Market quickly recovering from Operation Midnight Hammer
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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. Okay, it is Monday, 23rd of June, 2025. We had Operation Midnight Hammer hitting Iran over the weekend. Um,

Interesting details on this. I mean, these B-2 planes taking off from Missouri after some other B-2 planes also took off from Missouri heading the opposite direction. Those with their signaling devices on, the ones headed to Iran with the signaling devices off. 18 hours flight time and requiring mid-flight refueling and dropping these, what was it, 14 of these bunker buster massive bombs, large bombs ever dropped that are conventional, of a conventional sort, 30,000 pounds each, I believe it was.

We don't know the scale of the damage. Of course, Trump is saying everything's destroyed. We don't really know yet, but the situation is clear here. A, the U.S. is directly involved now, and B, this ups the pressure on the whole regime change scenario. But...

We don't really see much reaction in the markets beyond the big, big, big, of course, knee-jerk. And now we're back to almost square in the crude oil price. The NASDAQ, I think, which arguably put on a little geopolitical discount ahead of the weekend, is actually up on the day.

But yeah, back to Square. What's your take on what to focus on here? Well, we most certainly need to focus on the next steps from Iran, what they intend to do. They have obviously threatened to retaliate in some way or another.

And what from an oil market perspective everyone is focusing on is obviously Iran's potential threat of blocking the Strait of Hormuz. We all know it's a main threat.

It's one of the most important shipping lanes in the world, the most important shipping lane for the transportation of crude oil and gas. And obviously, if they successfully manage to block that, they could have quite a massive impact on crude prices because the supply could tighten up fairly quickly. But what we're seeing so far is really market wondering whether that's actually in Iran's best interest.

So I think at this point in time, unless Iran's own ability to export its fuel and its crude is disrupted, then I don't think they would go to that option. But who knows? But that's a good way to put it. So the only way they go for that option is A, some sort of –

desperation move because they feel like it's, I don't know, suicidal almost, or somebody else has taken out their oil facilities and therefore why not go ahead because their main customer is China. Exactly. So China would be almighty not pleased if they suddenly go this far.

Another one we consider is Qatar. Further up the Gulf there, they need to – they're one of the world's largest exporters of gas together with the U.S. They would be locked in as well, and they are friendly with Iran.

We have the shipping lane which, if you look at the map and look at where the actual shipping lane is, it's much closer to Oman than it's actually to Iran. So you can, it almost looks like it's inside Oman's territorial waters. So if, and Oman is part, a member of the GCC, the Greater Gulf Corporation, and if we, if, if,

If they have a NATO style, I'm not quite sure, but I've heard that they have kind of a NATO style agreement. So an attack on one is an attack on all of them. So obviously if they start to attack ships near Oman, basically then what happened then with Saudi Arabia and the UAE and the other GCC members,

Also, we have to remember that Saudi Arabia has, for this particular reason, built a massive pipeline that goes from east to west. It can ship up towards or transport up towards 5 million barrels of crude a day to the western part of the country away from the strait.

The UAE has got a pipeline in place down to Fujairah, which is outside the Strait as well, which has capacity of one and a half million barrels. So if we do get a disruption, which I think is very unlikely, there will be a spike, but it will be mitigated over time by the redirection of crude, but also potentially the release of strategic reserves, especially in the U.S. and China.

And that's what leads us back to what you pointed out on Friday, is we constantly need a stream of bad news to elevate what is already a very elevated price because of a built-in geopolitical premium. There is no supply shortage on the ground. Crude oil is proceeding through the Strait of Hormuz.

and the price action overnight speaks to that. I just wonder what scenario actually disrupts oil, I guess, is the key issue here. Exactly. And as we looked at the initial spike opening in Asia overnight did not even take us close to –

I was at the 82.30 level on Brent. If you look at the chart, that's basically the recent high. So we're still stuck in a wide range here. And yes, as you've mentioned, John, the risk premium around the 80 level, the risk premium is probably close to $10.00.

And that is basically a premium that should not be there if we don't have a disruption. Basically meaning as well, every day or every hour that goes by without any fresh news that causes concern, the price tend to drift. And we saw that last week. But then again, we rallied ahead of the weekend because we had 48 hours ahead of us with event risk and rightfully so.

But simply that $10 risk premium has to be maintained and has to be fed bad news or worrying news in order to be maintained. And if that's not the case, then we should probably see Brent trade close to 70 than where we are right now because the fundamentals right now does not really…

speak of an undersupplied market, the opposite is actually the case. Remember Brent now is trading for August. That's almost into the autumn months when we get into September and we're already starting to deliver crude into the periods of year where demand tends to taper off. So yeah, we really need a disruption to maintain this kind of bullish focus in the market and that's also a reason why we are

I think the market is struggling a little bit to take it even higher today. If I may just mention as well, John, looking at the speculators, how they have been behaving, the latest report, which we for now only have related to the Brent crude market because the CFTC delayed their weekly cut report until later today due to the Juneteenth holiday last week.

But if you look at the numbers in the Brent crude in the week to June 17th, that was basically when it basically encapsulated that first run-up where Brent jumped 14%. The changes we saw there was quite a significant jump in the net long, primarily driven by short covering. Basically means that there's not that many shorts left

now in the market. And so that basically means if this market needs to be driven higher, it's not pain trades anymore. It's basically long trades coming into the market. So really, do you want to buy crude where you have a $10 downside risk if nothing happens? And that's really also, I think, something that needs to be taken into consideration. Yeah, but also certainly risks abound if somebody gets the calculus wrong here. And speaking of calculus and probabilities, polymarket is constantly taking a stab at these kinds of things.

They rate Hormuz close – how are you going to collect on a close of Hormuz? I don't know. But they rate that probability at 24 percent. But they rate the regime change around regime change policy – or probability at 51 percent. An interesting, I think, probability there as well.

My two cents here is I agree with you. The ability to disrupt Hormuz is perhaps there. The ability to close Hormuz is arguably not really there. What does it really mean to completely close Hormuz? And that would leave the dirty tricks department, basically terror in these types of attacks as maybe the higher probability type of retaliation that Iran chooses, in which case

while awful or who knows where this could lead, doesn't really lead to much of anywhere for global markets, arguably. And I think right now, I would say it's in Iran's interest to keep the pot boiling without making any disruption, because obviously just the threat of it can eventually lead to tankers not wanting to go in because simply they can't get the insurance.

tanker freight companies are not government run or run by the Navy. So they are basically putting their ships at risk if they feel there is a risk. So the threat at this point in time could potentially be enough to slow some of the shipments because we have to remember more than 100 tankers go through that straight every single day. So it's only if a certain percentage of these say we're not going to go in.

um then then it could have an impact so um so yeah that that can help tighten the market but but not to the degree that uh it would lead to sharply higher prices but that will obviously help maintain these current levels yeah and that which will have inflationary impacts eventually so there is it would be important if even if oil prices remain at current levels and that's really important john because that's because when the next question is why why does gold respond so badly to uh or

to this move, to this latest geopolitical event. Gold almost reached 3,400 overnight, but we're again now at this point in time trading down on the day. And it is exactly what John mentioned there. The market is now focusing on the inflationary impact of prolonged energy, high energy prices. And what does that mean for inflation? And what does that mean for the Fed's decision-making? So the market right now is

It's basically betting that or contemplating whether the Fed is actually going to delay even further a rate cut simply because they're focused still on inflation while economic data doesn't show too much of a weakness. So for now, they can concentrate on inflation

But for that to change, we need to see economic data deteriorate so that they change their focus towards supporting the economy. Yep. A lot of things to keep in order here. So let's skip to other news now. I think we've talked that one to death for today. Who knows what could happen tomorrow? Maybe we'll have to get back in and reassess the entire situation. Clearly, anything can happen there. But just a couple other important bits and pieces here. So we did see a couple of Friday earnings reports yesterday.

So very small things to pull out of that. So Kroger, just the big grocery store chain in the U.S. Interesting to see a couple of the twists in their guidance or comments that they're talking about attracting weary consumers was the quote. So same-store sales are quite strong. So the argument there being that people are not dining out as much and choosing to up their grocery store purchases relative to their mix of household spending. A huge surge in the stock, 9%.

on those reports, that report on Friday. And then we have Darden restaurants, again, a casual dining chain, slightly interesting comments that vibe a little bit with what Kroger is saying. They cut their prices and offered some strong deals, which saw quote value seeking customers out in, in, in droves apparently to their restaurants. So they did see sales up, but earnings were down on a G double AP, a gap basis. Uh,

But it's not exactly very super negative stuff, but just some interesting color there. We also saw the... And by the way, in terms of the...

The market reaction to the currencies, for example, of course, we saw equities very similar to the crude oil reaction, a knee-jerk lower, and then we've come back a full circle, and even then some for the NASDAQ. Europe stumbled to the start, has been trying to come back as well. We saw in currencies, we saw the dollar affirming since the weekend.

Generally across the board, euro is more or less keeping pace with the US dollar, however. But the really interesting thing here is the runaway further sell-off in the Japanese yen. Now, some of that could be arguably accumulative effects of these energy prices rising a lot higher. It's going to aggravate Japanese inflation further. There's that failure to have a reaction function to higher prices from the Bank of Japan, which is just stuck at

at this almost 0% yield and not seeming to be reactive to anything going on around it. And then you have overnight the Ministry of Finance announcing that it is –

going to reduce its issuance of 20, 30, and 40-year JGBs over the next financial year in Japan, so through March of next year, and to the tune of some trillions of yen, U.S. dollars in terms, 22 billion in that timeframe. And that's ahead of a 20-year auction tonight or Tuesday, if you will, in Japan. So this is just another interesting sign that this fear of bond vigilantes, the whole inflation theme,

hitting the yen quite strongly. And it's getting pretty remarkable. We're seeing euro yen running away to the upside, almost hitting 170. Sterling versus yen, 198 plus. Dollar yen still quite low relative, of course, where it's high as of the cycle way back when. But still, 147 and arguably this 147 plus and arguably this 150 area is going to attract once again if this continues up.

It just feels like now with this type of price action, we're building towards some kind of climax. I do think that you have to consider that Japan sits in a very, very different place in terms of being able to control

both the currency and the bond market than many other countries. Yes, it has a massive overall debt load, but it also has a gigantic international investment position that is very, very positive and in surplus. And it can, if it has to, in extremis, force some of those savings back home, sort of the flip side of what the situation is for the US. So

This is the focus now. I certainly would not stand in the way of yen weakness, but just very interesting to see how this resolves itself and if this results in some sort of a climax for the rundown in the yen or if that is already happening now. But something to be aware of for the cycle there is the main real mover in currencies. Elsewhere, traditional cyclical, pro-cyclical currencies like the Aussie and Kiwi really suffering quite badly overnight.

All right, looking ahead. Oh, and by the way, we had some, the Eurozone flash PMIs for June were out yesterday.

This morning for France, quite disappointing on manufacturing, 47.8 versus the 49.8 expected. Pretty ugly there. Germany, as expected, 49. So we're still not seeing anything, of course, there. We need to get this budget and we need to see the spending actually happening to get some energy into German manufacturing, which is one of the key sort of cornerstones of the more longer-term euro bullish cases. So we need to watch for that budget and see where the distribution of spending will lie.

And we also have the NATO meeting tomorrow and Wednesday. Interesting, of course, to see how that shapes up and what NATO, European NATO allies are going to be saying to Trump to appease him on the military spending as a percentage of GDP, etc., and what his general tone is during that meeting.

All right. This one went on far longer than I anticipated, but we had a good discussion around oil. Hope you appreciated that. And yeah, we'll see where things stand in the coming days. And we'll be back very soon with the next Saxo Market Call.