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Officials in Washington and Beijing signaled Friday that they had reached a deal that will make badly needed rare earths less of a rarity for US manufacturers.

China’s Ministry of Commerce said it would approve exports of the key minerals, essential in making everything from electronics to medicines, electric vehicles and fighter jets. In exchange, US Commerce Secretary Howard Lutnick said his country will “take down” export curbs that were introduced in May. Treasury Secretary Scott Bessent, meanwhile, told Fox Business that the administration could have all of the major trade deals it wants done “wrapped up by Labor Day.” There’s hope for a holiday BBQ where you won’t have to listen to your cable news-watching relatives complain about “tariff uncertainty.” There’ll be other stuff to complain about.

Industrials

America’s Anduril Among Potential Winners of NATO Breakthrough

Photo of Anduril headquarters
Photo via Stan Sholik/ZUMAPRESS/Newscom

There are defensive stocks — the companies investors retreat to in times of distress, like McDonald’s, because of their sturdy and reliable business — and then there are defense stocks — the companies that arm nations for volatile geopolitical times.

Last week, a convergence of sorts occurred: The world’s largest transnational military alliance, NATO, announced that its 32 members agreed to boost their defense spending to 5% of their national GDPs by 2035, a massive leap from the current 2% guideline that will unlock hundreds of billions for defense firms. Just don’t expect soldiers in basic training to be eating McMuffins.

US Firm Seeks Windfall from Quantum Leap

NATO chief Mark Rutte said last week that the new defense spending target amounts to a “quantum leap.” The 5% target will be broken into two segments, with member nations expected to put 3.5% of GDP toward traditional military spending and another 1.5% toward defense-related investments like cybersecurity and military mobility.

To put it in perspective, the EU spent about €326 billion ($381 billion) on defense last year, or about 1.9% of GDP. And 23 of the bloc’s 27 nations are members of NATO, meaning they will aim to spend hundreds of billions more per year on defense by 2035. Defense firms stand to profit handsomely, in part because European defense requires significant modernization. In 2023, the bloc dedicated just 19.5% of its defense expenditures to capital investments, such as equipment and research and development, compared with 40.7% in the US. The continent’s major defense firms like Germany’s Rheinmetall, France’s Thales, the UK’s BAE Systems and Italy’s Leonardo are the obvious candidates to capture the windfall, but they’re not alone on the radar:

  • California-based Anduril had a couple of perfectly timed announcements earlier this month. One of the most valuable private startups, the Peter Thiel-backed firm currently assessed at $30 billion will offer its aerial vehicles in Europe through a partnership with Rheinmetall. Saab also tapped it to manufacture rocket motors for a ground-launched bomb system the Swedish firm is developing with Boeing. CEO and founder Palmer Luckey said earlier this month that Anduril is “definitely going to be a publicly traded company,” and its focus on autonomous systems and drones positions it to benefit uniquely because of the prominent role they’ve played in the Ukraine war.
  • RBC analysts highlighted two French aviation giants with significant exposure: Airbus, which derives roughly 23% of its revenue from defense and space, and Safran, which derives roughly 20% of its revenue from the same sectors. They also highlighted an American sleeper in Lockheed Martin, which already makes about 11% of its sales in Europe.

No, Gracias: NATO’s initial commitment to 2% of GDP spending, made in 2002, initially struggled to gain traction. Only six members had fulfilled the pledge by 2021, but the war in Ukraine, the first large-scale conflict in Europe since the Second World War, flipped a switch: 23 members met the target as of last year, and all 32 are on track to reach it by the end of the year. However, a handful of countries, including Spain, Belgium and Slovakia, have raised objections to the new target, suggesting its full impact on defense spending may be subject to marginal disputes in the years to come.

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Regulation

SEC Seeks to Rev Up ‘Engine of Growth’ by Loosening Corporate Disclosure Rules

Ripping up the red tape around public market debuts could lead to more ribbon-cutting ceremonies for startups.

Or at least that’s the hope of the Securities and Exchange Commission, which is reportedly in talks with major stock exchanges to ease disclosure rules for public companies and spur initial public offerings. The agency is interested in “an overhaul of current proxy processes” that would, among other things, ease disclosure requirements, Reuters reported last week. Exchange listing fees and special purpose acquisition companies (SPACs) were also a part of the months-long discussions between the regulator and exchanges.

Friendlier Cop on the Beat

SEC Chair Paul Atkins’s stance on financial regulation contrasts starkly with that of his predecessor, Gary Gensler.

“As the chairman has said, capital formation is at the root of what we do — fostering a direct, economical route for investors’ capital to find its way to entrepreneurs and industry to create products and services. The SEC is focused on this engine of growth,” an SEC spokesperson said in response to The Daily Upside’s emailed query.

Gensler was focused on enhancing US capital markets as well, but took an aggressively cautious turn as speculative trading in crypto, meme stocks and SPACs, or blank-check companies, reached a fever pitch. He rolled out dozens of rules to bolster investor protection, which some blamed for a steep decline in IPO activity in 2022, when the pace of public debuts was the slowest in over three decades. The SEC’s crackdown on crypto, which included aggressive use of enforcement action, earned Gensler the title of industry public enemy No. 1.

Under Gensler’s leadership, the SEC enacted rules on climate risk disclosure, cybersecurity incident reporting and proxy voting. According to an October 2024 report from the Committee on Capital Markets Regulation, which compared the pace of SEC rulemaking under different leaders:

  • Gensler enacted 34 rules, exceeding three of his most recent predecessors by an average of 36%. He oversaw the issuance of 49 proposed and final substantive rulemakings, which topped only the 67 issued by Mary Schapiro among the past three agency chairs.
  • However, Schapiro operated under a congressional mandate for more than half of her total rules, whereas Gensler’s rules were mostly voluntary, with nine of those, or roughly 18%, resulting from a directive.

While IPO activity is still down, newly listed companies have been performing well.

Winds of Change: Easing regulation could help put the wind back in the US equity market’s sails, but market volatility threatens to counteract it. “Although macro crosscurrents like trade policy and recessionary fears could continue to challenge the markets, the potential for a solid IPO rebound remains if markets can digest them,” EY Americas IPO and SPAC advisory leader Mark Schwartz wrote in a report published in April.

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Electric Vehicles

BYD Downshifts Production into First Gear

BYD has taken the lead, and as it comes around the bend, it’s … tapping its brakes?

According to a Reuters report last week, the Chinese car giant — which earlier this year surpassed Tesla as the world’s top EV seller by revenue — has started slowing production in recent months. The pullback comes as BYD makes major gains outside of China. So what gives?

On the Road

In March, BYD reported that its fourth-quarter revenue for fiscal year 2024 had jumped 73% year-over-year — pushing its total annual revenue past $100 billion, narrowly outstripping Tesla’s $97.7 billion 2024 revenue to become the top-selling EV company in the world. And crucially for BYD, that race is now taking place on highways (almost) the world over, not just in its home country, where it has long been a dominant player.

BYD is now the EV pace-setter in Europe, too, according to a recent report from automotive firm JATO Dynamics, which showed that BYD notched a 359% year-over-year surge in April sales in the region, outstripping Tesla. That comes even as BYD vehicles face a much higher tariff rate on the continent than Tesla (last year, the EU imposed punitive tariffs on BYD as it probed whether the company employed unfair pricing tactics).

Yet for all that success, BYD appears to be hitting the brakes extra hard:

  • According to sources who spoke to Reuters, the company has been canceling night shifts and has decreased output by as much as 33% at several factories. The company has also suspended some of its plans to launch new production lines, the sources said. Data from the Chinese Association of Automobile Manufacturers shows that output at BYD plants slowed 29% in April and May compared with the fourth quarter of 2024.
  • The why remains unclear, with some sources telling Reuters it was a cost-saving measure and others saying it resulted from failing to meet recent sales goals. Some evidence suggests slowing sales: According to a China Automotive Dealer Association survey in May, BYD dealers held an industry-high average inventory of 3.21 months, well above the industry average of 1.38 months.

Xiaomi Too: The possible over-supply shouldn’t be that surprising. In June, the China Auto Dealers Chamber of Commerce released a statement urging automakers to stop offloading too many cars onto dealerships, as the resulting price wars were eroding profitability. Still, some Chinese automakers are roaring ahead on nitrous oxide. On Friday, shares of upstart EV player Xiaomi surged 5% to a record high after the company received 240,000 orders in just 18 hours for its new YU7 electric SUV model. Priced 4% lower than the Model Y in the country, Xiaomi is just another player breathing down the neck of Tesla, China’s once and perhaps not future EV king.

Extra Upside

  • Seek Elsewhere: German officials directed Apple and Google to block Chinese AI firm Deepseek’s app, ruling it illegally sends user data to China.
  • Belt Tightening: US consumer spending fell unexpectedly in May, the second decline this year, according to the Department of Commerce.
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