by Patrick Fearon-Hernandez, CFA, and Thomas Wash

[Posted: 9:30 AM ET] | PDF

Our Comment opens with an analysis of fresh signs of escalating tensions between NATO and Russia. We then pivot to the positive momentum in trade negotiations between the US and China. Further into the report, we delve into the rising hype surrounding Chinese tech stocks, examine a significant new milestone in Italy’s fiscal situation, and detail the emerging signs of trouble within the consumer credit market. We also provide a summary of key economic indicators from the US and global markets.

Rising NATO-Russia Tensions: The possibility of a direct conflict between NATO and Russia continues to intensify as the US weighs a significant policy shift. Specifically, the White House is reportedly considering providing Ukraine with intelligence for its deployment of Tomahawk missiles and drones to strike Russian energy infrastructure. This assertive step, though unconfirmed, is seen as a strategic lever designed to compel Moscow to the negotiating table, given its continued attempts to stall talks in order to gain more territory in Ukraine.

• While Moscow has downplayed the development by stating that the US was already sharing intelligence, it has concurrently expressed strong frustration with NATO’s increased assistance with strikes on Russian territory. These strikes, which have targeted at least 15 Russian oil refineries, have been highly effective, forcing refinery throughput to below five million barrels per day. This drop is a significant financial blow, directly undermining the oil revenue Moscow relies on to finance its military campaign.
• In response, Russia continues to test NATO’s resolve through repeated airspace violations. The most recent incident occurred late on Thursday when Munich Airport in Germany was forced to temporarily suspend all flight operations due to multiple drone sightings in its airspace, affecting approximately 3,000 passengers. These incursions prompt calls for the drones to be shot down, an action Russia could deem a declaration of war.
• This standoff has devolved into a dangerous game of chicken, with Washington and Moscow each betting the other will yield to prevent a major conflict. This geopolitical brinkmanship is inherently hazardous, as it increases the potential for miscalculation and accidental escalation. Although the likelihood of direct military confrontation remains low, we believe the risk is greater than current market sentiment would suggest.

China Trade Progress: The White House has announced a potential breakthrough in trade talks with China. Treasury Secretary Scott Bessent suggested that the two nations could be nearing an agreement during their fifth round of talks, which are being held in South Korea. The secretary’s comments underscored the ongoing US effort to persuade China to resume purchases of American agricultural products and lift restrictions on the export of rare earth minerals. A potential trade deal could open the door for a new phase in the two countries’ complicated relationship.

• The US is believed to be using trade talks as a way to convince China to pivot away from an export-driven model toward one powered by domestic demand. Yet, Beijing has reframed the dialogue, shifting the focus from economics to also include geopolitics. China is demanding both the removal of US tariffs and an explicit US denial of Taiwan’s sovereignty. While the US has denied agreeing to a change in its stance, these discussions show how China plans to use talks to achieve its aims beyond trade.
• However, while trade tensions show signs of cooling, the geopolitical rivalry is clearly heating up. Earlier this week, a senior Chinese diplomat expressed displeasure with the newly appointed US consul general to Hong Kong, warning her not to collude with “anti-China forces.” This warning is particularly pointed since under the previous administration, US officials were photographed conversing with student leaders in Hong Kong.
• A trade deal between the US and China would be highly supportive of equities in both countries, as their economies remain strongly linked despite efforts to decouple. That said, even as commercial uncertainty dissipates, we anticipate that the strategic competition for influence will continue as both nations pursue the development of their respective global spheres of influence.

Japan Elections: Following a series of electoral setbacks, Japan’s ruling Liberal Democratic Party will choose its new leader on Saturday. Five candidates are in the running, with Shinjirō Koizumi and Sanae Takaichi being the clear favorites to win and subsequently become the next prime minister in mid-October. This incoming leader faces an immediate and difficult agenda consisting of handling cost-of-living discontent, managing US trade and security tensions, and tackling increasingly urgent immigration concerns.

China AI Hype: The global AI rally is broadening, propelling Chinese tech companies into focus. Alibaba’s deep commitment to AI, which aligns with China’s policy push for technological self-reliance, is seen as a primary driver for the recent surge in returns. Investors are also attracted to the stark valuation gap where the Hang Seng Index carries a P/E ratio of approximately 26.4×, which is dramatically lower than the NASDAQ Composite’s multiple of about 57.1×, according to Bloomberg data.

Italy Deficit Improves: Italy’s improving fiscal health is set to give its government crucial political flexibility, with the budget deficit projected to drop below 3% by 2026. Achieving this would bring Italy into compliance with EU rules for the first time since 2019 and would likely lead to its exit from the EU infringement procedure. This timing is opportune, as the freedom from restrictive EU oversight could immediately open the door for new government initiatives, including significant defense spending increases and substantial tax relief.

AI Integration: Walmart is increasing its investment in AI to optimize supply chain management, signaling a strategic shift to reduce its dependence on manual labor for specific tasks. This move is expected to boost profitability, especially as the company adapts its business model to navigate challenges like tariffs. While AI adoption is becoming widespread across industries, its integration will be a gradual process. The most immediate impact will likely be seen in a reduced pace of hiring for roles susceptible to automation.

Credit Problems? Despite the economy’s overall resilience, significant vulnerabilities are surfacing in the consumer credit market. The collapse of subprime auto lender Tricolor Holdings, combined with weak earnings from CarMax and the bankruptcy of First Brands Group, points to an intensifying credit crunch in the subprime auto sector. This distress is a key indicator that, beneath strong macroeconomic headlines, a segment of the population is increasingly burning through savings and accumulating debt to sustain their standard of living.

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by Patrick Fearon-Hernandez, CFA, and Thomas Wash

[Posted: 9:30 AM ET] | PDF

Our Comment begins with an update on Stargate’s latest ventures. We then shift our focus to global developments, including stricter EU tariffs on Chinese steel and Beijing’s strategy to counter potential isolation from the West. Further analysis covers the decline in ADP private payrolls, the US defense pledge to Qatar, and the latest on the government shutdown. We also provide a summary of key economic indicators from the US and global markets.

Stargate Deals: Market optimism remains underpinned by the public-private AI infrastructure push. On Wednesday, OpenAI solidified this trend by securing key agreements with Samsung Electronics and SK Hynix for its ambitious Stargate projects. Crucially, the deal involves both the supply of next-generation chips and a commitment to jointly build AI data centers in Seoul. This strategic expansion is a clear indicator of the effort by the US-led AI ecosystem to diversify its computation capacity and deepen alliances with key global hardware partners.

• Stargate’s deal with a South Korean tech company forms part of its broader strategy for international growth. This follows closely on the heels of a similar infrastructure agreement with the UAE as well as with the UK, demonstrating a coordinated push to establish a global footprint that spans both advanced technology and critical data center capacity.
• The US push to develop AI infrastructure is a key component of a broader strategy to solidify its position as the global epicenter of artificial intelligence. The administration’s approach appears to be one of expanding US influence through technological supremacy, while simultaneously reducing the rest of the world’s reliance on international trade.
• The central challenge to watch for is the US’s ability to compete with China as both nations expand their AI reach abroad. US success hinges on convincing more countries to adopt US-based AI infrastructure and technology over Chinese alternatives. Successfully winning these build-out contracts will directly increase US market share, making it significantly easier for US tech companies to justify their aggressive, high-growth valuations.

EU Trade Restrictions: The EU has proposed doubling tariffs on imported steel to 50% in an effort to shield its domestic industry from dumping by China and other Asian nations. This new rate is designed to align with the US tariff level, a move intended to prevent steel exports that are being diverted by US policies from flooding the European market. Although the EU has steel import quotas in place already, this new plan is far more granular, introducing specific quotas based on individual product types and originating countries.

• The global move to restrict imports reflects a concerted effort to economically isolate China, as US trade policy is prompting a worldwide realignment. In response, key US partners and regional powers — including Canada, Mexico, Japan, and India — have enacted new anti-dumping measures targeting Chinese goods.
• Concurrently, efforts are underway to counter China’s potential to weaponize its own imports in retaliation. Last month, G-7 members began talks to establish price floors for rare earths. This strategy aims to incentivize investment in alternative production and reduce collective reliance on China. The group is also considering targeted tariffs on Chinese exports of these critical minerals.
• As Western nations toughen their stance, China is expected to deepen its ties with the Global South to reduce its own economic dependencies. This shift is already visible, with Chinese exports being increasingly redirected to Africa and Latin America, leveraging existing investment partnerships. We can expect this trend to accelerate as China works to establish an alternative trading bloc.

Cook Safe for Now? The Supreme Court will hear arguments in January on the president’s authority to fire Federal Reserve Governor Lisa Cook, a case that will define the limits of presidential power over independent agencies. The delayed hearing has, for now, secured Cook’s position on the FOMC. However, her eventual removal could undermine confidence in the Fed’s independence, potentially weighing on the US dollar.

ADP Payrolls: Private sector payrolls recorded their steepest decline since 2023, falling by 32,000 jobs in a fresh sign of a cooling labor market. The downturn appears broader than initially thought, as the prior month’s data was revised down from a gain of 51,000 to a loss of 4,000. Although the ADP report and official government data can differ, they typically move in tandem, offering a critical glimpse into the labor market while the federal government’s release is suspended.

China Soybean Purchases: The White House is preparing to confront China over its halted purchases of American soybeans, a critical point in the ongoing trade negotiations. China’s shifting of its massive agricultural orders to competitors like Brazil and Argentina has damaged the US farm sector. While a resumption of Chinese buying would offer significant relief, the agreement hinges on unspecified concessions that Beijing is expected to demand. The two nations face a November deadline, after which previously suspended tariffs are slated to be reinstated.

Qatar Protection: The White House has pledged to defend Qatar in the event of an attack, a move aimed at securing the country’s continued participation in the Abraham Accords. This assurance comes in response to a recent Israeli airstrike on Qatari soil targeting Hamas leaders — an act Israel has since apologized for but was seen as a severe breach of trust. By extending US protection, the Trump administration hopes to reassure Qatar that such an incident will not be repeated.

Federal Job Cuts: The White House is considering permanent layoffs to pressure Democratic lawmakers into ending the government shutdown. This escalation comes as the two parties remain deadlocked over a spending agreement to fund the government. While the threat of layoffs suggests the stalemate could persist longer than expected, there are indications that both sides remain willing to negotiate a deal.

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by Patrick Fearon-Hernandez, CFA, and Thomas Wash

[Posted: 9:30 AM ET] | PDF

Our Comment starts with an analysis of the government shutdown and the evolving strategy of the White House in restructuring US healthcare to fight chronic disease. We then pivot to global topics, including the UK’s move to establish a regulatory framework for stablecoin, the dynamics driving the Argentine peso’s current pressure, and Saudi Arabia’s massive $55 billion acquisition of Electronic Arts as part of its gaming push. Finally, we provide a summary of recent economic indicators from the US and global markets.

Government Shutdown: A government shutdown began at midnight as a deep political divide prevented Democrats and Republicans from agreeing on a stopgap spending bill. The breakdown occurred when lawmakers failed to reconcile the Democratic demand to extend Affordable Care Act subsidies with Republican opposition to tying that provision to ongoing government funding. While there is some hope that the government shutdown will be limited, there are some signs that each side is willing to hold out to prevent the other side from gaining an edge.

• While a government shutdown can cause significant public inconvenience, its economic impact is typically minimal, especially when it lasts for only a few days. For instance, the longest shutdown on record, which ran for 35 days, was estimated to have reduced that year’s GDP by only 0.4%, meaning it had a rough economic cost of 0.15% per week that it was in effect.
• A major concern for financial markets regarding a government shutdown is the potential delay in the release of critical economic data. For instance, the shutdown would halt the publication of the Bureau of Labor Statistics’ (BLS) jobs report, leaving the underlying health of the labor market in doubt. This delay is particularly problematic because Federal Reserve officials have stated that future interest rate cuts likely hinge on the outlook for employment.
• We believe a potential government shutdown is unlikely to derail market sentiment. Although it would deprive investors of crucial economic data, the market has looked past this risk so far, positioning for a positive outcome that should mitigate near-term downside. In the absence of official reports, however, market participants will likely assign greater weight to private data sources like the ADP employment report.

Healthcare: The White House has unveiled a new initiative aimed at lowering healthcare costs. On Tuesday, the president announced an agreement with Pfizer to cut certain drug prices by up to 85%, facilitated by tariff reductions. The administration expects other major pharmaceutical companies to follow suit. In a separate move, the president directed $50 million toward AI research to advance pediatric cancer treatments, signaling a strategic shift to leverage technology for more efficient medical breakthroughs.

• These drug price cuts are part of a larger administration strategy to incentivize the pharmaceutical industry to reshore its manufacturing base. This follows the president’s threats earlier this year to impose higher tariffs on companies that refuse. Despite some willingness from players like Eli Lilly, significant cost concerns remain a primary barrier for a sector facing thin profit margins. In this context, reduced drug prices seem to be a concession offered to secure industry cooperation on reshoring.
• Additionally, a longer-term goal appears to be shifting reliance from university-led research toward tech companies. The White House believes that leveraging technology could make achieving breakthrough research more cost-effective than relying on academic institutions.
• Overall, we view the government’s increased economic involvement as a potential stabilizer for equity markets, offering crucial support during downturns and funding for long-term development. The primary risk, however, is a reduction in corporate autonomy, which could lead to market inefficiencies. Consequently, we believe this environment favors a more active investment management approach to hedge against these potential risks.

Stablecoin Future: In a clear sign of a shifting regulatory landscape, Bank of England Governor Andrew Bailey endorsed stablecoins as a tool to reduce commercial lending reliance. This move aligns with a wider Western effort to catch up to the United States, which has taken a lead with its pro-digital asset legislation. As part of this race, both the UK and EU are exploring the development of their own stablecoins. Despite this accelerating acceptance, the fundamental concern that stablecoins could threaten financial stability remains unresolved.

Hybrid War? The prime minister of Denmark has warned that NATO must do more to counter Russian aggression. She argued that last week’s drone incursions, which led to the shutdown of Denmark’s main airport, appear to be part of a broader strategy by Moscow to divide Europe and represent a form of hybrid warfare. In her remarks, she advocated for increased supplies of defense equipment to shore up regional defenses. While we believe the risk of direct conflict remains low, this risk is currently underpriced by financial markets.

Argentine Bailout: The Argentine central bank intervened on Tuesday to defend the peso after a sharp sell-off. This was triggered by market fears that the US may be unable to follow through on its pledge of support, especially with a looming government shutdown. These concerns were ignited by a lack of detail from US Treasury Secretary Scott Bessent, who had vowed to do “whatever it takes” to bolster confidence after weak regional election results.

Basel Talks: The US is pushing for changes to the Basel framework that would no longer treat the EU as a single market for regulatory purposes. This move is likely to cause significant friction with EU regulators and institutions, as it would increase the risk weighting for many banks in the region and undermine the fundamental EU principle of a unified single market. This push for a rule change exemplifies the increasingly frosty state of transatlantic relations.

The EA Takeover: The game maker went private following the largest leveraged buyout in history. The $55 billion takeover was backed by the investment fund Silver Lake and Saudi Arabia’s Public Investment Fund (PIF). This acquisition serves as a potent reminder of the growing economic ties between the United States and Saudi Arabia, as the oil exporter seeks to diversify away from hydrocarbons and into technology. The move signals that Riyadh is poised to expand its global reach by adding more major companies to its investment portfolio.

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by Patrick Fearon-Hernandez, CFA, and Thomas Wash

[Posted: 9:30 AM ET] | PDF

Our Comment today opens with a note on the high likelihood of a federal government shutdown starting tonight. We next review several other international and US developments with the potential to affect the financial markets today, including a US-Swiss deal that should allow Switzerland to keep intervening in the currency market to hold down the value of the franc and new Chinese retaliatory measures against the US’s new port fees targeting Chinese ships.

US Fiscal Policy: Yesterday’s meeting between President Trump and the top Republicans and Democrats in Congress broke up with no deal on a short-term funding bill to avert a partial federal government shutdown starting Wednesday. Democrats continue to push for restoring billions of dollars of healthcare spending. Republicans say they’re willing to discuss the issue, but not under the pressure of a deadline. If it happens, a shutdown could potentially disrupt financial markets and would likely postpone the monthly labor report due Friday.

US Artificial Intelligence: Fortune magazine today released its first-ever “AIQ 50” list, which ranks Fortune 500 companies generating significant and measurable impact with AI. In a surprise, many of the firms on the list aren’t in technology at all, but they have been at the forefront of implementing and leveraging AI in their financial, manufacturing, mining, or retailing operations. The top 10 companies on the list are:

1. Alphabet
2. Visa
3. JPMorgan Chase
4. Nvidia
5. Mastercard
6. Coca-Cola
7. ExxonMobil
8. Amazon
9. Ecolab
10. Wesco International

United States-Switzerland: The US and Swiss governments yesterday signed an agreement not to “target exchange rates for competitive purposes,” although the document also recognizes that market interventions are a valid tool for addressing currency volatility or “disorderly” moves in exchange rates. The deal is being taken as a green light for Switzerland to keep intervening in the currency markets to hold down the value of the franc against the dollar.

United States-China: The Commerce Department yesterday said its “entity list” of foreign firms subject to export controls would be expanded to include the subsidiaries of any named entities. The entity list isn’t focused only on China, but Chinese entities make up a large share of it. Therefore, the move will probably be a further source of tension in the US-China relationship and could potentially invite Chinese retaliation against US firms.

Australia: The Reserve Bank of Australia today held its benchmark short-term interest rate unchanged at 3.60%, as widely expected. The central bank has cut rates three times since February, but it said rebounding economic activity and an uncertain outlook justified holding rates steady today. In response, the Australian dollar has appreciated about 0.5% so far today, reaching $0.6611 and continuing its upward trajectory that started in January.

China: The official purchasing managers’ index for manufacturing rose to a seasonally adjusted 49.8 in September, beating expectations and rising from 49.4 in August. Like most major PMIs, the official China indicator is designed so that readings over 50.0 signify expanding activity, so the latest reading suggests Chinese factory activity is now basically stagnant or declining only slightly. The modest improvement suggests the manufacturing sector is seeing some improvement from government stimulus and relative stability in the US-China trade war.

China-United States: Beijing yesterday released new measures to retaliate against the US’s new port fees for Chinese-owned and Chinese-operated ships calling at US ports. The new Chinese measures will allow Beijing to impose special fees or restrictions on US-connected ships trying to access Chinese ports. The US isn’t a shipping power, so the number of affected vessels could be small. However, the rules may allow Beijing to take an expansive view of what US-connected ships could be targeted, potentially making this a more important issue for shippers.

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by Patrick Fearon-Hernandez, CFA, and Thomas Wash

[Posted: 9:30 AM ET] | PDF

Our Comment today opens with reports that China plans to demand an important change in the US’s policy toward Taiwan in return for trade concessions. We next review several other international and US developments with the potential to affect the financial markets today, including the prospects for a US government shutdown this week and a risk that the French government could fall in the coming days.

United States-Taiwan-China: An exclusive weekend report by the Wall Street Journal said Chinese General Secretary Xi plans to leverage President Trump’s desire for a bilateral trade deal to secure a US commitment to “oppose” independence for Taiwan. Such a policy would require a shift from the US’s traditional “strategic ambiguity,” in which it hasn’t explicitly said it would support or oppose Taiwanese independence.

• By easing tensions with China, the shift in US policy could remove a key risk for the financial markets and allow US stock prices to keep rising. However, the shift would likely be alarming to traditional US allies and investors in the Asia-Pacific region, as it might undermine their confidence in Washington’s support against Chinese aggression.
• The potential loss of US support could also undermine long-run prospects for economies and stock markets in other regions, such as Europe.

US Fiscal Policy: President Trump today meets with the top two Republicans and the top two Democrats from each chamber of Congress to try to flesh out a compromise for the funding bill to keep the federal government operating after the current stopgap financing measure ends on Tuesday night. However, the Democrats are demanding an extension to Affordable Care Act subsidies that are set to expire at the end of the year and a reversal of the cuts to Medicaid and other health programs that Republicans made unilaterally over the summer.

• The impasse makes it increasingly probable that the government will face at least a short-term shutdown starting this week.
• As a potential shutdown looms, it is likely that US and global financial markets could become more volatile. Already, for example, gold prices have surged to new record highs above $3,800 per ounce.

US Defense Policy: New reporting says the Pentagon began pushing defense contractors over the summer to dramatically increase their production of 12 important types of missiles to be sure the US has sufficient stockpiles in case of war with China. The missile makers have pushed back because some of the production goals are so aggressive, and they aren’t confident the defense budget will grow enough for them to get paid. Nevertheless, the reports are consistent with our oft-stated expectation for global defense firms to see stronger sales going forward.

US Politics: New York City Mayor Eric Adams has dropped his bid for re-election, boosting the odds that former New York Governor Andrew Cuomo could beat current front-runner Zohran Mamdani. Since Mamdani’s socialist policies threaten to increase regulation and costs for business firms in New York — especially financial companies — a surprise win for Cuomo could potentially give at least a short-term boost to major US financial stocks.

US Private Credit Market: As we had flagged early on, auto parts maker First Brands last night filed for Chapter 11 bankruptcy protection, disclosing more than $10 billion in total liabilities. While details on the firm’s finances haven’t yet been made available, the sudden collapse of the company and the large amount of liabilities will likely make this a key test of the US’s booming private-credit industry. One important issue is whether there will be any spillover into the broader US financial markets.

United Kingdom: Chancellor Reeves has signaled that her proposed budget for 2026 will include big tax increases, adding to the tax hikes in her budget for 2025. Reeves argued the new measures have become necessary due to the wars in Ukraine and Gaza, rising global borrowing costs, the US’s new tariffs, and pessimistic economic projections. The rising tax burden will likely add to the headwind of slow economic growth that has weighed on UK stock prices in recent years.

France: After newly-installed Prime Minister Lecornu rejected budgetary demands on Friday from the leftist Socialist Party, including a large wealth tax on the rich, the Socialists today have warned that they are prepared to withdraw support from Lecornu and topple his government. The threat suggests the Socialists are prepared to launch a no-confidence vote for Lecornu sometime after Friday. If Lecornu loses such a vote, it could potentially lead to early elections and open the door for the far-right National Rally to take power.

Moldova: In the final round of parliamentary elections yesterday, the Party of Action and Solidarity of President Maia Sandu won 55 of the 101 seats in parliament, which should allow it to continue pursuing its goal of having Moldova eventually join the European Union. Meanwhile, the pro-Russian Patriotic Electoral Bloc received less than half the votes that Sandu’s party won.

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