Macro

US and Israeli strikes on Iran in February 2026 escalated into a shipping crisis in the Strait of Hormuz, threatening global oil supplies. A June truce memorandum aimed to facilitate talks but was undermined by tanker attacks and renewed US military action in early July.

Oil prices surged in early July 2026 despite reaching four-month lows, influenced by geopolitical tensions including Iran's leader assassination and tanker attacks. OPEC+ approved an additional quota increase of 188,000 bpd, helping to stabilize shipping through the Strait of Hormuz and mitigate price hikes.

Since March 2026, ongoing conflict between Israel and Hezbollah has resulted in over 4,000 deaths and displaced more than a million people in Lebanon. Despite a US-brokered ceasefire in April and its reaffirmation in June, which reduced violence by about 35%, tensions remain high with Israel maintaining control in southern Lebanon. This standoff is exacerbating broader tensions between the United States and Iran.

The Federal Reserve's interest rate path for the second half of 2026 is highly uncertain, with no cuts expected and potential hikes on the table. After six rate cuts in 2024-2025 brought the benchmark to 3.50%-3.75%, new Chairman Kevin Warsh has kept rates steady through four FOMC meetings since May, ending forward guidance. The outbreak of the Iran war in late February drove U.S. inflation to 4.2% year-over-year in May, the highest in three years, dashing hopes for further cuts. A fragile 60-day ceasefire with Iran may not reduce inflation near the Fed's 2% target. If peace talks fail, the Strait of Hormuz closure could keep inflation high, forcing rate hikes that would hurt stocks and bonds.

China's dominance in critical mineral refining, not mining, creates a strategic supply chain chokepoint. Through decades of deliberate industrial policy, state investment, and technology control, China now processes the majority of the world's refined output for 19 of 20 key critical minerals, including 96% of graphite and 90-91% of rare earths. This midstream control, built via vertical integration and Belt and Road feedstock pipelines, gives China leverage over supply timing and denial, as demonstrated by export controls on gallium, germanium, and graphite since 2023. The dependency is acute for EV battery supply chains, AI infrastructure, and semiconductor fabrication, where no short-term substitutes exist for materials like rare earth magnets. This refining dominance, not raw material ownership, defines modern industrial geopolitics.

Lockheed Martin announced a seven-year, up to $35 billion undefinitized contract action from the Pentagon to quadruple production of THAAD interceptors. The deal locks in long-term revenue, strengthens Lockheed's already deep backlog, and provides a steady multi-year production cadence that supports earnings visibility. Analysts see the award as a sector-wide signal of a shift from episodic to sustained defense investment cycles, with spillover benefits for suppliers like RTX and Northrop Grumman, whose radar and space-tracking capabilities tie into future integrated missile defense systems like Golden Dome. Lockheed stock rose 3.16% on the news.

China's 2025 export controls on critical minerals, including tungsten, tellurium, bismuth, indium, molybdenum, and heavy rare earth elements, have reshaped global supply chains by leveraging its dominant processing capacity (85–90% of rare earth refining) rather than raw ore reserves. The phased escalation—February, April, and October 2025—introduced licensing requirements, expanded to seven heavy rare earths and finished magnets, and added extraterritorial provisions affecting foreign products with Chinese-origin rare earth inputs. These measures, building on 2023 gallium and germanium restrictions, exploit inelastic demand and long substitution timelines, creating compliance risks for defense, clean energy, and electronics manufacturers. The October extraterritorial rule, partially suspended until November 2026, parallels the U.S. Foreign Direct Product Rule, signaling a strategic shift in economic statecraft.

NATO's eastern flank, particularly the Bucharest 9 (B9) countries, holds most of Europe's critical mineral deposits essential for defense and technology, yet the alliance faces a supply chain crisis as China tightens export controls on rare earths and other materials. With Beijing's October 2025 measures effectively blocking foreign defense access to Chinese-origin minerals, and Washington pressing Europe to assume conventional defense by 2027, the B9—including Sweden's rare earths, Poland's copper, and Romania's graphite—offers a strategic solution. The paper urges the B9 to lead geological mapping, stockpiling, and counter-disinformation efforts, leveraging its existing cooperation to secure NATO's mineral independence and meet EU diversification targets.

China escalated rare earth and critical mineral export controls twice in five weeks during summer 2026, targeting 10 U.S. companies on June 22 and 14 EU firms on July 24. The International Energy Agency warned on July 16 that full enforcement could jeopardize $6.5 trillion in downstream production globally. While rare earths like neodymium and dysprosium are used in magnets for hard drives and cooling fans, and gallium and germanium are critical for compound semiconductors and wafer polishing, the controls primarily threaten hardware supply chains rather than directly impacting GPU prices yet. This marks a return to escalation after a November 2025 truce, widening restrictions beyond gallium and germanium to broader rare earths and EU targets.

Gold futures fell to their lowest level since November 2025 on July 17, 2026, opening at $3,980.10 per troy ounce amid a sixth consecutive day of U.S. airstrikes against Iranian targets. While the conflict has escalated steadily, with the U.S. striking roads, bridges, and military sites, Iran has refused to relinquish control of the Strait of Hormuz and has retaliated with its own airstrikes. The ongoing fighting has driven oil prices higher, leading to expectations that the Federal Reserve may raise interest rates at least once this year to combat rising energy costs. Analysts suggest that as long as the Strait of Hormuz remains blocked to oil tankers, gold prices will struggle to gain momentum.

China's export controls on critical minerals like yttrium, gallium, and tungsten have escalated a supply chain issue into a global strategic contest, triggering a worldwide scramble for alternatives. Beijing's decades-long dominance in mining and processing has created bottlenecks for semiconductors, defense, and EVs, with a licensing system now causing uncertainty and stockpiling. In response, the US has committed $40 billion to domestic projects since 2022, and the EU is accelerating mining permits. However, building resilient supply chains faces high costs, long timelines, and potential oversupply, while China continues expanding its global mining investments.

Global power competition is shifting from oil to rare earth elements and critical minerals, which are essential for AI, EVs, semiconductors, and defense technology. China dominates 80-90% of global rare earth processing, leveraging this advantage through export controls on minerals like gallium and germanium since 2023. The US, EU, Japan, and others are now investing billions to secure supply chains and reduce dependence on China, as resource nationalism rises. EU chief Ursula von der Leyen stated lithium and rare earths will soon surpass oil and gas in strategic importance.

Escalating US-Iran conflict has driven global defense stocks to record highs, with Hanwha Aerospace surpassing ₩1 million on the Korea Exchange. President Trump hinted at larger strikes on Iran, accelerating weapons expenditure. Lockheed Martin reported a 19% revenue increase in its missiles division, with a $35 billion THAAD contract boosting its backlog to $230.4 billion. RTX saw 18% revenue growth, driven by surging Tomahawk demand from 86 to 785 annual purchases. Northrop Grumman also hit a record $105 billion backlog. European and Middle Eastern demand further fueled growth, with RTX noting half of new orders from international clients. The rally extended to South Korean defense stocks, including LIG Nex1 and Hyundai Rotem. Analysts predict the weapons order bottleneck may persist until mid-2029.

Tensions in the Middle East escalated as Iran threatened Strait of Hormuz closure, while the U.S. imposed sanctions on Iran's Persian Gulf Strait Authority (PGSA), stripping its website of encryption and exposing shippers' data. A sanctioned Russian tanker, the Caroline Bezengi, carrying 800,000 barrels of oil, spilled over 1,240 square miles off Oman after running aground June 30, creating a 'nightmare scenario' for salvage. Meanwhile, Israel's U.N. envoy cited new data showing child malnutrition in Gaza dropped to pre-war levels, refuting starvation claims. Separately, War Secretary Pete Hegseth stayed with President Trump during a secret plane swap in Turkey over an Iranian assassination plot, while Secretary Rubio remained on a decoy Air Force One.

Elbit Systems reported strong second-quarter results for 2026, with revenue rising 15.9% to $2.287 billion and GAAP diluted EPS increasing 34% to $3.61. The defense contractor's backlog hit a record $32 billion, driven by international demand, with 73% of orders from outside Israel. Europe accounted for 25% of quarterly sales, while Israel represented 37% following post-conflict inventory replenishment. Gross margin expanded to 25.3%, and operating cash flow more than doubled to $237 million. The company plans to increase capital expenditures to approximately $300 million, focusing on production expansion, robotics, and AI. CFO Kobi Kagan highlighted double-digit growth across revenues, backlog, operating profit, and EPS.

On August 6, Deputy Defense Secretary Steve Feinberg declared the Pentagon's 30-year procurement model broken, ordering Boeing, Lockheed Martin, and RTX to submit plans within 21 days for dramatically faster delivery and expanded production. The directive, confirmed August 9, follows a CSIS analysis showing U.S. Patriot interceptor stockpiles fell at least 65% from 2,330 prewar to between 759 and 827, and THAAD interceptors dropped at least 38% from 452 to between 234 and 278. The memo demands capital investments and facility expansions, but physical constraints mean new interceptors cannot arrive before mid-2028. To address vulnerabilities, the Pentagon awarded Northrop Grumman over $3 billion in framework agreements on August 3, making it a second source for PAC-3 rocket motors. The Pentagon has also secured massive contracts—$58.6 billion for PAC-3 through 2032 and $35.3 billion to quadruple THAAD production—and requested $18.2 billion for interceptor replenishment in a $67 billion emergency FY2026 package.

A Pentagon war game last summer revealed that the US aluminum supply chain is critically vulnerable, particularly for high-purity aluminum used in fighter jets and armored vehicles. The US relies on the UAE for about 90% of its imports of this niche metal. Seven months later, US attacks on Iran led to Iranian drone strikes damaging major UAE and Bahrain aluminum plants in March, driving prices to a four-year high. The closure of the Strait of Hormuz has further disrupted shipments. The US's sole large-scale high-purity aluminum producer shut down in 2022 due to energy costs, leaving the military dependent on foreign suppliers amid a global surge in defense spending.

The release of Chinese AI startup Moonshot's Kimi K3 model has sparked alarm in Washington and Silicon Valley, as it suggests China's AI capabilities are now only 2-3 months behind US leaders, shattering earlier estimates of a 6-12 month gap. US concerns fall into three categories: cybersecurity vulnerabilities, as Chinese models may harbor hidden exploits; military risks, given China's 'military-civil fusion' strategy and potential AI use in drone swarms or bioweapons; and threats to democracy, as Chinese AI must uphold 'core socialist values' and could become a global standard under authoritarian control. Policymakers, including the Trump and Biden administrations, have restricted semiconductor exports and may ban open-weight models like Kimi K3, though consensus on effective countermeasures remains elusive.