by Patrick Fearon-Hernandez, CFA, and Thomas Wash

[Posted: 9:30 AM ET] | PDF

Our Comment opens with a discussion of the US decision to de-escalate and withdraw from the Persian Gulf over the coming weeks. We then outline our views on how the resulting energy shock is affecting economies around the world. In addition to examining the new Japan–France rare earths partnership, we will highlight emerging signs of deregulation that appear to be improving liquidity conditions. As always, we include a summary of recent US and international economic data releases.

NATO Friction: President Trump announced his intention to withdraw from the Persian Gulf within the next two to three weeks, regardless of whether a deal is reached with Iran. He also singled out NATO allies for failing to assist with the mission, claiming it was their problem to fix. The decision to leave comes as the conflict has dragged on longer than the White House initially anticipated, with Iran’s ability to attack vessels proving more formidable than expected. This reality has also raised growing concerns about when the Strait of Hormuz will reopen.

• There appears to be broad agreement that Iran’s leadership is likely to remain in power. In his speech, the president declared that the United States has accomplished all of its military objectives in the region and expressed confidence that the current regime is an improvement over the one the one that preceded it. Similarly, Israeli Prime Minister Benjamin Netanyahu, in a televised address on the eve of Passover, echoed this sentiment by highlighting what he described as key achievements from the conflict.
• On Tuesday, Iranian officials stated that although messages have been exchanged through intermediaries to explore an end to the conflict, no direct negotiations have taken place with the United States. Tehran indicated, however, that it would halt hostilities if Israel and the US cease their strikes and agree to provide reparations. Additionally, it also threatened to ramp up the pressure by targeting American tech companies operating in the Middle East starting today.
• While the United States and Israel are considering a potential wind-down of the conflict, NATO allies have remained largely unwilling to become directly involved. On Wednesday, Italy denied US forces access to its military air base in Sicily. Although Italian officials described the decision as a procedural matter, it comes as Spain and the United Kingdom, both critical of the operation in Iran, have also rejected similar US requests.
• In the absence of NATO allies coming together to resolve the dispute in the Middle East, Beijing has emerged as a potential peace broker to help reopen the strait. China and Pakistan have been working on a ceasefire agreement that largely delivers on many of the demands issued by Iran. While it remains unclear whether Washington supports the gesture, the effort does demonstrate China’s diplomatic weight, as well as its potential to serve as a counterweight to the United States in the Middle East.
• A possible end to the conflict would likely set the stage for a fragile recovery as markets begin to focus on what comes next. Once hostilities subside, the full extent of the damage to energy infrastructure across the Middle East should become clearer, helping to establish a realistic timeline for restoring and normalizing operations. In the near term, this disruption is likely to benefit energy producers globally, including in the United States, as they move to fill the supply gap.

Energy Concerns: While optimism is building that the US–Israeli joint mission against Iran is beginning to de-escalate, concerns over a potential energy crisis remain elevated. Many fear that if the United States withdraws before the Strait of Hormuz is fully reopened, oil prices could spike to $200 per barrel. These risks have prompted public officials worldwide to consider policy responses and emergency measures to ease pressures from supply shortfalls, reinforcing a broader shift toward more regionalized energy supply chains.

• In Asia, where economies are heavily reliant on fuel transported through the strait, governments have scrambled to implement stopgap measures to safeguard energy access. China has imposed a fuel export ban, exacerbating supply pressures on Southeast Asian economies. In response, countries across the region have stepped up cooperation, including various forms of resource‑swapping and informal barter arrangements, in order to make more efficient use of available supplies within the region.
• Europe is likewise grappling with how to manage its emerging energy shortfall. Governments across the region are embracing an “all of the above” strategy that includes accelerating investment in renewable energy, revisiting nuclear power options, and, in some cases, extending or expanding coal use. At the same time, policymakers are advancing demand‑side measures such as incentives and guidelines for working from home to curb fuel consumption and reduce pressure on electricity and heating systems.
• Across Latin America, governments are increasingly using taxes and spending to deal with rising oil prices. Several Latin American countries — including Chile and, to a lesser extent, Colombia — have allowed fuel subsidies to shrink or prices to move more closely in line with market prices to protect government budgets. In contrast, Mexico and Brazil have gone the opposite route, using tax cuts, aid programs, and targeted fuel subsidies to shield households and key industries from the worst of the price shock.
• The push toward higher oil prices is likely to impact international equities, though we still see some opportunities, especially as the conflict winds down. We expect that international companies in the traditional energy sector could see a rebound in the short term. However, as energy prices begin to fall, we may also see some of the hardest-hit countries — particularly in Asia — start to recover. In short, we still see a case for maintaining some international exposure despite the conflict in the Middle East.

Rare Earth Partnership: Japan and France have agreed to launch a public–private partnership to refine heavy rare earths in southwest France. The initiative is part of a broader push to reduce global dependence on China for critical rare earth supplies. The partnership underscores growing Western investment and coordination around securing key strategic materials and is likely to strengthen the resilience of supply chains in both Europe and Japan.

Repo Market Functions: Wells Fargo’s recent inclusion in the short-term lending market has reinforced confidence that deregulation can help ease liquidity stress in the repo market. Since the removal of its balance sheet caps, the bank has expanded its repo lending activities, contributing to greater stability in the financial system. We expect ongoing discussions in Washington regarding regulatory capital and liquidity requirements, as policymakers consider reducing barriers that restrict banks from holding or purchasing US Treasurys.

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