Oil Extends Gain as US and Iran Trade Strikes, Escalating Conflict

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1:28Carol Massar:Bloomberg Audio Studios. Podcasts. Radio. News. This is Bloomberg Business Week Daily. reporting from the magazine that helps global leaders stay ahead with insight on the people, companies, and trends shaping today's complex economy. Plus, global business, finance, and tech news as it happens. The Bloomberg Businessweek Daily Podcast with Carol Masser and Tim Stenevek on Bloomberg Radio. Today's trade, Christine, is really showing what tensions in the Middle East and higher oil prices do across assets. Absolutely, Tim. And we're seeing that most clearly really in the bond market, right? I mean, those yields skyrocketing to the highest levels that we've seen in almost two decades.

2:14Carol Massar:And it's not just the U.S. It is a global story. And a lot of that reaction function really coming from what we're seeing in oil prices, Brent back above key levels. So is WTI. And really doesn't seem like there's any end in sight because we're getting fresh hostilities between the U.S. and Iran. So that's our focus for the first part of this hour. And for more, we want to bring in Wendy Benjaminson. She's senior editor for Bloomberg News. She joins us from our Washington, D.C. Bureau. Wendy, President Trump said the strikes were in retaliation for Iran trying to put mines in the strait and for earlier attacks by the Islamic Republic on a military base.

2:47He warned of more attacks to come if Tehran responded. He said, quote, if the failed nation of Iran retaliates for this very justified attack, they will be hit again at a much harder and higher level. He said this in a social media post just a little bit earlier today. It seems like I have lost track of how many times the president has threatened a bigger and bolder attack. And I wonder your reaction to this and sort of like the reaction out of the Middle East, like, is he going to follow through with these attacks?

3:17Carol Massar:Well, it certainly looks that way, given that this, the hostility sort of renewed themselves on Sunday, when the US noticed that the IRGC, the Islamic Revolutionary Guard Corps, were setting up rocket launchers on an island that would shoot mines into the Strait of Hormuz to stop shipping. So the U.S. military took those rocket launchers out. Then Iran responded by trying to hit some U.S. targets in Jordan, or excuse me, somewhere in another country in the Gulf, excuse me. And those missiles were intercepted. now today the U.S. is striking again and Iran says it will retaliate. So it looks like we're right back in the middle of this.

4:05Carol Massar:And in terms of my initial reaction, I mean, part of this is, this is where we're striking an Iranian military that the president says no longer exists. So we don't, you know, we're sort of left to figure out, you know, what's left that we're striking. There were explosions heard in the city of Bandar Abbas in Iran today. So there's a lot of it looks like we're going to be back at it again. And right before the midterms, this is what Republican candidates are really clutching their pearls about right now. Now, Wendy, as you mentioned, we're right back at it again, which means that we've climbed back down from this very situation just a few weeks and months before only to come back around.

4:48Carol Massar:Do you see anything that's different this time that would lead all of us to believe that, you know, this is the period of de-escalation being effectively over? The short answer, Christine, is no. I mean, this is, I think probably the person who most wants to find an off-ramp for this right now is Donald Trump himself. I mean, he's trying now with Treasury Secretary Scott Besson to do this economic squeeze. So far, most of the world has been like, yeah, okay, you know, we're not going to play ball on this. This isn't our war. So far, the U.S. has sanctioned the branches of an Egyptian bank that works in the UAE and does some business with Iran.

5:37Carol Massar:We're expecting another bank to be sanctioned this week. But this is hardly the, and I'm quoting Besant here, financial violence that he proposed. And so in lieu of financial violence, we're actually now getting actual violence, again, from the United States. And Iran is saying that, look, if you want to go back to the memorandum of understanding that we signed in June, that Trump very, you know, dramatically signed at Versailles, that they would be fine with that. The U.S. has said they're no longer fine with that. It wasn't a great deal for the United States in the first place. You might remember the reporting then was that that gave a lot back to Iran.

6:20Carol Massar:And so that seems to be dead in the water. We just don't see an easy off-ramp to the six-month war so far. But, Wendy, I think what's notable here is we've spent this entire conversation, yes, we've mentioned the Strait of Hormuz, and that is what is at issue. But if we think back to the whole reason that the U.S. and Israel started this war was because of the nuclear material in Iran and the idea of Iran not building and not getting a nuclear weapon is that we're not even talking about that right now. Well, to be fair, Donald Trump is talking about it as the core reason that that the U.S. is involved in this war.

7:00Carol Massar:You know, Israel sort of gone back to worrying about its own problems, it seems. but he keeps saying he's doing this so Iran doesn't have a nuclear weapon. I mean, I'm sure they are distracted from building a nuclear weapon, and the U.S. has bombed both in June and June of last year, and the current war that began in February. They have bombed Iran nuclear sites, but the uranium is still there. It's buried under the ground. When this all calms down, There's nothing to stop Iran from, you know, going on with their nuclear program. But unlike what the Israeli government says, the U.S. and global intelligence experts do not believe that Iran is anywhere near having the capability to build a nuclear weapon.

7:48Carol Massar:I mean, they may in years, but it is not the imminent threat that Israel and the Trump administration say it is. Yeah, well, Wendy, it seems like, you know, we're gearing up for an extended confrontation that involves both military strikes and also economic pressure. Where do you think the funding is going to come for all of this? The funding for it? Is that what you said? I'm sorry. Yes, that's right. How are we paying for all of this? That's a very good question. So far, Congress has been okay with passing the spending. They have asked for$70 billion more for the war. They are really ramping up their contracts.

8:32Carol Massar:The U.S. is with military contractors, the people who can replenish the missiles and drones that we have used in this war and also given to Ukraine for its war against Russia. So there's a lot of spending going on. It's a lot of deficit spending. And, you know, we keep spending money we don't have. And that's probably a good segue to the bond market, which we're going to get to in just a second. We should note a redhead crossing the Bloomberg terminal. The White House passes a stopgap funding bill to avoid a government shutdown. Once again, the White House passing a stopgap funding bill to avoid a government shutdown.

9:10A big thank you to Wendy Benjaminson, senior editor for Bloomberg News down there in our Washington, D.C. bureau. The House passes a stopgap funding bill to avoid government shutdown. Stay with us. More from Bloomberg Businessweek Daily coming up after this.

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10:21Carol Massar:Available on Plus and Pro plans. With LPL Financial, we provide the services to help push you forward. When it comes to your finances, your business, your future, the only question should be, what if you could? Paid advertisement, Anna Kendrick is not a client of LPL Financial LLC and receives compensation to promote LPL. Investing involves risk, including potential loss of principal LPL Financial LLC member FINRA SIPC. You're listening to the Bloomberg Business Week Daily Podcast. Catch us live weekday afternoons from 2 to 5 Eastern. Listen on Apple CarPlay and Android Auto with the Bloomberg Business app.

10:52Carol Massar:Or watch us live on YouTube. Now let's take a look at what's happening in energy markets and how that is all changing as a result of the U.S.-Iran war, which continues. We've seen a surge in oil prices rippling across global markets, hitting stocks and bonds on worries that higher energy costs will fuel inflation and force the Federal Reserve to boost rates. So we can talk about all that and more with Frank Moncom. He joins us here in the Bloomberg Business Week studio. He is macro strategist for Bloomberg's Markets Live blog, which is my day job. And Frank is one of my colleagues. So Frank also previously worked at commodity trading houses, Gunvor and VTOL.

11:29Carol Massar:He did a stint at PIMCO. He has lectured at the University of Chicago. So pretty full resume. You're probably pretty qualified to talk about everything. Now you can add your Bloomberg Business Week daily to your resume. This is your debut. Exactly. We're happy to have you. Yeah, yeah. Glad to be here. Yeah. Okay, so Frank, obviously, you're very well-versed in this. You've traded these markets in another life. What strikes you as different this time? Is it potentially worse than we've had it in years past of higher oil prices? Yeah, I mean, listen, everybody looks at brand in WTI. That's crude, but it's not really at the epicenter of this crisis.

12:08I mean, if you think about how parks market and cracks have been traded, I mean, if you look at guys' story right now, guys, guys are trading at a record high. Brent has been lagging simply because there's been a policy that has been implemented to basically flush out speculative money into the Brent market. And I call that policy the Varshock policy, which is all the jawboning and all of the verbal intervention by, you know, the administration has really scared off traders to put on risk in Brent. And it's a lot easier to express that risk view into products because there isn't a lot of tourist money into products.

12:44There isn't a lot of speculative money there. So that's why you're seeing the product space really explode to really reflect the tightness that we're seeing in the market. So obviously, this is the worst crisis ever for energy markets. I mean, I've been in this market for pretty much all my career. And the first thing you learn when you start is the Armageddon risk is really Hormuz. And we're here today, but we have Brent trading sub$100. But that is not reflective of the crisis that we're seeing as being reflected in products. Yeah. So, okay. So, that's exactly where I want to go. This is the worst crisis we've ever seen when it comes to this commodity.

13:16Why aren't prices higher? Well, for the very reason that I just, you know, talked about here. The fact that, you know, you need people to engage in the market for the market to go higher. Right. And people that have been flushed out. You know, it's hard to keep on risk because you have this volatility that's basically hard to hedge against. Because risk is not an issue for traders, right? It's the ability to identify, measure, and hedge risk that makes a risk factor palatable. But this is a risk factor that's just not, you know, you can't measure it. You can't put your hand on it. So traders basically just left the market.

13:49And you can see it in open interest. Open interest in brand has been dropping, you know, to multi-years of. Is that translating to a lack of volatility in the equity market too? And the reason I ask is because if we were to go back to the end of March, I mean, the S &P 500, gosh, at the end of March was at 63.43. Okay. Right now it's at 76.29. It's up more than 20 % since then. For the first month of this war, that was the concern. And then since then, it's been on this just rocket ship higher. And it seems to be ignoring higher oil prices and higher yields too. Yeah. No, I think you're spot on with that.

14:30And I think what's happening there is that, you know, the benchmark, you know, interest rate is still the 10-year yield, right? And the 10-year yield has been very much in check throughout this process. And if you think about the fact that today we're breaking out of the range a little bit on the 10-year, we're 478. We were at 440 when we hit$120 on Brent, you know, in the spring, right? So the equities market didn't really see this as what could potentially be inflationary pressures being reflected in real yields, in 10-year yields. So the market was fine. And to be fair, the AI story has been rolling totally fine.

15:05Earnings have been coming in pretty strong. But what the equity market really fears is a tantrum in the rates market. And that really comes with an escape higher in volatility, which we haven't really seen. If you look at the move index, we're still right around high 60s, low 70s. we printed 75 today, which I think it's probably, you know, a couple of weeks, maybe a month high, but it's nothing really to write home about when it comes to volatility. So because volatility in the bond market remains, you know, pretty contained, I think the equities market is still taking things in stride. And that's the real risk.

15:34You know, if we get an escape higher in volatility, in bonds, it's not about us grinding higher to 5 % to only 10 year. But if we wake up tomorrow and we're, you know, we're gapping 15 basis points in a day, then this is really when you start seeing these explosive squeezes lower in equities. But we haven't seen that yet.

15:54Carol Massar:Yeah. Well, now, Tim, Frank has actually done a little bit of work in the relationship between oil and yields, right? Because as we understand it, it's oil that typically drives yields higher. And what we're seeing in oil corresponds to what we're seeing in yields. But, Frank, I know that you've done some work in kind of seeing how that relationship seems to be changing now. Why don't you tell us about it? I mean, you know, could there be a situation where it's yields that drive oil because of the changes that you mentioned are happening in the markets? Sure. So we so we're going to study basically to look at a correlation regime between oil and yield.

16:28And typically, you know, moves higher in oil tend to have an impact on yield, whether it's nominal yields or real yields. But we've seen as a correlation has basically come off pretty aggressively. So we hit a high of around, you know, point eight, point eight, five percent. That's almost a one to one correlation between oil yields, meaning oil driving yields higher. But that's come off pretty strongly. It's now down to flat. And we're seeing the opposite actually happening where we can actually see what I call the reflexivity of this relationship taking place, which is yields actually could drive oil higher.

16:57And that happens usually when there is issues that are specific to the bond market that are pushing investors out of the bond market because they're worried about fiscal deficit, et cetera, et cetera, credibility risk at the Fed level, the Treasury level. and they're saying, you know what, I'm not going to use the bond market as an inflation hedge or I'm not going to stay in the bond market and ask for a term premium because that market is being interfered with. And they're saying, I'm going to move out of that and transfer that risk over the oil. So then you've seen that correlation sort of reverse.

17:28And we're seeing signs of that already here at this juncture. And that's definitely a dynamic that we continue to watch.

17:34Carol Massar:Now, if we do, in fact, see this relationship morph for a longer time period, what would be the biggest implication of that? Well, the biggest implication would be that I think the Brent market within the oil complex, because remember I said that the cracks and the products were kind of outperforming Brent here. I think this is where Brent could potentially play this catch-up trade that we've been kind of watching for, where if you see this risk transfer out of the rates market into the commodities complex, specifically in the oil market, I think that risk budget would go into Brent more so than into products because that's the cleaner hedge.

18:14So that would definitely be the most linear implication of that kind of risk transfer. Frank, come back and hang out with us again. Will do. Is that allowed?

18:23Carol Massar:I'll allow it. Okay, she'll allow it. Frank Mockham is a macro strategist for Bloomberg News. MLIV Go on the Bloomberg Terminal. Or just look him up on the terminal and you can see what he's been doing for the month of August. He's got quite a few stories in there in today's blog. And every day the markets have been open. Frank, once again, a macro strategist for Bloomberg News. Stay with us. More from Bloomberg Businessweek Daily coming up after this.

18:53Carol Massar:some people treat chat gpt like some kind of smart search engine and some use it to get work done chat gpt work is a new way of working in chat gpt that can take action across your apps and files stay with a project for hours if needed and turn a goal into finished work it's designed to help you move from a chaotic starting point to a reviewable first version so all the source materials, briefs, and scattered information that you have to grind through to turn into something useful can just become something useful. Put ChatGPT to work on your most ambitious ideas and projects. Get started at chatgpt.com by selecting Work Mode, available on Plus and Pro plans.

19:37Carol Massar:What if you could make that stop? With LPL Financial, we remove the things holding you back and provide the services to help push you forward. If you're a financial advisor, what if you could have more freedom, but also more support? Ready to invest? What if you could have an advisor that really understood you? When it comes to your finances, your business, your future, at LPL Financial, we believe the only question should be, what if you could? Pitt advertisement, Anna Kendrick, is not a client of LPL Financial LLC and receives compensation to promote LPL. Investing involves risk, including potential loss of principal LPL Financial LLC member FINRA, SIPC.

20:07Carol Massar:Hi, I'm Tom Keen, inviting you to join me for the Bloomberg Surveillance Podcast. It's about making you smarter every business day. I'm Paul Sweeney. We bring you complete coverage of stocks, bonds, commodities, even crypto. All the information you need to excel in the markets. And I'm Alexis Christophorus. Listen to us for essential conversations with the smartest names in economics, finance, investment, and international relations. That's the Bloomberg Surveillance Podcast. Subscribe today on Apple, Spotify, or anywhere you listen. You're listening to the Bloomberg Business Week Daily Podcast.

20:42Carol Massar:Catch us live weekday afternoons from 2 to 5 Eastern. Listen on Apple CarPlay and Android Auto with the Bloomberg Business app. Or watch us live on YouTube. Americans always looking to ways to figure out their retirement. I mean, this is something we talk about all the time. Honestly, I've started thinking about my retirement the day I started working. That's good. I mean, you're way ahead of the game if you're doing that. I mean, we constantly hear over and over again that Americans aren't ready. I want to bring in Heather LaValle. She's CEO of Voya Financial. It's a more than$9 billion market cap financial services firm.

21:15Think retirement, group benefits, health accounts, wealth management, and more. Shares, by the way, up more than 35 % so far this year. Heather's out there in Old Saybrook, Connecticut. Heather, I just want to get from you if you agree with all the data out there that we see quarter after quarter that says Americans are woefully prepared for retirement. Is that right? So I'm going to go back to a little bit of how Christine started. it is thinking about retirement from the moment she started working. So what I would say is our research is showing first, if I start with Gen Z population, the Gen Zs right now are saving more than any other generation has saved.

21:53They've saved earlier, they've saved more. So we see some really positive trends. As a matter of fact, they're saving more, twice as much as millennials at the same age. So our research finds that while there is challenges today and we see inflation, we do see that people who are staying the course, who engage digitally, who have access to a financial advisor are actually feeling much, much better about their retirement.