by Patrick Fearon-Hernandez, CFA, and Thomas Wash

[Posted: 9:30 AM ET] | PDF

Our Comment today opens with the latest on the Israel-Iran conflict and the US’s bomber and missile attacks on Iran over the weekend. We next review several other international and US developments with the potential to affect the financial markets today, including signs that some US allies in both Asia and Europe are pushing back against President Trump’s demand that they hike their defense spending to 5% of gross domestic product and an update on the progress of Trump’s “big, beautiful” tax-and-spending bill in the Senate.

United States-Iran-Israel: As we warned in our Comment on Friday, the US on Saturday launched a bomber and missile attack on Iran’s key nuclear facilities. The attacks included massive “bunker buster” munitions dropped by B-2 bombers at Fordow and Natanz, and cruise missile attacks on Isfahan. US officials say they believe the attacks caused “severe damage” to Iran’s nuclear program, but full damage assessments will take time, and officials admit they don’t know where Iran’s enriched uranium stockpiles are.

• Trump administration officials say they have no plans for further attacks on Iran, and that the weekend attacks are not the beginning of an open-ended war. However, President Trump also warned that he will launch more attacks if Iran retaliates. On Sunday, he also hinted that he may pursue regime change in Iran.
• In any case, if the bomb damage assessments indicate Iran’s nuclear program has not been destroyed definitively, there is some chance that Israel, potentially backed by the US, might have to deploy special forces or bigger military units to Iranian territory to seek out and destroy the remnants of the program. More broadly, regime change may be the only way to ensure that Iran’s menacing program is finally destroyed.
• A key issue now is how Iran might respond to the US attack. Iran retains many possible retaliatory options including: attacks on US and allied forces and/or energy facilities in the region, shipping restrictions in the Strait of Hormuz, renewed terrorism, seizures of Western hostages, cyberattacks, withdrawal from the Non-Proliferation Treaty, and reconstitution or acceleration of its nuclear program. Any of these options could force the US to attack again, potentially with ground troops.
• In the longer term, we believe the US attack will encourage Iran and other nations to rush toward acquiring their own nuclear weapons. For example, an advisor to Iranian supreme leader Khomeini warned on X that “Enriched materials, indigenous knowledge [and the] political will remain” for Iran to keep pursuing its own nukes. As we have warned before, today’s increasing geopolitical chaos risks sparking a new, global nuclear arms race.
• We also note that China, Russia and other Iranian allies merely condemned the US attack but offered no obvious tangible help to Iran. In our view, that reflects China’s continued inability and/or unwillingness to support the members of its bloc with real military aid. As we have written in the past, Beijing is managing its geopolitical bloc largely on economic, neocolonial lines. Beijing’s failure to offer Iran more tangible benefits risks undermining the cohesion of the entire China bloc.
• Despite the risk of Iranian retaliation and disruptions to global energy supplies, near oil futures as of this writing are essentially unchanged, with Brent currently changing hands at about $76.95 per barrel and WTI trading at $73.52.

Taiwan-China: Taiwanese President Lai Ching-te launched a series of “national unity” speeches yesterday, ahead of a July 26 recall vote against nearly half of the parliament members from the China-friendly Kuomintang opposition party. In a statement sure to anger Chinese leaders, Lai stressed in his speech that “of course Taiwan is a sovereign state!” That assertion will likely provoke dangerous, market-concerning retaliation from Beijing, such as more military exercises around the island or restrictions on trade and capital flows between Taiwan and the mainland.

Japan-United States: Late last week, Tokyo reportedly canceled its participation in the annual US-Japan “two-plus-two” meeting between the countries’ top foreign relations and defense officials. That meeting had been scheduled to take place in Washington on July 1. According to the report, Tokyo’s cancelation stemmed from its anger over recent US pressure to hike Japanese defense spending to as much as 5% of GDP. The move illustrates the type of pushback it can expect as it pressures its allies into politically painful defense spending hikes.

Japan: In an interview with the Financial Times published Saturday, the chief investment officer for global fixed income at bond giant PIMCO said the firm has been buying long-term Japanese government bonds (JGB) in the belief that the market is being too pessimistic about the obligations despite rising consumer price inflation in Japan and the central bank’s effort to reduce its buying.

• With the yield on 30-year JGBs now approaching 3.0%, PIMCO believes the obligations now offer an enticing opportunity.
• The firm’s interest in long-term JGBs shows how some sophisticated bond investors still see opportunities in the debt of even highly indebted developed countries. While we’ve recently seen early signs of capital flight from the US because of debt concerns and policy uncertainty, PIMCO’s decision shows why a large-scale sell-off in long-term US Treasurys is not yet set in stone.

Germany-Italy-United States: An article in today’s Financial Times indicates that lawmakers in Germany and Italy have begun to urge their central banks to reduce the amount of their gold reserves held in the US. The calls reflect not only foreign concerns about US policy uncertainty under President Trump, but also their increased prioritization of gold as a key part of their reserves.

United States-European Union: A report late Friday said the US and the EU are mulling a draft agreement reforming dozens of non-tariff trade barriers posed by the Europeans, including the EU’s Digital Markets Act, its carbon-based border tariffs, shipbuilding and more. The draft deal doesn’t address the Trump administration’s tough tariffs on EU imports or the EU’s planned retaliatory tariffs against US goods and services. However, it does suggest the two sides are making some progress in their trade dispute, raising hopes for reduced US-EU tensions

North Atlantic Treaty Organization: With NATO leaders set to meet for their annual summit at The Hague on Wednesday, Spanish Prime Minister Sánchez yesterday said he has struck a deal with the alliance to opt out of its new target of spending 5% of GDP on defense. That target is due to be officially agreed at the summit. However, a Spanish opt-out would raise questions about what spending goals the allies will ultimately agree to. In turn, that could spark volatility in global defense stocks later this week.

US Fiscal Policy: Senate leaders aim to vote this week on President Trump’s “big, beautiful” tax-and-spending bill, but the chamber’s parliamentarian has ruled several key provisions related to spending cuts as out of bounds for the fast-track reconciliation procedure. That could slow the process in the Senate. In turn, that would delay returning the bill to the House for reconciliation and final passage.

US Artificial Intelligence Industry: Masayoshi Son, founder of giant Japanese tech investor Softbank, has reportedly pitched the Trump administration with a proposal to invest $1 trillion in a new industrial project in Arizona that would focus on producing artificial intelligence, AI robots, and related products. The “Project Crystal Land” complex would aim to compete with China’s massive high-technology manufacturing cluster in Shenzhen.

• Son has also reportedly asked a range of top technology firms to join in the project, including leading semiconductor maker Taiwan Semiconductor Manufacturing Company and Samsung Electronics.
• The reporting doesn’t make clear whether the Trump administration or other big tech firms would be interested in joining the Crystal Land project. Nevertheless, Son’s vision illustrates the continuing momentum toward more US investment in high-tech manufacturing and AI.

US Labor Market: An article in the New York Times over the weekend said on-line job postings are now being inundated with applicants, not only reflecting a recent softening in labor demand but also the ease of using AI to generate tailored resumes and applications. For example, the article says the number of applications submitted on LinkedIn has surged more than 45% in the past year, and the platform is now receiving an average of 11,000 applications per minute. The result is likely to complicate hiring for both firms and applicants.

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