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For some time now, we have been pointing out that complacency has been creeping into the markets. Friday’s flash market crash significantly disrupted that complacency. After witnessing months of low volatility (see last week’s GCIO Weekly) and steady gains, markets finally reversed course. The S&P 500 fell about 2.4% for the week, while the Nasdaq slid 3.6%, led by semiconductor and AI-related names. The trigger for the decline came from Beijing. China’s announcement to impose tighter controls on exports of rare earths and refining technologies was a de facto escalation of a long-simmering resource confrontation that the tariffs have only exacerbated. President Trump’s retaliatory threat of 100% tariffs on all Chinese goods from 1 November turned a policy dispute into an outright trade war. Markets abruptly repriced the risk that the US–China economic conflict could reignite just as global growth momentum weakens.
Chart 1: Friday Was A Tough Day for the S&P500
Index
Source: Bloomberg
Rare Earths: The Strategic Choke Point Exposed
China controls roughly 70% of global rare-earth mining and nearly 90% of refining — a stranglehold over the inputs that power high-end electronics, EVs, and defence systems. The new export-licensing rules tighten control over heavy elements such as dysprosium and terbium. Washington’s reaction has been reactive: the Pentagon plans a $1 billion stockpile of critical minerals. But Beijing has been preparing for this moment for more than a decade — diversifying away from U.S. demand, securing long-term contracts, and deepening partnerships across Africa and Southeast Asia. The West, fixated on quarterly earnings, has ignored the strategic fragility of its supply chain.
Trump, China, and Strategic Misalignment
The escalation via tariffs exposes a deeper failure of strategy. Trump’s tariffs are a political weapon without an industrial plan. Confrontation has replaced coalition-building; allies remain unengaged. China, meanwhile, has been patient and pragmatic — cutting reliance on U.S. soybeans, cultivating Indian partnerships, and accelerating domestic semiconductor and rare-earth capacity. The contrast is stark: China’s long game versus the West’s reactive populism.
Beyond Tariffs: The Economic Setup Was Fragile
Much of 2025’s growth surprise reflected a surge in front-loaded capital investment now fading fast. The U.S. Logistics Managers Index for September showed Transportation Utilisation collapsing to 50.0, its weakest reading on record versus an eight-year average of 65.1. This should be peak freight season; instead, warehouses are full, and shipments have stalled. Warehousing Capacity remains tight at 50.8, signalling an inventory glut rather than vibrant demand. The front-loading of imports earlier in the year to beat tariffs has flipped into payback: full warehouses, weak shipments, and falling consumption. Retail data echo the same story. The CNBC/NRF survey for September reported retail sales −0.66% month-on-month, with seven of eleven sectors declining notably furniture (−1.9%) and clothing (−1.1%), both tariff-sensitive. Job indicators are softening ADP −32k in September, ISM Services below 50, and confidence surveys rolling over. The slowdown is already under way.
Q3 Corporate Earnings: Good Numbers, Gloomy Guidance
Earnings season may still deliver respectable backward-looking results, but guidance will matter far more. Corporates are likely to sound cautious. Inventory drawdowns, weak logistics, and softer spending point to margin pressure ahead. The danger is that a market priced for perfection faces a wall of unremarkable guidance prompting multiple compression even without an earnings collapse.
Economics by Ego
The Fed minutes confirmed that another rate cut is coming; the only debate is timing. The cautious camp still clings to inflation fears, but Friday’s turmoil tariff brinkmanship, market stress, and geopolitical theatrics strengthens the case for easier policy. Yet the larger absurdity lies in Washington, where economic strategy is now dictated by ego rather than economics. A 100% tariff on Chinese goods is not policy; it is vandalism. The result is predictable: growth slows long before inflation falls.
Inflation Risk: What the Markets Would Prefer Not to Discount
If the markets were to take President Trump at his word, we would have much more serious downside for financial markets. A blanket 100% tariff on Chinese imports would almost certainly:
• Add 2–3 percentage points to U.S. headline inflation within a year.
• Lift core goods inflation by 5–7 points temporarily.
• Shave approximately 0.5–1% off real GDP, producing a stagflationary shock.
• Force the Fed into a policy dilemma: fight inflation or cushion recession.
In practical terms, it would replay the 1970s-style dilemma of cost-push inflation amid weakening growth the exact mix that markets fear most.
Over the weekend, the rhetoric between Washington and Beijing shifted subtly but importantly.
Chinese officials defended their new rare earth export restrictions as a national-security measure, framing them as a response to the U.S. decision to tighten controls on advanced chip exports—a move that Beijing views as breaking the spirit of earlier trade understandings. The sequence makes clear that China’s measures were retaliatory, not provocative. In turn, President Trump appeared to temper his tone, suggesting that talks could resume and that “China will be fine,” signalling a desire to calm markets after Friday’s rout. For investors, the weekend reinforced two points: that the trade conflict is now as much about technology sovereignty as tariffs, and that Washington’s economic posture can still pivot quickly when financial markets deliver a warning shot.
What To Do?
Remember April, a lesson in not over-reacting before the dust settles. TACO (Trump Always Changes Opinion) still applies. The sell-off, though sharp, was modest in context. The hardest hit were the speculative pockets with a thin investor base. Crypto bore the brunt: Bitcoin down 12%, Ethereum down heavily, and around $19 billion in value erased in the cryptomarket as leveraged traders were flushed out.
Gold and Silver for All Seasons?
Whatever the outcome of the U.S.–China spat, gold remains a core asset. A hostile outcome brings geopolitical tension and inflation; a compromise still leaves China determined to reduce dollar dependence. Beijing will keep accumulating physical gold to underpin trade settlement. Gold and silver thus remain assets for all seasons.
Chart 2: Gold and Silver Continue to Rally
Source: Bloomberg
Non-U.S. Equities – The Value Play?
The extreme valuation premium in U.S. equities leaves little cushion for disappointment. Europe trades at a 10-point P/E discount, while Asia offers stronger growth and room for further rate cuts. Those two regions combine value with monetary flexibility — an appealing contrast to the U.S.
Technology – Separate Signal from Noise
The sell-off in tech creates opportunities in core franchises with resilient cash flow and supply-chain strength, not in speculative AI-story names. Selectivity is essential; structural tech remains investable, hype does not.
Final Thought
The week’s turmoil was not random; it was the market’s verdict on policy built on impulse rather than design. The era of good news priced in is ending. What comes next will reward those positioned for volatility, value, and realism.
Gary Dugan – Investment Committee Member
Bill O’Neill – Non-Executive Director & Investor Committee Chairman
13th October 2025
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