by Patrick Fearon-Hernandez, CFA, and Thomas Wash

[Posted: 9:30 AM ET] | PDF

Our Comment today opens with the latest developments in the Iran war, including Iran’s response to the latest US peace proposal. We next review several other international and US developments that could affect the financial markets today, including the US’s imposition of new sanctions on Chinese entities for supporting Iran’s military and new concerns about defaults in the US private-credit industry.

United States-Israel-Iran: The Iranian government responded to the 14-point peace proposal delivered by the US last week by issuing a counterproposal to gradually open the Strait of Hormuz as the US gradually lifts its blockade of Iranian ports. Iran’s nuclear program would be negotiated over the next 30 days, with Iran having some of its highly enriched uranium diluted and the rest transferred to a third country, subject to repatriation if talks fail or the US exits the deal later. On social media, President Trump rejected the counteroffer as “totally unacceptable.”

• Separately, a classified CIA analysis recently delivered to the White House reportedly said that Iran can survive the US’s naval blockade against it for at least three to four months before facing more severe economic hardship. The report also said that Tehran retains significant ballistic missile capabilities despite weeks of intense US and Israeli bombardment.
• Coupled with the US rejection of Tehran’s counterproposal, the CIA analysis suggests the war and the associated commodity supply disruptions are likely to continue, setting the stage for further price hikes, economic disruption, and risks for stock prices.
• In another development, the Wall Street Journal reported that Israel set up “a clandestine military outpost in the Iraqi desert to support its air campaign against Iran.” Importantly, the report also says Israel launched airstrikes against Iraqi troops sent to investigate after a shepherd reported unusual activity in the area. The report highlights the ongoing risk that the war against Iran could draw in other countries at any time and pose further risks for global commodity supplies, economic activity, and asset prices.
• Confirming our view that oil and natural gas supply disruptions from the war will boost all kinds of alternative energy sources, new data shows that global coal shipments have been surging. Worldwide imports this month are expected to reach 107 million tons, the third-highest monthly figure for May in records that go back to 2017. Separate reports have also shown renewed interest in renewable energy sources, such as wind and solar.
• Illustrating how the disruptions from the war are weighing especially hard on emerging economies, Indian Prime Minister Modi has urged his citizens not only to use less petroleum-based fuel, but also to buy less gold. The call to buy less gold aims to preserve the country’s foreign reserves, which have been under pressure as the rupee weakens.

United States-China: Over the weekend, the US imposed financial sanctions on nine mainland Chinese and Hong Kong companies and individuals for providing support to Iran’s military. The announcement accuses the entities of helping Iran’s armed forces secure weapons, components and raw materials for drones, and satellite imagery for targeting. The move is significant because it could spoil this week’s highly anticipated summit between President Trump and General Secretary Xi in Beijing.

China: In April, China exported more electric vehicles and plug-in vehicles than gasoline or diesel cars for the first time ever. The shift toward EV exports reflects China’s enormous government-bred problem of excess capacity in the domestic EV manufacturing industry and weak domestic demand. The surge in EV and other exports continues to push down prices and raise financial pressure on foreign manufacturers, worsening China’s trade tensions with other countries.

• Separately, the US Chamber of Commerce yesterday issued a report warning that Beijing is “doubling down” on state intervention in manufacturing, services, and frontier technologies to dominate global supply chains.
• The report warns that free-market economies around the world are running out of time to push back against China’s policies and avoid being reliant on Chinese suppliers.

Australia: In a by-election on Saturday, the far-right, anti-immigrant One Nation Party won a seat in the national parliament for the first time. The result is seen as a protest vote to punish the center-right Liberal Party for ousting its leader, who represented the district and was well liked there. Nevertheless, the news shows how anti-immigrant sentiment and other issues are boosting the far right in Australia, just as they are in Europe. If far-right parties continue to gain power, the result could be a big shift toward nationalist, populist economic and social policies.

Germany-France: Franco-German tank maker KNDS has warned the German government that it will press ahead with a decision on an initial public offering within the next two months, whether or not Berlin has responded to its offer for it to take a stake in the defense business. If Berlin declines, the French government would be the largest shareholder in the firm as it opens itself to public ownership. In any case, the IPO planning illustrates the strong investor interest in European defense firms — a sentiment that we share.

United Kingdom: Another top Labour Party lawmaker yesterday urged Prime Minister Starmer to resign, heaping pressure on him to step down amid scandals and accusations of ineffective government. A change in government would create political uncertainty and could undermine UK stocks. Nevertheless, reports suggest Starmer’s opponents in the party for now remain reluctant or unable to force him out. Starmer will attempt another “reset” of his government with a major speech today and new legislation to be laid out in his “King’s speech” on Wednesday.

Argentina: The legislature has voted to amend the Glacier Law of 2010 to ease restrictions on the mining of glaciers and areas around them. The easing of regulations could potentially open more of the country to the extraction of gold, copper, molybdenum, and other valuable minerals. However, critics of the move warn that large-scale mining operations in or around Argentina’s 5,270 square miles of glaciers could threaten critical water supplies downstream.

US Politics: While Democrats have been widely expected to win control of the House in the November mid-term elections, a series of three redistricting losses in the courts has suddenly made such an outcome significantly more difficult. The most recent loss was a decision by the Virginia Supreme Court late last week that invalidated the Democrats’ aggressive redistricting effort there. Of course, ballot dynamics still could swing in either direction, but investors should be aware that a Democratic takeover of the House is not yet set in stone.

US Private Credit Industry: In news that could rekindle investor concerns about the private-credit industry, Apollo Global Management said it’s trying to sell MidCap Financial Investment, its publicly listed business-development company. Defaults in the fund jumped to 5.3% in the first quarter from 3.9% previously, driving down MFIC’s stock price. Business-development companies are considered a type of private-credit firm, so the news will likely remind investors of the private-credit default scare earlier this year and spark renewed market volatility.

• Separately, KKR said its largest private-credit fund held by individual investors, called FS KKR Capital (FSK), suffered a major loss and required a 10% write-down in the first quarter due to rising defaults.
• According to KKR, defaults in the fund jumped to 8.1% in the first quarter from 5.5% in December.

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