by Patrick Fearon-Hernandez, CFA, and Thomas Wash

[Posted: 9:30 AM ET] | PDF

Good morning! The market is eagerly awaiting the latest wave of earnings reports. In sports news, Real Madrid staged a remarkable comeback and defeated Borussia Dortmund 5-2 with five unanswered second-half goals. Today’s Comment will explore the market’s anticipation of a Republican sweep in the upcoming election, analyze the economic indicators suggesting a more dovish ECB compared to the Federal Reserve, and delve into the ongoing reluctance of Western companies to sever ties with China despite escalating tensions. As always, the report will include a summary of key domestic and international economic data releases.

Red Wave is Coming? Election jitters are starting to make their way into the market as investors grow bullish about a potential Republican sweep in November.

• Though the election remains a toss-up, markets seem to be preparing for a potential Republican victory. The 10-year Treasury yield has been the most noticeably hit by concerns over higher inflation expectations driven by tariffs and rising deficits, triggering some selloffs. Meanwhile, the Mexican peso (MXN) has plunged amid fears that a new government could strain relations over trade, border security, and recent judicial reforms. The movement is likely a reflection of investors not wanting to hold on to certain assets until there is certainty regarding the outcome.
• The greatest uncertainty stems from how a Republican-controlled government will act on campaign promises. President Trump’s tax proposals, including eliminating taxes on tips, lowering corporate taxes, and offering exemptions for military personnel, police, and firefighters, are expected to significantly increase the national deficit. There is also uncertainty surrounding tariffs, which have ranged from 10% on all imports to as high as 2000% on specific Chinese goods. Moreover, doubts persist about the seriousness of some of these proposals as there are concerns about their feasibility.

• The outcome of the congressional and presidential elections will likely depend on a few key votes, so investors should be cautious about assuming a clear winner and avoid being surprised by an unexpected result. The red wave optimism of 2022 serves as a reminder that polls can be unreliable. While we can anticipate some market volatility around election day, it is unlikely to significantly impact the long-term trends of Treasury yields or equity performance. Regardless of the outcome in November, the winning party is likely to scale back on campaign promises quickly.

Leading the Pack: While the eurozone’s growth remains uncertain, the US economy is beginning to gain traction.

• The United States was the only developed country to have its economic growth outlook upgraded by the International Monetary Fund for the next two years. According to the supranational agency, the US is expected to maintain its position as the driving force of global growth, fueled by consumer spending this year and next. In contrast, the eurozone’s growth outlook has been downgraded for the coming two years, weighed down primarily by a slowing in manufacturing, tightening of fiscal policy, and cooling of the labor market.
• Recent data suggests the ECB and Fed will ease at different rates. The US Citigroup Economic Surprise Index entered positive territory earlier this month, as economic data has consistently exceeded expectations. In contrast, the eurozone’s economic surprise data, while improving, remains negative. The more robust US performance has led Fed officials to advocate for a more gradual approach to rate cuts. Meanwhile, the continued weakness in the eurozone has prompted ECB officials to push for aggressive easing to prevent the region from slipping into recession.

• Despite differing outlooks, the IMF maintains that global inflation has largely been defeated. This suggests that central banks should continue their easing cycles in the coming months. We anticipate that the Fed will likely cut rates by at least 25 basis points before the year’s end, assuming there are no inflationary setbacks. Meanwhile, the European Central Bank could reduce rates by 50 basis points at its next meeting. The ECB’s relatively dovish stance and economic weakness should lead the euro (EUR) to depreciate against the dollar.

Middle Ground on China: Firms appear to be unwilling to readily give up ties with China even as the West continues to reduce ties with the second largest economy.

• Apple CEO Tim Cook has reaffirmed the company’s commitment to investing in China, highlighting the country’s crucial role in its supply chain. This statement follows a recent meeting with a top Chinese technology official to discuss strengthening bilateral ties as the Chinese economy has struggled to regain its footing following the pandemic. In the meeting, the Chinese officials pushed Cook to agree to invest in some of its key industries, such as cloud services and the secure management of data.
• Despite Beijing’s reassurances of its commitment to prevent a prolonged economic slowdown, foreign direct investment in China has declined. Investors remain concerned about the potential for deflation and increased Western scrutiny of Chinese exports. In recent years, China’s trade relationship with the United States has faced challenges as officials have raised import tariffs and tightened export restrictions on companies. As a result, trade activity between the US and China remains well below its long-term trend.

• Economic decoupling between the United States and China is likely to occur, despite potential resistance from some companies. While the transition may be slower than anticipated, the overall trend remains clear as both sides don’t trust one another. US companies with significant revenue or supply chain exposure to China are particularly vulnerable to the disruptions associated with this shift. Investors should consider adjusting their portfolios accordingly to mitigate these risks.

In Other News: The latest AI processors for Huawei Technologies were developed by TSMC, indicating that the company is circumventing some of the export restrictions imposed by the US. Additionally, US officials have confirmed that they believe Russia has used North Korean troops in its conflict with Ukraine. This decision exemplifies the growing threat posed by this new axis of evil. Lastly, Israel has confirmed the killing of a potential successor to Hezbollah, signaling that it is closer to achieving its objectives in Lebanon.

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by Patrick Fearon-Hernandez, CFA, and Thomas Wash

[Posted: 9:30 AM ET] | PDF

Our Comment today opens with a preview of the big BRICS summit of emerging-market nations such as China, Russia, and Iran. Since the group includes key countries in China’s geopolitical bloc, we’ll be looking to see how much General Secretary Xi dominates the meeting, despite it being hosted by Russian President Putin. We next review several other international and US developments that could affect the financial markets today, including an important new IPO on the Indian stock market and a court ruling that favors the US oil and gas industry.

BRICS Summit: A summit of the BRICS emerging-market countries kicks off today in Russia. While the group is led by Brazil, Russia, India, China, and South Africa (accounting for its acronym), this will be the first summit since the group was expanded to include Saudi Arabia, Iran, the United Arab Emirates, Egypt, and Ethiopia. Importantly, leading countries in the group say the summit will discuss further steps to reduce use of the US dollar in international trade and develop a BRICS currency and non-dollar international payments system.

• The discussions on moving further away from the dollar and Western systems will likely play into investor concerns about the greenback’s value going forward. That could weigh on the dollar and boost gold prices in the coming days.
• Nevertheless, as we noted in our Comment yesterday, the effort by some countries to cut their use of the dollar hasn’t stopped it from appreciating against most other major currencies for the last decade and a half. The chart below shows how the greenback’s value has changed against each currency in the Federal Reserve’s broad dollar index since roughly the beginning of its long bull market.

China: According to market data provider Wind, share buybacks by companies listed on China’s domestic stock exchanges have reached the equivalent of $33 billion for the year to date, almost double the record amount in all of 2022. The buybacks have been driven by a special lending facility that was part of last month’s economic stimulus program. If the strong buybacks continue, they could help buoy the market even as investors begin to question the efficacy of the overall stimulus program.

India: South Korean auto maker Hyundai Motors today raised the equivalent of $3.3 billion by listing 18% of its local unit on India’s main stock exchanges. Even though the share price fell modestly by day’s end, the rich IPO valuation for the unit is expected to entice other global companies to consider listing their Indian units as well. That prospect underscores India’s attractiveness as one of the world’s few large, fast-growing economies.

European Union: For the first time since Russia invaded Ukraine in 2022, leading to shortages of natural gas in the EU, we’ve noticed that media concerns about gas storage have fallen off sharply. Nevertheless, we think it’s important to note that EU gas storage is now more than 95% full, above the five-year average of around 92% for this time of year. That has kept a lid on EU gas prices and should help limit the damage if geopolitical events disrupt international supplies this winter.

United Kingdom: Bank of England Chief Economist Huw Pill has reportedly sent a private letter to the Office of National Statistics complaining that the agency still hasn’t fixed its problem with unreliable estimates regarding employment and other aspects of the labor market. The episode shows how statistics agencies, including in the US, have struggled with falling survey response rates, which have led to big data revisions and called into question the accuracy of economic data. (Of course, the same dynamic has rendered political polls less reliable.)

US Economic Policy: With exactly two weeks to go before the presidential election, we still consider the contest too close to call. Nevertheless, we’re intrigued by an article in today’s Financial Times that looks at the possible economic policies of Vice President Harris if she were to win. The article is useful because, as we noted in our recent Bi-Weekly Geopolitical Report comparing US foreign policy under Trump versus Harris, the vice president’s policy views are hard to read, based on her relatively low profile in the Biden administration and her own campaign strategy.

• The article claims Harris’s most likely picks for Treasury Secretary would be current Deputy Treasury Secretary Wally Adeyemo, current Commerce Secretary Gina Raimondo, or current White House Chief of Staff Jeff Zients.
• The article says Harris might also consider Federal Reserve board member Lael Brainard as Treasury secretary, but she may prefer to have her replace Jerome Powell as Fed chair when his term expires in 2026.
• The article also notes that Harris has much closer ties to top business leaders than President Biden does. The article therefore suggests Harris would listen more closely to business concerns about the economy and move away from some of Biden’s more progressive policies.

US Oil Industry: A federal judge yesterday ruled that a regulation friendly to the offshore oil industry should remain in place until next May, rather than expiring as scheduled in December. The regulation exempts the industry from a rule protecting a nearly extinct whale species, and industry lobbyists had argued that if the exemption expires, all US oil rigs in the Gulf of Mexico would have to shut down. Environmentalists have argued that the industry position amounts to fear mongering.

US Spirits Industry: According to industry data provider IWSR, the volume of alcoholic spirits sold in the US from January through July was down 3.0% from the same period one year earlier, accelerating from a 2.9% decline in full-year 2023 and a flat performance in 2022. For comparison, US spirits consumption had increased at an average annual rate of 2.6% per year in the two decades to 2019, and the growth rate nearly doubled in the pandemic years of 2020 and 2021. What’s unclear is whether the recent declines are structural or merely cyclical.

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by Patrick Fearon-Hernandez, CFA, and Thomas Wash

[Posted: 9:30 AM ET] | PDF

Our Comment today opens with a statement from a European monetary policymaker that suggests the European Central Bank could cut its benchmark short-term interest rates more slowly than investors expect, just as we think the Federal Reserve could cut US rates more slowly than anticipated. We next review several other international and US developments with the potential to affect the financial markets today, including a new competitive threat from Chinese electric vehicle makers and a tentative deal to end the Boeing strike in the US.

Eurozone: Slovenian central bank governor Boštjan Vasle, who is also on the European Central Bank’s policy committee, has warned that the ECB’s back-to-back interest rate cuts in September and October do not necessarily portend further cuts at each upcoming policy meeting. European swap markets suggest investors expect an aggressive pace of cuts, but Vasle said the policymakers will need to be convinced by the economic data. The statement suggests that the ECB will cut rates only slowly from here, just as the Fed might do with US rates.

France: Economy Minister Armond yesterday said state-investment bank Bpifrance will take a stake of about 1% in Sanofi’s consumer health business as part of its sale to a US private-equity firm. That will give the French government a seat on the health company’s board and ensure it has influence over the unit’s production, investment strategy, and employment policies. The move shows how the French government continues to prioritize maintaining control over what it considers strategic industries.

Moldova: In presidential elections yesterday, incumbent Maia Sandu came in first but failed to win an outright majority. She will therefore compete in a run-off on November 3, facing main rival Alexandr Stoianoglo, whose candidacy was backed by the pro-Russia Socialist party. Also in the elections, voters only barely approved a referendum supporting future accession to the European Union. The disappointing results for Sandu followed weeks of reports that Russian operatives were working to throw the elections into the Kremlin’s favor.

China: In a sign that China has expanded its lead in electric-vehicle technology, almost all major Chinese EV makers have now developed or are starting to develop extended-range EVs. The new Chinese EREVs can go more than 600 miles on a single charge and cost about 10% less than regular EVs. They not only accommodate a power cable to recharge the battery, but they also have a small internal-combustion engine to generate electricity for the battery when needed.

• The new Chinese EREVs may be an additional competitive threat to traditional and electric vehicle manufacturers around the world.
• Therefore, they are likely to further spur protectionist measures against Chinese EVs in the US and the rest of its geopolitical and economic bloc.

China-India: Ahead of the big BRICS summit opening tomorrow, China and India have reportedly reached a deal on military patrols along their disputed border in the Himalayan mountains. After deadly clashes along the “actual line of control” in 2020, tensions have been high in the area, raising the risk of a broader, more dangerous conflict between the countries. Although we haven’t yet seen any details on the deal, a solid agreement that cools tensions over the long term would therefore be a positive for global stability.

• We suspect the new deal was at least partly aimed at getting the BRICS summit off on the right foot. We also suspect Beijing might have made concessions to New Delhi to slow its growing ties to Washington, Tokyo, and Canberra.
• Separately, we note that the BRICS summit is due to discuss further de-dollarization efforts. So far today, the risk that the BRICS countries will further reduce their use of the greenback is giving a boost to gold prices. Near gold futures today have reached a new record high and are currently trading at about $2,752.40 per ounce.
• As a reminder, our Bi-Weekly Geopolitical Report from September 9 discussed prospects for the dollar as the world fractures into relatively separate geopolitical and economic blocs. The report shows how the dollar has kept appreciating against most other fiat currencies even as some countries have tried to reduce their use of it, in large part because of continued strong capital flows into the US.

United States-Russia: More than 50 members of the US Congress from both parties have written a letter to the Biden administration to protest SLB’s continued work in support of Russia’s oil industry. The letter to Secretary of State Blinken and Treasury Secretary Yellen demands the administration tighten its sanction rules so that US firms aren’t helping Russia earn oil revenues, which in turn can be used to finance its war against Ukraine.

• The move suggests SLB and other Western firms still operating in Russia could soon be forced to retreat from the market.
• Exemptions for oil service firms like SLB were initially put in place to avoid a collapse in Russian oil output. If Western oil service firms are forced to pull out of the country, there is some risk that Russian oil output could fall, pushing up global energy prices.

United States-Israel-Iran: Two classified US intelligence reports on Israeli preparations for a military strike against Iran have reportedly been leaked and posted on pro-Iranian internet platforms. Based on press reports, the two reports appear to be relatively raw, first-cut analyses of spy-satellite imagery collected by the National Geospatial-Intelligence Agency last week.

• The intelligence summaries do not appear to be comprehensive, well-vetted discussions of Israel’s attack plans. However, since they raise concerns about Israel’s operational security, they could potentially prompt Israel to delay its attack.
• Some commentators will likely decry the reports as new evidence that the US spies on its allies, but we don’t see that as a major story. More importantly, the reports may have been deliberately released by a lower-level employee in the US government or military who is disgruntled or seeking to undermine Israel. In that case, further embarrassing or damaging reports could be released in the coming days.

US Military: The Defense Department is reportedly developing a new program in which chief technology officers and other senior tech professionals in the private sector could take positions in the reserves. The initiative would be similar to existing programs in which medical and legal professionals serve as part-time military officers. The tech reserve officers would help the armed services with short-term projects in cybersecurity, data analytics, and other areas, illustrating how the modern military is built around information processing and other advanced technologies.

US Labor Market: Over the weekend, Boeing and the International Association of Machinists and Aerospace Workers reached a tentative deal for a new contract, potentially ending the union’s month-long strike against the company. Under the deal, workers represented by the union would receive a 35% pay hike spread over four years, an up-front bonus of $7,000, and increased company contributions to their retirement accounts.

• The workers are due to vote on the deal this Wednesday. If they vote to approve, Boeing could start producing its key airframes over the coming weeks and begin to stem the big financial losses it has incurred because of the strike.
• Settlement of the strike could also remove one important risk to US economic growth. Not only has Boeing shut down much of its production and announced layoffs, but key suppliers have started to do the same. If the new contract is approved, it could prevent any further production stoppages and layoffs in the key aerospace sector.

US Oil Services Industry: As it released a disappointing report on third-quarter revenue and profit growth last Friday, oilfield services giant SLB warned that energy firms are becoming more cautious about spending both in the US and abroad. According to CEO Olivier Le Peuch, the spending restraint reflects low global oil prices, which he in turn attributed to weak economic growth in China and elsewhere, surging rising oil production outside the Organization of the Petroleum Exporting Countries, and uncertainty about OPEC+ supply releases.

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by Patrick Fearon-Hernandez, CFA, and Thomas Wash

[Posted: 9:30 AM ET] | PDF

The market is currently processing the recent GDP data from China. In sports news, the Cleveland Guardians stunned the New York Yankees with a 10th-inning home run to win Game 3 of the ALCS. Today’s Comment will discuss why consumer spending has remained resilient, the essential role of drones in modern warfare, and our thoughts on the European Central Bank’s latest rate decision. As usual, our report includes a roundup of domestic and international data releases.

The Strong US Consumer: Despite concerns over rising prices, households are still managing to increase their spending on everyday goods and services.

• Retail sales for September exceeded all expectations, surging from a 0.1% increase in August to a robust 0.4% the following month. Consumer spending has surged, particularly in the Retail Sales Control group, which excludes food services, autos, gasoline, and building materials. This category, which feeds into the GDP numbers, increased from 0.3% to 0.7%, marking the fastest growth in three months. This strong report boosted the Atlanta GDPNow forecast for the third quarter, projecting an annualized rate of 3.6%, a significant increase from the previous quarter’s rise of 3.0%.
• Despite the positive headline, the underlying data suggests growing consumer frugality. Households have shifted their spending towards everyday essentials while curtailing major purchases. Grocery stores, online retailers, and miscellaneous retailers like florists and pet stores were the biggest contributors to the strong retail sales figures. In contrast, big-ticket items, such as vehicles, have experienced muted sales, and home furnishing sales have declined for two consecutive months. Additionally, sales seem to be rising below their historical pace.

• The resilient labor market has enabled consumers to maintain spending despite rising inflation. As long as employment remains robust, consumer spending will likely continue to support the economy. The recent positive retail sales data reinforces the expectation that the Federal Reserve will either cut interest rates by 25 basis points at its next meeting or pause until economic indicators weaken. However, concerns about a potential resurgence of inflation may provide a floor in 10-year Treasury yields at 4% in the coming weeks.

The Rise of the Drone: The use of drones has become increasingly valuable in modern warfare as countries aim to reduce costs and yet remain effective in taking on larger rivals.

• The wars in Ukraine and Lebanon have demonstrated the crucial role of drones in modern warfare, particularly for smaller militaries. In its conflict with Russia, Ukraine has successfully developed a domestic drone industry that rivals imported models from the United States, bolstering its ability to strike Russian targets. Meanwhile, Hezbollah has employed drones to defend against Israeli attacks. These examples underscore the strategic importance of drone technology in contemporary combat.
• The drone revolution is a threat to global stability that shouldn’t be underestimated. Iran’s cheap, combat-proven drones are captivating developing nations, bolstering defenses, and aiding militaries like those in Ukraine and Sudan. The global production network of drones, spanning South America and Central Asia (including some US parts), raises questions about the effectiveness of sanctions. Meanwhile, Ukraine’s experience exposes limitations in US drone capabilities, prompting them, in some cases, to explore Chinese alternatives for reconnaissance. This highlights how any nation, regardless of size, can exploit niche strengths, reshaping the modern military landscape.

• The changing face of warfare favors smaller, stealthier equipment over traditional, heavy-duty hardware. This shift offers a strategic opportunity for the United States. By capitalizing on its advanced semiconductor industry, the US can not only improve drone performance but also develop counter-drone measures. This technological pivot could potentially reduce military expenditures, addressing budgetary concerns amidst a rising fiscal deficit. Moreover, these investments will likely stimulate growth in tech and defense companies with close ties to the government.

The Dovish Tilt: The European Central Bank (ECB) has reiterated its desire to ease policy as it looks to boost its flagging economy.

• On Thursday, the ECB lowered its benchmark policy rate by 25 basis points for the third time this year. Following the rate decision, the central bank observed that inflation was moving in the right direction, but it had growing concerns about the economy. This combination gave it the confidence to lower rates further. While there was no indication of future policy actions for December, it is speculated that they may reduce rates at the next meeting if inflation continues to decline and economic conditions deteriorate.
• Despite a general easing of eurozone inflation, several countries continue to face stubbornly high rates. In September, harmonized core inflation for the eurozone rose to 2.8%, significantly lower than the Netherlands and Belgium, where rates remain above 4% year-over-year. Greece’s rate was also notably higher. This discrepancy is primarily due to increased demand for services and the end of energy price control measures. As the price control information is phased out of the data, these countries could experience even more intense inflation in the coming months due to base effect changes.

• The ECB’s aggressive interest rate cuts are focused more on preventing a recession than a display of confidence that it has achieved its price stability objective. That said, while additional monetary easing is expected to continue into 2025, policymakers may slow the pace of cuts as signs of economic growth and rising inflation emerge. In the short to medium term, the ECB’s dovish stance could bolster the US dollar, especially as robust US economic data reinforces the Fed’s cautious approach to future rate cuts.

In Other News: Hamas leader Yahya Sinwar was killed on Thursday by Israel; his death has likely added pressure for an end to the conflict in Gaza. The US has eased restrictions on space technology exports as it looks to expand its foot print in the industry. China’s GDP growth increased 4.6% from the previous year, aligning with market expectations but marking its slowest rate of growth since Q1 2023.

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by Patrick Fearon-Hernandez, CFA, and Thomas Wash

[Posted: 9:30 AM ET] | PDF

Good morning! The market is currently analyzing the latest retail sales data. In sports news, the New York Liberty secured a victory against the Minnesota Lynx in Game 3 of the WNBA Finals, taking a 2-1 lead in the series. Today’s Comment will discuss why small cap stock indexes are gaining attention, explore the strategic shift toward clean energy sources, and provide an overview of North Korea’s increasing assertiveness. As usual, the report will conclude with a roundup of international and domestic news releases.

The Rally Broadens: The market has changed its equity sector preference as it embraces the possibility of a soft landing.

• A broad-based rally over the past four months has pushed small cap indexes, such as the Russell 2000 and S&P SmallCap 600, close to all-time highs. Investors are increasingly willing to take risks, shifting their focus to smaller cap stocks that were often overlooked in the early half of the year. This shift in sentiment started when rising market expectations of a rate cut encouraged investors to move away from the tech sector in mid-July.
• The two best performing sectors over the past four months have been large cap utility companies and small cap communication firms. This shift comes as investors seek to maintain limited exposure to AI-related companies without incurring significant downside risk. Utility companies in the S&P 500 have gained appeal due to AI’s energy demands, their relatively high dividend yields, and their negative correlation with interest rates. Meanwhile, small cap communication companies within the S&P SmallCap 600 index have attracted investors seeking bargains.

• The overall broadening of the market should continue as long as investors remain confident in a soft landing. A continued decline in inflation, which would keep the Fed on track to lower rates, should be supportive of not only the sectors outlined above but also Real Estate and Financials, which had been shunned by investors during the Fed’s hiking cycle. However, any indication of a recession could lead investors to seek shelter in safer assets. At this time, we remain confident that if current conditions persist over the next few months, small cap stocks should perform relatively well.

Battery Superpower? As the US looks to build out its supply chain diversification, it is starting to focus on resources in its own backyard.

• A Silicon Valley startup, Lyten, has announced that it plans to invest over $1 billion in a lithium battery factory in Reno, Nevada. This area has become known as one of the key regions that will be used to build out the capacity of the US battery manufacturing industry. It is estimated that the state may be sitting on the largest deposit of lithium found anywhere in the world, at around 20 to 40 million metric tons.
• In recent years, the US has been ramping up its battery manufacturing capacity to diversify its energy resources. This effort is evident in the surge in the value of shipments from battery factories. A key component of this strategy involves securing critical mineral resources, which is why it has expanded investment lithium and cobalt production. Earlier this year, the US made its first major investment in Ottawa since WWII in order to gain access to its cobalt, while President Biden is scheduled to visit Angola in December to explore similar investment opportunities.

• While renewable technologies won’t supplant traditional fossil fuels as the primary energy source, their increased utilization will contribute to diversifying the US energy portfolio. This shift is essential as the US seeks to reduce its dependence on energy cartels like OPEC, whose member countries may be hostile to US interests. Consequently, the development of renewable resources will be a cornerstone of America’s energy strategy.

South Korea-North Korea: The two sides are feuding again as North Korea issues new threats to invade its southern neighbor.

• The new dispute arose after North Korea accused South Korean drones of flying into North Korean territory and dropping propaganda leaflets, which Pyongyang labeled as an act of war. In retaliation, North Korea destroyed parts of an unused bridge and railway connecting the two countries and warned that the escalating tensions had prompted 1.4 million people to sign up for military service. While the possibility of North Korea launching an imminent large-scale attack on its southern neighbor appears to be unlikely, the country does seem to be acting more hostile.
• Since the collapse of the nuclear agreement under the previous US administration, which would have lifted sanctions, North Korea has sought to strengthen its ties with some of America’s rivals, namely Russia and Iran. These relationships have likely contributed to the development of North Korea’s military capabilities, as the three countries have been known to exchange military expertise and weapons. Most recently, reports indicate that North Korea sent troops to assist Russia in its war against Ukraine, suggesting that its military is now gaining firsthand combat experience.

• Rising tensions on the Korean Peninsula have largely gone unnoticed as news coverage has focused primarily on the wars in Ukraine and Gaza. However, there are growing concerns that the possibility of conflict is at its highest level in recent memory. North Korea’s growing ties with hostile actors such as Iran and Russia suggest that the US will need to seek greater coordination with its allies within the Indo-Pacific to deter conflict. While we do not think a war is imminent, the risk is elevated.

In Other News: The Mexican peso (MXN) has dropped significantly as investors continue to factor in the possibility of a Trump victory in November. Chinese President Xi Jinping has urged officials to make every effort to ensure that the country meets its 5% annual growth target. Meanwhile, Meta has laid off employees who misused its $25 meal credit, indicating that the company may be preparing for a smaller workforce. The European Central Bank cut its rate by 25 bps, which is in line with expectations, as inflation continues to move downward.

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