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- [00:00]
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Bloomberg Audio Studios Announcer
Bloomberg Audio Studios Podcasts Radio news
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Sarah Holder
It's a time of intense global uncertainty.
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The Hartford Insurance Representative
The US and Israeli militaries have carried out more than 1,000 strikes in the last three days. Iran vowing to retaliate, Unleashing fears the energy crisis is dangerously spiraling.
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Ruth Carson
Retail gasoline prices have surged by more
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The Hartford Insurance Representative
than a dollar a gallon armed with
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Public and Okta Advertiser
guns and knives stormed the lobby outside the ballroom at the Washington Hilton, where the annual White House Correspondents Dinner was being held.
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Sarah Holder
Typically, headlines like these panic investors. But if you look at the stock market right now, it tells a different story.
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Winnie Hsu
It's almost as if nothing has happened in the past two months. When you look at how markets slumped and then now making record highs, that's
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Sarah Holder
Bloomberg's Winnie sue, who covers equities markets from Hong Kong.
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Winnie Hsu
So it seems like, you know, right now they're Pricing in that the worst is over and that the peak of uncertainty is over as well.
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Sarah Holder
Central banks and economists have cautioned that the worst actually may be yet to come, that even if a ceasefire holds and the Strait of Hormuz reopens to global oil traffic in there are longer term economic risks for companies and consumers. But investors have gotten good at shrugging off these warnings.
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Ruth Carson
When I went for coffee the other day with a hedge fund trader, he looked at stock markets and said there is a very curious exuberance that's incredibly hard to explain. And it's true.
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Sarah Holder
Bloomberg's Ruth Carson, who covers the bond market and currencies from Singapore.
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Ruth Carson
Now, is there going to be a tipping point when suddenly people wake up to the reality that the war hasn't gone away, that oil is still disrupted, that soon we're going to see this coming out in the economic data?
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Sarah Holder
I'm Sarah Holder and this is the big take from Bloomberg News today on the show so far, markets have been brushing off the Iran war. What explains today's investor confidence and what could shake it? Bloomberg's Ruth Carson and Winnie Hsu say there are a handful of reasons why the markets are so far more resilient than expected.
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Ruth Carson
There's obviously the focus on fundamentals. People are focusing on AI and its disruption and all that. But when you look at where we are, week 9, week 10, week 11 into the Iran war, nothing's really changed here. So I was having a chat with an analyst who was holidaying in Australia and he's been following markets unable to switch off because of the war. And he basically set this people in general, not just investors, are becoming ever more desensitized to both good news and bad. So think about it, right? We're multi weeks now into the war. Markets are signaling that you know what, buy stocks. This is fantastic. And bond markets are going, no, it's really not. But they're stuck between a rock and a hard place and not really moving when in which does not make sense. In theory, they should be gaining a lot more than stocks, stocks for that safety bid. That weird disconnect is showing how people have become desensitized to war, right?
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Sarah Holder
I mean, Winnie, we've been seeing this pattern over the past few weeks where the Trump administration escalates or looks like it's about to escalate. Attacks in Iran markets dip. Then the Trump administration pivots or softens its stance and investors who bought that dip stand to win when the market inevitably bounces back. It's been called the TACO trade, Trump always chickens out. How is that cycle, that assumption booing the markets right now and influencing investors?
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Winnie Hsu
Investors are pretty much just betting on the Trump put to come through and as we talked about how it has shown up last year during Liberation Day and also what we saw back in the Russia Ukraine war. So with investors betting on that to happen they it actually makes it more difficult for them to bet towards one side heavily just because the risk of being caught wrong footed and hence we're seeing that trading volume remains very thin because of the lack of conviction. And one investor put it this way actually that markets are right now in this no war, no peace zone. So right in between that means there's no durable macro conviction at the point and we're only looking at some technical relief whenever escalation does not worsen. And what that means for markets is that money still has to go somewhere and somewhere credible. That's where we're seeing right now. It's flowing into the ones that have good fundamentals which in this case are areas that are showing earnings strength as well as adding on the AI theme.
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Sarah Holder
Well Winnie, let's talk a little bit more about AI because excitement and skittishness around this technology has pushed the markets up and down over the past few months, even before the Iran war of course. What role have AI and tech stocks played in sustaining this recent rally?
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Winnie Hsu
That's a very interesting question because at the beginning of the war actually they were the ones that got hit the worst because they were the ones that have surged the most into the war. And also investors were talking about because of these expectation for inflation that it's going to hurt growth stocks more. In fact, these data centers rely heavily on energy. So the higher energy prices actually are supposed to be weighing on tech stocks even more when it comes to the AI theme. However recently what we are seeing is that the earnings really prove that the demand itself remains very strong. And we saw that in chip makers like SK Hynix, like TSMC posting massive profit growth. And that goes to show how it is actually quite insulated so far just because the demand is so strong.
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Sarah Holder
And you've also been tracking earnings. The vast majority of S and P companies that have already reported their first quarter results have beaten analyst earnings expectations. So what does that say about how businesses are weathering the uncertainty?
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Winnie Hsu
Yeah, actually surprisingly we're seeing earnings season happening pretty robust so far. Showing you that the Iran risks so far have been quite contained. But it's worth noting that it's just first quarter earnings and that Includes two months that was not impacted by the war. So only one month into the Iran war. And obviously there's also kind of some delayed effect as well. So while some investors may see this as very positive signs, we actually should be expecting the impact to come further down the road. That can make a more painful Q2 that might not even show up in second quarter earnings, but somewhere down the road maybe showing up third quarter or fourth quarter. Because so far with this oil cushion that we're seeing, actually that some of the economies have been releasing these oil supplies and companies have all these extra oversupply as well. So these are helping companies to weather the impact so far.
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Sarah Holder
So, Ruth, Winnie just mentioned this idea of an oil cushion that countries all over the world have tapped their emergency reserves to help mitigate the impact of price spikes. That's especially true in Asia, which is the final destination for the vast majority of the oil that normally moves through the Strait of Hormuz. How important is that oil cushion and how long can it last?
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Ruth Carson
So context is incredibly important. We were talking about a cushion, for instance, Right. The cushion buys us time, not safety. So even if prices are, let's call it $100 per barrel today, if suddenly the world wakes up or thinks that, you know, investors think that markets are mispricing this risk and it suddenly turbocharges higher to 120, 130, then we're talking about a big shock and a sudden one. There are more and more people across the entire spectrum of markets who are sort of sounding the alarm here. The longer this goes on, the more desensitized people are too, in markets, the more that breeds complacency. But no, when you look at the volatility and when you look at how long this takes, the cushion buys time, not actual safety. Right. The risks are very much there still for elevated oil prices. And bond markets are kind of signaling
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Sarah Holder
that you said this cushion buys time but not safety. How much time does it buy?
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Ruth Carson
How long is a piece of string? If the war ends tomorrow, that's fantastic. You know, use of the time. But if we're talking about if the oil crisis, the energy crisis continues for another three months, six months. The longer the obstruction, the longer the choke hold. Supply losses suddenly deepen beyond what reserves can be replaced. That's critical.
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Sarah Holder
Coming up, why there's less exuberance in the bond market and the signals investors will be watching for from central banks.
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The Hartford Insurance Representative
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The Hartford Insurance Representative
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Sarah Holder
The stock market has largely barreled ahead despite the headlines of the past couple months. Same with commodities and bets on emerging markets. But Bloomberg's Ruth Carson and Winnie sue say there is one area that's flashing caution.
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Ruth Carson
Bonds. Bonds have just flatlined, Ruth says.
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Sarah Holder
That's especially concerning because the bond market is considered to be a strong predictor of downturns and recessions.
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Ruth Carson
So it shows that bond investors are really scratching their heads. That curious conundrum. Why on earth is there such exuberance in markets when clearly there are two major risks here? One, inflation. So that's bad for bonds. But number two, which is the harder risk to quantify right now? An actual real huge whacking ball to the global economic growth picture. And when bond investors grapple with these two, do I sell bonds because it erodes the value of what I hold because of inflation, or do I buy the heck out of bonds because to give me safety right now, when I know in two years or five years or 10 years time, the world will still be paying the price of this disruption. What do you do until bonds move one way or another? If bonds sell off from here a lot more, it means, hey, everything is well, stock investors are right. But if you suddenly see a big drop in yields, watch out.
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Sarah Holder
Well, this week is a huge week for rate decisions, right? Ruth, The US Fed, central banks in Japan, the uk, Canada, they're all making rate decisions. What might that mean for the bond market? What are they looking out for?
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Ruth Carson
So everyone that I've spoken with and also swaps markets indicate that all the big central banks are going to keep their rates on hold. So it's kind of boring in that aspect. So what's really perking their interests right now is how they signal the risks from the Iran war. Now, if they turn around and they say we need to fight this inflation hit, we are going to at some point have to raise interest rates or lean that way to tighten monetary policy, then that is signal to sell bonds, at least in the short term. But if central banks turn around and they say we're actually worried, sure there's an inflation shock, but we do worry about our economy. Our supply only goes that far. We're running out of oil. Okay, we got to figure out how to bolster our economy then. Then you will see bonds getting bought. And that's a clear signal. Remember, bonds always tend to move way, way faster than equities in terms of its harbinger status of, you know, your doom and gloom,
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Sarah Holder
even if this war ends tomorrow. Last week the Washington Post reported that the Pentagon had informed Congress that it could take six months from the end of the war to fully clear the Strait of Hormuz from mines. I'm wondering what, what that kind of extended obstruction could mean for global oil markets and markets more broadly. Is this something that's been priced in that kind of potential long term impact.
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Winnie Hsu
So at this point, I don't think at least the equity market hasn't really been pricing in that longer term impact. And we're seeing more calculations coming through for sure. And we're talking about, for example, Germany having already slashed their economic growth forecast in half and the IMF also expecting a lower growth projection due to the war. So these seem to be factored in, in the economic outlook, but a bit less when it comes to the equity space. But the risk right now is really further jump in energy prices, the physical supply shortages and the demand destruction that is yet to come.
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Sarah Holder
I mean, the potential for demand destruction does seem elevated. In April, consumer sentiment in the US Hit record lows despite the stock market's gains that we've been talking about. For me, it's just another reminder that as the adage goes, the stock market is not the economy. But what does it mean that the confidence levels of Wall street and Main street have diverged so much?
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Ruth Carson
I think a good way to look at this is as simple as your cost of living. If you know a war is going on and an unpopular one and it's showing up in your gas bill and your gas pump, that is not good for your confidence. How are you going to bring your kids to school? How are you going to get to work? You know, things like that weigh on the US Consumer. Ironically, there is also this cycle going on where if consumer confidence is bad, if the economy is bad, the Fed would likely potentially cut rates at some point. And if you cut rates, that's actually great for stocks. So you kind of go, oh, okay, bad news is good news. Perhaps that's also driving some of that because we know easy monetary conditions is great for equities regardless if you're in the US or the UK or Australia or Japan. So bad news could be good news.
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Sarah Holder
This is the big take from Bloomberg News. I'm Sarah Holder. To get more from the Big Take and unlimited access to all of bloomberg.com, subscribe to TODAY@Bloomberg.com podcastoffer if you like this episode, make sure to subscribe and review the Big Take. Wherever you listen to podcasts, it helps people find the show. Thanks for listening. We'll be back tomorrow.
- [21:22]
Bloomberg Audio Studios Announcer
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