by Patrick Fearon-Hernandez, CFA, and Thomas Wash

[Posted: 9:30 AM ET] | PDF

Our Comment today opens with a few words on this week’s rout among technology stocks and the broader equity markets. We next review several other international and US developments that could affect the financial markets today, including a major US concession to Iran on selling its oil in dollars and more evidence that investors are trying to pull funds from the US private-credit market as they worry increasingly about defaults.

Global Stock Markets: Investors are selling stocks aggressively so far this morning, pushing prices lower and especially punishing large technology shares. The main South Korean stock price index, which is dominated by Samsung and SK Hynix, fell approximately 10%, but European tech shares fell sharply as well. In the US, SpaceX and other tech shares have driven the NASDAQ index down about 2.5%. The selloff appears to have stemmed mostly from concern about rising interest rates around the world and rich tech valuations.

United States-Israel-Iran: The US Treasury Department yesterday said it will temporarily waive longstanding sanctions that had prevented Iran from selling oil in dollars. The move will allow Iran to sell oil at market prices, including to US buyers, and earn potentially billions of dollars. Vice President Vance later said the waiver is to reward Iran for agreeing to allow nuclear inspectors from the United Nations to once again visit the country’s facilities.

• Investors initially interpreted the US move as a sign of progress toward a lasting peace deal. Global oil prices therefore initially dipped on the news, but they have rebounded so far this morning.
• We would also note that the US move, if extended, could help reverse the widely held narrative that the US dollar is losing its status as the world’s reserve currency. With the removal of sanctions, for example, Iran would likely prefer to sell its oil for dollars at market prices rather than for Chinese renminbi at distressed prices.

Eurozone: S&P Global said its composite purchasing managers’ index for June rose to 49.5 from 48.5. Like most major PMIs, this one is designed so that readings above 50.0 point to expansion, while readings below that level point to contraction. Importantly, the subindex on prices paid fell to its lowest level since the start of the Iran war, suggesting price pressures from the conflict are dissipating. Nevertheless, the data suggests that the eurozone economy will likely be flat or even contract a bit in the second quarter.

European Defense Industry: Franco-German tank manufacturer KNDS has struck a deal allowing the German government to buy up to 40% of the company, setting the stage for an initial public offering in the coming weeks or months. The French government has also agreed to cut its stake to 40%, with the remaining 20% to be floated to the public. The move will give investors yet another way to capitalize on Europe’s booming defense sector as the threat from Russia and US withdrawal forces European countries to boost their military budgets.

Germany: Chancellor Merz, a former chair of US asset manager BlackRock in Germany, endorsed a proposal today for his country to adopt a Swedish-style public pension fund that would invest a share of workers’ wages in capital markets. Under the proposal, a compulsory individual contribution of 2.0% of salaries would “be managed centrally and invested in capital markets” to help pay for rising benefits. The proposal could drive increased business for asset managers and potentially reduce fiscal stressors as the population ages.

United Kingdom: Newly elected member of parliament Andy Burnham, who is widely expected to become prime minister next month, is reportedly demanding that incumbent Prime Minister Starmer further delay his controversial 10-year military investment plan. Starmer’s government has struggled to identify credible funding for the defense buildup, but Burnham could cut it back to help make fiscal space for domestic civilian programs.

• The dispute illustrates how funding pressures are becoming a headwind for some of Europe’s defense rebuilding programs.
• In turn, that has prompted a pullback in pricing for some European defense stocks, although we remain bullish on the sector over the longer term.

US Private Credit Industry: Private investment giant Apollo yesterday said investors in the second quarter requested to withdraw 17% of the value of its flagship private-credit fund for retail investors, up from withdrawal requests of 11% in the first quarter. Per the fund’s rules, Apollo only allowed redemptions of about 5% of the fund in the latest quarter, but the requested redemptions were still consistent with elevated concerns about rising debt defaults in the sector.

US Quantum Computing Industry: President Trump signed two executive orders yesterday aimed at speeding the development of advanced quantum computers and mitigating the security threats they present. The effort to boost the industry with the new orders is consistent with our discussion of quantum computing in our Mid-Year Geopolitical Outlook report, which we published yesterday.

• As noted there, quantum computing is rapidly evolving from a speculative niche to a strategically important sector.
• That, coupled with government support, could eventually draw capital now focused on artificial intelligence firms, leading to a rotation in favor of quantum computing.

View PDF

by Patrick Fearon-Hernandez, CFA, and Thomas Wash

[Posted: 9:30 AM ET] | PDF

Our Comment today opens with a recap of key events over the weekend in the US-Israeli war against Iran. We next review several other international and US developments that could affect the financial markets today, including the increasing risk of a trade war between China and the European Union and news of yet another new, innovative deal to provide energy to a data center focused on artificial intelligence.

United States-Israel-Iran: While the 60-day ceasefire signed last week between the US and Iran continues to hold, fighting between Israeli forces and Hezbollah militants in Lebanon over the weekend appears to have left it hanging by a thread. In response to the Israeli attacks and the US’s decision to threaten Iran anew over its support for Hezbollah, the Iranians say they have again shut the Strait of Hormuz, although it isn’t clear that they have really done so. In any case, Vice President Vance and Iranian leaders have now begun direct negotiations in Switzerland.

• Reports this morning say that the Switzerland talks have yielded a mechanism to end the Israeli-Hezbollah fighting, but it is still too early to know if it will be effective. If not, the ceasefire will likely be quite fragile, as both Israel and Hezbollah have reasons to scuttle it and keep the US-Iran fight going.
• In any case, the Strait of Hormuz remains effectively closed. For example, the latest satellite imagery shows more than 400 large tanker-sized vessels waiting to enter the strait from the East, as shippers remain reluctant to send their vessels through the waterway until the US-Iran ceasefire is more certain. The continued effective closure of the strait will likely keep alive the possibility of further price spikes for energy and other commodities.
• Under the ceasefire agreement, the direct talks in Switzerland are supposed to center on Iran’s nuclear program. The 60 days allotted are already exceedingly short for a deal as technically complicated as a nuclear one, but with every day that the talks are focused on Israeli-Hezbollah fighting in Lebanon, there will be even less time to discuss Iran’s nuclear program.

China-Japan: New customs data shows China continues to limit or ban exports of tungsten and rare earth minerals to Japan, months after it began to punish the country for Prime Minister Takaichi’s statement that a Chinese effort to take over Taiwan would require Japan to respond. The dispute has largely fallen out of the news, but the latest Chinese customs data shows that Japan-bound exports of some key types of tungsten, as well as rare earths dysprosium and terbium, stayed at zero in May, and some other rare-earth categories were also at unusually low levels.

• The selective Chinese embargo has forced some Japanese industrial firms to find costlier alternative supplies, but it hasn’t necessarily caused production of any key items to cease.
• All the same, the Chinese action illustrates its newfound economic leverage when it comes to key supplies of minerals and other industrial inputs. It also shows China’s recent willingness to use that leverage to punish adversaries — a willingness that helps explain why the US administration is working to establish a kind of détente with China.

Japan: Defense Minister Koizumi has announced that the Japanese armed forces recruited over 11,000 personnel in fiscal 2025, up 14.9% from the previous year. Officer candidate recruitment rose by roughly 35%. The results reflect efforts to improve pay, working conditions, and career opportunities to offset the challenges of Japan’s shrinking population. Still, as in other countries, the shrinking pool of potential recruits will probably further incentivize the use of automation in the military, which in turn should boost Japan’s prospects as a major arms exporter.

China-Philippines: In an interview with the Financial Times, the Philippine defense minister said his country is increasingly concerned that China will try to take permanent control over the disputed Scarborough Shoal in the South China Sea, based on recent naval maneuvers. The recent aggressive moves by China have raised concerns that the US’s effort to ease bilateral frictions may have emboldened Beijing to take even more aggressive territorial measures against its Indo-Pacific neighbors, raising the risk of miscalculation that leads to a security crisis.

European Union-China: At a summit on Friday, national leaders from the EU directed the European Commission to prepare a revised strategy to protect the bloc’s producers from China’s predatory competition. Importantly, even German Chancellor Merz delivered a blistering criticism of China for flooding foreign markets through the use of “high subsidies” and an artificially weak currency. The tough talk suggests an EU-China trade war could evolve in the coming months, threatening companies on both sides.

China: New reports show that China’s rapid shift to electric vehicles has created a fiscal problem for local governments, as heavier electric cars boost the cost of road maintenance and repair. Now that EVs make up more than 60% of the nation’s automobiles, local governments are also facing a drop in the gas-tax revenues that once covered more than 80% of road upkeep costs. The report suggests that China’s enormous problem with local-government debt could continue to worsen and create financial risks for the broader economy.

United Kingdom: Ballot results on Friday showed Manchester Mayor Andy Burnham decisively won a parliamentary by-election that would return him to the national legislature and allow him to challenge the unpopular Keir Starmer for prime minister and head of the Labour Party. Saddled with Labour’s dismal polling and seeing the writing on the wall, Starmer today announced that he will immediately resign as party leader but stay on as prime minister until Burnham secures the post in a leadership process that could wrap up as early as mid-July.

• Importantly, Burnham has marketed himself as being to the left of Starmer. In the past, he has talked up the idea of “business-friendly socialism” and insisted on the need to decentralize power from London, have greater public control over utilities, and re-industrialize left-behind regions of the country.
• Even though investors are wary that Burnham might increase borrowing and raise taxes to boost social spending and military outlays, British markets today are celebrating the likely end of the recent political instability. British stocks and the pound have appreciated modestly so far today. UK government bond prices have also risen a bit, pushing yields modestly downward.

Indonesia: Index provider MSCI has announced that it is increasingly concerned about transparency, operational procedures, and other issues in the Indonesian stock market, raising the risk that it will soon downgrade the country from “emerging” to “frontier” market as early as next week. If MSCI does downgrade the country, investors would likely pull billions of dollars out of the market, driving down stock prices and potentially causing broader economic problems.

Colombia: In the second and final round of presidential elections yesterday, right-wing populist Abelardo de la Espriella appears to have won with about 49.7% of the vote. If confirmed, it would mean that Colombia will swing back toward its more traditional conservative policies after four years of leftist rule under outgoing President Gustavo Petro. De la Espriella’s pro-business agenda includes a crackdown on crime, an opening up of the countryside to fracking for oil and gas, an easing of restrictions on mining, and improvement in relations with the US.

US Energy and Artificial Intelligence Industries: In the latest example of how the AI data center boom is prompting increased energy demand, Chevron and a partner have struck a deal to provide 2.7 gigawatts of electricity to a new Microsoft data center in the Permian Basin. The electricity will be generated on site by turbines fueled with natural gas from Chevron’s wells in the region. The deal shows how data-center developers are increasingly focused on having assured local power generation.

View PDF

by Patrick Fearon-Hernandez, CFA, and Thomas Wash

[Posted: 9:30 AM ET] | PDF

Our Comment will focus primarily on the Federal Reserve meeting and the outlook for monetary policy under new leadership. We begin by examining potential shifts in the Fed’s operating framework, including a possible pullback in forward guidance. We then turn to the policy decision itself and its implications for rates. Finally, we briefly assess the agreement between the United States and Iran to reopen the strait. As usual, we include a review of recent domestic and global economic data.

First Meeting: Fed Chair Kevin Warsh held the first FOMC meeting of his term and signaled a potential shift in the Federal Reserve’s relationship with financial markets. During his press conference, Warsh indicated that he plans to establish a task force to review several aspects of the Fed’s operations. He also suggested a move away from forward guidance, marking a significant departure from recent communication strategy. If implemented, these changes could materially alter how markets interpret and respond to Fed policy decisions.

• While Warsh has announced his intention to implement changes, they are not expected to occur overnight. The new Fed chair has stated that he will establish a task force to examine the central bank’s communications, balance sheet management, inflation framework, data sources and uses, as well as productivity and its impact on the economy. Although he has not yet named the individuals who will lead these efforts, he expects the work to be completed by the end of the year.
• Chair Warsh has made it clear that he wants to reduce forward guidance to limit the central bank’s market footprint. While he didn’t outline specific changes, he consistently refused to comment on the Fed’s future policy path during the press conference. Furthermore, the official statement was drastically shortened, removing individual voters’ names. He was also non-committal about the future of the Summary of Economic Projections (SEP) as well as whether he would maintain a press conference after every meeting.
• Given his past statements, Warsh appears to be aiming to return the Federal Reserve to its pre-financial crisis roots. This would likely entail less communication about policy decisions, a reduced influence over the bond market, and greater flexibility in interpreting economic data; specifically, becoming less reactive to any single report. During the press conference, Warsh mentioned that he envisions the bank focusing more on underlying trends.

• While the push for change is notable, its durability is uncertain — particularly in a rising inflation environment. In 2022, both the ECB and the Federal Reserve attempted to step back from forward guidance after upside inflation surprises allowed for larger-than-expected rate hikes. However, both central banks ultimately retained the tool to manage market volatility and mitigate recession fears.
• As he settles into leading the Fed, the more important test will be how Warsh responds to market reactions, particularly if investors perceive a decline in transparency. The 10-year Treasury yield has been especially sensitive to shifts in expectations around Fed policy, underscoring the importance of clear communication. As a result, while we expect some adjustments to operations and forward guidance, these changes are unlikely to be as aggressive as Warsh may prefer at this stage.

Rate Decision: The latest two-day FOMC meeting concluded with a notable hawkish shift. Although the Federal Reserve voted to hold rates steady at 3.5%–3.75%, the accompanying statement and forward guidance revealed growing policymaker unease. Officials are increasingly concerned that recent inflationary upticks may necessitate an additional rate hike later this year. Yet, the Fed resisted locking in that outcome, choosing to keep its options open while it works through pending changes to its policy-setting approach.

• The SEP reveals that much of the hawkish shift stems from rising inflation anxiety and diminishing growth concerns among Fed officials. The latest forecasts show upward revisions to inflation across all three projection horizons, with the most striking adjustment coming this year. Core PCE is now expected to reach 3.3%, up from the previous 2.7% estimate. By contrast, GDP and employment projections remained largely unchanged, underscoring that inflation, not growth, is driving the current policy debate.
• The latest projections underscore how sharply Fed sentiment has shifted since March. Back then, when the Iran conflict was still in its early stages, the median SEP path still pointed to one rate cut in 2026, with no support for hikes. By contrast, the latest projection now shows a clear hawkish tilt, with roughly half of participants anticipating at least one rate increase, and most of those expecting more than one, while only a single member still projects a cut this year.

• That said, Chair Warsh reiterated that the Fed’s overriding goal is to return inflation to target, while cautioning that markets should not prejudge policy on the basis of the projections alone, since the dots do not represent a preset path for rates. He noted that views on 2026 remain divided and stressed that much could change before the Committee meets again, underscoring that policymakers’ preferences are conditional and likely to evolve with the data and the outlook.
• Although the Federal Reserve has clearly turned more hawkish since its last meeting, it does not appear to be in a rush to raise rates. The outcome of the next FOMC meeting will likely hinge on how the recent Iran-US ceasefire agreement feeds through to inflation in the coming weeks. If the data suggests that the worst of the inflationary pressure has passed, the Fed may step back from further hikes and keep rates on hold. However, if inflation remains stubborn, then policymakers could opt to raise rates before year’s end.

Deal Signed: The US and Iran have signed a memorandum of understanding regarding the conflict in the Strait of Hormuz. The decision to sign came ahead of schedule and will take effect immediately. The agreement follows the release of a 14-point plan and will likely be followed by discussions over Iran’s nuclear program. While the waterway is set to reopen immediately, ships may not move until it is safe, as there are signs that mines still remain in the strait and need to be removed before shipping can commence.

Note: Due to the holiday, there will be no Comment published tomorrow.

View PDF

by Patrick Fearon-Hernandez, CFA, and Thomas Wash

[Posted: 9:30 AM ET] | PDF

Our Comment opens with a discussion of how the United States is leveraging AI capabilities to keep key allies within its strategic orbit. We then turn to the Federal Reserve, outlining our views on its next policy direction. Next, we provide briefings on SpaceX’s rising valuation, newly released details of the US-Iran ceasefire agreement, and risks of a potential oil glut next year. As always, we include a review of recent domestic and international economic data.

AI Foreign Policy: The United States is increasingly turning to artificial intelligence as a tool to reshape its foreign policy. Just one week after the White House prohibited foreign nationals, including those working within the US, from using the Anthropic tools Mythos and Fable 5, Washington has initiated talks with European partners regarding access to American-made AI tools. These discussions reflect the US’s growing willingness to leverage its technological edge as an instrument of geopolitical influence.

• During the G7 Summit, the United States discussed a “trusted partner” scheme that would grant close allies privileged access to the latest AI models. The scheme could mean that AI providers would be restricted from selling their products to certain countries — or, in some cases, specific companies. A broad agreement may allow participating nations to leverage these advanced technologies in order to assist in the ramping up of their defenses against rivals such as China.
• The decision reflects growing US concern over the capabilities of Anthropic’s latest models. Last week, Commerce Secretary Howard Lutnick warned that the company may require special export licenses to provide certain tools to foreign nationals, citing national security risks. While the White House has not formally explained the directive, it is widely believed to be linked to the discovery of a jailbreak in Fable 5 that could circumvent Anthropic’s safety guardrails.
• The move to restrict AI exports mirrors the semiconductor controls that expanded from 2022 to 2024, which sharply limited advanced chip sales to China and other “countries of concern.” In both domains, Washington aims to guarantee allies’ access to US technology while constraining rivals, underscoring how protective it has become of its technological edge and how it is using that edge to keep key states within its strategic orbit.
• The government push to limit advanced AI-model use by foreign nationals is likely to weigh on the earnings of major technology firms, which are more dependent than most sectors on international revenue. These restrictions also highlight the risk that tech valuations may be elevated relative to rising policy and regulatory headwinds. We continue to advocate sector diversification as a way to hedge against over‑concentration, given the growing dominance of large technology companies within equity indexes.

Warsh Takes the Lead: All eyes will be on Fed Chair Kevin Warsh this afternoon as he presides over his first meeting since taking office. Markets will be focused on how the central bank assesses the inflation outlook, particularly in light of recent progress toward de-escalation in Iran. While easing geopolitical tensions should help improve the near-term inflation outlook, uncertainty around the policy path remains elevated amid persistent signs of underlying price pressures.

• Warsh inherits a more hawkish Federal Reserve than his predecessor. Ahead of today’s meeting, several Fed officials have signaled that further rate hikes may be warranted if inflation remains above the 2% target, citing not only pressures from the Iran conflict but also demand strength from the AI boom and a firming labor market. The departure of a noted dove, Governor Stephen Miran, further removes a key counterweight to tightening.
• Further reinforcing the hawkish bias are recent moves by peer central banks. Despite the agreement between Iran and the US to reopen the strait, policymakers elsewhere remain cautious about declaring victory on inflation. The Bank of Japan raised rates on Tuesday, citing ongoing inflation concerns, while ECB Chief Economist Philip Lane signaled that additional tightening remains possible following this month’s hike.

• Markets will be paying very close attention to Warsh as he offers his views on the direction of Fed policy. Over the past several years, the dollar has grown increasingly sensitive to shifts in interest rate differentials, as investors have come to view central banks with relatively dovish stances less favorably against a backdrop of persistently elevated inflation. Against that environment, any hawkish tilt from the Fed could lay the groundwork for another sustained dollar bull market.
• Heading into his first meeting, we expect Warsh to signal that the Fed will stay the course while keeping its options open. Such a stance would leave room for potential rate cuts later this year, which could act as a headwind for the dollar. That said, any shift toward a more hawkish tone could prompt a reassessment of current equity valuations while simultaneously supporting the dollar.

SpaceX’s Rise: The Musk-owned company’s stock is off to a strong start, having just surpassed Amazon’s valuation to become the fifth-largest firm by market capitalization. The sharp move reflects robust post-IPO demand, but much of the recent upside also appears tied to a broader relief rally following progress in Iran-US talks. The rise of SpaceX reflects the growing dominance of tech companies in the S&P 500.

Iran Deal: There remains significant debate surrounding the reported agreement between Iran and the United States to reopen the Strait of Hormuz later this week. While the official framework has been released, subsequent leaks suggested the possibility of a $300 billion investment fund tied to Iran’s compliance with the terms of the deal. The White House has denied any direct US involvement in such a mechanism, but the emergence of these reports underscores the intensifying political pressure and scrutiny surrounding the agreement.

Oil Glut? The International Energy Agency warns that the Middle East agreement could set the stage for oil overproduction during the next few years. Although it does not expect exports to rebound immediately once the conflict ends, it anticipates that as shut‑in capacity and war‑affected facilities gradually return to operation, global output could rise sharply, creating a substantial supply overhang by next year. This prospective increase in production is likely to exert downward pressure on oil prices and related inflation measures in the coming months.

View PDF

by Patrick Fearon-Hernandez, CFA, and Thomas Wash

[Posted: 9:30 AM ET] | PDF

Our Comment today opens with the latest on the US-Israeli war against Iran, including news that the US will support a rebuilding fund for Iran. We next review several other international and US developments that could affect the financial markets today, including the European Parliament’s formal approval of last year’s trade deal between the US and the EU and a few words about the Federal Reserve today as it starts its first policy meeting helmed by new Chair Kevin Warsh.

United States-Israel-Iran: Citing an unidentified senior US official, the Financial Times late yesterday said the Trump administration is prepared to allow the private sector to establish a $300-billion investment fund for Iran if Tehran agrees to a final settlement to end the war that includes a nuclear deal. According to the official, sanctions relief and the fund “to rebuild their country” would be connected to Iran’s “performance” in adhering to the framework of the US-Iran ceasefire extension that is to be formally signed on Friday.

• If the reporting is accurate, it could draw criticism as payment of reparations to Iran or bribing the country to get a nuclear deal. Even though the proposed fund would apparently be financed by private companies, Washington could offer tax or regulatory incentives for companies to participate, essentially transforming the fund into a US institution.
• Separately, the chief executive of Mitsui OSK Lines, the world’s biggest operator of oil tankers, has warned that shippers will not resume transit through the Strait of Hormuz for weeks until they are confident that the US-Iran deal is “material.” That being the case, he estimated that shipping through the strait probably won’t start in earnest until at least two weeks after the new US-Iran ceasefire extension is formally signed on Friday. Such a delay would further raise the risk of new surges in energy prices.

United States-European Union: The European Parliament today finally approved the trade deal reached last year between President Trump and European Commission President von der Leyen. Under the deal as it now stands, the US is relying on temporary emergency legislation to impose a 10% levy on top of existing duties, putting the total US duty north of 15% for some products. Meanwhile, the EU will cut its duties on US industrial goods and some farm products to 0%. The formal parliamentary approval will now provide more certainty in US-EU trade.

US Monetary Policy: The Fed starts its latest two-day policy meeting today, with its decision due tomorrow at 2:00 PM ET. This will be the first policy meeting led by new Fed Chair Warsh, with former Chair Powell also at the table. Based on the latest futures trading, investors are nearly unanimous in expecting the policymakers to hold their benchmark fed funds rate steady at a range of 3.50% to 3.75%. In fact, investors appear to be assuming rates will be held steady through the end of the year.

US Defense Industry: In a scoop last night, the Wall Street Journal said auto giant General Motors is in talks with Lockheed Martin about making parts for the defense contractor’s weapons. Under the arrangement, GM would manufacture commonly used parts that could help Lockheed bolster munitions output. The companies are currently discussing which components GM could potentially make.

• The potential deal harkens back to the World War II era, when many civilian firms shifted rapidly to military production to leverage their manufacturing expertise and excess capacity.
• The potential Lockheed-GM deal echoes developments that we’ve also seen in Europe, where firms with idle civilian production lines have made their workers and facilities available to support the Continent’s rearmament.
• In sum, the phenomenon illustrates how increasing defense budgets around the world are creating financial opportunities for firms far beyond the defense sector.

Japan: As widely expected, the Bank of Japan today raised its benchmark short-term interest rate to a 31-year high of 1.00%, compared with 0.75% previously. The hike reflects Japan’s new experience of continued high price inflation, as well as concerns about the weakness of the yen. The move follows the European Central Bank’s rate increase last week, which was also driven in large part by inflation concerns as global energy and commodity prices have jumped in response to the war in Iran.

China: May retail sales were down 0.6% from the same month one year earlier, marking their first annual decline since 2022 and illustrating the country’s persistently weak domestic demand. Meanwhile, fixed-asset investment in January through May was down 4.1% on the year, largely because of an ongoing slump in property investment. The weakness in Chinese domestic demand will likely encourage the government to keep emphasizing exports for growth, which in turn will keep pressuring foreign firms and raising international trade tensions.

Global Gold Market: A survey by the World Gold Council shows many major central banks, including those of France and India, have been pulling their gold reserves out of New York and London as they worry more about the security of their holdings. The finding illustrates just how concerned central bank reserve managers have become about geopolitical risk. Although central banks and some other major market participants have sold gold in recent months to raise liquidity, that concern suggests they will resume buying once the US-Iran conflict eases.

View PDF

by Patrick Fearon-Hernandez, CFA, and Thomas Wash

[Posted: 9:30 AM ET] | PDF

Our Comment today opens with some observations about the reported US-Iran deal to extend their current ceasefire. Importantly, we think investors should consider the deal highly fragile and not necessarily enough to prevent a further spike in energy prices. On a news day that is otherwise very slow, we next review several other international and US developments that could affect the financial markets today, including an effort by the UK to stop young teens from using social media and a sudden US export ban on Anthropic’s most powerful AI model.

United States-Israel-Iran: The US and Iran yesterday said they have agreed on a deal to extend the current ceasefire for 60 days, with the signing of the agreement to come this Friday. Once the deal is signed, Iran will stop attacking ships trying to transit the Strait of Hormuz and the US would lift its naval blockade of Iranian ports. Within the 60-day ceasefire extension, the US and Iran would also enter negotiations over the future of Iran’s nuclear program. In response, stock futures prices are surging today, while crude oil prices are down about 5%.

• Throughout the US-Israeli war against Iran, financial market participants have been taking an overly optimistic view of when and how the conflict will end. Time after time, they have been disappointed. We, in contrast, have been much more cautious, assessing that the advantage lies much more with Iran than people realize. The Iranians have therefore been dragging the conflict out. We would caution that the slightest provocation, such as renewed Israeli strikes on Lebanon, could well prompt Iran to scuttle the deal.
• Even if the deal is signed and implemented, we would also caution that it will likely take months to normalize the shipments of oil, natural gas, and other commodities through the Strait of Hormuz. Until then, the world’s commodity inventories are likely to be drawn down further, keeping prices high.
• Indeed, top oil company executives have been warning that the stockpile drawdown to date already threatens to cause a new spike in energy prices in the coming weeks. The drawdown has affected not just the US’s Strategic Petroleum Reserve, but also commercial inventories.
• In sum, the announced deal is positive on its face, but investors should consider it highly fragile. Renewed attacks by the US, Israel, or Iran could lead to the ceasefire breaking down. Failure of the upcoming talks on Iran’s nuclear program could probably also lead to the deal being abandoned. In any case, we think the war will permanently raise investor perceptions of risk in the region and the need to stockpile more energy and other commodities, which will likely keep prices higher than before the war.

US Artificial Intelligence Industry: Late Friday, Commerce Secretary Lutnick sent a letter to Anthropic CEO Dario Amodei informing him that the firm’s Mythos 5 and Fable 5 models would be subject to export controls to any location outside of the US and to all foreign persons within the country, based on national security concerns.

• The move forced Anthropic to make the models unavailable to all users while it and the government hammer out measures to implement the controls.
• The incident illustrates how security concerns will likely lead to significant restrictions on the most advanced models and affect major US companies in the AI space. In turn, that could affect the firms’ ability to commercialize their products broadly and limit potential profits.

US Defense Industry: In an interview with the Financial Times, Anduril Chief Executive Officer Brian Schimpf called for a “reset” of the US’s strict arms-export rules to make it easier for defense contractors to produce inexpensive weaponry at scale. According to Schimpf, making it easier to export or co-produce weapons with allies is essential to helping the US deter foreign adversaries. We also remain optimistic about US and foreign defense stocks going forward, and deregulation of arms exports would likely bolster the case for those equities.

US Stock Market: SpaceX shares started trading on Friday and closed at $160.95, up 19.2% from their offering price. That gives the company a market capitalization of $2.2 trillion. If it were included in the S&P 500 today, the company would be the fifth largest in the index, with a weight of about 5%. It would also have one of the most extreme valuations in the US stock market, given that the closing price on Friday is equivalent to about 107x SpaceX’s sales.

United Kingdom: Following Australia’s lead, the British government today will announce new rules to force leading social media companies to restrict access to their sites for teens under 16 years of age. The new rules will come into effect early next year. Similar restrictions are now being considered in about a dozen other countries, potentially creating marketing and operational challenges for companies such as Snapchat, TikTok, YouTube, Instagram, Facebook, and X.

China-Taiwan: In a little noticed development over recent weeks, the Chinese military has stepped up its provocative territorial moves in the South China Sea, including by sending coast guard and law enforcement ships into the area around Taiping Island and around the Donsha Islands, which are midway between the Chinese mainland, Taiwan, and the Philippines. The renewed territorial intrusions are likely designed to assert Chinese sovereignty over the disputed waters. The risk is that they could also spark outright military conflict that could draw in the US.

View PDF