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: Please note MarketMinder is nonpartisan, preferring no politician or political party over another. However, this in-depth review of Italian Prime Minister Giorgia Meloni’s government, in power since September 2022, raises some key themes that investors benefit from internalizing. One, politicians on the campaign trail and politicians in office are different beasts—the former can be bombastic and radical-sounding when trying to win votes, while the latter frequently moderate once in power. “In office, Meloni and her League finance minister Giancarlo Giorgetti have displayed an unexpectedly zealous commitment to fiscal discipline. They have cut Italy’s budget deficit to the 3 per cent of GDP target set by the EU, from 8 per cent when they took charge. … In opposition, the right-wing parties in Meloni’s coalition said that ‘austerity was the worst thing a government can do’, points out economist Veronica De Romanis, a former treasury official who is now a professor at Rome’s Luiss University. ‘But if you look, the current government has imposed the biggest dose of austerity, raising taxes and cutting expenditure.’” Which brings us to the second theme: Politicians have limited political capital, and when elections loom (Italy’s next general election is scheduled for 2027), they are less likely to push major structural reforms that create winners and losers and instead focus on keeping their constituents on board. “But exercises in cutting wasteful expenditures would inevitably put special interest groups on the defensive. That helps explain why Meloni, despite her coalition’s comfortable parliamentary majority, has mostly opted for straight budget cuts after initially shutting down an unsustainable construction bonus, and suspending a controversial welfare scheme.” These themes aren’t unique to Italy, and investors can apply the lessons here to their political analysis elsewhere as they search for investment opportunities. For more, see our December commentary, “Market Lessons From Europe’s Political Dramas.”