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- [00:00]
ReliaQuest Announcer
This podcast is brought to you by relioQuest. Cybercriminals are constantly attacking. They want your data. They want your identity. They want your innovation. RelioQuest fortifies your business with agentic defense AI that detects, contains and eliminates cyber threats in minutes. It helps your security team move faster at the work that matters most to protect the business now and delivers insights to help them predict what's next. ReliaQuest agentic defense for the enterprise. Learn more at reliaquest.com that's R E L I A Q U E-S-T.com
- [00:34]
Marcus Walker
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- [00:34]
Luke Vargas
US chip sell off goes global on signals that China is catching up in the tech arms race. Plus, Senator Mitch McConnell's staff fail to clear up questions about his health or when he'll return to work. And Volodymyr Zelensky heads to the White House amid signs that President Trump now holds him in high esteem.
- [00:53]
Marcus Walker
What remains open, however, is whether this shift in vibes in the White House towards Ukraine will translate into a shift in the substance of U.S. policy.
- [01:01]
Luke Vargas
It's Tuesday 28th. I'm Luke Vargas for the Wall Street Journal and here is the AM edition of what's news, the top headlines and business stories moving your world today. Asian stocks have tumbled today as mounting doubts over the cost of the AI buildout triggered a sell off in tech shares. Those declines followed a broad dip in chip stocks in the US yesterday, with Nvidia down about 5%. With more, I'm joined by Journal Finance editor Alex Frang. Alex, let's start with what is happening today. Some big declines in Asia, notably Japan's Nikkei off close to 4%. And the Kospi in Korea seeing a double digit pullback, its biggest decline in four months and leading regulators to not once but twice halt trading. What is going on here?
- [01:51]
Alex Frangos
So what we have is basically huge enthusiasm for chip stocks. You had the Korean market and other places going up, you know, massively. And now we're in a period where people are questioning their assumptions about the enthusiasm for the AI buildout and about competition for making those chips. We have this Chinese chip maker come out of, it feels like came out of nowhere to become China's most valuable company, cxmt seen as a big competitor and competition erodes profits. So that's one thing. Then the Journal reported yesterday that Nvidia was in talks to provide this $250 billion of backstop financing on OpenAI data center that sent Nvidia's shares down 5%. And then there was a report in the information that a Shanghai company had made progress in creating these ultraviolet lithography tools that currently the provenance of a Dutch company called asml and this Shanghai company, if it really has built that kind of thing, could definitely give the Chinese a leg up in the tools that are used to create the chips, the most advanced high end chips. So all this has people spooked and sending chip stocks way lower.
- [02:57]
Luke Vargas
Some of these sources of the market unrest, Alex, are novel. Some aren't though, especially concerns around circular financing in AI, whether just all of this spending is truly sustainable and of course the impact of Chinese competition on some of the sort of long standing winners in this space. And yet I wonder if what is new is that this sort of unease is coming right before we start to see hyperscaler earnings in the next few days. What does that make for in the trading sessions to come?
- [03:24]
Alex Frangos
Yeah, I mean, I think investors are concerned that the big hyperscalers are going to say that they're going to be spending a lot more and making a lot less money. And we saw that kind of a preview of that with Google last week where they had negative free cash flow for the first time, which meant they're burning their resources in order to do this AI buildout that's potentially good for chip making stocks but also seen as maybe not sustainable in the long run, you know, so people are on edge. People have to remember the expectations are very high. These chip companies and the AI hyperscalers and the different companies, their valuations are extremely high. The stock market, despite the pullback in the NASDAQ, it's still up 8% this year. So there's still a lot of high expectations baked into the prices of stocks.
- [04:11]
Luke Vargas
That was finance editor Alex Frangos. Alex, thanks for stopping by. Appreciate you as always.
- [04:15]
Alex Frangos
Thank you, Luke.
- [04:17]
Luke Vargas
Meta and Microsoft are due to report earnings tomorrow, followed by Amazon and Apple on Thursday. The leaders of Ukraine and Israel are due to meet with President Trump in Washington today. Ukrainian President Volodymyr Zelenskyy is in attend the funeral of Republican Senator Lindsey Graham, a staunch backer of Kyiv. Our Marcus Walker says that the visit comes at a high point in Trump's view of his Ukrainian counterpart.
- [04:45]
Marcus Walker
Trump used to regularly insist in private that Ukraine was losing the war and would have to accept terms that favored Russia because it was simply stronger. But as the Journal's Washington reporters have shown, he has been expressing optimism in recent months about Ukraine's prospects and and his perception of the conflict seems to be changing. We've reported that he's been particularly impressed with Ukraine's long range drone stripes deep within Russia, its prowess in the drone war in general, and particularly with the fact that Ukraine has been able to defend against the same shahed model drones that the US has been facing in its war with Iran.
- [05:23]
Luke Vargas
Despite that change in tone, Marcus said that Zelenskyy will be eager to see if it's accompanied by a change in US policy.
- [05:30]
Marcus Walker
Zelenskyy will again press Trump to help get Ukraine more Patriot interceptor missiles, which Ukraine badly needs to shoot down Russian ballistic missiles which have been pounding Kyiv and other Ukrainian cities. Trump has said he's open to getting Ukraine a license to produce Patriots on its own territory. However, that would take time and Ukraine badly needs actual Patriot interceptors as soon as possible. In addition, the Ukrainians are hopeful that the US Will support their push for a partial ceasefire with Russia. That is, both sides would stop long range airstrikes against infrastructure even while the ground war continues. That would help relieve some of the pressure on Ukraine's energy infrastructure.
- [06:12]
Luke Vargas
Meanwhile, Trump is set to speak to Israeli Prime Minister Benjamin Netanyahu about the war in Iran today. Israel has held off on attacking Iran since June at Trump's request, but some US Officials say that a resumption of attacks could be an option should the US Commit to a major new air campaign. For now, though, Washington is accelerating a diplomatic push to restart shipping through the Strait of Hormuz. In recent days, Iran and Oman have held meetings about how to govern the waterway, including about charging fees for transit, while Oman and the US Oppose that idea. We report that Iran is insisting on retaining control of the strait, including collecting fees, which some of its leaders view as a lucrative new revenue stream for the country as it stares down huge post war reconstruction costs. Coming up, Johnson Johnson makes a new offer to settle years of lawsuits over its Talc products and we'll look at whether any foreign automakers can find their footing in China. Those stories and more after the break.
- [07:17]
ReliaQuest Announcer
This podcast is brought to you by reliaQuest. Cybercriminals are constantly attacking. They want your data, they want your identity, they want your innovation. ReliaQuest fortifies your business with agentic defense AI that detects, contains and eliminates cyber threats in minutes. It helps your security team move faster at the work that matters most to protect the business now and delivers insights to help them predict what's next. RelioQuest agentic defense for the enterprise. Learn more at relioquest.com that's R E L I A Q U-E-S-T.com.
- [07:51]
Luke Vargas
The Trump administration is ramping up pressure on the Supreme Court to allow federal agencies to put new restrictions on mail in ballots and create lists, lists of people deemed eligible to vote ahead of November's midterms. Those changes were outlined in an executive order signed by Trump in March and later enjoined by a federal court. Many election law experts have questioned the order's legality, given that the Constitution gives power over voting to states and Congress. At the same time, President Trump is urging Senate Majority Leader John Thune to cancel the upcoming August recess until lawmakers pass a strict proof of citizenship voting bill known as the Save America Act.
- [08:30]
Marcus Walker
It's fun. I have a good relationship relationship with John Thune. He's just got to get his job done. You got to get the Save America act passed. Or better than that would be the filibuster. If you terminate the filibuster, everything happens.
- [08:43]
Luke Vargas
Thune has consistently said that Republicans don't have the votes to pass the bill in the Senate, where they hold a 53 to 47 majority, or to alter filibuster rules, which effectively set a 60 vote threshold. Meanwhile, staff for Kentucky Republican Mitch McConnell say that the 84 year old senator isn't yet ready to leave a rehabilitation facility and to the Capitol. McConnell has now been absent for 40 days, fueling continued speculation around his health. If he doesn't return to the Senate this month, McConnell will likely miss votes on confirming the new Director of National Intelligence and Attorney General, as well as a fight to secure more funding for the Pentagon to pay for the Iran war. Johnson and Johnson has agreed to pay $5.5 billion to resolve remaining lawsuits that allege that its talc products caused o answer It's a bid to end more than a decade of litigation that's hung over the company, damaging its consumer reputation and the value of its shares. Johnson and Johnson said that the agreement, which was reached with firms representing plaintiffs in the outstanding talc cases, is conditioned on 95% of remaining claimants participating. JJ shares are up in off hours trading. Mercedes Benz is warning of intensifying pressure in China after reporting a 30% drop in its sales there this morning. It's the latest automaker to warn of headwinds in China, which in part led Porsche to slash an additional 5,000 jobs this week, well ahead of earnings from Ford this afternoon and BMW later in the week. I asked Journal Auto reporter Stephen Wilmot if any foreign brands have found ways to break through in the Chinese market.
- [10:25]
Stephen Wilmot
The outlook is certainly very tough for global auto brands in China. Almost no one is showing growth there. The first companies to really get hit were the mass market brands. Volkswagen in particular, which was a longtime market leader, lost its pole position in the Chinese market to BYD in 2022, 2023 then. At the time, Mercedes and BMW and the luxury brands were still doing pretty well, but now they're really suffering, too. And that's kind of what we're seeing in the results this week. You mentioned the Porsche job cuts. It's lost more than half its sales in recent years. There have been extra taxes on LU cars. But the key effect that the European luxury automakers point to is real estate. So the Chinese real estate market's been pretty damp in recent years, and that has led to kind of a wealth effect, which means that people haven't wanted to buy luxury cars in the way they used to.
- [11:20]
Luke Vargas
All right, Stephen. So China looks like it's kind of drying up as an import market for many of these foreign brands. But we should say that even for those like Ford, who have taken a very different approach, treating it as more of an export platform, they're running into headwinds, too.
- [11:35]
Stephen Wilmot
Yeah, that's right. And I think the volume brands, so Ford and GM's brands, they saw that their position in China was a bit challenged, so they thought, oh, we've got the factories, we've got relatively good cost positions, let's use China as an export hub. And so they both sent some flagship models to the us, but, yeah, they're now saying that the next iterations of those products aren't going to be built in China because the political pressure in the US is so against Chinese cars. You've got this connected vehicle rule which bans Chinese software cars. They're talking about making that even tighter. So there's certainly shipping cars from China to the US is not looking like a winning strategy. Other companies, including also Ford and gm, are talking about using China as an export hub for other markets. So the Global south, as it's sometimes referred to. Volkswagen is also going down that route, saying essentially it'll build cars in North America for North America, Europe for Europe and China for the rest of the world, because they face increasing pressure from BYD and Chinese automakers in those global markets like South America. So in order to compete with those Chinese automakers, they're saying we need to produce in China, too. We can't produce in Europe or the US for global export. That's the one hope for their Chinese businesses that these companies are clinging onto at this point, is that they can be export hubs for emerging markets for Latin America, for Southeast Asia, the Middle east, where Chinese brands like BYD themselves are expanding rapidly.
- [13:01]
Luke Vargas
That was Journal European autos reporter Stephen Wilmot. And it's shaping up to be another huge earnings day with Coca Cola, UPS and Boeing reporting this morning, followed by Visa snacking giant Mondelez and the aforementioned Ford after the closing bell. And that's it for what's news for this Tuesday morning. Today's show was produced by Hattie Moyer. Our supervising producer was Daniel Bock. And I'm Luke Vargas for the Wall Street Journal. We will be back tonight with a new show, and until then, thanks for listening.
- [13:42]
ReliaQuest Announcer
This podcast is brought to you by reliaQuest. Cybercriminals are constantly attacking. They want your data. They want your identity. They want your innovation. ReliaQuest fortifies your business with agentic defense AI that detects, contains and eliminates cyber threats in minutes. It helps your security team move faster at the work that matters most to protect the business now and delivers insights to help them predict what's next. ReliaQuest agentic defense for the enterprise. Learn more at reliaquest.com that's R E L I A Q U E-S-T dot com.