by Patrick Fearon-Hernandez, CFA, and Thomas Wash

[Posted: 9:30 AM ET] | PDF

Our Comment today opens with a review of what appears to be a brewing trade war between the US and Canada. We next review several other international and US developments that could affect the financial markets today, including the latest on the war in Iran and a large follow-on stock offering by a major Chinese technology firm in order to fund its artificial intelligence business.

United States-Canada: US and Canadian officials said late Friday that their negotiations over a new trade deal had broken down, setting the stage for the US to impose new tariffs of 50% on some $20 billion of imports from Canada. The tariffs, which would cover about 5% of Canada’s total US-bound exports, went into effect at 12:01 AM on Saturday morning.

• According to Canadian Prime Minister Carney, the breakdown came when the US side demanded last-minute changes that “were unfair, uneconomic, and called into question the reliability of any deal.” If true, the statement could mean that foreign leaders facing the administration’s hard-ball negotiating tactics are starting to toughen their own responses — a development that could prolong trade tensions, lead to even higher trade hurdles, and potentially buoy consumer prices.
• On the Canadian side, Prime Minister Carney said he will impose dollar-for-dollar retaliatory tariffs on US goods. In addition, he vowed to introduce support for affected Canadian workers in the coming days.
• Finally, we note that the new tariffs against Canada rely on a section of US trade law that has never been utilized before, similar to the ones struck down earlier in the summer by the Supreme Court. The new tariffs are therefore likely to draw lawsuits and could ultimately be deemed invalid.

United States-Israel-Iran: At the weekend, Iranian President Pezeshkian and Speaker of the Parliament Ghalibaf both called on the country’s hardline leaders to restart peace talks with the US and allow the country’s economy to start recovering. However, hardliners such as Supreme Leader Ayatollah Mojtaba Khamenei and the Islamic Revolutionary Guards Corps have shown no willingness to drop their tough demands on the US before they would stop attacking shipping through the Strait of Hormuz, supporting regional proxies, or ending their nuclear program.

• In fact, Iran’s new security chief on Saturday vowed to strike the country’s oil-rich neighbors if they joined the US’s new “economic D-Day” strategy to further strangle its economy. The statement is a reminder that the hardliners who control Iran’s government are not only willing to keep up their war with the US, but they’re willing to expand it to US allies if they see it as necessary.
• Indeed, Iran’s new Persian Gulf Strait Authority today said it has identified 46 ships that have violated Iranian protocols for passing through the Strait of Hormuz and would therefore “face restrictions on future passages, including fines, detention or confiscation.”
• At the same time, multiple global oil analysts say they can’t corroborate the US’s assertion last week that it has been running enough convoys of oil tankers through the Strait of Hormuz to replace almost half the daily volume of crude that went through the waterway before the war. Using ship tracking and other methods, the analysts estimate just 2 million to 6 million barrels of crude are going through the waterway each day, versus about 20 million before the war.
• The hardline statements out of Iran suggest global energy supplies remain at risk of further disruption, with negative implications for financial markets.

China: Technology giant Alibaba yesterday said it will issue the equivalent of $10.2 billion in new shares, with all proceeds earmarked for building up its artificial intelligence business. The new issuance will help the firm shift from being an e-commerce giant to being a full-stack AI player with businesses spanning chips, computing infrastructure, large language models, and AI applications. The new issuance also shows how the ravenous demand for capital for AI investment is no longer just confined to the US.

Japan: An earthquake measuring 5.9 on the Richter scale struck Tokyo and the broader Kanto region early Sunday, shortly after authorities issued a warning. Railway disruptions were reported, and dozens of people were injured, but there have been no reports of deaths so far. Importantly, based on warnings from government geological scientists, authorities have warned that further tremors could occur over the coming week.

Singapore: Prime Minister Wong yesterday said his government will further liberalize its child payment and parental leave policies, including providing parents with more than $55,000 for each child they have. The move aims to boost the city-state’s falling birth rate and stop its rapid population aging. However, similar programs in other rapidly aging countries have had only modest success, and the new rules may not substantially change current forecasts that more than 25% of Singaporeans will be 65 years old or older by 2030.

France: Finance Minister Roland Lescure today said the government would like to scrap its “exceptional” income tax surcharge on the profits of large firms, but doing so in 2027 would be difficult because of the country’s wide budget deficit. The tax, introduced as a temporary measure in 2025, has already been extended twice. Extending it again in 2027 would therefore risk sparking strong pushback by businesses, potentially push more firms out of the country, and probably weigh on the French stock market.

US Politics: With just ten weeks to go until the midterm Congressional elections in November, the widely followed Cook’s Political Report late last week shifted its assessment of the US Senate races in Texas and Iowa from “lean Republican” to “toss-up.” The shift means the firm now rates six Senate races as toss-ups or leaning Democratic, raising the odds that the Democrats could take control of both chambers of Congress in the new year, so long as a dramatic change in the situation doesn’t occur in the meantime.

• Separately, the New York Times over the weekend said Jared Kushner, President Trump’s son-in-law and top outside adviser, recently met in New York City with House Minority Leader Hakeem Jeffries to discuss potential areas of common ground.
• During the meeting, Kushner and Jeffries reportedly discussed housing, immigration, and the high cost of living as potential areas of common ground, and Kushner suggested that Jeffries should meet with White House Chief of Staff Susie Wiles. All the same, a meeting of the minds on such issues seems a remote possibility at present.
• The meeting suggests the White House sees a high probability that the Democrats will take control of the House from the Republicans and is trying to lay the groundwork for cooperation when and if that happens.

US Artificial Intelligence Industry: Based on data from 70,000 firms collected by payments group Ramp, Anthropic’s largest and priciest model, Fable 5, has plateaued at only about 11% of total outlays on the company’s tools. The figures are consistent with our view that firms are likely to balk at the high price of cutting-edge US models when they can use less capable or foreign models at a much lower cost. As we’ve argued before, that presents a risk that much of the current frenzied investment in AI infrastructure could end up wasted.

Global Auto Industry: Reports at the weekend show how the artificial intelligence investment boom is causing challenges for the global auto industry. The reports say that as automakers work to make their cars more autonomous, they’re facing shortages of key information technology components — especially printed circuit boards and multilayer ceramic capacitors — which are also in high demand for data centers. The result has been skyrocketing prices for the parts, adding to challenges such as weak consumer demand and high materials prices.

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by Patrick Fearon-Hernandez, CFA, and Thomas Wash

[Posted: 9:30 AM ET] | PDF

Our Comment today opens with news of another major disruption in the global shipping industry, which will likely drive up costs for customers trying to move their goods around the world. We next review several other US and international developments that could affect the financial markets today, including a discussion of the upward march in US bond yields and new reports that China is blocking the shipment of critical manufacturing components to Taiwan.

Global Shipping Industry: Because of poor rainfall and low water levels amid an intensifying El Niño weather pattern, the Panama Canal Authority has announced it will throttle back the number of ships it allows through the canal starting September 3. The move will cut daily ship transits from 36 to 32. Coupled with other shipping disruptions around the world, such as the effective closure of the Strait of Hormuz because of the Iran war, the move will likely put further upward pressure on shipping rates, benefiting shippers but increasing costs for their customers.

US Bond Market: US federal obligations sold off again yesterday as investors became more skeptical of Treasury Secretary Bessent’s announcement of increased bond repurchases the day before. The yield on the 30-year Treasury rose to 5.24%, reversing most of the prior day’s decline. Other global bonds also sold off. So far today, longer-term Treasury yields are flat to slightly down.

• Because of the various forces pushing government bond yields higher, we think a wider and more sustained intervention would probably be needed to keep longer-maturity yields contained.
• As we’ve noted before, a sustained, concerted effort by the federal government to artificially cap bond yields would represent “financial repression.” Such a strategy could hurt bond investors because yields may be kept too low to compensate for price inflation, i.e., real yields could be negative.
• Therefore, as investors begin to question the value of US bonds and the dollar, we are seeing increased buying and price gains for alternative assets ranging from bitcoin and gold to European and Asian currencies.

US Monetary Policy: Coupled with recent data showing slightly slower price inflation and a drop in nonfarm payrolls, the government’s effort to push down bond yields also seems to be undermining investor expectations that the Federal Reserve will soon shift to interest rate hikes. Interest rate futures trading now suggests investors see a 65% chance that the Fed will hold its benchmark fed funds rate steady at its next policy meeting in September. They don’t expect a rate hike until at least December.

US Defense Industry: Erik Prince, the former chief of private security firm Blackwater, has reportedly teamed up with Ukrainian drone software firm Swarmer to launch a new private venture providing custom air-defense systems to companies, militaries, and governments around the world. The venture, Vectus Air Defense Systems, would design and operate the systems with a focus on keeping costs low.

• The news highlights not only the increased global demand for defense goods that we’ve long discussed, but it also illustrates how air defense systems are especially in demand.
• While today’s investors may be tempted to seek out manufacturers of military drones, it could be difficult to make money from such mass-produced, commoditized systems. The better investment prospects could well be in high-value, specialized drone components such as software or air-defense systems aimed at countering such drones.

European Union: Analysis by S&P Global indicates European oil refinery capacity will shrink by about 20% over the next decade. The report says European governments now mostly support refineries to ensure needed supplies of gasoline and other energy products. The problem is that investors are reluctant to support major investments to extend or expand the facilities, especially given expectations that increased use of electric vehicles will cut the demand for gasoline over time. The result may be that surviving refineries run at higher profitability.

China-Germany: New data shows that Germany’s automotive sector lost 42,300 jobs in the year through June, representing 5.8% of the sector’s total employment. As a result, the number of jobs in the sector is now at its lowest level since 2005. The decline comes as carmakers grapple with both falling profits in China and mounting competition from Chinese brands in Europe. The news will put further pressure on the European Union to put up higher trade barriers against China, which in turn will heighten tensions and invite retaliation from Beijing.

China-Taiwan: China has been restricting or delaying exports of key aerospace and optical materials to Taiwan since late last year, new reports say. Specifically, exports of materials based on germanium and quartz have faced difficulties clearing Chinese customs. As a result, whole industries in Taiwan are facing shortages and are having to delay shipments to their customers. The development suggests Beijing has become more comfortable with a strategy of strategic export bans to extract concessions from governments beyond its borders, including the US.

South Korea: Semiconductor giant Samsung Electronics today said it will return the equivalent of at least $65 billion to investors this year in the form of dividends and stock buybacks. The total could be as much as $80 billion, depending on business performance, investment needs, and cash flow. If the total comes in at the high end of the range, it would be about five times more than in 2020. The initiative reflects how Samsung has benefited from the global boom in artificial intelligence infrastructure investment.

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by Patrick Fearon-Hernandez, CFA, and Thomas Wash

[Posted: 9:30 AM ET] | PDF

Our Comment today opens with an important new development in the Iran war, where reports say the US has been quietly running convoys of oil tankers through the Strait of Hormuz. We next review several other international and US developments that could affect the financial markets today, including some encouraging economic news from the United Kingdom and a discussion of US monetary and fiscal policy as gross federal debt tops $40 trillion.

United States-Israel-Iran: Reports yesterday afternoon said the US military has been quietly running convoys of private oil tankers into and out of the Strait of Hormuz for the last several weeks, using a corridor along the coast of Oman and providing escort fighter jets to shoot down any Iranian missiles or drones that might threaten them. The program, run by the 82^nd Airborne Division out of Fort Bragg, North Carolina, is reportedly getting some 10 million barrels of crude out to world markets each day, or about half the daily volume before the war.

• The news helps explain the administration’s anger at Iranian statements that it has total control over shipping in the waterway. In any case, news of the program did appear to push global oil prices slightly lower yesterday, with near Brent crude futures retreating to below $91 per barrel. However, prices later rebounded, possibly reflecting concern that Iran will respond to the revelation by staging new attacks to shut it down.
• Separately, President Trump yesterday announced a new program of economic warfare against Iran, calling it the “most crushing economic operation ever taken against any country” and demanding that US allies abide by it and stop all trading with Iran. Given Iran’s long history of dealing with US economic sanctions, it’s not clear that the new program will be successful. Moreover, it could become a source of further friction between the US and its allies.

United Kingdom: Second-quarter productivity — defined as the average value of output per hour worked — was up 1.8% from the same period one year earlier, accelerating from the 1.2% gain in the year to the first quarter and marking one of the best gains in years. Since productivity growth is key to boosting overall economic growth and living standards, the data is being taken as a sign of improving long-term prospects for the UK economy. Economists believe much of the increase has come from recent investment in artificial intelligence and other technology.

Taiwan: President Lai Ching-te’s government has proposed hiking its military budget by 18% in 2027, bringing the total to the equivalent of $34.5 billion. That would mark Taiwan’s largest defense budget ever and lift its defense burden to above 3% of gross domestic product. The proposal is likely to be resisted by the China-friendly opposition parties, but it nonetheless shows how rising geopolitical tensions continue to push up military spending around the globe, creating new opportunities for investors.

US Monetary Policy: The minutes of the Fed’s July policy meeting, released yesterday, showed that more officials favored raising interest rates last month than the three who formally dissented. Others signaled they would back an increase if consumer price inflation doesn’t cool. The news could rekindle investor concerns that the central bank under new Chair Warsh is too reluctant to hike rates. The prospect of the Fed acting too late to control inflation will likely put new upward pressure on longer-term bond yields, despite the Treasury’s move yesterday (see below).

US Fiscal Policy: Treasury Secretary Bessent announced yesterday morning that his department will double its planned repurchases of government bonds from $2 billion to $4 billion. Although modest compared with the enormous size of the US Treasury market, investors clearly got the message that Bessent would intervene in the market to hold down yields. The move implies the Treasury will issue more short-term debt to fund purchases of longer-maturity obligations, with the likely result of relatively higher short-term yields but lower long-term yields.

• Along with Bessent’s recent move to shield the US Treasurys from Japanese selling as it tried to boost the yen, yesterday’s action underscores how the US administration seems especially focused on capping longer-term yields at around 5%. That’s consistent with our long-held view that there is a significant risk that the federal government will embark on “financial repression,” i.e., artificially holding down interest rates, as debt loads climb.
• The result yesterday was a sharp increase in bond buying, which drove yields lower. The yield on the 30-year Treasury bond fell to 5.195%, while the yield on the 10-year Treasury declined to 4.650%. The drop in yields supported stocks generally, although the prospect of a flatter yield curve weighed on bank stocks.

US Retail Industry: Now that court decisions have forced the federal government to rebate billions of dollars of invalid tariffs, Walmart today said it will use most of its allotment of up to $3 billion to freeze prices to the end of the year. Because of Walmart’s large size and dominance of the retail and grocery industry, the move could potentially have a noticeable impact in holding down overall consumer price inflation in the coming months. Of course, it could also further strengthen Walmart’s competitive position in the industry.

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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 new attacks on shipping add to evidence that the conflict will continue for some time. We next review several other international and US developments that could affect the financial markets today, including news that the US and Canada have reached a preliminary agreement on a new trade deal and another unexpected primary election win for a Democratic Socialist.

United States-Israel-Iran: According to the United Arab Emirates military, Iran fired two ballistic missiles at commercial ships in the Strait of Hormuz yesterday, hours after it hit a bulk carrier in the strait east of Oman. The US military evidently did not respond to either attack, although it still appears to be enforcing the US blockade on Iranian ports. The lack of a US response to the latest attacks seems to reflect the administration’s decision to focus on economic pressure to force Iran to allow shipping in the waterway.

• However, as we’ve argued in the past, the hardline Iranian leadership appears to have the tactical advantage in the war and is likely to keep trying to escalate the violence to show the US as impotent or force it into again launching politically unpopular military strikes. The Financial Times yesterday said the Iranian military has even weighed striking US and allied assets in Europe to keep increasing the cost of the war for the US.
• Either way, the conflict looks set to keep going and create a continued risk of disruption to world energy markets.

United States-Canada: President Trump last night said that US and Canadian negotiators have agreed in principle on a new trade deal, so he will pause a threatened 50% import tariff on certain goods from Canada for three days to give them time to finalize it. The Office of the US Trade Representative said the deal would include improved market access for US goods in Canada, along with “economic security commitments” and “alignment” on digital trade issues that have long caused tension between the two countries.

United States-China: US semiconductor giant Nvidia has reportedly received permission from Beijing to send small batches of its H200 artificial intelligence chip to China. Major Chinese technology firms such as ByteDance and Tencent have each received about 10,000 of the processors in recent weeks, while a few other Chinese tech groups could soon get approval for shipments of similar size.

• Beijing had previously banned the US chips to support its domestic AI chip industry, but now it has apparently relented to help its AI labs in their race against US model developers.
• Nvidia’s H200 processor is still at least two generations behind the firm’s most advanced chips, but China has shown that it can leverage even less-than-cutting-edge technology to advance its AI models. That could potentially help US chip suppliers.

China-United States: New federal data shows China’s holdings of US Treasury obligations fell from $659.3 billion in May to $633.4 billion in June. China’s official portfolio of US Treasurys has therefore declined by more than 50% since its peak in 2015 and now stands at its lowest level since September 2008. The figures may not capture some indirect Chinese holdings in third countries, but the data nevertheless shows how key countries have cut their exposure to the US and the US dollar over time.

• Foreign central banks and institutions have been working to reduce their exposure to the US for a number of reasons, from fear of financial sanctions to concern over the US’s expanding budget deficit, rising debt, and shifting monetary policy.
• As we’ve noted before, however, no other major currency offers the same advantages as the greenback, such as big, deep, well-regulated financial markets and full currency convertibility. Therefore, China and other foreign investors will probably continue diversifying away from the dollar and US Treasurys only gradually. The trend may put upward pressure on US bond yields over time, but it won’t necessarily lead to a sudden outflow that sparks a sharp financial crisis.

Japan: Concerns about Prime Minister Takaichi’s health have grown after she unexpectedly spent 6-1/2 hours in what was supposed to be a routine checkup on an arthritic hand she injured while campaigning in February. Government officials say the extended exam found no particular problems, but observers note that her intense work schedule and habit of getting very little sleep could put her health at risk. Of course, if Takaichi were to suddenly become incapacitated, it would likely spark volatility in Japan’s financial markets.

Singapore: The Monetary Authority of Singapore today said it plans to remove the tax paid by investment professionals relating to profits from fund management services. It will also set up an investment program to provide hedge fund managers operating in Singapore with capital, while loosening visa rules for senior fund-management staff. The growth-friendly moves aim to help the city state compete for investment management business now that Hong Kong is cutting its taxes on the industry as it tries to regain its cachet as a financial center.

US Politics: Florida’s Democratic primary for the US Senate yesterday was unexpectedly won by state Rep. Angie Nixon, a Democratic Socialist who had campaigned on Medicare for All and a federal minimum wage of $25 per hour. Nixon is widely expected to lose the general election against GOP Sen. Ashley Moody in November, but her win in the primary will likely keep alive the narrative that the Democratic Party is drifting farther to the left — a narrative the Republicans will use against the party’s candidates ahead of the mid-term elections.

US National Security Policy: The US Navy this week said it will accept its newest nuclear-powered attack submarine, the USS Massachusetts, without the customary final sea trials. According to Vice Adm. Rob Gaucher, the Navy’s director of submarine programs, early acceptance is a calculated risk, but it would make the Massachusetts available for operations sooner and allow shipyards to accelerate their production of other subs.

• The decision probably reflects White House and Pentagon pressure on the Navy to reverse the chronic delays in producing major combat vessels.
• As noted by Vice Adm. Gaucher, the decision to forego the traditional final sea trials raises the risk that the Massachusetts will be found to have problems. However, it will also help slow the current slide in the number of combat ships available to the Navy.

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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 conflict in Iran, where there are new signs of the war expanding. We next review several other international and US developments that could affect the financial markets today, including new evidence that sophisticated US investors increasingly find China to be uninvestable and a discussion of the upward pressures on government bond yields in the US and other developed countries.

United States-Israel-Iran: Reports today say the Iran-allied Houthi rebels in Yemen continue to ramp up their military attacks in the region, including launching missile and drone attacks that shut down the port of Mokha, a key logistics hub for civilian shipping and for anti-Houthi forces operating along the coast of the Bab al-Mandeb Strait. Other reports also said a commercial ship was attacked near the Strait of Hormuz yesterday. The developments are consistent with our view that the Iran war could continue for some time and risks spreading throughout the region.

• Separately, in the latest SpyTalk podcast, a recently retired CIA analyst describes how the large-scale culling of personnel from the intelligence community since early 2025 has left few senior officers with the expertise or prestige to provide effective warning to top government leaders when they are about to launch risky national security initiatives.
• In turn, the relative lack of intelligence community input or pushback likely raises the risk of US leaders making bad national security decisions. Of course, any such decisions could have negative implications for the global economy and financial markets.
• Reflecting the latest fighting in the Middle East, global oil prices rose yesterday, with near Brent crude futures up about 3.5% to almost $92 per barrel, although they have retreated slightly in recent hours.

Map of Yemen, with the port of Mokha on its southwest coast. (Source: CIA)

Global Mining Industry: Australian mining giant BHP yesterday said copper was the biggest contributor to its annual profit growth for the first time ever, outstripping the contribution from iron ore and other minerals. In the year to June, the company said copper profits rose about 48%, exceeding the 27% increase in its total earnings before interest, taxes, depreciation, and amortization. The data reflects how global trends such as electrification and artificial intelligence have boosted the demand for copper and supported its price.

US Bond Market: As oil prices rose yesterday on reports that a tanker had been seized in the Strait of Hormuz, bond prices fell, driving the yield on the 30-year Treasury bond to a 19-year high of 5.31%. The 10-year Treasury yield edged up to 4.725%. In our view, the rise in longer-term bond yields reflects not only concerns about price inflation because of the war in Iran, but also worries about worsening US budget deficits, rising federal debt, and more opaque monetary policymaking under the new Fed chair, Kevin Warsh.

US Artificial Intelligence Industry: AI model developer OpenAI yesterday said it has signed a 20-year lease for a massive new data center to be built in central Ohio, with AI chip developer Nvidia partly guaranteeing the financing. The data center will be built and owned by SoftBank subsidiary SB Energy, in which Nvidia will invest. OpenAI’s reliance on funding from Nvidia, a key supplier, will likely add to investors’ concern about circular financing deals in the AI space, which raises the risk of financial contagion if a major player stumbles.

• Separately, reports yesterday said Google will pay $10 million for a trove of emails, calendar info, chats, documents, spreadsheets, and other business data from the defunct Spirit Airlines, which went out of business earlier this year and whose assets are now being sold off.
• Google is expected to use the data to help train its AI models. The news therefore illustrates how data is rapidly becoming a valuable resource that can command top dollar in auctions.

United States-United Kingdom: Prime Minister Burnham’s cabinet office has reportedly asked the Department for Business, Innovation, Science and Trade to examine how the UK economy would be affected if the US cut it off from frontier AI models launched by companies such as Anthropic and OpenAI. The move reflects fears among other countries that they could be disadvantaged by AI export restrictions such as those the US temporarily imposed for Anthropic’s Fable 5 model in June.

United States-China: New analysis by the Financial Times shows that top private equity firms, including giants such as Blackstone and KKR, have made no new deals in China so far this year. That suggests the full-year total could be even worse than the three deals in 2025 and the two deals in 2026. It also stands in sharp contrast with the dozen investments the firms made in China in 2021. The analysis suggests sophisticated private investors increasingly see China as uninvestable because of issues such as government interference in private firms.

United States-South Korea: President Trump yesterday ordered the Pentagon to scale back its participation in the annual US-South Korea military drills, arguing they are too expensive and provocative toward North Korea. He also appeared to tie the action to Seoul’s resistance to helping the US in its war against Iran. In any case, the move will likely increase the concern among US allies in Asia that they can’t rely on Washington to keep living up to its security commitments.

• As we’ve argued in the past, that could put increased pressure on countries such as Japan and South Korea to eventually develop their own nuclear weapons.
• The development therefore should be supportive of uranium prices over the longer term, given that large amounts of uranium would be needed for new countries to develop their own modern, credible nuclear weapons arsenals.

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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 new reporting confirms our suspicions that hardline leaders in Tehran intend to keep fighting the US. We next review several other international and US developments that could affect the financial markets today, including new data showing weakness in China’s domestic economy and a report that will likely rekindle concerns about rising defaults in the US private credit industry.

United States-Israel-Iran: Based on sources with access to Iranian officials, reports yesterday said the country’s hardline leaders never had faith in the June “memorandum of understanding” that US officials saw as setting up a ceasefire. The sources say Iran’s leadership saw the memo as merely starting a pause that Washington and Tel Aviv would use to replenish their arsenals and prepare for new attacks. The Iranians therefore planned to restart their attacks, alone and with their proxies, while the US and Israel had their guard down.

• Importantly, the reports say the Iranian leaders have put a plan into place to continue fighting the US and Israel and to impose so much pain on them that they will never again try to attack Iran.
• Coupled with our belief that Iran holds the military and economic advantage in the conflict, the suggestion that they also have the motivation to keep fighting implies the conflict will continue indefinitely. If the Iranians really do want to impose ever higher costs on the US and Israel, it would indicate they would even escalate the fighting, say by launching bigger attacks on US allies in the region. That will likely keep alive the risk of further disruptions to the world’s energy supplies and more financial market volatility.
• Separately, Fox News this morning said President Trump told one of its reporters that he would order the US military to bomb Oman if its negotiations with Iran over control of the Strait of Hormuz obstruct the current US-Iran talks. According to the reporter, the president said, “If Oman gets in the way, we’ll bomb the s*** out of them.” It’s not clear how serious the president was, but it adds to the evidence that he is increasingly frustrated by the war and may consider unexpected new steps.

Japan: At the country’s annual memorial service for its World War II dead on Saturday, Prime Minister Takaichi attempted to strike a balance between asserting Japan’s intention to defend itself but not signaling a return to militarism. In her speech, Takaichi stressed Japanese efforts to build peace in the Indo-Pacific region but notably avoided repeating her predecessors’ “remorse” for the war. She also avoided making what would have been a controversial visit to the Yasukuni war-dead shrine, but she sent Defense Minister Koizumi in her place.

• As Japan hikes its military budget and unshackles its defense industry, countries around the region probably understand that this is a response to growing Chinese geopolitical pressure and US insistence that Japan shoulder more of its own defense. All the same, regional leaders with long memories of World War II are becoming concerned about renewed Japanese militarism.
• Takaichi’s caution at the memorial services suggests she understands how Japan’s new defense policies could unsettle other countries in the Indo-Pacific. To ensure those countries remain friends, or even allies, Takaichi will likely continue to soft-pedal her defense policies in public while still pouring new resources into the armed forces.

India: Prime Minister Modi on Saturday said his government will provide free online coaching lessons for students prepping to take competitive exams. The move comes just weeks after large student protests, triggered by the leak of a key medical entrance exam paper, and other scandals that together prompted the resignation of Modi’s education minister. The new move implies that Modi has been rattled by those protests and now sees a continuing need to appease India’s large cohort of students, all of which has implications for Indian political stability.

China: July retail sales were up just 0.6% from the same month one year earlier, slowing from a 1.0% rise in the year to June. The urban unemployment rate rose to 5.2% in July from 5.0% in June. Meanwhile, fixed-asset investment in January through July was down 6.7% from the same period one year earlier. Even though Chinese exports are still booming, reflecting both technological prowess and aggressive pricing, the data today confirms that the domestic economy remains in the doldrums, putting even more pressure on firms to unload products abroad.

United States-China: With just six weeks to go before General Secretary Xi’s summit with President Trump in Washington, reports say Chinese officials are frustrated by disorganization and missed deadlines for deliverables on the US side. The problems reportedly reflect internal disputes within the Trump administration over the goal of the meeting, as White House advisers such as Stephen Miller and Steven Cheung push the president to project superiority over China, while other advisers advocate taking steps to smooth over US-China tensions.

• The only concrete item on the agenda being discussed so far is a roughly $30-billion tariff reduction for Chinese goods as a targeted US concession. The reports say other potential deliverables remain under discussion.
• In any case, we think Trump continues to prefer a policy stance that reduces tensions and lays the groundwork for a kind of US-China détente over the long term. That’s consistent with the market-friendly “constructive relationship of strategic stability” that the two leaders agreed to at their May summit.
• However, recent Chinese territorial moves in the South China Sea and new US technology-export curbs suggest each side faces internal pressure to take more aggressive action against the other. If those forces ultimately win the day and tensions suddenly spike again, the result would probably be negative for world financial markets.

US Dollar: In an interview over the weekend, legendary investor Jim Rodgers said he’s been boosting his cash allocations due to stretched US asset values and high federal debt. Importantly, Rodgers said that because of worsening US debt levels, he would prefer to shift his cash holdings to Chinese renminbi but was deterred from doing so because the currency still isn’t convertible. The remark illustrates how other currencies’ problems with convertibility, market size, and other issues continue to slow the global shift away from the dollar as the reserve currency.

US Politics: Jonathan Reiner, MD, the long-time cardiologist for former Vice President Cheney, on Saturday posted a New York Times opinion piece raising concerns about President Trump’s health and questioning whether the White House is covering up medical issues. Reiner’s observations were based solely on publicly released health records, photographs, and videos, but his concern raises the potential issue of an unexpected presidential health problem leading to a sudden, disruptive political transition that would probably unsettle the financial markets.

• In his article, Reiner asserts that “at times over the past year, the president has not looked well” and points to evidence such as large bruises on both the president’s hands, swelling in his legs, and episodes when it appears he is struggling to stay awake. He also notes that the president has had advanced imaging performed for unclear reasons.
• Reiner also calls attention to the fact that the president was examined by 22 different specialists at his last physical exam in May — a number Reiner calls “extraordinary” for even the most extensive executive health evaluation. He also questions why the president has been subjected to such a large number of cognitive tests.
• Reiner asserts that all these issues taken together could point to serious problems in a man as aged as the president, who turned 80 in June.

US Private Credit Industry: New analysis by the Financial Times today shows non-accruing loans at the 20 largest business-development companies rose to 2.8% of cost in the second quarter, up from 2.0% in the first. Citing that and other data, the article asserts that the level of problem loans in the private credit space is now at its highest since 2017, despite recent efforts by private credit funds to downplay the issue.

US Labor Market: An article in the Wall Street Journal today shows the cancellation of the “temporary protected status” program that provided work authorization to immigrants from certain countries has had an especially large impact on the labor market in southern Florida. Cancellation of the program reportedly took over 90,000 immigrants from Haiti out of the labor market in Florida, creating labor shortages in industries such as hotels, restaurants, home healthcare, and retail.

• The article illustrates how the administration’s crackdown on immigration has helped constrict the US labor force. We believe that another major reason for the falling labor force is increasing retirements by baby boomers.
• While the loss of workers and potential workers has helped hold down the unemployment rate, it also means the economy is losing wage-earning consumers, which could eventually be a drag on economic growth.

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