by Patrick Fearon-Hernandez, CFA, and Thomas Wash

[Posted: 9:30 AM ET] | PDF

Our Comment today opens with an update on the conflict in Iran, where the June ceasefire has essentially collapsed and produced an enormous spike in global oil prices. We next review several other developments that could affect the financial markets today, including new data showing that Chinese exports are benefiting from the global artificial intelligence boom in the same way that South Korean and Taiwanese firms are, and a preview of Federal Reserve Chair Warsh’s first semiannual testimony before Congress today.

United States-Israel-Iran: The US yesterday re-imposed its embargo against Iran’s ports and launched a new wave of attacks on the country, with President Trump also announcing that the US will begin to charge a 20% fee on international shipping through the Strait of Hormuz. In turn, the Iranian government said it would never allow the US to control the strait and launched its own new strikes against US and allied military targets across the region. As we asserted yesterday, it appears that the June ceasefire between the US and Iran is now abandoned.

• In response to the renewed fighting and the US’s reimposition of its embargo, Brent crude futures prices jumped 9.6% yesterday to settle at $83.30 a barrel. That marked the largest daily percentage gain for Brent since May 2020. The jump in crude prices yesterday brought prices essentially back to the level they were at one month ago, right before the announcement of the US-Iran ceasefire.
• Separately, Dubai-based port operator DP World reportedly plans to build a new port and container terminal on the United Arab Emirates’ east coast that would reduce Dubai’s dependence on its flagship Jebel Ali hub and bypass the Strait of Hormuz. The move is consistent with our expectation that Persian Gulf countries in the coming years will build many new pipelines and other infrastructure to cut their reliance on the Strait of Hormuz. Once completed, those facilities will reduce Iran’s importance in the region.

Israel: As the Israeli government announced that its next parliamentary elections will be held on October 27, several new opinion polls show voters now favor centrist former military chief Gadi Eisenkot over Prime Minister Netanyahu. The polls suggest Eisenkot’s new Yashar party could become the biggest faction in the new parliament, setting the stage for it to potentially lead the government. Such an outcome would likely shift Israel away from its current aggressive stance toward Iran, among other implications.

China: The June trade balance showed a surplus of $125.6 billion, beating expectations and rising from the May surplus of $105.4 billion. Exports in June were up 27.0% from the same month one year earlier, beating expectations and accelerating from their 19.4% rise in the year to May. The surge in export revenue mostly reflected higher prices for semiconductors and related computer equipment, showing that China is benefiting from the AI boom just as South Korea and Taiwan are.

Japan: New opinion polls show support for conservative Prime Minister Takaichi now stands at 65.9%, little changed from the similar reading of 71.9% in March. Support for Takaichi’s cabinet also remains unusually steady and robust, currently at 58.0%, versus 59.0% in March. The figures point to an unusually stable political environment in Japan, which is likely a positive environment for Japanese stocks.

• Separately, with the yen plumbing new lows, the Takaichi government has embarked on a push to encourage Japanese firms and individuals to invest more domestically.
• In the latest initiative, Finance Minister Katayama has proposed adding Japanese government bonds to a tax-free investment program for individuals and said the nation’s massive pension fund could adjust its asset allocation strategy to put more emphasis on domestic investments.
• However, it’s not clear whether those and other new initiatives would help buoy the yen and remove the headwind of currency depreciation for US investors with exposure to Japanese stocks and bonds.

France: Soaring temperatures yesterday forced state-owned electricity giant EDF to shut down three of France’s 57 nuclear reactors and reduce production at another seven, resulting in an 8.7% dip in power production. The shutdowns were driven by high temperatures in the river water used to cool the reactors. The problem wasn’t so much that the river water couldn’t sufficiently cool the reactors, but that returning the heated water to the rivers would kill aquatic life.

• The increasingly frequent problem could require billions of euros of new equipment and infrastructure to keep up production in France’s vaunted nuclear power sector.
• Without that investment, reduced electricity supply in the summer could threaten the government’s effort to attract AI and other energy-intensive industries to France.

US Politics: President Trump yesterday said on social media that he will deliver a televised address to the nation on Thursday evening at 9:00 PM ET. According to White House officials, the president will tackle a range of topics, from the war against Iran to election security. Given that Congress has refused to pass Trump’s high-priority “SAVE America Act,” with its strict voter identification rules, it appears that one reason for the speech will be to go over the heads of Congress and try to build support for the legislation directly with the voters.

US Monetary Policy: Federal Reserve Chair Warsh will deliver his first Semiannual Monetary Report to Congress this morning at 10:00 AM ET, giving investors a chance to potentially get more insight into his goals for interest rates, the Fed’s balance sheet, forward guidance, bank regulation, and other key issues. In our view, how he performs under the Congressional grilling could potentially prompt some market volatility today.

• Separately, Fed board member Waller warned yesterday that the central bank will need to consider raising interest rates soon if underlying inflation comes in “hot” this week.
• Specifically, Waller said an acceleration in inflation as measured by the “core” consumer price index would likely require consideration of rate hikes.

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