by Patrick Fearon-Hernandez, CFA, and Thomas Wash

[Posted: 9:30 AM ET] | PDF

Our Comment today opens with an update on the on-again, off-again war in Iran (it now appears to be on again, driving up global energy prices today and weighing on stock values). We next review several other international and US developments that could affect the financial markets today, including a plunge in South Korean technology stocks that is weighing on the global tech sector and a few words on the implications of South Carolina Sen. Lindsay Graham’s death over the weekend.

United States-Israel-Iran: After former Supreme Leader Ali Khamenei’s weeklong funeral procession and Saturday’s burial ceremony, new Leader Mojtaba Khamenei warned that revenge for his father’s assassination “will most certainly be carried out.” According to other recent reports, Israel has also warned the US that it has intelligence that Iran is actively developing plans to assassinate President Trump. Separately, the US continued to launch renewed strikes against Iran over the weekend, and Iran responded with attacks against the US and its allies.

• Giving credence to the assassination threat, reports say that after last week’s NATO summit in Turkey, the president had to fly to the UK in the old Air Force One to ensure his safety. Consistent with longstanding security concerns about the new, luxurious Air Force One gifted to the president by Qatar, the new aircraft reportedly doesn’t have the same level of air-defense and other security equipment as the old one.
• The risk of the US president being assassinated by Iran is probably very small. All the same, if it happened, the event would likely cause a sharp downturn in global financial markets as investors braced for a sudden change in US policy and a high risk of a major US military strike to punish Tehran.
• In any case, the renewed fighting suggests that the celebrated June ceasefire has effectively collapsed, even though US and Iranian officials reportedly continue to talk. Importantly, Iran has threatened to shut down shipping through the Strait of Hormuz again, and its strikes against commercial vessels in the area over the weekend suggest it is serious. That means it remains too early to call the “all clear” for the global economy and markets.
• Indeed, the renewed fighting has pushed up global oil prices about 3.3% so far this morning, with near Brent futures trading at $78.55 per barrel. The jump in energy prices is also apparently contributing to a pullback in global technology shares.

China-Australia: New analysis by the Financial Times shows Australia has suddenly become a huge importer of large-scale batteries, mostly from China. According to the report, Australia accounted for almost 10% of new global battery capacity in March, with about 2,000 home batteries being installed every day this year. The report says the surge in battery installations is even starting to impact the nation’s peak electricity prices.

• Australia’s battery boom reflects multiple influences, including a subsidy implemented last year, extensive solar panel installations, unreliable coal-fired electricity generation, and connectivity issues between states.
• The surge of imports from China makes Australia even more dependent on economic ties with its huge neighbor to the north. It also reflects China’s huge excess industrial capacity and its ability, or even requirement, to unload its enormous output abroad.

South Korea: SK Hynix’s share price plummeted approximately 15% in Seoul today, helping drive the overall South Korea index down some 9%. The plunge came just one trading day after the company’s initial offering of American Depositary Receipts in the US on Friday. The ADRs traded up 13% on their first trading day, but premarket prices are down about 9% so far today.

• There is no apparent change in the firm’s fundamentals to account for today’s price drop. Rather, the pullback appears to reflect investors normalizing their positions now that the IPO is complete.
• For now, the artificial intelligence boom continues apace, buoying the value of just about anything related to AI data centers and other infrastructure, including processing and memory chips.

United States-Canada: In a sign of cooling bilateral trade tensions, President Trump over the weekend said he would allow the new Gordie Howe International Bridge linking Michigan and Ontario to open on July 27. Previous reports had suggested that Trump’s initial hold reflected a major political donation by the owner of the rival Ambassador Bridge at Detroit. However, according to the Canadian government, the president lifted his hold on the opening after the two sides agreed on changes in how toll revenue would be managed.

US Politics: Sen. Lindsay Graham of South Carolina died unexpectedly on Saturday, setting the stage for a quick Republican process to replace him on the November ballot. Republican Gov. McMaster can name a replacement for Graham, but he or she would only serve until January 3. Thus, the party is expected to hold a primary on August 11 and a potential run-off on August 25. It’s not yet clear who the frontrunner in the primary will be, but because South Carolina is so conservative, the winner would have the advantage over Democratic candidate Annie Andrews.

US Monetary Policy: Fed Chair Warsh will deliver his first Semiannual Monetary Report to Congress tomorrow morning at 10:00 am ET, giving investors a chance to potentially get more insight into his goals for interest rates, the Fed’s balance sheet, forward guidance, bank regulation, and other key issues. How he performs under the Congressional grilling could potentially prompt some market volatility today and tomorrow.

US Regulatory Policy: The Financial Times today carries a useful article showing that firms are increasingly concerned about populist policies in the US. The article highlights the president’s recent assertion that he has pressured Walmart to cut prices on thousands of goods, but other concerns include the government’s effort to push companies into investments, secure equity stakes, and extract payments in return for regulatory approval.

• While such efforts to intervene in the economy are especially notable for a Republican administration, given the party’s long embrace of private property and free markets, we reiterate our long-held view that both parties are increasingly influenced by populism. Republicans and Democrats both seem much more willing to intervene in the economy to advance working-class interests than they were in recent decades.
• Importantly, the threat of government intervention in corporate pricing, investment, and other decisions will likely weigh on stock values at some point. Indeed, government pressure to hold down highly visible consumer prices could be one reason why consumer staples stocks have been so out of favor recently.

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