Plugging One Goal With The Other

By Elwin de Groot, Head of Macro Strategy at Rabobank

Markets were in a risk-off mood yesterday, led by a sell-off in tech shares and growing investor concerns about valuations and policy risks. The US made the books with the longest government shutdown in its history. The S&P lost 1.2%, the Eurostoxx 50 index fell 0.4%. The risk-off tone resulted in lower yields across the board, albeit modestly (1-3 bp in US/Europe). Remarkably, Bitcoin plunged and gold prices dipped as well, an unusual move suggesting broader repositioning rather than just a classic safe-haven bid.

Talks between EU environment ministers yesterday confirmed that the bloc remains committed to its headline goal of cutting greenhouse gas emissions by 90% by the 2040, but with greater flexibility built in. This flexibility introduces a higher risk that targets may not be fully met, or not within the set timeframe. Ministers agreed to include so-called brake clauses, which would allow targets to be adjusted if natural carbon sinks underperform, and to permit offsetting, meaning that part of the reductions could come from foreign carbon credits. They also discussed enabling emissions to be traded between domestic sectors such as industry and agriculture.

This shift in tone is not surprising and reflects the recalibration of priorities between economic and environmental goals advocated in the 2024 Draghi report on competitiveness. That report did not call for abandoning climate objectives, but it urged integrating decarbonization with competitiveness through a “Clean Industrial Deal” and a major investment push. The EU intends to present a unified view next week at the COP30, but many details remain unresolved and attention may already be shifting toward another critical issue: raw material supply security.

On that front, tensions between China and the Netherlands –and by extension the EU– remain unresolved. The US announced on Saturday that China would allow Dutch chipmaker Nexperia BV to resume shipments from its Chinese facilities, easing fears of disruptions to auto production. However, China escalated pressure yesterday. Beijing criticized the Dutch government’s “unilateral” actions and urged it to stop interfering in Nexperia’s internal affairs and find a constructive solution.

The broader economic impact on European or even global industry is still hard to gauge at this stage. Nexperia chips are widely used, especially in automotive applications. Since Nexperia halted wafer exports to China, supply disruptions could also affect production of consumer goods there. Automotive experts note that substitutes exist, but switching would take weeks at minimum – raising the risk of temporary production halts given low inventories in Europe. Some companies, such as Robert Bosch GmbH in Germany and Honda in the US, have already announced production reductions, while others, including Volkswagen AG, have warned they may have to follow suit.

There is little precedent for assessing the impact. The post-COVID chip shortage, which partly caused a 40% decline in motor vehicle production between November 2020 and August 2021, offers some perspective. That shortage stemmed from a perfect storm of factors: surging demand for consumer electronics during lockdowns, automakers cancelling chip orders early and then scrambling as demand rebounded, factory shutdowns, and staffing shortages at semiconductor fabs, natural disasters such as droughts in Taiwan and fires in Japan, and later raw material shortages linked to the Russia–Ukraine war.

If so, it probably requires more financial resources from governments as well, which are in short supply, as the IMF warned yesterday. The institution argues for “a rethink of the role of government […] in some countries” and notes that “if reforms and medium-term consolidation are insufficient, then more radical fiscal measures could include reassessing the scope of public services and other government functions, potentially affecting the social contract.”