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This is the Bloomberg Surveillance Podcast. I'm Jonathan Ferrow, along with Lisa Bromwitz and Amrie Hordert. 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. So here's the LASS
this morning. The President ramping gun pressure on other countries, demanding support for escorting vessels through the strain of for merge. Trump threatening NATO with a quote very bad future and to delay his summit would shine of President Jiji pink nom and rule. The former senior US Intelligence official and senior advisor at csis non welcome back to the program.
We seen reports over the past few days of moving additional assets into the region and what does the next phase of this conflict look like?
Good morning.
The United States is not preparing for a greater involvement. It would lead to boots on the ground, but the commitment of the United States does remain focused on a coercive approach to this. There is no sign of a
diplomatic engagement in the near term. So you basically have a situation where the United States approaches to beat down Iran's missile and drone capacity, to hit the regime on its police, its interior forces, and the hopes that this might provoke some sort of unrest to open the Strait of Hormuz. And at the same time the regime regime is trying to outlast this by striking economic targets that echo into the world economy to put pressure on the
United States. Each side is trying to outlast the other.
Norm when it comes to Carg Island, how significant was that hit over the weekend from the President.
Well, the United States certainly destroyed every military site on the island, and the island is indeed the primary artery for Iran's outlet of oil. It has no secondary outlet of any any consequence. The port of Jask, which Iran has attempted to open in the Gulf of Oman, has a very modest output, but the the Harg Island appears to be operational for all of its oil output capacity. I think there are a couple of ships that burst very quickly after the U. S military operation, and I
think that's consistent. But the President was trying to do trying to message the Iranians, Look, we can touch you here if we wish. We're going to touch the military elements, but we can take this farther. Why don't you win the conflict. I don't think it changed the Iranian position, but it certainly sent a message in.
Terms of the military strike on carg Island. What does this mean for the operational capacity of the IRGC, Well.
It doesn't really touch the IRGC's capacity per se. The iergy c's capacity is derived from its missiles, it's derived from its drones, and it's derived from its internal military placements that suppress the people. So it's got plenty of capacity that doesn't rely upon of the economy, doesn't rely upon the banking capacity. It's accessible reserve, so it's not a money issue that keeps the iergacy going at present.
What role do you think the ground trips would play You mentioned it does seem like there could be a preparation to send a special unit of marines over potentially even to carg Island. Do you understand or have an understanding of what that would look like.
I think that's very unlikely at present. The US commander's first option at this point would not be to create a force protection problem for himself. His goals to create a force protection problem for the Iranians. This unit, although capable certainly of ground operations, probably would have its first goal to improve counter drone operations and improve protection capacity
for units. Although some ground operations could conceivably be part of its mission, it's a relatively small force for such an activity, Norman.
Are you seeing an off ramp evolving here?
Not? At present, the conflict will likely continue for some weeks on each side. But this said, the United States and Israel have absolutely eroded Iran's missile and drone capacity to a far, far greater agree than Iran ever anticipated.
And the golf partners, particularly the.
United Arab Emirates in Saudi Arabia, have done an absolutely spectacular job of defense, as well as Bahrain, Kuwait and the Qataris. And I think you're seeing that years of investment of training, equipment, and the leadership of these programs
has done spectacular work. And indeed Fujera's ability to put itself back online demonstrates just the redundancy of the systems and the leadership of the Amorti oil program under individuals such as doctor sultanage Job, where it's really coming to the forefront of keeping the world's economic programs going but normal.
At what point do the Gold allies have to go to the White House and say enough is Enough's a lot of reporting over the week about Mohammed bin Salman urging harsh action against Iran, But at one point do they say this is just too harsh Right now in our economies, I.
Don't see that happening yet. Now, certainly there's going to be an economic blow. Remember these countries derive their economic gains from tourism, from transit. Dubai Airport was hit today by a drone. That's a single drone attack. That's obviously a messaging attack by the Iranians. It's meant to disrupt, it's not meant to cause massive damage. So that economic blow is there. But these countries at the same time have shown tremendous resilience. So you're looking get it up.
Going to Abu Dhabi in Dubai and Saudi Arabia. They've shown tremendous capacity to keep their economies going during all of this. Expatriates are generally quite comfortable in these environments by many many reports.
Stay with us. More Bloomberg surveillance coming up after this. We begin this hour with stocks pushing higher on the S and P five hundred by about seven tenths of one percent. Stephen Parker of JP Morgan Private Bank with a seventy four hundred to seventy six hundred year end SMP target and right in the following, we've not changed our base case forecast for growth, but acknowledge increasing downside risk the longer energy prices remain elevated. Stephen joins us
now for more. Stephen, good morning, morning. It's going to see it. So let's talk about what we've seen so far. Five percent move on stocks, sixty bases points of widening on high yield spreads from the ties of the year so far. Is that a sign of resilience or complacency?
You know, I do you think the markets are probably a bit complacent given the move that we've seen in energy markets. We've always said to clients, so when it comes to geopolitics, geopolitics rarely have long term impacts on markets, but we have to acknowledge that, particularly when energy is at the center of the storm here, they can certainly have a bigger impact on markets in the short term. You mentioned the pullback that we've seen in the US.
We've seen a bigger impact in international markets, particularly in places like Europe and Asia who are more exposed and more at risk to these higher prices. But there does seem to be a bit of complacency in markets.
Where do you see that complacency concentrated at the moment.
Well, I think the investors are just looking at the fact that the expectations for energy prices are to recover and be back around eighty dollars in the not too distant future, and in that sort of world, then we can get back to the fundamental story around US equity markets and double digit earnings growth, which is what we expect.
The challenge is if we end up in a situation where we're looking at triple digit oil not just for the next month or two, but for the next three to six months, then you have to start asking yourself about the outlook for growth and the outlook for inflation.
Are people more accurately pricing. In that perspective. Internationally, you talked about the hit to international markets.
Well, I think you're.
Seeing two things. One, places like Europe and Asia are more exposed to higher prices in the near term, and the risks of those prices remaining higher are there for a longer time period. The US is buffered by a greater percense of energy independence. I think you're also seeing a bit of a flight to safety of flight to quality. You're seeing it in the rally and the dollar. You're also seeing it in the recent out performance of tech.
Not too long ago, we were talking about tech being under pressure, the rotation into more cyclical parts of the market. I think investors are looking at this environment and saying the long term structural fundamentals, the earnings growth, the upgrades that we're seeing in the tech sector, and that's bringing money back into the US and supporting US equity markets.
Do you think this has materially shifted the narrative that took hold in the first two months of the year, which is diversify outside of the United States, diversify outside of tech. Has that pulled it full circle and actually caused the leadership to come from the United States and from big tech.
I think perhaps in the near term, but I do think that longer term there is still that diversification story. In particular, we think there are interesting opportunities in emerging markets who have been hit the hardest in this recent move higher in oil prices. But still there's a really interesting story, particularly in Asia around the tech story. There the hardware sector. We've seen massive earnings upgrades in places
like Taiwan, Korea, India. We think that story continues, and we're looking to build a shopping list with our clients to say, if this volatility continues, what are we thinking about adding emerging markets would be sparely in that bucket at.
The top of a shopping list over at Newberger Berman just on the program months ago. The bond market, they believe all roadally to lower bondiards here even if you fix this crisis over in the Middle East, lower bonyards, if you don't lower bond yards, because if you don't, ultimately it's going to hit growth and yield to the long end of the curve, are going to roll over. Is there an opening kit in the bond market?
You know, our view of around rates is that we're probably more rangebound. We came into this year a little bit more conservative than the market. We thought we would see one cut from the FED. That's still our base case view. The challenge is going to be this push and pull between potential for lower growth and potential for
higher inflation. That's why it's going to be in interesting to listen to what we hear from the Fed this week as they try to set the narrative, as they try to guide markets in terms of which one they're going to prioritize. I still think that there's room potentially for another cut, but we don't think necessarily that rates are going to move meaningfully lower from here.
How do they guide the market in this moment when in the past, when we saw energy price spikes, they just called it transitory and they were wrong.
Well, I think what's going to be interesting is to listen to their comments on not just energy markets, because I think those are more difficult to prognosticate, not just for us, but also for the FED. I think it's going to be interesting to listen to what they say about labor markets. Obviously, recent data has been a bit
weaker than what we would like to see. The question is going to be about not just sort of the demand for labor, but the supply of labor, and if they indicate that that is front and foremost at the top of their mind, that could indicate that they're willing to let inflation run a little bit hotter at the expense of supporting labor markets.
You mentioned semiconductor some of these companies you like. Have you thought about other issues with the strader form moves besides oil? A third of global helium gooes to shade removes that is needed when you make semi conductors.
Yeah, I mean what we're seeing everyone is looking at the first order effects, which is higher energy prices, higher gasoline prices. But as you point out, Amory, there are long term, meaningful impacts around supply chains, broadly speaking, in different industries around the world. And the challenge is if these things get turned off, they don't just get turned
on with a flip of the switch. One of the themes that we've been talking about a lot with clients is this idea of the shift from globalization to global fragmentation, and the idea that countries and companies are going to be more concerned about supply chain resiliency rather than supply
chain efficiency. And so one of the areas of focus has been on this idea of national champions and strategic industries as the US, as Europe, as Asia look to develop these national champion companies in places like power and infrastructure, security and defense, and technology.
I'm going to ask you a really unfair question. Surprise yourself and forgive me. Forgive me for doing this. But as I sit here and listen to this and you bring up chips and about geopolitics, a lot of this is scenario analysis, but I think it's a scenario that we need to explore. How would you react if China use this as an opportunity to go after Taiwan.
I think that question is coming up more and more in our conversation.
What do you say back to clients?
I think we have to acknowledge that it is a significant risk, and I think that markets would react more aggressively to that type of news even than what we're seeing as it relates two energy prices. I do think at the end of the day, there is still an economic agreement amongst the world, and the impact that that might have on the economy probably reduces some of the risks there, but it's a risk that we need to acknowledge.
And at the end of the day, when it comes to geopolitics, we don't manage portfolios around tail risks, and in the long run, that's a losing strategy. It's why we lean into diversification. It's why we think about global investing stocks and bonds, but also diversifiers in a portfolio related to higher inflation, which has been top of mind for our client.
And that's the risk.
It's because those supply chains diversified enough stay with us. More Bloomberg surveillance coming up after this. Francisco at lunch of Bank for America writing this, Brent could well average one hundred dollars a barrel for the year if the war impacts oil balances significantly into the third quarter, and could average near one thirty if the disruptions extend into the fourth quarter. Francisco joins us now for more. Francisco,
welcome to the program, sir. I want to start with a key assumption of yours in your research, we do not embed any permanent supply loss from this war. Francisco, why is that line so important?
Thanks for having me, John, and great to see you again, it's very important because if we end up with some meaningful destruction of energy acids, we are going to have to We're going to see former points increasing very quickly in the curves in this curves that that mister Hassett
was referring to his comments. So of course we've seen Hart Island, Iran's main oil loading terminal being struck over the weekend, and there was a clear point made that energy infrastructure was still intact even though military acids had been specifically targeted.
So I think it's it's very important.
But of course in wars, as you know, it's difficult to find sometimes a closure and and and you know we are we are always one step away from a major escalation on the energy side, and that's I think the fear the all market has.
There are supply chain realities though that we could discuss right now. If you shut in production, how hard is it to restart it and get back production to where it was before?
Well, I mean, I think I think there are some concerns around that, but again, most oil fields across the Middle East are are conventional, so I would expect a lot of the production to come back relatively quickly.
Refineries are another point of concern.
We saw the Terran refinery, or at least the run refinery fuel depots being targeted. The refined itself is unclear what's its scarence status, but I think I think generally most assets should be able to come back within a month or two months and when the war ends. And now having settled that, another key assumption in our numbers is that Hormos is going to be reopening sometime soon to and record the majority of this traffic, which might also be maybe too far fretter an assumption. That's one
very very important concern. Hormos, as you pointed out, is the joke point for a lot of the commodity flow in and out of the world.
Francisco, do you have a day circled on the calendar this week to John's point earlier where you start to challenge some of your assumptions and shift to some of the one hundred and thirty dollar a barrel base cases.
Well, look, I mean, we know the hoodies were able to disrupt traffic in Babblement that for about twenty eight months, so I wan't to remind everybody of that flows were down from nine million barrels a day to.
Four point one four point two.
Now, the difference between mavem Mon Devn and Hormosis that there's clear alternatives that allowed shippers to reroute. Those seventy vessels that used to cross, a lot of them rerouted through the cape. So also I think a big relief valve for Bible that here there's no clear rerouting. So I think I think the options are not great to reopen the strait pretty good in the line of all
the capabilities that that Iran might have. And also, to be honest, this quickly becomes a bit of a guerrilla war like we saw in Yemen, and I think shippers themselves will will be very very costures not to take that route if there's risk of their vessels sending up in fire, and we've seen twenty of those already being attacker, so I think so it's a difficult time for shippers, for insurers.
Everyone's kind of waiting for a resolution.
But if it doesn't come up in the next few weeks, I mean I'm going to give it maybe until the.
End of the month. Things can get very very complicated for weight prices.
We had Jeff Curry of Carlisle on last week, and he was talking about how even if the straight up removes is opened this week or next week, there is going to be an extra risk premium placed not only on oil, but a whole bunch of different commodities, partly because there'll be nations that are stockpiling and kin to what China has done, and partly because people will understand that there is that risk of transporting goods on the seas. Do you agree with that thesis?
Yeah, I think the war is going to it's going to transform the way we think about commodities more fundamentally. Remember in the nineteen nineties, Japan pushed for just in time, and in the twenty twenties it's been China's just in case strategy.
Of inventory accumulation.
So they've been building up huge oil reserves, and we've seen, obviously, in part because trade tensions, in part of it because of political slash military tensions, we've seen a big buildout in commodity inventories. I think this trend only speeds up once the war's over, and I think that provides support to long dated commodity prices.
Sooner or later, and we'll.
See I think a bit of a bit of a mad rush once we are out of the war, but again, we need to finish. We need to see this war coming out to an end, because if we don't, I think the risks of recession will grow by the week as we head into April, and definitely if we are still in the same place in.
May looking into a third quarter.
I've already mentioned we could see spikes t one hundred and sixty hours of barrel. If things keep going, we could see Brent breaking two hundred doors of barrel. I think it may take a longer to get there, but it's important to understand that.
We don't have that much time, and.
Obviously at US a little more instaly than all regions. But I think in particular Europe is very very exposed, as are many other Asian countries, particularly in Northeast Asian countries.
Francisco, I know you that you track what is going on in terms of the OPEC countries, and we've learned this morning at Bloomberg that the UAE production has fallen to about two million barrels a day. It was closer to three point six in February. What other countries do you see production really falling off a cliff when it comes to the Gulf.
Well, so it is known that the Iraq has been a curtailing output as Haskubai remember that, I mean, I mean we think probably about ten to eleven million barrels a day of production has been curtailed in the past two weeks, so it's about ten percent of the world supplies, about twenty percent.
This will pass us through hormus.
So we've seen about profunctional academy our health. The other big issue I think is refined petroleum products. Refineries have been shut down across the board. And the issue with refineries, as you know, we don't really have a strategy paternal reserve for petroleum products. We have it for crue oil, so it's a little bit in mislabeled. Real reserve is really so it's through the crudel oid reserve. So if
we lose refining capacity, that impacts petrochemical units. You pointed out to weddings in India for LPGs like propane, and honestly, like it's the supply chain, there's locations that are building up in the background that are gigantic. I mean, remember one percent of energy is roughly one percent of GDP, So if you take out ten percentage points of oil, and oil is about a third of energy.
Plus obviously we're losing on gas.
We are looking at potentially seven or eight percentage points of energy sucked out the world's system right now, and that's going to have a big knockdown effect on GDP very soon if those if that disruption doesn't get resolved.
I'm glad you brought up products because a lot of the conversations I had over the weekend was centered around jet fuel, diesel LPG. When it comes to these golf exports, are they having to start to pick and choose what they're going to export, what's the most important for the global economy.
Well, we are seeing very little petroleum, very little in terms of patronu products flowing to the golf. I mean, my understanding is whatever's been flowing has been Iranian crude oil to tune of one point five to two million.
Barrels a day.
And again those those are crude vessels heading for China, which I think sets a very interesting next set of days with harg Island now being a bit in limbo. But also importantly, I think the petroleum products are already experiencing huge distress. Jet fuel prices are two hundred and fifty hours in barrel already, right, So we've seen that, and and we've seen in fact Dubai crewe oil over one hundred and fifty dollars a barrel. Again that's crude
oil for the delivery in the Persian Gulf. And of course we know China has been curtailing, has actually banned the export of petroleum product fuels like gasoline, jet fuel, and diesel, which is in part exacerbating this problem. So I think the question is who else is going to do it? Who else is going to preserve or limit those petroleum product exports. And of course we know who
is most dependent on those petroleum product exports. Number one exporting in the world petroleum products America seven million barrels a day. So not a bad time for US refiners, but obviously a point of concern as those petroleum fuels that are being exported also impact domestic prices for gasoline at home in America, So lots of question marks as countries go on to protect their own market.
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