by Patrick Fearon-Hernandez, CFA, and Thomas Wash

[Posted: 9:30 AM ET] | PDF

Our Comment today opens with an update on the conflict in Iran, where the US has provided new details on its economic war against the country and its new secondary sanctions against countries and other entities that engage economically with Iran. We next review several other international and US developments that could affect the financial markets today, including the latest on the evolving US-Canada trade war and important new pushback against the Treasury Department’s plan to artificially depress longer-term bond yields.

United States-Israel-Iran: Treasury Secretary Bessent yesterday announced details of the US “economic D-Day” program of new sanctions on Iran that are designed to force it to stop disrupting Middle East shipping. Dubbed “Operation Economic Outcast,” the program has reportedly already sanctioned more than 60 entities, individuals, and vessels that enable Iran to procure nuclear and missile technology, earn revenue from oil, or carry out cyber operations.

• Most important, Bessent warned that the US would sanction any country or entity that engages economically with Iran.
• Of course, Iran’s supporters, such as China, might have so much leverage over the US that Washington can’t actually sanction them. It therefore remains to be seen whether the new program meaningfully increases the pressure on Iran to meet US demands.

United States-China: In response to the new US secondary sanctions, Beijing today warned that “China will take all necessary measures to firmly safeguard its rights and interests” if the sanctions impose a significant burden on China or its major firms. The sanctions announced by Treasury Secretary Bessent yesterday included some small Chinese and Hong Kong companies, so it’s clear the administration is trying to make sure China isn’t entirely off the hook. However, we think the US may pull its punches to avoid upending its current effort at détente with China.

• If the US goes too far and imposes what China believes are unacceptable sanctions on its companies, the most obvious way that it would retaliate is to again throttle its exports of rare earth materials to the US or its allies. Such a move would threaten a range of US and allied manufacturers.
• Although the US and its allies are trying to rapidly develop their own sources of supply for rare earths, the effort hasn’t borne fruit yet. A new Chinese embargo of the materials or other critical goods could force the US to soften its new sanctions.

United States-Canada: In a social media post yesterday, President Trump said the US will impose a 50% tariff on Canadian autos, auto parts, and steel starting in January. The decision comes after Canada said it would impose big tariff increases against a range of US products to retaliate for new US import tariffs announced last week. The move adds to the risk of a bilateral trade war between the US and Canada. It also calls into question whether the US-Mexico-Canada trade agreement will be renewed.

• On a related note, President Trump this morning said his administration is seriously considering changing the name of Lake Ontario to Lake America because it doesn’t expect to be “doing much business with Ontario any longer.” The move echoes the president’s executive order last year that changed the name of the Gulf of Mexico to the Gulf of America.
• Like the unilateral renaming of the Gulf, any US effort to unilaterally change the name of Lake Ontario would almost certainly not be recognized by Canada or many other countries. Coupled with the US’s inability to defeat Iran and force it to reopen shipping in the Middle East, making such a move and not achieving international buy-in would likely add to growing perceptions that the US’s power as the global hegemon is waning.

Germany: Authorities have discovered another explosives-laden drone near the Leipzig airport, where a similar drone was discovered next to a Ukrainian cargo plane earlier this month. Both drones had traces of military-grade explosives but were defective and did not explode. The drones are widely suspected of being a warning from Russia or its proxies that the German government should stop supporting Ukraine in its effort to defend itself from Russia’s invasion. The incidents highlight the growing risk of Russian hybrid attacks in Europe.

United Kingdom-Ukraine: Under a deal that British Prime Minister Burnham struck with Ukrainian President Zelensky yesterday, the UK will gain access to a vast trove of Ukrainian battlefield data used to train AI models to identify and strike Russian targets, while the Ukrainians will get access to British defense technology. The vast Ukrainian dataset based on actual combat conditions could give British defense firms a leg up when developing autonomous weapons systems.

US Monetary Policy: In a Wall Street Journal op-ed today, hedge-fund veteran Stanley Druckenmiller strongly criticizes his longtime protégé, Treasury Secretary Scott Bessent, over his plans to intervene in the Treasury bond market to reduce interest rates. Druckenmiller complains that Bessent’s strategy of financial repression, including buybacks of longer-term Treasurys, is merely a distraction from the real need, which he says is to rein in the federal budget deficit and bring down government debt.

US Labor Market: The Department of Homeland Security yesterday said it plans to charge a $103,265 fee to foreign nationals applying for an H-1B high-skilled work visa. The fee would have to be paid upfront, before the government decides whether to approve the application. The new fee, which is designed to meet court objections that scuttled a similar fee proposal last year, would mostly affect technologically skilled workers from India. If it is successful in driving those workers out of the US, it would mostly affect the technology and finance sectors.

US Agriculture Industry: New research by the American Farm Bureau Federation shows that without government assistance, US farmers growing nine key crops will lose over $30 billion in 2026 and 2027. For example, the AFBF estimates corn producers will lose $131 per acre this year, rising to $167 next year. The negative economics reflect both constricted export markets and skyrocketing costs for fuel and fertilizer due to the wars in Iran and Ukraine.

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