Investors Still Bracing for a Diplomatic Breakthrough
The Fog of Peace
Key Takeaways
Markets Keep Looking Past Tail Risks: The buy-the-dips mentality is well intact, and when negative headlines now come out, they are viewed more as an “escalate to de-escalate” strategy by both Tehran and Washington. Investors are trading this war “playbook” as one in which both sides are looking for an off-ramp while maintaining credibility and being able to declare some sort of victory. In essence, the muted reaction yesterday reflects a market that has learned to discount Trump’s escalation rhetoric, is positioned for a positive momentum-driven market steered by technicals, and firmly believes that WTI will remain in a tolerable range — not necessarily a market that has taken much time assessing tail risks.
Global Defense Strengthens As a Theme: In terms of sectors, one winner — which was already a winner — from the Iran war is the global aerospace/defense sector, of which we are long in the Rosie Model Portfolio. I recommend a read of Germany Reinvents Itself As a Weapons Factory on page A8 of the Wall Street Journal — you don’t have to do much more than read the opening sentence: “As its export model breaks down, Germany is pivoting from cars to cannons — and trying to turn industrial decline into a defense boom.”
AI Will Be a Disinflationary Pressure: Sentiment on the Treasury market remains quite sour, and the debate over inflation continues to rage, but there was an interesting article that showed up on page 7 of today’s Financial Times, well worth a read (AI boom in line to drive disinflation, Northern Trust says). We tend to agree with the headline and the conclusions. There is no doubt that we are already seeing the productivity benefits of the AI boom, and productivity is the driver of unit labor costs, which in turn are the mother’s milk of inflation. Far more relevant than oil prices.
