by Patrick Fearon-Hernandez, CFA, and Thomas Wash

[Posted: 9:30 AM ET] | PDF

Our Comment opens by highlighting growing optimism that there is now a plausible pathway toward de‑escalation in the Middle East conflict. We then examine why expectations are building that the Federal Reserve may be preparing for a more hawkish policy stance. In addition, we discuss the Pentagon’s potential setback in its lawsuit with Anthropic and the emergence of Arm as a serious new rival in the chipmaking space. As always, we include a summary of recent US and international economic data releases.

 Easing Tensions? The market gained cautious optimism following signs that the White House is engaging in direct talks with the Iranian leadership. On Tuesday, President Trump suggested that negotiations were progressing, claiming Tehran had offered a “present” as a sign of good faith. While these claims were quickly undermined by additional US troop deployments and Tehran’s refusal to acknowledge talks, the market continues to hold out hope that cooler heads will prevail as it awaits an end to the conflict.

• The easing of tensions appears to be part of a White House effort to build momentum after Monday’s announcement of a five-day pause before deciding whether to strike Iran’s power infrastructure. It has been reported that the US has presented a 15-point peace plan, several elements of which Iran had previously signaled it could accept. Although it is still unclear who will attend any meetings, US officials are working to start talks with Iranian representatives on Thursday.
• While the White House has pushed for diplomacy, Iran has publicly rejected claims that it is willing to end the conflict. The failure to acknowledge talks comes as Iranian officials express distrust that the US, or even their own leadership, might use peace negotiations as a means to compromise their position or security. As a result, Iranian officials have stated they are not prepared to engage in negotiations as long as attacks continue and have warned that the Strait of Hormuz will remain closed.
• Despite Iranian resistance, there is growing international pressure to bring both sides to the negotiating table. China’s foreign minister, Wang Yi, has urged Iran to consider talks with the US, insisting the crisis should be resolved through diplomacy rather than force. At the same time, a group of Middle Eastern states, including Pakistan, Egypt, and Turkey, has moved to establish a backchannel between Washington and Tehran to facilitate potential negotiations.
• Even so, Iran has offered a limited concession, indicating it will allow non‑hostile vessels to transit the strait, amid reports it is charging fees of up to $2 million per voyage. This levy signals Tehran’s effort to assert de facto control over the waterway, while also suggesting that commercial shipments may face fewer outright blockages. On Tuesday, reports indicated that a Thai-flagged vessel successfully passed through the contested waters.
• Hopes of easing tensions have fueled a rebound in risk assets, with gold and silver prices recouping some of their recent losses. In the short term, we expect a fragile recovery that could strengthen over time as confidence grows that the conflict will end. This could lead market attention to shift from concerns about escalation to an assessment of the broader impact of the conflict. Looking ahead, investors may begin to favor companies that show earnings resilience and operational efficiency.

Fed Expectations: The sudden rise in energy and commodity prices has led to concerns that the Federal Reserve may need to make a hawkish pivot later this year. Earlier this week, Chicago Fed President Austan Goolsbee was the first to publicly state that tightening could be on the table. Speaking with CNBC, he said he could be open to a rate hike depending on how the conflict plays out. Although he also noted that rate cuts remain a possibility, his remarks show that inflation concerns are rising within the FOMC.

• Goolsbee’s comments suggest that the Fed’s focus may be shifting away from its maximum employment mandate in favor of price stability. Following the recent Fed meeting on March 17–18, Powell acknowledged that several board members could also see a rate hike in the future, though it is not the base case for the majority. However, he indicated the Fed is prepared to take appropriate action if inflationary pressures begin to build due to the Iran conflict.
• That said, even as the tone has shifted, the FOMC has also signaled that it is prepared to adopt a wait‑and‑see stance before pivoting toward rate hikes. On Tuesday, Fed Governor Michael Barr indicated that rates may need to be held steady for some time as the conflict unfolds, while Governor Stephen Miran suggested that although higher oil prices could push up goods and energy costs, he remains optimistic that the Fed could still cut rates several times this year.

• Markets are already leaning more hawkish, even as Fed officials remain non‑committal about how the Iran war will ultimately shape policy. The latest one‑month SOFR futures for December indicate that investors now expect the Fed to keep rates on hold, with some probability assigned to a hike before year‑end, whereas before the conflict, they had been pricing in as many as two cuts.
• A potential hawkish shift by the Federal Reserve is likely to remain a central theme even after the conflict ends, as the economy braces for renewed inflationary pressures in the coming months. For now, we remain skeptical that the Fed will be willing to vote for another rate hike, given the significant political pressure from the White House. That said, we have grown less optimistic about the Fed’s ability to cut rates without clear signs that the labor market outlook has begun to deteriorate.

 Pentagon Anthropic: A judge signaled that she may not side with the US government in its dispute with Anthropic. The judge overseeing the case stated that the Pentagon was using the removal of its contract as punishment for Anthropic taking its dispute public over the use of AI. The comments suggest that the government’s ability to award or withdraw contracts at will is likely to be taken up by the Supreme Court. The ongoing fight is expected to have implications for future public-private partnerships as the government gets more involved in the economy.

Chip Rivals: More companies are looking for ways to bypass major chipmakers by designing their own semiconductors. Arm appears to be making headway in this shift after announcing that it has developed its own chips, potentially allowing it to compete more directly with larger manufacturers. The company expects orders to rise following reported commitments from Meta and OpenAI. The emergence of new chip rivals is likely to accelerate as AI becomes a more prominent force in the global economy.

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by Patrick Fearon-Hernandez, CFA, and Thomas Wash

[Posted: 9:30 AM ET] | PDF

Our Comment today opens with an update on the Iran war and its economic and financial market implications. We next review several other international and US developments that could affect the financial markets today, including a new free-trade agreement between the European Union and Australia and a potential deal in Congress to resolve funding for the Transportation Security Administration to quell airport security lines.

United States-Israel-Iran: Saudi Arabia, Kuwait, and Bahrain all indicated they have been hit by new Iranian drone and missile strikes this morning, but it isn’t clear whether the attacks caused new damage to their globally important energy infrastructure, commodity production, or shipping facilities. The strikes came despite President Trump’s vow yesterday that the US would postpone new attacks on Iranian power plants because of “productive” talks with the Iranians. New details suggest those talks are actually being led by Middle Eastern officials.

• According to reports, the foreign ministers of Turkey, Egypt, Saudi Arabia, and Pakistan are trying to drive talks with the Iranians forward, but they’ve struggled to locate a high Iranian official to engage with. They and the US now appear to think the speaker of Iran’s parliament, Mohammad-Bagher Ghalibaf, would be a viable interlocutor, but Ghalibaf has said Iran isn’t ready to talk. In any case, reports say Ghalibaf also fears that if he comes out of hiding for talks, he would be assassinated by the US or Israel.
• With Middle Eastern producers such as Aluminum Bahrain and Qatalum cutting output amid energy and shipping disruptions related to the war, new reports say global automakers are starting to engage in “panic buying” on fears that aluminum supplies could run out within months. Naturally, the result will likely be continued upward pressure on prices on top of the price pressures already hitting crude oil, natural gas, and fertilizers.
• Meanwhile, several major purchasing managers’ indexes from around the world today are pointing to a broad risk of “stagflation” because of the war (see tables in the data section below), with overall growth weakening and the subindexes on prices surging.

European Union-Australia: European Commission President von der Leyen and Australian Prime Minister Albanese yesterday signed a free trade agreement designed to shield their economies from the increasingly nationalist and protectionist policies of the US and China. The deal will drop bilateral tariffs and onerous regulations on a wide range of exports. The EU and Australia also signed several security deals, including one with a provision allowing Australian firms to participate in the EU’s big new rearmament program.

Italy: In a referendum yesterday, right-wing Prime Minister Meloni lost her bid to achieve several judicial reforms that critics said would have undermined the rule of law. With almost all ballots counted, the constitutional amendments were rejected by 53.7% of voters. Turnout was also unexpectedly high, with nearly 59.0% of registered voters taking part in the election. The results will likely weaken Meloni’s political power to some extent, although she is in no danger of being ousted.

US Labor Market: A new survey of corporate chief financial officers indicates that artificial intelligence had essentially no effect on employment in 2025 and will spur companies to trim only a small number of their overall jobs in 2026. In future years, however, the surveyed CFOs believe AI could prompt more significant job cuts for people in routine, clerical, and administrative roles such as bookkeeping and customer service, while workers with sophisticated technical skills, such as engineers and architects would more likely see their jobs enhanced.

US Air Travel Industry: As the Transportation Security Administration continues to shed workers and airport security lines continue to lengthen, angering travelers, Senate Minority Leader Chuck Shumer last night said Democratic and Republican leaders in the chamber are approaching a deal that would fund most parts of the Department of Homeland Security, including the TSA, but would still not provide funds for the Enforcement and Removal Operations branch of Immigration and Customs Enforcement.

• If consummated, the evolving deal would help end an increasingly disruptive situation for the US airline industry and avoid an additional political threat for the Republicans ahead of the Congressional midterm elections in November.
• Funds for that portion of ICE would still be held up over Democratic-Republican disputes over the conduct of immigration enforcement raids.

US Private Credit Industry: Apollo Global Management has become the latest major investment firm to limit withdrawals from one of its private-credit funds. According to Apollo, investors in its Apollo Debt Solutions BDC had requested to withdraw 11.2% of the $15-billion fund, triggering a rule limiting the withdrawals to 5.0%. As with similar incidents at other firms, this one shows how investors have suddenly soured on private-credit investments but have discovered just how illiquid they can be, triggering even more redemption requests.

US Prediction Markets: In response to the introduction of a bill in Congress to outlaw contracts on sports in prediction markets, as we reported yesterday, sources say Kalshi plans to block athletes, coaches, and officials from betting on their sports and to block political candidates from trading on their campaigns. The move shows that the prediction-market industry has finally seen that insider trading could throw it into reverse and is now moving more aggressively to address the issue.

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by Patrick Fearon-Hernandez, CFA, and Thomas Wash

[Posted: 9:30 AM ET] | PDF

Our Comment today opens with an update on the Iran war and the US’s apparent retreat from its threat to target Iranian energy infrastructure. We next review several other international and US developments with the potential to affect the financial markets today, including evidence that the Iran war is prompting a rethink about the value that green energy could have in a world of disrupted fossil fuel supplies and new administration efforts to end the long security lines at US airports.

Iran War: In a dramatic statement this morning, President Trump said the US will postpone further military attacks on Iranian power plants and energy infrastructure for five days because Iran had entered “productive” talks with Washington. The announcement marks a major pivot after the president on Saturday night gave Iran a 48-hour deadline to provide ships free passage through the Strait of Hormuz, after which the US would bomb Iran’s power plants. In response, global energy prices are plunging so far this morning, while equity prices are surging.

• In response to Trump’s threat over the weekend, the Iranian government had warned that it would respond to an attack on its energy facilities by targeting “all energy, information technology, and desalination infrastructure belonging to the US and the Israeli regime in the region.” That had sparked a surge in energy prices and threatened major stock losses, suggesting the president backed down in response to market reactions. Iranian officials today denied that Washington and Tehran are in talks to end the conflict.
• Trump’s ultimatum and the Iranian response encapsulate the maximum risks arising from the war. Iran’s effective closure of the strait was long seen as almost unthinkable; it has now happened. The threats on both sides to target basic civilian services such as energy and water signal an even worse step — what would essentially be unrestrained, all-out war. Since the start of the war, the Iranian government has likely felt it is facing an existential risk. Now, that’s even more likely and could prompt them to respond in kind.
• The weekend also brought unsettling evidence of the broad military capabilities Iran could still bring to bear against the US, Israel, and their allies. Reports indicate Iranian missile and drone attacks in the region are actually increasing again, suggesting the US and Israel haven’t been able to degrade the Iranian military as much as they say. Iran also launched missiles against US forces in Diego Garcia, thousands of miles into the southern Indian Ocean, showing that Iran could now hit targets as far away as London and Paris.
• Indeed, in some respects, the war has already strengthened Iran, despite all the damage its military has taken. For example, it is increasingly negotiating with individual countries, including Japan, to allow their ships to pass through the strait unmolested. That essentially positions Iran as master of the strait, with an unprecedented ability to punish or reward firms and nations around the globe.
• Military analysts and commentators also increasingly worry that the Iranians will be prompted to act more viciously because of unclear messaging from the US. For example, President Trump’s threat to attack Iran’s energy plants came less than a day after he said he was thinking of “winding down” the war. Shifting, inconsistent messaging from the US could make it even harder to reach an eventual ceasefire.

China: According to the Financial Times, the share prices of China’s top manufacturers of batteries and energy storage equipment have surged since the start of the Iran war, adding at least $70 billion to the combined market capitalization of firms such as CATL, BYD, and Sungrow. The jump in the companies’ values reflects expectations that no matter how the war wraps up, the disruptions to energy and other commodity shipments from the region so far will likely prompt renewed interest in green energy technology and the need for energy storage.

China-Vietnam: The Vietnamese government on Saturday formally complained about China’s renewed efforts to expand and exploit islets in the disputed Paracel Islands in the South China Sea. China’s recent activities there have focused on an islet called Antelope Reef. It’s unclear why China has recently ramped up its dredging and reclamation activities in the area, and its activities to date suggest the reef could become China’s largest outpost in the area.

Cuba: The government announced on Sunday that the national power grid had again collapsed, creating the second nation-wide power outage in the last week. Power was reportedly restored to much of the country by late yesterday, but the fragility of the grid and growing popular anger at the government suggest the US could be tempted to pivot toward further economic pressure on Havana as it reaches the limits of its war against Iran.

France: In the second and final round of municipal elections yesterday, the far-right populist National Rally managed only mixed results, as it won the mayor’s office in the country’s fifth-largest city, Nice, but fared poorly in other large cities. Despite its surging popularity in recent years, the party continued to see its strength largely limited to smaller cities and rural areas in the south. That raises questions about how well the party will fare in the presidential elections that are due next year.

Italy: State-controlled Poste Italiane yesterday offered 10.8 billion EUR ($12.5 billion) in cash and stock for Telecom Italia, and the target firm’s CEO, Pietro Labriola, expressed his support for the deal because it would produce a telecom “national champion” for Italy. Against a backdrop of concerns about Europe’s economic competitiveness, the development suggests that some firms and national governments may adopt the strategy of building big, dominant companies that in theory could compete better in global markets.

US Airline Industry: Over the weekend, The New York Times scooped that Senator Markwayne Mullin, the Oklahoma Republican chosen by President Trump to be the next homeland security secretary, has been negotiating for weeks with centrist Rep. Josh Gottheimer (D-NJ) on terms to end the Homeland Security shutdown.

• Mullin and Gottheimer are reportedly negotiating on terms that would include requiring federal immigration agents to obtain judicial warrants “for forced home entry, unless in hot pursuit,” and effectively barring civil immigration enforcement actions at sensitive locations, including hospitals, churches, schools, and polling places.
• It isn’t clear whether the talks could really produce an end to the standoff and allow Transportation Security Administration employees at airports to get paid again. However, increasingly long security lines at the airports are raising pressure on the administration and Congress to reach a deal.
• Separately, President Trump at the weekend said Immigration and Customs Enforcement agents would start helping out at airport security lines today to help reduce the long security lines at airports. Again, however, it isn’t clear exactly what the ICE agents will be doing or how much they could speed up the lines.

US Prediction Markets: Two senators today plan to introduce legislation that would prohibit entities regulated by the Commodity Futures Trading Commission, including prediction-market exchanges Kalshi and Polymarket, from listing contracts related to sporting events. The move reflects growing concern about sports-betting scandals, impacts on young people, and states’ rights issues. At this point, it’s unclear how likely the bill could be passed into law.

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by Patrick Fearon-Hernandez, CFA, and Thomas Wash

[Posted: 9:30 AM ET] | PDF

Our Comment opens with our views on the latest central bank rate decisions and their implications for the dollar. We then examine why the US and Israel may be seeking a way to transition the conflict into its next phase. In addition, we discuss why Washington has ruled out an export ban and highlight fresh signs of distrust between the US and its allies. As always, we also include a summary of recent US and international economic data releases.

A Global Pause: In the same week that the Federal Reserve signaled that it would not rush to judge the war’s impact on the US economy, several other major central banks followed suit. On Thursday, the Bank of Japan, the Bank of England, the European Central Bank, and the Bank of Canada all kept policy rates on hold. Their decisions reflect uncertainty about whether the conflict will have a short- or long-term effect on inflation and the economy, and these decisions are expected to shape market views of the dollar.

• The choice to remain on hold comes as central banks grapple with the severity of the war’s impact on the economy. ECB President Christine Lagarde stated that while she believes the EU can absorb economic shocks, she is no longer confident that the economy remains in a strong position. Additionally, Bank of Canada Governor Tiff Macklem noted that the Middle East conflict has increased downside risks to the global economic outlook.
• That said, there are signs that some central banks may pivot toward additional rate hikes if inflation shows signs of re‑accelerating. Bank of Japan Governor Kazuo Ueda has reiterated that the bank still expects to raise interest rates, judging inflation risks to be more pressing than growth concerns. At the same time, the Bank of England has adopted a more hawkish tone, signaling a renewed focus on inflation risks in its policy deliberations.
• A potential shift in monetary policy is also likely to influence foreign exchange markets. When investors expect foreign central banks to adopt a more hawkish stance than the Federal Reserve, their currencies tend to appreciate against the dollar, and the reverse is true when they are seen as more dovish. As a result, the dollar could weaken if other central banks are viewed as more assertive than the US in responding to inflation.
• Futures markets have so far priced in a hawkish pivot globally as investors react to rising inflation risks. Following the recent central bank meetings, futures now imply that the US has shifted from one rate cut to holding steady, while expectations for the BoE and ECB have moved from unchanged policy to as many as two hikes this year. By contrast, the implied probability of a rate hike by year-end for the Bank of Canada and the Bank of Japan has remained largely unchanged.
• In the near term, the dollar is likely to find support as investors raise cash and seek safety amid sharply higher oil and energy prices. However, this strength could fade once the conflict begins to stabilize, particularly if the Federal Reserve rules out the possibility of further rate hikes. In that scenario, a weaker dollar could re‑emerge over time, depending on how the situation in Iran evolves in the coming weeks.

US Reinforcements: Now entering its third week, the conflict with Iran appears to be shifting into a new phase. On Thursday, the Pentagon submitted a $200 billion supplemental funding request to the White House to continue ongoing military operations. At the same time, several US allies pledged formal support for Washington’s efforts to secure and reopen the Strait of Hormuz. The shift follows Israeli assessments that the campaign has effectively destroyed much of Iran’s uranium enrichment and ballistic missile infrastructure.

• The proposed surge in defense spending is expected to receive a cool reception on Capitol Hill. Defense Secretary Pete Hegseth said the funds would be used to replenish critical weapons and ammunition expended in the campaign, likely pushing stocks above prewar levels. House leaders have signaled that they are prepared to take up the legislation, but its passage is far from assured, given the GOP’s slim majority and Democrats’ outright opposition.
• Internationally, NATO partners appear eager to ease tensions with Washington by committing to help secure the Strait of Hormuz. On Thursday, seven allies — the UK, Japan, France, Germany, Italy, the Netherlands, and Canada — joined a pledge to take appropriate measures to ensure safe passage through the waterway. Although the statement did not explicitly commit naval forces, it signals a growing willingness among these countries to coordinate military efforts to protect vital sea lanes.
• The escalating costs of the war may be pushing the US and Israel toward a point where declaring victory becomes an appealing option. However, whether this happens within days remains unclear, as it would likely require a settlement that leaves the current Iranian regime in place — a prospect that seems improbable given the ongoing attacks. Furthermore, even if a declaration is made, there is no guarantee the conflict will not reignite, particularly given the network of Iranian proxy groups across the Middle East.
• While a de-escalation should reduce geopolitical uncertainty and offer some relief for equities, attention will quickly shift to logistics. Reopening trade routes, restoring production, and preventing a spike in interest rates driven by higher inflation expectations and heavier debt issuance are likely to become key priorities. In this environment, firms that are less energy-intensive and carry relatively low debt burdens should be better positioned to benefit from the transition.

No Export Bans: The White House has so far ruled out imposing a ban on crude oil and natural gas exports to keep domestic energy prices in check. The decision comes as the Trump administration explores ways to cushion households from the economic fallout of the conflict. While an export ban could lower prices at home, it would likely drive them higher globally. The refusal to take that step may increase pressure on Washington to pursue diplomatic off-ramps to the war instead.

NATO Tensions: Denmark was preparing for the possibility of a US invasion earlier this year. The government sent soldiers with explosives to Greenland to destroy a runway near the capital, as well as a former fighter base, if necessary. They were also supplied with blood reserves in case they were forced to confront US forces. This approach was backed by France and Germany, underscoring growing distrust of the US among key allies. We believe this could signal that Europe intends to become less dependent on the US for its security.

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by Patrick Fearon-Hernandez, CFA, and Thomas Wash

[Posted: 9:30 AM ET] | PDF

Our Comment begins with our take on the latest Federal Reserve announcement, followed by an update on the conflict in the Middle East. We then turn to key market developments, including the US softening its assessment of China’s ambitions toward Taiwan, the Bank of Japan’s decision to hold rates steady, and an Apple supplier’s move to diversify its rare earth supply chain. As always, we also include a summary of recent US and international economic data releases.

Fed Stands Pat: The Federal Reserve kept rate cuts on the table after its two‑day meeting, while signaling that officials are still digesting the implications of the ongoing conflict. On Wednesday, the Fed voted 11–1 to leave the policy rate unchanged at a target range of 3.50% to 3.75%, with Governor Stephen Miran dissenting in favor of an immediate cut. While the rate announcement appeared to have a dovish tilt, the forward guidance from the press conference and the Summary of Economic Projections made clear that policymakers have not yet settled on a firm policy path.

• During the press conference, Fed Chair Jerome Powell emphasized that while the committee expects higher energy prices to put upward pressure on both headline and core inflation, it does not yet have a clear sense of how large or persistent that impact will be. He also noted that tariff‑related goods inflation remains a key driver of current price pressures and said policymakers are watching for signs that those effects begin to fade over the coming months, even as the war adds a new layer of uncertainty to the outlook.
• Powell further cautioned against the over‑interpreting of the Summary of Economic Projections, stressing that the evolving conflict and associated oil shock could significantly alter the outlook in the near term. That uncertainty is reflected in the new SEP, where Fed officials marked up their 2026 forecasts for growth and inflation while leaving their unemployment estimate broadly unchanged and still signaling just one rate cut this year.
• While the inclusion of a rate cut in the Fed’s projections may look dovish at first glance, Powell made clear it is far from guaranteed. He stressed that the committee will not begin easing until it has “greater confidence” that inflation is moving sustainably toward the 2% target. That caveat weighed on market sentiment, reinforcing speculation that, with the Middle East conflict likely to push prices higher in the near term, inflation could drift further from target and make even a single 2026 cut harder to deliver.
• Moreover, given that this is likely to be Chair Powell’s final Summary of Economic Projections, we see it as carrying limited weight for the future policy path. While a sharp policy shift could become necessary if the growth or inflation outlook changes materially, we expect Powell and the Committee to refrain from major adjustments at that meeting, preferring instead to hand over a clean slate to his successor. In our view, this reduces the likelihood of the Fed moving rates, in either direction, before the summer.

A Push for Calm: Attacks on energy facilities around the Red Sea and the Persian Gulf have prompted President Trump to call for calm. On Wednesday, both Israel and Iran struck critical energy infrastructure in the region, with key natural gas and oil installations in Iran, Qatar, and Saudi Arabia reportedly affected. The resulting supply disruptions pushed Brent crude above $115 a barrel, with prices at risk of testing $120 if the conflict continues to escalate.

• The rise in energy prices comes as the war continues to intensify. President Trump has used the latest attacks to urge both sides to stop striking energy infrastructure, while tying that restraint to a new threat of US retaliation. He has pledged that Israel will carry out no further attacks on Iran’s South Pars gas field unless Tehran hits Qatar again, and he warned that in that case the United States would “massively blow up” the field itself.
• The call for calm comes amid growing signs that the war could trigger a broader global energy crunch. European countries have already seen a sharp rise in energy costs, with benchmark gas prices jumping since Iran’s attacks on natural gas facilities in Qatar. At the same time, several Asian governments are exploring ways to conserve fuel to avoid straining supplies, and there is mounting concern that some African nations could face outright shortages if disruptions persist.
• The longer facilities remain damaged or shut in, the more protracted the process of restoring normal production will be. Because many petroleum extraction and storage sites are not designed for extended periods of inactivity, prolonged downtime can complicate maintenance, accelerate equipment degradation, and ultimately make it more difficult and costly to bring capacity fully back online once the conflict subsides.
• The timing of any resolution to the conflict remains highly uncertain, but its economic aftershocks are likely to persist for weeks, and in some cases months. In our view, this raises the risk of an uptick in inflation as supply disruptions and precautionary buying push energy prices higher. Against this backdrop, we expect energy companies to fare relatively well, as tighter supply and elevated prices are likely to support margins for producers.

US Reduces Alarm: The US intelligence community’s latest Annual Threat Assessment marks a notable shift in its outlook on Taiwan, stating that Beijing does not currently plan to execute an invasion by 2027. While Beijing remains committed to reunification, the report suggests that China has no fixed timeline for this objective and maintains a strong preference for a peaceful resolution over military conflict. This more tempered outlook also reflects a softening of tensions between the US and China as both sides explore the possibility of another trade agreement.

Bank of Japan: The Bank of Japan left its benchmark interest rate unchanged at 0.75%, citing heightened uncertainty stemming from the conflict in the Middle East. In his press conference, Governor Kazuo Ueda indicated that policymakers are trying to look through the short‑term effects of the turmoil and keep the option of an April rate hike on the table. The decision, coming shortly after the Federal Reserve also chose to hold rates steady, underlines that major central banks are inclined to be patient and data‑dependent as the conflict unfolds.

US Decoupling: Apple supplier Murata Manufacturing plans to reduce its reliance on Chinese rare earth elements over the next three years. This shift comes as nations increasingly seek to insulate their supply chains from geopolitical volatility, particularly after China utilized its rare earth dominance as leverage in trade negotiations. Diversification is expected to become a defining global trend as industries strive to mitigate vulnerability to future supply shocks.

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by Patrick Fearon-Hernandez, CFA, and Thomas Wash

[Posted: 9:30 AM ET] | PDF

Our Comment opens with our views on the upcoming Fed announcement following its two-day meeting. We then provide an update on the conflict in the Middle East. Next, we highlight key market developments, including a US company’s acquisition of a mining firm in Africa, Beijing’s greenlight for Nvidia to sell more chips into China, and the drag on the Chinese economy from higher aluminum prices. As always, we include a summary of recent US and international economic data releases.

Fed Thoughts: The FOMC will issue its statement and hold a press conference after its two-day meeting, setting out its latest views on inflation and the economic outlook in the wake of the recent Middle East conflict. In the run-up to the decision, markets have pared back expectations for rate cuts this year, and some participants are even speculating that a hike could be back on the table. Fed funds futures now price in roughly one rate cut over the course of the year, and the outcome of this meeting is likely to be a key driver of Wednesday’s market action.

• In the run-up to the meeting, there were already signs that some Fed officials were growing more cautious about cutting rates. Minutes from the prior meeting suggested that the combination of prospective tariffs and a stronger-than-expected economy warranted at least a shift in the committee’s language, including clearer guidance on the conditions under which another rate hike could be considered if inflation failed to make progress toward the Fed’s 2% target.
• The escalating conflict in the Middle East is likely to push US officials toward a more hawkish stance. Just before the Fed entered its 10-day blackout period, several officials downplayed the possibility of further rate cuts. Both Boston Fed President Susan Collins and Minneapolis Fed President Neel Kashkari signaled their opposition to another cut this year. Meanwhile, New York Fed President John Williams acknowledged the risks but left the door open for a potential move.
• Although the market expects the Fed to moderate its rate-cut outlook, attention will remain fixed on any signals of a potential hike. The last major oil shock, in 2022, prompted the Fed to aggressively tighten policy to address supply and demand imbalances. This time, however, a less tight labor market and considerably lower inflation suggest the central bank may have more room for patience before considering a similar action.
• While we expect the Fed to keep rates on hold, a pivot in signaling from cuts to potential hikes could still provoke a sharp market reaction. Any indication of future tightening would likely amplify concerns that the economy may come under increasing strain from the combination of higher interest rates and elevated oil prices. In turn, this could spur a broad de‑risking shift, pushing investors toward a more defensive stance in their portfolio positioning.

US Fights On: The US-Israeli conflict with Iran has kept oil prices below $100 a barrel, though they remain elevated as the timeline for a resolution remains unclear. On Tuesday, President Trump stated that the US is prepared to act unilaterally to defend the Strait of Hormuz following pushback from NATO allies. Simultaneously, Iran has intensified its regional campaign, targeting natural gas facilities in the UAE. Despite these tensions, equity prices have remained resilient, as the market continues to have optimism that conditions will not worsen from here.

• The White House appears determined to press ahead with the conflict as it seeks to disarm Iran. In an Oval Office meeting, the president sharply criticized allies that refused his request for assistance in the strait, openly questioning their loyalty but vowing to continue the campaign. He has also ordered continued strikes on Iran’s key oil facilities on Kharg Island in an effort to pressure Tehran back to the negotiating table.
• Iran’s security establishment has suffered a major setback following the confirmed death of Ali Larijani, a key architect of the country’s military strategy. His loss removes one of Tehran’s more pragmatic power brokers, potentially tilting the balance of power in favor of hardliners. Yet despite the blow, Iran remains resolute in pursuing its campaign to disrupt maritime traffic through the Strait of Hormuz.
• While some investors fear oil prices could breach the psychologically significant $100 mark, broader market sentiment reflects confidence that such a move is unlikely in the near term. The White House has been actively working to stabilize energy supplies and prevent a sharp price surge. On Tuesday, it announced plans to ease sanctions on Venezuela to help ease supply constraints and authorized the reopening of an offshore oil pipeline in California.
• So far, markets have largely digested the conflict through a rotation rather than a broad-based selloff. The S&P 500 is only modestly lower year-to-date, even after a relatively weak start, while the S&P SmallCap 600 index and S&P MidCap 400 have surrendered most of their earlier gains. We expect large caps to continue to outperform if the conflict worsens, but we see room for that leadership to reverse should geopolitical tensions begin to ease.

US Mining Expansion: A US-based minerals company is set to acquire a mining operation in the Democratic Republic of the Congo. The deal reflects a broader shift in Washington’s Africa strategy, moving from humanitarian aid toward strategic investment partnerships. The DRC, the world’s largest producer of cobalt and the second-largest producer of copper, sought US security assistance in exchange for its mineral wealth. The move highlights that the US is building close relationships with countries through security rather than trade guarantees.  

China Approves Chips: Nvidia has received approval from Beijing to resume selling certain chips into China. This decision will allow the company to once again supply its H200 processors to Chinese firms, following a tense standoff between Washington and Beijing over chip and materials exports aimed at curbing each side’s AI ambitions. While the partial resumption of trade suggests a modest easing in tech‑related trade frictions between the two powers, it is unlikely to mark the end of their broader strategic dispute.

Aluminum Woes: A pickup in aluminum prices has begun to dampen demand in China, as many manufacturers grow reluctant to place new orders. The resulting drag on aluminum-intensive activity is likely to weigh on the economy at a time when it is already contending with higher oil prices and tighter trade tariffs. Taken together, these pressures suggest that the conflict in Iran is likely to further restrain China’s growth outlook.

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