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Speaker 1: Here's the latest, the US and Iran agreeing to a
Speaker 1: two week ceasefire, with Tehran vowing to reopen the street
Speaker 1: for moves. Joining US now is someone who's worked in
Speaker 1: the Defense Department, who's worked with military forces in the US,
Speaker 1: has extensive experience in this entire region. Seth Jones of CSIS,
Speaker 1: thank you so much for being with us. I want
Speaker 1: to start with your response to the ceasefire. How realistic
Speaker 1: you see it holding for after that two week and
Speaker 1: even entire two week period.
Speaker 3: Well, look, I think it's helpful that there has been
Speaker 3: there have been negotiations between the US and the Iranians.
Speaker 3: I think it's helpful and a step forward that we
Speaker 3: are at a ceasefire. I just think even in talking
Speaker 3: to Israeli officials recently, I think they do not expect
Speaker 3: the Iranians or Iranian partner forces to abide by any
Speaker 3: deal over the medium to long term. There were already
Speaker 3: sirens going off in Tel Aviv last night for potential
Speaker 3: incoming Iranian rockets. So I do have low expectations that
Speaker 3: this is going to stick over the next two weeks.
Speaker 1: So what do you think has actually been accomplished, Seth.
Speaker 3: Well, it's hard to say. I mean, when I look
Speaker 3: at the ten point plan that the Iranians have put together,
Speaker 3: most of those, at least many of the points are
Speaker 3: completely unacceptable for the US of the long run. They
Speaker 3: are the withdrawal of all US forces, particularly combat forces
Speaker 3: from the region, Iranian control of the Strait, and a
Speaker 3: number of other things, allowing Iran to have missiles and
Speaker 3: drone programs, and then compensation for the damage that Iran
Speaker 3: has incurred over the past several weeks of the conflict.
Speaker 3: I mean, I don't think any there's no realistic expectation
Speaker 3: that the US is going to provide compensation probably worked
Speaker 3: off states along those lines.
Speaker 4: I think there's a lot to hammer out seth on
Speaker 4: that point, in terms of a lot to hammer out realistically,
Speaker 4: what do you think could be achieved from that ten
Speaker 4: point plan? What do you think of the lowest hurdles
Speaker 4: to be too.
Speaker 3: Well, I think the lowest hurdles would be some kind
Speaker 3: of a joint arrangement involving countries in the region, particularly
Speaker 3: ones that are on the Straight of Hormuz that share.
Speaker 4: Any tolls that.
Speaker 3: Are charged to commercial ships going through the region, and
Speaker 3: potentially also some security of commercial vessels that go through
Speaker 3: the region. So it's not all on the US's shoulders,
Speaker 3: but it'll hinge on really how much trust any of
Speaker 3: these countries, including the US, have that the Iranians want
Speaker 3: fire on commercial vessels, and I think we'll have to see.
Speaker 4: And then you obviously talk about the toll, the toll,
Speaker 4: this tollbooth not being a realistic prospect, can maybe could
Speaker 4: you talk a little bit about what's on the sanctioned
Speaker 4: relief side or also the offshore frozen funds as well,
Speaker 4: which could maybe provide some compensation in Europe that toll
Speaker 4: booth instead.
Speaker 3: Yeah, I mean it's possible that there could be some
Speaker 3: sanctions relief for Iran. I mean, the challenge is that
Speaker 3: both the current Trump administration and even the Biden administration
Speaker 3: had pretty tough sanctions against Iran. I find it unlikely
Speaker 3: that the vast majority of those sanctions are going to
Speaker 3: be relieved with the prospect of Iran continuing to have
Speaker 3: a range of partner forces and pretty significant capabilities. But
Speaker 3: there could be some sanctions relief that comes with any
Speaker 3: kind of longer term deal.
Speaker 1: So a few percents of how closely aligned the US
Speaker 1: is with the GCC, with Saudi Arabia and United Arab
Speaker 1: Emirates and cutter and the other nations in the region.
Speaker 3: Well, I think they are aligned in some ways. I
Speaker 3: think that, you know, one challenge right now is some
Speaker 3: Golf states appear to have openly called for the end
Speaker 3: of the regime in Iran. That does not look like
Speaker 3: it's going to take place. The Supreme Leader Son is
Speaker 3: in power at the moment, the regime is largely the
Speaker 3: Islamic Polutionary Guard is still in place. But I do
Speaker 3: think there is a joint viewed get the straight open.
Speaker 3: I mean, I think it's a single most important issue.
Speaker 3: I think that the US shares it's a common interest
Speaker 3: between the Gulf states.
Speaker 1: In the US, is there a sense of what it's
Speaker 1: going to take seth in terms of have we actually
Speaker 1: taken ground troops off the table? Have we actually taken
Speaker 1: a further more aggressive stance in the region and put
Speaker 1: that aside for the time being.
Speaker 3: I don't think we've taken the prospect of using either
Speaker 3: ground or naval forces completely off the table. They're still
Speaker 3: in the region. The US has naval ships that could
Speaker 3: be used. The US also has ground forces that could
Speaker 3: be used, whether it's to take islands in the in
Speaker 3: and around the Straight of Foremus or on the shoreline
Speaker 3: of Iran. So I think if the US wants to escalate,
Speaker 3: if it does not feel that Iran is abiding by
Speaker 3: any kind of a deal, it could use those forces,
Speaker 3: either naval or ground, as a back. I mean the
Speaker 3: problem is there would be risky. You do risk naval
Speaker 3: forces getting shot at. I think I should cruise missiles
Speaker 3: coming from around, So there are some risks involved.
Speaker 2: Stay with US mulblinderg surveillance coming up after this.
Speaker 1: I'm readercent of energy aspects writing. Even after Hormo's flows restart,
Speaker 1: most producers will need will need several months to restore production.
Speaker 1: I'm readacent, joins us now, I'm I would love to
Speaker 1: get your sense of just how much has changed given
Speaker 1: the truth that was Now it's last night.
Speaker 5: I think I completely agree with what Javier said. If
Speaker 5: you read the statements, they're actually two quite different statements.
Speaker 5: We're hearing from refiners and lifters who are trying to
Speaker 5: kind of get a ship in. Firstly, the cost is prohibited.
Speaker 5: You know, you're talking about more than forty dollars a barrel,
Speaker 5: even if you can get insurance. There's a huge amount
Speaker 5: of confusion with regards to whether they need to pay
Speaker 5: the Ranians, how they're going to pay the Ranians, because
Speaker 5: payment to be made to Theirranians is not easy given
Speaker 5: the sanctions. The Iranians are actually sending out messages to
Speaker 5: vessels outside the strait saying that you know, if you
Speaker 5: are actually going to pass the straight or if you're
Speaker 5: going to come in, you need our permission. So this
Speaker 5: is by no means a straight that's open for business.
Speaker 5: To be very clear, what I would say is that
Speaker 5: we are likely to see the ships that are within
Speaker 5: the Strait right now whether they're empty or whether they're
Speaker 5: loaded with crudent products. We've counted, our cargo tracking team
Speaker 5: counts about two hundred and fifty vessels. Those over time
Speaker 5: could potentially move out with Iran's permission, but I don't
Speaker 5: think you'll see vessels moving in, and I think that's
Speaker 5: going to be the critical thing unless you actually have
Speaker 5: a complete cease far, not just a two week one.
Speaker 5: But we know that hostilities.
Speaker 6: Have ended, Amrita. When thinking about the growth versus inflation
Speaker 6: trade off, I'm just wondering, have you seen any evidence
Speaker 6: of demand destruction in these last several weeks?
Speaker 5: Great question, because you know, and you guys were just
Speaker 5: talking about the divergence between actual kind of physical prices
Speaker 5: and futures prices. The problem is everything is being reflected
Speaker 5: in the physical price, right. You know, dated Brentons trading
Speaker 5: above one hundred and forty dollars do buy traded back
Speaker 5: in a few weeks ago at one hundred and sixty
Speaker 5: dollars per barrel, and that's actually being reflected in products prices.
Speaker 5: If you look at diesel, if you look at jet fuel,
Speaker 5: they've been trading over two hundred dollars for barrel, even
Speaker 5: in the US, and yes, we have seen some demand
Speaker 5: destruction in parts of Asia, partly also because governments have
Speaker 5: stepped in and asked for rationing in advance or as
Speaker 5: kind of the crisis has progressed. So we have definitely
Speaker 5: seen about a million barrels per day of reduction, mostly
Speaker 5: in jet fuel also, you know, given the flight cancelations
Speaker 5: in the Middle East, but also in like NAFFA, LPG,
Speaker 5: so steam crackers, you know, things or units that would
Speaker 5: actually make plastics effectively.
Speaker 1: Right.
Speaker 5: So again the challenge we have in this is that
Speaker 5: because this is hitting Asia first, it's a really long
Speaker 5: time lag before it hits the West, right, whether it's
Speaker 5: the products itself jet fuel, gasoline, diesel, or the end
Speaker 5: products it's you know, the clothes we're wearing or all
Speaker 5: the kind of plastic goods that we consume, and that's
Speaker 5: why there's so much complacency in the market. But yes,
Speaker 5: we have seen the demand destruction and I don't think
Speaker 5: it's over.
Speaker 1: Yet, Rita, How long is that lag time before maybe
Speaker 1: you're going to say ongoing higher oil prices and higher
Speaker 1: products product prices, even if the cease fire were to
Speaker 1: hold today.
Speaker 5: Yeah, Look, the damage in some ways has been done.
Speaker 3: Right.
Speaker 5: We were all kind of talking about this big surplus
Speaker 5: in oil markets. Our surplus was definitely not as big
Speaker 5: as some of the US investment banks out there, but
Speaker 5: still it was a big surplus that's been wiped out.
Speaker 1: Now.
Speaker 5: All that Russian oil that was on water floating around
Speaker 5: that's now gone. India's taken all of that. So for
Speaker 5: the market, we're pretty much starting from scratch, right, so
Speaker 5: we are going to be trading in a higher range.
Speaker 5: But more importantly to your question that when do we
Speaker 5: see that impact. It's about a two and a half
Speaker 5: month lag because Asia would be buying the crude in
Speaker 5: March that arrives in April, they process the or they
Speaker 5: make the products, and then they send it west. So
Speaker 5: the earliest the West is going to feel the real
Speaker 5: pinch is mad really into June. So we haven't seen
Speaker 5: the actual shortages being felt yet.
Speaker 2: Stay with us. Mulplinberg surveillance coming up after this.
Speaker 1: Julian Emmanuel of Evercore is I joining us here in
Speaker 1: the studio. Julian, Before we get into it, what's your
Speaker 1: response to the ceasefire and how much you can really
Speaker 1: buy into it?
Speaker 6: Well, so I think we just have to step back
Speaker 6: and say two things here. Number one, there's a huge
Speaker 6: sire of relief that the incendiary language and and the
Speaker 6: inflamed rhetoric of the last three days on all sides
Speaker 6: is being set aside for hopefully at least two weeks,
Speaker 6: perhaps longer. But then when you think about where the
Speaker 6: markets were and are you know, taken individually the degree
Speaker 6: of hedging in stocks, credit bonds all bearish, and oil
Speaker 6: all bullish were at extremes going back to the pandemic.
Speaker 6: Taken collectively, the amount of hedging, and I've been doing
Speaker 6: this for a while. I was a junior trader on
Speaker 6: the floor during the First Gulf War. There is no
Speaker 6: precedent for the collective amount of hedging. So from that perspective,
Speaker 6: you know, this is a sigh of relief that we
Speaker 6: do think has some staying power. But again, as we've
Speaker 6: been saying, the devil will be in the details over
Speaker 6: the next several weeks.
Speaker 1: So if it has staying power, that means it's something
Speaker 1: that is tradable and that you do see upside here
Speaker 1: in a number of different markets. How much is it
Speaker 1: concentrated in the United States versus say, Europe versus say,
Speaker 1: Southeast Asia.
Speaker 6: Well again, if you go back to the oil price,
Speaker 6: which is essentially the lynchpin for everything here, the sigh
Speaker 6: of relief being breathed in Europe this morning is proportionately
Speaker 6: larger because the effect on elevated oil prices on Europe
Speaker 6: is also proportionally larger. But when you think about it,
Speaker 6: our view has been that the bull market that started
Speaker 6: in October of twenty twenty two has further to go.
Speaker 6: We thought that a week and a half ago as
Speaker 6: you were plumbing back towards sixty three hundred and frankly,
Speaker 6: what we find in bull market history is the stocks,
Speaker 6: themes and geographies that lad and US tech has been.
Speaker 6: All of those end up leading. So from our point
Speaker 6: of view, the biggest thing is the fallen yields here
Speaker 6: telling you that that is an endorsement of higher multiple equities.
Speaker 1: Clearly what is gaining the most this morning. You can
Speaker 1: see this sort of this rush into big tech seeing
Speaker 1: valuations is more attractive after the selloff. I wonder more
Speaker 1: broadly though, about the drop in yields, because you aren't
Speaker 1: seeing necessarily yields going all the way back to where
Speaker 1: they were on February twenty seventh, and you're not seeing
Speaker 1: oil prices go all the way back to where they
Speaker 1: were on February twenty seventh. And even if this deal
Speaker 1: isn't acted in some form and a prolonged ceasefire, it
Speaker 1: takes hold unclear how much oil prices go back to
Speaker 1: where they were. Does there have to be a higher
Speaker 1: inflationary understanding going forward that will affect those bond yields?
Speaker 6: No, And look, to be clear, our has few is
Speaker 6: that the landing zone for oil is certainly going to
Speaker 6: be much higher than it was. This is a structural
Speaker 6: change that will take years to work through the system.
Speaker 6: So we're looking at a brand price that ultimately lands
Speaker 6: in the mid to high eighties, WTI the low to
Speaker 6: mid eighties, and for stocks, both of those are perfectly
Speaker 6: fine given the fact that over the course of years
Speaker 6: and decades the reliance on oil for equity markets has diminished.
Speaker 6: Obviously it is still quite significant, as we've seen by
Speaker 6: the threat, but again here for us, it is not
Speaker 6: if you continue subsiding from here, is not at all
Speaker 6: a material headwind for either growth or the equity markets.
Speaker 1: How much of a linchpin will potentially earnings be even
Speaker 1: more so now given the fact that that has been
Speaker 1: the one aspect of the market that has upheld all optimisms,
Speaker 1: starting off with delta later this hour.
Speaker 6: So if in the middle of February, before the conflict began,
Speaker 6: I told you that earnings would be revised higher between
Speaker 6: here and then, you'd have called me a fool. Earnings
Speaker 6: have been revised higher, and actually we are below consensus
Speaker 6: projecting an earnings growth rate of over eleven percent for
Speaker 6: twoth thousand and six. And the history of double digit
Speaker 6: earnings growth is incredibly powerful. Since nineteen ninety six, eleven
Speaker 6: years of double digit earnings growth, the market has been
Speaker 6: up ten out of eleven years.
Speaker 2: This is the Bloomberg Surveillance Podcast, bringing you the best
Speaker 2: in markets, economics, angiopolitics. You can watch the show live
Speaker 2: on Bloomberg TV weekday mornings from six am to nine
Speaker 2: am Eastern. Subscribe to the podcast on Apple, Spotify or
Speaker 2: anywhere else you listen, and as always on the Bloomberg
Speaker 2: Terminal and the Bloomberg Business app.