by Patrick Fearon-Hernandez, CFA, and Thomas Wash

[Posted: 9:30 AM ET] | PDF

Our Comment today opens with an update on the war in Iran, including a new US threat to blockade ships traveling to and from Iranian ports and an Iranian warning that it would respond by attacking regional ports. We next review several other international and US developments that could affect the financial markets today, including new signs that the UK is working to at least partially reverse Brexit and new reports that the artificial intelligence boom is producing a shortage of computational power.

United States-Israel-Iran: The US-Iran peace talks in Pakistan at the weekend ended with no deal, mostly because the Iranians wouldn’t accept US demands to reopen the Strait of Hormuz to free and unfettered shipping or promise to give up their nuclear program. The Iranian side said lower-level technical officials would keep talking, but President Trump later said the US would up the ante by blockading passage through the strait to prevent Tehran from re-arming or selling its oil on world markets. Iran threatened to retaliate for the blockade by attacking regional ports.

• The failure of the talks will raise the odds that the US, Iran, or both could soon re-start their attacks, especially with a third US aircraft carrier and more ground troops set to arrive in theater within days. For the US, the focus would likely be an attempt to open the strait – an effort that could involve ground troops or other risky operations. In turn, that could mark a return to unbridled attacks and even more disruptions to the world’s energy and commodity markets.
• President Trump yesterday also said the US Navy would hunt down and stop any commercial vessels that pay a toll to Iran to pass through the strait. The statement will further raise the risk when shipping through the waterway.
• Of course, countries around the world are already suffering economic damage from the war. Researchers at Capital Economics have issued a new forecast that Qatar’s gross domestic product will shrink by 13% this year, the United Arab Emirates’s by 8%, and Saudi Arabia’s by 6.6%.
• Separately, media reports over the weekend said the Chinese government is preparing to send new shoulder-fired anti-aircraft missiles to Iran in the coming weeks. Although it has already been reported that China has been aiding Iran with chemicals, dual-use equipment components, and the like, any provision of lethal weapons would mark a significant escalation and eventually risk drawing China into the conflict.
• Iranian sources said the country’s new Supreme Leader, Mojtaba Khamenei, suffered severe facial and leg injuries during the US-Israeli airstrike that killed his father at the start of the war. However, the sources say Khamenei is recovering. Going forward, any facial scars on Khamenei could have political significance, providing a reminder of the US-Israeli attacks with every public appearance.
• Reflecting the failure of the Pakistan talks and the new US threat to blockade Iranian ships, the price for Brent crude oil so far today has jumped 6.7% to $101.55 per barrel.

China-Taiwan: As the leader of Taiwan’s opposition Kuomintang Party, Cheng Li-wun, ended her visit to China and wrapped up her talks with General Secretary Xi, the Chinese government said it will take nearly a dozen steps to ease travel to and from the mainland, such as restoring direct flights to Taiwan. The announcement likely aims to bolster Cheng’s political stature in Taiwan and undermine the current conservative, anti-China government.

• Separately, a senior Taiwanese official said the government will carry out its first-ever joint exercise between the Interior Ministry and other departments to escort ships carrying natural gas and oil during a potential Chinese naval blockade.
• The drills suggest the war in Iran has alerted Taiwan to the risk of disrupted energy supplies, which China could use as a nonlethal way to pressure the island to unify with the mainland.

European Union-United Kingdom: As opinion polls increasingly show Britons now regret Brexit, Prime Minister Starmer is reportedly planning to propose legislation that would insert EU rules into UK law with minimal parliamentary oversight. The law would apply to rules in certain policy areas, such as food safety standards. According to Starmer, the legislation would help cut business costs and bring down prices. In our view, it may also signal further re-integration of the EU and UK as the British try to reignite economic growth.

Hungary: In parliamentary elections yesterday, the opposition Tisza Party won approximately 138 of the 199 seats in parliament, beating pro-Russia populist Prime Minister Orbán and securing the two-thirds majority needed to ensure Orbán’s policies can be jettisoned. With this election result, Hungary will probably cease to be a major impediment to the European Union’s anti-Russia policies and will be more likely to hew to basic EU policies such as rule of law.

• The European Commission said it has already begun “immediate engagement” with the expected new prime minister, Péter Magyar.
• Besides pushing Magyar to mend ties with Ukraine, officials in Brussels are urging him to start long-demanded reforms to unlock 35 billion EUR ($41 billion) in frozen EU funds for Hungary.

US Artificial Intelligence Industry: The Wall Street Journal yesterday published an interesting article asserting that the rapid growth in “agentic” AI systems has caused the demand for computing resources to outstrip capacity, forcing firms to ration the resource and even drop product offerings. Anthropic and other AI firms have even faced service outages over the issue. The development illustrates the challenges firms face as AI becomes more widely adopted and may portend higher prices going forward.

US Stock Market: Nasdaq announced on Friday that software maker Atlassian will be replaced by memory chipmaker Sandisk in the Nasdaq 100 index. The move illustrates how the AI boom has scrambled the fortunes of major tech firms, weighing on the market values of software makers while boosting any equipment suppliers to the data-center buildup.

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