Collateral Damage

Collateral Damage

By Molly Schwartz, Cross-ASset Macro Strategist at Rabobank

Negotiations between the US and Iran are going nowhere. In fact, they’re not really even happening at all. Over the weekend, Axios reported that Iran gave the US a proposal to reopen the Strait — not to end the war. The proposal includes extending the ceasefire and an assertion that any conversations about Iran’s nuclear program are off the table until the Strait is open and the US blockade is lifted. The US has not indicated whether it will accept or reject the proposal at the time of writing.

Assuming the US does agree to extend its indefinite ceasefire, a flimsy ceasefire extension, even if agreed to by both parties, holds little water. Remember, keeping the Strait open was a condition of the current ceasefire as agreed to on April 8, and we can all see how well that held up. Just take a look at the prices at the pump.

While conversations between the US and Iran stall, Iran is making friends elsewhere. Iranian Foreign Minister Araghchi met with Putin yesterday, as Bloomberg reported that Araghchi told Putin he is “committed to strengthening the country’s partnership with Russia” and that “the Iranian people are able to ‘resist US aggression and will be able to overcome it.’”

As Iran and Russia are making nice, the US and Germany are not. During a visit to a school in western Germany, German Chancellor Friedrich Merz said that the Trump Administration was being “humiliated” by Iran: “The Iranians are clearly stronger than expected and the Americans clearly have no truly convincing strategy in the negotiations either. A whole nation is being humiliated by the Iranian leadership.” Trump has not commented on Merz’ claims at the time of writing.

The longer the Strait remains closed, the longer the European economy, and energy complex, is squeezed. Germany has rejected Trump’s calls to join the war under NATO, despite German leaders softly echoing support of US military efforts. Europe has drafted a plan to re-open the Strait after the war has ended, that is not enough to appease Trump, who has made his demands for NATO participation in the Iran war clear. But the question remains just how much collateral damage Europe is willing to be subject to in the pursuit of keeping its hands clean.

Europe’s reliance on energy from the Middle East and direct flows through the Strait of Hormuz suggest that they are in for more pain than the US under a prolonged closure. At the same time, they don’t have a fanatic obduracy to tolerate it like the Iran (or rather, the IRGC at the expense of the Iranian people). If negotiations fail to result in a somewhat peaceful re-opening of the Strait and conclusion of the US naval blockade, Europe may have no choice but to get involved.

It’s probable that the Trump Administration is aware of this. Trump has lambasted European leaders for refusing to support the US and in some cases, outright refusing to cooperate. If the US keeps the Strait closed and inflicts enough second-hand damage on Europe, Trump may be able to achieve the NATO military “cooperation” he has been asking for.

Crude oil futures have continued to grind higher, trading up to highs of $109/bbl yesterday. Futures prices have started to converge with the physical market, which is currently pricing crude at $113/bbl, narrowing the spread from highs of $35.9 earlier this month to only $4, which would be more consistent with levels seen pre-war.

Meanwhile, the Fed drama saga continues. The path to Warsh’s confirmation as Fed chair seems to have cleared as the US Department of Justice (DOJ) has dropped its criminal probe into Powell with regard to the Federal Reserve’s renovation budget. However, whether Powell will stay on the Board is not yet certain. While Powell’s term as Chair ends in May, he is allowed to stay on the Board of Governors until January 2028.

Despite it being a highly popular question from reporters during the Fed decision press conference, Powell had been tight lipped about his plans for a while, until confirming more recently that he would stay on the Board until the DOJ investigation levied against him was concluded.

However, while the DOJ has dismissed the charges, that doesn’t mean that Powell’s troubles are over. Rather, this means that the case has now landed on the desk of the Fed’s Office of Inspector General (OIG), though according to the Fed’s own article about the renovation, the OIG has had full access to all financial records and information throughout the duration of the project.

Given the dropped charges against Powell, that has opened up Senator Thom Tillis to vote to officially confirm Warsh as Fed Chair. Whether or not the Fed meeting tomorrow will be Powell’s last is still TBD. Read more from our Fed whisperer, Philip Marey, here.

A little farther north, Canadian Prime Minister, Mark Carney, announced the creation of a Canadian sovereign wealth fund, called the “Canada Strong Fund.” The fund is designed to further lower barriers to business and investment in Canada—something the Carney has spoken about extensively as a part of his mission—by “investing in strategic Canadian projects and companies.”

A more financially-savvy Canadian government does not come without drawbacks. Carney has recently come under scrutiny by some after his ethics disclosure, which has led some to question the dissonance in Carney’s insistence that Canada needs to diversify away from the US, while he himself is heavily invested there.

Tyler Durden
Tue, 04/28/2026 - 10:15