Marked by significant market volatility, last week ended with Donald Trump's angry outcry. The S&P 500 fell 2.71% last Friday, and the Nasdaq 3.56%, their largest one-day decline since April.
Breaking the truce agreed in the spring, the Sino-American standoff abruptly resumed on October 10. Donald Trump, like the famous Indonesian volcano spewing lava and ash with a cataclysmic roar, announced a widespread increase in customs duties to 100% on Chinese imports in response to restrictions on rare earths. He also canceled his meeting with Xi Jinping at the APEC summit. Beijing responded by imposing port surcharges on American ships and announced that other countermeasures, including targeted duties on certain products, were under consideration.
The two economic giants, caught in a modern Thucydides trap involving value chains, technological standards, and strategic alliances, are thus resuming trade hostilities, each with its own flaws. On the one hand, the United States, a dominant power losing steam—and soft power—with Donald Trump dreaming of becoming a hegemon, is showing signs of slowing: slowing growth (+2.0% expected in 2025 after +2.8% in 2024), persistent inflation (+3.5% forecast in Q2 2026), fragile employment (unemployment at 4.3%), and a third week of shutdown looming. Last Friday, among the hundreds of thousands of civil servants placed on compulsory leave, the Trump administration laid off more than 4,000 deemed "non-essential" and drawn from a "bloated bureaucracy."
On the other hand, China, a rising power in structural imbalance, is posting solid but mixed growth (+5.3% in H1 2025), driven by its exports to Asia and Europe, even though domestic demand remains weakened by a prolonged real estate crisis and creeping deflation, with declining consumer prices and pressure on industrial margins.
Donald Trump must not forget that China, with its more than 5,000-year history, is an empire that has not been swept away by the maelstrom of time and that masters the long term. This cultural misunderstanding could well be one of the blind spots in American strategy.
Make China Great Again! Rare earths have become Beijing's strategic weapon, and this threat is not new, as it was already used against Japan a few years ago. However, without rare earths, there are no microprocessors... China controls approximately 60% of global extraction and nearly 90% of refining. In its "Mineral Commodity Summaries 2025" report, the U.S. Geological Survey estimates global reserves at over 90 million tons, including 44 million in China. Thanks to policies implemented since the 1970s, China has become the leading producer of mined and refined magnetic rare earth elements, such as neodymium, praseodymium, terbium, and dysprosium. China is thus in a strong position, and Europe, caught between these two giants, carries little weight. Many European companies are still struggling to access Chinese rare earths, despite an "improved" export agreement signed in July, and Europe is not ready to absorb the shock of the massive arrival of Chinese electric cars despite anti-subsidy duties and the "Small Affordable Cars Initiative."
While we had already reduced our equity exposures as early as Friday morning, we tactically reduced them again following Donald Trump's announcement at 5 p.m.
We nevertheless believe that it's important not to overreact. Donald Trump's volatile behavior can certainly lead him to fits of rage, but his frequent about-faces also evoke a more lighthearted memory: the famous gesture from Jacques Dutronc's song "The Opportunist." With Trump, the unpredictable is always possible, and an accommodation is never out of the question. Playing the "TACO trade" is therefore particularly tempting, and we can clearly see that Donald Trump is already starting to post reassuring messages on social media.
As we highlighted in our Monday meeting on September 29, 2025, entitled "Time in the Bull Market Versus Timing the Bull Market," the euphoria surrounding AI is based on extreme valuations and massive infrastructure investments, notably by Apple, Meta, Nvidia, Microsoft, and Google. In this context, Donald Trump certainly doesn't want to be the one to burst the AI financial bubble, as he remains attentive to the markets' reaction to his decisions - especially as fears related to circular deals in AI are beginning to emerge. Beyond overinvestment in AI, it is indeed the concentration of this sector and cross-shareholdings that raises questions.