By Anna Szymanski
Aug 28 (Reuters) – From the Editor
U.S. President Donald Trump originally said the Iran war would last four to five weeks, but we’re now hitting the six-month mark. What remains most surprising is the resilience of financial markets in the face of what was previously thought to be a doomsday scenario – the multi-month obstruction of the Strait of Hormuz.
The critical trade artery, through which roughly 20% of global energy flows used to pass, has effectively been closed for much of the time since February 28. It’s unclear exactly how much oil is currently getting through. While U.S. Energy Secretary Chris Wright claimed last Friday that over 8 million barrels per day were leaving the Gulf, tracking data shows something closer to 5 million bpd. Asia’s depressed crude imports in August suggest it’s closer to the latter. What’s clear, though, is that we’re nowhere near the volumes seen before the conflict began.
Yet Brent crude oil prices are currently trading under $90 a barrel, above pre-war levels but far from the high triple-digit figures that many feared we could see if the strait were not fully reopened by the end of summer. It’s important to remember, though, that the major concern for the global economy right now is not so much crude but refined products, where prices are continuing to sound alarm bells. European diesel profit margins are near record highs, and refined product and gas markets are sending a number of other signals that they could remain tight through next year.
Nevertheless, oil prices did dip early this week after some positive diplomatic signalling out of the Middle East. While talks between Washington and Tehran remain stalled, Iran and Oman reported that they are working to finalize the details of an agreement over control of the strait. Qatar also met with senior Iranian officials in Tehran on Thursday to discuss conditions for normalizing transit through the waterway.
These actions came after U.S. Treasury Secretary Scott Bessent’s “economic D-Day” on Monday. Bessent had claimed he would be announcing “the toughest sanctions in history,” with many fearing that Chinese banks could be targeted, but he ended up mostly sanctioning Iranian entities while threatening to impose secondary sanctions if other countries didn’t fully sever ties with Tehran. While this wasn’t exactly the invasion of Normandy, the U.S. shift toward economic warfare could still be having an impact on Iranian strategy, as evidenced by the renewed diplomatic efforts.
For now, though, the protracted conflict appears to be stuck in a period of trench warfare, with small shifts on either side, but no big actions that massively move the needle.
Away from the Middle East, another country was caught in the U.S. economic crosshairs this week: Canada. The U.S.-Canada trade deal that Trump previously said was settled broke down last Friday, meaning that 50% tariffs on roughly $20 billion of goods, including lumber and dairy products, kicked in on Saturday. Canadian Prime Minister Mark Carney didn’t back down, coming out with “dollar for dollar” levies in response. The White House then upped the ante by threatening to slap 50% tariffs on autos, trucks and auto parts as of the beginning of next year if a new deal isn’t reached.
While the two neighbours probably will come to an agreement well in advance of that, this spat could still have wide-ranging implications, given that Canada is America’s second-largest trading partner. Perhaps most importantly, this rancour could be a negative sign regarding the fate of the USMCA, the trade agreement between the U.S., Canada and Mexico, America’s biggest trading partner.
Moving over to Wall Street, the AI boom got a shot in the arm on Wednesday when the quarterly results from $5 trillion chip giant Nvidia beat already sky-high expectations. It forecast a 70% surge in revenue next fiscal year, underscoring the strength of demand for AI chips. Its stock rose almost 9% on Thursday, even after The Information reported that Jensen Huang’s firm had agreed to pay nearly $13 billion to buy AI platform Hugging Face.
U.S. equities got an additional boost from an unexpected source: the software sector. Salesforce on Wednesday raised annual revenue and profit forecasts while rolling out a new plug-in with Anthropic, and the cybersecurity software provider CrowdStrike raised its annual revenue forecast as it also topped second-quarter earnings estimates.
Staying in tech, Meta Platforms on Wednesday settled lawsuits brought by many U.S. states related to its responsibility for children’s social media addiction. Meta agreed to pay up to $18 billion over the next decade and put strict limitations on teenagers’ use of Facebook and Instagram. (For more news on Meta, check out this fascinating Reuters investigation on how Mark Zuckerberg’s plans to replace the company’s staff with AI imploded.)
Finally, all eyes are on Wyoming today, as the Federal Reserve kicks off its annual Jackson Hole symposium. Central bankers got some unwelcome reading in advance of this as the PCE inflation index, the Fed’s preferred measure, for July came in slightly higher than expected. The 0.2% month-on-month increase in headline inflation, which is closer to 0.3% if you use the unrounded figure, exceeded the 0.1% forecast, while the annual increase of 3.7% was also slightly above consensus expectations.
Bond yields increased modestly on the news and remain elevated, with the 10-year hovering around 4.7%. This caps a rough week for Treasury Secretary Bessent, whose recent efforts to tame government borrowing costs by announcing an increase in bond-buying were panned by his former colleague Stanley Druckenmiller, who argued that such actions risk eroding the Treasury’s credibility.
Speaking of credibility issues, Fed Chair Kevin Warsh will have to watch his words very carefully when he delivers his first set-piece speech in Jackson Hole later today. His press conference after the most recent Fed meeting was widely panned, as many Fed-watchers argued that he raised questions about his commitment to the central bank’s inflation target. Warsh, who isn’t a fan of excessive communication, is expected to play it safe and focus on the task forces he’s creating to reform the Fed.
Please note that Morning Bid will be off on Monday due to the UK bank holiday, as Mike Dolan and I seek to enjoy the waning days of summer.
Can U.S. refiners pass their historic stress test?
Are crumbling U.S. public finances really such a problem?
How will the U.S. handle its mounting aluminum problem?
Why should yen bears recalibrate their expectations?
What headaches may European traders face when they come back from the bank holiday?
How might China help zinc bears at the LME?
Can U.S. LNG producers keep up their rapid pace?
How is the AI boom connected to the U.S. fiscal hole?
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(Editing by Marguerita Choy)