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August 28: Syria in Spotlight

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Geostrategic concerns centered on the Middle East are in the spotlight, with impending U.S. strikes in Syria stoking fears that the conflict could engulf the entire region. This is producing all the typical flight-to-safety movements across the different asset classes, but the moves are unlikely to have much staying power.  

The U.S. government is in a tough spot. Its need to maintain international credibility in the face of the alleged use of chemical weapons by the Syrian regime demands a military response. But the war fatigue in the country limits the government’s options. The U.S. also needs buy-in from independent entities like the U.N, the Arab League, and others for a more robust response, which is simply not there at this juncture.

Even more importantly, there is no compelling strategic case for the U.S. to replace the Syrian regime with the rebels – the alternative is no better than what is available now. What all of this amounts to is a symbolic show of force by the U.S. through a few surgical strikes that ensure that the conflict doesn’t spread to the outside the region beyond what it has already.

But the potential U.S. entry into the conflict does add to uncertainty and fears of a wider conflict in this strategically important region. And this is creating the usual safe-haven bid in gold, pushing oil prices higher and stocks lower. The slide in Treasury bonds has eased a bit as well, helping 10-year yields modestly reverse the move towards the psychologically important 3% level.

The stock market weakness is likely a function of other variables, like the future of the Fed’s QE program and the prospect of another fiscal fight in DC. But I don’t envision the current bid in oil, gold and treasuries to have much staying power. 

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