by Patrick Fearon-Hernandez, CFA, and Thomas Wash

[Posted: 9:30 AM ET] | PDF

Our Comment today opens with news that Iranian forces have fired missiles at two commercial ships in the Strait of Hormuz, putting at risk the current US-Iran ceasefire and negotiations toward a permanent end to the war. We next review several other US and international developments that could affect the financial markets today, including a statement by Federal Reserve board member Christopher Waller on monetary policy and a French court decision allowing far-right leader Marine Le Pen to run in the country’s 2027 presidential election.

United States-Israel-Iran: US officials say Iran’s Islamic Revolutionary Guards Corps this morning fired missiles at two commercial ships passing through the Strait of Hormuz. The action shows how the IRGC continues trying to scuttle the current US-Iran ceasefire. However, it’s not yet clear whether the new attacks will put an end to the current recovery in shipping through the strait, which has been proceeding faster than expected. Global oil prices are little changed so far this morning.

US Monetary Policy: Fed board member Christopher Waller, whom President Trump had once considered elevating to the chairmanship, yesterday voiced support for Chair Warsh’s plan to cut back on “forward guidance” regarding the direction of monetary policy. According to Waller, the Fed’s forward guidance on keeping interest rates low during and right after the coronavirus pandemic had “tied the hands” of policymakers and helped spark the excessive price inflation that occurred from 2022 to 2024.

• Waller’s statement helps ensure that the Fed’s forward guidance will indeed be rolled back.
• Weaker forward guidance could well leave investors less sure about the future direction of monetary policy, so it may lead to increases in the policy risk premium in market interest rates. Along with the likelihood of higher and more volatile inflation in the future, that could mean higher interest rates going forward, which would likely weigh on fixed-income and equity valuations.

US Stock Market: SpaceX joins the Nasdaq index today, meaning investors holding mutual funds or exchange-traded funds linked to the index will have exposure to the stock whether they want it or not. However, because of the rules determining how the index is constructed, SpaceX will start out representing less than 1% of the index. Over time, the company’s weight will fluctuate not only as its share price changes but also as its free float changes.

US Artificial Intelligence Industry: The Wall Street Journal today carries an article describing how major AI firms are offering big discounts on compute resources to land and/or keep corporate customers. In some cases, customers have been able to play one AI firm against another to get huge price reductions on needed computing power. The article is likely to further raise concerns about tough competition and excess investment in the sector, which will increase the risk of another correction in AI stock prices.

Canada-Germany: Canadian Prime Minister Carney yesterday announced that his government has selected German shipbuilder TKMS as its preferred supplier for a fleet of 12 new diesel-powered submarines capable of operating in Arctic waters. The government’s second choice is South Korean defense firm Hanwha Ocean. Either way, the selection shows how Canada’s government is seeking to cut its reliance on US suppliers as relations between Washington and Ottawa continue to fray over a number of military, political, and economic disagreements.

Germany: The government of Chancellor Merz yesterday released new budget projections showing it plans to boost borrowing by 838 billion EUR ($958 billion) by 2030, largely to pay for big defense budget increases. The projections illustrate the extent to which even center-right parties in Germany now embrace the idea of borrowing to achieve high-priority public goals, after decades of insisting on fiscal austerity.

• As we’ve argued in the past, the boost in defense spending will likely help spur faster economic growth in Germany in the coming years.
• Coupled with rising orders from foreign governments, higher demand from the German government will likely provide an ongoing boost to the financial performance of Germany’s top defense firms.

France: An appeals court today confirmed the embezzlement conviction of Marine Le Pen, leader of the far-right National Rally party. However, the court also said she would not be banned from running in next year’s presidential election. Opinion polls currently show Le Pen would beat any expected first-round challenger, but she did not immediately say whether she will run. Later today, she is expected to make a statement clarifying whether she will run herself or allow 30-year-old party leader Jordan Bardella to compete in her place.

• If National Rally beats the established centrist parties in the election next year, the result would likely be a sea change in French foreign and domestic policy, including much less support for the European Union and the North Atlantic Treaty Organization.
• The associated political upheaval alone could unsettle European stock markets. If a National Rally-led government also adopted more populist economic policies, investors could also become concerned about a worsening fiscal deficit and higher debt.

South Korea: Memory chip giant SK Hynix late yesterday said American Depositary Receipts (ADR) representing its stock will begin trading in the US on Friday, making it significantly easier for US investors to invest in the surging equity. However, given that the underlying stock’s value has already jumped some 765% over the last year on higher memory-chip prices tied to the artificial intelligence boom, its high valuation likely presents the risk of a correction in the ADR price at some point.

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