U.S. Government Shutdown Nears End, Fed Divisions Remain Unresolved

The first face-to-face meeting between Japan's prime minister and the head of its central bank has cooled expectations that an interest-rate hike is coming soon, sending the yen to a nine-month low.

Markets had been closely watching the interaction between Prime Minister Sanae Takaichi, a proponent of looser monetary policy, and Bank of Japan Gov. Kazuo Ueda, who has been steadfast in saying that the bank is ready to hike rates, but only when conditions are right.

Takaichi has been calling for close coordination on policy with the central bank since she took office last month.

"It is extremely important that appropriate monetary-policy management be conducted toward achieving both strong economic growth and stable price increases," Takaichi said Wednesday at a meeting of an economic council that Ueda is also a member of.

"We will continue to request that the Bank of Japan Governor provide regular reports to this Council on Economic and Fiscal Policy. The government and the BOJ will continue to work together to advance the national economy," she said.

The remarks were taken by some traders as a sign that any action by the BOJ will be pushed further back. The yen reached the 155 threshold against the dollar overnight--the first time it has touched that level since February.

The Japanese currency has been soft in recent weeks on speculation that Takaichi, who prefers expansive economic policies, may pressure the BOJ to postpone monetary tightening. So far, Takaichi has refrained from making public comments about the direction of BOJ policymaking.

The pair last stood at 154.65. Easing fears over the U.S. government shutdown also led the dollar to strengthen against the yen. Earlier, lawmakers in the U.S. voted to end the country's record-long government shutdown. The measure ending the shutdown now goes to President Trump's desk for his signature.

The BOJ has kept its policy rate on hold at 0.5% since January as it waits for more data on the impact of U.S. tariffs and domestic wage trends, but has maintained its position on seeking further rate hikes.

Recent central bank messaging suggests that more BOJ policy board members think the domestic conditions needed for another rate hike are gradually being met.

"It seems the biggest risk right now is the possibility that the Takaichi administration will pressure the BOJ to hold off on raising interest rates," said Mizuho Securities economist Yusuke Matsuo.

Source: TradingView

Eight AUKUS submarines will give Australia sufficient deterrence and combat capabilities.

Four defense giants have teamed up to develop the combat system for Australia's new nuclear-powered submarines.

BAE Systems, Raytheon Australia, General Dynamics Mission Systems, and Thales have teamed up to develop and install the combat systems on the Royal Australian Navy's AUKUS submarines.

Combat Systems for Nuclear Subs

The four companies signed a memorandum of understanding positing the establishment of the AUKUS Combat Systems Collaborative Team that will design, manufacture, and integrate combat systems in the AUKUS submarines.

The proposal is for a trinational command system for both navies that would be based on the existing AN/BYG-1 combat system. Designed and manufactured by General Dynamics, the AN/BYG-1 is a modular, open-architecture combat control system for submarines that integrates tactical control, payload and weapons control, and information assurance. The combat system is already in service in numerous subs, including the US Navy's Virginia, Los Angeles, Ohio, Columbia, and Seawolf class submarines, as well as Australia's Collins-class subs.

Of course, the defense companies will need to negotiate with the Royal Navy and the Royal Australian Navy about the specific requirements and capabilities behind each combat systems suite.

The four defense giants signed the memorandum of understanding at the Indo-Pacific International Maritime Exposition.

"This Memorandum of Understanding is another strategic step forward to developing the most effective and advanced combat system for SSN-AUKUS, simultaneously strengthening Australia's operational sovereignty and industrial capability," Craig Lockhart, chief executive officer, BAE Systems Australia, said in a company press release.

BAE Systems (alongside ASC Pty Ltd) is also one of the two lead manufacturers behind the construction of the Australian submarines.

"By aligning with our industry and trilateral partners, this signing will accelerate and enhance combat system development that is interoperable by design, reaffirming our role as a trusted partner to the Commonwealth of Australia and Royal Australian Navy," Lockhart added.

Under AUKUS, Australia will receive a total of eight subs and its first nuclear-powered attack submarines. However, the subs will not be armed with nuclear weapons but rather rely on nuclear power to operate. Nuclear-powered submarines can sail almost indefinitely and do not require fuel to operate. In many ways, during operations, they are limited by the number of victuals and ammunition they carry.

The Royal Navy will also be getting AUKUS submarines and expects to have the first vessels operational by the end of the next decade. In the UK, the AUKUS submarines will replace the Royal Navy's seven Astute-class nuclear-powered submarines.

A Deal Beyond Submarines

Australia, the United Kingdom, and the United States announced the AUKUS pact in the fall of 2021. For Canberra, it was a consequential foreign affairs decision. Up until that moment, the Australian military had partnered with France to buy submarines. The AUKUS pact meant that Australia walked back on that option, cooling its relationship with France. It was a conscious decision with one thing in mind: China.

China's rise in the Indo-Pacific concerns Australia, as it threatens its national security and the stability of the region. Canberra calculates that the eight AUKUS submarines will give its military sufficient deterrence to prevent a conflict, but also sufficient combat capabilities to excel in one.

Source: The National Interest

Last week, I wrote about the "Trump Trades." Many investors' initial reactions to the 2024 US elections have reversed in 2025. International stocks have outperformed, and within the US market, large-cap technology has led. The dollar is down and bond prices are up—all in contrast to early expectations.

Only in passing did I mention the financial-services sector, and I completely neglected to discuss the regional banks more specifically. The Morningstar US Banks—Regional Index took a wild ride over the past year.

After surfing a wave of postelection bullishness, regional-bank stocks took a nosedive when tariff turmoil roiled markets in March and April 2025, only to recover, then sell off more recently. The bankruptcy of auto supplier First Brands, among others, is raising concerns over banks' exposure to bad loans. This isn't the first time the share prices of regional banks have served as warnings for broader credit market trouble. Sometimes, though, the market sends up false alarms. Are we now in 2007 or 2023?

Regional Banks Are Checking for Cockroaches

In contrast to diversified, "money center" banks like JPMorgan Chase JPM, Bank of America BOA, Wells Fargo WFC, and Citigroup C, regional banks tend to focus on traditional activities like retail and commercial banking. They are considered more sensitive to the economy, interest rates, and credit markets. And, as noted by the "regional" designation, lenders like PNC PNC, U.S. Bancorp USB, Truist TFC, M&T MTB, and Fifth Third Bancorp FITB tend to be geographically limited in their scope.

Given these traits, it wasn't surprising to see the Morningstar US Banks—Regional Index pop after the November 2024 US election. It rose higher than the broad Morningstar US Market Index, higher than the sector-level Morningstar US Financial Services Index, which includes not just banks but also insurers, asset managers, and capital markets players, and higher than the Morningstar US Banks Index. Clearly, investors saw in the victory of Donald Trump and the Congressional Republicans a future of economic growth, deregulation, and higher interest rates. Deregulation is especially important to an industry eager for mergers and acquisitions. Higher rates support "net interest margins"—the spread between what banks pay depositors and charge lenders.

Since the election, regional banks have acted as a barometer for economic sentiment. Fears of recession and higher loan defaults as a result of Trump's tariffs roiled bank shares in March and April. As macroeconomic worries receded, regional banks bounced back. Strong earnings calmed nerves.

The wobble in September and October 2025 reflects problems in the credit markets. Tricolor Holdings, a subprime auto lender, filed for bankruptcy, prompting write-downs from lenders JPMorgan Chase and Fifth Third, which is a prominent constituent of the regional banks index. First Citizens Bank FCNCA, another regional, was hit by the First Brands bankruptcy. Then came disclosures from both Zions ZION and Western Alliance WAL that they had been victims of borrower fraud. Zions' share price dropped 13% in a single day, while Western's fell more than 10%.

"When you see one cockroach, there are probably more," said JPMorgan Chase CEO Jamie Dimon during the company's third-quarter earnings call. Dimon has been through financial crises before. He knows that seemingly one-off issues can signal systemic problems. Marc Rowan, CEO of Apollo, has also weighed in, referring to the credit market issues as "late-cycle accidents." It's hard to know the extent of the connections within the system. Much of the risky lending these days is done by so-called NDFIs—nondepository financial institutions. Banks lend to NDFIs.

Wait, Didn't We See This Movie in 2023?

It wasn't so long ago that US regional banks were embroiled in another crisis. In March 2023, Silicon Valley Bank collapsed, the victim of an old-fashioned run on the bank. The smaller Signature Bank, a lender to the cryptocurrency industry, went down with it. Then, in May, came the demise of First Republic, the second-largest bank failure in US history. First Republic and Silicon Valley Bank were both top-10 constituents of the Morningstar US Banks–Regional Index as of Feb. 28, 2023. By June, they had disappeared from the index. Check out the drop in the regional-bank index's value that year.

At the time, I wondered if we were in the midst of another financial crisis, like the one I watched start in 2007. The warning signs back then were the bankruptcy of subprime mortgage lender New Century Financial in April, a Bear Stearns hedge fund collapse in June, and a bank run on British lender Northern Rock in September. At the time, we didn't know if they were one-offs or harbingers. By the end of 2008, Lehman Brothers had bitten the dust, and Washington Mutual became the largest-ever US bank failure, a distinction it still holds.

As for the 2023 banking crisis, it didn't metastasize. The failures of Silicon Valley Bank and First Republic Bank were less about systemic credit issues and more about poor risk management and concentrated depositor bases. Both SVB and First Republic had invested heavily in long-term US Treasuries, which lost substantial value when the Federal Reserve started jacking up interest rates in 2022, in response to stubbornly high inflation.

Thanks to reforms after the financial crisis, banks were far better capitalized in 2023. Yet, as in 2008, government intervention was needed. Regulators moved quickly to guarantee deposits, over and above FDIC-insured limits. The joke in Silicon Valley was that the SVB collapse "turned venture capitalists into venture socialists." But in retrospect, SVB and First Republic were red herrings.

What Does the Future Hold for Regional Banks?

Morningstar researchers have published useful analysis on regional banks. In a note about Zions, Morningstar equity analyst Rajiv Bhatia acknowledges that its write-down "understandably raises questions about the firm's underwriting and risk management practices." The team was already modeling for higher "charge-offs and provisioning, with the period from 2021-24 being generally healthy from a credit perspective, and results tending to revert to norms over time."

I notice that my equity analyst colleagues don't currently view regional-bank stocks as screaming buys. U.S. Bancorp is the only regional bank with a Morningstar Economic Moat Rating of wide, meaning it has a durable competitive advantage in our researchers' eyes. It currently carries a 4-star "buy" Morningstar Rating. Many of the regional-bank stocks covered by Morningstar analysts are seen as no-moat businesses, meaning they lack a durable competitive advantage, and carry High Morningstar Uncertainty Ratings.

Morningstar DBRS, a credit rating agency, expects more delinquencies and loan losses in the coming quarters from regional banks. DBRS notes that banks are even tapping a "repo facility" from the US Federal Reserve to ensure they have sufficient liquidity to meet short-term obligations. While DBRS researchers Michael Driscoll and John Mackerey see the regional banks they rate as "well positioned to absorb higher loan losses," DBRS has also seen deterioration in the private debt markets, to which the banks are indirectly exposed. "Downgrades continue to outpace upgrades in private credit," headlines a section in an October report.

A DBRS research paper on regional banks includes a "lessons learned from the 2023 bank failures" section, which contains much wisdom. "Banks are involved in a confidence business," write Driscoll and Mackerey. "Rapid withdrawal of funding" can "exacerbate existing issues." That's consistent with the High Uncertainty Ratings that most regional banks carry, in the eyes of Morningstar Equity Research.

Only time will tell if the tremors we are currently seeing are canaries in the coal mine like those of 2007 or red herrings of the kind we saw in 2023. Even as regional banks enjoy the frenzy of dealmaking that was anticipated after the election—Huntington merging with Cadence Bank CADE, and Fifth Third buying Comerica CMA are two recent examples—we're all on the lookout for more cockroaches. Here's a prediction: The regional-bank index will continue to produce volatile returns.

Source: Morningstar

Asian indices rise with Wall Street cues

Mixed moves in broader Asia-Pacific region

Wall Street strength provides global tailwind

Source: CNBC

The U.S. House of Representatives on Wednesday evening passed a bill aimed at unlocking funding and ending the longest ever government shutdown, with President Donald Trump now set to sign the measure into law.

The bill– which will keep the government funded until at least January 30, was passed in a 222 to 209 vote, with 216 Republicans and six Democrats voting in favor of the measure.

The bill was almost unanimously opposed by the Democrat minority in the House.

The bill will now head to President Trump's desk to be signed into law, with the White House stating that Trump will sign the bill at 21:45 ET (02:45 GMT).

Wednesday's vote comes after eight Senate Democrats crossed party lines earlier this week and helped the funding bill gain approval in the upper house of Congress.

Passage of the bill came just hours before the shutdown entered its 43rd consecutive day. The closure is by far the longest ever shutdown in U.S. history, having handily overtaken the 35-day shutdown seen during Trump's first term, in late-2018-2019.

Democrats had largely opposed the bill to reopen the government, citing concerns over the removal of certain Affordable Care subsidies that will now result in sharply higher healthcare costs for nearly 10 million Americans.

The shutdown had sparked widespread disruptions in federal services, most notable in air traffic and travel safety staffing, which in turn saw thousands of flights being cancelled across the country. Transportation Secretary Sean Duffy had warned that the shutdown could disrupt key Thanksgiving holiday travel.

Recent reports said the shutdown was costing the U.S. economy between $10 billion and $30 billion per week, and could also wipe out as much as 2% from the national gross domestic product.

Source: Investing

OPEC's supply revision triggers fresh bearish sentiment

Technical weakness reinforces the downturn

Production forecasts add to downward pressure

Refined fuel prices diverge due to supply disruptions

Source: Bloomberg