China Strikes Back: Tech War With U.S. Set to Escalate?


  • China has struck back in its technology war with the United States and pulled out its ace in the hole: rare earths.
  • And, Apple’s index weight has given mutual funds a headache, driving increased purchases.
  • Meanwhile, emerging currency carry trades have yielded intriguing returns for investors.

China is striking back in the ongoing technology war with the United States, raising concerns in the metals industry about potential new export restrictions on ‘rare earths’. These rare earth elements, which consist of 17 chemical elements found in nature, have gained immense significance in the past decade due to their vital role in the manufacturing of various technologies such as cell phones, hard disks, electric vehicles, monitors, and military equipment.

The problem lies in China’s overwhelming monopoly on rare earth production, accounting for a staggering 98% of global output. It seems like a mere fantasy to imagine any other country dethroning the Asian giant from its dominant position.

However, the economic warfare between the United States and China is intensifying, particularly with regard to the pivotal competitive advantage of artificial intelligence. In response to the U.S. ban on selling new Nvidia (NASDAQ:) chips to China, the Chinese government has launched a counterattack by imposing its own restrictions on the United States.

China recently announced its plans to implement stricter controls on the export of gallium and germanium, two critical metals used in the production of semiconductors and other components essential for the global energy transition. This move marks another escalation in the technology war between the world’s two largest economies.

Apple’s Dominance a Headache for Investment Funds

Mutual funds are facing a predicament as shares of Apple (NASDAQ:) continue to rise, setting new all-time highs. Many of these funds find themselves lacking the necessary number of shares they should hold in the company.

After a stellar performance in 2023, Apple’s presence in the indexes has reached unprecedented levels, accompanied by a skyrocketing market capitalization.

In fact, Apple’s weight in the now stands at an unprecedented 7.6%, surpassing any previous company in history. It even surpasses the entire consumer goods sector, which weighs in at 6.7%. Looking at the iShares MSCI ACWI ETF (NASDAQ:), Apple carries a weight of 4.7%, higher than the combined weight of all stocks in the UK, which stands at 3.6%.

However, some fund managers have intentionally kept a lower exposure to Apple. Some prefer greater diversification, avoiding dependence on a single company, while others are bound by internal fund rules that limit their holdings in any given company.

As a result, passive fund managers, who aim to replicate an index’s composition to mirror its performance, find themselves in a bind. They must go above and beyond, buying more Apple shares than they would ideally prefer to hold, in order to accurately replicate the target index.

Even active mutual fund managers, striving to outperform the market, are compelled to acquire more Apple shares. Failing to do so would make it exceedingly challenging to achieve their already difficult goals.

A Decent July Awaits Markets

Did you know that historically, the S&P 500 has shown a positive trend in July? Since 1950, it has risen by an average of +1.3% during this month.

If we zoom in on the last 20 years, the average July increase jumps to +2.2%. And over the past decade, it climbs even higher to +3.3%.

However, interestingly, in pre-election years, the rise tends to be more modest, with an average increase of +0.9%.

Now, here’s an intriguing observation: When the S&P 500 has experienced a surge of over +3% in the month of June (which has occurred 15 times in the past 72 years), the average return in July settles at +0.8%.

Carry Trades Prove Fruitful

In simple terms, the carry trade involves buying and selling different currencies to profit from interest rate differentials. Let me break it down for you:

Imagine an investor who sells a currency with a low-interest rate and simultaneously buys another currency with a higher interest rate. The key here is to capitalize on the difference between these interest rates.

Essentially, the trader borrows the low-interest-rate currency and benefits from the higher interest rate associated with the purchased currency.

One popular example of a carry trade has traditionally involved the and the . The Australian dollar historically had high-interest rates, while the Japanese yen had lower rates. Traders would borrow Japanese yen and use it to buy Australian dollars.

Now, here’s the interesting part: Carry trade investors who have focused on emerging market currencies have seen gains this year. For instance, the has experienced carry trade gains of +18%, while the has achieved +15.4%, and the has reached +14%.

Despite the recent decline in the , which lost -14% in carry trade value over the past month, emerging market currencies have managed to sustain their gains throughout the year.

The ranking of the main stock markets so far in 2023 goes as follows:

  • +30.52%
  • +23.26%.
  • +17.17
  • +14.57%
  • +12.39%
  • +12.06%
  • +11.68%
  • +9.86%
  • +1.77%
  • -1.19%
  • -2.61%

Investor Sentiment (AAII)

AAII’s weekly investor survey has produced these numbers:

  • Bullish sentiment: 46.4%.
  • Neutral sentiment: 29.1%.
  • Bearish sentiment: 24.5%.

Bullish sentiment rose to 46.4% from 41.9% last week. Although bulls are not yet in the majority and have not been in the majority in over two years, this week’s reading was the highest level of bullish sentiment since November 2021.

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Disclaimer: This article is written for informational purposes only; it is not intended to encourage the purchase of assets in any way, nor does it constitute a solicitation, offer, recommendation, advice, counseling or recommendation to invest. We remind you that all assets are considered from different perspectives and are extremely risky, so the investment decision and the associated risk are the investor’s own.



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