by Patrick Fearon-Hernandez, CFA, and Thomas Wash

[Posted: 9:30 AM ET] | PDF

Our Comment today opens with a short update on the conflict in Iran. We next review several other international and US developments that could affect the financial markets today, including growing economic disruptions in Germany due to Europe’s recent heatwaves and drought and another big artificial intelligence funding deal that will likely further raise concerns about circular financial deals in the sector.

United States-Israel-Iran: Global oil prices jumped more than 3% earlier today on the news of fresh Iranian demands on the US and new attacks on shipping in the Strait of Hormuz, which we described in our Comment yesterday. However, prices have since retreated and are now up only slightly, with near Brent futures prices essentially flat at $87.75 per barrel.

Germany: In an emergency move to soften the trade disruption caused by historically low water levels on the Rhine River, several German states have suspended their bans on Sunday trucking. Meanwhile, shipping rates have surged. As parts of Europe face their fifth heat wave of the year in the coming days, some officials fear the Rhine will get so low that it will be unnavigable along its entire length, shutting in much of Germany’s industrial economy.

Chile: The Chilean government yesterday said it will allow state-owned copper giant Codelco to retain 100% of its profits this year, up from about 30% in recent years. The move aims to help Codelco handle its enormous debt burden, which has grown along with the firm’s massive capital investments to keep up production levels. The firm’s investment program is seen as vital to solving a massive projected shortfall in global copper production by 2040, even as electrification and data centers boost the demand for electricity.

Japan: In foreign exchange markets yesterday, the yen depreciated about 1% to more than 159 JPY per dollar, reversing about half its appreciation after the joint US-Japan intervention on July 31. The currency is trading roughly flat so far this morning, but the renewed depreciation is raising concern that it will continue to lose value until the Federal Reserve agrees to loosen its internal rules for currency operations, which may be necessary to increase the US’s intervention firepower.

Singapore: The city-state’s statistical agency said second-quarter gross domestic product was up a strong 5.9% from the same period one year earlier, almost matching the increase in the year to the first quarter. In response, the Ministry of Trade and Investment raised its full-year growth outlook to a range of 4.5% to 5.5%. The stronger-than-expected GDP growth reflects less disruption than expected in the global energy market because of the Iran war and stimulus from the global AI boom.

China: The People’s Bank of China last night appointed German financial giant Deutsche Bank to be its first European clearing house for renminbi as it seeks to increase international usage of the currency. Deutsche will be the first non-Chinese bank in Europe to be allowed to clear and settle renminbi transactions, along with the local branches of China’s major state-owned banks. That should give Deutsche an improved ability to facilitate trade, treasury, and investment activity between Europe and China, despite the growing threat of new bilateral trade barriers.

United States-China: An analysis posted yesterday said Chinese artificial-intelligence developers still prefer to train their large language models on processors from US chip giant Nvidia, despite Beijing’s pressure for them to use China’s own rapidly improving chips. According to the report, the main hurdle is that shifting to Chinese chips requires difficult engineering and software changes.

• As a result, the US government still likely has geopolitical leverage over China to the extent that it’s willing to keep or tighten its current restrictions on exporting Nvidia chips.
• Of course, that means Nvidia and other US tech firms are still at risk of sudden trade restrictions that could adversely affect their businesses.

US Artificial Intelligence Industry: AI processor giant Nvidia late yesterday confirmed it is partnering with investment firms Apollo, BlackRock, Blackstone, Brookfield, Goldman Sachs, and KKR to assemble more than $500 billion in loans at “attractive rates” for “the build-out of AI infrastructure over time.” The announcement is likely to rekindle concerns about circular financing deals in the AI space, which could lead to financial contagion if a major firm related to AI runs into problems. A key source of such problems could be a competitive threat from China.

US Energy Industry: Refiner Phillips 66 and two partners, including refiner HF Sinclair and pipeline operator Kinder Morgan, today said they have agreed to build a 900-mile pipeline to carry gasoline, jet fuel and diesel from the Texas Panhandle to Arizona and California. With a capacity of 230,000 barrels per day, the pipeline aims to help bring down California’s sky-high fuel prices, which in part reflect its loss of petroleum imports and refineries over the years.

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