by Patrick Fearon-Hernandez, CFA, and Thomas Wash

[Posted: 9:30 AM ET] | PDF

Our Comment opens with our analysis of China’s recent military parade and its implications. We then turn to pivotal global developments, such as the ongoing global bond sell-off, the potential digitization of gold, and Moody’s optimistic outlook on Europe’s private credit markets. Finally, we conclude with an overview of other essential factors shaping the global financial landscape.

China Parade: During its military parade, Beijing unveiled a new arsenal of domestically developed weapons designed to project power and signal its military readiness. The display was a clear signal to the world that China believes it can fend off any attack and possesses the capability to take Taiwan by force if necessary. However, while the technological advancements were impressive, many analysts remain unconvinced of China’s overall military capabilities. During the parade there was a sell-off in Chinese defense stocks.

• The exhibition demonstrated key breakthroughs in Chinese military tech, particularly in unmanned platforms such as robotic ground vehicles, four-legged drones, and uncrewed naval and aerial vehicles, though it is uncertain how many are fully operational. The display also served to flex China’s advanced capabilities in other domains, including air defense systems, directed-energy weapons (lasers), and its world-leading hypersonic missile program.
• Of the five key categories in which China would need to demonstrate military superiority — long-range strikes, air dominance, amphibious operations, joint-force coordination, and space/counterspace — China leads the US in only two: long-range strikes and space/counterspace. While China could still inflict serious damage in a conflict, the balance of power suggests the US would likely prevail in a direct confrontation.
• The parade also served as a powerful demonstration of China’s growing network of strategic partnerships. The presence of Russian President Vladimir Putin and North Korean leader Kim Jong Un alongside Chinese President Xi Jinping was a striking visual symbol. This show of unity signals a deepening alignment among the three countries, which has been particularly apparent in the context of the war in Ukraine, where North Korea has provided military aid to Russia, and China has offered crucial economic support.
• Although we do not view a military conflict between the US and China as imminent, the significant posturing between the two nations creates a tangible risk of escalation. As this strategic competition intensifies (both militarily and economically), we anticipate that companies aligned with national priorities (e.g., defense, semiconductors, AI, and cybersecurity) will be key beneficiaries. Concurrently, this elevated geopolitical friction is likely to bolster demand for traditional safe-haven assets, such as gold.

Long Bond Sell-Off: A significant long bond sell-off is underway, causing global bond yields to rise as markets begin to price in the dual risks of elevated government debt and potential stagflation. This upward pressure is primarily driven by a fundamental shift in supply and demand, where central banks are actively reducing their bond holdings through quantitative tightening (QT) just as governments are significantly increasing debt issuance to fund fiscal deficits.

• Rising bond yields are crippling tech stocks by dramatically increasing their cost of capital. These companies have been rewarded by the market for their potential to generate substantial future profits. However, they are now under scrutiny for the immense scale of their capital expenditures, which threaten to diminish future investor returns. This problem is most acute for companies funding massive data center builds for AI and cloud services.
• We are seeing early signs of a shift toward a regime of fiscal dominance, where central banks may be forced to take a more active role in bond markets to keep government borrowing costs manageable. The primary risk of this policy is that it could require central banks to subordinate their inflation mandates. While this would likely be negative for long-duration bonds, it could simultaneously provide a source of increased demand for short and intermediate-term government securities.

Digital Gold: Efforts are underway to create digital gold. This initiative, often referred to as “pooled gold interest,” would enable banks and investors to buy and sell fractional ownership of physical gold, a significant move toward greater accessibility and liquidity. This push for modernization comes as past efforts to create gold-backed stablecoins have failed to gain widespread adoption. That said, new innovations in digital gold ownership are a response to the persistent demand for the asset.

Chrome Stays: A judge ruled against potentially breaking up Google, arguing that the rise of generative AI has weakened the case regarding the company’s monopoly power. Prior to the ruling, regulators had considered forcing a sale of Google’s Chrome browser business due to concerns over its market dominance. The decision highlights how emerging technologies like AI are rapidly reshaping competitive landscapes, challenging traditional antitrust assumptions, and potentially protecting incumbent tech giants from government intervention.

European Credit Markets: Moody’s predicts that the European Union’s private credit markets are on track to rival those of the US. In a new report, the agency states that the EU’s push for strategic autonomy in a fragmenting global economy is a key growth driver. This potential, however, is currently constrained by persistent regulatory and legal challenges. The analysis adds to a growing body of evidence that the rising investor appetite for European assets is not solely a function of a weakening US dollar.

EU-Mercosur: European Union officials are seeking to reassure farmers that they will not be adversely affected by a new trade deal with South American partners. The agreement, announced earlier today, is designed to help the EU reduce its reliance on the United States as an export destination and broaden its overall trade reach. Estimates indicate that the deal could absorb approximately one-third of the export volume the EU is forecast to lose following its separate trade agreement with the US.

Retailers Report: Recent earnings reports from Macy’s and Dollar Tree provide a nuanced view of the American consumer. Both companies posted strong earnings but offered a cautious, mixed outlook on future consumer spending. Macy’s cited headwinds from new tariffs and expressed wariness about the fickle nature of shoppers, though it expressed confidence in its ability to manage these risks. Similarly, Dollar Tree conveyed a mixed perspective on the upcoming quarters due to tariff related costs. The strong consumer is key for the ongoing market rally.

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