Master Of The House

By Benjamin Picton, senior markets strategist at Rabobank

Welcome, Monsieur, sit yourself down,
And meet the best innkeeper in town…

Markets last week were understandably in risk-on mode in reaction to the sit-down meeting between Presidents Trump and Xi on the sidelines of the APEC conference. The US agreed to cut fentanyl-related tariffs in half to 10ppts in return for cooperation from China on stemming the flow of precursor compounds into the United States. China agreed to delay the imposition of export controls on critical rare earths for one year, and to resume purchases of US soybeans to the tune of 12mmt this season and 25mmt in each of the next three years. Both sides agreed to delay the introduction of port service fees and the US – crucially – made no commitments to provide China with access to NVIDIA’s advanced Blackwell chips or revise its position on Taiwan. On the latter, Donald Trump yesterday told 60 Minutes that the topic never came up because “they know the consequences” if China was to attack Taiwan.

Treasury Secretary Scott Bessent later said that China had made a “real mistake” by threatening to withhold rare earths from foreign countries. “It’s one thing to put the gun on the table. It’s another thing to fire shots in the air.” He also chided the “grumpy old men” of the Wall Street Journal editorial board for thinking that China would not use the leverage over rare earth supply chains that it had spent 25 years building while the US was “asleep at the switch”.

Master of the house, doling out the charm,
Ready with a handshake and an open palm…

The US has been quick to capitalize on the sense of urgency created by China’s willingness to exploit its dominant position. Bessent says that the US has now rallied its allies to “get out from under the sword” that China holds over other countries by building out their own rare earth supply chains.

Trump has recently inked deals with Australia, Japan, Thailand, Malaysia, Cambodia and Vietnam that are designed to create alternative sources of supply. The US may yet conclude a similar deal with Brazil – which holds the world’s second-largest rare earths deposits after China – after President Lula last week intimated that his country was on the cusp of concluding a trade deal with the United States. Brazil is seeking ways to convince the USA to reduce its punitive 50% tariff, but progress on a deal may be hampered by Lula’s perceived closeness to China and policy differences over Venezuela, where Trump told 60 Minutes that the Maduro regime’s days are numbered.

For its part, the EU is also exploring the potential for rare earths supply deals with Australia, Canada, Greenland, Chile, Kazakhstan, Uzbekistan and Ukraine while also working on plans for domestic processing, joint purchasing and stockpiling of materials.

Glad to do a friend a favor,
Doesn’t cost me to be nice,
But nothing gets you nothing,
Everything has got a little price!

Trump also used meetings with the leaders of Japan and South Korea to extract commitments to provide capital investment into beefing-up US shipbuilding capacity, with commitments made in return to facilitate the construction of nuclear-propelled submarines for South Korea. We’ve previously described these kinds of investment commitments as a ‘reverse Marshall Plan’ to recapitalize the US industrial base (as the US did for Europe after WWII), but the intent goes well beyond blue-collar job creation for the MAGA base. The focus on shipbuilding is aimed squarely at closing the current production gap with China and perhaps allowed Trump to make concessions on port service charges in his subsequent meeting with President Xi.

In a similar vein, the FT yesterday reported that Trump administration officials are discussing ways to encourage other countries to adopt the US Dollar as their official currency to counter China’s efforts to internationalize the Renminbi and erode the Dollar’s position as world reserve currency (as we wrote about last week). Argentina is seen as an obvious candidate for Dollarization by some, given its history of currency crises, friendly government and recent history of financial bailouts orchestrated by the US Treasury.

Prospective homebuyers in Australia might also be attracted to the idea of taking responsibility for maintaining the purchasing power of the currency out of the hands of the RBA. Figures this morning revealed that Aussie house prices are now growing at the fastest pace in more than two years following three RBA rates cuts and some fiscal pump-priming dressed up as help for first homebuyers. Perhaps Dollarization down under wouldn’t be such a bad idea?

Charge ‘em for the lice, extra for the mice,
Two percent for looking in the mirror twice…

Meanwhile, UK Chancellor Rachel Reeves is reportedly considering a 20% ‘settling-up’ tax on the assets of people emigrating from the country. The new tax would reportedly raise about £2bn/year and would apply to the sale of assets such as company shares. The Guardian quotes an unnamed government source claiming that Treasury is currently modelling the policy ahead of the November budget. The source is apparently stressing that no decisions have yet been taken, but news that the policy is being considered surely raises the risk of capital flight as wealthy Britons are further incentivized to get their money out of the country before the Exchequer can change the rules.

The search for new sources of revenue is becoming desperate as the FT last week reported that the Office of Budget Responsibility is likely to downgrade its forecast for trend productivity growth by approximately 0.3 percentage points, thereby blowing a £21bn hole in the budget. The matter is further complicated by Labour’s manifesto pledge not to increase any of the three big taxes (income tax, VAT or national insurance), and the inability of Reeves and PM Starmer to secure backbench support for relatively modest cuts to the welfare budget earlier in the year. Consequently, the UK is potentially facing something of a Laffer curve moment as the unstoppable force of government spending faces the immovable object of fiscal reality.

When it comes to fixing prices,
There are a lot of tricks I knows…

While the UK considers a soak the rich strategy to deal with its budget constraints, New York City looks set to elect Zohran Mamdani as Mayor. Mamdani has run on a left-wing populist platform of price controls for rents, groceries and childcare, which he says will be funded by taxing corporations and the 1%. Donald Trump has been critical of Mamdani, describing him as a “communist” in his interview with 60 Minutes, while New York Governor Kathy Hochul (a Mamdani supporter) has prompted questions about the likelihood of the Mamdani program actually being implemented after telling the ‘Raging Moderates’ podcast that she is “concerned about outmigration of people who are the ones who are supporting our budget.”

Perhaps the Laffer curve is about to be tested in NYC, too?