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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