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- [00:00]
Robert Armstrong
Foreign.
- [00:10]
Katie Martin
So is the US Conflict with Iran over? I'm not just trying to be a smartass here. I genuinely don't know. Earlier this week, Donald Trump said the conflict was, and I quote, very complete, pretty much. While his secretary of defense, Pete Hegseth, outlined a plan for the next phase of the bombardment, an enterprising reporter somewhere asked Trump to explain which it was. Very complete or still underway? The answer? You could say both. Confused. Well, welcome to the club. But investors seem pretty sure they've spotted a Taco T A C O. You guys. Trump always chickens out. Oil prices have dropped back and stocks are picking up. Today on the show, what do investors really make of this war? And what is our best guess of what happens next in the markets? This is Unhedged, the Markets and Finance podcast from the Financial Times and Pushkin. I'm Katie Martin, a markets columnist at FTHQ in Old London Town, and I'm joined all the way from the Big Apple, New York City by His Excellency, the Very Reverend Robert Armstrong off of the Unhedged newsletter. Rob, like, seriously, what is going on?
- [01:24]
Robert Armstrong
Congregants at our lady of Eternal Liquidity. Peace be with you. And it's really hard to say. What markets are responding to is not anything about the world outside of Donald Trump's head. They're purely responding to the fact that what he signals very strongly yesterday with those comments was he yesterday being. Oh, I'm sorry, Monday with those comments was he's looking for the exit. He's had his fun, he's dropped his bombs and now he's looking to talk about, think about, do other things. That doesn't mean anything has changed on the ground necessarily. But the markets were anticipating and now they have received confirmation that in the president's eyes, he wants this thing to be over. And that's a meaningful fact, even if the facts on the ground, war wise, haven't necessarily changed between last week and this week. So, you know, you use the phrase taco. I'm hesitant to use that here, not only because it's kind of a joke and this is a war, but also using that term creates the impression that Trump can just close the door on this thing.
- [02:41]
Katie Martin
Yeah.
- [02:41]
Robert Armstrong
And I don't think this is that kind of a situation. There are other people involved, to say the least.
- [02:49]
Katie Martin
Yes.
- [02:49]
Robert Armstrong
So the Iranians might have a couple of words to say about whether this war is over. So might the Israelis. So that's something that this is not Liberation Day. Trump's tariff announcements in April where when he chickens out they are over. Right. He is in charge of that in a way. He is not in charge of this war.
- [03:08]
Katie Martin
Yeah. So everyone's talking about this in terms of it being like a taco thing, as you say. That might not be right for a number of reasons, but one thing that we do know is that we know what we don't know. And so we're not gonna get into the geopolitics because we've got much, much cleverer colleagues who have got a better read on all of that stuff. But we do know that even ahead of this move by Trump to back away, I think we're safe to call it that markets, like, never really took this, that seriously in the first place. Right. They always thought he would back away at some point because we had some big moves in markets, like the oil price obviously shot higher, but it was never like panic stations.
- [03:56]
Robert Armstrong
Well, let's talk about the oil price first. I mean, I think we did see a big move up in oil. Probably not coincidentally, that was the night before Trump made his comments. So if you wanted to build out a narrative around Trump realizing he'd gotten in over into the deep end of the pool and was paddling furiously towards the shallow end, you would say he saw oil get into the danger zone, both economically and in terms of the gas price, therefore electorally and so forth, and he decided he needed to turn things down.
- [04:34]
Katie Martin
Let's talk a little bit about gasoline prices, actually, in the states. So they went up 6, 16% in a week.
- [04:41]
Robert Armstrong
Yep.
- [04:41]
Katie Martin
If you're wondering, listeners, that's a lot. So that gets you to pretty much $3.50 a gallon American. And if we, like, weirdly focused on petrol prices, aren't you?
- [04:52]
Robert Armstrong
It's true, we do drive a lot here. Certain voters are very exposed to the gasoline price. Agriculture, people are very exposed to the gasoline price. Obviously, people commute a long way, which is a lot of Americans, a lot of suburban Americans commute a long way and sustained $100 plus oil, you would have seen a much bigger than 16% move up. So that was electorally bad. But there is a somewhat complex point to be made here about the oil price, which I am afraid to say involves the futures market. So now we are going to get into some nerdy stuff. So oil, you can buy it for right now, and you can also make a contract with somebody to buy it later. You can buy it next month, two months from now, a year from now, whatever you like. And there's a big, deep liquid market for these futures contracts. And the difference in prices along that series of months is called the futures curve. And the difference in those prices tells you something about people's expectations about the world. And what we saw in the oil curve was that front month futures, in other words, I want to buy oil for right now, went absolutely bananas. But we never saw a big response to this war in the further out prices. The price for two months, three months, four months from now, and indeed the steepness, the wild way in which prices fell down as you go further out into the future was like historic. I was talking to oil analysts and traders yesterday and they were like, this is the steepest we've ever seen it. And what that's telling you is everybody was like, holy crow, it's going to be hard to get the oil that we need and we're going to have to pay up for it right now. But in a month or two everything's going to be fine. And the market really stuck to that view.
- [06:54]
Katie Martin
I think there's a fun story by our colleague Malcolm Moore on FT.com today about like oil traders saying, this is the craziest week in trading oil I have ever known. Now bear in mind, six years ago during the COVID shock, the oil price went negative. You had to pay people to take it off you because there was no storage left because the market went completely bananas in lockdown. Even bearing that in mind, oil traders are saying this is some crazy stuff.
- [07:25]
Robert Armstrong
Absolutely wild couple of days. On Friday, we're in the mid-80s, late in the weekend, overnight Sunday, early Monday, we get as high as 119. The price as we speak, 86.
- [07:40]
Katie Martin
They've never seen anything like it. Like there's some pretty exhausted people on energy trading floors at the moment.
- [07:45]
Robert Armstrong
But again, if you wanted to buy oil for two months from now, it wasn't so crazy. That's the oil market in the way the oil market can telling you what the expectations of the world are. And a lot of people said, a lot of these oil traders said to me, the idea of having the Strait of Hormuz closed for months is so economically catastrophic that something would happen to change that. Whatever it had to be, you know, the world would change. I mean, that's a fifth of the world's supply goes through there.
- [08:18]
Katie Martin
There's a little kind of, well, little channel of water, but in relative terms it's a little channel of water that goes through this like incredibly important pinch point in the Middle east, in the Gulf, around where oil flows around the world. Iran has done a pretty good job of saying, you shall not pass through this strait just by, you know, chucking the odd drone in its direction or the odd missile in its direction. And as you say, that is the absolute worst case scenario, or it's certainly among the worst case scenarios, which is that literally that passage of water is just completely shut down. And then you get oil going to $150 a barrel, you get it going to $200 a barrel, you know, really quite apocalyptic stuff starts happening.
- [09:01]
Robert Armstrong
And by the way, Katie, we should mention for listeners that it would be a delayed effect because there is a certain amount of oil inventory out there in the world in big tanks, floating around on ships, wherever. So it's not like you, you close that strait and there is an oil crisis immediately when the strait closes. That's when the horrible clock starts ticking, right, as all that floating storage and online storage starts to work its way down. Which is why, by the way, we heard this week there was talk about, oh, maybe we should ease these sanctions on Russia, right? Because it's like if we can't get it through the strait, we can't screw around having the second biggest producer in the world, right, and not being able to sell their barrels to everybody.
- [09:47]
Katie Martin
But the other thing that pulled the oil price down, you know, yes, it's this statement from Trump. But also the big economies got together, like the G7 biggest economies, biggest developed market economies in the world got together their representatives and said, we're going to release some strategic oil reserves, right? That's what strategic oil reserves are for. They're there for to relieve these pressure points. And so, you know, that is a sign, isn't it, that it's not just, you know, politicians in the US it's politicians globally can see this is why we are so laser focused on geopolitics in the Middle east, because it is just this pinch point that can screw over everybody's economy all at once by making energy incredibly expensive.
- [10:30]
Robert Armstrong
And indeed, what we saw in other market prices was the way that other economies, particularly in the UK And Europe, are more sensitive to the energy price than the US Is for not, you know, for industrial reasons in terms of what kind of business they do. And the fact that of course, the US has its own sources of oil in the shale patch and so forth. But, man, we saw some, you know, there was more action in the stock markets of Europe and Japan in terms of, you know, spooked responses to this war than anything we saw in the
- [11:02]
Katie Martin
US let's just pick that apart a little bit, right? So this is one of the Things that I think is really important about how the market responded to the bombardment of Iran. It was not your classic, what people call risk off move. Right. It wasn't the classic thing where investors just scramble into safety. So no, they were not scrambling into government bonds. They were scrambling out of government bonds because of the inflationary impact of the oil price.
- [11:29]
Robert Armstrong
Yes.
- [11:29]
Katie Martin
They weren't scrambling into gold, which they would normally do in a shock. They were getting out of gold because gold has actually been a really successful bet for them over the past few months. Like you look everywhere, there was some weird stuff going on in markets. Yes, the stock markets that have been the most popular over the past few months and have done the best. They're the ones that pulled back the most. Even the Swiss franc, which is supposed to be the place you go to when you're really worried about the state of the universe that fell back because again, that has been doing really well against the dollar over the past few months. So it wasn't a kind of classic flight to safety. It was more investors saying, I'm going to just do some spring cleaning of my portfolio because there's a bunch of things here that have done really well. I'm just going to take some profits and cut back a little bit because there is just this weird stuff going on. But it wasn't a kind of liberation day, tariff day style, oh my God, get me somewhere safe right now. It was different.
- [12:29]
Robert Armstrong
I think you're absolutely right. And I think the crucial context here is, is that investors in the equity markets in particular have made a load of money. And what you could see was them unloading the stuff that had worked in the months running up to this event. So it was like a good time to take some profits on your most successful trades. But what we didn't see, for example, was U.S. equity investors diving into safety plays like consumer staples. On the contrary, because consumer staples had done really well in the last couple of months, they sold off. So it was very strange. The other piece of context, of course, was that oil crises will naturally strengthen the dollar. So that's another reason why we saw international markets weakening in a way that US markets didn't weaken is because they, you know, they go down basically when the dollar goes up. So if you were looking at things priced in dollars, the damage looked significantly weak.
- [13:28]
Katie Martin
Worse, one bit of the market that did have a very violent reaction was in very short term government debt in the UK and Europe. So the UK obviously, like we, we need oil from the Middle east. We're a lot closer to that part of the world than we are to you lot in the States where you've got plenty of your own oil. So we're very, very reliant on, on this particular kind of energy network. And there was a real sense of fear at one point that we were going to have another energy crisis in this country, just like we did after Russia's full scale invasion of Ukraine in 2022. So the short term debt markets responded pretty violently. They went from pricing in an interest rate cut from the bank of England, which is what, you know, people that thought that was what was coming in the coming months, to pricing in an interest rate rise. So, you know, not even going to neutral, but almost going all the way to pricing in a rise in interest rates by the bank of England to tack inflation from higher energy prices. Now to the uninitiated, that might not sound like that big of a deal, but there was a lot of hedge funds that were crammed into this bet that UK interest rates were going to keep on falling. And it has been brutal for those guys. There's been billions of dollars lost during that process. They'll make it back. They're grown ups, they can handle it. But you know, it's kind of worth remembering that this is why governments tend to try and avoid volatility in financial markets rather than creating volatility in financial markets. Because accidents can happen really easily. Somebody blows up, it sets off a domino of financial instability. It certainly sounds like there were pockets of short term debt markets that really suffered.
- [15:14]
Robert Armstrong
You're absolutely right that the short term debt markets, that's basically all markets bloodstream, right?
- [15:20]
Katie Martin
Yes.
- [15:21]
Robert Armstrong
That's your collateral. That's, you know, how, you know, you have to borrow to keep your trades going, et cetera, et cetera. It's very, you know, it really is the circulatory system for markets is the short term debt market. And I was building a chart for the newsletter yesterday of what had happened to short term yields. And you know, something big has happened when you have to double check your chart because you can't believe you've gotten it right. And I was looking at this like 43 basis point move that's you know, 0.54 or 3% move in in UK short term debt in like a week. And it's like, no, no, that can't be right. Yeah, and, and that doesn't sound like a very big number. But when you're levered 100 to 1 or whatever it is, which is what somebody who's betting on short Term interest rates will do. That is a huge, acutely painful move that will send you running home to mama.
- [16:14]
Katie Martin
Yeah, it turns out, you know, you find out how popular some of these, like, bets, some of these positions are when they go belly up. And it turned out this one was pretty popular. So now what markets are trying to do. And again, this remains a fluid situation. So if this is out of date in a couple of days, so be it. But what markets are trying to do now is kind of get back to, quote, unquote, normal. Stocks going up, borrowing costs generally coming down, the oil price edging back towards where it was before this whole thing started. My problem with that is, you know, yes, Trump has said this thing is over or nearly over or whatever his exact wording was, but it's not up to him. Right. He's not the only human in this process who has agency. Iran still has agency. It has a very messy political situation now. Are you confident this thing is over?
- [17:09]
Robert Armstrong
I have no idea what to think. And it's not just Iran and Israel that has to agree. It's also, you know, oil companies and oil traders and oil shippers are all involved, too. Somebody has to decide that it's worth the risk to captain a boat through those straits.
- [17:30]
Katie Martin
I saw a clip of someone on Fox News saying, come on, ship people, be brave. You know, stand up and be counted. Take the ships through the strait. Rob, my question to you is, would you do that?
- [17:45]
Robert Armstrong
I can barely parallel park my car, so I will not be piloting a tanker through the strait. You're absolutely right. We don't know if this is over. We got to get a different set of colleagues on the line here to discuss the geopolitics because if anybody knows, we know it's not us, too. So, you know, all we can say is what the markets are pricing in. What are the markets pricing in? As of this morning, Tuesday morning, U.S. stocks are kind of stable and flattish gold is coming back up. The measures of market volatility are still a little bit elevated, like the VIX and the V vix, which are these markets for basically betting on how much stocks will move around in the next month or so. They're telling you that some people are out there still hedging their bets a little bit.
- [18:35]
Katie Martin
Yeah.
- [18:36]
Robert Armstrong
So everybody is taking a breath. That is good. But the markets have not declared that it's truly over.
- [18:45]
Katie Martin
Listen, let's take a little breath of our own and come back in one sec with Longshore.
- [19:02]
Helen Pidd
Hi, it's Helen Pidd here, one of the Hosts of the Guardian's award winning daily news podcast, Today in Focus. We go beyond the headlines, all over the world, talking to the people at the heart of the action, bringing you stories that matter every weekday. Listen wherever you get your podcasts.
- [19:22]
Katie Martin
Okay, it's time for Long Short. Where we go, long a thing we love or short a thing we hate?
- [19:28]
Robert Armstrong
Rob, what you saying I'm long the necktie. I have written a piece for our sister magazine HTSI this month, which you can look up find at newsstands near you, saying, the tie is back. I think they look great. I think they're fun to wear. It's happening. I can see. I see ties all around now.
- [19:49]
Katie Martin
Are you like, also spats?
- [19:51]
Robert Armstrong
Just kidding.
- [19:53]
Katie Martin
Are you anti casualization? Is that what you're saying?
- [19:57]
Robert Armstrong
No.
- [19:57]
Katie Martin
Specifically, ties.
- [19:58]
Robert Armstrong
No, I'm not. I'm. You know, every year people say, oh, formality's coming back. Obviously that's never happening. I just think the tie is like a fun decorative thing is coming back. Okay, where it started. It's a kind of fun scarf that men can wear. You know what I mean?
- [20:14]
Katie Martin
Fun scarf for men. You heard it here first.
- [20:17]
Robert Armstrong
Okay.
- [20:17]
Katie Martin
I am Long Korean Viral food crazes. An excellent piece on our website today. Apparently, Korea loves a food craze and the latest one is these, like Dubai chocolate style chewy chocolate cookie things. And apparently they sell like, they're pretty small. They sell for like the equivalent of $4.75 each. And they've become such a huge obsession, like queues round the block for these things that apparently they've been using them at centers for blood donation to encourage people to come and give blood.
- [20:57]
Robert Armstrong
Say, who give blood, get chocolate.
- [21:00]
Katie Martin
It seems like a reasonable deal. Like, when I go and give blood. You get very poor quality biscuits these days. I really think maybe more people would do it if you have better chocolate.
- [21:09]
Robert Armstrong
I'm gonna check one of those things out.
- [21:10]
Katie Martin
Yeah, this is the ticket. I'm running on listeners. There's a lot of chaos in the world. But all being well, we'll be back in your ears on Thursday. So listen up then. Unhedged is produced by Jake Harper and edited by Bryant Urstadt. Our executive producer is Jacob Goldstein. We additional help from Topher Forehead. Cheryl Brumley is the FT's global head of audio. Special thanks to Laura Clark, Alasdormacki, Greta Cohn and Natalie Sadler. FT Premium subscribers can get the unhedged newsletter for free and a 30 day free trial is available to everyone else. Just go to ft.com unhedged offer. I'm Katie Martin. Thanks for listening,
- [21:58]
Robert Armstrong
Sam.