Chinese economic growth going forward.

Finland-Estonia:  Authorities in Helsinki and Tallin said they suspect sabotage after discovering damage to a key natural gas pipeline and communications cables running between the countries under the Baltic Sea.  If the damage did result from deliberate sabotage, a likely suspect would be Russia, which probably wants to punish Finland for recently joining the North Atlantic Treaty Organization and Estonia for the support it has rendered to Ukraine as that country seeks to fight off Russia’s invasion.

Canada-India:  The Indian government’s deadline for Canada to slash its diplomatic presence in New Delhi expired yesterday with the two countries still negotiating on how to deal with the crisis sparked by Canada’s accusation that India helped assassinate a Canadian citizen and Sikh separatist leader in British Columbia in June.  Although it isn’t yet clear how the negotiations will go, the fact that the two sides are hashing things out could be a welcome sign that they are trying to halt the downward spiral in their relations.

Canada:  The Unifor auto workers’ strike against General Motors (GM, $30.99), which we mentioned in yesterday’s Comment, ended abruptly last night after the union and the company tentatively agreed on a new labor contract that would boost wage rates by as much as 25% over three years and also increase the company’s pension contributions.  The quick capitulation suggests GM wants to avoid a “two-front war” while it also faces the strike by the United Auto Workers in the U.S.  Since one target of the Canadian strike was GM’s lucrative pickup products, it also suggests that the UAW would have greater leverage if it extends the strike in the U.S. to those types of factories.

U.S. Politics:  As of this writing, Republicans in the House of Representatives still plan to vote on a new Speaker today, choosing between current Majority Leader Scalise and Judiciary Committee Chair Jordan.  However, it appears that neither Scalise nor Jordan has locked up the votes needed to win, raising the distinct possibility that the issue won’t be resolved today.

U.S. Bond Market:  New analysis suggests that part of the recent weakness in the bond market may reflect the cumulative impact of reduced buying by the Federal Reserve, China, and Japan.  The Fed’s policy of allowing Treasury obligations on its balance sheet to mature without replacing them has reduced its holdings of Treasury bonds by about $650 billion over the last year.  China and Japan have also reduced their holdings as they periodically try to support their currencies.  And, of course, China continues trying to diversify its foreign reserves away from the greenback.

U.S. Regulatory Policy:  Today, the Federal Trade Commission and the Consumer Financial Protection Bureau jointly proposed a set of new rules to clamp down on junk fees that are poorly disclosed or sprung on consumers at checkout.  The proposed rules will now begin a 60-day public comment period before they can be formally adopted.

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