by Patrick Fearon-Hernandez, CFA, and Thomas Wash

[Posted: 9:30 AM ET] | PDF

Our Comment opens with an analysis of the recent push by the US and Iran toward an interim deal over the Strait of Hormuz. We then examine the results of Tuesday’s primaries and what they could mean for the upcoming midterms. Next, we briefly cover growing concerns over AI safety, China’s crackdown on tax avoidance, and Italy’s push to slow its military buildup. As always, we conclude with a round-up of recent domestic and international economic data.

Deal Possible: Optimism is mounting that the United States and Iran are moving closer to an interim agreement designed to de-escalate tensions and restore commercial traffic through the Strait of Hormuz. On Tuesday, Treasury Secretary Scott Bessent confirmed that negotiations are underway on a potential arrangement to reopen the waterway to shipping, though he cautioned that a final deal has not yet been reached. The improving outlook has buoyed risk assets, as fears of a broader regional conflict continue to recede.

• Progress appears to be centered on parallel diplomatic tracks. Iran has been negotiating with Oman on a framework for safe maritime passage, while the United States has engaged Qatar on potential arrangements to support a broader interim deal. Although Iran continues to publicly assert its ability to manage maritime trade through the strait, there are indications that its position has softened in private discussions as the agreement takes shape.
• While few details have been officially disclosed, there are emerging signs of de-escalation. Iran is reportedly considering allowing the EU to clear mines within the strait, a move that would restore confidence among shipping operators and insurers after five months of hostilities between the two sides. However, any agreement would hinge on securing reliable assurances that the Islamic Revolutionary Guard Corps will not target commercial vessels.
• While no final agreement has been reached, both sides appear to signal their willingness to continue fighting if necessary. That said, the recent talks do seem more constructive, particularly regarding the reopening of the strait as a preliminary step while the two sides negotiate a broader accord on Iran’s nuclear ambitions. As a result, this is likely to bring a significant easing of tensions, though it probably will not mark a definitive end to the underlying conflict.

Midterms: The recent primary elections brought less-than-stellar results for progressives. Abdul El-Sayed managed to secure the Democratic nomination for the Senate, narrowly defeating his opponent. However, the unexpectedly tight race could reinforce concerns within the party about its ability to flip the Senate in November. This narrow victory highlights growing internal divisions within the Democratic Party regarding its policy direction as it seeks to rebuild support following its defeat in the 2024 general election.

• The election results show that the progressive wing of the Democratic Party still faces challenges with mainstream appeal, despite recent victories elsewhere. In Missouri, incumbent Wesley Bell, a traditional Democrat, easily staved off progressive challenger Cori Bush in a rematch of their 2024 primary. While this was the progressive wing’s only major loss of the night, it reinforces unease within the party about how a leftward shift might impact performance in the general election.
• Heading into the midterms, Republicans appear well-positioned to retain control of the Senate, while Democrats remain favored to flip the House. According to RealClearPolitics, eight Senate seats are currently considered tossups, with Democrats needing to win six to secure a majority. Although polling prior to the Michigan primary showed Democrats holding an advantage, current polls indicate that Republican challenger Mike Rogers has an edge over El-Sayed in the general election.
• Overall, a divided Congress may be the most favorable outcome for equity markets. Gridlock makes major legislative shifts less frequent, creating a more predictable regulatory environment that allows companies to plan long-term with greater confidence. Additionally, split control relieves pressure on either party to take performative stances. Instead, it creates room for compromise on complex issues, such as addressing the growing fiscal deficit.

Rogue AI? New reports from the UK have revealed that the latest tools from Anthropic and OpenAI were used to hack into third-party software and send phishing emails to steal user credentials. The activities also included the potential insertion of malicious code into an open-source project. Although the breach was detected within an hour, the incident is likely to heighten concerns over the growing AI-related risks to critical infrastructure, particularly at a time when governments are still working to establish the necessary regulatory guardrails.

China Tax Crackdown: Beijing is cracking down on tax avoidance as it seeks to plug widening fiscal budget deficits. Authorities have stepped up efforts to curb capital flight and repatriate offshore wealth, with tax audits extending as far back as 2000. This campaign specifically targets ultra-wealthy individuals and gains made on foreign investments. Because Chinese capital has long been a major driver of global investment, this enforcement push could potentially ripple through international asset markets.

Italy Cool on Ukraine? The Five Star Movement’s resurgence could raise serious questions about Europe’s ability to achieve military self-sufficiency. The left-wing Five Star Movement has begun pushing back against providing further military aid to Ukraine for use in its conflict with Russia. This hesitancy stems from apprehension that aid has merely prolonged the stalemate rather than facilitating peace negotiations between the two sides. The party has also opposed raising Italy’s defense budget to meet NATO spending targets.

View PDF