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This is the Bloomberg Surveillance Podcast. I'm Jonathan Ferrow, along with Lisa Bromwitz and Amrie Hordern. Join us each day for insight from the best in markets, economics, and geopolitics from our global headquarters in New York City. We are live on Bloomberg Television weekday mornings from six to nine am Eastern. Subscribe to the podcast on Apple, Spotify or anywhere else you listen, and as always on the Bloomberg Terminal and the Bloomberg Business app.
Here's the latest, the US and Iran agreeing to a two week ceasefire, with Tehran vowing to reopen the street for moves. Joining US now is someone who's worked in the Defense Department, who's worked with military forces in the US, has extensive experience in this entire region. Seth Jones of CSIS, thank you so much for being with us. I want to start with your response to the ceasefire. How realistic you see it holding for after that two week and even entire two week period.
Well, look, I think it's helpful that there has been there have been negotiations between the US and the Iranians. I think it's helpful and a step forward that we are at a ceasefire. I just think even in talking to Israeli officials recently, I think they do not expect the Iranians or Iranian partner forces to abide by any deal over the medium to long term. There were already sirens going off in Tel Aviv last night for potential
incoming Iranian rockets. So I do have low expectations that this is going to stick over the next two weeks.
So what do you think has actually been accomplished, Seth.
Well, it's hard to say. I mean, when I look at the ten point plan that the Iranians have put together, most of those, at least many of the points are
completely unacceptable for the US of the long run. They are the withdrawal of all US forces, particularly combat forces from the region, Iranian control of the Strait, and a number of other things, allowing Iran to have missiles and drone programs, and then compensation for the damage that Iran has incurred over the past several weeks of the conflict.
I mean, I don't think any there's no realistic expectation that the US is going to provide compensation probably worked off states along those lines.
I think there's a lot to hammer out seth on that point, in terms of a lot to hammer out realistically, what do you think could be achieved from that ten point plan? What do you think of the lowest hurdles to be too.
Well, I think the lowest hurdles would be some kind of a joint arrangement involving countries in the region, particularly ones that are on the Straight of Hormuz that share.
Any tolls that.
Are charged to commercial ships going through the region, and potentially also some security of commercial vessels that go through the region. So it's not all on the US's shoulders, but it'll hinge on really how much trust any of these countries, including the US, have that the Iranians want fire on commercial vessels, and I think we'll have to see.
And then you obviously talk about the toll, the toll, this tollbooth not being a realistic prospect, can maybe could you talk a little bit about what's on the sanctioned relief side or also the offshore frozen funds as well, which could maybe provide some compensation in Europe that toll booth instead.
Yeah, I mean it's possible that there could be some sanctions relief for Iran. I mean, the challenge is that both the current Trump administration and even the Biden administration had pretty tough sanctions against Iran. I find it unlikely that the vast majority of those sanctions are going to be relieved with the prospect of Iran continuing to have
a range of partner forces and pretty significant capabilities. But there could be some sanctions relief that comes with any kind of longer term deal.
So a few percents of how closely aligned the US is with the GCC, with Saudi Arabia and United Arab Emirates and cutter and the other nations in the region.
Well, I think they are aligned in some ways. I think that, you know, one challenge right now is some Golf states appear to have openly called for the end of the regime in Iran. That does not look like it's going to take place. The Supreme Leader Son is in power at the moment, the regime is largely the Islamic Polutionary Guard is still in place. But I do think there is a joint viewed get the straight open. I mean, I think it's a single most important issue.
I think that the US shares it's a common interest between the Gulf states.
In the US, is there a sense of what it's going to take seth in terms of have we actually taken ground troops off the table? Have we actually taken a further more aggressive stance in the region and put that aside for the time being.
I don't think we've taken the prospect of using either ground or naval forces completely off the table. They're still in the region. The US has naval ships that could be used. The US also has ground forces that could be used, whether it's to take islands in the in and around the Straight of Foremus or on the shoreline of Iran. So I think if the US wants to escalate, if it does not feel that Iran is abiding by any kind of a deal, it could use those forces,
either naval or ground, as a back. I mean the problem is there would be risky. You do risk naval forces getting shot at. I think I should cruise missiles coming from around, So there are some risks involved.
Stay with US mulblinderg surveillance coming up after this.
I'm readercent of energy aspects writing. Even after Hormo's flows restart, most producers will need will need several months to restore production. I'm readacent, joins us now, I'm I would love to get your sense of just how much has changed given the truth that was Now it's last night.
I think I completely agree with what Javier said. If you read the statements, they're actually two quite different statements. We're hearing from refiners and lifters who are trying to kind of get a ship in. Firstly, the cost is prohibited. You know, you're talking about more than forty dollars a barrel,
even if you can get insurance. There's a huge amount of confusion with regards to whether they need to pay the Ranians, how they're going to pay the Ranians, because payment to be made to Theirranians is not easy given the sanctions. The Iranians are actually sending out messages to vessels outside the strait saying that you know, if you are actually going to pass the straight or if you're going to come in, you need our permission. So this is by no means a straight that's open for business.
To be very clear, what I would say is that we are likely to see the ships that are within the Strait right now whether they're empty or whether they're loaded with crudent products. We've counted, our cargo tracking team
counts about two hundred and fifty vessels. Those over time could potentially move out with Iran's permission, but I don't think you'll see vessels moving in, and I think that's going to be the critical thing unless you actually have a complete cease far, not just a two week one. But we know that hostilities.
Have ended, Amrita. When thinking about the growth versus inflation trade off, I'm just wondering, have you seen any evidence of demand destruction in these last several weeks?
Great question, because you know, and you guys were just talking about the divergence between actual kind of physical prices and futures prices. The problem is everything is being reflected in the physical price, right. You know, dated Brentons trading above one hundred and forty dollars do buy traded back in a few weeks ago at one hundred and sixty dollars per barrel, and that's actually being reflected in products prices.
If you look at diesel, if you look at jet fuel, they've been trading over two hundred dollars for barrel, even in the US, and yes, we have seen some demand destruction in parts of Asia, partly also because governments have stepped in and asked for rationing in advance or as
kind of the crisis has progressed. So we have definitely seen about a million barrels per day of reduction, mostly in jet fuel also, you know, given the flight cancelations in the Middle East, but also in like NAFFA, LPG, so steam crackers, you know, things or units that would actually make plastics effectively.
Right.
So again the challenge we have in this is that because this is hitting Asia first, it's a really long time lag before it hits the West, right, whether it's the products itself jet fuel, gasoline, diesel, or the end products it's you know, the clothes we're wearing or all the kind of plastic goods that we consume, and that's why there's so much complacency in the market. But yes, we have seen the demand destruction and I don't think it's over.
Yet, Rita, How long is that lag time before maybe you're going to say ongoing higher oil prices and higher products product prices, even if the cease fire were to hold today.
Yeah, Look, the damage in some ways has been done.
Right.
We were all kind of talking about this big surplus in oil markets. Our surplus was definitely not as big as some of the US investment banks out there, but still it was a big surplus that's been wiped out.
Now.
All that Russian oil that was on water floating around that's now gone. India's taken all of that. So for the market, we're pretty much starting from scratch, right, so we are going to be trading in a higher range. But more importantly to your question that when do we see that impact. It's about a two and a half month lag because Asia would be buying the crude in March that arrives in April, they process the or they
make the products, and then they send it west. So the earliest the West is going to feel the real pinch is mad really into June. So we haven't seen the actual shortages being felt yet.
Stay with us. Mulplinberg surveillance coming up after this.
Julian Emmanuel of Evercore is I joining us here in the studio. Julian, Before we get into it, what's your response to the ceasefire and how much you can really buy into it?
Well, so I think we just have to step back and say two things here. Number one, there's a huge sire of relief that the incendiary language and and the inflamed rhetoric of the last three days on all sides is being set aside for hopefully at least two weeks, perhaps longer. But then when you think about where the markets were and are you know, taken individually the degree of hedging in stocks, credit bonds all bearish, and oil all bullish were at extremes going back to the pandemic.
Taken collectively, the amount of hedging, and I've been doing this for a while. I was a junior trader on the floor during the First Gulf War. There is no precedent for the collective amount of hedging. So from that perspective, you know, this is a sigh of relief that we do think has some staying power. But again, as we've been saying, the devil will be in the details over the next several weeks.
So if it has staying power, that means it's something that is tradable and that you do see upside here in a number of different markets. How much is it concentrated in the United States versus say, Europe versus say, Southeast Asia.
Well again, if you go back to the oil price, which is essentially the lynchpin for everything here, the sigh of relief being breathed in Europe this morning is proportionately larger because the effect on elevated oil prices on Europe is also proportionally larger. But when you think about it, our view has been that the bull market that started in October of twenty twenty two has further to go.
We thought that a week and a half ago as you were plumbing back towards sixty three hundred and frankly, what we find in bull market history is the stocks, themes and geographies that lad and US tech has been. All of those end up leading. So from our point of view, the biggest thing is the fallen yields here telling you that that is an endorsement of higher multiple equities.
Clearly what is gaining the most this morning. You can see this sort of this rush into big tech seeing valuations is more attractive after the selloff. I wonder more broadly though, about the drop in yields, because you aren't seeing necessarily yields going all the way back to where they were on February twenty seventh, and you're not seeing oil prices go all the way back to where they
were on February twenty seventh. And even if this deal isn't acted in some form and a prolonged ceasefire, it takes hold unclear how much oil prices go back to where they were. Does there have to be a higher inflationary understanding going forward that will affect those bond yields?
No, And look, to be clear, our has few is that the landing zone for oil is certainly going to be much higher than it was. This is a structural change that will take years to work through the system. So we're looking at a brand price that ultimately lands in the mid to high eighties, WTI the low to mid eighties, and for stocks, both of those are perfectly fine given the fact that over the course of years and decades the reliance on oil for equity markets has diminished.
Obviously it is still quite significant, as we've seen by the threat, but again here for us, it is not if you continue subsiding from here, is not at all a material headwind for either growth or the equity markets.
How much of a linchpin will potentially earnings be even more so now given the fact that that has been the one aspect of the market that has upheld all optimisms, starting off with delta later this hour.
So if in the middle of February, before the conflict began, I told you that earnings would be revised higher between here and then, you'd have called me a fool. Earnings have been revised higher, and actually we are below consensus projecting an earnings growth rate of over eleven percent for twoth thousand and six. And the history of double digit
earnings growth is incredibly powerful. Since nineteen ninety six, eleven years of double digit earnings growth, the market has been up ten out of eleven years.
This is the Bloomberg Surveillance Podcast, bringing you the best in markets, economics, angiopolitics. You can watch the show live on Bloomberg TV weekday mornings from six am to nine am Eastern. Subscribe to the podcast on Apple, Spotify or anywhere else you listen, and as always on the Bloomberg Terminal and the Bloomberg Business app.