by Patrick Fearon-Hernandez, CFA, and Thomas Wash

[Posted: 9:30 AM ET] | PDF

Our Comment today opens with the latest developments in the Israel-Iran conflict. We next review several other international and US developments with the potential to affect the financial markets today, including signs that the US and China remain susceptible to new military and economic tensions and President Trump’s partial reversal on some of his immigration crackdowns.

Israel-Iran: Both Israel and Iran continued to strike each other with air and missile attacks throughout the weekend, following Tel Aviv’s initial attacks on Friday. Israel’s attacks, mostly using aircraft, have broadened beyond the initial focus on nuclear sites, military leadership, and air defenses and now include strikes on Iran’s energy infrastructure. Israel has also conducted at least one attack on the Iran-supported Houthi rebels in Yemen. All told, dozens of Israelis and Iranians have now been killed in the conflict.

• By expanding its attacks on Iran’s oil industry, Israel could potentially spark further investor concern about the world’s energy supplies, especially if Iran takes the cue to launch retaliatory attacks on energy facilities throughout the region. Nevertheless, as of this writing, oil prices have fallen about 1% so far today, with Brent trading at $73.64 per barrel and WTI at $72.27.
• Importantly, reports over the weekend said the Israeli government has pressured the US to participate in the attacks. Since the US has powerful “bunker buster” munitions that Israel doesn’t possess, Tel Aviv apparently wants the US to help take out the Iranian nuclear facilities that are buried in deep underground bunkers. So far, President Trump has refused the request. However, if he changes his mind, fear of Iranian retaliation against the US could well lead to even greater concern among investors.

China-United States: According to two officials involved in the latest US-China trade truce last week in London, the Chinese side would not commit to re-starting exports of some specialized rare-earth magnets that US military suppliers need for fighter jets and missile systems. According to the officials, the Chinese negotiators hinted they wouldn’t take that step unless the US eases up on its limits on sending advanced artificial-intelligence chips to China.

• The US officials also suggested they are looking to extend the US’s existing 30% reciprocal tariffs on China for a further 90 days beyond the August 10 deadline agreed in Geneva last month. That indicates that a more permanent trade deal between the US and China is unlikely to happen before late 2025.
• Earlier reporting suggested the London deal merely re-established the interim cooling-off deal reached in Geneva in May. However, after China reneged on its Geneva promise to ease up on rare-earth exports, the end result of the London meeting appears to be that China has only eased up on its civilian rare-earth exports. That suggests US-China trade tensions could easily flare up again and further delay any deal. Investors will therefore have to deal with heightened trade uncertainty for some time to come.

Chinese Military: In its latest yearbook, the Stockholm International Peace Research Institute (SIPRI) said China’s nuclear arsenal has now risen to 600 warheads, up from 500 last year. Beijing’s nuclear arsenal remains far below those of the US and Russia, which each have more than 5,000 warheads, but it remains on track to match the 1,700 or so the US has deployed by 2035.

• While the Trump administration’s tariff policies can make it seem that today’s US-China tensions are all about economics, the new SIPRI data on Beijing’s rapid nuclear build-up is a reminder that geopolitical and military tensions remain a key part of the relationship.
• As we noted in our Bi-Weekly Asset Allocation Report from April 15, 2024, China’s nuclear build-up is likely also boosting the price of uranium. SIPRI’s estimate that China built 100 new warheads over the last year isn’t far off from the 115 warheads we projected in our report. We estimated that such a level would require more than 10% of the world’s 2023 uranium production, which almost certainly would put upward pressure on prices.

Chinese Economy: Total industrial production in January through May was up 5.8% from the same period one year earlier, slowing from its gain of 6.1% in January through April. Fixed investment in the first five months of the year was up 3.7% on the year, after a gain of 4.0% in the first four months. This weak data was partially offset by a stronger-than-expected rise in May retail sales, but that gain likely only reflected the government’s temporary buying incentives. In sum, the figures suggest Chinese economic growth remains weak.

Australia: The Securities and Investments Commission today said it will open a probe into the country’s stock exchange operator, the Australian Securities Exchange, over its governance and risk management practices. The investigation stems from recent mishaps, including a botched upgrade to the exchange’s clearing and settlements systems and a prolonged outage late last year. The exchange is also suffering from a long drought in initial public offerings. The probe could potentially help boost Australian stock prices and new offerings going forward.

Eurozone: In a speech today, Bundesbank leader Joachim Nagel said the European Central Bank shouldn’t rush in cutting interest rates further, given that consumer price inflation in the region has already fallen to the targeted level. The statement comes after the ECB cut its benchmark short-term interest rates for the eighth straight time earlier this month, leaving it at 2.00%. The hawkish statement has given a boost to the euro so far today, with the currency now up about 0.2% to $1.1579,

G7 Summit: Leaders from the US, Japan, Germany, France, Italy, the UK, and Canada today begin their annual “Group of 7” summit in Alberta, Canada, along with invited leaders from a range of other countries, such as Mexico. While the forum will allow the leaders to discuss many key topics, such as the Israel-Iran and Russia-Ukraine conflicts, key trading partners are also reportedly eager to finalize commercial deals with the US at the meeting. Any announcements could potentially affect the global financial markets this week.

US Monetary Policy: The Fed will hold its latest policy meeting starting tomorrow, with its decision due on Wednesday at 2:00 PM ET. Based on interest-rate futures trading, investors widely expect the policymakers to hold their benchmark fed funds rate at a range of 4.25% to 4.50%. Investors currently expect the next rate cut to come only in September, with perhaps one more cut by the end of the year. We agree with that assessment, but we’ll also be looking for more clues on the direction of rate cuts at Chair Powell’s Wednesday press conference.

US Labor Market: Reports say President Trump late last week ordered US Immigration and Customs Enforcement to mostly pause its immigration raids on farms, meatpacking plants, hotels, and restaurants. According to one source, Trump was not aware of the extent of the enforcement push he had unleashed, and “once it hit him, he pulled it back.” Under his new directive, enforcement raids on the designated business types would focus only on arresting immigrants accused of serious crimes.

• As we have long surmised, any large-scale immigration crackdown would run the risk of creating labor shortages and driving up wage rates, especially in industries heavily dependent on immigrant labor.
• Trump’s quick pullback on the raids helps confirm that our concerns were valid. We suspect Trump was hearing an earful of complaints from backers in the business community.
• In any case, the president’s climbdown on the raids is a reminder that the actual policies he leaves in place on trade, immigration, fiscal policy, or regulation might be much less dramatic, and less disruptive for the economy or the financial markets, than his rhetoric or initial steps.

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