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- [00:01]
Jonathan Ferro
At Venture Global, we think about what can be done, not what's usually done through innovation. Venture Global is not only building some of the largest energy facilities in the world right here in the United States, but delivering American energy at a fraction of the cost in a fraction of the time.
- [00:20]
Lisa Abramowicz
So while others are busy talking, we're busy building.
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Jonathan Ferro
That's Venture Global. That's unstoppable energy.
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Francine Lacqua
Healthcare doesn't always work great. If you've ever waited on a refill or couldn't schedule an appointment, you get it. That's the kind of stuff Optum is changing. They're using data and technology to integrate patient care, pharmacy and everything else. So healthcare is connected, not complicated. What's that look like? Cheaper prescriptions that are easier to get and care that looks at the whole person how you need it. Optum is helping make healthcare work as one for everyone. Learn more@business.optum.com the thing about AI for
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Scott
business, it may not automatically fit the way your business works. At IBM, we've seen this firsthand. But by embedding AI across hr, IT and procurement processes, we've reduced costs by millions, slashed repetitive tasks, and freed thousands of hours for strategic work. Now we're helping companies get smarter by putting AI where it actually pays, deep in the work that moves the business. Let's create smarter business. IBM
- [01:32]
Francine Lacqua
Bloomberg Audio Studios Podcasts Radio News.
- [01:41]
Jonathan Ferro
This is the Bloomberg Surveillance Podcast. I'm Jonathan Ferro along with Lisa Abramowicz and Annmarie Horden. 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 6 to 9am 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. I'm pleased to say that any identity research joins us now for more. Ed welcome back to the program, my friends. So I've been conditioned to ignore this situation. I wake up this morning, I want to ignore the situation. Can I ignore the latest situation in the Middle East?
- [02:20]
Lisa Abramowicz
And no, absolutely not. I mean this is a geopolitical crisis that just won't go away, won't end. The cease fire, according to the President, is over and he's clearly in a position to to know and in a position to end it. So we're back to square one in some ways. Back to where we were in March. I think, though, I think both sides are testing one another. I think the President is demonstrating to the Iranians that while they may have obviously a significant impact on flows through the strait, he can shut off their oil to the rest of the world. The unsettling development here, I think, is it may very well be that Iran is basically out of control, that the Revolutionary Guard is not going along with whoever is, quote, unquote on the moderate side, moderate being that they'd like the cease fire to continue and they'd like to come out with some sort of agreement. But the President made it pretty clear that it's very frustrating if not impossible to negotiate with another the other side. And so clearly we can't ignore this at this point.
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Ed
It is sort of surprising, as John was mentioning, that oil prices aren't even higher. If the truce really is over, though, the pace of increase is pretty notable. The two day increase for both Brent and WTI is the most since at least April. And you see just sort of this surge upward. Is there a trigger point either in the pace of increase or the level that could make you rethink even the broadening out trade in US equities?
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Lisa Abramowicz
LISA the honest answer is I don't know. Nobody knows for sure. But so we are, we are all watching the price action in the marketplace, particularly in the oil market. And I think what we're seeing is we're being reminded constantly here that there was a bear market in oil before the war started at the end of February. The bear market actually started when Russia invaded Ukraine. We had a big spike there and ever since then we been on a significant downtrend until this war started. So that kind of and it certainly everybody was surprised by how quickly the price of oil came down. And I think that just reflects that. Over in China they really adopted electric vehicles and on top of that their economy is really very weak. And on top of all that, the United States has looked the other way as the Russians have been selling more oil to China and India and other countries. And meanwhile we've been exporting a lot of oil to Japan and in South Korea. So put it all together and the underlying fundamentals for oil are actually bearish, but certainly not bearish in the short term here with the end of the cease fire.
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Ed
The volatility that we're seeing though, just highlights how much inflationary pressures are coming from myriad places and seem to be persistent even when you want to say, look, there's potentially a LUT because of all of these off these release valves that you talked about. At what point do you think that this market is underpricing the risk of inflation running a Bit hotter, putting pressure, yes, on the Fed, but potentially pressuring certain profit margins for companies that are facing a pretty wearied consumer.
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Lisa Abramowicz
Well before the June meeting of the fomc, we thought that the Fed was going to pivot fairly significantly from an easing stance back in April to a tightening stance in June. And that's exactly what happened. The big surprise to me was that Kevin Wash turned out to be among the hawks because he had, when he interviewed for the job, he certainly sounded dovish. Now, the Fed is, seems to be pretty much all aligned with the idea that price stability is much more important than the labor market. Labor market seems to be stable, but you know, all bets could be off here depending on what happens with it. With the Middle east, you know, the consumer has been doing just great, but if we get another spike in gasoline prices, there may be some kind of geopolitical fatigue. And meanwhile the market has run into air fatigue. And just, you know, as I saw in your brief cuts for all the strategists that you had interviewed recently, everybody was talking about rotation. I was talking about rotation out of the air trade into companies we know something about and we know their future more than we do the AI companies. And that was the Dow Jones, that was the Russell 2000. But now we're all back to, as I said, square one in some ways with regards to the Middle east and that's become the main focus. And you're right, the inflation concerns are back in play and as a result of that, the Fed is back in play. Not only is the Fed pivoted to tightening, but they may actually have to tighten.
- [07:21]
Jonathan Ferro
This is the three punch combination right now to sentiment. And it's not just the situation in energy to your point, it's how you fold that into the outlook for interest rates. And the third point is this rotation. Quite vicious. Rotation away from the high flies in this equity market right now. Lisa Shannon, Morgan Stanley was pretty scathing in the last 24 hours. She said while many investors are waiting for capex to actually slow before reducing semiconductor exposure, given what is implied about the sustainability of future growth, we're taking profits now and you were there too. And I just want an updated thought from you about where that chip stage trade stands now given the 16% move we've had just in a few weeks.
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Lisa Abramowicz
Yeah, well, clearly we did have a tremendous rally in the, in the semiconductors and that of course led the way up for the stock market. But the fact of the matter is it's not a FOMO melt up. It's been A female melt up FOMO means fear of missing out, which typically leads to very elevated valuation multiples, which basically is a valuation LED melt up. This has been an earnings LED melt up and I'd rather have an earnings LED melt up. I think there's less downside than there is in a FOMO melt up and I think it presents more of a, of a opportunity in the market because the fact of the matter is earnings have really justified the rally in semiconductors and it's not just expectations, but it's expectations based on actual reality. So I would view this sell off more as an opportunity than a reason to panic. But right now we're seeing not so much panic, just massive profit taking because there have been massive profits.
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Jonathan Ferro
So as you went there, when did you start buying these chips, these chip names that have been beaten up in just a few weeks?
- [09:14]
Lisa Abramowicz
Well, I think we're getting pretty close because these things move, you know, they don't kind of leisure do things in a leisure fashion. They go up very quickly, they go down very quickly. And so I think there's an opportunity starting right now. But I say that with some hesitation given that I don't really know, nobody really knows how this latest end of the cease fire plays plays out. And so the war is not over is the bottom line here. And the stock market is working on discounting that idea.
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Jonathan Ferro
Stay with us. More Bloomberg surveillance coming up after this.
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Samantha
Get the news you need in just 15 minutes.
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Scott
Start your day with Bloomberg Daybreak, the podcast with a global view on the stories that matter.
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Jonathan Ferro
I'm Nathan Hager.
- [10:05]
Samantha
And I'm Karen Moscow. Join us each morning for curated stories on current events, politics, business and foreign
- [10:11]
Scott
relations, plus one conversation on the day's biggest developments, all in just 15 minutes.
- [10:16]
Samantha
Subscribe to Bloomberg Daybreak for a precise, thoughtful take on the stories that matter.
- [10:21]
Jonathan Ferro
Listen to Bloomberg Daybreak each morning on Apple, Spotify or anywhere you listen. Cruise surging then with the President saying the ceasefire with Iran is over. This after the U.S. launched, quote, powerful strikes and revoked a wafer allowing the sale of Iranian crude. Samantha down to Goldman Sachs is busy again. Sammy had a rest for a couple of weeks. Welcome back. It's good to see you. What is the supply backdrop like right now? Let's start there. That's important because that's been a major factor in the past few months. What's it look like now?
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Samantha
Yeah, so the last time we had a flare up, we had a decline in the crossings through the strait. We're very likely to see that again now. But we have to also remember when we saw the MoU being announced, we couldn't expect going from 0 to 100 directly. I think right now we shouldn't also extrapolate that this is going to go to zero and so stop altogether. So let's give it a couple of days. The President also said that negotiations continue that he thinks is a waste of time, but they continue. So to me that signals that this is not necessarily over. Let's see what happens with the flows. And in terms of how high the flows were just before this latest flare up, we saw total Persian Gulf exports reach 70% of normal. So by this does include, to be fair, the reroutes, the pipeline reroutes from the region. But it was a pretty good rate of flow considering how soon it was the mou.
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Jonathan Ferro
Where was that flow coming from, Sam? And how material was that waiver for Iranian crude which has now been revoked?
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Samantha
Yeah. So if you look where the ships are coming from, it's from everywhere in the Gulf. It's not just Iran, it's not just Saudi, it's from everybody in the region. And, and if we consider the Iranian sanctions, even before this whole war started, Iran was selling crude. It just wasn't selling to everybody. It wasn't selling in an unsanctioned way. So it's not obvious to me that the revocation of the license alone is going to change this dramatically. We have to see where those flows go. I think the blocking of the strait that was in place before board, this is what we need to watch for. So going back to your first question, we need to watch the crossings. We need to watch how much that 70% of normal is going to fall to.
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Ed
Do you have a break even point, say the traffic goes up to 30% or 40% or 50% that it would kind of even out and it would be okay. Especially given your forecast, Goldman Sachs forecast earlier this month that potentially there could be a supply gluttony. Should there be more normalization for the Strait of Hormuz?
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Samantha
Yeah, that's a very good point. We're talking about flows having been around 70% of normal. And when we look at visible global oil inventories, they were starting to build, they were starting to build even though flows had not been fully normalized. And this goes back to something you guys mentioned just a minute ago. What China had been doing and this I think to me was one of the most surprising things since the deal announcement is the fact that China oil imports in June, they kept dropping versus May. So they didn't rebound after the announcement of the MoU. And this gives the system a lot of flexibility. It makes it softer, it makes it easier to accommodate the flare ups like what we're seeing right now.
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Ed
If someone were in the markets and listening to you, you could forgive them for thinking. So you're saying I can ignore this? Are you saying that this potentially is not as disruptive of a development as it would have been treated, say three months ago?
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Samantha
I think just like the blockade duration matters. But I would be more concerned with refined products than I would be with crude. First, because we see this, this difference in terms of what China is, is doing. But second, because when we think of production capacity, crude production capacity, what we're hearing from the services companies is that this has not been damaged in the Gulf. So that's good news. That means that once this is resolved, production can likely go back to what it was, but the refining capacity has been damaged. So the ability of refined product output to normalize I think is going to take a lot longer. And already, even though, so I mentioned that China oil imports are continuing to move lower, but flights were starting to go up.
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Scott
Right.
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Samantha
So mobility was starting to go up. So your consumption of refined products is going up before your production and your export of refined. So I would worry a little bit more about gasoline and diesel and jet fuel than I would about crude right now.
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Jonathan Ferro
So you can have a reset in crude but you can still have elevated refined product prices.
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Samantha
Well, let's just think about how prices changed since, since the MoU announcement. So before this flare up, we had seen crude down just about 18%. We had seen European natural gas down about, you know, depending on the day, 5 to 9%. But crude oil products, they were down 4%, 5%, they were down the least. And I think this illustrates how tight that balance still is that the things
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Jonathan Ferro
that consumers buy, and that's going to be a political problem in some places.
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Samantha
I think that's exactly right. When we think about inflation, we don't buy crude oil. We buy gasoline at the pump and the trucks buy diesel and we fly on jet fuel.
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Jonathan Ferro
Just a final question. Some inventory levels, clearly they're very different now compared to where they were in late February going into the first mess. What do they look like now?
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Samantha
Yeah, so this is also a good point and it goes back to the point on flexibility on the crude side. They are not as low as what we would have expected at the beginning of the crisis. If we assume if the crisis lasts this long, it's going to go to record low levels. They didn't go to record low levels. But on the again on the product side, the color we are receiving from market participants is that retailers indeed have very low inventory of that.
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Jonathan Ferro
Stay with us. More Bloomberg surveillance coming up after this.
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Francine Lacqua
The Bloomberg Sustainable Business Summit returns to Singapore on July 22. Our 5th annual Asia Pacific Summit will explore how business and finance leaders are shaping the next phase of globalization by strengthening resilience and driving a multi speed energy transition across Asia's diverse markets. Join us for solutions driven discussions and networking opportunities. Thank you to our Summit advisor, Bangkok Bank. Learn more at bloomberg live.com/sbs-singapore.
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Jonathan Ferro
So chronic Citi writing Until we get some fundamental clarity, especially around the build out, we suspect rotation and choppiness will linger. However, we believe this creates an opportunity for less crowded trades. Scott joins us now for more. Scott, welcome sir. It's always good to hear from you. Recently downgrading tech so I think that's where we should start. Why the move away from tech?
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Scott
Well, I think it's pretty clear the way we are looking at it is that the setup with the strength that we saw in Q2 on the and the memory storage component of the semiconductor space really began to set up for a face off. Where where is this going to lead us as as the hyperscalers have to contend with the influence of rising input costs into their CAPEX calculations. What this did in our view is set up a situation where the strength we saw in Q2 for that semi hardware component we felt was somewhat unsustainable relative to where the hyperscalers capex considerations are right now.
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Jonathan Ferro
Scott, with that in mind, is that a market where the hyperscalers can start to pick up. We've heard lots about a rotation away from chips, from hardware back to the big spenders. Do you see it the same way?
- [18:21]
Scott
Well, I think it's going to be tricky. I think the way we're looking at it is at the Q2 reporting period is going to tell us a lot on this. I don't know that the hyperscalers can back off just yet in terms of their CAPEX plans and nor do I think they should necessarily. But what you have is this ongoing friction where the market's going to be looking for evidence on the ROI discussion for the hyperscalers and the burden of proof on that I think is going to be the mission critical component on the way this plays out. So we've remained underweight. The media component of communication services downgraded as I mentioned, semis and hardware, but we did lift software from an underweight up to a market weight. So there we think that there's an opportunity for the software component of this to be a sort of a tertiary beneficiary of some of the pressure we're seeing now on semis and the hyperscalers.
- [19:11]
Ed
Scott, how do we get it, how do we get to 80, 100 without the participation of the tech behemoths?
- [19:17]
Scott
Yeah, you know, it's a really good question, Lisa. So when you look at this, the Mag 7 and I would say first up front that we think the Mag 7 construct is dead. We think it's gone, we've gone to Mag 8 and we could probably go to 9 or 10 if we really wanted to in terms of the way some of these memory semiconductor related companies have appreciated of late. But the path here really requires two things. Number one, you need the broadening effect to kick in that other half of the market that's not attached to AI, that's more traditionally macro and economically sensitive driven. We think that is where there's opportunity right now. But number two, to your point, the Mag 7 coming back to the construct I think is dead, has essentially traded roughly flat year to date and that's 40% of the index. So we do have a set up here. We're going to into the second half and we got, you know, roughly six months to go. Is this broadening effect to take hold on one hand as we wind down Iran, which I know is back in the news flow this morning, but as oil prices fade we think that takes pressure off of inflation. But then as you go further into the year, we do think there's opportunity for the, the trade, once it digests a lot of these, these issues that we're contending with currently to kick back in. And the combination of the two is how we get that sort of mid to upper single digit move into the end of the year.
- [20:37]
Ed
Scott, you mentioned the Iran situation and we are seeing a flare up this morning. At what point would oil prices rise to a point where you would think that the broadening out trade was threatened, that this thesis of disinflation into the end of the year truly gets undermined?
- [20:54]
Scott
Yeah, I'm not sure there's a magical level here at least. But what I would say is that you know, obviously with oil, oil sub 70 we were feeling pretty good about our broadening play. Right. And I still think that's our base case. We're a day or two into this, the conflict sort of reasserting itself. So we'll need to let this play out, but I'd say if there's a line in the sand on oil prices that we've been drawing, it's probably around that $80 level. That really begins to kind of clip the thesis for us.
- [21:21]
Jonathan Ferro
This is the Bloomberg Surveillance Podcast, bringing you the best in markets, economics and geopolitics. You can watch the show live on Bloomberg TV weekday mornings from 6am to 9am 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.
- [21:44]
Francine Lacqua
This week on Leaders with me, Francine Lacqua, I speak to tennis legend Rafa Nadal about how he stayed competitive despite injury.
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Lisa Abramowicz
I was able to enjoy the victories
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Samantha
probably more than if I will not have this issue.
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Francine Lacqua
One iconic match in my mind was
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Jonathan Ferro
I am almost dead and whether he
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Samantha
misses playing, I don't miss Dennis because there was nothing else to offer.
- [22:09]
Francine Lacqua
Listen and watch Leaders with me, Francine Lacqua, on Bloomberg Television or wherever you get your podcasts.