by Patrick Fearon-Hernandez, CFA, and Thomas Wash

[Posted: 9:30 AM ET] | PDF

Our Comment opens with our thoughts on the Fed ahead of today’s rate decision. We then turn to AI, examining the growing debate over regulation. Next, we cover legislation that would grant President Trump new trade authority, a meeting between US and Chinese officials ahead of their summit later this month, and the United Kingdom’s push to join a Canada-led defense bank. As always, we conclude with a review of recent domestic and international economic data.

Hawkish Sentiment: The Federal Reserve is set to deliver its rate decision later today, and the market is pricing in its first hike since 2023. Expectations of a rate hike have been increasing since the war in the Middle East started raising energy prices, leading to concerns about an uptick in inflation. While there have been worries that a hike could be the wrong move given that the source of inflation is being driven by supply factors as opposed to demand factors, questions about the Fed’s independence may mean that avoiding a rate hike could be costly.

• Sentiment has shifted regarding the Fed’s tilt over recent months after signs that the Fed was not moving closer to its 2% inflation target. Since the conflict began, the Fed has been progressively more hawkish. Although dot plots at the start of the conflict showed that FOMC members were confident in a rate cut this year, that confidence has given way to the central bank brushing aside any mention of a dovish tilt, and, at the previous meeting, a call for a rate hike from some officials.
• The shift in the FOMC has put pressure on Chair Warsh to offer some forward guidance, given that his stance has been somewhat unclear, but he has maintained the need for patience while also acknowledging the Fed’s commitment to price stability. During his comments at the Jackson Hole Symposium in August, he mentioned that the Fed “has work to do” to get inflation back to target, which has largely been seen as implicit support for a rate hike.

• The hawkish shift has occurred as key inflation measures have moved in opposite directions. Core CPI has edged closer to the Fed’s 2% target in recent months, while core PCE, the central bank’s preferred gauge, has moved further away from it. The divergence largely reflects differences in how the measures are weighted, particularly for housing — shelter has exerted more downward pressure on core CPI while having a much smaller effect on core PCE.
• The Fed is likely to raise rates, though we would not be surprised if it held policy steady or even opted for a larger-than-expected increase. A pause would probably reinforce the view that the committee is exercising patience in light of the conflict, while an outsized hike could help quell concerns about the Fed’s independence. As a result, today’s decision could materially reshape market expectations and set the tone for risk assets in the weeks ahead.

AI Safety Talks: There is growing discussion on Capitol Hill about how to best place guardrails for AI while also protecting against the negative consequences. On Tuesday, it was reported that a member of the Trump administration met with executives of Anthropic to discuss AI risks. This attempt to meet with business professionals comes as the White House has expressed wariness about adding restrictions that could slow the development of AI, which it views as a critical component of its national security strategy.

• White House efforts to understand the best way to guard against AI risks are fraught with growing disagreements. During a press conference in San Francisco, several tech executives argued that while the risks of AI are in fact real, the tech industry does not need new regulation. Meanwhile, at a separate conference in Washington, right- and left-wing populists Steve Bannon and Bernie Sanders agreed that there should be some oversight to prevent AI from hurting human interests.
• The discussions about what to do with AI are occurring at a time when the leading AI companies are purportedly preparing for IPOs. SpaceXAI, Anthropic, and OpenAI have all called for a global slowdown in development, despite having gone public or being prepared to do so. While these companies have continued to make promises of strong earnings power, their effort to moderate the pace of development has already been seen as a possible excuse if they fail to meet investor expectations.
• The market impact of these fears has been somewhat mild. Investors have been reducing their exposure to some chip stocks following worries that this could slow spending in the space, while software companies, which have been seen as possible casualties of the rise of AI tools, have benefited from the scare. The former may not last for long, as we think the push for the AI race is likely to benefit from government help; meanwhile, the latter’s gains may extend as AI fears continue to slow adoption rates.
• The concerns over potential guardrails have added to the fears about AI. However, its importance to US national security makes the government reluctant to offer any regulation that could prevent it from achieving its mission of eventually reaching artificial general intelligence (AGI), which would allow these models to reason and make logical decisions. This advancement would give the US a strong geopolitical advantage over its rivals.

Tariff Authority: On Tuesday, the House of Representatives advanced legislation that would give the president more authority to pursue tariffs. The proposal would allow the president to punish countries that purchase Russian energy. There is growing momentum to allow the White House more leeway in using trade and financial restrictions to prevent rivals and trade partners from going against US foreign policy and not following through on pledges.

Xi-Trump Summit: Roughly a week before President Trump is set to meet with his Chinese counterpart, both sides appear to be working to ease tensions. Treasury Secretary Scott Bessent is scheduled to meet Chinese Vice Premier He Lifeng on Sunday to discuss growing differences between the two countries, including AI development and trade. Although a major breakthrough is unlikely, the meeting could help set the tone for talks between the leaders of the world’s two largest economies.

UK Joining Canada: The United Kingdom is in discussions to join a Canada-led initiative for a defense bank. While the UK previously rejected the initial plan, it appears to have changed its tune, viewing the initiative as a potential aid in reaching its 3% of GDP defense spending target. The move is likely to further support aerospace and defense companies as Europe and other countries ramp up their military capabilities.

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by Patrick Fearon-Hernandez, CFA, and Thomas Wash

[Posted: 9:30 AM ET] | PDF

Our Comment opens with our thoughts on how rising fears over AI are shaping the debate on global policy. We then turn to fixed income, examining the drivers behind the 10-year Treasury yield’s move to 5%. Next, we briefly cover China’s new travel restrictions and the Supreme Court’s ruling on mail ballots. As always, we conclude with a review of recent domestic and international economic data.

AI Fears? A push for a global slowdown in AI development has fueled a broader debate over ways to address geopolitical risks. On Monday, China rejected calls to restrict the use of its models in the US, arguing that it could disrupt the process of global governance of AI. Meanwhile, Canadian Prime Minister Mark Carney called for a global body to oversee AI development, arguing it would help ensure international standards. This debate over a global AI standard marks the first serious attempt at an international framework for the technology.

• Uneasiness over AI safety has led to a push for technological protectionism. Over the weekend, a top Chinese official in Beijing published an article warning that the technology could be abused by hostile forces to wage a propaganda and cognitive war against the government. He specifically referred to US models, including those from OpenAI and Anthropic. His comments followed concerns from Anthropic CEO Dario Amodei, who warned that China’s lead could pose a danger to the US and the world.
• However, there does seem to be a push for some form of international cooperation as a way to ensure AI is created safely. Carney has advocated for a board similar to the Financial Accounting Standards Board, which would create a unified set of governing rules to ensure AI is developed safely. The implication is that a rule-setting board would govern how public and private companies build and test AI models.
• The push toward either more protectionist AI policies or greater global cooperation reflects a world still adapting to the AI age. We think the global economic system may be shifting from one built primarily on trade to one increasingly built on technology. As a result, a dispute could emerge over how different AI models are permitted to operate across countries, particularly as the US and China continue to vie for supremacy in the space.
• The debate over the risks of AI could slow development, whether countries move toward protectionism or a global cooperative governing body emerges. While the latter is preferable, competition between the two largest economies makes the former more probable. This is apt to slow adoption, as it could prevent firms from accessing the lowest-cost alternatives. However, it may provide a boost to software-as-a-service companies, which are more likely to be threatened by the rapid adoption of AI tools.

Treasury Yield Peaks? The 10-year Treasury yield rose above 5% for the first time since 2023. The increase in yields comes as investors price in the possibility of a broadening conflict in the Middle East leading to further supply shocks in energy. This concern compounds the fact that inflation is likely to stay elevated, as government debt issuance and rising AI-related corporate debt continue to flood the market with supply. As a result, there are growing worries over what can be done to bring down global borrowing costs.

• The rise in bond yields comes in response to concerns about Iran and its proxies targeting energy infrastructure throughout the Middle East as it looks to gain leverage against the US. Over the last few days, Iran has used its proxies to broaden the war beyond the Strait of Hormuz. Most recently, the Iran-backed Houthis were able to take control of the Bab al-Mandab Strait and have tightened their grip on the coast of the Red Sea.
• The rise of the Houthi threat has put the US in a bind as it decides whether to expand its operations throughout the Middle East. Saudi Crown Prince Mohammed bin Salman has requested US military support as the kingdom looks to avoid having its oil exports blocked on two fronts. However, the US appears reluctant to provide that support, given its existing commitment to the Strait of Hormuz and unease about the further straining of its military resources.
• Oil markets have been hit hardest, as Saudi Arabia has struggled to export to the rest of the world. The kingdom is currently trying to resume operations at its East-West Pipeline, which has been a key means of selling oil while bypassing the Strait of Hormuz. There is hope that Saudi Arabia can rely on inventories held at one of its storage facilities on the Red Sea, as well as reserves stored in Egypt, but there are concerns that this would only serve as a short-term fix.
• While Treasury yields are elevated, it is important to remember that much of the risk is related to geopolitical tensions in the Middle East. Once there is a final resolution — preferably a reopening of the Strait of Hormuz, on which there has been considerable progress — long-duration bonds should be able to rally in response. In the meantime, however, rates could find considerable support due to oil supply uncertainty.

China Travel Restriction: Beijing has introduced a new travel restriction for civil servants and those working in sensitive industries. The move comes as the government aims to prevent the sharing of state secrets, particularly those related to its AI technology. The rule follows Meta’s blocked purchase of a Chinese AI company. The restriction comes as competition between the US and China over AI continues to heat up.

Mail Ballot Ruling: The Supreme Court rejected the White House’s request to restrict mail ballots for the midterm elections. The decision will allow states to continue sending out ballots in their usual manner. This ruling sets back the Trump administration’s efforts to restrict the use of mail-in voting as a way to ensure election integrity. While the issue is likely to be challenged further, its overall impact on November’s contest for either party is probably inconsequential regardless of the ruling.

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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 Iran-backed rebels in Iraq have apparently forced the shutdown of a key Saudi Arabian pipeline, boosting energy prices and driving down stock values around the world today. We next review several other international and US developments that could affect the financial markets today, including the weekend call from key US artificial intelligence leaders to “pace” the industry’s development and a review of upcoming monetary policy moves by key central banks this week.

United States-Israel-Iran: Saudi Arabia said over the weekend that it had shut down its critical East-West pipeline, which had allowed the kingdom to bypass the Strait of Hormuz and get some 7 million barrels per day of its crude oil to market through the Red Sea. The government said the pipeline had been targeted and damaged by drones apparently launched by Iran-backed militias in Iraq. The government also said it is repairing the pipeline; nevertheless, the incident highlights the vulnerabilities there.

• Now that the US and Israel have eroded more Iranian military power and the US has been able to escort more oil tankers through the strait, it appears that Iran is implementing a plan to lean more heavily on its proxy forces in the region to hurt the US and its allies.
• As investors begin to understand that shift and the now-demonstrated vulnerability of the East-West pipeline, global oil prices today have jumped about 3.4%, with near Brent crude oil futures trading at about $108.18. In turn, the jump in energy prices is weighing on stock values as well.

US Artificial Intelligence Industry: Anthropic chief executive Dario Amodei on Saturday published a 3,800-word essay calling for AI model development to proceed more slowly to avoid doomsday scenarios such as a rogue-agent takeover of the entire internet. Remarkably, a range of top AI executives including Elon Musk at SpaceXAI and Sam Altman at OpenAI publicly seconded the idea. As consensus on the issue apparently grows, it is becoming increasingly probable that Congress will finally be spurred to action to impose guardrails on the industry.

• Of course, the Chinese government and AI firms in China are so far showing no concern about the models’ rapid development. They are likely to keep charging ahead even if the US modelers slow down. Because of that, President Trump and officials associated with his administration are pushing back against a slowdown and calling for full steam ahead.
• In our view, there are now multiple headwinds growing for the AI industry in the US, including a competitive threat from the increasingly capable and low-cost Chinese models, public pushback against the data centers needed to run AI applications, and the new pressure to tighten regulations on the industry. If those headwinds continue to intensify, the risk of a pullback in AI-related equity valuations is expected to grow.
• In any case, the weekend discussion about deliberately slowing or “pacing” the momentum in AI development is weighing heavily on technology stock prices so far this morning.

China: The Beijing municipal government yesterday announced a ban not only on flying drones in the city but also on possessing, storing, transporting, or bringing them and their core components into the city, except in exceptional circumstances. The ban responds to a June incident in which a small plane flew into Beijing’s tallest building. The ban may also signal that as civilian drones become more commonplace around the world, they are likely to become regulated as the inevitable accidents happen, potentially crimping the budding industry.

India: The government has announced that it plans to source virtually all of its newly approved $11.6-billion military equipment spending from domestic sources, including an expanded role for the private sector. The move illustrates how governments around the world are prioritizing resilience, supply chain security, and domestic industrial development as they boost their defense budgets and respond to greater geopolitical tensions.

Sweden: The country’s parliamentary election yesterday has become the closest ever, with fewer than 30,000 votes currently separating the left-wing opposition bloc from the right-wing government as hundreds of thousands of overseas votes and late ballots are still to be counted. Electoral authorities don’t expect to announce the final results until Wednesday or Thursday.

US Monetary Policy: The Fed begins its latest policy meeting tomorrow, with its decision due out on Wednesday at 2:00 PM ET. Based on the latest interest-rate futures trading, investors widely expect the policymakers to hike their benchmark fed funds rate by 25 basis points to a range of 3.75% to 4.00%. That expectation stems from both the continued high readings for consumer price inflation and recent hawkish statements by Chair Warsh and other policymakers.

• Still, because of the risk of political blowback from the White House or other concerns, there is probably still some chance that the policymakers could simply hold rates steady.
• Such a decision would likely spark significant volatility across a range of asset markets.

UK Monetary Policy: In contrast with the Fed, the Bank of England is expected to hold its benchmark interest rate steady at its policy meeting later this week. However, analysis by the Financial Times suggests that relatively brisk economic growth coupled with rising energy costs due to the war in Iran could force the central bank to boost rates later this year. Any such rate hike would be the BOE’s first in more than four years.

Japan Monetary Policy: Economist surveys also show that the Bank of Japan is widely expected to hike its benchmark interest rate again when it holds its latest policy meeting this week. Importantly, the normalization of Japanese interest rates after decades of extraordinarily low rates continues to contribute to an unwinding of the yen “carry trade.” In turn, that is causing significant volatility in the global currency markets and broader financial markets.

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by Patrick Fearon-Hernandez, CFA, and Thomas Wash

[Posted: 9:30 AM ET] | PDF

Our Comment opens with an assessment of the growing shift toward more hawkish monetary policy. We then turn to geopolitics, examining developments in the Middle East as the conflict broadens beyond the Strait of Hormuz. Next, we briefly consider the potential for an electoral upset in Brazil and the efforts by AI developers to slow work on some of their most potentially dangerous models. As always, we conclude with a review of recent domestic and international economic data.

Global Hawks: Many countries are considering tightening monetary policy to contain inflationary pressures caused by the rise in oil prices. This push comes as central banks try to curtail the pass-through effect of energy prices to other parts of the economy. Several central banks have either already hiked rates or signaled their willingness to tighten policy. This shift in expectations of policy rates has helped spur long-term yields globally, and the resulting increase in borrowing costs will likely add to the fiscal burden most countries are facing.

• On Thursday, the European Central Bank raised rates for the second time since the war began in February. The vote was unanimous, showing that members shared concerns about the rising inflationary pressures building throughout the economy. During the press conference, ECB President Christine Lagarde suggested that further hikes were likely, given the central bank’s expectation that inflation would remain elevated and not return to its target until 2027.
• The ECB’s adjustment comes as other central banks have also appeared to take a more hawkish view on monetary policy. The Bank of Japan is also reportedly considering moving in a similar direction, with expectations that it will raise rates by 25 basis points to 1.25% and signal faster tightening ahead. Meanwhile, implied policy rates suggest that both the Bank of England and the Bank of Canada could also hike interest rates by the end of the year.
• While much of the developed world appears to be leaning toward hikes, it is still not clear what the Federal Reserve will do on Wednesday. As of this writing, the latest CME FedWatch tool suggests that the central bank has about a 70% chance of raising rates by 25 basis points. However, there has been a push by the White House for the Fed to hold rates steady, due to the lack of evidence of sticky core inflation. As an exporter, the US is more resilient than other economies to energy shocks, making a rate hike less necessary.
• The shift toward more hawkish policy abroad is likely to weigh on growth and may persist as the war continues to add concerns about energy security. This could have a negative impact on growth, particularly abroad, as other economies could be more inclined to tighten policy to adjust to inflationary pressures. However, if worries about energy ease, we could see sentiment improve for international stocks.

Middle East Fears: The escalating conflict in the Middle East has raised concerns that supply disruptions could worsen. On Thursday, the Houthis were able to take over ports in the Red Sea as they look to close the Bab el-Mandeb Strait. The group’s advance increases the likelihood that there could be two compromised straits in the region, which would further strain trade, making it difficult to transport oil. The rising conflict in the Middle East has put pressure on other countries in the region to help put an agreement in place as they look to prevent the conflict from broadening.

• The Iran-backed Houthis have managed to secure the port of Mocha. The takeover is part of their effort to impose a blockade on Saudi ports as they look to expand the war throughout the Middle East. They have been able to make progress in taking control of the Red Sea coastline, which they believe will allow them to launch more successful attacks on ships moving through the Bab el-Mandeb Strait.
• While Iran itself has seen its success fade, it appears to have leveraged the help of its proxies in other regions around the world. The group has several alliances with groups in countries such as Syria, Iraq, Lebanon, and Yemen, as well as the Palestine area. These groups have demonstrated the ability to disrupt regional security, threaten infrastructure and shipping routes, and raise the risks for Gulf states and their partners. This network gives Iran a means of exerting pressure beyond its borders.
• The widening of the conflict will likely add to the supply and demand imbalance in oil markets. The conflict has pushed oil prices above $100 a barrel and kept them elevated over the last two days. The main worry for investors is that the lack of oil flows means the growing imbalance will likely worsen as Chinese demand returns to the market and strategic reserves start to dwindle. While US forces remain able to make some progress in the Strait of Hormuz, which could ease pressure, the Houthi advance suggests prices may remain elevated.
• Although the US is reluctant to hold talks, discussions involving Iran and Gulf governments are already under way. If they produce a credible de-escalation agreement, it could help restore safe passage through the Strait of Hormuz and reduce the risk of a broader regional conflict. That, in turn, could help bring down oil prices and offer some relief from rising bond yields. However, any deal would likely need some form of US support to be effective.

Bolsonaro Upset: As the Brazilian election approaches, Flavio Bolsonaro’s chances of winning appear to be increasing. The pickup comes as a new poll shows that Bolsonaro now holds a 1% lead, indicating that his popularity is rising. Growing expectations of a Bolsonaro win have led to an unwinding of hedges against the Brazilian real, since a victory is expected to pave the way for more sound fiscal policy as well as more preferential treatment from the US in terms of trade and investment.

Slow AI: The CEO of OpenAI has announced that he is considering the possibility of slowing down the development of some of the company’s more complex systems. The shift comes amid concerns that the technology is developing at a pace that at some point could pose a risk to humanity. While it is not clear whether other companies will follow suit, it does highlight the growing need for oversight of AI due to the potential dangers.

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by Patrick Fearon-Hernandez, CFA, and Thomas Wash

[Posted: 9:30 AM ET] | PDF

Our Comment opens with an analysis of the Treasury Department’s decision to scale up buybacks and the subsequent market response. We then examine artificial intelligence and address growing concerns around safety risks associated with the technology. Next, we briefly highlight the president’s push to win over voters with cash incentives, as well as Iran’s decision to intensify regional conflict. As always, we conclude with a wrap-up of recent domestic and international economic data.

Bessent vs. Market: The US Treasury Department announced plans to buy back up to $6 billion in long-dated securities, well above the $2 billion operation communicated to the market on August 19. The larger purchase underscores Treasury Secretary Scott Bessent’s effort to dampen market volatility. The Treasury’s more active role in the bond market, however, has also tested investors’ willingness to take Bessent’s guidance at face value as the department seeks to manage the government’s expanding fiscal debt burden.

• The announcement was poorly received by the market. Treasury securities sold off immediately, driving the 10-year yield above 4.85% for the first time since 2023. That rise was likely the opposite of what Treasury Secretary Scott Bessent intended, since the buyback was meant to help calm the bond market, not intensify the selloff. The adverse reaction highlights the difficult task facing the Treasury as it seeks to steady market conditions and exert greater influence over borrowing costs.
• The Treasury’s decision to expand buybacks of government bonds comes amid debate over the market’s appropriate equilibrium price. According to Bessent, the intervention is intended to address periods when market sentiment prevents bond prices from reaching that equilibrium. He has also argued that removing off-the-run Treasury securities from corporate balance sheets would free up capacity for financial institutions to participate more actively in Treasury auctions.
• Treasury buybacks have been in operation since 2024. When Secretary Yellen launched the program, it was designed to shift issuance toward shorter durations, redirecting liquidity out of the Federal Reserve’s reverse repo facility and into Treasury bills to help ease funding stress and lower term yields. This strategy was intended as a temporary fix while awaiting expected Fed rate cuts, after which the Treasury could extend duration at lower interest rates.

• Secretary Bessent faces a similar market environment, albeit without the buffer of excess cash in the reverse repurchase facility. However, coordination with the Federal Reserve’s reserve management purchases has provided welcome relief. This policy framework has allowed the Treasury to facilitate a rotation out of longer-dated bonds and into shorter-duration securities without triggering broader market disruptions.
• Consequently, Bessent’s expanded buyback strategy is meant to serve as a temporary bridge to manage upward pressure on yields. The Treasury is likely using buybacks to contain borrowing costs stoked by geopolitical tension with Iran, which has heightened inflation expectations and term premiums. Assuming the conflict resolves — an outcome the White House suggests could materialize following the midterms — we expect the Treasury to gradually scale back its active intervention in the bond market.
• If this thesis holds, interest rates could remain elevated over the next few months, but yields may not rise materially above current levels. Consequently, this environment could present an attractive entry point for investors seeking to extend duration. Over the long term, however, total returns for fixed income will remain tied to achieving price stability and seeing credible fiscal progress, whether through spending restraint or accelerated economic growth.

AI Fears: Growing concerns over artificial intelligence safety intensified this week following the resignation of an Anthropic employee, who warned that advanced AI could pose an existential threat to humanity within a matter of years. This departure highlights the escalating risks associated with rapid AI development and the government’s struggle to keep pace with regulation. Consequently, lawmakers face mounting pressure to establish oversight committees and effectively regulate the technology.

• A former Anthropic employee claimed that researchers are developing models at a pace that could soon escape human control, with some workers even referring to their current project as “endgame.” Industry experts share these worries, with one prominent figure estimating a less than 10% chance that a rogue AI could destroy humanity within the next decade.
• Concern about the potential dangers of advanced AI has prompted lawmakers to consider new regulatory measures. Texas Senator Ted Cruz has discussed introducing legislation aimed at limiting AI’s use in potentially catastrophic areas, including biological and nuclear threats. Meanwhile, Democrats are weighing the creation of a dedicated AI oversight committee with subpoena power to question technology executives and gain a clearer understanding of how advanced AI systems are being developed.
• The growing difficulty of containing AI will probably take a toll on rising AI companies, especially as they look to go public. As a result, the push for greater oversight — probably leading to more regulation that will slow development — could make it harder for these companies to reach the profit goals needed to justify the lofty valuations that are likely to come.

Trump Dividend: In an effort to boost Republican voter turnout for the November midterms, President Trump delivered a high-stakes pitch at the party’s Texas convention: a $5,000 check for every adult US citizen if the GOP holds both houses of Congress. The pledge reflects a wider White House trend toward leveraging financial incentives to rally political support. It comes shortly after discussions emerged regarding a policy draft to pay stay-at-home parents $9,000 per child annually to offset child-rearing costs.

Iran Intensifies: Tehran maintains that it is willing to escalate its conflict with the US over the Strait of Hormuz. The warning comes as Iran struggles to export oil under a US naval blockade and faces diminishing control over the strategic waterway. Fears of a broader conflict have pushed oil prices past $100 a barrel. While the immediate risk of all-out war remains low, that calculus could shift if Iran targets key US allies outside of the gulf.

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by Patrick Fearon-Hernandez, CFA, and Thomas Wash

[Posted: 9:30 AM ET] | PDF

Our Comment opens with takeaways from the latest escalation in US-Canada trade friction, before turning to recent geopolitical developments between the US and Iran. We then cover Treasury Secretary Bessent’s announced intent to intervene in bond and currency markets, along with the EU’s push for closer ties with Canada. As always, we include a summary of recent domestic and international economic data.

US-Canada Trade War: The US-Canada trade dispute escalated on Tuesday as both countries exchanged new trade restrictions. Canada moved first, imposing tariffs on US goods in response to duties that Washington had placed on Canadian imports two weeks earlier. The United States then threatened to block sales of its military aircraft and announced it was considering restrictions on certain dairy products and alcoholic beverages. That said, although tensions are rising, there are still few signs that this will have an impact on market momentum.

• The president’s latest actions come amid heightened scrutiny of the US-Canada relationship, as he seeks to realign bilateral terms to better serve American interests. Earlier this week, he questioned the fairness of the Canadian exchange rate, characterizing it as imbalanced. He has also suggested that Bombardier may need to start building more of its jets in the US or risk losing market access to government contracts. The remarks show that US grievances with Canada are not solely based on trade.
• Prime Minister Mark Carney has responded to US actions by acknowledging that the trade dispute will probably hurt Canada’s economy, but he is also pushing for alternative paths forward. His administration is reportedly exploring new free trade arrangements, possibly with the US and others, while accelerating infrastructure spending nationwide. While these steps are unlikely to resolve the issue in the long run, they are designed to soften the blow in the near term.
• The measures are unlikely to materially affect either economy, but the political fallout could be greater. Canada’s tariffs may pressure US policymakers ahead of the midterms, particularly in swing states such as Maine and Wisconsin, while US tariffs target manufacturing hubs in Ontario, New Brunswick, and Quebec. Canada’s retaliation could modestly weigh on the US economy, while US tariffs are likely to be a larger drag on Canadian growth. Even so, they are not expected to push Canada into recession.
• While the latest measures are unwelcome, their immediate market impact is likely to be limited because most US-Canada trade remains governed by the USMCA. The more important question is whether the dispute will spill over into other trade relationships, particularly as the United States prepares for talks with China. A broader rise in trade tensions could add to market volatility, but there is currently little evidence that this dispute is spreading beyond the bilateral relationship.

Iran Escalation: The conflict between the US and Iran has flared up once again, with both sides escalating retaliatory strikes. The US has launched missile attacks on Iranian oil tankers, while Tehran has responded by hitting US military positions in Jordan. The latest escalation comes amid a surge in Chinese oil purchases, fueling renewed concerns over supply-demand imbalances. While the heightened tensions could weigh on risk sentiment in the near term, little evidence remains to suggest that they pose a lasting threat to equity markets.

• The recent spat comes as the two sides fight for control over the strait. This renewed conflict has reversed much of the progress made in securing safe passage through the waterway, though many vessels still manage to transit by turning off their transponders. However, both countries have now begun targeting each other’s oil tankers, complicating their ability to profit from sales and rendering the strait increasingly dangerous for maritime trade.
• China’s pickup in purchases has heightened concerns over global oil supply. Until recently, China had slowed its buying and drawn down existing inventories, which helped ease upward pressure on prices. However, that trend reversed this month as oil shipments rose to 10 million barrels per day, up from the lows of 6 million barrels per day earlier this summer. This resurgence in buying appears to be driven less by broad end-user demand and more by Chinese refiners moving to capitalize on attractive refining margins.
• Nevertheless, while oil prices are likely to remain elevated, there are still encouraging signs that consumer spending remains resilient. Much of this sustainability stems from households’ access to available credit. In July, the increase in nonrevolving credit was the largest in three years; meanwhile, revolving credit growth slowed from the previous month but still posted a gain. This reliance on credit has helped sustain consumer purchasing power even as inflation has outpaced wage growth.
• The rise in oil prices, driven by conflict involving Iran and China’s resumption of purchases, remains a key economic concern. However, higher energy costs alone are unlikely to derail household spending. As long as geopolitical tensions stay relatively contained, markets should recover from temporary drops in sentiment. For risk-averse investors, value stocks offer attractive potential due to their stronger fundamentals and lower volatility profile.

Bessent Steps In: US Treasury Secretary Scott Bessent made clear his readiness to intervene in order to prevent markets from spiraling out of control. On Tuesday, he stated that he is prepared to step into both bond and currency markets to deter speculators from triggering a sell-off. His actions come amid growing investor anxiety over rising fiscal spending in both the US and Japan. Collectively, these moves reinforce the perception that the government is becoming increasingly interventionist in the economy.

EU-Canada Alliance: The European Union and Canada are working to deepen security and trade ties as both look to reduce their economic dependence on China and the United States. European Commission President Ursula von der Leyen is expected to outline these plans during her State of the Union address on September 16, with Canadian Prime Minister Mark Carney in attendance. While there has been ongoing speculation about Canada establishing an EU-style partnership with the bloc, the practical mechanics of such a framework remain unclear.

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by Patrick Fearon-Hernandez, CFA, and Thomas Wash

[Posted: 9:30 AM ET] | PDF

Our Comment today opens with some disturbing remarks from a former White House official that serve as a reminder that the US-China competition in artificial intelligence could eventually lead to geopolitical conflict, although not necessarily in the near term. We next review several other international and US developments that could affect the financial markets today, including new attacks in the Iran war that have driven up energy prices today and the latest skirmishes in the US-Canada trade war.

United States-China: Jacob Stokes, a former White House official who is now a leader at the Center for a New American Security, said at an event on Thursday that the federal government should start preparing for offensive action against China to keep it from surpassing US capabilities in artificial general intelligence (AGI). According to Stokes, the US needs to start developing the espionage, covert operations, and military programs that would be needed to slow or destroy China’s ability to exploit AGI.

• The call from Stokes is an extreme proposal. We’ve seen no other current or former US official calling for military strikes aimed at China’s artificial intelligence capabilities. Since China is probably no more than a few months behind the US in this technology, and since the war in Iran has probably weakened the US armed forces severely for years into the future, it isn’t even clear that US intelligence or military action could meaningfully slow China’s progress.
• All the same, the dramatic proposal raises a point: If artificial intelligence and AGI really are game changers for national economic development or geopolitical power, losing out to the Chinese could eventually be seen as an existential issue for the US. At some point down the road, investors may indeed see a growing debate about potential offensive kinetic action against China — a development that would be profoundly impactful on the financial markets.

European Union-China: In an interview with the Financial Times, the chair and chief executive of Spanish auto parts giant Gestamp today warned that Europe’s “wealth won’t last” unless it can salvage its auto industry amid surging imports from China and rising trade barriers in the US. The statement comes as EU automakers and other industrial firms continue to hemorrhage jobs, prompting EU officials and national leaders to consider tougher trade policies against China. However, those officials and leaders continue to worry about Beijing’s likely retaliation.

United States-Canada: In a social media post yesterday, President Trump appeared to threaten a new US ban on selling business jets from Canadian aerospace firm Bombardier, even though the firm employs more than 3,000 workers at nine different facilities in the US and buys supplies from thousands of US firms. The president’s threat came just hours before Canada imposed its big retaliatory import tariffs on a range of products from the US. The statement suggests the US and Canada will remain locked in a disruptive trade war for the near future.

United States-Israel-Iran: The US military over the weekend struck three Iranian oil tankers in retaliation for Iranian missile attacks on two US Navy vessels. Then, yesterday and today, Iran-backed Houthi rebels in Yemen attacked several oil facilities in southern Saudi Arabia, shutting down several of them. The renewed strikes have pushed global oil prices higher yesterday and today, with near Brent futures currently up 1.6% to $98.54 per barrel.

• Now that the US Navy has had some success in escorting allied oil tankers through the Strait of Hormuz, the renewed Houthi strikes may reflect a tactical shift by Tehran to focus on Saudi Arabia.
• As shown by the behavior of oil prices today, such attacks can push up global energy costs and potentially cause political problems for President Trump.

Germany: In a weekend election for the Saxony-Anhalt state parliament, the far-right Alternative for Germany (AfD) won handily with 43.8% of the vote, thrashing the Christian Democratic Union, which rules nationally. The CDU came in second with just 17.2% of the ballots. The results put the AfD just three seats short of a majority in the state legislature, but that isn’t likely to prevent it from taking control of the state to push the national AfD party’s agenda.

• The AfD’s populist, nationalist agenda focuses on aggressive anti-immigration policies, financial incentives to boost the birth rate, reduced teaching about Nazi Germany in the schools, and increased teaching of Russian. The agenda also strongly focuses on wresting back power from the European Union and drawing closer to Russia.
• The AfD’s win in Saxony-Anhalt gives it further momentum that could help it eventually seize power at the national level. The risk of policy upheaval could well weigh on German stock values going forward.

France: Private model-maker Mistral AI today raised 3 billion EUR ($3.5 billion) in new equity as it fights for relevance in the global artificial intelligence race dominated by US and Chinese firms. The new private-equity financing, which was led by an investment from Samsung, lifts Mistral’s valuation to 21 billion EUR ($24.4 billion) and will be used mostly to secure compute capacity for the company’s modeling effort. However, Mistral’s valuation is still only a small fraction of the valuations expected for US companies such as Anthropic and OpenAI in their upcoming initial public offerings (IPOs).

United Kingdom: As a reminder that government bond yields are rising across the globe, the British government today sold 4.25 billion GBP ($5.74 billion) of 30-year debt at a yield of roughly 5.83%. That marks the highest interest rate on any gilt since at least 1998. The surge in yields reflects many factors, including concerns about elevated consumer price inflation, high global credit demand from the AI investment boom, and worries about national governments’ big budget deficits and rising debt loads. The rise in yields could eventually weigh heavily on national stock markets.

Japan: In London trading yesterday, the yen not only continued its recent appreciation but also reached its highest value against the greenback since February, at 154.06 yen per dollar. In US trading early today, the currency remains at about that level. The joint US-Japanese market intervention in late July has been seen as only temporarily effective, but now it appears that the yen is getting an added boost from expectations of more aggressive interest-rate hikes by the Bank of Japan and the reversal of short positions as the yen broke through 155.

Global Education: The latest PISA survey of comparative educational attainment across the countries of the Organization for Economic Cooperation and Development shows that reading scores have plunged across the developed world, as widespread access to AI and social media has harmed teenagers’ ability to concentrate. The performance of the average 15-year-old across the OECD in 2025 was more than a year behind where it was in 2018, according to the report. The report will likely raise concerns about skill shortages in the future workforce.

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