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, where it remains unclear whether a new round of US-Iran peace talks will be held this week. We next review several other international and US developments that could affect the financial markets today, including a move by Japan to dismantle its longstanding restrictions on arms exports and Kevin Warsh’s confirmation hearing in the US Senate this morning.

United States-Israel-Iran: As of this writing, a new round of US-Iran peace talks is still up in the air, with Iranian officials reportedly telling regional mediators they are prepared to send a negotiating team to Pakistan but not yet saying so in public. It is unclear whether a complete US team is on the ground in Islamabad. At the same time, reports today say the US military in the Indo-Pacific region has boarded an oil tanker known for working with the Iranians. That move was likely designed to put further pressure on the Iranians to negotiate.

• Separately, the Wall Street Journal today carries a story highlighting how Iran-backed militias in Iraq and other countries have been launching missiles and drones at US allies in the region, including Saudi Arabia, creating a kind of war within a war. The militias sometimes coordinate with the Iranian military but other times operate independently. That will complicate whether and how peace can be brought to the region.
• Other new reports by energy consultants say US refiners are reaping enormous profits from the spike in global diesel and jet fuel prices touched off by the war. According to the reports, a major advantage for US refiners is the relatively cheaper domestic oil feedstock, allowing them to sell dear at low cost.

Japan: The cabinet of Prime Minister Takaichi today approved a measure ending Japan’s ban on exporting lethal military equipment. Weapons exports will be approved by the National Security Council and will be limited to countries that have a defense and tech transfer deal with Japan. There are currently 17 such countries, and the number is expected to grow. The new rules are widely expected to transform Japan’s defense industry into a strong competitor for global arms sales — a development that will likely create interesting new opportunities for investors.

European Union-United Kingdom: JPMorgan Chase yesterday said it will include the EU and UK in its 10-year, $1.5-trillion lending program for defense and critical industries. The program aims to funnel capital to sectors deemed essential to national security, including defense, energy, infrastructure, pharmaceuticals, quantum computing, and AI. The bank’s move is consistent with our view that investors will still find opportunities in Europe’s rearmament and resilience efforts despite the economic headwinds from higher energy prices caused by the war in Iran.

United Kingdom: Prime Minister Starmer yesterday said he unintentionally misled parliament when he said his former ambassador to the US, Peter Mendelson, had full security clearance. Starmer was forced to fire Mendelson last year after it was discovered that he had extensive ties with Jeffrey Epstein, and press reports last week revealed that Mendelson had failed the security vetting process.

• The scandal further weakens Starmer’s political position, raising the risk that Labour Party rivals will try to replace him.
• If Starmer is ultimately replaced, current British economic policy could shift, including the prime minister’s current effort to rebuild trade and investment ties with the European Union.

Poland: Rejecting the recent proposal by President Nawrocki and central bank chief Glapiński to sell Polish gold reserves to finance military expenditure, Finance Minister Domański yesterday said Warsaw would move forward with its plan to tap the European Union’s 150-billion EUR ($176 billion) Security Action for Europe defense fund to buy needed weapons. However, it isn’t clear how the government can get around Nawrocki’s veto of the needed legislation.

• In any case, the dispute shows how the Polish gold-sale proposal is tied to internal political disputes between the right-wing Nawrocki and Glapiński, who want to weaken Poland’s ties to the EU, and the government of Prime Minister Tusk, who advocates for stronger ties with the EU.
• All the same, it remains true that many central banks and other investors have recently sold gold amid the tumult of the war in Iran. Much of that gold selling likely reflects efforts to raise liquidity to pay for higher energy costs.

US Monetary Policy: Kevin Warsh, President Trump’s nominee to be the next Fed chair, will face a confirmation hearing in the Senate today at 10:00 AM ET. The Senators are expected to focus on whether Warsh has promised the president to cut interest rates aggressively, even if economic and financial market conditions argue for higher rates. Any statement by Warsh could have a big impact on bond and stock values today as the testimony proceeds.

US Antitrust Policy: Yesterday afternoon, the Department of Justice said it had launched a criminal price-fixing investigation into major beef processors including Tyson Foods, Cargill, JBS, and National Beef. The probe into possible criminal wrongdoing was more stringent than expected and suggests the administration is willing to act quite aggressively against firms to either bring down consumer prices or shift the blame for high prices onto producers ahead of the November mid-term elections.

• Agriculture experts and economists generally attribute today’s high beef prices to a drought that has prompted farmers to trim their herds, reducing supply.
• Nevertheless, the administration’s stance is likely to raise regulatory risks for a range of consumer firms.

US Labor Market Policy: The White House late yesterday announced that Labor Secretary Lori Chavez-DeRemer has resigned to return to the private sector. Reports indicate Chavez-DeRemer resigned under pressure after months of accusations centered on misuse of funds and a potential inappropriate relationship. Her resignation marks the third time President Trump has ousted a cabinet member in the last two months, perhaps signaling heightened political concerns ahead of the mid-term elections.

US Artificial Intelligence Industry: In the latest high-profile AI deal, Amazon yesterday said it would invest at least $5 billion in AI giant Anthropic in return for Anthropic’s commitment to buy more than $100 billion worth of cloud computing services from Amazon. The deal could help ensure that the massive new data-center capacity that Amazon is building will actually be used. Amazon shares therefore jumped sharply in response to the news.

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