Geopolitics derails risk sentiment, but for how long?
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Welcome to the Saxo Market Call. Before we get started, it's important we emphasize that the views and opinions expressed in this podcast are those of the host and guests and do not constitute investment advice or recommendations. All information provided is for educational and entertainment purposes only. All right. It is Friday, 13th of June, certainly a Friday the 13th for...

position holders and bulls and equities and risk on as overnight we have the Israel attacks on Iran. We're shaking up markets. It was a relatively positive session yesterday. And I don't know if those warnings, you were sending that around, Ola, on sort of an uptick in general warnings that Israel may be looking at attacking Iran. And we saw some U.S. defense names, I noticed, were up very heavily on the session yesterday.

into the close even before the actual attacks occurred. So, Ola, take us through sort of what happened exactly, what was attacked, and what this means for real sort of supply risks on the ground. I mean, we saw some really crazy action in crude oil markets overnight and some of that spilling over and some contagion into other markets that we'll get to in a minute. Yeah.

Yeah, indeed, John. Initially, crude oil spiked around 13%. It was the biggest one-day spike since Russia attacked Ukraine back in 2022. We briefly, I believe it was something like 78 plus we saw in Brent and now we're back down quite a bit. Still up on the day though.

It seems like the signals were there in the days leading up to the attack. We saw US basically telling its embassy staff in Baghdad to reduce or to non-essential staff could leave.

Similar warnings were sent to other US installations around the area. And it all boils down to these nuclear talks that have been ongoing for a while. Trump's obviously looking for a solution to that.

that problem with all the other stuff that is going on, then Iran nuclear talk has been very key. And it just seems like initially, increasingly that they were not really going anywhere. And it culminated earlier this week when Iran basically said, well, they were reducing access for the nuclear observers, and they said they're going to start working on the third

And that was really, I think that basically triggered the response from Israel. So overnight, all the nuclear production facilities were attacked. We also saw key personnel,

being taken out as well. So really quite a significant escalation. And we're now still waiting for the Iranian response. The question is obviously what kind of strength they can muster at this time. At this time, where obviously they are losing support in the region. We've seen that both in

in Gaza, we've seen that in Libya. So the question is really how much of an impact they can make. So this is a long one, John, but basically my view is that we've seen these geopolitical risk spikes now on several occasions in the last three years, several reasons or developments that warranted a spike. But as soon as we saw them, they basically started to deflate. And ultimately what we have to ask, the question has to be asked is,

whether Iran will try to bring in the region to expand it. They could do that by attacking US assets in the area that also bring US on board in the fighting there.

But generally, we've seen on several occasions that the appetite for conflict in the Middle East is simply not there right now. There's a lot of things going on in the Middle East among the GCC countries. The war is not top of their mind, that's for sure. So as long as we don't get any disruption to safe passage of crew through the Strait of Hormuz, which is around 20 million barrels a day,

then the supply risk is limited. But again, who wants to sell into a market where things obviously could deteriorate in the short term? Yeah, it's so tough to understand the response here.

From Iran, obviously it could do something crazy like attack Saudi production facilities or the Straits of Hormuz, as you say, but then we all know what kind of incredible response that would engender. So yes, it's so difficult to know what to do with these geopolitical situations.

They generally do fade. Of course, something as serious as when Russia invaded Ukraine, that took a long time to fade and there was a very big impact into Europe and the prices of energy into Europe for quite some time because of real disruptions on the ground. And it's kind of interesting to understand what Trump is going to do as well because he's been trying to send the signal that he –

really wanted to avoid Israel attacking Iran. It was hopeful for a deal. So it's a bit of egg on the face from Trump. And when Trump is not happy and he looks bad, he kind of lashes out. So I wonder what form that lashing out could take. I have no idea. I don't know if you have any clue on that up front either. Well, the initial reaction, as we see now, is the price at the pumps will go up. We've actually already seen an increase in the last months or so. So

So perhaps, so the benign inflation data we had the other day, that is probably increasingly difficult to see that being repeated for the months of,

months of June when the data comes out. So we'll see. But the market is also really quite conflicted because we have a situation where the economic growth globally is slowing. We have the unknown impact of the tariffs and the trade war. We have increased the production from OPEC+ members, basically meaning that if you look at the forward curve in the oil market right now, it's a massive hockey stick.

Basically meaning that we have quite an elevated backwardation at the front and then the curve just flattened out at a much lower level further out. And that's also what I'm actually just showing on slide seven. That is the spread between the first and the 12 months and the first contract and then 12 months out.

And you can see right now, if you look at something like the black line, which is a double tie, crude, 12 months out, it trades almost $9 below current spot price. And in Brent, it's $6.5. And that basically means that the market is pricing in tightness now. Also, because we are into the middle, we're into the peak summer demand period where gasoline and diesel demand is peaking. Not only are we driving a lot more,

more on the roads, but we also spending much more energy to keep cool through air conditioning, through electricity production. And these are having a tightening impact. But as we move into the autumn months, we will see ample supply start to weigh on price again. The only question in the short term is really what

from what level will we start to see the market prices start to come down again? And that's really where we have a lot of unanswered questions here, at least in the short term, regarding what's happening in the Middle East. All right. I'll get back to some other commodities topics in a moment. I wanted to run through what was going on before all this disruption overnight. We had, of course, the weak U.S. Jawa claims, another weak print yesterday, 248K unchanged from the prior week. This is sort of the third in a row that's a little bit elevated today.

A couple of things here. I actually think the continuing claims was far more interesting, the jump to – a very significant jump to above 1.95 million. Starting to cement the sense that we are seeing a weakening labor market in the US. But really these claims – there's been a bit of seasonality over the last two years at least where there's been a summer –

whether it's in June or further into August, but just sort of a wave of, even though these numbers are very heavily seasonally adjusted, there's still been a wave of increases in the summer. So to me,

We still need to see a couple of more prints. And let's get it well above 250K before we start to call this a bit more significant. Again, I think it is the continuing claims that is the more interesting data point yesterday. We saw the dollar selling off. We saw Eurodollar extending all the way to 116 plus. And this backing off was, of course, on the Iran-Israel news.

Looking at the dollar, a broader picture, it's a bit frustrating here. You're just not getting quite as much traction. Dollar-yen, yes, it was lower, but now it's bottled back up into the range. I suppose the higher crude oil prices on one hand are quite yen negative because of Japan's import bill and importing energy, whereas, however, the crush lower in U.S. yields traditionally has been something that's driven yen strength because of the relative improvement in the spread with Japanese yields.

It just feels to me like this market is risking frustrating us once again, even though if you just look at your dollar, it looks like we did have a break. And as long as we stay above 115, you could argue we're still in the clear here for a continuation higher. Massive week coming up. I do have a long FX update that I'm almost finished with. Please look for the podcast episode.

the description for the link to that update a bit later. I may actually post the podcast before the update is ready, but I'll add it back in later if you want to see the rundown of the six G10 central banks meeting next week. I think the Fed is quite interesting. Are they going to open the door a little bit for a July move? I would think it would be wise for them to do so from a political angle. You have Trump bashing on about

calling Powell at this point, he may have to force Powell to do something. How is he going to do that? I do not know. Calling him a numbskull, quote unquote. And then I saw an interesting, and this could be an interesting tact that he could take that is concrete, something that he could do. It was a quote from Scott Bessant, so US Treasury Secretary Scott Bessant in October of 2024 on how they could sort of

front run the next Fed chair post Powell, which is not until May of next year that his term ends. Quote from Scott Besson, so quote, you could do the earliest Fed nomination and create a shadow Fed chair. And based on the concept of forward guidance, no one is really going to care what Powell has to say anymore.

So in other words, if, if palace or if Trump says, I'm going to appoint, let's say it's Scott Besson's, I will appoint Scott Besson fed chair as of next May. And Besson comes out and says, and I will crush rates 200 basis points on day one. You've got forward guidance. You've got a managing the forward guidance between now and then would be a huge move. So very interesting quote there. And I think, um,

the shape of what is to come. Those yields will be guided lower at some, somehow, some way in the U S. Yeah, I think that's one of the key points there. So yeah, we did see U S yields falling and they're still relatively within range. We look at the 10 year since, since May, but towards the bottom end of that range and next week, a critical one with the, with the FOMC up. And before that we have the U S retail sales and you can see the whole economic calendar run down later in the slide deck. So,

Other bits and pieces from the market, we have besides the dollar move, we have metals, gold above $3,400. And I'll get you to talk about that in a moment, Ulla. And then crypto doing its usual indicator of a risk-on, risk-off indicator. It wasn't really confirming the decent comeback in risk sentiment yesterday. We did see U.S. equities a fairly strong close there.

I saw a great quote from somebody on Twitter. I think it's this guy, Markets and Mayhem, whoever that is, saying crypto continues to show itself as, quote, a relief valve for speculative liquidity, unquote. And I think that's exactly what it is. Where could we go technically if the risk-off continues? Again, I would focus on that $20,200-ish area on the NASDAQ 100.

You can see the future there on – I did post the future rather than the index itself on slide two because the index didn't incorporate the overnight action. Earnings calendar next week, pretty light. I've got it on there on slide three. But a couple of interesting names, especially on the consumption front in the U.S. We have Lennar.

A big home builder out reporting, and as I show on the inset there on slide three, existing home sales inventory, that's the black line, is starting to pick up quite strongly. So some houses are coming onto the market. I think it's more because of forced selling here.

than anything else that extremely constrained supply of housing was because of those mortgage refinancing rate that happened during the pandemic at very, very low interest rates. And people are sort of almost imprisoned in a sense in their own houses because they're paying such low mortgages right now, there's no incentive to move. So if at all you can stay put, you do stay put because you know you're moving to the next place if you have to finance it with a mortgage, it's going to be at double the rate you got during the pandemic.

And then the blue line shows the new home realtor sentiment. It's a pretty solid forward indicator on the status of demand for new homes. And it's near the bottom of the range there since the sort of post-housing crisis situation back there in 2007 to 2009 area. So...

That's an interesting one on the home front. And then we're sort of very discretionary consumption. You have Carnival Cruises on Wednesday and Darden Restaurants, casual dining, are people saving money? No signs of that the last time around. We have another quarter forward here. Is anything changing on that front? I think it's some good color from specific companies. Eurodollar chart there on slide four. Again, I think the rally is intact if we're sort of closing and staying above 115, especially post-2020.

today because of this nervous weekend we're heading into here and because we just freshly broke higher. But of course, post-FOMC as well next week for the status of this rally. If we're punching back into the range post-FOMC, I think we'll be in for a long wait on ginning up any fresh enthusiasm for upside.

The FX overview is available on slide five. And again, if you're wondering what I'm talking about, the slide deck, you can find the link in the podcast description. We've seen dollar weakness picking up to a degree. Again, this is a bit mixed after this backup overnight, which doesn't get picked up on these trend readings. The Euro and the Norwegian krona definitely showing the strongest trend readings, and you see gold picking up as well.

Sterling as well, the weakness is gathering to a degree and we're seeing it rolling over versus the euro with some good reasons to be bearish on Sterling. And I think the Bank of England could encourage that next week with their central bank meeting. All right, let's have a look back in your space where we have your commodities month to date, how we've been doing across the commodity space.

Some pretty large numbers here in terms of percentage moves. I mean, something like crude oil, 17.8%, platinum, 20.8, 6%, just some really big moves this month. But take us through what you're seeing as we look at the commodity space really heating up in this month so far. Well, I think simply that the main focus among investors right now is the demand for hard assets, tangible assets. We've seen that very strong rally in the

in platinum, which was triggered by the technical breakout last month. We've seen silver break above 35 bucks, attracting some renewed and fresh interest. And then obviously the bulk of that latest move in crude oil within the last 48 hours. But generally crude oil has been on a rising

rising path this month so far and some of that as I mentioned earlier is driven by the pickup in seasonal demand which is underpinning spot prices and refineries are running at full speed to produce diesel and gasoline and other fuels. So very strong months and what we also know is that the agricultural space is lagging, it's struggling and the

I suppose from an inflationary perspective, the food perspective, that's good news. And it is simply because of the outlook for ample supply at this point in time. Once again, weather was a bit threatening a month ago, but has improved around some of the key production regions. And that's basically adding some downward pressure on prices. So we're looking at something like wheat and corn. They're really struggling near the low end of their established ranges.

But we talked about the dollar, John, and I think we also just need to highlight on slide eight that a decent part of the rally we've seen in gold this year has been due to this dollar weakness. I just put in a performance statement.

table on slide 8 just showing gold's return in different currencies and as you can see the gold is up against the dollar by 30% obviously incredibly impressive but then if you look at some of the other currencies you can see how the impact of the dollar weakness has played its part so here in Europe for instance your return would

would be closer to 17%, which is still obviously a very strong return. But just looking at the gold chart, we broke above 3400 overnight with that fresh haven demand coming in. But it's really just struggling a bit here to gain some traction. So I think the

The message right now is that there's no selling appetite. There's no reason why you should sell gold as a time where you've got fiscal debt worries, where you have heightened geopolitical risks, where your central bank's buying, where you've got the dollar showing signs of weakness. But what will it take really to ignite some fresh interest? And I think that's really where we need to focus on the US economy.

whether we are going to see a situation where the economic data weakens while we see price pressures rise, i.e. stagflation, and that would, I think, leading potentially to a rate cut or expectations for aggressive rate cuts. I think that would be the trigger. So I think we just, from a

From a bullish perspective, just need to be a bit patient. But I think we will. I think that the route of travel is still towards higher prices, but probably just some patience is required. Yeah, and I'm curious as well. We've seen this US Treasury rally yesterday.

And if we do shape up that idea that the US is heading into recession and there's strong demand as a global safe haven, if the concerns globally speaking about the status of the economy, if that US treasury flow could actually incite some dollar upside.

Which I think might impact gold because if treasuries are approving a safe haven asset, then it's competing maybe with gold. I don't know. I just – like you, I feel a little bit concerned here that we're a bit early on this story. But let's see how the landing of stock here and the dollar and gold and other assets into the end of this week and as we see next week unfold as well. I think getting to the other side of that FOMC meeting and seeing the dollar status is going to be very –

revelatory for where we stand the next many weeks, uh, looking ahead. All right. Thanks for joining today. Um, if you roll forward in the, in the slide deck, slide nine is that, uh, macro calendar highlights, uh, slide for next week. I already pointed out a number of the data points. I would just add to that. We have the, um,

Besides U.S. retail sales, on Tuesday we have that June NAHB housing market index. Again, a good leading indicator on where the U.S. housing market is. It's key, I think, for consumer psychology if the U.S. housing market is suffering. There are signs of really ballooning inventories. Also for new home sellers, the Lennar earnings report could also add to that.

There's further housing data on Wednesday with the housing starts and building permits. Very key as well, I think, if we're looking at Sterling where we've seen a lot of volatility as well this week is the UK May CPI data point up on Wednesday, which is the day before the Bank of England meeting. The Bank of England has been out guiding for this gradual and careful sort of forward guidance on its intent to lower policy. It clearly wants to see inflation on a stronger glide path lower, doesn't want to

probably doesn't want to trigger too much concern that is going to cut too fast and be seen as irresponsible. But we've seen some weak data out of England, out of the UK economy, sorry, with the payrolls, etc. I would suspect they pick up the level of concern probably too early to expect a hike at this next meeting. There'll probably be a couple of dissenters. But the August meeting is not really priced very strongly for a move. So

Sorry, August is mostly priced for a move, but not fully priced for moves. You would think you would get a more full price for an August cut. And as well, they're only priced for 50 basis points through December of this year. It seems like we could see that rising quite considerably above, well, I think it's 54, 55 basis points now, but more towards 75 basis points or 100 basis points eventually even for where the rate is ending up towards the end of this year.

As well, keep in mind that the U.S. markets are actually closed the day after the FOMC meeting because of the Juneteenth holiday in the U.S. Kind of an interesting setup where you have the FOMC meeting late the evening before, evening for us here in Europe, but late in the session before a Thursday session that is unusually for the U.S. where they tend to put the holidays on Monday. It's closed on Thursday. And then Japan's May CPI.

up on Friday. And yeah, that's, that's pretty much it. I think as well, the political cycle in Japan is critical. I've put in that July 13th as a question mark for when the Japanese upper house election takes place. Critical. I think the domestic political situation and the LDP sort of fragile status right now is, is,

It means that the domestic agenda is, you know, Japan, the Japanese political leadership is trying to avoid looking bad relative to the U.S. and trying to look strong and not wanting to agree to something that is not seen as popular to critical voters ahead of this election. The upper house has less power than the lower house, but still it has some powers. And the current president

sitting prime minister would like to see his support solidified through that election. So I would suspect that they're trying to delay whatever the shape of the U.S.-Japan trade talks are

Whatever the status is there, wherever this is going, they're trying to delay this until after this election. And I have to imagine that yen strength and Bank of Japan policy is one of the focal points of those talks. But yeah, I'm not sure we'll get a discussion of that at the Bank of Japan meeting next Tuesday. That's something that's into the trade talks going on currently. And we're all awaiting, of course, the shape of all these trade talks nearly everywhere.

I've got some good must-reads and listens on slide 10. There's a really good new Michael Every appearance on Thoughtful Money. Very good conversation there. Some great questions as well. And then another one, I think I referred to this already in a previous podcast this week, but this idea that

Why is it in anybody's interest to really strike a deal with Trump when he backtracks on these trade deals anyway? So what is a trade deal worth with the US in the age of Donald Trump?

And then a couple of articles talking into what I discussed also earlier this week on whether Trump's support is beginning to fracture and his ability to rule is weakening here. And I think some – I don't agree with all of his points necessarily, but some very interesting discussion points from Adam Tooze on this.

The risk of seeing a radicalization with these moves into the L.A. riots and the support fracturing in the form of Elon Musk walking away to a degree from his association with Trump, etc. And then on the Stratechery podcast, they went through the disastrous Nike business decisions under the reign of former CEO John Donahoe.

A very interesting podcast I found on that specific company. There is a new CEO that is sort of backtracking and unrolling or unraveling a lot of what Donahoe did. But just an eye-opening example

An eye-opening and good criticism of what was going on there, the sort of attempt to bring everything into sort of direct-to-consumer marketing online rather than using the traditional network of physical stores, et cetera, to sell Nike products. It turned out to be a disastrous decision, even though there was a very brief period where it was a great decision, ironically, because of the pandemic.

And then a great chart there, by the way, on slide 10 from this Subodh Barakar, if that's how you say his name, apologies for the pronunciation, if not, on...

I think it's just a retweet actually of Markets of Mayhem, but showing the trajectory of the U.S. dollar and U.S. 10-year yields and how those have diverged as sort of proving the point that the dollar is sort of breaking down relative to what it normally does relative to U.S. treasury yields. So I think a good data point and chart point there. All right. It's been a long one today. I'll close it out here.

Have a more than ever with these crazy markets today and since what we saw overnight. Stay very careful out there and we'll be back, of course, next week with the next Saxo Market Call.