Quick Morning Note

Reports emerged this morning that back-channel conversations are underway between the United States and Iran... More concretely, a commercial tanker successfully transited the Strait of Hormuz this morning after direct talks with Iranian officials -- the first tangible sign that the critical shipping corridor that carries a meaningful share of the world's oil supply may remain open.

Stocks are up broadly, gold is surging, and oil prices are pulling back -- all the logical responses to a world that looks slightly less likely to tip into a full-scale energy supply crisis.

That said, while hopeful, again, things are clearly not settled at this point... Tehran has publicly rejected ceasefire characterizations through state media, and Gulf nations addressed the United Nations this morning describing Iran's actions in very serious terms... Think of today as a bit of fear-unwinding, as opposed to resolution.

The conflict is definitely showing up in the data:

The most significant release was U.S. trade price data... The cost of goods entering and leaving the United States both rose at more than double the pace economists had expected -- an early signal that the conflict is beginning to transmit into the prices of real goods faster than economists expected... I.e., the inflationary pressure that the conflict could generate is starting to show up in the data, and it hasn't even fully arrived yet... This reinforces why we hold meaningful exposure to assets that tend to hold their value -- or appreciate -- when the purchasing power of the dollar comes under pressure.

Global market jitteriness of late has also to do with the prospects for global central banks to respond hawkishly to current events... For example, the European Central Bank signaled this morning that further rate increases could be necessary if inflation accelerates... I.e., central banks on both sides of the Atlantic are effectively caught between slowing growth and rising prices -- a difficult position that has historically favored real assets.

Our core allocation is performing well so far today, and more importantly, it's performing well for the right reasons... The assets we've held through a difficult stretch -- precious metals, mining companies, commodity-producing international markets, along with even commodity-consuming international markets -- are among the biggest beneficiaries of this morning's optimism. 

The economic data, meanwhile, is confirming that the inflationary backdrop we've been positioning around is real and building... The conflict is not just a geopolitical event -- it's a cost of goods event, and the data is beginning to reflect that.

Stay tuned...