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MARKETS

As Asian investors gear up to take the baton, sentiment and risk appetite will likely remain subdued after a Wall Street selloff. Despite solid earnings from financial powerhouses like Goldman Sachs (GS), Citi (C), and Bank of America (BAC), concerns over tech stocks and the gloomy global economic outlook are looming large. The tech sector's stumble and broader market jitters have cast a shadow over the optimism fueled by robust bank earnings, leaving investors cautious as they navigate the turbulence ahead.

The tech sector took a notable hit, with Nvidia (NVDA) and ASML leading the global slump. ASML’s shocking earnings miss—booking only half the orders analysts expected—sent the stock plunging the most in 26 years, rippling across the tech landscape. It's a wake-up call for an industry thrived on lofty expectations. Like any major innovative transformation, adaptation is uneven, especially in sectors already feeling the pinch—such as the global car market, which hit the brakes after a strong rebound last year and a resilient first half of 2024.

For me, nothing speaks louder about the state of the U.S. economy than the demand for new cars. But the big issue right now? More than one in four American car owners are underwater on their vehicles, with negative equity surpassing $10,000 on average, according to Edmunds. This financial burden makes it nearly impossible for many to trade in their cars, while those who need to buy face sky-high interest rates, further compounding their financial woes. Auto loan delinquency rates have already exceeded pre-pandemic levels and continue to rise.

Auto loans taken out between 2021 and 2023—when car prices were at their peak—are likely in a low-to-negative equity state, regardless of the car’s price. The more expensive the vehicle, the steeper the depreciation. This, coupled with loan payments averaging $600 per month and soaring insurance premiums, is putting significant financial stress on lower—and overextended middle-income households. In regions like Florida and the Southeast, tens of thousands of auto loans are likely to default, adding to the growing economic strain. This is well on the Federal Reserve's radar and is the primary reason the Republican candidate proposed new tax relief for car loan interest.

Note: The delinquency rate measures the fraction of balances that are at least 30 days past due, excluding severe derogatory loans. The data are seasonally adjusted.

Source: Federal Reserve Bank of New York Consumer Credit Panel/Equifax.

With Taiwan’s chip giant TSMC, the leading producer of cutting-edge chips for AI applications, expected to report a whopping 40% surge in third-quarter earnings on Thursday, global tech investors might be pinning their hopes on this juggernaut to plug the minor leak in the tech sector's dyke. TSMC’s performance could offer much-needed reassurance amid the recent tech stock stumble as investors look for solid footing in the volatile landscape. All eyes will be on the chipmaker to reinvigorate market sentiment and steady the ship.

CHINA MARKETS

On Tuesday, China's markets took another beating as persistent concerns over faltering domestic demand in the world's second-largest economy weighed heavily on investor sentiment. The recent flurry of policy stimulus, while headline-grabbing, has yet to convince skeptics that it can reverse the deepening property-driven downturn.

Tensions are brewing on multiple fronts, adding fuel to the fire. A looming trade war with Europe and China’s provocative military drills around Taiwan cast long shadows over the market. With the U.S. election just around the corner, any hopes for a swift recovery in China’s markets are fading fast as global uncertainty continues to cloud the outlook.

China is proving to be an untidy market for Western allocators, and even local investors remain hesitant to jump in for another leg higher. To truly spark a rally, Beijing must show that its monetary stimulus is more than just window dressing, with real economic growth and a multiplier effect kicking in. Without that concrete evidence, investor sentiment—even with support from government-backed financial institutions—will likely stay on edge. Sure, propping up the market with state-owned entities may keep the wealth effect intact, but it won’t fix the deeper issues if the country’s key economic engines are still sputtering on a few cylinders.

OIL MARKETS

Despite still-elevated geopolitical risks, traders are breathing a bit easier as global markets and inflation concerns find some reprieve following a Washington Post report. The article suggests that Israeli Prime Minister Benjamin Netanyahu has signalled to the Biden Administration that while he remains resolute in battling Iranian proxy groups and defending against direct attacks from the Islamic Republic, his military focus will be on strategic targets rather than Iran’s oil or nuclear facilities. This has helped ease fears of a major disruption to Middle East oil supply.

However, oil bulls have bigger concerns on the horizon. The oil market faces the potential for a supply glut in early 2025, despite the ever-present threat of geopolitical disruptions. The International Energy Agency (IEA) predicts that oil demand growth will slow sharply to just 1 million barrels per day (mb/d) in 2025—half the growth rate seen in 2023. Much of this slowdown is expected to stem from China, where economic cooling will see demand growth more than halved. This could spell trouble for oil bulls banking on stimulus-fueled demand to prop up prices, especially as the market braces for a potential oversupply.

ECB PREVIEW

The October ECB meeting barely registered on anyone’s radar just a month ago. The message in September was crystal clear: there was not enough new data between meetings to justify any moves. Fast forward to now, and the game has completely changed. Suddenly, all eyes are on the October 17 decision, with the stakes skyrocketing. The market is buzzing—and for good reason. The case for another rate cut isn’t just real, it’s looming.

Let’s kick things off with Germany, the heavyweight of the Eurozone, and it’s looking punch-drunk. PMI and Ifo readings? Deep in the red. But the real blow? Volkswagen—Germany’s largest private-sector employer—is shutting down plants and slashing jobs for the first time in 87 years. When VW stumbles, the entire country feels the shockwaves. Moody’s took notice, too, slashing its outlook on the automaker. And just when you thought things couldn’t get worse, Intel paused its semiconductor plant in Germany for two years, derailing the Eurozone’s semiconductor ambitions.

Germany’s economic outlook is bleak. The forecast now? A 0.3% contraction in 2024, marking the second straight year of economic shrinkage. Economy Minister Habeck didn’t sugarcoat it, bluntly blaming “decades of failures.” It’s a storm of bad news for the Eurozone’s powerhouse, and the rest of the bloc can’t escape the fallout.

Meanwhile, inflation is cooling down across the Eurozone, fast. Over half the region is now seeing inflation dip below target. Eurozone CPI plummeted to 1.8% in September, down from 2.2% in August—the lowest since April 2021. For perspective, remember the peak of 10.6% in October 2022? Yeah, no wonder the doves are circling. Core CPI slipped, too, though service inflation remains at a stubborn 4.0%. Even Isabel Schnabel, typically a hawkish voice, has toned down the rhetoric, signalling the Hawks may be running out of steam.

So, what’s the play? The market is gearing up for the ECB to cave into mounting pressure and cut rates by 25 bps in both October and December. With Germany on the ropes and inflation dropping faster than anyone expected, the odds of earlier-than-expected cuts are rising.

The real wildcard? Whether these cuts will be enough to stop the Eurozone’s slide into deeper economic trouble or if we’re headed for a long, slow grind. Either way, the market’s primed, and the ECB is about to shake things up in a big way. 

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