How markets may be affecting US military action in Iran

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0:30How do you square this circle? President Trump's saying he'll further pause his deadline to attack Iranian power plants to give more time for negotiations with the Iranian regime. The Pentagon is sending troops to the Middle East from one of the most elite U.S. Army units. It seems like the president has a pattern. Tell markets he's trying to end the war and then do something very, very different.

1:00This is Swamp Notes, the weekly podcast from the Financial Times, where we talk about all the things happening in U.S. politics, finance, and the economy. I'm Mark Filippino, and this week we're asking, what does President Trump's communication mean for markets? Here with me to discuss is Abigail Hausloehner. She's the FT's U.S. foreign affairs correspondent. Hi, Abby. Hi, Mark. And we've also got Katie Martin, the FT's markets columnist. Hi, Katie. Hey, how are you doing? I am doing well. We are recording Friday morning, a couple of hours before this episode airs. Abby, at this point, tell me what this U.S.

1:31military buildup in the Middle East looks like right now. Well, the question is what it looks like to whom. Trump has dispatched thousands of U.S. combat forces to the Middle East, including Marines, including paratroopers, and, you know, to the Iranians, and certainly to a lot of nervous lawmakers in Congress. This looks like, you know, the buildup for a potential ground invasion, either to try to secure the Strait of Hormuz in some way by taking land along Iran's coast or by taking Harg Island, you know, a critical point in their energy infrastructure. And so we don't we really don't know what's going to happen.

2:14Trump prides himself on being unpredictable and not telling anyone what he's going to do. Well, he has nailed that. Can you tell me a little bit about Trump's comments from earlier this week about negotiations with Iran? Because I believe today was supposed to be a deadline of sorts. That's right. Let's rewind a minute. Trump shocked a lot of people over the weekend, Saturday night, when he declared that Iran had 48 hours to open the Strait of Hormuz or he would bomb Iran's power plants and energy infrastructure. This would be a huge escalation. Iran predictably vowed to retaliate the instance of that against its Gulf neighbors' energy infrastructure, which would certainly, of course, escalate the energy crisis that we're already seeing.

3:05Trump then on Monday did a little reversal and said, actually, we've been in talks. Iran really wants to make a deal after I threaten them. And I'm going to give them, you know, five days to try to make a deal before we, you know, bomb the power plants. And then last night, Trump came in with another surprise on Fox News. He said that the Iranians wanted more time. They wanted an extra seven days. But he was so generous, he gave them 10. And so now the whole threat, the plan has been delayed for 10 days as the two sides negotiate. The Iranians, meanwhile, have been, at least publicly, taken a tough line, accusing Trump of kind of pulling these moves, particularly on Monday with the delay as a ruse, you know, to try to tip the markets in his favor.

3:54They've also said, you know, they're not going to submit to some of these U.S. demands. but it looks like they returned to the United States a counterproposal. So talks are continuing, and we'll see how this plays out. Now, I want to go back to the idea that Trump is unpredictable, because to a lot of us it is, but I think markets have maybe picked up on some of the patterns about when Trump announces certain things, what he announces and when he announces them. Katie, what are investors picking up on? So the baseline for investors and how they're looking at this whole situation is nobody knows anything.

4:35Nobody knows how this is going to play out. But the overriding narrative is that the higher oil prices get and the longer they stay there, the worse this problem is. But the underlying assumption is that Trump cares about the midterm elections that are coming up in November. and he cares what's going to happen to overall inflation, but also to fuel price inflation in the run up to that vote. And so the assumption is he won't want to see, you know, gas at the pump get too expensive before we get into election season. And broadly speaking, that has held. So you can see quite clear patterns in markets that whenever oil prices pick up, which they do when there is like broad-based concern about the conflict getting worse, he tries to de-escalate.

5:23He gives delays to Iran. He says, you know, conciliatory things. And when oil backs down again, then he amps the temperature back up. So there does certainly seem to be a sensitivity to oil prices that's running through all of this. The problem, I guess, is this power to calm markets down is demonstrating diminishing returns. So with every de-escalation that he comes through with, you see less of a decline in oil prices and you see less of a pickup in the stock market. So it feels like investors' patience with this idea is wearing a little bit thin at this point. And it's just really striking to me that everybody I speak to, whether that's in investment banks or whether they are investors or whatever it is, they just don't have a read on this.

6:12Normally with a geopolitical situation or a political situation, or certainly with an economic shock, you can kind of draw a picture in your mind around what all the different actors in it really want to happen and what might happen next. This is not one of those situations that people really do feel quite lost at sea about how this is going to pan out. It was funny. Trump actually referenced, again, the markets and obviously people's anxiety around them yesterday during this cabinet meeting. He said, I thought the oil prices would go up more. I thought the stock market would go down more and claimed that it actually hasn't been as bad as he thought and then suggested that the markets are actually not skewing as badly as he apparently expected because people perhaps have confidence in him as president.

7:01I think I'd come to a slightly different conclusion, but I'd make the same observation, which is that oil prices have picked up less than I thought they would do and stock prices have fallen less than I thought they would. I guess the reason for that is if you're an investor, you're managing money, there are various different ways that this can pan out. It can remain a bad situation or it can become a disastrous situation. And those two different outcomes have very different implications for how the global economy is going to perform and for how markets are going to perform. And so without knowing whether we are in the bad camp or the disaster camp, it's actually quite difficult to move markets around and move portfolios around to reflect that without that certainty.

7:49Abi, you mentioned Karg Island earlier, and some of our colleagues earlier this week wrote a piece about one possible reason for the military buildup in Karg Island, which is this Iranian-controlled island in the Gulf. Why would the administration focus there? Well, Khark Island is home to Iran's most critical oil export infrastructure. And so by hitting or sort of disabling Iranian, the regime's access to oil on that island, you're sort of cutting off basically their flow of oil revenues. That's the theory. The other reason strategically that they would have for trying to take it is the argument that they could potentially secure or try to secure the Strait of Hormuz for shipping traffic by having a grip on that island.

8:39Now, of course, you know, every defense analyst, lawmaker, even in both parties, national security experts who we've talked to, believe that putting boots on the ground, whether it's in Harg Island or somewhere else in the country, will inevitably incur major U.S. casualties. And so that is obviously a consideration going into this and, you know, a big one, presumably. Katie, not to, you know, play down the importance of the loss of life in a conflict, what would market reaction be to that? Well, I think it would be a bit of a self-inflicted blow by Trump were he to do that because you have to imagine it would push the oil price much higher still.

9:27And, you know, at that point, you know, he's been observing that the oil price hasn't blasted higher. This would probably do it, to be honest. And, you know, sure, the States, you know, the United States has got plenty of its own oil, but it's still subject to global oil prices. So this would still be strategically quite difficult to figure out. I can't imagine the markets taking it very well, not least because why would that incentivize the Iranians to opening up the Strait of Hormuz? You know, one of the sort of long-term things that we're going to wrestle with really from now on is that we now have proof of concept for Iran that they can control that strait and they can control the shipping through it and they can determine who comes through it and who doesn't and what they have to pay to do that, almost as if it's a toll road.

10:14this actually makes a pinch point in global energy supply chains and global supply chains generally much more squeezed in a durable fashion than it was before so you know i'm not a geopolitical expert but i don't see how it would open up the strait i don't see how it would bring down oil prices and i don't see what's really in it for the u.s if there is any kind of consideration going into U.S. military thinking of what would the market reaction be? Katie brings up a really good point, Abby. I just want to jump in for a second, that it seems like there's very little incentive for Iran to come to the table if they're going to give up so much because they have control of the strait, especially because this attack from the U.S.

10:59and Israel a few weeks ago, it came while they were supposed to be having talks. I mean, is there anything that would bring Iran to the table, give them assurances to ultimately come to some sort of deal? Well, a lot of the Iran experts who I speak to, including some who are in touch with people close to the regime regularly, say that no, they actually don't have a lot of incentives to come to the table right now. In fact, they have far fewer incentives to make concessions to the Trump administration than they did before the war started. And that's because in their view, the U.S. has very little credibility right now to uphold a deal.

11:39You know, Trump obviously backed out of the Obama-era JCPOA nuclear agreement, and he has now twice attacked Iran in the midst of negotiations. Trump sees this as a leverage point, the idea being that you can keep hammering Iran with bombs, that you could cut off the source of their oil revenues, and all that pressure would eventually push Iran to the table. Iran is meanwhile sending these signals that it can withstand a lot of pressure. You know, we don't know if that's bluffing or not, but as a lot of security analysts have pointed out to me, you know, the Strait of Hormuz is a huge point of leverage for the Iranians.

12:23And all they really need to do is inflict some damage every now and then to keep ships from transiting, to maintain that effective chokehold. So in some ways, this is a game of chicken with two sides with kind of different views of when the other side is going to buckle. Up to now, it's been Trump who has the power to turn markets around. What's going to happen in the next couple of weeks is that power shifts to the Iranians, because it's very clear at this point that Iran has agency and it can make its own decisions. Thank you very much. And it's got its own defense strategy and it sees this as an existential fight for survival.

13:02So I think actually, you know, the market direction is going to come much more from the Iranian side than from the US. Well, I would argue that it already has started, right? Because when Trump comes out and says we're having peace talks with Iran and Iran turns around and says, no, we're not. The market moves. It does. It moved more on the initial statement from Trump this week than it did on the latest statement from Iran. But I do think we're at a kind of pivot point where it is the Iranian statements that carry more weight. Thank you.

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14:12Katie, we want to go back to a point that you had kind of brought up earlier without naming it as such, but Taco, right? How can we have a conversation about this without talking about the Rob Armstrong patented Trump always chickens out? We have, I think to a certain extent we have seen that in this war, going back to the idea that oil prices haven't shot up as much and stocks haven't dropped as low as everybody thought they would, including the president. As that diminishes, what happens to markets? I mean, once they start taking Trump at his word. So look, so far, maybe there's not enough, not enough ingredients for a taco, right?

14:51So U.S. stocks are down by about 5%. After Liberation Day, it was a much heavier decline. You know, we're talking well, well into double digits. So that's enough to spook the president, whereas 5 % here or there probably isn't. So it does change the equation because the longer markets are quite well behaved, the more ammunition this gives to Trump to keep pushing this agenda forward, because it looks like it's being absorbed okay in the markets. So, you know, I've always said this is a kind of vulnerability here and that markets, you know, to the extent they have any kind of control of what the president does, which has always been debatable, they're definitely not using it here.

15:33Probably what would really spook the president and people around the president, though, in addition to what the stock market does, is bond markets. I was just going to ask you about sovereign debt. Yeah. Yeah, exactly that, right? So the U.S. has a sort of stated objective to keep 10-year bond yields around 4%. Basically, they want to keep borrowing costs reasonably low. Now, the long-term implication of what we're seeing here from what's happening in and around Iran is higher energy prices, higher defence spending, and a push certainly outside the US for much more green energy investment so that we don't keep getting into this situation over and over again.

16:12And also potentially outside the US, government spending on keeping households and businesses' energy prices down. All of this is inflationary. And bonds hate inflation, right? This is just a thing that they cannot deal with. It eats into their returns if you're an investor. So the longer this goes on, the more bond prices fall, the more borrowing costs push higher. This is already happening quite forcefully. UK and Europe took the earliest blow here because they're most vulnerable among the sort of major bond markets. They absolutely got hallowed, you know, a week or so ago. But it's starting to trickle into US markets.

16:52I suspect that if you get to the point where the US government bond market, where the treasuries market, if that really starts rebelling, that might be the point at which Trump starts listening a little bit more carefully to markets. But at that point, again, it's not clear to me that he has the ability to turn it around. It's up to the Iranians. Abby, last question goes to you. Geopolitically, we've seen the U.S. call on a lot of its allies to support it militarily in the Gulf. And a lot of our allies have kind of shrugged us off. And I say shrug because that's the more polite gesture. But they're unwilling to send support to a certain degree because of the way the Trump administration has treated them over the past year.

17:36I mean, do you think this will continue to alienate American allies? Yeah, it certainly looks like it. You know, Trump has, with this war, whether, you know, for those who support it or those who opposed it, you know, the U.S. is in a tricky situation right now. There are no easy off-ramps. There are no off-ramps that aren't going to be somewhat, at least somewhat painful. And I think the Trump administration has realized that, and, you know, that is why they are making these overtures to the what remains of the Iranian regime. But the administration does not have sort of a clear answer right now for how it's going to get the Strait of Hormuz open and those ships and energy moving again.

18:24And that has sort of become the objective or the most pressing objective of a war that started without really seeming to take that into account. And so it's a tricky situation. There are no easy options for the U.S. president now. There are no easy ways to open the strait. And there are certainly, according to most people I talk to, no easy ways to declare victory. Katie, I'd like this question to go to you, too. You know, we talked about a lot last year about foreign investors abandoning the U.S. because of Liberation Day tariffs. Do you think that will happen here? I mean, yes, is the short answer.

19:06And one way that you get an early warning sign that is already happening is that if you look at the U.S. dollar, normally in, you know, in wars, in big outbreaks of geopolitical stress or in economic crises or whatever it is, the dollar blasts higher because it's considered to be the world's safest currency. And look, it's a bit higher in this crisis, but not much. And I think that tells you that already, you know, markets are not treating the dollar with quite the same level of reverence that they normally do. And some of this sheen has already come off. I guess shorter term, though, you know, the economies that are really going to suffer as a result of this energy crisis that is crystallizing in front of us is it's Europe and Asia and Africa.

19:49It's not the US. You've got plenty of your own oil. So, you know, I guess there might be a period where US markets, stock markets, for example, outperform those in the rest of the world simply because you've got better energy security. But yeah, you absolutely have to imagine that this undermines the status of US assets in the eyes of very conservative investors, particularly very conservative investors that are allied with or associated with governments around the world in the Gulf and elsewhere. All right, guys, I want to end there. I want to thank our guests, Abigail Houselohner. She's the FT's U.S.

20:25Foreign Affairs Correspondent. Thanks, Abby. Thanks for having me. And Katie Martin, the FT's Markets Columnist. Thanks, Katie. Me, a pleasure.

20:38This is Swamp Notes, the U.S. politics show from the FT. We want to sign up for the Swamp Notes newsletter. We've got a link to that in the show notes. Our show was produced by Henry Larson. It was mixed by Kent Millitzer. We had help this week from Lauren Fidor. Special thanks to Pierre Nicholson. I'm your host, Mark Filippino. Our executive producer is Topher Forges, and the FT's global head of audio is Cheryl Brumley. Original music by Hannes Brown. Check back next week for more U.S. political analysis from the Financial Times.

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