Scott B. MacDonald, Ph.D. – October 13, 2025
Summary: Last week concluded with an abrupt escalation of the US-China trade war, threatening to derail upcoming talks between President Trump and Xi in Seoul, South Korea scheduled for the end of the month. At the same time, the US government shutdown continues, with little sign of a compromise (see below). Also coming into sharper focus is the damage from the First Brands bankruptcy to snare a widening number of financial firms. Although we don’t want to overstate First Brands’ failure, it reflects that some investors have gone down the credit curve to make Alpha. How many First Brands sit out in front of us? On the geopolitical front, the Gaza peace deal looms (see below) large as does US-China trade. The war continues in Ukraine, France has yet another prime minister (the same guy as the last time!), and Japan’s new prime minister Takaichi Sanae promises change for that country’s economy and possibly its foreign policy.
At Home — Headlines
The week ahead – by the numbers. The US government shutdown has greatly reduced economic data flow. Market focus will be on what happens with US-China trade talks (see below), what various Federal Reserve Regional Fed presidents have to say, and bank earnings. The last may be what moves markets as bank earnings provide data on consumer behavior, economic sentiment and confidence in mergers and acquisitions. The week ahead will see earnings from JPMorgan Chase, Goldman Sachs, Citigroup, BlackRock, Bank of America, Morgan Stanley, Charles Schwab, and Interactive Brokers. One item to closely watch is investment banking revenues – Wall Street’s largest banks are expected to top $9 billion in Q3 for the first time since 2021, buoyed by the more deal-friendly Trump administration. Another item is the potential for mergers and acquisitions in the banking sector.
The shutdown continues. The US government shutdown is heading toward the two-week mark and from all appearances it is set to go longer. Both sides appear dug into their trenches. According to the Office of Management and Budget, hundreds of thousands of government workers have been furloughed in recent days and there could soon be a firing of over 4,000 federal employees. Although there is some constitutional questionability over the firings, the Trump administration appears to be wed to the idea as outlined in Project 2025 of taking a sledgehammer to a bloated government bureaucracy to streamline it and make it more efficient. In a recent Reuters/Ipsos poll 67% said Republicans deserved “a fair amount” of blame, while 63% said the same of Democrats. The longer the shutdown lasts, the deeper the economic bite, which is likely to have a political cost which could be played out in November’s elections (as with the tight gubernatorial races in New Jersey and Virginia).
Moody’s says automakers to take $30 billion tariff hit to profits. Tariffs are an ongoing concern to both consumers and companies. The impact thus far has been like a slow-moving avalanche, with some costs being passed on to consumers. The auto sector looms large in this. According to Moody’s, “Global carmakers, explicitly or implicitly, indicated that tariffs will cut their 2025 operating profitability by more than $30 billion.” The rating agency went on: “Though the companies’ disclosure parameters differed, the guidance points to a tariff impact equivalent to more than one-fifth of the operating profit of the same companies generated in in 2024.” What happens next hinges on trade deals. While the framework guidance trade agreement between the US and the European Union and Japan provides a rough idea of what is to come, the US still has not concluded deals with Canada and Mexico. A deal with South Korea is also up in the air, especially after the ICE raid, arrests and carrying away South Korean engineers and contractors from Hyundai’s Georgia plant in chains. What is next for US automakers? According to Moody’s, “Automakers will continue to try to offset tariffs by reducing amenities in their vehicles and raising prices, which are less complex to implement and make more sense while the situation remains fluid.” Anyone in the market for a Chevrolet Bolt; they only cost around $30,000.
First Brands – tugging at the thread on the sweater. First Brands is slowly becoming a tug on the financial market’s sweater. Does it unravel the sweater and spark a major financial crisis? Probably not. Unlike Bear Stearns or Lehman Brothers in 2008, First Brands is not a financial house, but develops and markets automotive parts like windshield wipers and spark plugs. Where the financial and automotive world meet, however, is in how First Brands financed an acquisition spree, tapping Wall Street and investors willing to assume greater risk for greater returns. The problem is that First Brands used opaque off-balance financing for its factoring side of the business, which became difficult to follow. In its bankruptcy filing, the company indicated that it owed between $10-$50 billion against what it owned – between $1-$10 billion. The firms tagged by First Brands include Jefferies, BlackRock, UBS, MassMutual, and Mitsui & Co, while insurers such as Allianz are preparing for potential claims. Meanwhile, Aegon Asset Management, with $380 billion of assets under management, has indicated that it expects more highly indebted companies to fall into distress as the US economy cools and earnings suffer. What to watch for – Q3 earnings will give an indicator as to signs of deterioration in revenue or guidance as well as how high yield companies are managing greater input costs (related to tariffs) and how they will refinance debt. First Brands now, what comes next?
Headlines — Abroad
Trump’s Mideast peace deal launches. A truce has been established, President Trump is in the Middle East, and the hostages have been freed. An amazing achievement, ending two years of conflict. Hopefully all goes according to plan and Gaza is on its way to governance under a technocratic government run by Palestinians, backed by an international stabilization force, while Hamas is to be disarmed. President Trump has expended considerable political capital in the Middle East to make this work, and it could be a sea change for the region. However, there is a risk of failure. Hamas is hardly finished as a military and political force in Gaza: after agreeing to a ceasefire to end the two-year fight, Hamas began establishing checkpoints throughout parts of the enclave, fighting with rivals, and meting out violent beatings to Palestinians it regards as collaborators. There is a plan, but implementing it will be a bumpy ride, especially if one of the key actors opts not to accept it.
US-China Talks hit a snag. At the beginning of the Trump administration’s tariff war, it was believed by many that China would quickly cave to US demands to the make the trade playing field more level. China has yet to concede. After the April 1 tariff announcements, the two sides managed to arrange a truce in May. Presidents Trump and Xi were expected to meet in South Korea at the end of October to hopefully carve out a deal. Now both a deal and the meeting may not occur. Last week China announced new port fees on US ships (in retaliation to US fees on Chinese built ships), began an antitrust investigation of Qualcomm, and announced stringent new curbs on exports of critical minerals, including rare earths (the US is heavily dependent on China for many of these commodities). In response, President Trump announced an additional 100% tariff on China as well as export controls on “any and all” critical software beginning November 1. He also threatened to cancel the meeting with his Chinese counterpart.
China appears to have taken the stance that it would rather escalate ahead of the South Korea talks, rather than passively waiting. Considering China’s history of grievances vis-à-vis the West and what many Chinese regard as America’s “deep-rooted sense of arrogance and self-righteousness”, a new deal will be hard to achieve. For its part, China’s mercantilist policies are a sore point for the US, not to mention the recent pain imposed on US farmers by China’s boycott of US soybeans in 2025. China has also been working hard to de-risk from its trade with the US, finding what it considers to be more reliable partners. All things considered it is best to take Winton Churchill’s advice that “jaw, jaw, is better than war, war” – even if it is trade war. We expect that Trump and Xi see it that way too.
Oh look! France gets a new prime minister…again: Last Friday President Macron announced that Sébastien Lecornu is to be his prime minister, again. Lecornu had resigned earlier last week after only 26 days in office only to be reappointed again on last Friday. What comes next is anyone’s guess. Lecornu has formed a new cabinet and will attempt to gain parliamentary approval for the 2026 budget. Bonne chance! Parliament is divided between three blocs - the left (a broad and uneasy alliance of parties), hard right (dominated by the National Rally) and a weakened center (Macron’s base). It remains questionable as to whether Lecornu can bring a budget to the finish line; he may not survive a vote of confidence. It appears the game for the left and right is to get a prime minister of their own, hold snap parliamentary elections or force Macron to resign and bring presidential elections forward from 2027 to soon. France’s current round of political dysfunction is reminiscent of the problems that plagued both the Third Republic (1870-1940) and Fourth Republic (1946-1958) – acute political polarization, fragmentation of parties, socio-economic upheaval and policy paralysis. While the actors have changed, the script is eerily similar. The US is hardly alone in its dysfunctional politics.
