by Patrick Fearon-Hernandez, CFA, and Thomas Wash

[Posted: 9:30 AM ET] | PDF

Our Comment today opens with some disturbing remarks from a former White House official that serve as a reminder that the US-China competition in artificial intelligence could eventually lead to geopolitical conflict, although not necessarily in the near term. We next review several other international and US developments that could affect the financial markets today, including new attacks in the Iran war that have driven up energy prices today and the latest skirmishes in the US-Canada trade war.

United States-China: Jacob Stokes, a former White House official who is now a leader at the Center for a New American Security, said at an event on Thursday that the federal government should start preparing for offensive action against China to keep it from surpassing US capabilities in artificial general intelligence (AGI). According to Stokes, the US needs to start developing the espionage, covert operations, and military programs that would be needed to slow or destroy China’s ability to exploit AGI.

• The call from Stokes is an extreme proposal. We’ve seen no other current or former US official calling for military strikes aimed at China’s artificial intelligence capabilities. Since China is probably no more than a few months behind the US in this technology, and since the war in Iran has probably weakened the US armed forces severely for years into the future, it isn’t even clear that US intelligence or military action could meaningfully slow China’s progress.
• All the same, the dramatic proposal raises a point: If artificial intelligence and AGI really are game changers for national economic development or geopolitical power, losing out to the Chinese could eventually be seen as an existential issue for the US. At some point down the road, investors may indeed see a growing debate about potential offensive kinetic action against China — a development that would be profoundly impactful on the financial markets.

European Union-China: In an interview with the Financial Times, the chair and chief executive of Spanish auto parts giant Gestamp today warned that Europe’s “wealth won’t last” unless it can salvage its auto industry amid surging imports from China and rising trade barriers in the US. The statement comes as EU automakers and other industrial firms continue to hemorrhage jobs, prompting EU officials and national leaders to consider tougher trade policies against China. However, those officials and leaders continue to worry about Beijing’s likely retaliation.

United States-Canada: In a social media post yesterday, President Trump appeared to threaten a new US ban on selling business jets from Canadian aerospace firm Bombardier, even though the firm employs more than 3,000 workers at nine different facilities in the US and buys supplies from thousands of US firms. The president’s threat came just hours before Canada imposed its big retaliatory import tariffs on a range of products from the US. The statement suggests the US and Canada will remain locked in a disruptive trade war for the near future.

United States-Israel-Iran: The US military over the weekend struck three Iranian oil tankers in retaliation for Iranian missile attacks on two US Navy vessels. Then, yesterday and today, Iran-backed Houthi rebels in Yemen attacked several oil facilities in southern Saudi Arabia, shutting down several of them. The renewed strikes have pushed global oil prices higher yesterday and today, with near Brent futures currently up 1.6% to $98.54 per barrel.

• Now that the US Navy has had some success in escorting allied oil tankers through the Strait of Hormuz, the renewed Houthi strikes may reflect a tactical shift by Tehran to focus on Saudi Arabia.
• As shown by the behavior of oil prices today, such attacks can push up global energy costs and potentially cause political problems for President Trump.

Germany: In a weekend election for the Saxony-Anhalt state parliament, the far-right Alternative for Germany (AfD) won handily with 43.8% of the vote, thrashing the Christian Democratic Union, which rules nationally. The CDU came in second with just 17.2% of the ballots. The results put the AfD just three seats short of a majority in the state legislature, but that isn’t likely to prevent it from taking control of the state to push the national AfD party’s agenda.

• The AfD’s populist, nationalist agenda focuses on aggressive anti-immigration policies, financial incentives to boost the birth rate, reduced teaching about Nazi Germany in the schools, and increased teaching of Russian. The agenda also strongly focuses on wresting back power from the European Union and drawing closer to Russia.
• The AfD’s win in Saxony-Anhalt gives it further momentum that could help it eventually seize power at the national level. The risk of policy upheaval could well weigh on German stock values going forward.

France: Private model-maker Mistral AI today raised 3 billion EUR ($3.5 billion) in new equity as it fights for relevance in the global artificial intelligence race dominated by US and Chinese firms. The new private-equity financing, which was led by an investment from Samsung, lifts Mistral’s valuation to 21 billion EUR ($24.4 billion) and will be used mostly to secure compute capacity for the company’s modeling effort. However, Mistral’s valuation is still only a small fraction of the valuations expected for US companies such as Anthropic and OpenAI in their upcoming initial public offerings (IPOs).

United Kingdom: As a reminder that government bond yields are rising across the globe, the British government today sold 4.25 billion GBP ($5.74 billion) of 30-year debt at a yield of roughly 5.83%. That marks the highest interest rate on any gilt since at least 1998. The surge in yields reflects many factors, including concerns about elevated consumer price inflation, high global credit demand from the AI investment boom, and worries about national governments’ big budget deficits and rising debt loads. The rise in yields could eventually weigh heavily on national stock markets.

Japan: In London trading yesterday, the yen not only continued its recent appreciation but also reached its highest value against the greenback since February, at 154.06 yen per dollar. In US trading early today, the currency remains at about that level. The joint US-Japanese market intervention in late July has been seen as only temporarily effective, but now it appears that the yen is getting an added boost from expectations of more aggressive interest-rate hikes by the Bank of Japan and the reversal of short positions as the yen broke through 155.

Global Education: The latest PISA survey of comparative educational attainment across the countries of the Organization for Economic Cooperation and Development shows that reading scores have plunged across the developed world, as widespread access to AI and social media has harmed teenagers’ ability to concentrate. The performance of the average 15-year-old across the OECD in 2025 was more than a year behind where it was in 2018, according to the report. The report will likely raise concerns about skill shortages in the future workforce.

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