by Patrick Fearon-Hernandez, CFA, and Thomas Wash

[Posted: 9:30 AM ET] | PDF

Our Comment today opens with the most recent security incident that threatens to further undermine popular support for artificial intelligence. We next review several other international and US developments that could affect the financial markets today, including the latest signs that the war in Iran could expand regionally and a new order by President Trump that is designed to help bring down diesel fuel prices.

Global Artificial Intelligence Industry: At a cabinet meeting today, South Korean President Lee Jae Myung said there is evidence that a recent computer hack of his country’s top financial firms used cutting-edge AI tools, “causing considerable public concern and anxiety.” Other reporting suggests the specific tool deployed was Artex, a Chinese-language, open-source model that uses AI to find and test computer system vulnerabilities.

• The South Korean incident indicates the long-feared age of AI hacking attacks has now arrived.
• The result could be even more negative public perception of AI and stronger calls for regulation. Coupled with issues such as the competitive threat from low-cost Chinese models and public backlash against data centers, that could trigger a reversal in the ongoing AI investment boom.

United States-Israel-Iran: Saudi and Yemeni forces yesterday launched a surprise offensive to take back control of the Yemeni port of Mokha from the occupying Houthi rebels. The offensive is designed to reduce the risk to globally important energy shipments through the Bab al-Mandeb waterway. That risk has risen now that the US has launched a blockade against Iran and Tehran is looking to use its militant proxies across the region to attack US and Israeli interests.

• In fact, the Houthis today reportedly launched drone or missile attacks against two Saudi airports.
• Saudi Arabia, Pakistan, and NATO member Turkey have therefore triggered their new mutual defense pact today for the first time, aiming to ensure the rapid deployment of Pakistani and Turkish “military forces and capabilities” to Saudi Arabia. The move threatens to turn the US-Israeli war against Iran into a full-blown regional conflict, with continued risks to global energy supplies.

US Energy Market: President Trump yesterday signed an order allowing “red diesel,” which is exempt from the 24-cent per gallon federal fuel tax, to be used for any purpose through the end of the year. Red diesel can normally be used only for off-road vehicles and farm equipment. The new order extends its use to on-road cars and trucks, potentially saving drivers a few percentage points off regular diesel’s current cost of about $6.32 per gallon.

• The move is clearly aimed at boosting Republican chances in the November midterm elections. However, the savings would be so small that the order may not make a difference in the balloting.
• At the same time, exempting more diesel fuel from the fuel tax will bite into federal revenues, making the budget deficit bigger than it otherwise would be.

European Union-China: German Chancellor Merz and French President Macron yesterday said they’ve agreed to support tighter anti-dumping and anti-coercion tools that the EU could use to protect its industrial sector from the current onslaught of ultra-low-cost Chinese exports. With Berlin and Paris in agreement on the tools, the EU is now anticipated to get final sign-off on the plan in the coming months. Implementing such tools would likely invite retaliation from China, but the move could also help slow the hollowing out of EU industry.

Germany: August Hanning, who led the Federal Intelligence Service from 1998 to 2005, was arrested today on suspicion of illegally obtaining classified information and passing it to a foreign agent. A former bureau chief of Hanning’s was also arrested on similar charges. The presence of such alleged high-level moles in the intelligence agency reflects Russia’s long success in recruiting Germans. It will therefore probably be a political embarrassment for Chancellor Merz, who is already coming under pressure to resign due to a string of state election losses.

France: With the country’s burgeoning debt prompting investors to demand ever-higher yields to buy French bonds, far-right leader Marine Le Pen today proposed a “golden rule” capping national debt at 60% of gross domestic product and reducing the public deficit by 0.5% of GDP each year until it is “close to a balanced budget.” Le Pen, who is leading opinion polls ahead of next year’s presidential election, also said she would enshrine the rule in the constitution via a referendum.

• Many investors fear the rise of far-right populist politicians because they assume those leaders will adopt profligate fiscal policies as a sop to their working-class base. However, far-right leaders such as Italian Prime Minister Meloni generally adopted much more mainstream policies when they came to power at the national or regional level.
• Le Pen’s proposal is likely intended to allay concerns about how she would govern while also piling pressure on France’s centrist political elite for allowing the country’s finances to become so precarious.

Italy: At a cabinet meeting late last week, the right-wing populist League party, which is a member of Prime Minister Meloni’s coalition government, managed to push through a deal calling for smaller defense budget hikes in the coming years. The move by the isolationist party reportedly reflects both war fatigue related to the conflict in Ukraine and a desire to spend more on domestic civilian priorities. The deal suggests European politics are becoming less supportive of defense spending, although we still believe military budgets will keep rising into the future.

India: In what could expand into the latest in a string of major protest headaches for Prime Minister Modi, hundreds of opposition officials are demonstrating against Gyanesh Kumar, the head of the country’s Election Commission, for a recent purge of voter rolls that they say benefited Modi’s Hindu-nationalist political party. The revisions reportedly removed some 130 million names, a high proportion of them belonging to Muslims.

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