Trump’s Iran war raises risks for U.S. credibility and markets

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Highlights

The joint U.S.-Israeli attack on Iran on February 28 enabled Iran to control the Strait of Hormuz, impose shipping tolls, and demand reparations and U.S. troop withdrawals.
U.S. depletion of cruise missile and Patriot missile interceptor stocks, coupled with gaps in Gulf missile defense, has led Saudi Arabia, Turkey and Pakistan to form a new defense pact.
Despite foreign capital inflows, the U.S. faces warning signs including a 6 per cent budget deficit, rising federal debt-servicing costs exceeding the Pentagon’s budget, and persistent market unease.

Iran conflict exposes policy missteps

As reported by Financial Times, the administration’s problems deepen after the joint U.S.-Israeli attack on Iran on February 28, which the commentary says followed Trump’s impatience with stalled diplomacy. The piece argues that Iran now controls the Strait of Hormuz, seeks to impose tolls on shipping and is advancing broader demands, including reparations from the U.S. and the withdrawal of American troops from areas near Iran.

The article says those developments stem from a flawed decision-making process in Washington. It says Trump was persuaded by Israeli Prime Minister Benjamin Netanyahu that regime change in Iran was achievable, dismissed warnings that Tehran could close the Strait of Hormuz and did not conduct what it describes as routine consultations with regional and European allies.

The commentary adds that the crisis may mark a delayed reckoning for a presidential style it characterizes as driven by vanity, vengeance and erratic judgment. It also says Trump’s alternating threats and sudden talk of peace are undermining the credibility that previous U.S. administrations treated as central to foreign and security policy.

Economic and alliance concerns widen

The article says the credibility issue is not limited to rhetoric, pointing to what it describes as depleted U.S. stocks of key munitions such as cruise missiles and Patriot missile interceptors. It also argues that gaps in missile defense leave Washington without a reliable way to shield Gulf allies’ critical infrastructure from Iranian attacks, prompting some partners to look for alternative security arrangements, including a newly announced defense pact involving Saudi Arabia, Turkey and Pakistan.

Beyond security, the piece links Trump’s decision-making style to rising unease in financial markets. It cites the view of an Asian money manager who increasingly sees Trump’s America as resembling an emerging market because of abrupt policy shifts, fears of discrimination against foreign investors and the business involvement of the president’s family and associates.

At the same time, the commentary notes that foreign money has continued to flow into U.S. equities and other assets during the roughly 18 months since Trump returned to the White House, while the U.S. economy still grows faster than the Eurozone. But it flags warning signs including a budget deficit of about 6 per cent of GDP, reliance on foreign buyers of U.S. debt and federal debt-servicing costs that now exceed the Pentagon’s budget.

In our earlier article, we covered how U.S. equity futures were struggling for direction as investors weighed uncertainty around a potential deal to reopen the Strait of Hormuz. We also highlighted how an unexpectedly weak July jobs report shifted rate expectations, with markets turning to upcoming CPI and PPI data and key earnings releases for the next catalysts.

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