C (2:43)

Yes, months ago, a move like this in oil would likely have triggered a sharp equity sell off. Markets held up in part because economic data is still good. Core capital goods orders rose 3.3% in March, the strongest since mid-2020. Also, our economists note that oil would need to rise to $175 per barrel and remain there for several months to materially damage economic activity.

B (3:10)

But of course, markets were also waiting for the earnings releases of four of the big US tech companies. The key question investors are thinking about is whether the massive spending on AI is providing tangible results.

C (3:24)

Overall, the company is guided for continued heavy investment in AI. Alphabet showed clear returns with strong growth in its cloud business, sending shares more than 6% higher after hours. But Meta lagged with shares down 6% after raising full year capital expenditure and seeing slower uptake of its consumer AI app. Amazon reported 28% growth in cloud revenues, its strongest since 2022, and the stock rose over 2% while Microsoft delivered a clean beat. Azure sales are expected to rise about 40% this quarter.

B (4:02)

Now, over in Asia, with all these developments over the last 24 hours, how are markets faring there?

C (4:08)

The tech heavy South Korea index KOSPI is down less than 1%, suggesting markets are not reacting really negatively to big tech earnings. Otherwise it is about stagflation risks. In Japan, the Nikkei 225 is down more than 1% and bond yields are sharply higher. But that is not helping the yen. It is at its weakest against the US dollar since July 2024. Over in China, Hong Kong's Hang Seng is down more than 1% while mainland China is only slightly lower. The composite PMI released this morning signaled slower momentum but stayed in expansion, easing to 50.1 points.

B (4:48)

And now later today the ECB will announce its interest rate decision. Rates are expected to remain unchanged, but the market is pricing in a June rate hike.

C (5:00)

The focus is on the ECB's messaging and how it balances inflation against slowing growth. German headline inflation rose to 2.9% in April on the higher energy prices, but that was below forecasts while core inflation actually eased to 2.3%. At the same time, growth signals continued to weaken with euro area sentiment falling to a three and a half year low as consumer and services confidence declines this morning. French GDP numbers for the first quarter showed the economy stalled.

B (5:34)

Okay, and apart from the ECB later then, what else is coming up today? Mike?

C (5:39)

We will also hear from the bank of England with no rate change. Expected earnings of course remain in focus with heavy rates like Volkswagen, Apple, Eli Lilly and Samsung. Lastly, we will also get Eurozone inflation for April, the Swiss cough growth indicator and in the US Q1 GDP figures and core inflation data for March to name just a few. And with all of that Said taking a look at European equity futures, they are in the red but less than 1% down. That's all from me.

B (6:10)

Very good. Thanks very much, Mike, for the great roundup this morning.

C (6:14)

And thanks for having me, Helen.

B (6:18)

And now on to you, Norbert. Good morning.

D (6:21)

Firstly, good morning, Helen.

B (6:23)

Let's start by talking about the conflict in the Middle East. Because Brent crude oil prices surged over the last few days. We just heard a bit from Mike. Moving above $120, a new high. What are the drivers at the moment from your perspective?

D (6:40)

I think there's three things at play. First, we're looking at negotiations that are in gridlock, so we have to talk and risk of escalation, even return of military action. So this injects uncertainty. Then since mid April we have this blockade which Iran is really no longer exporting crude oil. So the deficit that we see in market has somewhat increased. But the third is very likely, very specific thing at play from the paper market. We all looking at a brand futures price. And the contract we're looking at is in fact expiring today. So you wouldn't be surprised to see just out of that, a drop tomorrow because there might be some short covering currently going on because of this expiry in the contract.

B (7:20)

And the United Arab Emirates made headlines earlier this week with the announcement that it will exit opec. How much of a surprise was this?

D (7:28)

Well, first it was somewhere between surprising, expected, and there might be, of course, a greater political angle to it. But I think if you focus on the economic rationale, this seems quite clear and convincing. So the Emirates had for a long time really this strategy in terms of diversification and investment. So they did substantial investments in oil and gas production, into petrochemicals, even into ongoing investments into liquefied natural gas exports, pipeline, rail network, everything. So there's a really broader push in terms of economic diversification which brought the country where it is today. And with this exit from opec, they simply get much greater flexibility and independence to really do cash in and monetize these investments, especially those investments done into oil and gas production.

B (8:15)

Okay, and what does them leaving mean for OPEC overall?

D (8:20)

I mean, if you look back, you know, OPEC has been anything but a cohesive group and the different members objectives, they were really aligned more opportunistically than strategically. And the cohesion that we saw within this group, within the patron nation for us was rather surprising how strong it was over the past years. And there's several episodes, I mean, maybe remember early 2020s, just before the pandemic hit. Saudi Arabia and Russia are really at crosshairs. Or then later in 20, it was the disputes between Saudi Arabia and the Emirates that appeared because Saudi Arabia pushed for kind of maintaining kind of these production curbs, while the Emirates they really favored a much faster, swift normalization, curtailment, phase out. But of course it is exit. The kind of the greater future of the cartel is bit under scrutiny and the bigger challenge seems not to be what the Emirates have now done with the exit. The bigger challenge for the petronation is really the oil market and the structural, the tectonic shifts that we see in the oil market. So these constant market share losses that the petronations had because of the increase of shale production, because of the production boom, deepwater offshore South America, but also because of the shifts on the demand side, you know, with plugins undermining road fuel use and especially with the natural gas boom kind of bringing much cheaper feedstock for the petrochemical industry and they kind of moving away from oil based feedstocks. So this is the bigger risk than the politics that we currently see or are talking about this week.

B (9:50)

Some argued that this is rather negative for oil prices. What's our view on this?

D (9:55)

Well, we share this view because basically this exit and the greater flexibility very likely means that the Emirates will increase production faster once we move out of this conflict, that they might even spend more on capacity expansion because they can monetize it. And there's maybe another element too. So if something like that happens and we are kind of returning to this market of greater competition, maybe there's even more rifts within OPEC or OPEC itself. So this is really the way we look at it that this exit matches kind of with the oil market that appeared, the setting that appeared last year, late last year. And the setting we're very likely past this conflict in the Middle east, moving into an oil market where there's greater competition, an oil market where there's greater capacity and there's basically ample supplies.

B (10:43)

All right, just to wrap up on oil then where do we stand in terms of the Iran war and the energy crisis?

D (10:51)

Well, we see now that storage is declining. This is supposed to happen because you have a deficit. But the storage declines in the western world and the visual parts, they are a bit slower, which kind of confirms our view that the supply deficit might be not as big as we initially feared. Then the second element, we see the consequences of the supply chain re plugging, as we call it. So we had two months in a conflict. So These supply chains, they are about to replug. We see this in the physical market in the indicators where we had some easing. But at the same time we are also looking at the standoff that is kind of more enduring, that takes longer, much longer than do our initial estimates. We still believe it's all about the political solution because the infrastructure damage so far has not been given. So overall it fits with this pattern that we apply of this short term in commodity terms, bounce in the market. But because it's more enduring, we also had to adjust our oil price forecast and now we see oil prices moving towards 75 into summer and beyond summer, which is a bit higher than the forecast that we had before. That's it for Moel.

B (11:57)

Excellent. Thanks a lot Norbert. Always great to hear your latest insights.

D (12:01)

Thanks for having me.

B (12:05)

And finally, let's look at the Q1 earnings season which is now well underway. So plenty to talk about there. Good morning Mattia, welcome to the podcast.

A (12:14)

Good morning Helen.

B (12:16)

So how resilient have earnings been so far in the face of the ongoing geopolitical uncertainty?

A (12:23)

So earnings have actually been very resilient so far, which is probably the key takeaway here. So even with all the geopolitical noise, companies are still delivering. So in the US we are now close to half of the S and P founded having reported and the overall tone remains strong after already a solid start. And the numbers back that up. The earnings speed rate is running at around 82%, clearly above the long term average of 76%. Tech materials are leading here on the upside, while the consumer names are a bit softer here. What's also quite striking is the magnitude of the beats. Reported earnings are coming in roughly 8 percentage points above expectations, pushing expected Q1 growth for the S&P to above 15% year over year. And that's now the sixth consecutive quarter of double digit growth, which is quite remarkable. Europe looks a bit softer, especially on revenues where the strength of the euro has been a headwind compared to the same quarter last year. Even there, earnings have held up quite well and despite the higher oil prices, we're not seeing a meaningful slowdown in in consumption yet. So overall earnings are clearly holding up better than many would have expected in this environment.

B (13:29)

How have markets reacted to these results so far? And what key catalysts or risks should investors still be looking out for as the earnings season continues?

A (13:39)

So what stands out is how asymmetric the market reaction has been. So even though results are strong, the VAR for good news has been relatively limited, while the penalty for disappointment is quite pronounced. So if you look at the data, companies that beat on both revenues and earnings already outperforming by about 1%, which is below the historical average. But on the flip side, misses are being punished much more heavily. We found the performance of around 3.7%, so the market is clearly less forgiving at this stage. There are two main reasons behind that. First, expectations were already quite high going to the season. Equity markets have rallied strongly, so a lot of good news was already priced in and that naturally gaps the upside reaction. And second, the forward looking element has become more cautious. So if geopolitical backdrop still uncertain, companies are less confident in their outlook. So giving less optimistic guidance here which investors are picking up on. So even solid backward looking numbers don't necessarily translate into strong share price reaction. So the message is that we're in a phase where expectations matter as much as fundamentals and the bar for positive prices remains relatively high.

B (14:49)

Okay, so the market reaction's been quite muted then, despite solid results, this may partly reflect the strong rebound in equity markets and investor sentiment since the late April lows, particularly in the us. Does this suggest that the ongoing tensions around Iran and higher energy prices no longer carry the same weight for investors?

A (15:10)

To some extent, yes. So markets are crazily treating the current situation as a temporary disruption rather than a prolonged shock. And that's an important shift in perception. There's still uncertainty, but the base case for investors is that this doesn't turn into a structurally damaging event. Part of that view is driven by incentives on both sides to avoid the full escalation, but also by how quickly markets adapt. So we're already seeing alternative trade routes away from the Middle east being established, which helps reduce the immediate bottlenecks we are seeing in the energy market. And ultimately, earnings are playing here a key role. Companies continue to deliver strong profits, especially in areas such as US Tech. That's also why US equities have regained leadership more recently. So geopolitics still matters, but right now it's not strong enough to derail the earnings story.

B (16:00)

And just finally then, what does this latest rally imply for investor positioning and where do you currently see the most compelling opportunities regionally? Matthia.

A (16:10)

So overall we think investors should stay, remain invested, but diversify more globally. The strongest earnings momentum is still clearly in AI related segments, particularly in semiconductors and the broader supply chain. So demand for AI infrastructure continues to outpace supply, especially with the rollout of the new AI models driving a sharp increase in compute needs. And that keeps utilization high and supports pricing power for those equipment providers. So from a fundamental perspective, that part of the market still looks very solid. At the same time, it's also important not to get too concentrated. So outside the us valuations are simply more attractive, and we are starting to see better entry points emerging after the recent volatility. So the way to think about positioning is not either or. It's about keeping exposure to the structural winners in the AI space, but gradually complementing that with a more diversified regional exposure that should help navigate what is still a fairly uncertain macro backdrop.

B (17:09)

Excellent. Thanks a lot Mattia for the update this morning.

A (17:12)

Thanks for having me. Always a pleasure.

B (17:14)

So that's it for today. Thank you again to Mike, Norbert and Mattia and to you, our listeners, for tuning in. Now, tomorrow is a public holiday here in Switzerland, so just to note that there will be no podcast tomorrow 1st of May do look out for our weekly view beyond Podcast though, on how structured products can help investors to navigate current markets. This will be published on Saturday as usual, and the Daily show will return on Monday. So do join us then. Thanks a lot for listening. Have a great day everyone and bye for now. The information and opinions expressed in this podcast constitute marketing material and are not the result of independent financial or investment research. Please refer to www.juliusbear.com legal podcasts for further other important legal information.