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 the US is again threatening a massive attack on the Iranian electricity sector if the country doesn’t open the Strait of Hormuz by tomorrow evening. We next review several other international and US developments that could affect the financial markets today, including an unusual closure of airspace off the Chinese coast that has raised worries of imminent military activity there. Being Easter Monday, with much of the world on holiday today, it has been a very light news day so far.

United States-Israel-Iran: In perhaps the most dramatic moment of the war so far, the wounded US fighter pilot lost in Iran was recovered over the weekend, eliminating the risk of a hostage or prisoner-of-war situation. Nevertheless, the downing of the F-15 illustrates how the Iranian military maintains important capabilities, despite White House assurances that it has been “obliterated.”

• Reports say the US-Iranian talks that had been going on to end the war hit an impasse on Friday and are now suspended.
• Also, today marks the end of the 10-day deadline that President Trump gave the Iranians late last month to open the Strait of Hormuz to all shipping. That hasn’t happened, so the president has set his new deadline of Tuesday evening.
• By our count, the president has set more than a dozen deadlines for the Iranians to open the strait, so it would be tempting for many investors to assume that he won’t follow through with his threat to destroy Iran’s electricity generating capacity. However, reports say the US and Israel have drawn up concrete plans for just such an attack, and the political and military pressures on the US could lead to the strike actually happening. Such an offensive, and Iranian reprisals, would likely be a further risk for the markets.
• The risk of more Iranian reprisal attacks on Middle Eastern energy infrastructure and further closure of the strait will continue to threaten a major energy crisis in Asia and Europe. For example, Malaysian budget airline AirAsia today said it has cut about 10% of its flights and will boost fuel surcharges by about 20% and base ticket prices by as much as 40%.
• Separately, reports this morning say Turkey, Egypt, and Pakistan have given the US and Iran a proposal for a 45-day ceasefire, which has provided a bit of a lift to US stock futures this morning and pushed energy prices down slightly. However, it appears that the proposal is simply a re-submittal of a previous proposal, so it could ultimately have little impact on the war.

China-Taiwan: The Chinese military has announced two unusual 40-day airspace restrictions covering areas off the coast of Shanghai and north of Taiwan, with no explanation of what’s behind them. Press reports have raised the possibility that the restrictions could be related to an effort to seize control of Taiwan now that the US is tied down with the war in Iran. However, the location of the restricted areas doesn’t seem consistent with that hypothesis. In any case, the new restrictions will likely have investors on edge about a possible new geopolitical crisis.

China-Cuba: The Financial Times reports that Chinese exports of green-energy technology to Cuba have soared in recent months and are on track to rise even further to help the island cope with the effective US oil embargo on it. In our view, the development provides added evidence that one result of the new US foreign policy and the war in Iran will be to rekindle the demand for green energy around the world as a way to diversify energy supplies. In turn, that could boost the value of green-energy stocks.

Japan-Philippines-China: Japanese combat troops today have begun drills in the Philippines as part of the annual US-Philippines military exercises known as Salaknib. That marks the first time Japanese combat troops have been involved in drills in the Philippines since World War II and illustrates the new cooperation between Japan and the Philippines as they face the threat of Chinese territorial aggression in Taiwan and the South China Sea.

• Separately, Japanese Defense Minister Koizumi earlier today visited Iwo Jima, the site of the iconic US-Japanese battle.
• During his visit, Koizumi decried what he described as a “defense vacuum” over a vast swath of the Pacific and vowed that Japan would continue to partner with like-minded countries to strengthen its deterrence capabilities.

US Financial Markets: In his annual letter to shareholders, JPMorgan Chase CEO Jamie Dimon warned that when the credit cycle finally turns, soured loans to the private-credit industry are likely to be higher than investors now expect. Dimon specifically flagged loosening lending standards amid the explosive growth of private lending. More broadly, Dimon assessed the US economy to still be resilient, but he warned of higher inflation and interest rates because of the war in Iran.

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