by Patrick Fearon-Hernandez, CFA, and Thomas Wash

[Posted: 9:30 AM ET] | PDF

Our Comment begins with Nvidia’s strong earnings report and the potential implications for the AI trade. We then turn to the Iran‑US conflict, which has entered a new phase. Following that, we briefly cover a few other topics, including Bill Gates’s warning on AI, Lisa Cook’s response to the White House, and recent escalation in the Russia‑Ukraine conflict. As usual, the report concludes with a summary of today’s domestic and economic releases.

AI Gains Life? The AI trade received a boost on Wednesday after Nvidia once again delivered strong earnings and an upbeat outlook. In the second quarter, the chipmaker beat consensus expectations for the 15^th consecutive quarter. While the initial report triggered a brief sell-off over concerns about rising capital expenditures, investor anxieties were eased by Nvidia’s projections of robust sales through 2028 and an expanded partnership with Amazon. The strong report may reignite optimism across a sector that has recently faced growing skepticism.

• According to the chipmaker’s earnings report, second quarter revenue rose to $96.22 billion, surpassing the $92.17 billion consensus estimate. The stronger-than-expected result was driven primarily by data-center sales, which accounted for 92% of total revenue. Although the company remains heavily reliant on hyperscalers, it is seeing its customer base broaden to include AI cloud providers, industrial firms, and enterprise customers, a trend that supports its expectation for 70% revenue growth by 2028.
• However, despite the report’s strong positives, it also highlighted several areas of concern. The company identified its rising debt burden as a key risk factor, warning that its obligations could eventually weigh on financial health and cash flow. In addition, higher memory-chip costs have compressed margins, which management expects to bottom out in the fourth quarter. Earlier this month, reports indicated that the company had begun raising chip prices for customers.

• Better-than-expected earnings at Nvidia are likely to bolster sentiment toward AI-related equities, particularly the “Magnificent” tech giants that have anchored the broader market rally. The results arrive as this group begins to recover from a recent period of weakness. Although these companies continue to demonstrate strong earnings power, investor concerns over the scale of their capital expenditure plans — and uncertainty around the eventual return on that spending — have continued to weigh on valuations.
• That said, the AI trade continues to show sustained momentum and is likely to remain elevated over the short to medium term as infrastructure buildout remains a central market theme and an increasingly important driver of economic activity. At the same time, we see potentially greater long-term value in select companies beyond the small group of names that have attracted the market’s attention. That does not, however, imply that the AI rally is over.

Sanctions over Strikes? The United States is increasingly signaling a shift toward economic leverage over military action in its approach to Iran. On Wednesday, reports indicated that Secretary of State Marco Rubio informed allies that Washington does not plan to initiate strikes in the near term as a punitive measure but will instead intensify sanctions. The announcement comes as the Treasury Department deepens its involvement in the conflict, coinciding with intensified US pressure on Tehran to return to the negotiating table.

• Rubio’s reported admission that the US favors sanctions comes as Treasury Secretary Scott Bessent steps up his involvement in the conflict. Over the last few days, Bessent has announced plans to leverage the dollar-based system and rolled out new sanctions targeting 60 individuals, entities, and vessels that are enabling trade with Iran. The move appears to be having an immediate effect, with the Iranian rial tumbling to an all-time low against the dollar.
• The decision to pursue a more diplomatic approach comes as signs emerge that the fighting has reached a stalemate. Although the United States has achieved military successes by striking several of Iran’s key military assets, it has not prevented Iran from disrupting shipping traffic through the Strait of Hormuz or from retaining the ability to launch attacks against other Middle Eastern countries in the region.
• The shift from military strikes to economic sanctions threatens to draw additional countries into the dispute. In particular, the prospect of expanded US secondary sanctions on countries and companies doing business with Iran — including potentially China, one of Iran’s key economic partners — raises the risk of retaliation from Beijing. Europe also remains on alert after Iran warned Bulgaria against allowing its territory or military facilities to support US operations.
• While the scaling back of military operations may ease near-term market fears of a wider conflict, economic sanctions remain an imperfect tool. Historically, sanctions have delivered mixed results in compelling adversaries to comply with US demands, as illustrated by their failure to deter Russia’s invasion of Ukraine or halt North Korea’s weapons program. As a result, a pivot toward sanctions may create space for further negotiations, but it is unlikely to produce a swift resolution to US-Iran tensions.

Bill Gates Warning: In a recent essay, Gates cautioned that AI poses significant threats to both the labor force and cybersecurity, and he called for a slowdown in its development. His remarks come at a time when several AI models have demonstrated autonomous hacking capabilities and as adoption of the technology continues to rise steadily across the United States. While his views may not have an impact on financial markets right away, they are likely to fuel the ongoing political debate over AI’s evolving role in society.

Fed Governor Under Pressure: On Thursday, Fed Governor Lisa Cook denied any wrongdoing in response to claims made last year by FHFA Director William Pulte, who accused her of misrepresenting her primary residence to obtain more favorable loan terms. Her denial comes three weeks after President Trump suggested he was considering the matter as grounds for her dismissal. Although she has not been formally charged with a crime, the White House has used the allegation to justify firing her. The move is likely to heighten concerns over Fed independence.

Russia-Ukraine: The Russia-Ukraine conflict continues to show signs of escalation. On Wednesday, missiles struck several facilities including a Children’s Hospital. The attack came after Ukraine launched a strike on a facility belonging to a major retailer. The deepening cycle of attacks between the two countries raises the risk of more extreme weaponry being deployed, particularly by Russia. The escalation could potentially push the West to consider increasing their assistance in the conflict.

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by Patrick Fearon-Hernandez, CFA, and Thomas Wash

[Posted: 9:30 AM ET] | PDF

Our Comment begins with the escalating trade tensions between the US and Canada and why China may be behind the rift. We next examine the fiscal front, analyzing Richmond Fed President Thomas Barkin’s concerns about the growing deficit and the potential risks to the bond market. The next sections provide updates on three distinct fronts: diplomatic efforts between Iran and Oman to ease transit in the strait, primary wins bolstering Trump’s pre-midterm standing, and Huawei’s offensive to distribute its chips worldwide.

Canada-US Trade: Trade tensions between the United States and Canada flared on Tuesday as both countries sought leverage in ongoing negotiations. Ottawa imposed retaliatory duties on $20 billion of US imports, directly mirroring Washington’s initial measures. The back-and-forth comes as each side accuses the other of negotiating in bad faith. The rift also occurs as the United States prepares for high-stakes trade talks with China next month. Washington’s pressure campaign against Canada may offer insight into what it hopes to achieve in talks with Beijing.

• The latest round of duties peaking at 50% on certain goods is scheduled to take effect on September 8. Canada has tailored its retaliation to target specific sectors of bilateral trade, including dairy, steel, and agricultural equipment. However, the delayed implementation suggests Ottawa is deliberately leaving the door open for continued dialogue before the economic blow lands. Washington has already countered with a threat of its own by vowing to impose additional tariffs on Canadian imports starting on New Year’s Day.
• Rising trade tensions between the US and Canada may have less to do with personal friction than with the broader strategic shadow of China. Washington and Ottawa had previously been in discussions over forging a unified trade and investment front designed to make North American supply chains “China-proof.” However, given Canada’s recent overtures toward closer economic ties with Beijing, it appears Ottawa was unwilling to abandon that potential leverage without securing significant concessions in return.
• Despite the escalating rhetoric, markets appear to be shrugging off the ongoing row and its potential fallout. The S&P 500 closed up 0.3% on the day, while Canada’s benchmark S&P/TSX finished nearly 0.7% higher. This muted reaction suggests that, for now, the tariff measures remain insufficient to trigger major market disruptions. Key sectors, particularly US tech and Canadian energy, seem largely insulated from the tit-for-tat, with investors betting on a contained outcome rather than a full-blown trade war.
• Still, the real focus centers on next month’s US-China trade talks. If Washington uses its leverage with Canada to extract a stronger position against Beijing, markets and the broader economy stand to benefit. However, a more aggressive stance with Beijing that triggers another cycle of retaliatory tariffs will likely drive up market volatility. For now, the former scenario appears more likely than the latter.

Growing Deficit Concerns: The US Treasury’s recent actions have sharpened investor focus on the swelling federal deficit. On Tuesday, Richmond Fed President Thomas Barkin warned that America’s mounting debt burden could eventually provoke investor pushback if borrowing continues to rise unchecked. His remarks come as the Treasury has taken more aggressive steps to smooth the impact of heavier issuance on interest rates.

• Although Barkin later conceded that the exact point at which investor resistance might materialize remains inherently difficult to project, he characterized the outcome as virtually assured. He attributed this forecasting challenge to two structural advantages that continue to insulate the US: the country’s robust legal framework and its preeminent position as the issuer of the global reserve currency. These factors, in his view, have thus far deferred, but not eliminated, the risk.
• Despite his deficit concerns, Barkin has stated that he does not believe interest rates have yet had a meaningful impact on the broader economy. His relative optimism may partly reflect the Treasury’s more hands-on approach to easing pressure on long-term bonds. And while the recent bond buyback program has drawn considerable attention, it is worth noting that the Treasury’s sustained shift toward shorter-dated issuance over the past three to four years has likely played an even greater role in anchoring rates.

• According to the latest data from SIFMA Research, US Treasury bill issuance has surged since 2023 to levels not seen since the height of the pandemic. This reallocation — later termed “Activist Treasury Issuance” in a paper authored by former Fed Governor Stephen Miran and Nouriel Roubini — helped ease pressure on long-term bond yields. As a result, the 10-year Treasury yield fell from a peak of 4.99% in October 2023 to as low as 3.62% roughly a year later.
• While monetary policy, inflation expectations, economic growth, and investor preferences will continue to be key drivers of the yield curve, we believe Treasury debt-management decisions will become an increasingly relevant factor as federal borrowing needs rise. Greater bond issuance could exert upward pressure on yields and term premia, especially if investor demand fails to keep pace. This dynamic is particularly pronounced for longer-dated securities, where demand has notably softened.

A Possible Strait Deal? Iran and Oman appear close to an agreement that could potentially reopen the Strait of Hormuz. The two sides have announced terms to establish a maritime corridor for commercial shipping, but the arrangement does not necessarily guarantee that the strait will reopen. Iran has said it will do so only if the United States meets its conditions, including lifting the naval blockade and reinstating a waiver permitting Iranian oil sales. Still, the agreement will likely create an opening for further negotiations.

Trump Bump: Two Republican candidates endorsed by President Trump won their primary runoffs on Tuesday. The higher-profile contest was South Carolina’s Senate race, where Darline Graham defeated Ralph Norman. Meanwhile, former state Senator Mike Mazzei won Oklahoma’s Republican gubernatorial primary runoff. Both contests are likely to be decisive in determining who ultimately holds the seats, underscoring Trump’s continued influence within the Republican Party heading into the midterm elections.

Chinese Competition: Huawei is bidding to build a data center in Egypt using its own chips, a move that could expand the company’s international footprint as it seeks to compete with Nvidia in AI infrastructure. The effort also appears to fit within China’s broader strategy to challenge US chip diplomacy by strengthening technology and investment ties with emerging-market economies.

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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 the US has provided new details on its economic war against the country and its new secondary sanctions against countries and other entities that engage economically with Iran. We next review several other international and US developments that could affect the financial markets today, including the latest on the evolving US-Canada trade war and important new pushback against the Treasury Department’s plan to artificially depress longer-term bond yields.

United States-Israel-Iran: Treasury Secretary Bessent yesterday announced details of the US “economic D-Day” program of new sanctions on Iran that are designed to force it to stop disrupting Middle East shipping. Dubbed “Operation Economic Outcast,” the program has reportedly already sanctioned more than 60 entities, individuals, and vessels that enable Iran to procure nuclear and missile technology, earn revenue from oil, or carry out cyber operations.

• Most important, Bessent warned that the US would sanction any country or entity that engages economically with Iran.
• Of course, Iran’s supporters, such as China, might have so much leverage over the US that Washington can’t actually sanction them. It therefore remains to be seen whether the new program meaningfully increases the pressure on Iran to meet US demands.

United States-China: In response to the new US secondary sanctions, Beijing today warned that “China will take all necessary measures to firmly safeguard its rights and interests” if the sanctions impose a significant burden on China or its major firms. The sanctions announced by Treasury Secretary Bessent yesterday included some small Chinese and Hong Kong companies, so it’s clear the administration is trying to make sure China isn’t entirely off the hook. However, we think the US may pull its punches to avoid upending its current effort at détente with China.

• If the US goes too far and imposes what China believes are unacceptable sanctions on its companies, the most obvious way that it would retaliate is to again throttle its exports of rare earth materials to the US or its allies. Such a move would threaten a range of US and allied manufacturers.
• Although the US and its allies are trying to rapidly develop their own sources of supply for rare earths, the effort hasn’t borne fruit yet. A new Chinese embargo of the materials or other critical goods could force the US to soften its new sanctions.

United States-Canada: In a social media post yesterday, President Trump said the US will impose a 50% tariff on Canadian autos, auto parts, and steel starting in January. The decision comes after Canada said it would impose big tariff increases against a range of US products to retaliate for new US import tariffs announced last week. The move adds to the risk of a bilateral trade war between the US and Canada. It also calls into question whether the US-Mexico-Canada trade agreement will be renewed.

• On a related note, President Trump this morning said his administration is seriously considering changing the name of Lake Ontario to Lake America because it doesn’t expect to be “doing much business with Ontario any longer.” The move echoes the president’s executive order last year that changed the name of the Gulf of Mexico to the Gulf of America.
• Like the unilateral renaming of the Gulf, any US effort to unilaterally change the name of Lake Ontario would almost certainly not be recognized by Canada or many other countries. Coupled with the US’s inability to defeat Iran and force it to reopen shipping in the Middle East, making such a move and not achieving international buy-in would likely add to growing perceptions that the US’s power as the global hegemon is waning.

Germany: Authorities have discovered another explosives-laden drone near the Leipzig airport, where a similar drone was discovered next to a Ukrainian cargo plane earlier this month. Both drones had traces of military-grade explosives but were defective and did not explode. The drones are widely suspected of being a warning from Russia or its proxies that the German government should stop supporting Ukraine in its effort to defend itself from Russia’s invasion. The incidents highlight the growing risk of Russian hybrid attacks in Europe.

United Kingdom-Ukraine: Under a deal that British Prime Minister Burnham struck with Ukrainian President Zelensky yesterday, the UK will gain access to a vast trove of Ukrainian battlefield data used to train AI models to identify and strike Russian targets, while the Ukrainians will get access to British defense technology. The vast Ukrainian dataset based on actual combat conditions could give British defense firms a leg up when developing autonomous weapons systems.

US Monetary Policy: In a Wall Street Journal op-ed today, hedge-fund veteran Stanley Druckenmiller strongly criticizes his longtime protégé, Treasury Secretary Scott Bessent, over his plans to intervene in the Treasury bond market to reduce interest rates. Druckenmiller complains that Bessent’s strategy of financial repression, including buybacks of longer-term Treasurys, is merely a distraction from the real need, which he says is to rein in the federal budget deficit and bring down government debt.

US Labor Market: The Department of Homeland Security yesterday said it plans to charge a $103,265 fee to foreign nationals applying for an H-1B high-skilled work visa. The fee would have to be paid upfront, before the government decides whether to approve the application. The new fee, which is designed to meet court objections that scuttled a similar fee proposal last year, would mostly affect technologically skilled workers from India. If it is successful in driving those workers out of the US, it would mostly affect the technology and finance sectors.

US Agriculture Industry: New research by the American Farm Bureau Federation shows that without government assistance, US farmers growing nine key crops will lose over $30 billion in 2026 and 2027. For example, the AFBF estimates corn producers will lose $131 per acre this year, rising to $167 next year. The negative economics reflect both constricted export markets and skyrocketing costs for fuel and fertilizer due to the wars in Iran and Ukraine.

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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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