by Patrick Fearon-Hernandez, CFA, and Thomas Wash

[Posted: 9:30 AM ET] | PDF

Our Comment today opens with a quick update on the weekend shooting at the White House Correspondents’ dinner and on the war in Iran. We next review several other international and US developments with the potential to affect the financial markets today, including a Chinese threat to retaliate against the European Union if it implements a proposed bill to protect its domestic manufacturing base and further evidence that the US Senate is likely to approve Kevin Warsh as the new chair of the Fed.

Correspondents’ Dinner Attack: Law enforcement officials have announced that they believe the man who opened fire at the White House Correspondents’ dinner over the weekend was targeting President Trump and administration officials but was acting alone. The suspect will be arraigned in court today. For investors, the failure of the attack means there will be no abrupt change in the US policy environment in the near term, but sympathy voting or other ballot dynamics could shift as the November mid-term Congressional elections approach.

United States-Israel-Iran: President Trump on Saturday said his top negotiators for Iran, Steve Witkoff and son-in-law Jared Kushner, would not travel to Pakistan for a new round of talks despite announcements last week that they would be going. The development likely shows how far apart the US and Iran remain in their demands. Each side apparently believes it has the stronger position to weather the standoff, raising the possibility that global oil and commodity disruptions will continue to push up prices and threaten the global economy and risk assets.

• The US is apparently making little progress persuading Iran to turn over its stockpile of enriched uranium, curtail its nuclear program, and reopen the Strait of Hormuz.
• Separately, an internal Pentagon email leaked late last week discussed several possible retaliatory measures against allies in the North Atlantic Treaty Organization for their failure to provide access, basing, and overflight rights in support of the US-Israeli war against Iran, despite provisions in the NATO treaties that only obligate the allies to cooperative defensive measures if NATO countries are attacked. For example, the measures include possibly suspending Spain’s membership in NATO.
• With the strait remaining effectively closed, global oil prices continue to rise gradually. As of this writing, Brent crude is trading hands at $100.18 per barrel, up 1.0% on the day.

United Kingdom-European Union: UK government ministers dealing with technology issues are reportedly pushing back against Prime Minister Starmer’s effort to partly reverse Brexit and partially re-integrate the UK and EU economies, including by adopting a vast array of EU regulations. The technology ministers are warning that the plan would stifle British firms’ ability to innovate in areas ranging from artificial intelligence to lab-grown meat. In turn, we think the plan could potentially weigh on the British economy and stock values.

China-United States: The Chinese government said today that it is blocking Meta’s planned purchase of Chinese artificial intelligence start-up Manus, citing national security concerns. Meta has countered that the deal met legal requirements and signaled that it will appeal the ruling. Nevertheless, the announcement signals that China will closely guard its AI innovations to keep them out of US hands, potentially keeping US investors from benefitting from them.

China-European Union: Beijing today warned the EU not to implement its proposed new Industrial Accelerator Act aimed at protecting and growing the region’s domestic manufacturers. If the EU proceeds with the legislation and Chinese firms are harmed, Beijing threatened to impose “countermeasures” in retaliation. The development is further evidence that the US isn’t the only major economy starting to push back against Chinese dumping. That pushback will further raise trade and investment tensions and potentially slow Chinese economic growth.

Romania: Today, the center-left Social Democratic Party said it would join the far-right, ultranationalist Alliance for the Union of Romanians in a no-confidence vote against the center-right government later this week. The SDP’s willingness to vote in tandem with the AUR marks another case in which one of Europe’s far-right parties has been embraced by traditional voters or parties. As it is increasingly embraced, the far-right could gain power in one of the major countries, such as Germany or France, with major implications for foreign and domestic policy.

Colombia: Just a month before the country’s presidential election, authorities said a drug-trafficking group based in southern Colombia detonated 26 bombs that killed 20 civilians on Sunday. The attacks were the most extensive in Colombia in many years and raised concerns about more attacks in the run-up to the balloting. For investors, they are also a reminder that Latin America faces security risks, even though the commodity-driven region looks increasingly attractive as Asia and Europe face economic headwinds from high energy prices.

US Monetary Policy: Senator Thom Tillis of North Carolina yesterday confirmed he will now vote to advance Kevin Warsh’s nomination to be the new chair of the Fed. The announcement came after Tillis received assurances from the Department of Justice that it is dropping its prosecution of current Fed Chair Powell over the central bank’s big headquarters construction project. That prosecution has been widely seen as White House pressure on Powell to leave office and/or cut interest rates more quickly.

• If Tillis really does vote to advance Warsh’s nomination out of committee, Warsh is highly likely to become the new Fed chair when Powell’s term ends next month. However, there is still some question whether Powell will relinquish his seat on the Fed’s board, which does not expire at the same time as his chairship.
• Separately, the Fed’s policy committee will hold its latest two-day meeting this week, with its decision expected to be released on Wednesday at 2:00 PM ET. The committee is widely expected to keep its benchmark fed funds rate unchanged at 3.50% to 3.75%.

US Artificial Intelligence Industry: New reports say the rising cost of computing resources is eating up corporate information technology budgets to the point where human workers are sometimes seen as more cost effective than AI. The reports suggest that AI may not lead to the full job destruction that some analysts are expecting. The reports also suggest the current boom in computing use for AI may at some point have to slow down, which would likely take some of the momentum out of AI stocks.

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