Bloomberg Markets Full Show (02/14/2022)
From the financial centers of the world. This is Bloomberg Markets with Alix Steel and Guy Johnson. It's 30 minutes into the US trading day on Monday February 14th here at the top market stories we're following for you at this hour. Still talking it out. Russia's foreign minister proposes Vladimir Putin continued diplomatic conversations with the West over Ukraine and Putin agrees. But tensions remain high as Germany's all off. Schultz
was in Kiev today. In Moscow tomorrow roiled by geopolitical risk. Stocks bonds commodities all swing as traders weigh the odds of potential military action. It fuels concerns about inflation and the potential of aggressive central bank action to tame it. And on that note Bowler doubles down. The St. Louis sped president repeats. He'd like to see rates 100 basis points higher by July. The two year Treasury yield jumps to the highest since December of 2019. From New York on Kailey Leinz with Guy Johnson in London Alix
Steel is off today. Welcome to Bloomberg Markets and guy. It's a new week but we're focused on the same stories. Geopolitical risk inflation and the response on the monetary policy side. Yeah. I look at the markets this morning Kailey Leinz and I'm trying to figure out what's going on. I'm really
struggling with it. I think there's a number of differences that are hard to explain. We'll talk to Vince Signal rather about this in just a moment when we get to our Question of the Day. But I think you talked in the in the the headlines about geopolitical risk. It feels today like we need to define the difference with geopolitical risk and political uncertainty. I think risk and uncertainty feel like very different things today. And I think that's why you're getting some of the weird kind of responses you're getting into the market. But this morning when I got into work first thing looked like a classic
kind of risk off day stocks were down. You got a bit in the bond markets energy complex reacting as well. Gold precious metals a little bit of an anomaly. There's there's a whole range of kind of classic risk on risk off kind of signals. But then Bullard muddies the water. We try and figure out what is coming out of Lavrov. We don't know what are
ultimately the Ukrainian position on NATO seems to be those Lenski repeating the fact that they still want to join. So there's a whole range of uncertainties here that I think are really hard to deal with. So that takes us to our question of the day. How do you hedge for a potential Russian military action. In Ukraine let's talk about it. It's signature ELA.
Joining us Marcus Ashworth of Bloomberg Opinion also still with us. Also with us sorry. Still with us Vince. Talk to me a little bit about what you see today because I have to say I'm really confused by some of the price action I'm seeing. And you are not the only one confused. This is traders and I having this conversation this morning. One of the big things that they are scratching their heads over is the bid in precious metals. And I
think what we're looking at is what you mentioned a short moment ago is that conversation between risk and uncertainty. I think uncertainty more of more the theme and that you just can't hedge the geopolitical risk risk rather that's going on between Russia and the Ukraine. It's a binary event. There's simply no way to really trade that. And so I think what you're seeing is hedges being placed against risks that you're more comfortable long term. So if your long term comfortable being a positive on the equity market you're maybe short term hedging your risk by being long. Dollar's long a little bit of gold. And in that and such as that I don't think I can look at it as a as a big one story.
Well and Marcus to bring you in here what Vince didn't mention is hedging with bonds. Can they actually serve as a form of safety in an environment where central banks are potentially going to aggressively start hiking. Well I think the only thing I can throw out all this is one if you haven't hedged by now too late because you shouldn't have your portfolio you got plenty of time to figure where you want to be and how close to your index will get into cash or maybe other things is when you come to me. It's the weather. And if
you know the prospect of war diminishes a little bit. We're seeing bonds junk bond yield quite sharply. So in some sense we know what the underlying trend is clearly. Bonds you want to go higher. And I think that's the more interesting thing for me is that when if this turns out let's hope not to be anywhere near as scary as it could be then we will see bond yields substantially higher from here. I think that's that's the one thing. Look I think that you can see that this is amazing guy on. How much do you think that for broadly given the fact that we've had this risk surrounding Ukraine for a little while now. Do you think that that has been suppressing yields. Is it possible to quantify what that looks like today. I'm looking at the screen in front of me. I got the US 10 year up by four point two basis points in the German down by four point
eight basis points. I've got Bullard speaking on one hand. I'm waiting for Legarde on the other. Does this give us any clue as to the impact the Ukraine is having. Well anyway I can to look at it as what happened with Omnicom units. Soltanieh as you look out at 135. Now we begin to discount on the picture this substantially higher. And I think perhaps what's happening here is that the Ukraine is keeping a lid on some of this. And you know secondly I think it's coming down. We can see the secretary is up 10 basis points. That tells you will need to know. So I think the markets are that a funk function out and pass out risk
is as efficient as they can. There will come a point whereby if there is worse news that perhaps won't be as bad as it might have been. That's anyway. I think you can look at it. A lot of people who haven't had to have had as much they ought to have done. Clearly now all. So you know I think some people are rushing into precious metals but a little bit wrong and
therefore was playing out people who are not prepared to look through this Ukraine situation as something has not been as difficult as it may me being said a month ago. All right. So we've talked about the read through in precious metals events. Let's talk about oil specifically. It's been fluctuating a little today but still a ninety three handle is what we're looking at on WTI. What are the potential ripple effects of higher oil prices especially if we do eventually reach triple digits. Well I mean that's what everyone's looking for. You make a very good point. One hundred dollars a barrel for WTI seems to
be where a large majority of of the energy folks think this is going. I mean the impacts are enormous because not just the price of oil but the price of gasoline. It's such a big knock on disposable income for consumers. And we see that as we look at average hourly earnings last week and when CPI numbers came out one of the key things that we're looking at is the effects on inflation on take home pay which is real earnings for consumers. It's been negative for now about 10 months. So the higher inflation the higher energy prices the lower disposable income. Longer term doesn't spell well for risk markets. Equities in particular because if you're spending less than you're buying
less earnings earnings for corporations and profits and less so that I think energy is probably the biggest key. And then you know with or without Ukraine I think you're going to see energy prices go up. On the one hand if there isn't a situation a geopolitical risk. You see these supplies cut off and oil prices go higher. On the other hand that goes away. And economies grow and you see energy prices go up. So it looks like there's only one way to go for that. Marcus we come back to the question and vid sets it up very nicely about what do you think will be end up being the greater concern for central banks. Will it be a growth shot. Growth concern potentially caused by higher energy prices could be
caused by a number of different factors including higher interest rates if they go too aggressively or the inflation narrative that could come from higher energy prices. Do we need to rethink or do we need to think about energy as a tax or an inflation story right now. Difficult one to answer that. I mean I think you know in some senses it was going to go higher. It would have done so by now. I think it's had every opportunity to do so. And it's it's the price reaction today tells me quite a bit. But I think oil was losing some momentum here. So I have a slight different view of events on that. With regards to inflation how central bankers have handled it. I mean I think that they're not worried about
energy. Actually that's not at all. They think that passing through they're worried much more about food and some second order effects. So what we've clearly seen despite what's great a sense he's he's possessed himself very much on the whole side. And he say that he's going to have to try and convince the rest of his committee to follow him. So I think we'll we'll see both the Fed and clearly the Bank of England and also now the ECB trying to reign in one bar on inflation and therefore how far they're going to hike rates. They're going to hike but not as much as the market is pricing. And I think that will double down
their efforts to try and calm forward. Right. Expectations. Ben I'm wondering if you agree with that characterization. Gimble are not only having to convince his colleagues to move in this way. Is the market convinced that the Fed might move in this way or do we still have further to go to kind of recognize that fact. I think the market does feel that that Bullard even though he's speaking for himself is maybe closer to what the future majority position will be. We can't say that that's the majority position.
Now it doesn't seem to be. One thing that really keep in mind though is that a few years ago Bullitt was the author Duff not the Hawk. And he was not able to bring the majority of the conversation to his view in terms of being adding even more monetary stimulus. And now he's on the other side of the coin trying to do the same thing. So I would be a little cautious about just his view by itself in thinking that he can bring everyone into his opinion and a consensus. I think he. I think it's just his view. And you know he's he's entitled to his view as Marcus disagrees with me. I think people on the Fed disagree disagree with him. I just would like to make one point is what you're talking about
earlier. Rising inflation and growth are not necessarily a binary situation. You actually can have slower growth and higher prices. They they don't necessarily have to be something that move in opposite direction. And that is probably I think one of the biggest worries of the Fed that they would potentially lose a handle on inflation. And at the same time the economy might slow down. Marcus let's wrap things up with kind of where you started which
was if you haven't already hedged it's almost too late. I'm surprised about that. There seemed to be a lot of moving parts right now. Both the Fed central banks more broadly what is happening with the economy. What is happening with Ukraine. What is going on with China. There seem to be a lot of things that are that are moving. Aren't we in a position where basically on a day by day basis we have to adapt to that. Review our positions and continue to
adapt because it looks like it's it. It looks incredibly difficult to call what is happening here. I come back to this distinction between risk and uncertainty. It feels more uncertain than risky right now. Are you. We don't know what the outcomes are going to be. We have no idea really what is going to be going on here. We're certainly at the at the right hand
side of the Rumsfeld scale. Yeah well first off let's say I agree pretty much with all that says just but I think this is this isn't the semantics of it. You know you haven't hedged your portfolio. It's a situation where you know that every something else is going to go up down left right. You're not hedged. You know you're not playing the game here as you would. But you should be in the portfolio management. You shouldn't be having to react to things. You should be in a situation where you can ride with the flows with some comfort and take advantage of the opportunities which I'd set. I didn't get through because I don't know no one else does. Whether or not it's going to go left or right. The point is they're all going to be some great
opportunities out of this. Mostly. So one of them is shorting oil. But likewise if you get a chance to buy buy low yields on bonds maybe that's what to do as well. But I mean I don't I just don't think that there is necessarily any point really trying to second guess oil with yourself in situations I'm sure most Paul Allen and ISE should be by now or being able to have some cash on that on the book and in some products where you're not to worry about the DAX ups and downs. And I do feel like we've heard more and more people saying have a little cash on the sidelines. Wait for your moment to get back in. Vincent
Cinderella of Bloomberg News and Marcus Ashworth of Bloomberg Opinion thank you both so much. Now coming up our next guest says geopolitical risk could just have a short term impact on market sentiment near a panda. JP Morgan Asset Management global market strategist. He'll be joining us next. This is Bloomberg. Morgan Stanley's chief U.S. equity strategist is warning of the impact of Russian military action potential Russian military
action. Mike Wilson writing in a note to clients overnight a war quote materially increases the odds of a polar vortex for the economy and earnings and that a spike in energy prices would destroy demand in our view and perhaps tip several economies into an outright recession. Let's get more perspective now from Mira Pande in J.P. Morgan Asset Management global market strategist. Mira how do you view the geopolitical risks out there and what the appropriate market response is. Certainly geopolitical consequences could be pretty severe in this case but from a market perspective ultimately it comes down to the fact that markets do not like uncertainty and we're seeing a lot of uncertainty right now amidst an already pretty fragile take. I think the biggest transmission mechanism here in terms of this potential conflict is through oil prices and
energy prices and how that might put some pressure on global growth and the consumer. I think the impacts could be perhaps more severe in areas like Europe that are very reliant on Russia for energy and maybe a little bit more limited on the US. But overall we're certainly seeing a sentiment impact and people looking to hedge in areas like gold treasuries the dollar. But what I would say is that investors shouldn't scurry to reposition their portfolios because ultimately what we have seen in the past is that from wars and geopolitical events markets tend to have a shorter lived reaction to these type of issues. Merit does come back to the sort of the gold dollars kind of story. Are they enough of a hedge. A lot of people are starting to talk about just simply getting into cash and that is the best place
to be right now. As you say lots of uncertainty. Hard to quantify potentially creating opportunities but we operate in a difficult environment. Are we in a position where we should be upping our cash components in terms of portfolios. From a goal that in Treasury's perspective I think we hedge on the margin but essentially in terms of moving to cash it's just such a challenging trade to make right now. When you think about
the context of how high inflation is and how you're losing your purchasing power there. I do still think that there are many areas of the market that should be well supported given the backdrop of strong global growth overall and above trend growth. It has a bit of a cushion here. A strong consumer strong earnings. So I don't think that we want to broadly reposition
too much or we should be too worried about hedging too much. Look the uncertainty is is not great but at the same time we do want to keep an eye on the fundamentals that are going to be supportive of markets in the longer run. Mary you talked there about a strong consumer strong growth underlying kind of macro fundamentals. Are you not worried that if the Fed tightens aggressively if it front loads rate hikes like Bullard would like to see them do that is actually is going to choke off growth down the line and start to be a problem for some of the cyclical areas of this market.
It's absolutely a concern and one we're paying attention to quite closely and that's why we even more bias to. Closer to four rate hikes this year as opposed to some of some of the other expectations. Now we could see a bit of a front loading. Given the fact that we're still seeing pretty strong economic indicators across the board. But we do expect that a lot of that is going to moderate by the second half of the year. So if the Fed continues on a very aggressive path that could really
jeopardize the growth situation we're in. I think the good news is that we're not necessarily in a growth scared here. We are above trend when it cut growth and really strong when it turn when it comes to consumption. So there is a bit of a glide path here but from that standpoint. If energy prices stay is as high as they are and the consumer particularly the US consumer is super sensitive to gas prices. If they stay as elevated as they are right now do we need to
call into question that strong consumer thesis. Ultimately with the amount of cash on the sidelines in terms of how much consumers have in this backdrop that they do have look we naturally do see some degree of moderation in the consumer throughout the year regardless. But as we see economic activity open up things open up more. It should still be a good environment for consumption. I think where we're going to see the biggest impact when we think about higher oil prices and higher energy prices is among the lower income households for whom those utilities and then filling up the gas is a higher proportion of their overall budget. But from the perspective of the consumer in aggregate I think that there's still a good amount of cushion there for this consumer to withstand higher inflation. And yet what we're seeing from all of the surveys is that that willingness and that appetite is being dampened a bit by inflation. Energy prices of course are likely to to continue
to put some upward pressure there. So the hope is that even if consumer sentiment is somewhat dampened it doesn't necessarily dampen their ability to go out and consume to some extent. And of course this isn't just a U.S. story mirror. There's a real cost of living squeezed in the U.K. for example. And I'm wondering how you're viewing where regionally you want to put
your money right now. We still actually advocate for a relative balance. I mean last year when we took a look at the broad international landscape essentially it was really hard to resist being invested in U.S. stocks. And yet what we're seeing year to date so far is that areas like China many of the Asian economies Europe Japan are actually holding up quite well from a stock market perspective in comparison to the US. So we're seeing a bit about performance there. And if last year was the year in which the US saw a very strong recovery and this year is normalizing this year we could
see more durable international recoveries. And what we tend to find in these international markets is that degree and cyclical exposure there is much hotter than you see in the US. So many of these areas are essentially leveraged to the recovery there. So we think that some of the earnings estimates out there internationally are a bit too conservative. Now this geopolitical risk of course creates a headwind. Higher energy prices do create a headwind but overall the direction of travel
we think is a global recovery in terms of growth. Mary great catch up. Thanks for joining us today. A panda. JP Morgan Asset Management. Thank you very much indeed. This is. It's time for the Bloomberg Businessweek to look at some of the biggest business stories in the news right now and which could get Ted Pelton CEO Barry McCarthy is dismissing the idea that the health fitness group could be put up for sale pledging instead to pursue growth by doubling down on content expanding to new countries and increasing its product portfolio. That's according to the Financial Times. Paul Sweeney Scott stock rally last week after reports that Nike Amazon and others were
evaluating potential bids. Sources tell Bloomberg that Apple is boosting pay for its U.S. retail workers as it navigates a tight labor market. Raises of two to 10 percent have been offered to some salespeople and genius by technical support staff. It comes after Apple revealed plans to offer part time staff paid vacation for the first time as well as more sick days and childcare benefits. And the Los Angeles Rams beat the Cincinnati Bengals at twenty three to twenty to win the Super Bowl on
Sunday. The victory gives the Rams their second ever Super Bowl title and that first as a team based in Los Angeles. The Rams scored a touchdown with less than two minutes left in the game to take the lead. Cooper Kupp was named the Super Bowl Most Valuable Player and that is the latest business. Bash CAC Kelly. Guy Riddick. Thank you guy. As you know I am a huge football
fan. I was bombed to see the Bengals and Joe Barrow did not win the game. But most people aren't just watching it for the sport itself guy. We also watch it for the commercials and crypto and financial services really dominated dominated the ads late this year. Coinbase potentially the most talked about ad with this QR
code just bouncing around. I was tempted. I scanned it immediately takes you to Covid coinbase to sign up page. I thought it was pretty brilliant. Others disagreed but it got a lot of buzz on Twitter. Absolutely. They did have a few technical issues which I think is something you don't want to have. If you're going to make all of this fuss about this. You want to make sure that you can execute on it which is kind of
what I won. So a little bit of a fail there but certainly did well when it comes to the advert. I'd also like to point out there was a lot of chance in the office this morning to Kailey Leinz is wearing red for Valentine's Day. I think we've also now realize that it's orange. I think there's a Bengals sort of affinity going on here. This is.
We're about an hour into the U.S. trading session. Bloomberg's Abigail Doolittle is tracking the moves Abigail maybe traders just have some Super Bowl Monday hangovers but we can't seem to make up our minds. You're right about that. We usually don't like take a look at the Dow futures but here we are to show that volatility because we are down up down once again. Now not all the indexes are doing this but this really has to go along with the geopolitical tensions when investors traders very fearful.
You can see the Dow had been down about the same amount that it's down now about eight tenths of one percent and then a bit of a recovery. The NASDAQ indexes are a little bit higher. The S&P 500 down less but now down again. So that volatility that Kelly was referencing that we've seen all year for various reasons. But right now again geopolitical tensions with between Ukraine and Russia as they seem to intensify and then perhaps lessen. This is showing in markets to a real mixed picture here. The S&P 500 down about four tenths of one percent off of its lows. But that VIX not so long ago moments ago above 30 now at twenty nine. But still it is elevated. You can also see a bid for bonds here that 10 year yield excuse me the two year yield up about 10 basis points close to that 160 again if that extraordinary back up and then going back down last week. And
then finally interestingly not supporting a real risk op picture of the yen basically flat. This is the same picture that we're looking at for individual sectors and movers as well. The energy sector is down sharply. Of course last week when the Ukraine Russia when Ukraine Russia tensions were intensifying oil had been up in a big way. Oil move was up. Now we have that out. Ex
Ali down almost 3 percent. You can see Northrop Grumman one of the big defense contractors last Friday getting its best bid since I believe July of last year up almost 5 percent today. Lower suggesting investors are a little bit less are a little bit less worried. That's true too for airlines. Earlier today they had been lower. Now we have American Airlines up about six tenths of one percent. And then interestingly this is one of the other pieces that doesn't fit that. I know you all we're talking
about gold is higher. Gold miners higher up about one point three percent. I want to take a look at a chart that we looked at that when I presented it last time. It hasn't worked out the way that I was presenting it. So let's keep an eye on this and see what's going on. This is gold. You can see a massive downtrend over the last year or so but one that's been very volatile fitting to the uncertainty that's roiling all markets right now breaking out of the range suggesting that there could be a big break higher. However if you take a look at the RSI it's pretty close to overbought. I went last time I showed this chart guy talked about the idea that we're going to see gold go back down into the range. I think this chart may still be
suggesting that. But right now you have this breakout. Will it be a false initial breakout. We don't know. But right now this is another piece in this risk off risk on picture that's very difficult to sort out. The catch with at most a little bit later on get his take on that Abigail. Great stuff. Thank you very much indeed. Let's get back to that geopolitical uncertainty that we're focusing on. The Russian president Vladimir Putin countering US warnings that
Russia may invade Ukraine. Within days Putin staging a televised meeting with a very long table a little earlier on with his foreign and defense ministers to show they're making an effort to find a diplomatic resolution. Lavrov Berry is suggesting maybe the talks should continue. Putin Yeah. All right. Let's carry on. Talking slightly undermines the position the White
House took going into the weekend that war was imminent. Let's go to D.C. now Bloomberg's Washington correspondent Amari Holder. Joining us now Anne-Marie who's running the table here. We come into the weekend. The headlines are thick. There is talk of imminent war and then Putin whether offhand comment seems to deflate that whole concept. Well he certainly did make that offhand comment when he sat down with Sergei Lavrov and in Russian he said horror show. Which means good. And the sentiment was really like all right Lavrov continue with the diplomatic path ongoing.
But following the meeting President Putin had with President Biden on Saturday. Both Washington and Moscow had the same rhetoric that we've heard for weeks. But Washington is saying we're going to do anything we can to potentially give an offering. President Putin a gift of diplomatic off ramp. The one headline for me that both
matched up between both briefings from Washington Moscow was that each President Putin and Biden want their teams to continue to remain engaged and in contact. But we should remember what President Putin was doing today when he met with Lavrov and his defense minister was purely for domestic purposes. So this is either him saying to his domestic audience look I'm continuing on this diplomatic path. We should note that the polls in Russia show that there's very little appetite for amongst the Russian public for a war with Ukraine. And actually
there's more appetite. The closer link to what. To the west Emory. It seems like we've seen this play out time and time again where Biden speaks to relative leaders to Vladimir Putin to the president of Ukraine saying there will be harsh consequences should Russia make a move. Russia says you haven't addressed our concerns. Let's keep talking. It's just a repeating pattern. What needs to change to actually find a diplomatic resolution if
we haven't been able to find one already. Well this is a game right. This is the you know the saying is everyone's playing checkers pool. Putin's playing chess. This is the game he is playing. Right. If you amass more than a hundred thousand troops on the border he's either with the United States thinks he has the potential given the intelligence they have. And they've been very transparent with the press about to go in or he's using that as leverage to get what he wants. Now we know that his main security concerns is redrawing the map back to nineteen ninety seven when it comes to the NATO forces and that Ukraine can not join NATO. Now the United States says that is off the table but there are secondary security concerns really comes at placement of missiles that potentially Putin can take as a win. And then he'll go home to his domestic audience and
say look the West what he calls was at peak hysteria over Ukraine. And I never invaded. Like I said I wouldn't. All right. Bloomberg's Annmarie Horden at the White House for us. Thank you so much. And for more on this we're joined by Sam GREENE King's College London Russia Institute director. He is also the author of Putin Versus the People The Perilous Politics of Divided Russia. Sam great to get your perspective. We were just hearing Anne-Marie talking there about Putin having
leverage to get what he wants. What do you think is his end game. Well you know I wouldn't be so sure that he has an end game. I think to a large extent the situation that we find ourselves in actually suits Putin pretty well. You know he wins domestically from a sense of geopolitical threat and confrontation with the
West. It's very important to sort of the way that he's legitimized himself over the last seven or eight years and and certainly supports the idea that if you were thinking about political change in Russia now is not the time to do it. But by the same token he doesn't win from from an actual conflict. Right. A conflict is Dow Jones of a war. Is is unpredictable. And it doesn't it's not necessarily something that he would would win and that Russia would win. So I think what he may be aiming for is what we have which is a protracted open ended stance of geopolitical confrontation with the West that very much keeps him at the at the center of attention. But that doesn't necessarily lead to some kind of a lasting solution that continues to give him this ability to manipulate through the fears and anxieties of governments whether in Washington or in Kiev.
So let's just think about that from the other side of the table. If that is the case and if Western leaders of Western strategists recognize that what is their next move on the chessboard of the Checkers board to try and change that change the narrative. If we don't want years and years of this kind of instability how should we be responding. How should Kiev Ridge be responding. We heard from Ukraine a little bit earlier on saying we continue to believe that we should have the option of joining NATO for instance if that was removed from the table. How would that
change the game. Well I think one of the reasons people don't want to remove that from the table is because while it's it's possible to have a large scale strategic open ended conversation about a new security architecture for Europe which does not have to look anything like the current security architecture which could in fact eventually deliver something that Putin or any other Russian leader might be more happy with. The reality is that nobody wants to give Putin that kind of a gift right when when they feel like they have a gun held to their heads or to Ukraine's head. So I think there's there's a couple of things. One is is to be open that there are things that we can't talk about and we should be talking about. And there are things that that could make everybody more secure and to recognize that the current situation doesn't suit the West necessarily any better than it suits Russia. Obviously the Biden administration London Brussels would rather be talking about other things. But as we're having that conversation I think there's a lot of desire
on the part of Western leaders to create a bit more security and stability for for Ukraine. What they're not happy with is the possibility that if we end up in these very long protracted conversations that that Ukraine could be held permanently hostage. More or less permanently Sam even if we can find an interim solution to tamp down the escalation we have been seeing in recent weeks is this is just not going to rear its ugly head time and time again. I think it it very well may in part of the reason that it will I think is because it does suit Putin's political interests domestically. You know for for him. You know whatever he might
achieve eventually on the international scene is is not worth very much if he's not still in power in Russia. There are very real problems in the Russian economy in the handling of the pandemic and the fact that they haven't been able to to increase Russia's sense of Russian's ordinary Russian sense of well-being over the last seven or eight years. And so getting them to focus on on conflict getting them to focus on this sense of of of international threats and and frankly to accept a degree of sacrifice in order to to win that threat as is is something that's potentially a win from from front from his perspective. How unpopular would a war be in Russia. That's. That's a very good question. I mean I think look we've
had again you know Russia's been at war with Ukraine now for four for seven plus years going on eight years next month and despite a lot of propaganda. Right. It has not really built a sense of of public support as your reporter was saying earlier. Right. For a larger scale military confrontation with with Ukraine. And I really don't see that changing if a war happens. There will be a rally around the flag effect. It will probably be relatively short lived. I mean Putin has advantages right. He controls all of the television stations. He basically controls all the political parties in the in the parliament. So he will
dominate that that conversation. But that won't change Russia's sense of of of what's going on in their own country in their own pocketbooks and their own livelihoods for four for very long. Sam thank you very much indeed for the analysis and the insight. We greatly appreciate it. Sam GREENE King's College London Russia Institute director. Thank you very much indeed. What are we gonna be doing next. Taking another look at the markets through the lens of what is happening in Ukraine. We're seeing certainly volatile oil markets crude fluctuating over tension in Ukraine and around Ukraine. Cities at Morse bearish on crude. He joins us next. This is Bloomberg.
This is Bloomberg Markets CAC Group tour and you're looking at a live shot of the principal room. Tune in to Bloomberg's monthly series Cheap Feet to observe this episode featuring Macy's CFO Adrian Mitchell a sampling by dot com and YouTube. This is Glenn Beck. Oil pushing closer to 100 dollars a barrel in the face of geopolitical tensions over Ukraine. Joining us now is Ed Moore sitting global head of Commodities Research. And you've been persistently on the bearish end of the spectrum when it comes to this oil market. Should we see Russia take military action in Ukraine which of course it has denied its plans to do. Will it
cause you to rethink that bearish thesis. It won't really. And it wouldn't be. Even if oil goes over 100 for the time being it would not be surprised if there could be as much as a 10 percent increase in prices if there were military action that went to key. But the long term supply demand balance remains the same. We don't think that Russia is going to stop exporting gas or oil to Europe. Two of their biggest markets one of the gas one on the
oil side. And it looks very unlikely that European countries are going to take action to stop importing contracted oil or gas from Russia. So we think the supply situation will go back to normal. If there were to be military action and then over the course of the year all of the bearish factors on the supply side that we see coming into the market will still come into the market. Ed if you were thinking about the Ukrainian crisis and the inflation story and you were trying to figure out where the Venn diagram overlaps best to provide a hedge for a portfolio where would it be. Where would I be looking. Is it the metals market the energy market. You just kind of discounted the energy market but are there other places I should be looking. Well we think the gold market is already reflecting that it makes sense that there is two risks around geopolitical risk and now with the Fed raising rates and you think that would make the dollar more attractive than gold. But the gold is a great great hedge on on both the recession side and the inflation side. So
that would be one. We are very positive. The metals some of the metals are likely to. If they were to be sanctions imposed on Russia would likely to hit Russian exports of aluminum and nickel and palladium in the European market. Is that what you can do to through the financial markets to to hedge with palladium. But there are certainly things that can be done with aluminum nickel and copper. We'll talk more about your aluminum call because you think it could be up to thirty four hundred dollars a tonne in the next three months or so. Then it's going to consolidate over the next six to twelve. Why take that track.
Well there are very good reasons to do that. And there's a double reason. So the market itself we think is going to see bigger deficits than anyone had expected for this year. The little bump in the road is we're going to see aluminum smelters that have been shut in for a variety of reasons environmental the Olympics and the like in China. The crisis of energy supply or aluminum smelters in Europe being another one. Well we see the supply demand balance tightening. We see the potential for
Russian sanctions on companies that are doing the exports of aluminum that will make it more difficult to export it. So we do have that thirty four hundred dollar call and we know the prices come off a little bit. But with China easing in the end of the Olympics we think price is going to go up. Ed how much of what we see in the price currently in the metals
market in the commodities more brief but sort of broadly is financial hedging financial flows and how much of it is real demand. There's a bit of both. So on the financial flow side you just have to look at the implied volatility across all commodities. The implied volatility uncertain Russian kinds of exports has been very high. It's been in the 90 percent range for aluminum. It's been there for a nickel. It's been there for wheat. When you look at the oil market at the gas market the implied volatility is at a much lower level high for historical purposes at around the 50 percent level. But you don't have that feeling of political risk entering the volatility in oil and gas to the degree you do in the metals markets. Well talking geopolitics this has to do with Russia but not specifically to the Ukraine issue. Russia's top diplomat to the talks on the Iranian nuclear deal actually sounded pretty optimistic saying world powers have
made quote significant progress. How do you view the potential factor of Iranian crude coming back onto the market. So we think that there's a high probability on it. The Russians are mediating it. I think the Russians had a hand in convincing the US to drop its desire to go beyond the JCP away and getting a new nuclear agreement. The US has agreed that it's not going to ask for more. And the Russians have a role to play including taking the enriched uranium out of the country. And the link to Ukraine is that Putin is acting like a statesman and he can. Should there be that Iranian deal so elusive so far. Should it come into play. Putin will take the credit for it and that could make easing on Ukraine a lot easier.
There's a headline a little bit earlier on suggesting that President A.S. of Iran is going to travel to Gaza on Thursday. So maybe an indication potentially off some news coming on that fronts. Can I just take a step back there and look at the broader picture for OPEC at the Secretary-General. Buck Endo was speaking a little bit
earlier. I think it was at an energy conference talking about the fact that he's worried that opaque won't be able to meet demand that there is this fear that actually OPEC is not able to deliver upon these 400000 barrel increases that it says it's going to do. But that is ultimately unable to do so because it doesn't have the spare capacity. What is OPEC delivering right now. How far away from those targets is it currently. And is that problem going to persist. So first of all I'd like to say that 400000 barrels a day was always a fiction. It included the benchmarks of where all of those OPEC plus countries had started
before they stop producing as much oil. Some of them will not be able to go back for a very long time if ever. But the share of that 400000 barrels a day that can come back has been coming back. It's been around 260000 barrels a day on average per month. And we don't see any reason why that won't stop. I also think that the spare
capacity argument is a bit elusive. And I'll give you three examples of it if you will. One Russia certainly doesn't have the capacity to bring back a million barrels a day in 90 days let alone sustain it for 6 6 months. But it does have the capacity to bring a million three hundred thousand barrels a day into the market sustainably between now and the end of the year. It can't do it in 90 days. It doesn't need the spare capacity argument but it will be the U.S. short cycle. Oil has no spare
capacity at the moment. But we think it's going to have one point three million barrels a day of additional increment. So looking at spare capacity in the setting of history like the beginning of the decade of the century when we had no spare capacity and no incremental oil sands no incremental deepwater drilling Fremantle's shale we had the price go up on a sustainable basis. We do have a revolution technologically now that can bring that oil into the market sooner. So the logic that that argument on spare capacity justice will weigh as heavily now as it did 20 years ago. And always great to catch up. Thank you very much for sharing your views. Really appreciate it. Ed Balls Citi Global Heads of Commodities Research. This is Bloomberg. Thirty four minutes the European equity market closed European equities off their lows but still down and down hard. We are
pricing in some of the Friday price action out of the United States. You need to bear that in mind as well. But we came into work first thing this morning. European equities were down and down hard circa 3 percent plus. So we've come back from that but we're still down by around 2 percent were trading just below 460. Every single sector is in negative territory. The banks are down. That's where the losses are really coming from. We have seen today a bit in core bonds. A yields have been coming lower. That less good for the for the banking sector where rising yields have been a big benefit recently here in Europe. Euro
dollar is down four tenths of one percent. The market is running home to the dollar. Brent crude absolutely flat. The European close is coming up next. We'll continue to focus on what was happening in and around Ukraine. Control Wolf is going to be joining us from Bruegel. We've also got Christine Lagarde speaking in the next hour. We'll bring you that live. This is Bloomberg.
2022-02-16 12:07
