U.S.—China Trade War Again?
Chart of the Week:
China Tightens Rare Earth Controls; U.S. Retaliates With 100% Tariffs
On Oct 9, China announced expanded restrictions on rare earth exports. Any product containing over 0.1% of Chinese-origin rare earth materials, or produced using Chinese mining or refining technologies, will now be subject to export controls—effectively bringing the entire rare earth supply chain under regulation. In response, the U.S. imposed 100% tariffs on Chinese imports, signaling a renewed escalation in the trade war.
Market Recap 1:
Trade Tensions Weigh on Market Sentiment; Defensive Sectors Outperform
Renewed U.S.-China trade frictions drove a rebound in the VIX and triggered a sharp pullback in U.S. equities before easing as Trump adopted a softer stance. Meanwhile, the U.S. government shutdown has entered its third week, underscoring the lack of bipartisan agreement on a temporary funding bill. Beyond delayed economic data releases, Trump also announced plans to cut federal staff, adding uncertainty to the economic and market outlook.
Market Recap 2:
Bond Yields Decline as Gold Extends Gains; Euro and Yen Strengthen
Trade tensions have driven a flight to safety, boosting demand for government and investment-grade bonds and pushing yields lower, with prices rebounding. In contrast, sentiment toward high-yield debt remains cautious amid signs of global economic slowdown.
What’s Trending:
End of LDP—Komeito Alliance Clouds Takai’s Stimulus Agenda
Japan’s ruling coalition between the LDP and Komeito has ended after 26 years. Markets had anticipated that Sanae Takai would pursue aggressive monetary easing, reversing Shigeru Ishiba’s hawkish stance and
boosting equities. However, renewed U.S.—China trade tensions and domestic political uncertainty erased part of the gains, unwinding the “Takai trade”.
In Focus 1:
European Banks’ Stronger Balance Sheets Drive Outperformance
European banks have strengthened their fundamentals through several internal optimizations:
- (1) Cost control – Major banks have reduced operating expenses via digital transformation and branch closures, allowing revenue growth to outpace costs and lowering the cost-to-income ratio.
- (2) Revenue diversification – Beyond net interest income, banks have expanded fee-based businesses
such as wealth and asset management, providing stable revenue streams when markets perform well
and investor demand rises. - (3) Higher capital adequacy – The European banking system now holds stronger capital buffers than U.S. peers, with the gap widening further. This not only enhances resilience to economic shocks but also supports dividend payouts and share buybacks, boosting shareholder returns.
In Focus 2:
Economic Recovery and Low Policy Rates Support European Bank Earnings and Valuations
Market expectations for Europe’s economic outlook have improved notably, reflecting reduced uncertainty after tariff negotiations and healthier fiscal conditions across major economies. Germany is set to lead the shift from fiscal tightening to expansion, providing strong support for future growth momentum.
