Global Markets Receive A Jolt After Trump Tehran Warning
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Welcome to the Bloomberg Daybreak Asia podcast. I'm Doug Krisner. The mood in global markets earlier today was far less anxious after Iran signaled it wants to de-escalate hostilities with Israel. However, that could change. A short while ago, President Trump called for the evacuation of Tehran. He made those remarks hours after urging Iran's leadership to sign a deal to limit the Iranian nuclear program. And then...

President Trump cut short his visit to the G7 leaders summit and returned to Washington. So we begin there with a closer look at the conflict between Israel and Iran with Middle East analyst Roger Shanahan. He spoke earlier with Bloomberg's Paul Allen and Sherry Ahn. The first question focused on Israel's end goal. Is it crippling Iran's nuclear infrastructure or the possibility of regime change?

Yeah, listen, that's the $64,000 question. Of course, nobody's quite sure the initial justification for this campaign was because of an imminent threat of nuclear weaponisation on the part of Iran. That runs counter to US intelligence estimates.

Israel has publicly said that regime change is not one of the issues that the security cabinet discussed, but the range of targets that Israel has selected would indicate that it's much more than simply trying to degrade their nuclear capability. It's much more broader than that, but we don't know exactly how broad.

So we've just had this tweet or a social media post by President Trump urging an evacuation of Tehran. The practicalities of that aside, what are the chances of a popular uprising in Tehran if Israel starts targeting the population instead of just key infrastructure? Yeah, listen, one has to be very careful about the way that

people particularly large groups of people react in your ability to dictate events there's no doubt that the iranian regime is deeply unpopular there's no doubt that the iranian population is not happy with their economic lot in life uh

Every presidential and parliamentary election has seen smaller numbers of people turning out to vote because they don't believe that system is representative. There's deep corruption in the country. But at the same time, people don't normally rise up in the face of external attack from an external actor.

particularly if it's from Israel. So if that's the aim, and it's said that it's not, it's unlikely to happen. People in Iran will, if they are going to change the government, they're going to do it in their own good time and based on their own circumstances, not those imposed by external actors. Is Israel's goal here bringing the collapse of the Iranian regime? And then my question would be,

Is Israel able to achieve this? What course would it have to take in order to get there? Because not achieving this would actually threaten the rise of a more nuclearly powerful Iran. Yeah, listen, that's the kind of counter argument to expanding your aims if there are always doubts about Iran's

ambitions is regarding weaponizing its nuclear capability then attacking directly attacking Iran and exhibiting its weakness in its conventional weapons capabilities is likely to have the opposite effect you know if you're the Iranian political

you're going to say, well, listen, we're not nuclear capable. We're conventionally weak. Perhaps the best form of defence is an undeclared nuclear capability like Israel has, for instance. But certainly the medium-term aims that would appear from Israel is a further weakening of the Iranian regime. Certainly its conventional military capabilities, its military leadership,

And that's been ongoing since Israel's response to the 7th of October terrorist attack. And we've seen that in play out not only, obviously, in Gaza with Hamas, but in southern Lebanon and southern Beirut with Lebanese Hezbollah and, to a lesser extent, the Houthis in Yemen. Iran's external support forces have been degraded. And now this is...

Israel degrading Iranian political and military capabilities as well. So we have seen President Trump continue to make comments about the conflict, including he wants the evacuation of Tehran. He thinks that Iran wants to talk. What are the signals of how involved the U.S. is at this point?

Yeah, listen, the US is involved in a defensive capability at the moment in terms of assistance to Israeli air defence against Iranian attacks. There is no doubt the logistics and intelligence support going on in the background that doesn't hit the headlines, but that happens most days of the week. The issue is...

Does President Trump, who has tried to pride himself on staying out of conflict, want to be part of this conflict? And most commentators would say at the moment there's no real need for the US to become engaged in an offensive capability. But it's happy for Israel to do the offensive capability so that they can get them back to the negotiating tables.

Roger, really good to have you with us. Roger Shanahan, Middle East analyst and author.

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Welcome back to the Daybreak Asia podcast. I'm Doug Krisner. Let's continue to look at how markets are reacting to this conflict between Israel and Iran. I'm joined now by James Abate. He is managing director, also the head of fundamental strategies at Horizon Investments. James, thank you so much for making time to chat with me. And I have to begin with how your understanding of the

What is evolving in the Middle East right now? We earlier tonight, U.S. time, received an indication that President Trump has called for the evacuation of Tehran, saying that everyone should immediately evacuate Tehran. This situation is dynamic and it's very dicey.

Absolutely. I mean, let's not forget, I mean, the conflict between Israelis and Persians is biblical. I mean, those familiar with the book of Esther and the Feast of Purim, you know, know that very well. However, you know, today, Iran's in a very tough spot.

There's no friends left in the region. I mean, remember, Persians are not Arabs. And you have U.S. support of Israel is explicit. We just moved a large number of refueling tanker aircraft to the theater to support, you know, continued long-range Israeli attacks. Iran has no sponsor. Even Russia, who has filled that role in certain points,

um they have their hands full with ukraine and say what you want about uh putin but he has shown signs of paint recently as uh he demonstrated by his classifying the recent attacks

on Russia's strategic bombing fleet as a terrorist attack, so as not to trigger Russia's war doctrine, which would have led to a much more serious scenario in retaliation, possibly even against NATO and the US. The question, however, is what does Israel want to do? Does it want to stimulate a collapse in the regime? And does the US support this? I think one of the troubling signs for me was that we saw that the Israelis destroyed the Tehran Department Headquarters.

the intelligence ministry building, justice ministry,

So these are things that would be indicative of regime change. And you never know what you're going to get when you open up that can of worms. Is the U.S. on board on not just basically thwarting and giving Iran a lesson about its nuclear aspirations, but is it seriously contemplating a sparking regime change in Iran? And that will change the dynamic for markets tremendously.

So in terms of the oil story, so far from what we understand, critical Mideast exporting infrastructure has been spared from these military strikes. And we have yet to see any blockage of the Strait of Hormuz. Does that take most of the risk out of the oil space right now? Or do you think that there is still some inherent here?

There's always some inherent risk. Clearly, if the Houthis are able to escalate issues with regard to further attacks in the area, as well as Iran being able to somehow blockade the Strait of Hormuz, that will have profound impacts on Europe.

more than it will the United States. However, when we look at the price of oil, I don't think this is a scenario akin to what happened back in 2008

and 22 when Russia invaded Ukraine. We have a very different scenario here in the domestic investment of excess production with natural gas and liquids. So the price of oil at this point in time, I think, will be relatively stable. Saudis, who, again, are no friends of the Iranians,

have been willing to actually increase supply to a great degree, and we'll see alternative shipping lanes being protected. And, you know, we may just see a very similar scenario where you'll see the U.S. protect

um, shipping, uh, of, of oil and other transport, much like they did back in 1986, 1987, uh, under president Reagan. So I don't think this is the same type of risk to a shock that could somehow, uh,

paralyzed economies that are dependent upon fossil fuels at this point in time. So what does that mean for the bond market? If they're at the margin, had been a little bit of concern about the potential inflationary impact of higher oil on the treasury market, is that overstated, do you think, a little bit?

Agreed. I, for one, have been perplexed because, in essence, what we're seeing is actually the things that will retard growth, not actually contribute significantly to inflation. And when you look at the environment that we're in right now, you know, in terms of what the data has been showing across the board in terms of economic activity,

I mean, whether it's the base book, PMIs, the ISMs, non-farm payrolls, et cetera, et cetera, we have, in essence, a cyclical slowdown in the U.S., at least for this quarter and the next. And in fact, what we're seeing is service catching down to manufacturing. So to the extent where the oil price can somehow further crimp the consumer and put a further pressure on the services-related economy,

I think that is more deflationary than actually inflationary. So to me, long treasuries look like an opportunity here relative to other asset classes, particularly if the safety trade comes back into vogue. So does that necessarily mean that you want to lighten up a little bit on U.S. equities? Yeah, we are of the belief that margins in the U.S. stock market and valuations, particularly in the large cap areas of the market,

relative to expectations, just remain elevated. I mean, let's look where we are today. We're basically back at levels at the beginning of the year. And what has changed? We're at an environment where valuations are elevated. We're starting to see margin pressure, and that's indicative from the fact that CPI is now less than PPI, which will contribute to margin pressure

I think the opportunity, when you look at the market, is that we're going to see potentially, if investors look through the environment that we're in currently, I think you'll start to see a rotation to small cap companies at some point, because even though they are depreciating,

and margins are at depressed levels. In fact, if you look at the EBITDA margin of the Russell 2000 on an equated basis is back to recessionary 2009 levels, whereas the S&P 500 is at very elevated levels. And if you look at some of the stimulus impacts of the President's tax bill, which 100% bonus depreciation,

R and D expensing, um, tax breaks for factory building. In fact, we saw tonight, uh,

one of the things that came out of the Senate was increasing the tax credit for semiconductor manufacturing in the U.S., which was even established under President Biden's Chips and Science Act. So we're seeing more stimulus being put in place potentially for domestic investment. And I tend to think, if you look at the asymmetry or the opportunity set, it's much more favorable in smaller companies at this point in time than it is in the Magnificent Seven or the top-heavy S&P 500.

So given that outlook for the American economy, where do you think that leaves the Fed? Obviously, we've got a rate decision this week. Yeah, I think if the Fed was simply looking at data dependency and relying upon its page book and the indicators that I mentioned before, such as non-fond payrolls, even labor productivity, which was negative, which is a leading indicator...

future layoffs in most cases. You know, I think if Trump wasn't bullying the Fed, I'd say they would lower rates this meeting by 25 basis points. And if you would simply look at the difference between the Fed funds rate and two-year treasury, it indicates two 25 basis point cuts over coming months. But again, I think the Fed wants to show some degree of independence.

and will likely forego a cut this meeting but will likely indicate a 25 base point cut at the next meeting but i think one thing to be concerned about is the dollar if we see continued weakness in the dollar here that would be an

of potentially future inflation. I think that would be the one governing factor on the Fed's aggressiveness to actually lower interest rates. Before I let you go, James, I want to get your take on markets offshore. How are you viewing opportunities, let's say, in Europe or in Asia right now?

I think the environment as it stands now is that emerging markets look much more attractive. Even emerging market debt looked much more attractive than developed markets outside the United States. If you look at Europe, even though you've had a nice outperformance, most of that's been due to the currency. And a lot of it has been due to excitement about...

infrastructure build as well as defense rebuilding. But you're not getting away from the regulatory stranglehold as well as the demographic issues which are impacting Europe. I think the same issue could apply to Japan, although you're starting to see return on equities and return on capital improve in Japan.

I would prefer Japan over Europe at this point in time. But I think the real wild card may be to see the dragon rising in China to a certain degree with regard to potentially some stemming of the deflationary spiral that they've been in from real estate, as well as maybe some degree of, uh,

of the resolution of the trade issues going on between the United States and China. James, we'll leave it there. It's always a pleasure. Thank you so much. James Abate, Managing Director, also Head of Fundamental Strategies at Verizon Investments, joining us here on the Daybreak Asia podcast.

Thanks for listening to today's episode of the Bloomberg Daybreak Asia Edition podcast. Each weekday, we look at the stories shaping markets, finance, and geopolitics in the Asia Pacific. You can find us on Apple, Spotify, the Bloomberg Podcast YouTube channel, or anywhere else you listen. Join us again tomorrow for insight on the market moves from Hong Kong to Singapore and Australia. I'm Doug Krisner, and this is Bloomberg.

Switch to Verizon Business and get more from your internet without paying more for your internet. Get LTE Business Internet starting at $39 a month when paired with select business mobile plans. That's unlimited data and with it, unlimited possibilities. Start saving today with Verizon Business, ranked number one in small business internet customer satisfaction by J.D. Power.

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