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.

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by Patrick Fearon-Hernandez, CFA, and Thomas Wash

[Posted: 9:30 AM ET] | PDF

Our Comment opens with a discussion of the ECB’s decision to raise rates and its potential implications for other central banks. We then turn to the ongoing talks of renewing the USMCA before covering SpaceX’s anticipated IPO, and the latest developments in US-Iran peace negotiations. As always, we conclude with a review of recent domestic and international economic data.

Global Pivot: The sudden surge in inflation has paved the way for central banks to consider raising interest rates in a bid to restore price stability. On Thursday, the European Central Bank made history as the first monetary authority within the G-7 to announce a rate hike of 25 bps, raising its deposit rate to 2.25%. The decision comes in direct response to soaring energy prices, which have driven inflation across the bloc to three-year highs. By raising rates, the ECB may be paving the way for a shift in global monetary policy from a dovish lean to a more hawkish stance.

• The ECB’s decision reflects a broader trend among central banks navigating the aftermath of the Iran war amid heightened concerns over potential pass-through effects from rising energy prices. The Bank of Japan is projected to follow suit at its next meeting, while the Bank of England is anticipated to implement a rate hike in September. Meanwhile, an increasing number of Federal Reserve officials have openly signaled their readiness to support tighter monetary policy should inflation continue to accelerate.
• The Bank of Japan and the ECB have shown the greatest willingness to raise rates due to their heightened vulnerability to an energy shock stemming from the continued closure of the Strait of Hormuz. Both regions source a disproportionate share of their oil from the Middle East, leaving them very exposed to the risks of a prolonged conflict. The US and Canada, by contrast, enjoy greater energy independence, explaining why both central banks are expected to exercise more patience before committing to a rate hike.
• The potential policy pivot is likely to reverberate across bond markets and exchange rates. Rising short-term rates have historically acted as a floor for long-term yields during expansions, and a similar dynamic is expected to play out here. Exchange rates have proven particularly sensitive to shifts in Fed policy expectations with fears that the conflict could force a rate hike providing a tailwind for the dollar.
• The ECB’s decision signals how central banks intend to respond to inflationary pressures from the conflict in Iran. Countries most exposed to oil price shocks are expected to tighten first, while those with greater energy independence are likely to be more patient. A resolution could take hikes off the table, though the bar for cuts remains considerably higher than before the conflict, likely requiring clear evidence that the inflation spike is transitory rather than structural.

USMCA Trade Talks: The US has entered trade talks with Mexico and Canada as the three nations assess the future of their free trade agreement ahead of the July 1 renewal deadline. Earlier this week, President Trump signaled a potential unwillingness to renew the deal, a stance that could trigger a formal, decade-long withdrawal process and spark a lengthy renegotiation. These comments have introduced significant uncertainty into America’s relationships with its two largest trading partners, elevating the risk of renewed trade tensions.

• While the president has stopped short of saying he wants to leave the agreement, his comments have triggered a push for changes to the deal. On Thursday, the US ambassador to Canada expressed optimism that a deal could be reached, provided that there is no escalation. His optimism appears to be driven by Canadian Prime Minister Mark Carney’s push to establish a North American economic bloc, a vision of a unified trade front among the three countries under the existing agreement.
• Despite the optimism, talks to renew the trade agreement are expected to yield a more tailored arrangement as a way to keep the US on board. According to a Canadian trade official, any renewal of the USMCA will likely be accompanied by additional bilateral agreements between Canada and the US. The official also expects Mexico to pursue a similar arrangement. Although it is unclear as to what concessions these countries will make, it does appear that they are more open to appeasing the US than challenging it.
• A central theme emerging from these talks is the push for a unified trade policy. The White House has long sought to align Canada and Mexico with its stance on trade with China, and the current negotiations are expected to address the gaps between the three nations on this front. This alignment may take the form of coordinated restrictions on Chinese investment and trade in strategic industries, as well as tighter controls on sourcing requirements.
• Although the president has raised the prospect of not renewing the USMCA, there is currently little evidence of a planned US withdrawal. While negotiations will likely introduce temporary uncertainty as all sides work toward a new deal, this friction is unlikely to have a lasting impact on markets, provided investors remain confident the agreement will stay in place. Any credible signs of a US withdrawal, however, could weigh on market sentiment.

Hottest IPO: SpaceX has seen record demand for its shares leading up to its debut on NASDAQ. On Thursday, the company raised over $75 billion for its IPO, marking the largest stock opening on record. Demand was four times greater than the available supply, demonstrating robust investor interest. This surge partially reflects the inclusion of retail investors, who were allocated over 20% of the shares. The stellar performance suggests that other highly anticipated IPOs, such as Anthropic and OpenAI, may also see strong market demand.

Deal Imminent? The president has decided to call off a planned strike on Iran amid progress in ongoing peace talks. The decision comes as the president indicated that an agreement could be signed as soon as this weekend in Europe. While the details have yet to be released, the president announced that Iran’s Supreme Leader has agreed to a deal. The current arrangement would extend the ceasefire by 60 days, reopen the Strait of Hormuz without tolls, and provide Iran with sanctions relief contingent on compliance.

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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 CPI report and its implications for monetary policy. We then provide an update on the US-Iran conflict, followed by an analysis of the oil markets. Next, we briefly cover PIMCO’s growing concerns regarding financial weakness, Anthropic’s latest funding round for its AI buildout, and the ECB’s decision to hike interest rates. As always, we conclude with a review of recent domestic and international economic data.

Inflation Problems: Less than a week before Kevin Warsh will chair his first Federal Reserve meeting, policymakers appear to be confronting a renewed inflation problem. The latest CPI report showed headline inflation accelerated to 4.2%, its third consecutive monthly increase and its fastest pace in more than three years. This pickup in inflation is likely to complicate plans for a Fed chair who had previously signaled openness to rate cuts and could instead strengthen the hand of a Federal Reserve Board that has grown more inclined toward further tightening.

• In May, energy prices were the main driver of the latest CPI upturn, reflecting both the Iran-related supply shock and surging power demand from the AI buildout. Gasoline prices jumped 40.5% year over year, while fuel oil and other household energy costs climbed an even steeper 58.9%. Although such extreme moves are likely to normalize over time, a more troubling development is the nearly 6% increase in electricity prices, which appears increasingly tied to the growing power needs of data centers.
• The pickup in inflation is likely to complicate Kevin Warsh’s efforts to set a monetary stance that accommodates the AI buildout. He has argued that the Fed should be willing to hold rates steady and allow a prospective AI‑driven productivity boom to show up in the data. Yet, the recent energy‑price surge associated with that same buildout risks having the opposite effect, forcing Warsh to persuade more hawkish officials to tolerate above‑target inflation in the meantime.

• May’s inflation data is likely to harden the stance of many Fed officials, several of whom only a month ago had pressed the central bank to drop its easing bias and openly entertain the prospect of a rate hike. Market pricing has moved in tandem — overnight rates have swung from implying a 25-50 basis point cut at the start of 2026 to instead assigning a roughly 70% probability to at least one hike by year end at the time of writing.
• While the latest CPI report likely gives the Fed cover to delay any rate cuts, we remain less convinced than fed funds futures that policymakers will deliver a hike this year. The 2023 episode showed the Fed’s willingness to treat a rise in 10‑year yields as a substitute for additional tightening at the front end, plus, given today’s split among officials and the current chair’s leanings, an extended pause looks more likely than an outright hike as the conflict plays out.

Ceasefire in Jeopardy? The US has escalated its military operations in Iran, reflecting growing impatience over stalled negotiations to reopen the Strait of Hormuz. Iran has retaliated by targeting other Gulf states and signaling its intent to further restrict access to the waterway. The renewed hostilities follow a breakdown in talks that had appeared close to a resolution just weeks earlier. As anticipated, the escalation is likely a strategic effort by both sides to strengthen their bargaining positions and extract additional concessions in forthcoming negotiations.

• Following the latest round of strikes, which lasted roughly four hours before pausing, the president stated that military operations will continue until Iran agrees to peace terms. While several issues remain unresolved, the primary sticking point appears to be US demands that Iran dismantle or relinquish its uranium stockpiles. Iran, in turn, has held firm on securing the unfreezing of approximately $10 billion in assets, along with a ceasefire in Lebanon, as preconditions for any agreement.
• Investors had taken comfort from Washington’s reluctance to abandon the ceasefire, reflecting concerns that a broader escalation could prove difficult to control given Iran’s ability to sustain strikes even after significant damage to its military capabilities. At the same time, although there has been speculation that US forces could reopen the strait with a more substantial ground presence, the White House appears wary of the domestic political backlash that a visible troop deployment could trigger.

• The stop‑start pattern of strikes between the two sides has added to the volatility in crude, but it has also helped prevent prices from revisiting the peaks seen at the onset of the conflict. One area we have been watching closely is the spread between futures and physical barrels. While that spread has narrowed, the move appears driven less by easing tensions and more by buyers pulling forward deliveries amid concerns about future disruptions, even as some suppliers continue to face resistance in selling into Asian markets.
• While the worst may be behind us, we are reluctant to say that oil prices will normalize anytime soon. For one, it still appears that the US and Iran will continue to trade strikes even as they hold talks. Second, the spread between crude futures and the physical market suggests that near‑term demand and delivery concerns are outweighing any longer‑term optimism about a lasting deal, leaving room for another step higher in prices if negotiations fail in the coming weeks.

PIMCO Fears: PIMCO has reiterated its warning that a credit loss cycle may be approaching. In its latest outlook, the firm cautions that the AI buildout could leave lower‑quality borrowers particularly exposed to defaults. While credit spreads remain near historical lows, PIMCO flags the growing use of maturity extensions and payment‑in‑kind structures — where interest is paid with additional debt — as key red flags. Even so, there are still no clear, broad‑based signs of credit deterioration at this stage.

AI Debt: Apollo and Blackstone have partnered with Broadcom to help Anthropic finance additional chips for its AI buildout. The deal involves roughly $35 billion to fund purchases of Google‑designed chips that Broadcom helped develop. The arrangement highlights both the growing reliance on credit and the increasingly circular financing needed to support the AI infrastructure boom. While this may bolster near‑term growth, it also reinforces concerns about the longer‑term sustainability of the current investment cycle.

ECB Hawk: The European Central Bank raised interest rates by 25 bps for the first time in three years, marking a significant shift toward tighter policy. The move comes as the euro area contends with an energy shock that threatens its ability to maintain price stability. Although the hike was largely priced in and initially met with a muted market reaction, it could offer additional support to the euro if the Federal Reserve signals a pause at its meeting next week.

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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 the growing concerns about AI. We then turn to geopolitics, examining the latest developments in the conflict between the US and Iran. Next, we briefly cover the EU cracking down on Meta, Middle Eastern countries looking to build new oil pipelines, and the latest AI tool developed by Anthropic. As always, we conclude with a review of recent domestic and international economic data.

AI Uncertainty: There are growing concerns about the cash needs of Big Tech companies as they look to build out their AI infrastructure. Over the last few weeks, several high-profile companies have sought to tap equity markets for capital. Private companies SpaceX, OpenAI, and Anthropic are moving forward with IPO preparations. Meanwhile, public tech giants like Alphabet have announced new equity offerings, while Meta is also exploring one. The push to issue equity has led to concerns that future earnings may not be enough to justify current valuations.

• Over the past few weeks, several banks have raised concerns about the durability of the AI trade. On Tuesday, Bank of America strategist Savita Subramanian noted that while parts of the tech sector remain healthy, a clear shift has emerged since November. Specifically, cash flow conversion and buybacks have slowed, while capex, debt, and equity issuance have increased. Her view aligns with similar warnings from Wells Fargo and JPMorgan that the AI trade is showing signs of frothiness.
• The unease may reflect how readily many tech firms have turned to issuing equity for cash, even though borrowing remains relatively cheap. With corporate bond spreads still well below their long‑term averages, these companies could easily tap the debt markets instead. Their choice to lean on equity issuance suggests that management sees stock as the cheaper form of financing, which can also be read as a signal that they view their shares as fully valued, if not overvalued.
• The recent AI-driven market scare likely highlights growing fragility within growth stocks, driven by an overweight allocation to the technology sector. During Tuesday’s sell-off, equity markets rotated toward more defensive stocks, attracted by their better valuations and the perception that these sectors are more likely to preserve value over the long term. This rotation mirrors similar episodes seen over the past few months, where even minor jitters prompted investors to flee major tech names in search of safety.
• While AI is likely to remain a dominant market narrative, there are emerging signs that its momentum may be moderating. The recent wave of equity issuance by technology firms, while not inherently negative, can be interpreted as opportunistic due to the elevated valuations. Given this context, along with our broader concerns around market fragility, the current environment may present an opportunity for investors to reassess positioning and consider increasing exposure to value-oriented assets.

Mideast Tensions: Developments in Iran suggest that while Middle East tensions remain elevated, energy supply chains are showing resilience. Following Iran’s downing of a US helicopter, the two sides exchanged attacks on Wednesday, highlighting ongoing escalation risks. However, oil prices remained contained, with Pentagon officials signaling improved success in maintaining flows through the Strait of Hormuz. Despite continued hostilities, these dynamics point to a reduced near-term risk of major supply disruption.

• On Wednesday, the US and Iran exchanged missile strikes following Iran’s downing of a US Apache helicopter, marking a renewed escalation in tensions. The recent clashes come as both sides attempt to break the negotiating impasse and reopen the strait, with US efforts focused on countering Iran’s attempts to assert control over the waterway. The fighting underscores the fragility of the ceasefire, which has been repeatedly tested in recent weeks.
• However, despite ongoing fighting around the strait, US officials have expressed growing confidence in their ability to sustain transit through the waterway. Energy Secretary Chris Wright noted that traffic through the strait is increasing meaningfully and is expected to continue rising. His remarks appeared to reassure markets, contributing to a pullback in oil prices, with WTI futures falling below $90 and holding at those levels despite the overnight escalation in US-Iran tensions.
• While some progress is being made, concerns around oil inventories are building. Since the conflict began, oil markets have been well supplied by increased US exports, subdued Chinese imports, and strategic reserve releases by several governments. These measures have helped cap prices by narrowing the gap between physical tightness and futures pricing. However, the longer the conflict drags on, the greater the risk that these buffers erode and higher oil prices re‑emerge.
• We remain cautiously optimistic that conditions in the Strait of Hormuz will improve. Despite the recent escalation, both sides continue to engage in talks aimed at reopening the waterway, and much of the current posturing appears geared toward extracting additional concessions. This dynamic could invite further tactical attacks, but it also leaves room for a potential breakthrough in the coming weeks. In the meantime, we expect oil prices to remain volatile until a more durable agreement is reached.

Pipeline Alternative: Kuwait is looking to build an additional pipeline that would allow it to transport oil without relying on the Strait of Hormuz. The state-owned oil producer is working with Saudi Arabia and the United Arab Emirates to increase pipeline capacity, enabling exports to different markets. This effort comes as other Middle Eastern nations have also turned to alternative pipelines to transport their oil. The move signals that oil markets could shift due to the ongoing conflict over the strait.

EU Restrictions: EU regulators have ordered Meta to stop restricting AI rivals from operating within WhatsApp. The European Commission has warned that Meta must restore access for general‑purpose AI assistants within five working days or risk penalties under the bloc’s antitrust rules, potentially including a fine of up to 10% of its global annual revenue. The move underscores the EU’s determination to prevent its digital ecosystem from being dominated by US tech giants and could further strain relations between Brussels and the White House.

Mythos Update: AI provider Anthropic has released a new general-use version of its AI tool, Mythos, which is expected to be less powerful than the original version. The new model, Fabel 5, has similar capabilities to Mythos but includes built-in safeguards that prevent it from carrying out a cyberattack or developing a bioweapon. The release highlights the danger these AI tools pose to the broader world and could eventually pave the way for future regulation.

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by Patrick Fearon-Hernandez, CFA, and Thomas Wash

[Posted: 9:30 AM ET] | PDF

On a slow news day, our short Comment today opens with early signs of relatively disappointing demand for World Cup tickets, which could mean the economic stimulus from the event will be less than expected. We next review several other international and US developments that could affect the financial markets today, including an unexpected interest rate hike in Indonesia and a US blacklisting of more Chinese firms as suppliers to Beijing’s military.

FIFA World Cup: New data from FIFA shows it still has some 15,000 initial tickets available for first-round “group” games during the US-Canada-Mexico tournament, as well as a whopping 176,000 resale tickets available. Analysis by the Financial Times suggests demand is so weak that most resale tickets are being released at a loss after fees.

• The apparent shortfall in enthusiasm could mean that the economic jolt for cities hosting the games will be less than hoped for.
• It could also mean that the surge in hospitality and local government hiring and other preparations for the tournament will be reversed quickly, leading to some potentially weak economic reports for June and July.

China-North Korea: Chinese General Secretary Xi today wrapped up his visit to North Korean paramount leader Kim. While few substantial, concrete agreements or other developments have been noted, one key observation is that there was no significant reference to North Korea’s nuclear program. That suggests Xi no longer sees North Korea’s denuclearization as feasible. In turn, the US may not be able to rely on China for additional pressure on Pyongyang to scrap its nuclear weapons. North Korea will therefore remain a security risk for Asia and its investors.

United States-China: The Pentagon today designated about two dozen additional Chinese companies as suppliers to Beijing’s armed forces. The newly designated firms include tech giants Alibaba Group and Baidu, electric car manufacturer BYD, pharmaceutical firm WuXi AppTec, and humanoid robotics company Unitree. The designation means the firms can’t do business with the Pentagon, but it can also lead to reputational risk that can be a headwind for their overall business in the US.

US Artificial Intelligence Industry: Late yesterday afternoon, ChatGPT creator OpenAI announced that it has filed for an initial public offering that will likely come sometime this autumn. That means that OpenAI, its rival Anthropic, and SpaceX are all now planning big IPOs (at mammoth valuations) in the coming weeks and months. Reports indicate that some investors have already begun selling shares in other companies to raise cash and be ready to buy the new tech shares. In turn, that could weigh on share prices for targeted sectors or firms.

• Interestingly, some major college endowments that invested in SpaceX via private equity funds in recent years are now set to earn billions of dollars from its IPO.
• For some institutions, including Washington University in St. Louis, equity in SpaceX makes up more than 10% of their endowment portfolio. (We don’t expect any windfall to lead to lower tuition rates, unfortunately.)

US Housing Market: The Financial Times today carries an interesting article showing that buy-now, pay-later firms are starting to offer so-called “rent-split loans,” in which the lenders cover a tenant’s monthly payment to their landlord and receive the money back in installments spread over the course of the month. The loans effectively split up the borrower’s rent bill into smaller sums. The new product reflects the financial challenges that many lower-income consumers are facing because of rising living costs.

Indonesia: In an off-cycle move today, Bank Indonesia unexpectedly boosted its benchmark short-term interest rate to 5.50%, up from 5.25% previously. The hike followed a 0.50% increase just three weeks ago, which had been the first rate hike in about two years. According to the policymakers, the rate increases aim to support the rupiah, which has been losing value against the dollar and other major currencies as investors begin to project possible rate hikes in the US and other countries because of the war in Iran.

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