by Patrick Fearon-Hernandez, CFA, and Thomas Wash

[Posted: 9:30 AM ET] | PDF

Our Comment opens with our assessment of the latest CPI report and its implications for Fed policy. We then turn to AI, focusing on mounting concerns over the cybersecurity risks associated with these tools. Next, we briefly address Jamie Dimon’s call for closer US‑EU ties, the delegation of business leaders accompanying the Trump administration on its trip to China, and a potential leadership challenge in the UK. As always, we conclude with an overview of recent domestic and international economic data.

CPI Inflation: The April CPI report suggests that the war in Iran is now feeding directly into household costs, making it harder for the Federal Reserve to justify rate cuts this year. Headline inflation rose 3.8% year-over-year in April, the highest reading since 2023, while core CPI increased 2.8%, signaling that price pressures are no longer confined to energy alone. That rebound in inflation weakens the case for looser monetary policy and adds to the challenge facing a more divided Fed.

• While inflation did rise, the pickup still appears relatively narrow, particularly on the goods side. Although fuel oil prices eased from the prior month, they remained elevated, rising 5.8% in April after a 30.7% jump in March. Excluding the more volatile categories of food and energy, commodity prices were little changed, while services inflation was concentrated in higher shelter costs, with most other services categories remaining relatively contained.

• The recent increase in inflation is likely to complicate efforts by incoming Fed Chair Kevin Warsh to justify rate cuts. While he has repeatedly emphasized his commitment to the Fed’s price‑stability mandate, he has also questioned the wisdom of maintaining restrictive policy in the face of supply‑driven inflation. In addition, he has argued that monetary policy should support the development of AI, where appropriate, given its potential to lower inflation over time by boosting productivity.
• Warsh’s position is likely to widen divisions within the FOMC, where many officials remain wary of recalibrating policy in response to supply-side shocks. Several policymakers have recently argued that the Fed should abandon any residual easing bias, while some stress that rate hikes can no longer be ruled out. More broadly, those concerns have pushed much of the committee away from its earlier tilt to cuts and toward a more neutral stance that keeps all policy options open.
• The rise in inflation is likely to spur more intense debate among Fed officials over the appropriate policy path. While Warsh appears to welcome this confrontation, inviting colleagues to make their case for where rates should be set, markets may be less receptive, given expectations that he will be less transparent than his predecessor. In our view, the combination of higher inflation and greater internal disagreement over Fed policy could lead to increased volatility in the bond market, especially for longer‑duration Treasurys.

AI Risks: Fears over the cybersecurity risks posed by AI tools are mounting as lawmakers and companies confront the broader economic implications. Anthropic is set to brief the House Committee on Homeland Security on the dangers linked to its latest model, Mythos, which has reportedly exposed security flaws and breached cybersecurity systems. Growing scrutiny of Mythos is prompting Washington to reconsider both its regulatory approach and its foreign policy, given the likelihood that advanced AI tools will play a central role in future cyberwarfare.

• The closed-door meeting is scheduled for Wednesday and is expected to focus on national security risks, as well as potential safeguards. This marks the second time in two weeks that Anthropic has been called to testify before Congress, underscoring the growing urgency among lawmakers to contain emerging AI-related risks. Adding to these concerns, Alphabet noted this week that hackers may have already begun developing their own AI tools to enhance the sophistication and scale of cyberattacks.
• The White House is also planning talks with China to address AI safety risks as both countries race to develop advanced capabilities. Officials say the discussions will aim to manage competition and lower the risk that AI technologies could be weaponized against either side. The goal is to establish open channels of communication to reduce the chance of miscalculation or retaliation if AI systems are used to cause harm.
• Concerns about AI safety and distrust over how rival states might use these tools have highlighted the risk that lawmakers could move to slow adoption. Although no laws have been passed yet, the rising number of hearings suggests legislators may consider measures to limit AI systems that pose national security threats. Companies developing these models could also face pressure to restrict sales and access to prevent state actors from acquiring tools that might be used to harm the country.
• While the tech sector still has significant momentum, we continue to advise investors to maintain a more balanced portfolio. The potential safety risks of AI could lead to increased regulatory scrutiny, which may weigh on the earnings of companies that are already trading at high valuations. We continue to favor some exposure to value stocks, as these companies should be able to outperform growth stocks when doubts emerge around technology.

Jamie’s EU Push: JP Morgan CEO Jamie Dimon has called for the US to forge closer ties with the EU. In a recent interview with Bloomberg, he argued that Washington and Brussels should resolve their disputes in ways that leave both sides stronger. His remarks reflect a broader view that the EU needs to modernize its regulatory framework to create a more supportive business environment. We suspect this perspective is part of a wider trend among global investors who are positioning their portfolios to increase exposure to Europe if US‑EU relations improve.

White House and Friends: Several prominent business leaders are traveling with the Trump administration to take part in talks between the world’s two largest economies. The discussions are expected to cover not only trade, but also the countries’ deepening technology ties as they work to resolve ongoing disputes. Nvidia’s Jensen Huang, Apple’s Tim Cook, and Tesla’s Elon Musk will join the delegation as they seek to help both sides reach an agreement that avoids any broad disruption to global supply chains.

Labour Party Challenge: Following a poor showing in last week’s local elections, Prime Minister Keir Starmer appears to be bracing for a potential leadership challenge. Health Secretary Wes Streeting is reportedly sounding out colleagues to see if he can secure the backing needed to trigger a confidence vote. At this stage, he is believed to have support from around 40 MPs, well short of the 81 required to initiate the process, but a successful challenge could draw in additional contenders and pave the way for yet another change in UK leadership.

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by Patrick Fearon-Hernandez, CFA, and Thomas Wash

[Posted: 9:30 AM ET] | PDF

Our Comment today opens with an update on the war in Iran, where President Trump appears to be increasingly frustrated that the Iranians are not caving to his demands in negotiations. We next review several other international and US developments that could affect the financial markets today, including an increasing risk that British Prime Minister Starmer will be forced to resign and surprising new data showing that major oil companies are starting to explore for oil again in Alaska.

United States-Iran-UAE: In a television interview yesterday, President Trump said the US ceasefire with Iran was on “life support,” which may signal that he is considering a resumption of attacks against Tehran to extract concessions in the ongoing bilateral peace talks. Trump’s statement came as both sides reportedly launched limited attacks on each other yesterday.

• We continue to believe that few investors are pricing in the risk of a new price spike for energy and other commodities as global stockpiles dwindle in response to the continued closure of the Strait of Hormuz. Even fewer investors are probably pricing in the risk that frustration with Iran’s intransigence in the peace talks could prompt the administration to renew its military campaign against Iran much more aggressively than in the war to date.
• Separately, Trump said he supports the idea of temporarily suspending the US gasoline tax of 18.4 cents per gallon to ease soaring fuel costs for motorists. Lawmakers in Congress are already working on the required legislation. However, along with the cost of prosecuting the war, the move would further boost the US budget deficit and could put additional upward pressure on bond yields.
• In another important development, reports say the United Arab Emirates has secretly been launching military attacks on Iran, including a strike on its Lavan oil refinery in the Persian Gulf, to retaliate for Tehran’s large-scale attacks on the UAE. The development provides further evidence that the war could still draw in other nations in the region.

Germany: New polling shows that support for the far-right Alternative for Germany (AfD) has jumped to 27% since the party began criticizing President Trump for his war against Iran. That means the AfD’s support is now stronger than that of the ruling Christian Democratic Party. The news also shows how Europe’s far-right parties are rebuilding support not only by criticizing their national governments and advocating for better economic policies, but also by distancing themselves from the current US administration.

United Kingdom: As we flagged in our Comment yesterday, Prime Minister Starmer tried to rebuild his political support on Monday with a major speech calling for more leftist policies. However, the effort fell flat. More than 80 lawmakers from his own Labour Party have now publicly urged Starmer to set a timetable for his departure, and government ministers have begun to resign. Still, Starmer is refusing to step down.

• Amid the political instability, the yield on the UK’s 10-year government bonds has topped 5.10%, reaching its highest level since 2008. In addition, the pound today has depreciated by about 0.6% to just $1.35. The FTSE 100 stock price index is now down approximately 6.3% from its most recent peak in late February.
• The market reaction suggests investors are becoming more concerned that the political situation will undermine British fiscal discipline and preclude economic reforms needed to reignite economic growth.

Philippines: In a chaotic day of politics yesterday, the lower house of the legislature voted to impeach Vice President Sara Duterte for plotting to assassinate President Marcos, among other charges. However, sensing where the vote was going, Duterte’s party used a parliamentary procedure to seize control of the upper chamber, likely meaning that Duterte will be acquitted or have her trial delayed. The developments underscore the deep political fractures in Manila, which are also hindering needed economic reforms and discouraging investors.

United States-Japan: After a meeting today between US Treasury Secretary Bessent and Japanese Finance Minister Katayama, the Japanese side claimed Bessent had given them his “full understanding” regarding the weak yen. The statement suggests the US administration is satisfied with Tokyo’s recent currency market interventions to keep the yen from weakening further and will not take more aggressive measures to force Japan to boost the yen.

US Politics: After three straight losses in court regarding their redistricting efforts, as we discussed in our Comment yesterday, Democrats have begun mulling new redistricting efforts to pick up additional House seats in states such as New York, Maryland, and Colorado. Of course, it’s getting very close to the November mid-term elections, so it’s not clear that the effort would tip the redistricting battle in the Democrats’ favor, especially since the Republicans can also launch new efforts to squeeze more seats out of other states.

US Monetary Policy: With the success of procedural voting in recent days, a final Senate vote to confirm Kevin Warsh as the new chair of the Federal Reserve could come as early as Wednesday, setting the stage for Warsh to take over the central bank as soon as Chair Powell’s term ends on Friday. However, as noted in a useful Financial Times article today, Warsh is likely to face a fractured policy committee and will need to manage a tough balancing act to cap consumer price inflation while also supporting the economic growth that the White House wants.

US Energy Industry: In a little-noticed development amid the war in Iran and the continuing productivity of the US shale fields, new reports say ExxonMobil, Shell, Repsol, and other major oil producers bid a record $163 million in March to secure drilling leases in Alaska’s National Petroleum Reserve. In addition, ConocoPhillips and Australia’s Santos bid on leases covering more than one million acres on Alaska’s North Slope.

• The reports suggest that major oil companies have begun exploring in Alaska again to replenish reserves, diversify their portfolios, and capitalize on the US administration’s greater support for fossil-fuel development.
• While it is costly to produce oil in Alaska, the investments could end up being lucrative if discoveries are made and global oil prices remain high.

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by Patrick Fearon-Hernandez, CFA, and Thomas Wash

[Posted: 9:30 AM ET] | PDF

Our Comment today opens with the latest developments in the Iran war, including Iran’s response to the latest US peace proposal. We next review several other international and US developments that could affect the financial markets today, including the US’s imposition of new sanctions on Chinese entities for supporting Iran’s military and new concerns about defaults in the US private-credit industry.

United States-Israel-Iran: The Iranian government responded to the 14-point peace proposal delivered by the US last week by issuing a counterproposal to gradually open the Strait of Hormuz as the US gradually lifts its blockade of Iranian ports. Iran’s nuclear program would be negotiated over the next 30 days, with Iran having some of its highly enriched uranium diluted and the rest transferred to a third country, subject to repatriation if talks fail or the US exits the deal later. On social media, President Trump rejected the counteroffer as “totally unacceptable.”

• Separately, a classified CIA analysis recently delivered to the White House reportedly said that Iran can survive the US’s naval blockade against it for at least three to four months before facing more severe economic hardship. The report also said that Tehran retains significant ballistic missile capabilities despite weeks of intense US and Israeli bombardment.
• Coupled with the US rejection of Tehran’s counterproposal, the CIA analysis suggests the war and the associated commodity supply disruptions are likely to continue, setting the stage for further price hikes, economic disruption, and risks for stock prices.
• In another development, the Wall Street Journal reported that Israel set up “a clandestine military outpost in the Iraqi desert to support its air campaign against Iran.” Importantly, the report also says Israel launched airstrikes against Iraqi troops sent to investigate after a shepherd reported unusual activity in the area. The report highlights the ongoing risk that the war against Iran could draw in other countries at any time and pose further risks for global commodity supplies, economic activity, and asset prices.
• Confirming our view that oil and natural gas supply disruptions from the war will boost all kinds of alternative energy sources, new data shows that global coal shipments have been surging. Worldwide imports this month are expected to reach 107 million tons, the third-highest monthly figure for May in records that go back to 2017. Separate reports have also shown renewed interest in renewable energy sources, such as wind and solar.
• Illustrating how the disruptions from the war are weighing especially hard on emerging economies, Indian Prime Minister Modi has urged his citizens not only to use less petroleum-based fuel, but also to buy less gold. The call to buy less gold aims to preserve the country’s foreign reserves, which have been under pressure as the rupee weakens.

United States-China: Over the weekend, the US imposed financial sanctions on nine mainland Chinese and Hong Kong companies and individuals for providing support to Iran’s military. The announcement accuses the entities of helping Iran’s armed forces secure weapons, components and raw materials for drones, and satellite imagery for targeting. The move is significant because it could spoil this week’s highly anticipated summit between President Trump and General Secretary Xi in Beijing.

China: In April, China exported more electric vehicles and plug-in vehicles than gasoline or diesel cars for the first time ever. The shift toward EV exports reflects China’s enormous government-bred problem of excess capacity in the domestic EV manufacturing industry and weak domestic demand. The surge in EV and other exports continues to push down prices and raise financial pressure on foreign manufacturers, worsening China’s trade tensions with other countries.

• Separately, the US Chamber of Commerce yesterday issued a report warning that Beijing is “doubling down” on state intervention in manufacturing, services, and frontier technologies to dominate global supply chains.
• The report warns that free-market economies around the world are running out of time to push back against China’s policies and avoid being reliant on Chinese suppliers.

Australia: In a by-election on Saturday, the far-right, anti-immigrant One Nation Party won a seat in the national parliament for the first time. The result is seen as a protest vote to punish the center-right Liberal Party for ousting its leader, who represented the district and was well liked there. Nevertheless, the news shows how anti-immigrant sentiment and other issues are boosting the far right in Australia, just as they are in Europe. If far-right parties continue to gain power, the result could be a big shift toward nationalist, populist economic and social policies.

Germany-France: Franco-German tank maker KNDS has warned the German government that it will press ahead with a decision on an initial public offering within the next two months, whether or not Berlin has responded to its offer for it to take a stake in the defense business. If Berlin declines, the French government would be the largest shareholder in the firm as it opens itself to public ownership. In any case, the IPO planning illustrates the strong investor interest in European defense firms — a sentiment that we share.

United Kingdom: Another top Labour Party lawmaker yesterday urged Prime Minister Starmer to resign, heaping pressure on him to step down amid scandals and accusations of ineffective government. A change in government would create political uncertainty and could undermine UK stocks. Nevertheless, reports suggest Starmer’s opponents in the party for now remain reluctant or unable to force him out. Starmer will attempt another “reset” of his government with a major speech today and new legislation to be laid out in his “King’s speech” on Wednesday.

Argentina: The legislature has voted to amend the Glacier Law of 2010 to ease restrictions on the mining of glaciers and areas around them. The easing of regulations could potentially open more of the country to the extraction of gold, copper, molybdenum, and other valuable minerals. However, critics of the move warn that large-scale mining operations in or around Argentina’s 5,270 square miles of glaciers could threaten critical water supplies downstream.

US Politics: While Democrats have been widely expected to win control of the House in the November mid-term elections, a series of three redistricting losses in the courts has suddenly made such an outcome significantly more difficult. The most recent loss was a decision by the Virginia Supreme Court late last week that invalidated the Democrats’ aggressive redistricting effort there. Of course, ballot dynamics still could swing in either direction, but investors should be aware that a Democratic takeover of the House is not yet set in stone.

US Private Credit Industry: In news that could rekindle investor concerns about the private-credit industry, Apollo Global Management said it’s trying to sell MidCap Financial Investment, its publicly listed business-development company. Defaults in the fund jumped to 5.3% in the first quarter from 3.9% previously, driving down MFIC’s stock price. Business-development companies are considered a type of private-credit firm, so the news will likely remind investors of the private-credit default scare earlier this year and spark renewed market volatility.

• Separately, KKR said its largest private-credit fund held by individual investors, called FS KKR Capital (FSK), suffered a major loss and required a 10% write-down in the first quarter due to rising defaults.
• According to KKR, defaults in the fund jumped to 8.1% in the first quarter from 5.5% in December.

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by Patrick Fearon-Hernandez, CFA, and Thomas Wash

[Posted: 9:30 AM ET] | PDF

Our Comment opens with our views on rising concerns about AI‑related cybersecurity risks. We then turn to the UK elections, followed by brief discussions on the escalating tensions between the US and Iran, recent court rulings against universal tariffs, developments around the hantavirus, and the pickup in consumer credit. As always, we include an overview of recent domestic and international economic data.

 AI Oversight: AI advancement is accelerating faster than the government can control. The White House is currently weighing the development of a formal oversight process to monitor the latest generation of new AI models. This new initiative comes after the government was caught flat-footed by the development of Mythos, an AI model with cyber-hacking capabilities that could potentially threaten the nation’s digital infrastructure. The move also comes as the world is still trying to figure out how to contain the safety risks posed by such models.

• The decision to put some oversight in place comes as the power of AI has caught many government officials off guard. The major threat of these AI tools is their ability to find vulnerabilities independently, which has raised concerns that they could be used to disrupt the financial system, healthcare, and other vital sectors of the economy. As a result, there is fear that these models could potentially pose a systemic risk.
• The implementation of an oversight system highlights the severity of the risks, as the administration had initially been hesitant to impose restrictions on AI due to concerns that doing so could cost the US the AI race with China. The reversal is the latest indication that the White House may be looking to put in more guardrails to help regulators catch up and find the best way to contain some of these risks, while still promoting growth in the industry.
• Although it appears unlikely that the White House will pursue policies aimed at curtailing AI investment, the issue of regulation is likely to become increasingly prominent in the years ahead. A gradual expansion of guardrails could slow the pace of AI development and invite broader scrutiny, particularly around energy consumption and labor displacement. If this view proves correct, it may ultimately temper some of the upside growth potential currently embedded in large-cap technology valuations.
• While we continue to see strong AI-driven momentum supporting gains in technology and related equities, we expect volatility to increase over time. As the cycle matures, these stocks may become more sensitive to shifts in sentiment, leading to more frequent price swings. Against this backdrop, we believe investors should consider diversifying into value-oriented equities, which can serve as a buffer during periods of AI-related uncertainty.

 Outsiders Rise: UK local elections underscored the rise of fringe parties as voters continue to drift away from the traditional political establishment. On Thursday, voters overwhelmingly backed the Reform Party, which gained 311 seats and pushed a once marginal force into the political mainstream. The Labour Party, by contrast, suffered an embarrassing setback, losing 270 seats, the largest decline of any party. The rise of Reform and the weakness of Labour highlight a broader global trend of growing dissatisfaction with establishment parties.

• While the Labour Party avoided a worst‑case outcome, its seat losses underscore broad dissatisfaction with traditional parties. The Conservatives recorded the second‑largest setback, while the Liberal Democrats and the Green Party joined Reform in making gains on the political fringes. A recent YouGov poll suggests that this pushback is being driven by mounting socioeconomic concerns over underinvestment in public infrastructure, the rising cost of living, cuts to healthcare services, and immigration.
• The rise of fringe parties is not unique to the UK, as countries such as Germany and France have experienced similar political shifts. The move away from traditional parties could weigh on long‑term bond prices and the euro. While we believe fringe parties often have a louder bark than bite in terms of actual policy delivery, upcoming European elections could nevertheless create bouts of volatility in foreign developed financial markets.

 Iran-US: The ceasefire between the United States and Iran came under strain on Thursday after the two sides exchanged fire. The latest clashes began when Iran was accused of launching missiles and drones at a US destroyer transiting the Strait of Hormuz, an action Tehran said was in response to an earlier US strike on an Iranian tanker. Despite the escalation, the president has insisted that the ceasefire remains in effect as both parties continue to negotiate the terms of a potential peace agreement.

 Court Rules Against Tariffs: The Court of International Trade ruled that the president’s latest effort to allow for universal 10% tariffs was illegal. This ruling marks the latest blow to White House efforts to keep tariff rates in place to ensure that countries meet their obligations. However, the court did allow for the collection of tariffs to continue while the administration appeals the decision. The ongoing fight over tariffs is likely to lead to more uncertainty on trade, although the effects are likely to be more modest when compared to 2025.

 Hantavirus: The spread of a virus on a cruise ship has sparked concerns of a potential pandemic, although early indications suggest it will not resemble COVID-19. The White House has been briefed on the situation, especially given that several Americans were aboard the affected ship. To date, the virus remains well contained, though authorities are taking steps to track travelers from that cruise ship as a precautionary measure.

 Consumer Credit: In March, consumer credit rose at its fastest pace since 2022, as more households relied on debt to cope with the unexpected rise in gasoline prices. The sharp increase has led to concerns that Americans could start to pull back on spending, as their incomes are not rising as fast as their consumption. As we have mentioned in previous reports, credit remains a key support for the economy — as long as it is available, we believe the economy can continue to expand.

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by Patrick Fearon-Hernandez, CFA, and Thomas Wash

[Posted: 9:30 AM ET] | PDF

Our Comment opens with a discussion of private credit and AI, framed around key takeaways from the Milken Global Conference. We then share our views on the White House’s decision to end Operation Epic Fury. Next, we briefly address the administration’s push for greater oversight of AI models, North Korea’s move away from its longstanding goal of reunification, and the US decision to halt weapons shipments to Germany. As always, we include an overview of recent domestic and international economic data.

Milken Global Conference: Some of Wall Street’s largest firms took the stage at the Milken Institute Global Conference, emphasizing efforts to sustain momentum in both artificial intelligence (AI) and private credit. This push comes amid rising market skepticism driven by stress in private credit names like Tricolor and First Brands, alongside broader concerns about escalating AI-related capital expenditures. Yet the tone of the discussions suggests that, despite negative headlines, institutional investors remain largely confident in both sectors.

• Panel discussions at the conference struck a generally constructive tone, but with clear caution about the risks facing private credit. As the asset class has grown in importance, some participants highlighted that describing certain vehicles as “semi‑liquid” has become a source of tension, especially for less experienced investors. The language around liquidity may have created a false sense of flexibility. The rise in redemption requests has revealed how difficult it can be to withdraw cash during times of uncertainty.
• Additionally, JPMorgan Chase CEO Jamie Dimon and BlackRock CEO Larry Fink have dismissed concerns about a growing AI bubble. During their discussions, both expressed optimism that AI investment will sustain momentum in equity markets and the broader economy as tech companies push to expand capacity. Their comments come as major banks continue to act as a conduit for many of these tech firms seeking fresh funds for projects expected to cost over $1 trillion in the coming year.
• The discussion surrounding AI and private credit comes as the two are becoming increasingly linked. Major banks have turned to private credit as one way to offload some of their exposure to tech-related debt. At the same time, private credit has looked to major banks as a backstop to enhance its ability to provide credit. Working together, the two have helped keep each other afloat while also becoming deeply interconnected.
• We continue to see ample credit availability and sustained AI investment as important supports for overall economic activity. This is especially important at a time when consumer spending is outpacing income growth and AI-related capex is beginning to crowd out other types of investment. Taken together, signs that private credit flows and AI infrastructure buildouts remain largely unimpeded are providing some reassurance that the economy can stay resilient even amid rising geopolitical and trade risks.

Operation Over? The White House has ended Operation Epic Fury as it shifts to alternative measures to pressure Iran to abandon its nuclear program. On Wednesday, Secretary of State Marco Rubio said the US will halt offensive operations while remaining ready to defend against threats. The move signals a commitment to maintaining the ceasefire yet sustaining pressure through a blockade. Although further conflict has not been ruled out, the decision reduces the risk of escalation that had been weighing on markets.

• The decision to end the blockade comes at a time when the White House would need to seek congressional approval. The deadline was believed to have passed over the weekend, although there has been debate over what classifies as the start and end of a war. The president has insisted that the legal limits are likely unconstitutional, suggesting he was preparing to let the courts decide. However, the recent declaration indicates that such a step may no longer be necessary.
• There appear to be additional factors behind the operation’s end. In a post on Truth Social, President Trump said the decision was driven by progress in negotiations, while leaving open the possibility of future military action. He added that the halt came at the request of Pakistan and other countries and reflected momentum toward a formal agreement between the two sides. However, there are indications the administration may also be seeking to pivot away from the conflict ahead of the midterm elections.
• The potential end to the conflict will be supportive for risk assets as it indicates that the worst is perhaps behind us. This will likely allow investors to shift their attention to Q1 earnings, which continue to surprise to the upside. That said, the risk of renewed hostilities is not zero, and the ceasefire remains fragile. As a result, we continue to emphasize maintaining exposure to value as a potential portfolio shock absorber in the event of a return to fighting.

Government AI: Major AI companies are submitting their models to the US Commerce Department for vetting of national security risks as they prepare for wider release. The move comes as the US government looks for ways to ensure protection against safety risks following the release of newer, more advanced models. The push for government review of AI models comes as lawmakers consider possible regulations to limit AI risks to the broader public.

No More Reunification: North Korea has amended its constitution to remove references to reunifying the peninsula under a single country. The change comes as North Korea seeks to reaffirm its borders and define itself as an independent nation and a nuclear power with its own sovereign rights. Additionally, it may be a subtle sign that the country no longer wishes to challenge the borders established following the Korean War. This shift could reduce geopolitical tensions in Asia.

German-US Tensions: After deciding to withdraw troops from Germany, the US has also cut back on providing weapons. The White House announced that it would no longer supply Germany with weapons capable of striking deep into Russia. The administration’s decision follows Chancellor Merz’s criticism of the Iran war. We suspect that rising tensions between the US and Germany are likely to accelerate Germany’s plans to develop its own defense industries.

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by Patrick Fearon-Hernandez, CFA, and Thomas Wash

[Posted: 9:30 AM ET] | PDF

Our Comment today opens with an update on the war in Iran, where renewed military action by the US and Iran yesterday threatens to upset the ongoing ceasefire. We next review several other international and US developments that could affect the financial markets today, including a downgrade to global economic growth forecasts from the International Monetary Fund and new data showing a jump in the number of US homes with foreclosure filings on them due to the end of a Biden-era subsidy.

United States-Israel-Iran: In a chaotic day of news yesterday, it appears that Iran tried to disrupt the US’s new “Project Freedom” program of guiding ships through the Strait of Hormuz by attacking both US Navy warships and commercial vessels and also launched new attacks against the United Arab Emirates. Meanwhile, US Central Command said it used Apache helicopters to sink small Iranian boats that were harassing ships in the waterway.

• Despite the Iranian attacks and its continued refusal to reopen the strait or abandon its nuclear program, President Trump yesterday downplayed the conflict as a “mini-war” and said he didn’t plan to retaliate with massive US airstrikes again. All the same, the continued Iranian attacks could eventually force the president to resume major attacks and keep the US embroiled in the conflict.
• The Iranian attack on the UAE targeted a major oil exporting terminal at Fujairah on the Gulf of Oman, the eastern endpoint of the Habshan-Fujairah oil pipeline that allows Abu Dhabi to move some of the crude pumped from its fields directly to the coast without sending tankers through the strait. Early reports don’t indicate that the damage to the oil exporting infrastructure was extensive, but it still highlights the risk that the region’s key oil facilities could be damaged and put out of action for months or even years into the future.

Global Economy: International Monetary Fund chief Kristalina Georgieva yesterday said the war in Iran has nullified the institution’s baseline forecast that the global economy would grow 3.1% in 2026. Georgieva said that forecast, issued just last month in the IMF’s World Economic Outlook, must be replaced with the “adverse scenario” forecast that assumes the war becomes prolonged. In that case, the IMF sees global gross domestic product expanding just 2.5% this year, with average consumer price inflation of 5.4%, up from 4.4% in the earlier forecast.

United Kingdom: The yield on 30-year government bonds today rose 0.14 percentage points to 5.78%, reaching the highest level in almost three decades. The yield on the 10-year gilt also climbed 0.14 percentage points to reach 5.10%, close to the 18-year high of 5.12%, which was hit earlier in the Iran war. The jump in gilt yields reflects investor concern that the Bank of England will be forced to hike interest rates to contain consumer price inflation resulting from the war.

United Kingdom-United States: The Financial Times today carries an article revealing that US Treasury Secretary Bessent and UK Chancellor of the Exchequer Reeves had a “fierce row” over the wisdom and impact of the Iran war last month in Washington. According to the article, Bessent berated Reeves for her publicly stated view that the US hasn’t been clear about its goals in the war and that the war hasn’t necessarily made the world safer. Reeves reportedly snapped back that she doesn’t work for Bessent and wouldn’t tolerate being talked to in that manner.

• Bessent and Reeves reportedly have worked well together on issues other than the war, and they have been in contact since the April dispute.
• Nevertheless, the incident illustrates the fraying relationship between President Trump’s administration and the Labour Party government of Prime Minister Starmer.

China-United States: New reports say Beijing has ordered Chinese companies not to comply with recent US sanctions on Chinese refiners that buy Iranian oil. The move marks the first time the Chinese government has invoked its 2021 “blocking rule” designed to counteract foreign laws that it believes violate international norms or restrict trade. It also suggests Beijing wants to send a message to Washington that it can and will resist what it sees as coercive US measures ahead of the upcoming summit between President Trump and General Secretary Xi.

US Healthcare Market: Health Secretary Robert F. Kennedy Jr. yesterday announced an initiative aimed at helping wean some Americans off psychiatric medications. The move extends to antidepressants, which are some of the most widely prescribed medicines in the US and are used by about 16% of the population. While details of the program are still being worked out, an aggressive, widely applied move to cut usage could adversely affect some pharmaceutical firms’ sales.

US Housing Market: A new report from data firm ATTOM shows the number of US homes with foreclosure filings on them in March was up 28% from the same month one year earlier. The number is still below the pre-pandemic levels of 2019, but analysts expect foreclosure filings to jump well beyond those levels soon due to the Trump administration’s recent move to end a Biden-era subsidy. Removal of the subsidy will likely further weigh on the finances of relatively lower-income homeowners and further constrain their consumption spending.

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