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Speaker 2: President Trump surprising traders by posting on True Social that
Speaker 2: China can continue purchasing oil from Iran, Brent crude coming
Speaker 2: off the biggest two data client since twenty twenty two,
Speaker 2: and Rediscent of Energy Aspects joined us now for more
Speaker 2: and Rita, I want to get to this, this line
Speaker 2: that's coming for the president. Can you help me answer this?
Speaker 2: When did China stop buying a Runnian crude?
Speaker 1: I think that's a question you might have to ask him.
Speaker 1: But basically there's been a lot of confusion since that
Speaker 1: statement that, to your point, China hasn't stopped buying Iranian crewed.
Speaker 1: China still buying one point five to one point seven
Speaker 1: million barrel speer of Iranian crude. There was maximum pressure
Speaker 1: under the first Trump administration, which did get exports down
Speaker 1: to four hundred thousand, but then since the Biden administration
Speaker 1: took office, it's been kind of creeping up. And then
Speaker 1: election and high all prices were an issue, so the
Speaker 1: administration turned a blind eye. So yesterday when the kind
Speaker 1: of tweet came out, everybody was like, Okay, does this
Speaker 1: mean sanctions are being lifted?
Speaker 3: You know?
Speaker 1: Anyway, the point being, since then the White House has
Speaker 1: clarified this is not a change in sanctions policy. However,
Speaker 1: we would also say this does mean that there's not
Speaker 1: going to be a tightening in sanctions either. I status
Speaker 1: score prevails, China continues to buy about one point five
Speaker 1: to one point seven million barrel spade of Iranian all.
Speaker 2: Just built on some of those numbers, Zen rat, what
Speaker 2: is that of a share of total Iranian production? The
Speaker 2: amount of barrels that are on the market right now already.
Speaker 1: So Iranian production is about three and a half eh
Speaker 1: million barrels putting oscillates a bit between three point five
Speaker 1: three point seven. All their exports, whatever they are exporting,
Speaker 1: goes to China and the rest of it is consumed domestically.
Speaker 4: Which is the reason why this is such a big
Speaker 4: potential buyer and why this is such a big deal
Speaker 4: for the oil markets in terms of who else would
Speaker 4: supply that and what this would mean for the price.
Speaker 4: Does this suggest that this is part of the ongoing negotiation,
Speaker 4: that the goal is to keep oil prices low and
Speaker 4: the bet against that is frankly a fool's earned.
Speaker 1: I would say that's exactly how the market's interpreting it.
Speaker 1: You know, when we are talking to our clients, the
Speaker 1: general impression is that, look, we know President Trump wants
Speaker 1: low oil prices. He's gonna get it in one way
Speaker 1: or the other. Right, So if that means that, especially
Speaker 1: because we were in the high seventies not that long ago,
Speaker 1: that means that we are not gonna see tightening up sanctions,
Speaker 1: and I think traders are very much focused on that.
Speaker 1: The fact that he wants low oil prices, especially ahead
Speaker 1: of the bill, and he has been saying that consistently right,
Speaker 1: that he doesn't want prices to go up. Inflation is
Speaker 1: a big concern. So that's where I think the market
Speaker 1: kind of reality. That's why the market reacted the way
Speaker 1: it did in terms of selling it so hard. But
Speaker 1: at least since then it's been clarification that sanctions are
Speaker 1: still in place. This is China avoiding sanctions in the
Speaker 1: US not doing anything about it. But yes, it does
Speaker 1: mean that there's more oil in the market than otherwise
Speaker 1: would be.
Speaker 3: But from a.
Speaker 4: Trading perspective or MADA doesn't this act as a cautionary
Speaker 4: tale to anyone who tries to expect oil prices to
Speaker 4: rally in any kind of material way, that there is
Speaker 4: a Trump put an essence on that, that there is
Speaker 4: a willingness to navigate the geopolitical situation in a way
Speaker 4: that brings down oil prices one way or another. So
Speaker 4: why would you bet one hundred dollars crued or ninety
Speaker 4: dollars accrued, which is the worst case scenario that so
Speaker 4: many people are talking about.
Speaker 1: Yeah, no, I completely agree, and I've been surprised that
Speaker 1: people have been calling for that. You know, we've never
Speaker 1: I mean, I've been with you guys saying that non
Speaker 1: seventy and eighty is not going to be sustainable given
Speaker 1: where the ballot are and you know, people are looking
Speaker 1: towards those bills that we are also predicting from Q
Speaker 1: four onwards. I think the challenge, of course, is that
Speaker 1: this is not a market you can short either, because
Speaker 1: these risks and the geopolitical risks are real. Fundamentally, though
Speaker 1: the writer right now remains very very tight. Stocks are
Speaker 1: very tight. Cushing just look at that, it's super low.
Speaker 1: So this is this is also equally hard to short.
Speaker 1: But on a macro level, your point is very valid
Speaker 1: that Trump and his policies will somehow make sure that
Speaker 1: prices don't run away too quickly. It does mean that
Speaker 1: generally there's a bias towards the lower side.
Speaker 2: I'm rat can we just finish up asking you what
Speaker 2: the demands side looks like at the moment. I think
Speaker 2: economists are really scratching their heads at the moment about
Speaker 2: when the economy is, particularly here in the United States,
Speaker 2: we're trying to gauge where we are speaking to company executives.
Speaker 2: What's your take just looking through the prism of crude oil.
Speaker 1: Yeah, I mean it's not great, but it's not dire either,
Speaker 1: And I think we're kind of in between our demand
Speaker 1: numbers between seven to eight hundred thousand boules per day
Speaker 1: growth year on year. Again, the US is actually doing okay,
Speaker 1: Europe is doing very well, China not so much. And
Speaker 1: I think that's kind of the spectrum. We don't think
Speaker 1: this is a recessionary environment in the sense of what
Speaker 1: people were expecting when tariff fears were at its peak.
Speaker 1: But it's also not an environment where global growth is
Speaker 1: humming along very nicely.
Speaker 2: I'm ready to say advantagy aspects. I'm ready to thank
Speaker 2: you joining us. Now have to discuss John Leeber of
Speaker 2: the Erasia Group. John, welcome to the program, sir. Before
Speaker 2: we get sort of needy with what's handling over in Europe,
Speaker 2: I think we want to talk about the president's agenda
Speaker 2: and the key deadline still to come July fourth, the
Speaker 2: south impost deadline for the tax bill. July ninth, this
Speaker 2: south impost deadline for a trade deal with the whole
Speaker 2: host of countries. John, where do you think will be
Speaker 2: by the time we get to the middle of July.
Speaker 5: You know, this tax deal is coming together and they're
Speaker 5: basically done with it. There's a couple of kind of
Speaker 5: dotted eyes and cross te's they've got to think about
Speaker 5: right now, and of.
Speaker 6: Course there's the House of Representatives, who.
Speaker 5: Isn't going to like the deal that's coming out of
Speaker 5: the Senate necessarily, but I think it's going to have
Speaker 5: a really hard time voting against this thing. You're going
Speaker 5: to have unanimity among the conservatives in the Senate to
Speaker 5: pass a bill with deep cuts to Medicaid, the most
Speaker 5: impactful cuts that they've done on an entitlement program in decades.
Speaker 5: And I think that some of the moderate members are
Speaker 5: probably where you're going to have a harder time getting
Speaker 5: the votes because of the issue with the salt cap,
Speaker 5: which is how the Senate's moved back down to ten
Speaker 5: thousand dollars. The House had passed it at forty thousand dollars.
Speaker 5: That's going to be an issue you have to work out.
Speaker 5: But it you know, Brett, President Trump now out there
Speaker 5: true thing that nobody should go home for the fourth
Speaker 5: of July holiday until this has passed. If it doesn't
Speaker 5: pass next week, it's going to pass shortly thereafter. On
Speaker 5: the tariffs, you know that ninety day pause is up
Speaker 5: on July ninth, and a lot of countries, you know,
Speaker 5: there's a lot of countries are still negotiating their deals.
Speaker 5: So I think it's notable that despite the really early
Speaker 5: momentum around Japan, India, the UK of course announced something.
Speaker 6: You haven't finalized anything.
Speaker 5: So they're going to have to extend this ninety day deadline,
Speaker 5: and they're probably going to do it for most of
Speaker 5: the biggest countries.
Speaker 6: But I also think they're going to send a message.
Speaker 5: Here by increasing tariffs on some countries, maybe not back
Speaker 5: to Liberation Day levels. Trump still has total discretion here
Speaker 5: as to what level he's going to get to. But
Speaker 5: some of these tariffs are going up, and only Trump
Speaker 5: knows which ones that is. The White House staff doesn't know,
Speaker 5: and I think they probably haven't made that determination and
Speaker 5: won't for at least a week or two.
Speaker 2: And John, this president doesn't stop, by the looks of things,
Speaker 2: He never sleeps. After the next few weeks, what's left
Speaker 2: of his agenda? What does he focus on?
Speaker 5: I think that it's going to be crisis response, right, So,
Speaker 5: I mean this is going to look a lot like
Speaker 5: the first Trump term where they did the tax You
Speaker 5: know that they tried and fail on healthcare in the
Speaker 5: first half of the year, and then the second half
Speaker 5: of his first year was all tax reform. And then
Speaker 5: in year two it was kind of just you know,
Speaker 5: Trump tweeting about all kinds of subjects that was whatever
Speaker 5: was on his mind and responding to what was going
Speaker 5: on in the world, and then of course picking a
Speaker 5: trade battle with China. He's already picked the trade battles.
Speaker 5: He's going to be done with his tax agenda. You know,
Speaker 5: there's going to be foreign policy crises that come up
Speaker 5: from time to time, like we just saw in Iran
Speaker 5: this week.
Speaker 6: But he's not actively pushing much.
Speaker 5: And on the deregulation front, you know, I hear a
Speaker 5: lot of people talking about the tailwind coming from deregulation
Speaker 5: in the latter half of Trump's term coming up. But
Speaker 5: that stuff takes time, and they're going to stop enforcement
Speaker 5: across a number of for example, financial regulations basically, but
Speaker 5: deregulation itself is a whole process, and if they want
Speaker 5: it to stick up in the court, they have to
Speaker 5: do it right.
Speaker 6: And doing it right.
Speaker 5: Means going slow, and it means you won't see the
Speaker 5: results from the deregulation, if there is any, until possibly
Speaker 5: the end of Trump's term or even after, when all
Speaker 5: of that, of course, could be reversed potentially by a Democrat.
Speaker 6: John, There's a lot to unpack there.
Speaker 4: I want to talk about crisis response in particular to
Speaker 4: foreign policy. It seems like people are taking the recent
Speaker 4: developments in the Middle East as providing something of a
Speaker 4: roadmap for how President Trump will respond to future international crises.
Speaker 6: What's your take on that.
Speaker 4: What did we learn from the way the President handled
Speaker 4: Iran and the attacks by Israel.
Speaker 6: Yeah.
Speaker 5: I think what we learned, and this has been a
Speaker 5: pattern throughout Trump's time, is that foreign policy's pretty easy
Speaker 5: for him when there's a power imbalance. When there's a
Speaker 5: power imbalance and the US can respond with overwhelming force
Speaker 5: and has no risk really of being struck back at
Speaker 5: Trump will strike. He did it in Iran twice now
Speaker 5: with the assassination of Sulimaney and now this unprecedented level
Speaker 5: of bombing. But if you look, for example, at Russia,
Speaker 5: where there's less of a power imbalance, they have nuclear
Speaker 5: arms already, there's nothing really Trump can do to intervene
Speaker 5: in that conflict. So I think this is going to
Speaker 5: be something that other countries are paying attention to. I'm
Speaker 5: sure China is paying attention to what happened in Iran
Speaker 5: this week. China's diplomacy and their ambitions have a much
Speaker 5: longer timeframe, and they're much less of an active threat
Speaker 5: to their neighbors than Iran Wi, So that situation is
Speaker 5: obviously very different, of course, But I do think that
Speaker 5: I think that Trump is willing to act. He's not
Speaker 5: going to commit American troops on the ground that I
Speaker 5: think that's a red line for him, but he is
Speaker 5: willing to throw American firepower at countries that are irritating
Speaker 5: him if he thinks he's going to win without consequences.
Speaker 2: This is kind of a curveball.
Speaker 4: But you talk about we learned something about President Trump's
Speaker 4: response based on the mayoral primary election in New York.
Speaker 4: What have we learned about the Democratic response to President
Speaker 4: Trump's policies, if anything, Has that sort of served as
Speaker 4: something of a roadmap?
Speaker 6: Yeah, I don't think so.
Speaker 3: No.
Speaker 5: I mean, New York City, you know, great, most important
Speaker 5: city in the country, but it is not representative of
Speaker 5: the rest of America. And I don't think that a
Speaker 5: socialist mayor in New York City is going to be
Speaker 5: a look that the rest of the Democratic Party necessarily
Speaker 5: wants to embrace for the midterm elections. I expect the
Speaker 5: party's going to try to run from him. However, there
Speaker 5: is going to be a backlash against President Trump that
Speaker 5: is going to have very is going to have the
Speaker 5: left wing in its flavor, and that is going to
Speaker 5: be a national story. And you're going to have this
Speaker 5: battle inside the Democratic Party for who's most likely to
Speaker 5: win in general elections. You know, the social is emerging
Speaker 5: from the primary is not going to win in Missouri,
Speaker 5: but they can win in New York City. That's not
Speaker 5: really a roadmap for the rest of the party.
Speaker 2: Hey, John, I appreciate your thoughts as always, John Labor
Speaker 2: of the range of Great John, I guess now is
Speaker 2: Sheila Shelda?
Speaker 5: Good to see you.
Speaker 7: It's you.
Speaker 2: The defense spending very much in focus given this headline
Speaker 2: as well coming out of the NATO summit, companies like
Speaker 2: Ryan mattau German Defense operator that stock is already up
Speaker 2: one hundred and seventy seven percent so far this year.
Speaker 2: How much of this story is already well priced?
Speaker 7: Well, we focus on the US names, as you know,
Speaker 7: John's coach and in terms of what we're seeing as
Speaker 7: we're at the Paris are Show last week, it's historically
Speaker 7: a commercial aerospace show. But a lot of focus on
Speaker 7: defense exposure. European defense companies are trading at fifty times Zebadah.
Speaker 7: These multiples are ridiculous, and we're seeing a lot of
Speaker 7: focus from US investors into European names, but also undiscovered names.
Speaker 7: Whether it's a name like Aero Environment that reported last night,
Speaker 7: albeit in our coverage it's an Israeli named thirty percent
Speaker 7: Israel exposure, twenty percent US exposure, twenty five percent Europe.
Speaker 7: So who has hidden European exposure that could benefit from
Speaker 7: some of the NATO spending, which is going to pour
Speaker 7: hundreds of billions into additional defense spend.
Speaker 4: Do we have a sense of which region of defense
Speaker 4: contractors Europe will be working with disproportionately. Will it be
Speaker 4: mostly European defense manufacturers, Will it be the United States?
Speaker 4: Will it be elsewhere?
Speaker 6: Does it matter?
Speaker 4: Is this being used as a diplomatic tool or is
Speaker 4: this just where they can get them in order to
Speaker 4: get their forces up.
Speaker 7: Historically it's been two thirds of European spending has been
Speaker 7: flowed back to the US. But companies like ran Mattall
Speaker 7: are really emerging investing in their local capacity. In the
Speaker 7: last month, we've met with all five defense contractors, and
Speaker 7: the common theme is.
Speaker 4: Local for local.
Speaker 7: Yes, we have a facility in Spain, we have a
Speaker 7: facility in Poland. So we think about fifty percent of
Speaker 7: the NATO spend will come back to the US. And
Speaker 7: I actually think over the next five years it'll be
Speaker 7: focused on missiles, munitions, replenishing what got lost in Ukraine.
Speaker 7: And over the long term, I think what we'll lose
Speaker 7: out on is the fighter aircraft, you know, the local
Speaker 7: teams France SAB will have local manufacturing of larger equipment
Speaker 7: in Europe, and US will still supply missiles air defense,
Speaker 7: which is where the US really excels at.
Speaker 4: Yeah, to build on that, there was this feeling and
Speaker 4: John you mentioned it it was like watching top Gun
Speaker 4: in action over the past couple of weeks in terms
Speaker 4: of the B two bombers and what they actually engage
Speaker 4: with and how much is that, you know, different countries
Speaker 4: around the world saying I want that versus just the
Speaker 4: very nuts and bolt of you know, I need another
Speaker 4: missile here, I need another thing there. I mean, is
Speaker 4: that kind of the sort of more humdrum aspect of
Speaker 4: what we're actually talking about here from the European.
Speaker 7: Buildout yeah, I think we have to give the North
Speaker 7: or B two bomber minute here because I just I
Speaker 7: think it's so amazing and it just happened this weekend
Speaker 7: and everybody brushed it off on Monday morning. The last
Speaker 7: time it was used was against Yemen in twenty twenty four,
Speaker 7: but aside from that, it was used in Libya in
Speaker 7: twenty seventeen and twenty eleven before that, so we don't
Speaker 7: use these that often. I went to the facility in
Speaker 7: Palmdale where Northurope sustains them. I mean, the coding itself
Speaker 7: costs hundreds of millions to recode every time, so it's
Speaker 7: pretty cool aircraft. We only have twenty of them. We
Speaker 7: use seven over the weekend, so I think it also
Speaker 7: helps accelerate the Trump agenda, whether it's the next generation
Speaker 7: fighter with NGAD which they awarded to Boeing, and pulling
Speaker 7: forward things like the B twenty one, which is also
Speaker 7: a North of aircraft.
Speaker 2: What about what we have seen sat place in Ukraine
Speaker 2: in the war between Ukraine and Russia and their ability
Speaker 2: to cause serious damage to air defense of the Russians
Speaker 2: were just drones. That seems to be a major development
Speaker 2: over the last couple of years, the character of war
Speaker 2: has changed, and I wonder if the type of investments,
Speaker 2: the kind of things that people invest in in defense
Speaker 2: is changing too.
Speaker 7: I think a little bit of both. The Reconciliation Bill,
Speaker 7: which is about one hundred and fifty billion, has nine
Speaker 7: billion dedicated to drones and other autonomous vehicles. So the
Speaker 7: Trump agenda really focuses on accelerating technology and what the
Speaker 7: next war will look like, whether it's against China, but
Speaker 7: it also pushes forward their agenda. One of the things
Speaker 7: I do really appreciate is how the bill really pulls
Speaker 7: forward programs that are already accelerating, whether it's like tech
Speaker 7: strons Flora program, if we have it, if it's in
Speaker 7: the air, why are we waiting for certain milestones to
Speaker 7: be reached?
Speaker 2: Shida, important conversation, good to see. As a ways, Thank you,
Speaker 2: Silda Holy that of Jeffries on defense, spending a lot
Speaker 2: of spending on defense in Europe and again in the
Speaker 2: United States. What does it mean for fixed income and
Speaker 2: this spawn market? Matt home back at Morgan Stanley joins
Speaker 2: us now for more. Matt, Welcome to the program. Sir
Speaker 2: was going through the midiear outlook from yourself, the team.
Speaker 2: Let's talk about the bond market, caill and the dollar.
Speaker 6: Call.
Speaker 2: With that in mind, what's the new base case for
Speaker 2: you and the.
Speaker 6: Team, John, thanks for having me on the show.
Speaker 3: Yeah, we see both of these assets going down.
Speaker 6: The dollar we see going down in price.
Speaker 3: We have the dollar depreciating about ten percent over the
Speaker 3: next twelve to eighteen months. And then for treasury yields,
Speaker 3: we have treasure yields also falling. We have the tenure
Speaker 3: yield ending this year at four percent, and we have
Speaker 3: it ending closer to three percent by the end of
Speaker 3: twenty twenty six. Now, both of these forecasts, of course,
Speaker 3: are related.
Speaker 6: They are driven primarily by.
Speaker 3: A federal reserve, which ends up cutting policy rates much
Speaker 3: more aggressively than what markets are currently pricing in. We're
Speaker 3: more confident, i would say, on the magnitude and the
Speaker 3: direction of those rate cuts as opposed to the exact
Speaker 3: of those cuts. As I'm sure you read in the note,
Speaker 3: we don't have the FED cutting this year, but we
Speaker 3: have the FED cutting a lot next year. That's an
Speaker 3: interesting feature of the outlook, but is one that's subject
Speaker 3: to change, of course.
Speaker 2: Matt, what are the economic conditions that lead to those
Speaker 2: deep cuts in twenty six.
Speaker 6: Yeah.
Speaker 3: So, ultimately, the first is that we get past the
Speaker 3: hump on tariffs. Right, tariffs create a temporary inflationary impact.
Speaker 3: Our economists have that impact concentrated in the third quarter
Speaker 3: of this year, and then by the time we get
Speaker 3: to the fourth quarter, those tariff effects are starting to
Speaker 3: fade away and you begin to see the weakness and
Speaker 3: the labor market really come through. That's ultimately what catalyzes
Speaker 3: that discussion on the Fed to begin lowering rates, which
Speaker 3: our economics team has happening in the first quarter of
Speaker 3: next year.
Speaker 4: Why aren't you worried, Matt, that when the Fed does
Speaker 4: lower rates, it won't cause the long end yield to
Speaker 4: rise kin to what we saw last year.
Speaker 3: Yeah, well, I think what happened last year Lisa is
Speaker 3: the Fed did cut rates, and interest rates did go
Speaker 3: down temporarily. But then we went into the US election
Speaker 3: and the market, being forward looking, began to speculate on
Speaker 3: what was to come after the election, and of course
Speaker 3: at that time, investors were thinking about much larger deficits,
Speaker 3: more government bonds supply, kind of a better economic outlook
Speaker 3: than we think exists at the moment. So it was
Speaker 3: a different time, and we're not expecting that to happen again,
Speaker 3: at least for another three and a half years, Matt.
Speaker 4: Given the discussions heading into July fourth and then July ninth,
Speaker 4: it does seem like the deficits going to deepen in
Speaker 4: the United States. Why is that not a threat to
Speaker 4: your call to go into duration to buy those ten
Speaker 4: year bonds that maybe other people are steering clear of.
Speaker 3: Well, the expectations for the deficit have actually changed quite
Speaker 3: a lot, and the primary driver that change is, of course, tariffs.
Speaker 3: Coming into this year, most investors didn't expect the Trump
Speaker 3: administration to do as much with tariffs as they have done.
Speaker 3: And so when we think about what kind of revenue
Speaker 3: are these tariffs going to generate? And don't ask us,
Speaker 3: you can ask the Congressional Budget Office what it thinks
Speaker 3: about the revenues generated by the tariffs that are currently
Speaker 3: in place today, And the CBO scored that tariff revenue
Speaker 3: around two and a half trillion dollars over ten years.
Speaker 3: Presumably some of that's front loaded, So we are seeing
Speaker 3: a meaningful increase in revenue that was not expected coming
Speaker 3: into the year. That's going to mean that deficit expectations
Speaker 3: are actually lower than where they were right around the
Speaker 3: time of the election last November.
Speaker 2: Matt, have you got a window in that office? Going
Speaker 2: to extend a window? Some daylight?
Speaker 3: I do have some daylight. Good, but really my daylight
Speaker 3: comes from the picture of my daughter behind me.
Speaker 2: That's beautiful. Matt homeback of Malken Stanley. Matt, thank you.
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