Not surprisingly, geopolitics dominated the narrative, but for different reasons than we’ve seen in the recent past.
The Israeli air strikes against Iran on Thursday, which are likely to last several days, pushed crude oil prices to nearly $78 a barrel for the first time since the beginning of this year. Treasury yields rose again, but gold acting as a safe haven once again, continued its week-long move higher. We’ve been seeing this trend of the tariff narrative becoming less and less important to the markets and it seems now like geopolitics are clearly taking over. The clear implication of this is that it could push Fed rate cuts further into the future the longer this conflict continues.
One of deregulation’s biggest beneficiaries is the energy sector. If crude oil prices move substantially higher here, it could be good at least in the near-term for energy stocks. The other implication though is the potential re-acceleration of the reverse yen carry trade. As I noted on Twitter/X, as oil prices spike, oil priced in yen spikes even more. The risk of another big reverse yen carry trade, which almost certainly didn’t end with what happened in August, could damage global equities even more. It’s an underappreciated risk that I think investors need to be careful of.
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The other surprising development is President Trump indicating that he’ll issue an executive order to protect migrant farm workers in the country illegally from deportation. It’s a sharp policy turn from what Trump has long campaigned on. Whether it’s because the current ICE raids are becoming politically unpopular or the administration is recognizing the potential economic harm that could come from removing these people from the workforce, it’s an interesting twist that could mark another gentle move towards normalization.
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