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 both the US and Iran have paused their attacks on each other, sparking a sharp fall in oil prices. We next review several other international and US developments that could affect the financial markets today, including a discussion of Japan’s vulnerability to extended oil supply disruptions and some notes on US monetary and fiscal policy.

United States-Israel-Iran: As the US unexpectedly paused its attacks on Iran over the weekend, sources in the administration said a key reason was concern about dwindling US stockpiles of air defense weapons. Reflecting investor hopes for a new, extended ceasefire, global oil prices have fallen about 6.1% so far this morning, with near Brent futures at $86.14 per barrel. Still, the Iran-backed Houthi rebels in Yemen have expanded their attacks beyond shipping in the Red Sea and have hit at least one oil refinery in Saudi Arabia, raising new risks to global refined product supplies.

• President Trump’s decision not to launch further attacks on Iran over the weekend came despite his assertions last week that he was prepared to greatly intensify US strikes. At the time, at least one administration official said the president was becoming frustrated with the war and had shifted into a vengeful mood. If true, the dwindling US weapon inventory may provide a useful brake on decision making.
• Still, the report about the president’s mood bears watching. Launching any war is risky, as leaders have known since at least the days of the ancient Greeks. Emotions such as frustration, desperation, or a desire for revenge can cloud a leader’s judgment of benefits and costs. Even in the Ukraine war, periodic reports that President Putin is frustrated have raised concerns that he might try a risky “Hail Mary” attack with unpredictable consequences.
• Indeed, any leader getting bogged down in a war could be tempted to escalate in dangerous ways, potentially miscalculating the other side’s response or unleashing a chain reaction that can’t be easily controlled. Of course, one critical risk would be the temptation to use the very strongest weapons in the US arsenal, violating the nuclear taboo and probably touching off a new, global nuclear arms race. A less dramatic but still highly dangerous move would be to destroy or seize Iran’s oil infrastructure on Kharg Island.
• In any case, even without those extreme outcomes, the conflict in Iran remains volatile despite the current standdown.

Russia-Ukraine War: President Zelensky said over the weekend that Ukraine has intelligence showing the Kremlin has asked North Korea to send 30,000 more troops and additional ballistic missile launchers to help Russia defend itself against Ukraine’s increasingly effective attacks. According to Zelensky, Russia is already preparing to accept the new troops and other aid in the frontier region around Voronezh. In return, Russia is reportedly giving North Korea cash, military technology, food, and energy.

• Although Zelensky would have a political incentive to exaggerate North Korea’s cooperation with Russia, his assertion would be consistent with Ukraine’s expanded drone strikes across Russia.
• Those strikes have brought significant fuel shortages, commercial disruptions, and casualties home to the Russian people for the first time. Faced with rising anger and worry among everyday Russian citizens, President Putin probably feels pressure to turn the tide of the war back in Russia’s favor.
• Reports indicate that a lack of manpower for air defense units is one key reason why Ukrainian drones have become so successful in reaching their targets in Russia. The additional North Korean troops could free up troops to staff more air defense batteries, while the new missile launchers could allow Russia to intensify its offense strikes. Still, it’s unclear how much the additional North Korean aid would help Russia.
• Over the longer term, the bigger significance of any new round of Russian-North Korean cooperation could be a strengthening of bilateral relations and further technological sophistication for North Korean weaponry — a move that would make the country an even more dangerous actor.

Japan: Prime Minister Takaichi issued a statement on Saturday that the country has procured enough oil to meet the country’s needs in July, and that the supplies needed for August are also on track to be procured. She said the government, therefore, doesn’t plan to tap its strategic reserves any further in the near term. As for naphtha-derived plastic products, Takaichi said there has been no change in the outlook that they will remain available until next spring.

• Takaichi’s statement was clearly aimed at calming concerns in Japan about further petroleum supply disruptions now that the Iran conflict has flared up again.
• However, we’re struck by her statement about naphtha-derived products being available until spring. Given that there’s no end in sight for the war, it doesn’t seem inconceivable that global petroleum supplies could still be subject to disruption into 2027. For a highly developed country like Japan, it’s striking that it may only have eight months or so of visibility into its naphtha supplies.
• This underscores a concern that we’ve discussed repeatedly as the world fractures into relatively separate geopolitical and economic blocs and the wars in Ukraine and Iran further sever key global supply chains. As countries and companies increasingly face this reality, we think they will continue to prioritize resilience and stockpile resources. In turn, stockpiling demand will likely be a long-term support to commodity prices.

China: Memory-chip maker CXMT had its initial public offering on the Shanghai stock market today, with its share price at closing up a whopping 466% from its offering price. The price surge left CXMT with a market capitalization of $484 billion, making it the most valuable stock trading on mainland Chinese markets. The strong performance underlines how the frenzy for stocks related to artificial intelligence and the infrastructure to support it has now extended to China, the US’s main rival for the technology.

India: An interesting new article in the South China Morning Post indicates that India is now churning out a new warship roughly every six weeks as it seeks to expand its navy from about 150 hulls currently to at least 200 hulls by 2035. The report shows the new vessels coming out of India’s shipyards are made with about 75% local content. The article is more evidence that the global surge in the defense industry continues apace and is increasingly expanding from Europe to Asia, likely creating new investment opportunities there.

Indonesia: Long-serving central bank chief Perry Warjiyo resigned today, further raising concerns about central bank independence and volatile economic policymaking. Warjiyo’s resignation follows a period in which he was hiking interest rates to battle a crushing depreciation of the rupiah (IDR). The weakness in the currency is likely tied to President Prabowo’s big increases in social spending, which have widened the budget deficit.

United States-European Union: President Trump on Friday threatened to hit the European Union with “substantial” new tariffs over its decision to fine Google about $1 billion for violating its Digital Markets Act. If the president follows through with the threat, it could unravel last year’s US-EU trade deal, which ended the administration’s trade war against the EU. Such a development could pose new economic headwinds for many European companies and even US firms that rely on inputs from the EU.

US Politics: As we flagged in a Comment last week, a Democratic convention in Maine on Saturday officially chose Troy Jackson as the party’s candidate in the state’s November election for US Senate. Jackson replaces the initial candidate, Graham Platner, who withdrew over a scandal. Jackson is a former state Senate president, a small-time lumberman, and a progressive Democrat who supports Medicare for all, abortion rights, and economic populism, but he began his political career as a Republican who embraced conservative social policies.

• Despite Jackson’s transformation into a progressive Democrat from a conservative Republican, it is unclear how widely he will be supported in the November election.
• Incumbent Republican Sen. Susan Collins is considered a formidable opponent with ample financial resources to protect her seat.

US Monetary Policy: The Fed tomorrow begins its latest policy meeting, with its decision due on Wednesday at 2:00 PM ET. Based on current interest-rate futures trading, the policymakers are expected to hold the benchmark short-term interest rate, the fed funds rate, unchanged at 3.50% to 3.75%. However, the trading suggests investors see a 1-in-3 chance that the policymakers could hike rates in response to persistently high price inflation and the new price pressures arising from the war in Iran. That highlights the risk of an unexpected rate hike that would unsettle markets.

US Fiscal Policy: Reports on Friday revealed that administration officials in little-noticed court filings admitted they canceled more than $7.5 billion in Biden-era federal grants for clean energy projects last October “based solely” on political criteria, targeting projects in states that were represented by Democrats or had voted for Democrat Kamala Harris in the 2024 election.

• Many politicians are likely to use their power to reward allies and punish opponents, but the new reports show how the president’s extraordinarily strong political position and aggressive approach to using power have affected US fiscal policy.
• We discuss this phenomenon further in our latest Bi-Weekly Geopolitical Report, which will be published later today. We note in that report that strong, populist leaders in the US and some other developed countries are starting to push their political systems to new forms that look quite different from the traditional systems of the past.

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