Daily Commentary

MarketMinder’s View: It took 25 years of talks, but the EU finally has a free-trade deal with South America’s “Mercosur” bloc (Brazil, Argentina, Paraguay and Uruguay). It isn’t quite over the finish line, as it needs parliamentary ratification, but European Commission President Ursula von der Leyen secured the ok from a majority of EU heads of state, clearing the way for her to sign the pact next week. Like all trade deals, we don’t expect this to be an immediate boon for either side. Trade pacts take effect slowly, with gradual phase-in periods, which saps surprise power and delays the economic effects. To us, this one is significant more for what it shows: The US’s tariffs are motivating the rest of the world to push for freer trade among themselves—not retaliation and protectionist actions. The article details some of this (which reminds us, MarketMinder is politically agnostic, preferring no politician nor any party and assessing developments for their economic and market implications only), showing how reality on the trade front has shaped up far better than most expected when President Donald Trump announced sweeping tariffs last April. US trade may have more costs and friction, but trade getting freer elsewhere is a long-term positive and perhaps a near-term sentiment booster as positive surprise continues.

MarketMinder’s View: In happy—if backward-looking—economic news, Japan’s consumer spending rose unexpectedly in November, with a 2.9% y/y burst defying expectations for a -0.9% drop. The month-over-month print was even better, with spending up 6.2% (yes that is a seasonally adjusted figure), beating expectations for 2.7%. Now, this isn’t necessarily the start of a hot trend, as “an internal affairs ministry official said one-off, volatile categories, including automobile-related expenses, contributed to the November upside surprise.” But spending in core categories was healthy too, perhaps indicating Japanese domestic demand is recovering from its Q3 slump. Markets are looking well beyond that to the next 3 – 30 months, of course, but confirmation of a recovery can help sentiment and show stocks haven’t been pricing in hot air.

MarketMinder’s View: One of this year’s big items to watch is the UK’s forthcoming legislation to reform its trade relationship with the EU, which some characterize as an attempt to bring the Brexited nation into “closer alignment” with its former mothership. This is a pretty contentious issue, given sentiment toward Brexit remains deeply split, and it carries some uncertainty. Prime Minister Keir Starmer is now attempting to clear some of that uncertainty, with 10 Downing Street reportedly leaking that it won’t port EU financial regulations over to London. While doing so might seem beneficial in theory to improve market access, there isn’t much indication this is a glaring need. Focus instead is shifting to making London more competitive, which the financial services industry, largely anti-Brexit in 2016, thinks reverting to EU regulations runs counter to. Moreover, any sweeping rule changes mean rising uncertainty, which discourages risk taking. Among financial firms, “few are keen to face another period of uncertainty and potential unwinding of post-Brexit changes. UK regulators have been under pressure to dismantle a series of EU-era rules that politicians argue have hampered competitiveness and growth. Subsequent changes have led to larger banker bonuses, lower capital levels and looser listing rules for companies seeking to float in London.” Setting aside the political and social sides of Brexit, the more this legislation gets sanded down, the less it spikes uncertainty, which would likely be to stocks’ benefit.