by Patrick Fearon-Hernandez, CFA, and Thomas Wash

[Posted: 9:30 AM ET] | PDF

Our Comment begins with Treasury Secretary Bessent’s analysis of China’s export restrictions and his recommendations for bolstering the US negotiating position ahead of trade talks. We then provide an overview of the Federal Reserve’s Beige Book, followed by an examination of the sustained momentum in the AI sector, easing US-India trade tensions, and the outcome of the no-confidence vote in France. We also include a summary of key economic indicators from US and global markets.

Bessent on China: The US is strategically calibrating its leverage ahead of crucial trade talks with China scheduled for the end of the month. On Wednesday, Treasury Secretary Scott Bessent adopted a noticeably conciliatory stance, offering to extend the current trade truce — a pause on tariffs — beyond the 90-day deadline. The major condition: China must lift its restrictions on rare earth exports. While markets welcomed the unexpected concession, the explicit linkage reveals how vital China’s mineral supply is for sustaining the recent stock market rally.

• The strategic importance of rare earth elements has become a major concern for the White House as it seeks leverage in trade talks. To address this, Secretary Bessent has suggested that China’s failure to remove export controls may lead to retaliation, including  coordinated action between the EU and the US to counter Chinese dominance. Furthermore, Bessent has floated proposals for a more assertive industrial policy, which could include the US government taking stakes in strategically important companies.
• The vulnerability of US technology due to its reliance on external sources for critical minerals has become a central challenge in diplomatic discussions, potentially weakening the US negotiating position. This geopolitical anxiety is reflected in the consistent market sensitivity observed in the NASDAQ throughout the escalation of these talks.
• Although we anticipate the talks will continue as planned, there is growing risk of a US withdrawal. Strategically, this move would be aimed at recalibrating the US negotiating position to secure greater leverage. The continued export ban of Chinese rare earth elements would likely exert downward pressure on US tech stocks. On the other hand, tangible progress toward an agreement would almost certainly trigger a market rally.

Fed Beige Book: In a worrying sign of broad economic stagnation, a recent Federal Reserve survey found that US economic activity showed little change over the past six weeks. This overall flatness, however, masks significant regional disparities. While some districts reported slight-to-modest growth, five saw no growth, and four noted a slight decline in activity, highlighting pockets of notable economic strain. In the absence of comprehensive government data, this report serves as a crucial substitute for gauging the economy’s underlying trends.

• According to the report, consumer spending growth is being propelled primarily by high-income households, even as lower- and middle-income groups contend with financial pressure from increased tariffs. This divergence is evident in spending patterns as high-income consumers are increasing expenditure on luxury accommodations, whereas those in lower income brackets are relying on discounts and promotions to manage the price pressures.
• While this report may not fully reflect upcoming economic data, as the latest Atlanta GDPNow model suggests, it does indicate that market sentiment remains weighed down by economic uncertainty. This dynamic is not necessarily negative, as investors in recent years have consistently used large cap tech equities and gold as safe havens during uncertain periods. We expect this investment trend to persist, barring an unforeseen economic shock, which we consider unlikely in the coming weeks.

AI Momentum: In a strong signal that the AI capital expenditure cycle still has considerable momentum, chipmaking giant TSMC has raised its revenue outlook. As the world’s largest semiconductor foundry, this upgraded guidance reflects TSMC’s confidence that its corporate clients will continue spending heavily to build out their AI infrastructure. This bullish move is likely to bolster confidence across the tech sector, which has been facing growing concerns about the sustainability of its recent gains.

US-India Agreement: India and the US have improved their trade relations following an agreement for India to end its purchases of Russian oil. The White House announced that India will cease buying Russian crude at a future date but did not specify a timeline or confirm whether the US will become the replacement supplier. This agreement likely paves the way for reduced trade tensions, which had escalated after the US imposed secondary tariffs and immigration crackdowns affecting sectors with a high concentration of Indian workers.

Farm Bailout: The White House is developing a bailout plan to assist farmers facing severe financial pressure from rising trade tensions, which have caused declining sales and increased costs for essential inputs like fertilizer and equipment. While the government shutdown has complicated the rollout of these funds, the administration appears determined to provide relief. This support is critical as failure to do so could have significant ripple effects across the economy, potentially leading to reduced agricultural supply and higher food prices nationwide.

No Confidence Avoided: French Prime Minister Sébastien Lecornu has survived a no-confidence vote. He managed to secure the necessary support from the Socialist party by agreeing to delay the contentious 2023 pension reforms until after the 2027 elections. This political compromise is expected to pave the way for the approval of a budget that has strained the government and weighed on France’s credit quality. The government hopes this will help it avoid another credit rating downgrade, which could trigger forced selling of its sovereign debt.

Private Credit Concerns: JPMorgan Chase CEO Jamie Dimon sparked an uproar by suggesting there may be more “cockroaches” hidden within the private credit market. His comment has intensified scrutiny of the sector, which is already facing pressure from the collapse of Tricolor, the bankruptcy of First Brands, and rising delinquencies on subprime loans. While there are no immediate signs of systemic trouble, concerns are mounting that further pain may emerge. However, we suspect the broader financial system is likely to be insulated from a significant fallout.

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