by Patrick Fearon-Hernandez, CFA, and Thomas Wash

[Posted: 9:30 AM ET] | PDF

Our Comment today opens with news of an important video showing flight operations aboard China’s newest aircraft carrier. We discuss the investment implications of this Chinese success, and we recommend watching the video. We next review several other international and US developments with the potential to affect the financial markets today, including a major international institution’s forecast of more aggressive interest-rate cuts in the US and a potential hiccup in the US’s booming private-credit market.

China: State media yesterday released what appears to be the first-ever video of flight operations taking place aboard China’s new, domestically produced aircraft carrier, the Fujian. The video shows various aircraft types, including airborne warning and control system (AWACS) planes and J-35 jet fighters, taking off from the deck of the carrier with the help of its advanced electromagnetic catapult and then landing back on the deck. The flights were apparently practice sorties ahead of Fujian’s planned commissioning near the end of 2025.

• We think the video was clearly aimed at sending a message that China can now replicate US-style power projection anywhere its fleet can sail. However, Fujian and China’s other two carriers are smaller than US carriers. In addition, China’s carriers run on diesel fuel, as opposed to the US carriers’ nuclear propulsion, which limits the capabilities of the Chinese carriers. The Chinese will likely also need considerable time to reach the operational expertise and efficiency of the US carrier fleet.
• All the same, Fujian and future advanced carriers are likely to help China even the balance of military power in the Asia-Pacific region. That means China will probably become increasingly confident that it can take control of Taiwan or achieve other territorial goals in the region while deterring intervention by the US and its allies.
• For investors, China’s rising military power and increasing ability to deter US and allied military pressure could be a double-edged sword. On the positive side, finely balanced military power could force Washington and Beijing to avoid war, precluding a conflict that would likely devastate each side’s economy and financial markets. On the negative side, China’s rising military ability could help it to eventually displace the US as the global hegemon and gradually constrict US economic power and financial performance.

China and Hong Kong: Super Typhoon Ragasa is slamming into the southern provinces of China today, forcing hundreds of thousands of people to evacuate their homes and leading to hundreds of flight cancellations. The storm is the strongest typhoon to hit the area so far this year and is expected to cause significant damage and temporarily disrupt economic activity. The storm could potentially lead to the shutdown of the Shanghai and Shenzhen stock markets today, but the Hong Kong market is expected to stay open.

OECD-US Monetary Policy In its interim economic outlook published today, the Organization for Economic Cooperation and Development said slowing US economic growth could justify the Fed cutting its benchmark fed funds interest rate to as low as 3.25% by next spring. That would imply three 25-basis-point rate cuts in the coming six months or so, which is slightly more than Fed policymakers and many outside observers have projected.

• The OECD’s projection for faster rate cuts is also consistent with our view that personnel changes on the Fed’s policymaking board will likely result in faster rate cuts next year.
• Faster rate cuts would likely give a boost to the US economy in 2026 and support further price gains for assets ranging from stocks to gold. However, the rate cuts could add more downward pressure to the dollar.

Sweden: The Riksbank today unexpectedly cut its benchmark short-term interest rate by 25 basis points to just 1.75%, its lowest level in about three years. According to the central bank, the decision reflected continued weak economic growth, which the policymakers saw as likely to bring consumer price inflation down in the coming months. The policymakers also signaled that they did not foresee any further rate cuts going forward.

Denmark-Norway-Russia: Major airports in Copenhagen and Oslo were forced to close for several hours late yesterday after large drones were spotted in or approaching their airspace. According to Danish police, the drones came from several directions, and their size and flight patterns suggested they were sent by a “capable operator.” The incidents show how Europeans are increasingly on edge after Russia’s recent jet fighter and drone incursions into the airspace of Poland, Romania, and Estonia, potentially setting the stage for a market-shaking miscalculation.

France-Israel: At the UN General Assembly yesterday, French President Macron officially recognized Palestine as a state, a day after the UK, Portugal, Canada, and Australia did the same. With the General Assembly continuing this week, more major countries could follow suit, further isolating Israel in an attempt to punish it for its aggressive war against the militant Hamas government in Gaza.

US Military: The US Army has confirmed that it will cut 6,500 of its 30,000 active-duty aviation jobs over the next two fiscal years as it transitions away from its iconic helicopter systems to unmanned platforms. The move is the latest sign of how drones are becoming key weapon systems for militaries around the world. However, it still isn’t clear to what extent major publicly traded defense contractors will benefit from the trend.

US Pharmaceutical Industry: At a White House event late yesterday, the administration warned that acetaminophen, the active ingredient in Tylenol, is a potential cause of autism. Health and Human Services Secretary Kennedy also said this department would update the warning label for acetaminophen and conduct an awareness campaign about the potential link to autism, despite a range of scientific studies that, taken together, have shown no link.

• Tylenol maker Kenvue’s stock price cratered about 7.5% ahead of the announcement, bringing its total decline to about 21% over the last month.
• The steep decline in Kenvue’s stock price illustrates the regulatory risk with many healthcare and consumer products companies as the administration rapidly shifts US health policy.

US Private Credit Industry: Private credit firms today are rattled by the sudden bankruptcy of privately held auto parts firm First Brands, which grew rapidly in recent years using debt-fueled acquisitions. Up to $10 billion of the company’s private loans and financial obligations are reportedly plunging in value amid uncertainty over what the lenders might get from the bankruptcy proceedings. The situation could test the resiliency of the booming private-credit industry and potentially have spillover effects for the rest of the financial markets.

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