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Discussion
As discussed in The Outlook and on the Israel-Iran channel this weekend, the Israel-Iran conflict appears to be contained for the time being, and if anything might in fact effectively be over as a result of Iran’s brazen display of military incompetence. The problem for the equity market is that a reduction in geopolitical risk means the bond market can get back to pricing in the on-going shift in FED policy away from engineering a soft landing.
Bond yields are up sizably so far this morning, and while equities are seeing a bit of a relief rally, this relationship between equities and rates needs to be monitored closely, especially from the vantage point of policymakers.
It continues to be my staunch belief that Yellen/Brainard will want to at minimum manage the rise in rates (if not halt the rise altogether via the UST buyback program) so not to unduly impair a pre-Election equity market rally, but if their guidance at all indicates renewed comfort with downside equity market volatility, there is plenty of air to come out of equities if and when policymakers step aside.
As long as Israel-Iran does not re-escalate this week, we should get a pure look at how this dynamic is going to play out before major earnings hit the tape later in the month.