by Patrick Fearon-Hernandez, CFA, and Thomas Wash

[Posted: 9:30 AM ET] | PDF

Our Comment opens with our assessment of the latest developments in Iran. We then examine how the conflict is reshaping the US relationship with its transatlantic allies. Next, we look at the Texas primary elections, review a new report on Germany’s infrastructure woes, and highlight emerging signs of renewed US engagement in South America. We also include a summary of key US economic data and notable moves in global markets.

Iran Conflict Broadens: Iran’s actions have disrupted trade throughout the Middle East and damaged several key oil storage facilities. Both Saudi Arabia and Iraq are reportedly running short on storage capacity in the aftermath of the attacks. Meanwhile, China has faced difficulties securing the energy supplies it depends on from the Strait of Hormuz. These developments drove a sharp spike in energy prices, which were later eased following the US announcement of plans to escort tankers through the region’s troubled waters.

• There are growing signs that the US is making meaningful progress in its campaign against Iran, sparking debate over what comes next. US officials say ongoing strikes are steadily degrading Iran’s ability to threaten American interests and regional partners. At the same time, President Trump has cautioned against leaving Iran with a leader who is “no better” than the previous ruler. As a result, the administration has left open the option of deploying US ground forces, even as it insists such a move may not be necessary.
• That said, the conflict has shown signs of intensifying. Iran appears to be broadening the conflict across the Middle East to provoke its neighbors into intervening. The campaign escalated sharply this week with major strikes on Monday against the US Embassy compound in Riyadh, Saudi Arabia, and on Tuesday near the US Consulate in Dubai. The UAE has been a primary target, facing nearly as many drone and missile attacks as Israel.
• As of this morning, there are tentative signs that Iran may be seeking an off‑ramp from the conflict. Reporting indicates that Iranian intelligence officials have made indirect contact with US counterparts to probe possible terms for ending the war. This comes amid mounting signals that Mojtaba Khamenei, the son of the late Supreme Leader Ali Khamenei, has emerged as the regime’s favored choice to succeed his father, even if that succession has yet to be fully formalized in public.
• While we are cautiously optimistic that the conflict could wind down in the coming days, there are still no definitive signs that an end is imminent. We continue to see maintaining commodity exposure as a prudent stance for now, with prices, especially in energy, likely to remain supported by ongoing disruption and uncertainty. That said, if tensions begin to ease in a more durable way, a rotation away from commodities could already be in its early stages.

Allies Disunited: The US-Israel joint operation has triggered notable pushback as several allied governments question the speed and scale of the escalation. On Thursday, Spain and the UK were sharply criticized by the White House after both initially refused to let the US use military bases on their territory to conduct strikes on Iran. In response, President Trump has threatened to cut off trade with Spain and publicly disparaged UK Prime Minister Keir Starmer’s leadership, saying he is “no Churchill.” The friction is another sign of the fraying transatlantic relationship.

• Around the world, the response has been mixed, with many US allies stressing that Iran’s nuclear ambitions and regional aggression must be constrained even as they voice concern about the scale and legality of the US‑Israeli strikes. This tension was captured by Canadian Prime Minister Mark Carney, who backed efforts to prevent Iran from obtaining a nuclear weapon “with regret,” called the conflict “another example of the failure of the international order,” and urged rapid de‑escalation in the region.
• Disagreements over the Iran strikes are emerging just as the US and its allies rework their broader security relationship. Washington is pressing partners to shoulder more of their own defense burdens, while the rest of the West steps up support for Ukraine and adjusts to a less predictable role from the US. This shift has pushed other Western countries to accelerate defense spending and raise their international profiles, from military outlays to crisis diplomacy in Ukraine and the Middle East.
• While we do not think the US will completely abandon its Western allies, we do expect them to gradually diversify their exposure to the US. This is likely to involve strengthening their own defense capabilities, deepening trade ties with other partners, and reshaping their financial markets to better compete with the US for investment flows. Nevertheless, this would be a drawn‑out adjustment rather than a rapid, wholesale shift.
• This gradual diversification is mirrored by a broad de‑risking across global markets, where the prolonged conflict appears to have shifted investor sentiment. Gold and silver have declined even as the dollar has strengthened, underscoring its continued status as the cornerstone of the financial system. While the dollar has since given back some of its gains as of this writing, we will be watching closely to see whether this marks the start of a more durable trend.

Texas Primary: The Texas primary saw James Talarico defeat his Democratic rival, Jasmine Crockett, in a closely watched US Senate contest. On the Republican side, Senator John Cornyn and Attorney General Ken Paxton both advanced to a runoff for their party’s nomination. The Senate race has drawn international attention because it offers Democrats a rare chance to flip a seat in a state that has been reliably Republican for decades, with potential implications for the chamber’s balance of power.

German Infrastructure: Germany has pledged to improve its military readiness, but recent reports suggest it still has a long way to go. While its armed forces now benefit from better equipment and facilities after Berlin moved to strengthen security in the wake of Russia’s invasion of Ukraine, chronic underinvestment means basic infrastructure remains a major constraint. We continue to view higher defense outlays as a positive catalyst for German equities, particularly within the country’s defense sector.

US Ecuador: The US is continuing to deepen its ties across Latin America, in what increasingly resembles a modern Monroe Doctrine-style approach to the region. On Tuesday, the US and Ecuador launched a joint military operation targeting drug trafficking, underscoring Washington’s growing security footprint. We see this kind of cooperation as a potential precursor to closer economic links as well, suggesting that South American countries with strong relationships with the White House could become attractive destinations for investment.

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