by Patrick Fearon-Hernandez, CFA, and Thomas Wash

[Posted: 9:30 AM ET] | PDF

Our Comment opens with our thoughts on the recent attacks in Saudi Arabia. We then turn to cybersecurity, examining how AI can both uncover and create vulnerabilities. Next, we briefly cover expectations for the Bank of Japan’s upcoming rate decision, possible changes at Petrobras following Brazil’s elections, and a setback in peace talks between Russia and Ukraine. As always, we conclude with a review of recent domestic and international economic data.

Houthi Attacks: Saudi Arabia faces growing threats from Houthi forces as the conflict in the Middle East continues to broaden. On Wednesday, the US State Department ordered non-essential staff to leave Saudi Arabia following persistent strikes on the country. The escalation comes as the Iranian-backed group seeks to disrupt oil flows and preserve Iran’s leverage over the United States. Consequently, these ongoing attacks have disrupted global supply chains, forcing other regions to step in to offset the shortfall.

• The evacuation order occurred after two people were killed in drone strikes targeting regional oilfields. Over the past few weeks, the Houthis have escalated attacks against Saudi Arabia, targeting airports and critical infrastructure in a bid to disrupt oil production and capture key territory. On Monday, the United Kingdom deployed forces to help defend Saudi Arabia against further strikes, following the US’s reluctance to provide assistance.
• Renewed attacks in the region continue to put upward pressure on global energy prices. This week, WTI crude prices rose above $100 per barrel for the first time in over a month as hostilities escalated. Beyond recent strikes in Saudi Arabia, tension has intensified following Iran’s claims that it possesses missiles capable of striking US warships, a stark threat that comes even as both Washington and Tehran signal openness to renewed diplomatic talks.
• Conflict in the Middle East has triggered a surge in infrastructure investment across other regions, with North and South America emerging as primary targets. The US, Canada, and Brazil have seen their exports rise sharply following the conflict and are using the excess revenue to expand production capacity. The growing strategic importance of the Americas comes as other producers, including Venezuela, Suriname, and Guyana, also aim to attract fresh investment to build out their own energy infrastructure.
• Once the conflict between the US and Iran concludes, which is expected sometime after the midterm elections, oil prices could experience a longer-lasting downward trend than the market currently anticipates. Competition for market share will likely intensify as Middle Eastern producers lower prices to undercut competitors. The resulting decline in oil prices could provide a welcome economic boost to major net importers and clear a path for looser monetary policy.

Cyber Vulnerability: Critical flaws in a popular programming language have forced numerous websites offline. On Wednesday, reports surfaced that sites running on Hypertext Preprocessor (PHP) had been widely exploited, leaving administrators scrambling to secure their systems. The impact appears broad-based, with websites worldwide potentially exposed. With hacking on the rise in recent months due to increasingly sophisticated AI techniques, this incident raises fresh questions about the level of cybersecurity required to defend against modern threats.

• Amazon was the first to flag the threat using its AI tools. The cloud computing company discovered that hackers had attempted to exploit the vulnerabilities four days before they were made public. The exposure is believed to have affected more than 70% of websites, including many built on WordPress, Drupal, Joomla, and Magento, and is thought to have existed for at least a decade.
• The vulnerability was severe enough that operators of PHP-based websites were urged to update their systems immediately or take them offline. Several government and institutional websites across Europe were taken down as a precaution while the issue was resolved. Governments and developers also appear to be coordinating to identify vulnerable websites. The developers who maintain PHP have released a patch to close the security gap.
• This discovery of a security hole highlights the growing paradox of AI systems, as they can both help uncover vulnerabilities and cause breaches. The PHP vulnerability would likely have gone unnoticed far longer without the assistance of AI tools, and probably would have taken months to fix after its discovery. At the same time, these technologies possess the power to exploit those very same vulnerabilities or create new ones with ease, making them a significant threat, particularly in the hands of malicious actors.
• The role of AI in discovering vulnerabilities will likely improve public sentiment regarding its overall utility, especially as it becomes a greater part of our daily lives. AI-driven detection should help make the internet supply chain more resilient, particularly for firms that adopt these technologies. However, the risk that these same tools can be weaponized creates an even greater need for guardrails to prevent a broader crisis in the future.

Dovish BOJ: According to the Japanese publication Nikkei, the Bank of Japan is expected to hold interest rates steady at its meeting next week. BOJ officials are likely to signal that inflation remains consistent with their 2% target, even as headline inflation has risen to 1.9%. The overnight index swap market has priced in a 4% chance of a rate hike next week, but an 80% chance of a hike in December. The anticipated hold could weigh on the yen.

Petrobras Unleashed: According to an adviser to the front-runner in Brazil’s presidential race, the campaign has vowed to make changes at Petrobras. If elected, Flávio Bolsonaro, son of former President Jair Bolsonaro, is expected to grant the state-controlled oil company broad freedom to diversify its portfolio, which could include the sale of certain assets. The push to liberalize one of Brazil’s largest national assets has boosted regional equities, as the market welcomes prospective reforms designed to draw in greater foreign investment.

Russia Escalates: Moscow increased its missile strikes on Kyiv in a sign that it remains unwilling to agree to peace talks. The latest bombardment follows Russian President Vladimir Putin’s meeting with US special envoy Steve Witkoff regarding recent arrangements involving Ukraine. While Putin has stated a willingness to meet with Chinese and US leaders to discuss the situation, it remains unclear whether he would agree to any terms shaped or influenced by Kyiv. The increase in strikes suggests that the Kremlin may not be open to halting its attacks anytime soon.

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