Wall Street nearly enjoyed a calm week until China announced export controls on rare earth elements (REEs) on Friday morning. These elements power the technology sector, and China, supplying ~70% of U.S. REEs and ~90% of global refined REEs, dominates this critical market. The new controls mandate export licenses for products containing ≥0.1% REEs by value, threatening industries like semiconductors.
Beijing justified the move with national security concerns, but analysts interpret it as a calculated counter to intensifying U.S. trade and technology restrictions. The U.S. swiftly denounced China’s decision and retaliated by slapping an additional 100% tariff on all Chinese imports, effective November 1, 2025, raising total duties to ~130% on goods like electronics, electric vehicles, and defense components. Simultaneously, the U.S. Commerce Department imposed export controls on “critical software” to China, targeting AI and semiconductor design tools.
Why do REEs matter?
Rare earth metals are vital to advanced manufacturing in many sectors and China dominates global production. The adjacent graphics is an illustration of how these metals are used in various sectors and manufacturing facilities.
US officials, including from the Department of Defense (DoD), reiterated calls to accelerate domestic rare earth production. The Inflation Reduction Act and Defense Production Act are funding projects to increase REE production but it is less than 1% of China’s output right now. Think tanks like CSIS warn these restrictions threaten US defense primacy, urging faster diversification to allies like Australia and Canada.
Without rare-earth magnets, many semiconductor tools and advanced manufacturing processes would either be impossible or far less efficient. This means China has the upper-hand until their output can be replaced by the United States and its allies. However, that will take many years and may buy Beijing enough time to overtake US dominance in artifical intelligence. That may be a stretch but that is what they may be thinking.
Monitoring U.S. policy responses and diversification efforts for REE production will be key to assessing long-term impacts.
The Reaction in the Stock Market
The chart below is one that I share with clients daily on the S&P 500 futures which trade in the overnight session. You can see the dramatic plunge on the right side of the chart that began late Friday morning. I would also like to note that there was another wave lower after the 4PM close which is not a good sign for Monday’s open.
If we zoom out to a weekly chart, you can see that there has been a relentless rally since the April 2025 low with little in the way of pullbacks or consolidation. This has caused an overbought condition to develop and we can see the MACD indicator beginning to hook lower for the first time since April.
Potential Downside Targets
So far, it has only been one bad day but we did see trade tensions cause the correction in the lower left-hand part of the chart below. It is not a stretch to expect profit taking as returns in technology are outperforming this year. If we continue lower in the coming trading sessions, 6034 (-11%) and 5577 (-18%) are two levels that may act as support.
This will make for an interesting week as we are still dealing with a government shutdown and the potential for thousands of government workers to be fired. It certainly feels like we flipped to a ‘risk-off’ environment in Friday’s session.
Thank you for being a reader!
President, Kisco Capital
