Still The (Military) Base Case

By Michael Every of Rabobank

Hormuz traffic is climbing, but refined product prices are lagging, and crack spreads are blowing out: one can’t just look at the oil price to understand the overall energy dynamic.

On the geopolitical front, things are also still mixed. Talks about the US-Iran MoU in Doha, without either side speaking to the other, went well according to the US, who are staying on for what could be indirect talks today. However, the Wall Street Journal reports Iran is split, with political leadership focused on getting assets unfrozen and the IRGC on keeping Hormuz more frozen. Tehran has now rejected third-party offers to help demine the water way; they are in no hurry to see things return to normal as this removes their energy leverage. Iran is also opposed to allowing the southern passage via Oman, which the US favours, to become established - and there are still reports Oman wants to charge for access to this channel.

A WSJ headline is that Trump has been briefed on ‘all-out war options’ to finish the job but is sticking with talks while making clear that --as expected in our base case-- the 60-day MoU deadline ending 18 August will be extended. Until November at least, as we posit?

Meanwhile, Israeli PM Netanyahu visited south Lebanon and reiterated that as long as Hezbollah is armed, they won’t leave, as the US announced coordinated sanctions with Gulf countries against the Iranian terror proxy. So, Tehran reads the MoU as “peace, where Hezbollah wins the war though it lost the battle”, and the US reads it as “peace, where Hezbollah loses by Israel staying or by being disarmed.” That can easily lead to more conflict with Iran, who doesn’t care about the US midterm timetable.

Neither does Israel, perhaps: Defence Minister Katz warned yesterday Israel could resume war with Iran “within two days” if missiles are fired at it, presumably as Tehran’s response to what is transpiring against its wishes in Lebanon. There is an element of pre-election rah-rah in his statement, but the threat is serious. However, on balance the likelihood is that Iran won’t trigger a new phase of the war… yet. That said, the tail risks are clear and the weak foundations of the current ‘peacefire’ should be well noted.

On conflict and timetables, departing UK PM Starmer has handed his successor Burnham a £5bn defence black hole, pledging new, smaller systems (and far less than what the military says it needs, and many arriving after 2030 rather than in this parliament) without having a plan for where the money will come from. In the EU, while Macron wants higher taxes on foreigners to fund a €2 trillion EC budget, but Germany wants a €400bn spending cut to balance things: who will win, and what does that say about Europe’s trajectory?

Russia is meanwhile reported to be about to start importing gasoline as Ukrainian strikes have so damaged the local fuel system.

In geoeconomics, the Hong Kong press reports that the US is interested in using a hollowed out G20 in Miami for a Trump-Xi meeting. That’s as, in line with what the US has long wanted, the World Bank is to phase out lending to China, and the White House is looking to ban Chinese solar inverters for national security reasons.

The US has lifted national security restrictions on the export of Anthropic’s Fable 5 Model after a review; and Japan has announced a $2.3 trillion startup tech strategy just after South Korea’s $1.3 trillion pledge. The cash being splashed here is not small.

Closer to home, the US is also reportedly to declare that it wishes to trigger a decade-long countdown to exiting the USMCA trade pact. The Canadian press notes this opens the door to a reworking of the agreement into a ‘Fortress North America’, logically with a common external tariff set by the US, as long flagged as the only logical US economic statecraft target by us. Where would that leave EU and Australian plans to deal more with Canada rather than the US? And, by contrast, where would it leave a Donroe Doctrine bloc replete with energy, commodities, consumers, technology, and military vis-à-vis others? The NAFTA > NAPHTHA (North American Petroleum and Hydrocarbons Trading Hub Association) pun about potential realpolitik springs to mind.

At home, the Supreme Court ruled in favor of birthright citizenship, so anyone physically in the US gives birth to a US citizen regardless of whether they are there legally or illegally, or permanently or as a tourist. No change for the US trajectory on that front, but there is informed talk that this issue could be as energizing for the Republican base in the midterms as Roe vs Wade was for the Democrats when that was overturned. The Court notably also removed limits on election spending, handing the cash-rich Republicans a boost.

In data, today’s strong Japanese Tankan survey was much better than expected for large manufacturers in particular. The 10-Y JGB yield is now slightly lower at 2.70%, still near the highest since 1997, while USD/JPY is at 162.7, the highest since 1986.

Indeed, the dollar is again on a roll, catching out markets who had been expecting the opposite. Gold just had its worst quarter in more than a decade, as the Great Debasement suddenly isn’t; and despite crypto falling, it’s reported that Trump and his family made either $1bn, $1.4bn, or $2bn from crypto deals in 2025.

Moreover, as the Australian Financial Review puts it, 2026 is ‘The year the global markets got physical’, as “Until this year, investors sought solace in capital-light companies with reliable earnings. Now, in the age of disruption, nothing is safe.”

That remains our (military) base case.