by Patrick Fearon-Hernandez, CFA, and Thomas Wash

[Posted: 9:30 AM ET] | PDF

Our Comment today opens with a new initiative to shut down Chinese influence operations in the US that could spoil the current effort by Washington and Beijing to reduce tensions and make their relationship more stable. We next review several other international and US developments that could affect the financial markets today, including new intelligence that suggests a renewal of US-Israeli attacks on Iran may be forthcoming and a brief overview of the Federal Reserve’s policy meeting this week.

United States-China: Despite the US and China embracing a new, détente-like policy of “Constructive Strategic Stability” (CSS) to ease tensions, the Pentagon on Friday said it has shut down dozens of Chinese cultural organizations on US college campuses. The targeted groups are seen as successors to Beijing’s infamous “Confucius Institutes,” which proliferated on campuses from the early 2000s to about 2022, ostensibly to promote the Chinese language and culture.

• In reality, the Confucius Institutes were believed to be intelligence-gathering operations and mouthpieces for the Chinese Communist Party. Even after the federal government forced most to close down by 2022, about 80 have been reborn under different names and charters.
• Even though President Trump and General Secretary Xi have embraced the CSS policy to steady relations, lower levels of the US and Chinese governments have continued to take steps aimed at weakening the other side. Actions such as the Pentagon’s could undermine the CSS policy and rekindle US-China tensions.

United States-Israel-Iran: According to a US intelligence memo leaked on Friday, Iran has “substantially increased” its efforts to target American diplomats and officials in the Middle East and beyond, with lethal plots reaching “advanced stages.” The memo is believed to be one reason why the US has been withdrawing nonessential diplomatic and security staff from the region. It also provides further evidence that the war against Iran could re-escalate after the US’s midterm congressional elections next week. If so, energy prices could surge again, hurting stock prices.

United States-Canada: The US administration on Friday said it will slash its 50% import tariffs on a range of Canadian goods linked to agriculture and forestry, including different types of machinery, packaging materials, and plastic crates. The move is reportedly a response to requests from Republican congressional candidates facing tough races in districts with close economic ties to Canada. The move could help cut costs of those Canadian goods, although probably not enough to have a noticeable impact on consumer price inflation.

US Monetary Policy: The Fed begins its latest two-day policy meeting tomorrow, with its decision due on Wednesday at 2:00 PM ET. Based on current interest-rate futures prices, investors are nearly unanimous in expecting the policymakers to hold the benchmark fed funds interest rate steady at a range of 3.75% to 4.00%. However, we do think that because price inflation remains uncomfortably high, they will probably hike rates one or two more times in the coming months, with the next move likely coming in December.

France: After another weekend in which hundreds of thousands of protesters marched against poor public services and rising prices, right-wing populist leader Marine Le Pen today launched her campaign for the 2027 presidential election with a surprisingly positive message that the country can tackle its current challenges and regain its past glory. Even though the protests this weekend were devoid of the mass rioting seen the week before, the contrast between the popular unrest and Le Pen’s positive message could further boost her prospects in the election.

Brazil: In an election yesterday, left-wing President Luiz Inácio Lula da Silva won a fourth term in office with 51.8% of the vote, handing a surprising defeat to conservative Flávio Bolsonaro, who garnered 48.2%. Last-minute controversies did arise when court officials extended voting in some places, but it doesn’t appear that will be enough to overturn the election. The result suggests Lula’s left-wing policies will remain in place and US-Brazil trade tensions will continue, so Brazilian stocks look set for a massive, historic sell-off today.

Venezuela: In another complication for the US administration’s hope of building a bloc of like-minded, compliant governments throughout South America, the Venezuelan opposition leader María Corina Machado returned home yesterday after nearly a year of self-imposed exile. Tens of thousands of supporters have greeted her so far, suggesting she could undermine the left-wing government that the US has been working closely with to secure energy supplies.

Saudi Arabia-Singapore: Saudi Arabia and Singapore have struck a deal under which Singapore will store Saudi crude oil in rock caverns to better protect Saudi inventories and help secure Southeast Asian energy supplies from conflicts in the Middle East. The oil will be stored in the Jurong Rock Caverns, an underground facility on a man-made island off Singapore’s southern coast that can hold up to nine million barrels.

• The development illustrates how the war against Iran has prompted a range of new investments and other deals to better secure global energy supplies.
• Those investments, which include new pipelines, are likely to continue for some time to come, dramatically changing, diversifying, and strengthening the world’s energy infrastructure.

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