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 news that Tehran has demanded a number of conditions the US must meet before it will allow free shipping through the Strait of Hormuz. We next review several other international and US developments that could affect the financial markets today, including a worsening spat over immigration in Europe and a new effort by the US administration to remove Federal Reserve board member Lisa Cook.

United States-Israel-Iran: Exercising the leverage it enjoys by keeping the Strait of Hormuz essentially closed, Tehran on Saturday issued a list of demands that the US must meet before Iran would open the waterway. The demands would require the US to lift its naval blockade and sanctions on Iran’s oil and petrochemical exports, withdraw the US military from around Iran, pay war reparations, release frozen Iranian assets, and stop threatening the country or attacking its proxies in the region. Negotiations on Iran’s nuclear program would only come later.

• Most of Iran’s weekend demands were already agreed to by the US in the two sides’ June ceasefire, but the insistence on reparations is new.
• The demand issuance underscores how advantageous Iran’s position now is. With its ability to keep the strait essentially closed, it can put continued upward pressure on global energy prices, keep the US looking impotent, and prolong the political problems the US administration has created for itself by starting an unpopular war.
• Some analysts argue Iran would let shipping in the strait flow freely again once the US gives it strong guarantees that it will meet its demands. However, we think Iran will hold out for permanent power to regulate and charge tolls on shipping in the waterway. We think the increased power and confidence Iran has gained from the war will continue driving global energy prices higher in the coming years.

Japan-North Korea: Tokyo’s metropolitan government has announced plans to build a large missile shelter for civilians in an underground parking lot next to a major train station. The shelter would aim to protect civilians in the event of attack by North Korea, though it could also come in handy in case of a future conflict with China. While the world is now focused on the wars in Ukraine and Iran and the potential for a US-China conflict, the Tokyo plan is a reminder that North Korea’s rapid military advances are making it increasingly dangerous.

China-Europe: Chinese container-shipping company Sea Legend this week will launch the first regular container shipping service through the Arctic Ocean between China and Europe. The voyage between Ningbo on China’s eastern coast and Felixstowe in the UK is expected to take as little as 20 days, or only about half as long as the standard route. The new service shows how melting sea ice in the Arctic is creating new commercial opportunities, not to mention new geopolitical tensions between the major powers.

Spain-Italy: In retaliation for Italy’s imposition last week of border checks on arrivals from Spain, the Spanish government on Saturday imposed temporary new checks on arrivals from Italy. The tit-for-tat travel barriers are the latest fallout from the mass incursion of migrants into Spain’s exclave of Ceuta in North Africa at the beginning of August. Many European countries have criticized Spain for overly lenient immigration policies, sparking sharp political fractures among countries and likely spurring greater acceptance of right-wing, populist politicians.

Colombia: The country’s conservative new president, Abelardo de la Espriella, was inaugurated on Friday and now plans to quickly get tough on cocaine traffickers who had become much more numerous and powerful under the previous leftist government. The law-and-order president is also expected to have better relations with the US than the previous president did.

Russia-United States: After Federal Bureau of Investigation Director Patel scheduled a visit to the Russian capital this fall, Kremlin commentator Vladimir Vasiliev has warned that the Russians may use the meeting to provide Patel with “dirt” on prominent Democrats to undermine them in the November mid-term elections. Whether or not that is true, the report may rekindle controversial concerns about Russia trying to interfere in US elections — a development that would likely make the mid-term election campaigns even more acrimonious than usual.

United States-Australia: The US government today said it will lend $400 million to Australian firm Sunrise Energy to help finance its new mine to produce scandium, a rare earth mineral that is important to energy and defense products. In return, the US will get right of first offer for the mine’s output. As with many rare earth minerals, China dominates the world’s scandium production and processing, so the new mine will help cut the US’s dependence on its geopolitical rival.

• The loan also illustrates the US administration’s willingness to fund foreign firms for that purpose, rather than just US companies.
• In response to the news, Sunrise Energy’s share price rose approximately 18% on the Sydney stock market today, continuing a long upward trend.

US Politics: A new poll by Reuters/Ipsos shows political independents are now surprisingly open to progressive policies like those being promoted by the left wing of the Democratic Party. Some 43% of independents still say they wouldn’t vote for a Democratic Socialist. However, 64% said they support tax hikes on billionaires and corporations, and 60% said they support government-provided healthcare for all citizens. As the mid-term elections approach, the poll suggests the Democrats’ drift to the left may not hurt them as much as Republicans think.

• Of course, many establishment Democrats remain at least skeptical of left-wing messaging, and if the party drifts too far to the left, some will likely sit out the balloting.
• In any case, Republican leaders from President Trump downward reportedly plan to brand the Democrats as “socialists” and “communists” as a key part of their election strategy.

US Monetary Policy: The White House late Friday renewed its effort to remove Fed board member Lisa Cook, despite its previous effort being invalidated by the Supreme Court. In its first attack on Cook, the administration had accused her of mortgage fraud, but the court threw out the effort to fire her on grounds that she wasn’t given notice or a chance to respond. In a letter sent to Cook last week, the administration again accused her of mortgage fraud but gave her 21 days to defend herself.

• The new effort to fire Cook will probably rekindle investor concerns about the Fed’s independence.
• Those concerns could build on the developing investor anxiety over Chair Warsh’s effort to reduce Fed guidance for the markets. The resulting increase in uncertainty already appears to have nudged up longer-term bond yields.

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