Daily Commentary

MarketMinder’s View: With all the hoopla over America’s alleged trade war with Canada, Ottawa is making plenty of moves to strengthen ties with its non-US partners. The latest development: “[European Commission president] Ursula von der Leyen has endorsed [Prime Minister] Mark Carney’s pitch for Canada to become an ‘associate member’ of the EU ...” Now, there is a notable sticking point: “The EU has no framework for ‘associate membership’, meaning von der Leyen’s proposal would need the unanimous approval of the bloc’s 27 member states.” Meanwhile, “An EU-Canada free trade deal, known as Ceta, is still not ratified by 10 EU member states, including France, Italy and Poland, nine years after being signed. Several EU member states have suggested ratification should first be completed before embarking on new steps. Ceta is in force provisionally, meaning tariff cuts, customs rules and market access for goods and services already apply. But with elections due next year in France, Italy and Poland, the prospects for ratification in those member states are dimming.” So we doubt a deeper Canadian association with the EU brings any tangible benefits soon, on top of what it already enjoys through CETA. But we think this does highlight how trade globally is getting freer despite highly publicized tariff squabbles. That said, Canada is unlikely to find a trade partner that will usurp the US any time soon, given proximity and entrenched trade ties. But this is somewhat interesting in the sense that if you get a thawing in North American trade relations plus this prospect in the longer term, you get a very connected Canadian economy indeed.

MarketMinder’s View: We wrote about the titular bill in July, and its near passage—which US President Donald Trump is expected to push through shortly—isn’t surprising. But we think it is noteworthy enough to highlight given the added trade risks it could present. “The legislation would allow Trump to impose tariffs up to 100% on countries including China and India, that are within the top five purchasers of Russian crude oil or gas. Money from oil sales is critical to funding Russia’s war effort. It would also put sanctions on Russian leaders, officials and financial institutions and expand sanctions on Iran.” The critical verb here is “allow” since the president already has broad unilateral trade authority. The bill grants the office more legislative backing for enacting punitive tariff policies on countries deemed hostile to US interests by executive order. This could raise risk and uncertainty—especially if put into practice—but that isn’t guaranteed, and it isn’t like the president couldn’t use the office’s powers to implement limited trade measures before (subject to court challenges). This would smooth the process for a narrow—but potentially important—set of circumstances. Worth investors being aware of.

MarketMinder’s View: As this article notes upfront, headlines often go into overdrive over arbitrary round number milestones—$1 trillion market caps, Dow 10,000, etc.—but there is nothing magical about them. So it goes with 5.0% 10-year Treasury yields, which some imply could pop the “AI bubble” or cause US stocks to struggle more generally. But why 5.0% and not, say, 4.9% or 5.1%? Moreover, we have seen this movie before—and not too long ago: “Why can’t this economy and market handle a breach of 5%? Yields last eclipsed that level in 2023, accompanied by even more frightening commentary. Pessimists believed at the time that the economy was being sustained by a fading cash cushion left over from pandemic transfers and years of involuntary saving, and that we’d face a reckoning once the cash ran out. Projections of a late 2023 or early 2024 cash cliff never panned out. Rather than a meltdown, the intervening years have seen corporate profits, household wealth and the S&P 500 Index all surge to new records; debt service ratios remain relatively low; and the broad economy produce above-average growth.” For many, the main financial significance of higher yields is they translate into 7%+ mortgage rates, making it harder to buy a home. But again, housing affordability issues aren’t new—and haven’t stopped the economy or stocks. To see why, the piece helpfully tabulates household consumption items that aren’t interest rate sensitive (think healthcare, food, fuel and utilities)—over 60% of consumer spending. Seen in this light, 5% yields aren’t the looming threat many make them out to be. “Higher market rates are, however, just as much a reflection of strong economic growth at the aggregate level—a perfectly normal feature of a humming, if uneven, economy. Ten-year yields averaged about 5.8% in nominal terms from about 1990 through 2007, and today’s 2.6% inflation-adjusted, or real, yields look close to average. The difference is that we’ve emerged from the anomalously weak 2008-2021 period in which nominal growth was uniquely low and global central bank policy was extraordinarily accommodative.” For more on why the end isn’t nigh, please see last month’s commentary, “Why Treasurys Aren’t in Trouble.”