Daily Commentary

MarketMinder’s View: This piece mentions many individual companies, and as always, MarketMinder doesn’t make individual security recommendations. We are exploring the broader theme only. That theme: Nonfinancial companies are scrambling to launch financial arms. “Most of the new applications are for national trust charters. Trust banks differ from full banks in that they generally cannot take deposits or make loans. Instead, trusts charge fees for the safekeeping of customer assets. Since they don’t take deposits, they typically aren’t insured like full banks. So far this year, there have been 12 applications for trust charters, more than any in at least the preceding eight years, according to data compiled by Klaros Group, a financial-services advisory firm.” A lot of this ties to stablecoins, with speculation retailers could be launching these financial wings in order to build their own payment systems, theoretically sidelining banks and credit card companies. This is raising a lot of concerns about financial stability, and investors of a certain vintage might be getting flashbacks to when large Industrials companies had their own finance arms pre-2008. To us, this raises a very simple point: A big reason companies are interested in starting quasi-banks is that it is pretty darned hard to become an actual bank, thanks to the litany of well-intended regulations aimed at preventing a repeat of 2008’s global financial crisis. But the public’s appetite for financial services isn’t stagnant, and the market will always do its best to raise supply to meet demand. If regulations prevent that supply from building in the traditional banking world, then it will logically build outside of that. We aren’t making a statement about the level of risk in these endeavors, which is unknown given how speculative it all is. But it is a good reminder that derisking the financial system is impossible. 

MarketMinder’s View: While the world waits to see whether Supreme Court upholds President Donald Trump’s blanket and reciprocal tariffs, the administration continues plowing forward with deals. Thursday brought new deals with Argentina, Guatemala, El Salvador and Ecuador and rumblings about broad food tariff exemptions. And now we have a deal with Switzerland to lower the tariff on Swiss goods from 39% (apparently, one percentage point per each billion dollars of trade deficit) to 15%. Swiss corporate executives were key to the deal, which reminds us, MarketMinder doesn’t make individual security recommendations and highlights this for the broad story only. Concessions include Swiss pledges to increase manufacturing in the US, some of which was already underway, like pharmaceuticals’ plans to invest (one of the pharma firms named herein owns a US subsidiary it acquired years ago). But as with all the recent deals, the window-dressing likely matters less than the lower tariff rate, though the fact remains that tariffs are still higher than a year ago. Still, this helps ease uncertainty, though if the Supreme Court strikes down the tariffs, that raises questions about deals’ staying power. These question marks probably continue weighing on sentiment for a spell, although we doubt there would be much more than a fleeting effect on markets (if any), considering how widely watched and discussed those questions are even now, when we don’t know when the ruling will come.

MarketMinder’s View: Well lookie there, UK Chancellor of the Exchequer Rachel Reeves apparently won’t raise income tax rates after all in this month’s Budget, and it is all due to the Office for Budget Responsibility’s (OBR’s) unique role. The OBR’s fiscal forecasts are the driving force behind austerity, as the government is legally required to be on track to balance the budget within five years. But that also gives the OBR the responsibility of scoring fiscal policy, meaning, projecting tax proposals’ revenue in order to make its five-year forecast. Reeves reportedly told the OBR she planned to raise income tax rates by two percentage points while cutting employee National Insurance Contributions by the same amount, a round-about means of hiking taxes chiefly on higher earners. “However, the OBR ended up concluding it would not generate as much money as expected, sources said. The Chancellor is said to have been convinced to drop the idea by the OBR’s assessments, as well as the forecaster saying more money was coming into the Treasury thanks to improved wage growth.” So on Wednesday, “the final day for confirming major measures before the November 26 Budget - the Treasury formally told the OBR that income tax rates will not rise. Instead, the freeze on income tax thresholds is expected to be extended to the end of the decade, and a series of other smaller tax raids will be announced.” That would make the Budget more of the same, which markets are used to. Now, politics also played a big role here, which the article highlights. As always, we are politically agnostic, preferring no party nor any politician and assessing developments for their potential economic and market effects only. In this case, intraparty gridlock seems to have contributed to these policies’ getting watered down, which is part and parcel of reality going better than expected. That is how stocks climb the wall of worry, which UK stocks continued doing throughout the Budget formation process. For more, see this week’s commentary, “Deep Dive: How His Majesty’s Treasury Is Setting Budget Expectations.”