Trump and Xi to meet in South Korea, while US terminates trade talks with Canada

Key Concepts

• Trade Negotiations: President Trump's termination of trade talks with Canada due to an advertisement.
• Cloud Computing Deal: Google and Anthropic's multi-billion dollar agreement for AI infrastructure.
• Inflation and Federal Reserve: The impact of tariffs and service sector stickiness on the Fed's 2% inflation target.
• AI Infrastructure Funding: A record $38 billion debt offering to fund data centers for AI.
• Intel Earnings and Foundry Business: Intel's performance, its role in AI, and its foundry ambitions.
• Gold and Bitcoin as Safe Havens: Investor sentiment and performance of gold and Bitcoin.
• Quantum Computing: The technology, its potential, and current investment trends.
• Mag Seven Earnings: Upcoming earnings reports from major tech companies and their market impact.
• Federal Reserve Interest Rates: Expectations for interest rate cuts and market sensitivity to Fed commentary.
• US-China Trade Talks: The significance of the upcoming meeting between Presidents Trump and Xi.
• Proctor & Gamble Earnings: Strong sales performance driven by consumer goods.

Trade Tensions and Canada Negotiations

President Trump announced the immediate termination of all trade negotiations with Canada. This decision was reportedly triggered by an advertisement aired by the Ontario provincial government. The ad, which argued against Trump's tariff plans and featured the voice of former President Ronald Reagan, was deemed "fake" by Trump on Truth Social. He accused Canada of attempting to influence a pending US Supreme Court case that could impact his tariffs, including those imposed on Canada. Trump has previously implemented 35% tariffs on Canadian goods not covered by the USMCA (United States-Mexico-Canada Agreement). This development follows an earlier attempt by Canada's Prime Minister to mend the estimated $928 billion trading relationship. The Ronald Reagan Presidential Foundation and Institute stated that the ad misrepresented a 1987 radio address by Reagan, with his remarks edited without permission.

US-China Trade Relations and Economic Data

Wall Street is anticipating a positive opening, influenced by signs of easing trade tensions and optimism surrounding the tech sector. President Trump and Chinese leader Xi Jinping are scheduled to meet next Thursday in South Korea to deescalate the ongoing trade war. This summit will occur after lower-level talks this week, amidst rising trade tensions. Chinese stocks advanced today, reflecting growing optimism about a potential trade deal between the two largest economies.

Regarding economic data, the September Consumer Price Index (CPI) is expected to show inflation remaining around 3%. This persistent inflation, attributed to tariffs and service sector stickiness, complicates the Federal Reserve's objective of reaching its 2% target. The CPI report, originally scheduled for release at 8:30 a.m. Eastern, was delayed due to the ongoing government shutdown, marking the first major piece of federal economic data released since the shutdown began.

AI Infrastructure and Tech Investments

A significant development in AI infrastructure involves a $38 billion debt offering, slated for launch as early as Monday, to fund data centers associated with Oracle. This would represent a record amount raised for AI infrastructure on the open market, with JP Morgan and Mitsubishi UFJ among the leading banks. Vantage Data Centers is constructing these data centers, which Oracle will use to host OpenAI. These projects are part of Oracle's broader initiative to invest $500 billion in AI infrastructure, in collaboration with OpenAI, under a project named "Stargate."

Google and Anthropic have announced a cloud deal worth tens of billions of dollars. Google will supply Anthropic, the company behind the Claude chatbot, with up to 1 million specialized Tensor Processing Units (TPUs). These Google-provided hardware devices are intended to reduce Anthropic's reliance on expensive GPUs from Nvidia. This agreement solidifies Google's position as both an investor in Anthropic and an AI hardware provider. While the deal's value is in the tens of billions, Google has declined to comment on its funding.

Intel's Performance and Foundry Business

Intel reported third-quarter earnings and revenue that surpassed Wall Street expectations, leading to a significant pre-market surge of nearly 8% in its shares. Ben Barian of Creative Strategies commented on Intel's role in the AI era, emphasizing the continued importance of CPUs in both desktop and server markets. He suggested that Intel could leverage Nvidia's dominance, particularly in data centers, by aligning its CPUs with Nvidia's growth. While acknowledging the desire for Intel to develop its own AI accelerators, Barian sees the opportunity to become Nvidia's preferred CPU provider as a significant upside. He also noted that Intel's foundry business faces the challenge of attracting external customers for its 14nm and 18nm manufacturing processes. Success in this area hinges on demonstrating the quality of its processes and packaging, with customer wins for 14nm potentially benefiting 18nm and 18AP.

Regarding Intel's turnaround plan under CEO Pat Gelsinger, Barian views Gelsinger as a strong dealmaker, highlighting successful agreements with the government and Nvidia. He believes Gelsinger's customer-centric approach and willingness to explore new strategies are positive. However, he stresses the need for more customer commitments to Intel Foundry to fully validate the strategy.

Gold and Bitcoin: Safe Havens and Speculative Assets

Gold funds experienced their largest weekly inflow on record in the week ending Wednesday, according to Bank of America. This indicates a growing trend of governments, banks, and retail investors turning to gold as a safe haven. Despite this, gold prices have seen recent declines, falling over 5% on Tuesday, the largest drop since August 2020, primarily driven by ETFs. Gold has shown a strong year-to-date performance of around 55%, its best annual performance since 1979. Key drivers of this demand include purchases by central banks (Poland, Kazakhstan, UK, and China being major buyers in Q2), increased ETF holdings, a declining dollar, geopolitical tensions, expectations of US interest rate cuts, and risks in equity and bond markets.

Bitcoin has experienced significant volatility, including a major sell-off two weeks prior. Despite this, many investors remain bullish, with crypto continuing to be a topic of discussion in Washington and globally. Notably, Changpeng Zhao, founder of Binance, who admitted to allowing money laundering on his platform, received a pardon from President Trump. Eric Trump has expressed strong bullish sentiment on Bitcoin, predicting a rise to $200,000 within months and $1 million by 2030.

Marian Labour from Deutsche Bank views these Bitcoin price predictions as highly optimistic and outside of their internal models, valuing Bitcoin between zero and $1 million. She characterizes Bitcoin as a volatile, speculative asset with limited intrinsic value and usage, vulnerable to cybersecurity risks. While acknowledging its recent rise, she believes its value is still largely based on wishful thinking.

Regarding the "debasement trade" where Bitcoin and gold prices moved in tandem, Labour suggests that while gold has clearly acted as a safe haven, the recent market movements might indicate a shift. She highlights the strong demand for gold from central banks as a primary reason for its performance.

On the notion of Bitcoin as a reserve asset for central banks, Labour notes Bitcoin's impressive year-to-date performance, particularly since November 2023. Factors contributing to this rise include the success of Bitcoin ETFs, the 2024 halving event (which historically leads to price increases), a perceived "Trump effect" due to his optimistic stance, and regulatory clarity, particularly around stablecoins. This has also been accompanied by growing institutional adoption.

Trending Tickers and Market Movers

Ford: Trading up around 4.5% in pre-market. The company is prioritizing production of its diesel and hybrid F-150 models over its electric truck, shifting workers from its EV unit.

Alphabet (Google) and Anthropic: Alphabet is trading higher, with both tickers up nearly 1.5% in pre-market, following the announcement of a multi-billion dollar cloud deal. Google will supply Anthropic with up to 1 million TPUs to support its AI development.

Intel: Shares are up just below 8% in pre-market after beating analyst expectations on earnings, driven by growing demand.

Quantum Computing Stocks (IonQ, Rigetti, D-Wave): These stocks continue to rally, partly due to broader momentum in quantum computing and despite a White House report clarifying they are not considering taking equity stakes in these companies. Quantum computing is described as a future of computing, not necessarily a replacement for all current computing. It involves qubits that can exist as ones and zeros simultaneously, enabling massive parallel processing for complex calculations. While advancements are ongoing, widespread practical application is still some way off.

Market Outlook and Upcoming Events

Earnings: Next week is the busiest earnings season, with over 170 companies reporting, including five of the "Mag Seven" (Microsoft, Meta, Alphabet, Apple, and Amazon) on Wednesday and Thursday. These companies are crucial to the S&P 500, accounting for approximately 24% of its earnings.

Interest Rates: The Federal Reserve is widely expected to lower its benchmark rate by a quarter percentage point on Wednesday. Markets are likely to be more sensitive to forward-looking statements from Fed Chair Jerome Powell, with further rate cuts anticipated in December. The government shutdown is hindering the Fed's decision-making by delaying crucial economic data, particularly concerning the labor market.

US-China Talks: Investors will be closely watching the meeting between Presidents Trump and Xi on Thursday. While markets have largely shrugged off trade risks recently, renewed tensions between the US and China are back in focus.

Proctor & Gamble (PG): Reported better-than-expected sales for its latest quarter, with 2% organic revenue growth driven by beauty and grooming categories. The company maintained its fiscal year outlook but anticipates a reduced impact from tariffs and commodity prices, estimating a $400 million after-tax impact. Shares are up over 3% in pre-market.

Market Performance

Asia: Stocks are trading in the green, with the Korean Kospi up 2.5% and reaching a new record high. This positive sentiment is attributed to the confirmation of talks between Xi and Trump.

Europe: Stocks are lower despite strong results from companies like Sanofi, Saab, and NatWest, and positive PMI data.

Wall Street: Futures are indicating a green open, driven by hopes for a positive outcome from the US-China trade talks and optimism surrounding tech stocks.

Conclusion

The market is navigating a complex landscape of geopolitical trade tensions, significant technological advancements in AI and quantum computing, and evolving economic indicators. The termination of US-Canada trade talks highlights the volatility in international relations, while the Google-Anthropic deal underscores the massive investment in AI infrastructure. Intel's performance and foundry ambitions are crucial for the semiconductor industry, and the ongoing debate around gold and Bitcoin as safe havens continues. Investors are keenly awaiting key earnings reports from major tech companies and the Federal Reserve's interest rate decisions, all while keeping a close eye on the pivotal US-China summit.