by Patrick Fearon-Hernandez, CFA, and Thomas Wash

[Posted: 9:30 AM ET] | PDF

Our Comment today opens with an update on the Iran war and the US’s apparent retreat from its threat to target Iranian energy infrastructure. We next review several other international and US developments with the potential to affect the financial markets today, including evidence that the Iran war is prompting a rethink about the value that green energy could have in a world of disrupted fossil fuel supplies and new administration efforts to end the long security lines at US airports.

Iran War: In a dramatic statement this morning, President Trump said the US will postpone further military attacks on Iranian power plants and energy infrastructure for five days because Iran had entered “productive” talks with Washington. The announcement marks a major pivot after the president on Saturday night gave Iran a 48-hour deadline to provide ships free passage through the Strait of Hormuz, after which the US would bomb Iran’s power plants. In response, global energy prices are plunging so far this morning, while equity prices are surging.

• In response to Trump’s threat over the weekend, the Iranian government had warned that it would respond to an attack on its energy facilities by targeting “all energy, information technology, and desalination infrastructure belonging to the US and the Israeli regime in the region.” That had sparked a surge in energy prices and threatened major stock losses, suggesting the president backed down in response to market reactions. Iranian officials today denied that Washington and Tehran are in talks to end the conflict.
• Trump’s ultimatum and the Iranian response encapsulate the maximum risks arising from the war. Iran’s effective closure of the strait was long seen as almost unthinkable; it has now happened. The threats on both sides to target basic civilian services such as energy and water signal an even worse step — what would essentially be unrestrained, all-out war. Since the start of the war, the Iranian government has likely felt it is facing an existential risk. Now, that’s even more likely and could prompt them to respond in kind.
• The weekend also brought unsettling evidence of the broad military capabilities Iran could still bring to bear against the US, Israel, and their allies. Reports indicate Iranian missile and drone attacks in the region are actually increasing again, suggesting the US and Israel haven’t been able to degrade the Iranian military as much as they say. Iran also launched missiles against US forces in Diego Garcia, thousands of miles into the southern Indian Ocean, showing that Iran could now hit targets as far away as London and Paris.
• Indeed, in some respects, the war has already strengthened Iran, despite all the damage its military has taken. For example, it is increasingly negotiating with individual countries, including Japan, to allow their ships to pass through the strait unmolested. That essentially positions Iran as master of the strait, with an unprecedented ability to punish or reward firms and nations around the globe.
• Military analysts and commentators also increasingly worry that the Iranians will be prompted to act more viciously because of unclear messaging from the US. For example, President Trump’s threat to attack Iran’s energy plants came less than a day after he said he was thinking of “winding down” the war. Shifting, inconsistent messaging from the US could make it even harder to reach an eventual ceasefire.

China: According to the Financial Times, the share prices of China’s top manufacturers of batteries and energy storage equipment have surged since the start of the Iran war, adding at least $70 billion to the combined market capitalization of firms such as CATL, BYD, and Sungrow. The jump in the companies’ values reflects expectations that no matter how the war wraps up, the disruptions to energy and other commodity shipments from the region so far will likely prompt renewed interest in green energy technology and the need for energy storage.

China-Vietnam: The Vietnamese government on Saturday formally complained about China’s renewed efforts to expand and exploit islets in the disputed Paracel Islands in the South China Sea. China’s recent activities there have focused on an islet called Antelope Reef. It’s unclear why China has recently ramped up its dredging and reclamation activities in the area, and its activities to date suggest the reef could become China’s largest outpost in the area.

Cuba: The government announced on Sunday that the national power grid had again collapsed, creating the second nation-wide power outage in the last week. Power was reportedly restored to much of the country by late yesterday, but the fragility of the grid and growing popular anger at the government suggest the US could be tempted to pivot toward further economic pressure on Havana as it reaches the limits of its war against Iran.

France: In the second and final round of municipal elections yesterday, the far-right populist National Rally managed only mixed results, as it won the mayor’s office in the country’s fifth-largest city, Nice, but fared poorly in other large cities. Despite its surging popularity in recent years, the party continued to see its strength largely limited to smaller cities and rural areas in the south. That raises questions about how well the party will fare in the presidential elections that are due next year.

Italy: State-controlled Poste Italiane yesterday offered 10.8 billion EUR ($12.5 billion) in cash and stock for Telecom Italia, and the target firm’s CEO, Pietro Labriola, expressed his support for the deal because it would produce a telecom “national champion” for Italy. Against a backdrop of concerns about Europe’s economic competitiveness, the development suggests that some firms and national governments may adopt the strategy of building big, dominant companies that in theory could compete better in global markets.

US Airline Industry: Over the weekend, The New York Times scooped that Senator Markwayne Mullin, the Oklahoma Republican chosen by President Trump to be the next homeland security secretary, has been negotiating for weeks with centrist Rep. Josh Gottheimer (D-NJ) on terms to end the Homeland Security shutdown.

• Mullin and Gottheimer are reportedly negotiating on terms that would include requiring federal immigration agents to obtain judicial warrants “for forced home entry, unless in hot pursuit,” and effectively barring civil immigration enforcement actions at sensitive locations, including hospitals, churches, schools, and polling places.
• It isn’t clear whether the talks could really produce an end to the standoff and allow Transportation Security Administration employees at airports to get paid again. However, increasingly long security lines at the airports are raising pressure on the administration and Congress to reach a deal.
• Separately, President Trump at the weekend said Immigration and Customs Enforcement agents would start helping out at airport security lines today to help reduce the long security lines at airports. Again, however, it isn’t clear exactly what the ICE agents will be doing or how much they could speed up the lines.

US Prediction Markets: Two senators today plan to introduce legislation that would prohibit entities regulated by the Commodity Futures Trading Commission, including prediction-market exchanges Kalshi and Polymarket, from listing contracts related to sporting events. The move reflects growing concern about sports-betting scandals, impacts on young people, and states’ rights issues. At this point, it’s unclear how likely the bill could be passed into law.

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