Defending down under

 

Australia has committed to increase defence expenditure.

Last week, the US and Australia signed a deal to develop key rare earth and critical mineral deposits with both countries committing $1bn each over the next six months for joint projects. The West is currently playing catch up, as China dominates the market and controls around 70% of rare earths mining and 90% of the processing capacity.

Rare earth minerals have become a vital ingredient in many high-tech goods and are found in computer chips and cars as well as military defence equipment.

The agreement comes as China tightens control over global rare earth supplies. The trilateral Aukus security pact, agreed in 2023, which will see Australia acquire nuclear submarines was also discussed. Trump downplayed reports of delays saying, ‘we’re going full steam ahead, building.’

These agreements come as tensions mount in the South China Seas after the Australian government accused a Chinese fighter jet of deploying flares near one of its maritime patrol aircraft.

Australia is having to walk a political tightrope by maintaining its trading relationship with China, a big consumer of the country’s natural resources, while deterring Chinese aggression. A review by the Australian government found the emergence of ‘major power strategic competition’ in the Pacific, marked by an increasingly ‘ambitious’ China.

Australia’s PM Anthony Albanese has said he will lift defence spending by A$70bn in the coming years. The largest investment since World War 2 to counter the Chinese threat. Analysts expect defence spending to rise to 2.25% of GDP by 2028 and climb to 3% within a decade as the Aukus security pact with the UK and US kicks in.

Meanwhile, Trump appears desperate to force Ukraine into a peace deal so that the US can focus on China. It is ironic that Trump is demanding US allies boost defence spending, yet at the same time has hit some of the closest partners, including the UK and Australia, with a 10% trade tariff!

The UK is in a similar position to Australia as a member of Aukus yet, must also walk a tightrope given its trading relationship with China. This is currently playing out in the political fallout from the collapsed China spy case and delayed decision for approval of China’s application for a new super-embassy in London. Beware the Chinese dragon?

What have we been watching?

Markets ended last week in a positive mood with renewed confidence that the US and China will reach a trade deal, after negotiations set the framework for President Trump and Xi Jinping to finalise an agreement. The mood was also helped by softer-than-expected US inflation data alongside upbeat US corporate results. This translated into good performance across global equity markets with US equities and the UK’s top 100 companies hitting an all-time closing high. Investors face a busy week ahead with interest rate decisions from four of the G7 central banks as well as results from five of the ‘Mag7’ in the US which represent 25% of the S&P500 index by market value.

China’s Ministry of Commerce said that the US and China had reached an initial consensus on a range of issues including an extension of the tariff truce, fentanyl, agricultural trade, export controls and shipping levies. In turn, US Treasury Secretary Scott Bessent suggested that China would defer its new rare earth export controls for one year and make substantial purchases of US soybeans, while the threat of 100% tariffs on China was effectively off the table. The agreed framework is expected to allow Trump and Xi Jinping to have ‘a very productive meeting’ on Thursday at the APEC summit.

Trump also signed trade framework pacts with Malaysia, Thailand, Vietnam and Cambodia. By contrast, Trump hit Canada with an additional 10% tariff due to a spat over an anti-tariff advertisement released by the government of Ontario.

The US government shutdown rumbles on and is now the second- longest in history. There is still no sign of compromise between the Republicans and the Democrats that would bring it to an end. Betting sites suggest there is a 75% chance that the shutdown becomes the longest in history. Markets have shrugged off the shadow of shutdown, which will continue to delay the publication of US economic data.

Markets continue to monitor US regional bank reporting.  Zions Bancorp, one of two banks to be hit by alleged fraud, reported results that were not as bad as feared which helped calm nerves a little.

 

In the UK, more bad news for Chancellor Rachel Reeves as government borrowing in September hit the highest level for the month in five years. Analysts believe the government has now borrowed up to£13bn more than projected in the first six months of the current fiscal year and that getting back on track to meet fiscal targets will require £25bn of tax hikes and a further £10bn to build sufficient headroom, albeit some reports suggest the Chancellor may even go further. Meanwhile, the uncertainty around the Budget is hitting confidence -a repeat of the run into the Budget last year!

 

In the US, softer-than-expected inflation data for September cemented expectations of a 0.25% interest rate cut by the Federal Reserve (Fed). September CPI was +0.3% on the previous month or 3% annualised, driven by softness in owner equivalent rents. Markets are now pricing in almost 0.5% of further interest rate cuts by the Fed at its next two meetings.

 

In Japan, Sanae Takaichi won an historic vote to become the country’s first female prime minister. She has long advocated for increased government spending to boost economic growth.

 

Gold and silver saw their sharpest drop in years as investors deemed gold’s 2025 rally of 60% as overdone. This reflected the easing of US and China trade tensions with Trump due to meet Xi Jinping this week.

Read our latest investment insights from Alpha PM

 

Brent oil jumped over 8% to almost $66 as Trump announced sanctions against Russia’s two largest oil companies, Rosneft and Lukoil, citing ‘Russia’s lack of serious commitment to a peace process to end the war in Ukraine.’ Chinese and Indian oil refiners are reported to have suspended seaborne Russian oil purchases due to concerns about Western sanctions.

Finally, given the recent concerns about the health of some US regional banks, more alarming news for American lenders. A study by Vantage Score shows that delinquencies on car loan payments by US consumers have surged by 50% in the last 15 years and now stand at levels seen during the last financial crisis! American banks have $1.6trillion tied up in car loans which is double the level of 12 years ago, much of which has been sold on to financial institutions in the form of asset-backed securities. A case of subprime lending déjà vu?

Full version