Good morning and welcome back to the coal face after a wild weekend at the intersection of macro and geopolitics. First, [PERSON_NAME] raised the prospect of a military response to rising bond yields. We’re not joking and he wasn’t taken out of context — you can see the video here.

What could this mean? [PERSON_NAME] team raids on steepeners at dawn? Carpet bombing the belly of the curve? [PERSON_NAME] has already reported for duty. What will you do in the Great Bond War? Put an iron dome over your fixed income portfolio just in case. On a similar note, Canadian PM [PERSON_NAME] went elbows up and walked away from trade talks with the [ADDRESS], stating that “you’re at war when you’re attacked, and we got attacked”.

If all that is not enough event risk for you, the [ADDRESS] central bank jamboree kicks off on Thursday. Good luck to us all. Tell us your defence strategy: [EMAIL] Recently, Daire wrote about how the trend has reversed in the [ADDRESS] from shrinking equity supply, or “de-equitisation”, into positive net issuance, or “re-equitisation”.

This reversal presents an interesting test for [ADDRESS] equity returns; if you abide by the idea that demand for stocks is rigid, the shrinking supply of equities provided a nice bump to returns over the years. It turns out that demand for [ADDRESS] stocks right now is not just strong, but at an all-time high. [PERSON_NAME] at Deutsche Bank cites overseas investors buying a record $426bn of [ADDRESS] stocks in the second quarter — 43 per cent more than the next largest occurrence, and much bigger than debt inflows. It seems to us, at least, that investors will welcome greater equity issuance, and fears of this undermining returns might be overblown.

In fact, [PERSON_NAME] believes the jump in equity issuance in the second quarter contributed to more foreigners wanting to buy into the [ADDRESS] market. But even with the strong demand for [ADDRESS] stocks for reasons familiar to all of us (namely, AI), [PERSON_NAME] still doesn’t have confidence in one thing — the dollar, which has traded mostly sideways despite the “hefty appetite” for [ADDRESS] stocks in the past few years. He explains: He hits on a key point.

More than most other asset classes, currencies, including the mighty (once mighty?) dollar, are dependent on outside factors beyond investor demand — well demonstrated last week by the dollar’s fall following [PERSON_NAME]’s Treasury market intervention. A strong front on the equity market can, at most, just offset a strained dollar from a spooked bond market. Our colleagues across [ADDRESS] have well covered the toll of extreme heat this summer, in particular the economic impact of the shrivelling of the Rhine river. (You can hear more on that from the Unhedged podcast here.) Measuring the financial toll of climate change is notoriously difficult, and extreme heat is perhaps the trickiest.

It is much less clear-cut than larger-scale disruptive climate events such as wildfires or El Niño (the effects of which our colleague [PERSON_NAME] has unpacked nicely here). This also makes heat stress risk extremely difficult to insure. In developed economies, the macroeconomic risks of extreme heat still appear relatively shortlived. [PERSON_NAME] at Capital Economics notes that the [ADDRESS]’s heatwave is a bigger risk to inflation, such as pass-through effects on food, rather than to economic output, since weather-sensitive sectors such as agriculture are only a small share of the GDP.

The effect of extreme heat on asset prices is where it gets interesting. A group of professors — [PERSON_NAME] of [PERSON_NAME], [PERSON_NAME] of [ADDRESS], [PERSON_NAME] at University of Illinois and [PERSON_NAME] of Boston College — found that heat stress is associated with higher yield spreads for both municipal and corporate bonds, as well as higher conditional expected returns for stocks. The methodology here consisted of mapping out the projected changes in the number of extreme heat days per year and assessing the localised effects on lost wages (to proxy damages to labour productivity) and h...