by Patrick Fearon-Hernandez, CFA, and Thomas Wash

[Posted: 9:30 AM ET] | PDF

Our Comment opens with the latest developments in Iran. We then discuss the White House’s move to maintain the current trade regime even as some tariffs are set to expire on Friday. Next, we briefly cover the Treasury’s concerns about tax-strategy abuse, progress on crypto legislation, and the formation of a new political party in Turkey. As always, we conclude with a review of recent domestic and international economic data.

Iran Escalation: Tensions between the United States and Iran are intensifying as the renewed conflict enters its eleventh day. On Tuesday, President Trump threatened to target Iran’s nuclear facilities in the coming days, vowing further military action if Tehran does not de-escalate. The threat comes as Iran-aligned Houthis have announced they will block shipping in the Red Sea, raising the risk of a wider regional confrontation. Oil prices have continued to climb amid persistent concerns over supply disruptions, as attacks on key trade routes undermine global energy flows.

• The current pressure campaign appears to be part of a broader Trump administration strategy to force Tehran back to the negotiating table. In a recent interview, the president suggested that the US has precise intelligence on critical infrastructure in central Iran and threatened military action unless Iran agrees to engage in “meaningful” discussions. He also issued a warning to the Houthis, vowing to respond forcefully if they disrupt maritime shipping, though such disruptions have not materialized to date.
• That said, there are signs of a tentative appeasement effort. Behind the scenes, the United States has moved to strengthen ties with Lebanon, including the White House’s decision on Tuesday to lift a four-decade ban on flights to the country. This step coincided with a meeting between President Trump and Lebanon’s president and appears to be part of a wider effort to re-engage diplomatically, particularly as Lebanon has pressed Israel to withdraw its troops from the country’s southern region.
• The Middle East conflict has produced a mixed market response. Oil prices have continued to climb, with Brent crude pushing above $90 a barrel for the first time since May, adding to inflation concerns and putting upward pressure on Treasury yields, which have drifted back above 4.6%. Equities, meanwhile, have held up relatively well as investors return to chipmakers and buy the dip following recent weakness.
• While the war in Iran remains the primary geopolitical risk, markets seem more focused on the strength of AI-related momentum. Although the conflict may persist, we do not expect it to be the main driver of equity performance over the next several days unless talks lead to a major breakthrough or US involvement appears to deepen. In our view, the elevated uncertainty argues for limiting exposure to the riskier segments of the market.

Trade Wall: The White House is moving to reimpose tariffs before the current measures are set to expire on Friday. This week, the president announced a new round of tariffs, including reciprocal duties on Canadian goods over trade practices affecting products that were previously protected under the USMCA. He also said he would impose restrictive tariffs on generic pharmaceutical products, starting at 100% in 2028 before rising to 200% in 2029. The moves underscore his effort to build a new trading regime.

• The decision to raise tariffs follows the United States’ refusal to renew the July 1 trade agreement with Mexico and Canada. The president has said that Canada maintains discriminatory trade practices and has responded by imposing reciprocal tariffs intended to push Ottawa to change course in exchange for relief. The tariffs were increased to 50% on about 500 Canadian goods, representing roughly 2% of bilateral trade.
• Separately, the president’s push to raise tariffs on pharmaceutical companies reflects a broader effort to reshore strategically important sectors. The new tariffs will apply only to generic drugs and are set to take effect in two years. The measure targets companies that have been accused of undercutting domestic competitors, even though many of their products are made using US intellectual property. The change is intended to curb competition and protect domestic producers.
• The use of tariffs for both reciprocal and restrictive purposes stems from a shift away from a trade system that once prioritized free trade. The push to add tariffs to Canadian goods will likely face pushback from both sides of the aisle, as lawmakers seek to shield voters from a possible rise in the cost of living. Meanwhile, the pharmaceutical tariffs should give drugmakers time to adjust their supply chains and become more domestically oriented.
• While trade policy is important to households and firms, its impact on markets has been limited over the past two years. We think this illustrates the White House’s relatively accommodative approach to imposing tariffs in order to avoid disruptions, as well as the market’s broader focus on earnings, which has largely remained resilient despite rising trade uncertainty.

Tax Abuse: The US Treasury Department has raised concerns about popular tax-minimization strategies known as “tax alpha.” These practices include Section 351 conversions, box-spread ETFs, dividend-shifting between ETFs, and products designed to offset ordinary income. While the Treasury stopped short of announcing new restrictions, it confirmed plans to actively evaluate regulatory tools to address these strategies. The push by the Treasury to reduce the use of loopholes comes as the government looks to address the growing fiscal deficit.

Crypto Breakthrough: The Clarity Act is gaining momentum as both parties work to finalize the bill. The legislation would establish a framework for regulating the crypto industry. On Tuesday, the president agreed to ethics rule changes that had prevented Democrats from backing the bill previously. Although the measure is close to a vote that is expected to draw bipartisan support, debate continues over who will enforce the rules.

Turkish Opposition: A new opposition party is emerging as a potential threat to President Recep Tayyip Erdoğan’s hold on power. The party is being formed by Özgür Özel, who has faced legal pressure and investigations, and he plans to build a broad opposition coalition ahead of the next election. Reporting suggests the new party could quickly become a major political force, though there are concerns about a possible government crackdown. As a key NATO ally, any shift in Turkey’s leadership could also affect US foreign policy.

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