Morning Note

US equities are seeing a leg lower today: Dow down 700 points, S&P 500 down 0.80%, and the Nasdaq down 1%. 

Headlines say it's the hot Producer Price Index for January, released this morning... The overall market action, however, doesn't really jibe with that sentiment.

You see, US treasuries are catching a bid (yields lower), which is definitely not what you'd expect on a hot inflation print... It is however what you'd expect on heightened geopolitical risk -- read Iran (oil's up 2% on the morning)... Gold is catching a bid as well, which makes sense in a geopolitically-led selloff.

I asked AI for the most recent Iran-related headlines:

Thursday's Geneva talks — no deal. Iran and the US held hours of indirect negotiations in Geneva over Tehran's nuclear program but walked away without a deal, leaving the danger of another Mideast war on the table. Oman's FM said there had been "significant progress" without elaborating, but just before the talks ended, Iranian state television reported that Tehran was determined to continue enriching uranium, rejected proposals to transfer it abroad, and sought lifting of international sanctions. Investinglive

Military briefing at the White House. Navy Admiral Brad Cooper, commander of US Central Command, briefed President Trump on potential military options in Iran on Thursday — even while those diplomatic discussions were taking place. Manorama Online

Massive military buildup in place. The US has assembled its biggest deployment of aircraft and warships to the Middle East in decades. The USS Abraham Lincoln carrier strike group has been in the Arabian Sea since late January, while Trump ordered the USS Gerald R. Ford — the world's largest aircraft carrier — along with three destroyers and more than 5,000 additional troops to the region. Dozens of F-35s, F-22s, F-15s and F-16s have been tracked flying to the Middle East from US and European bases. Stockmarketwatch

Iran's red lines are clear. Iran has warned that any US strike would prompt retaliatory attacks on American military bases throughout the Middle East, where tens of thousands of troops are deployed. Tehran has also threatened to close the Strait of Hormuz. Stockmarketwatch

Today's diplomatic activity. Oman's Foreign Minister plans to meet with VP Vance in Washington today to discuss a potential nuclear deal. Vance said there's "no chance" of a protracted conflict but did not rule out military action. Manorama Online Separately, Iran's FM said technical talks are set to continue in Vienna on Monday. The Week

Congress pushing back. Democratic leaders in the House say they will force a vote next week on legislation requiring Trump to obtain congressional approval before launching military action against Iran, using a discharge petition to bypass Speaker Johnson. Even if it passes both chambers, Trump is widely expected to veto it. Charles Schwab

Bottom line: the situation is genuinely on a knife's edge. Diplomacy is still technically alive with the Vance-Oman meeting today and Vienna talks Monday, but the military machinery is fully staged and Trump was being briefed on strike options during the Geneva talks. The weekend risk premium in markets makes complete sense here.

Indeed, that's the market worry here, despite this headline from CNBC:

"U.S. stocks open in the red on tech slide, producer inflation data" 

Our base case thesis (always subject to change) for 2026 remains for now that, as we meander through the year, the geopolitical landscape will improve, and, relatedly, the average tariff rate will come down. 

Abating geopolitical and trade uncertainty will be economically, and, frankly, politically, helpful... Thus, if the Iran scenario is going to heat up, the earlier in the year the better for the powers that be. 

As you might imagine, given our gold position, fixed income and direct equity hedges, our core allocation is only off marginally (0.2% as I type)... But of course the day is still young.

Thanks for reading,

Marty