by Patrick Fearon-Hernandez, CFA, and Thomas Wash

[Posted: 9:30 AM ET] | PDF

Our Comment today opens with some thoughts on the new war against Iran that the US and Israel launched on Saturday. We next review several other international and US developments that could affect the financial markets today, including more signs of weak consumer demand in China and a continued effort by Canada and India to reduce their trade dependency on the US.

United States-Israel-Iran: Obviously, the weekend launch of a joint US-Israeli military attack on Iran is the key news that will drive the markets today. The news has been widely reported, so we’ll just focus on the key highlights for investors. Importantly, the attacks targeted both Iran’s political leadership and its military, resulting in the death of supreme leader Ayatollah Khamenei on Saturday as well as dozens of other high officials. Nevertheless, the Iranian military has launched retaliatory strikes across the region, and military operations continue.

• Reports suggest that Khamenei dispersed political and military authority before the fighting started, ensuring in particular that the Iranian military had standing orders to keep fighting even if he were killed. Indeed, some reports suggest the Iranian Revolutionary Guards Corps is now fighting nearly independently. That could make it difficult to stop the fighting even if some political leaders or groups in Iran decide they want peace.
• More broadly, the chaos has the potential to spark secession efforts by various groups within Iran, similar efforts by groups in other regional countries, and/or intervention by other regional powers. In other words, the situation continues to pose the risk of a wider regional war.
• The main goals of the US appear to be further degrading Iran’s military capability (especially its nuclear and missile programs) and prompting a popular uprising that would lead to a new regime or at least a serious alteration of the current one. However, if that doesn’t occur within the next several weeks, we suspect President Trump would declare victory and stop the operation. We believe Trump is especially cognizant that US voters have little stomach for yet another long war aimed at regime change in the Middle East.
• All the same, military operations are notoriously difficult to control. At the moment, much risk remains, and investors are rightly on edge about further conflict and risks related to the region’s energy supplies.
• Reports this morning say Iran has now staged a drone attack on one of Saudi Arabia’s most important oil facilities at Ras Tanura and is expanding its attacks on shipping through the Strait of Hormuz. That will raise the risk of Saudi Arabia joining the attacks on Iran and potentially spur Iran to further escalate its attacks on Saudi Arabia.
• Separately, other reports say Iranian attacks have forced Qatar to shut down its liquefied natural gas production, causing global prices to soar and risking bringing Qatar into the conflict.
• As a result, global oil prices are surging this morning, with Brent up about 8.6% to $79.04 per barrel. Natural gas prices have also surged. Gold prices are up 3.1% to $5,409.40 per ounce, but Treasury obligations have weakened, probably on concerns about rising consumer price inflation. Benchmark 10-year Treasury yields as of this writing are up modestly to 4.006%. Finally, US and European defense stocks are getting a strong bid.

China: BYD, which is now the world’s largest electric vehicle maker, said its February sales were down a whopping 41% year-over-year as a 50% rise in export sales was more than offset by a 65% plunge in domestic sales. The figures show how Chinese firms’ efforts to make up for China’s weak domestic demand by going abroad won’t necessarily work. The figures therefore illustrate a key vulnerability for Chinese stocks that are heavily focused on sales to domestic consumers.

South Korea: According to new data from the Trade Ministry, exports in February were up a strong 29% year-over-year, beating expectations and almost matching the 34% rise in January. The data show that much of the strength came from semiconductors, reflecting South Korea’s strength in producing memory chips. This serves as a reminder that foreign economies and stocks are also benefiting from the surge in US data-center construction for artificial intelligence.

Canada-India: During Canadian Prime Minister Carney’s visit to New Delhi today, he and Indian Prime Minister Modi agreed to accelerate their talks on a free-trade deal, seeking to sign a pact by the end of the year. The agreement illustrates how both countries are trying to broaden their trade relationships to reduce their dependence on the US. Over time, the plethora of new non-US trade deals could potentially rejigger world trade flows and affect global stocks, although it’s probably too early to identify the winners and losers at this point.

Argentina: In President Milei’s biggest legislative victory so far, the Senate on Friday passed a major deregulation of the labor market that will make it easier for firms to lay off employees. The reform will also roll back rigid restraints on hiring and working hours. By giving companies greater flexibility, the reform could improve economic efficiency and ease business conditions. That could also help boost foreign investment in the country. Overall, the reform is likely to be positive for the Argentine economy and stock values.

US Artificial Intelligence (AI) Industry: As threatened, the White House late Friday ordered all federal agencies to halt use of Anthropic’s Claude AI model over the company’s insistence on specific prohibitions against the Pentagon using the model for mass surveillance of US citizens or the autonomous killing of foreign adversaries. The Pentagon also designated Anthropic a “Supply-Chain Risk to National Security,” preventing any company doing business with the US military from also having a commercial relationship with Anthropic.

• The big winner from the confrontation is likely to be OpenAI, which closed on a new funding round worth $110 billion on Friday and then later announced that it had reached a deal in which the Pentagon would use its AI models subject to red lines similar to those that Anthropic had demanded.
• Nevertheless, the incident is another example of how the US government has now become much more aggressive about intervening in the economy and pressuring private firms to adopt or abandon specific policies.

Global Asset-Backed Securities Market: Investors in the asset-backed securities market have become alarmed by the collapse of British mortgage lender Managed Financial Solutions last week after it was discovered that the firm double-pledged collateral on some of its bonds. The scandal echoed recent concerns about similar shenanigans in the US asset-backed markets. These incidents are likely to make asset-backed investors increasingly skittish, which would likely raise the risk of a credit crunch and financial disruptions.

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