Markets Confront Iran Risk and Fed Policy | Macro Mondays

0:06Mikkel Rosenvold:Hello all there. Welcome to Real Vision. Welcome to Macro Mondays. My name is Mikkel Rosenvold. I'm joined as usual by Andreas Steno and we've got a jam-packed show for you today as usual. A lot of stuff going on in Iran. We have what would usually be a central bank bonanza week. We'll get back to that later. But we've got so much ground to cover here. Before we get started, remember that we're going to keep you updated all week if things move very, very fast in the Iran war. This is our free show. We give you a sneak peek into our views on the conflict and the macro backdrop. But if you want round-the-clock updates, realvision.com is the place to go.

0:48Mikkel Rosenvold:We post more and more of it as notes, as very, very quick updates and analyses and stuff. But also, obviously, our flagship reports are being published every week. We have our standard signals report that you publish address. It's coming out very, very soon, if it isn't already, every Monday. I have a weekly geopolitical commodities piece, The Drill. And then on every Friday, we have our portfolio update. So lots of great stuff to follow if you're on the pro tier with Real Vision. If you're on the pro tier, but also on some of the lowest, all the way down to the Connect tier, you can join the Arena.

1:21Mikkel Rosenvold:That's a new trade idea competition from Real Vision. You simply log in, you enter your very, very best trade ideas, and then in two weeks' time, we're starting today, in two weeks' time, we'll measure who has the best return on investment. So the winner takes, I think,$7 ,500 and a year of pro, up to$25 ,000 in prizes all in all being given out. So check out realvision.com slash arena to get in from the very, very start to optimize your chances of winning that. And Andreas, before we get to our usual disclaimer here, if you had to make one trade right now, that's basically the idea of the arena, what would it be?

2:00Andreas Steno:Yeah, and I have two weeks to make the returns. Yeah, that's it. It's got to be something related to the supply chains of the war, hasn't it? If you really want to clock in something here. Or, of course, you could also look at trades that would do incredibly well if we get a ceasefire. I think those are kind of the two outcomes that would generate the largest returns very short term. I'll go with one of the stocks that we actually added to our portfolio as a consequence of the war, or at least we added to the size of it in our portfolio. I'll say Circle Internet Group. And the reason why I say so, it sounds a little bit odd to make that a top pick during a war in the Middle East.

2:50Andreas Steno:But we've obviously seen how USDC, the stablecoin market, has proved to be vital for family offices trying to move wealth back and forth during this in the Middle East. Circle Group is on an absolute tier. And it's up 7 % since we added to my portfolio of it or to the overall portfolio. but also my own portfolio on Friday. And before that, it was up like 30%, something like that. So I guess that will be my pick.

3:20Mikkel Rosenvold:Yeah, I'm going to have to go in on the website and see if I can get some highly leveraged oil 10x leveraged position to really maximize for the next two weeks. Otherwise, I'll be looking at Red Cat Holdings, which I wrote about in the drill report last week. So you can check that out. So anyway, that's the arena. Go check it out. Go take part in the competition. As I mentioned, one of the main prizes is winning a year of pro membership. That means having to endure much more of Andreas' and me. But that's on you if you decide to take part and participate. Remember, as usual, we try to be very, very actionable.

3:57Mikkel Rosenvold:We just showed that. Very, very concrete every week. But our trade ideas, they might be...

4:02Andreas Steno:Sometimes it may be good, sometimes it may be shit.

4:07Mikkel Rosenvold:Exactly, Andreas. Let's start off with laugh of the week. Andreas, and I think this is a great one we have this week. I don't know if it's a little too small to show on here, but a lot of people may have seen this tweet from Newt Gingrich. So he's essentially proposing a very, very bold, very, very actionable solution to the Hormuz crisis, throw in a handful of thermonuclear weapons to essentially dig a new canal to the south of the of Hormuz through UAE and Oman, and that's it. That's solution-oriented leadership here, Andreas. I don't think it's going to work. There are too many mountains. I don't think I would want to be on the first cruise to sail through that thermonuclear wasteland, but it's an idea anyway.

4:55Mikkel Rosenvold:Remember, this guy was a very, very serious presidential contender a few decades ago. So, but yeah, we're perhaps lucky that he isn't anymore. But so many great ideas floating out there on how to solve this crisis, Andreas.

5:08Andreas Steno:Wasn't he in the race during the primaries coming up to the 2016 election? I actually think he was. He could be. But never mind. Yeah, but never mind. I mean, this is an outrageous prediction or suggestion. So please, please don't listen to this guy. No, no. nobody show Pete Hexer this tweet.

5:31Mikkel Rosenvold:I mean, it's definitely not a solution.

5:33Andreas Steno:Maybe the second laugh of the week, right? Last Monday, I told the audience that I would not shave until the war was over.

5:41Mikkel Rosenvold:Yeah, I was going to ask you that.

5:42Andreas Steno:Then on Friday, I was told, we've won. We've won. So, you know, this is my own prediction market. It triggered the event. I've won. We've won.

5:53Mikkel Rosenvold:We've won. I'm not buying that, Andreas. Fair enough. looks really, really good and sharp. I'm going to the barber tomorrow, so I'm not looking nearly as sharp as that. So fair play to you, Andres. I think we are seeing, Andres, maybe that's a segue into talking a bit more about the Iran war. People are beginning to lose focus on this Iran war. It's becoming boring. It's becoming, I hate to say low intensity because the stakes are so high, but it is where we're at. Iran seemingly has the capacity still to amp up attacks sometimes, But we're essentially grinding down to a nutritional war that will probably last a few more weeks or face out somehow.

6:35Mikkel Rosenvold:And that's a big, that can be very anticlimactic. But I think that that's where we're at. If we just do a quick rundown, I just wanted to do this over what happened during the weekend. We had U.S. Marines deployed and a huge strike on the Cog Island. So that is opening up as an option for Donald Trump to take the Khark Island, essentially encrypting Iran's oil exports. We'll get back to that. The U.S. is struggling to put together a naval coalition to escort ships through the Strait of Hormuz. The U.S. Navy could probably do it on its own, but it's going to take a while, and it's going to leave them a little bit vulnerable.

7:09Mikkel Rosenvold:In the meantime, we saw Iran attacking. We don't know the exact details of this, but it seems that they have attacked a Fujairah port on the east side of the Strait of Hormuz, which is one of the main outlets or the bypasses of the Strait of Hormuz. Still no attacks on the east-west pipeline during Saudi or no Houthi activity in the Red Sea. That's sort of the red flags we're looking for. If that begins to happen, you begin to see an uptrend in oil. On the other hand, you saw Russian sanctions being lifted. I read a report about India buying Russian oil at$99 a barrel, including transportation, but still that's perhaps two or three times as much as Russian crude would have costed simply three weeks ago.

7:51Mikkel Rosenvold:And you had a Pakistani tanker passing through the strait today. I think we are slowly seeing people adjusting to this conflict rather than working towards a conflict. Oil is finding its ways through, and we're seeing both the US and especially Iran really treading a delicate balance here because the Iranians don't want to attack the oil infrastructure in Saudi Arabia, because then they're afraid that the US is going to take out their own oil exports. At the same time, the US seems to be somehow accepting Iranian exports, at least not attacking the ships. So a very, very delicate situation. And markets seem to be adapting sort of, this is the new normal?

8:33Mikkel Rosenvold:Or what's your vibe here, Andreas?

8:35Andreas Steno:Yeah, so as we talked about last week, roughly 20 million barrels of oil typically flow through the Strait of Hormuz on a daily basis. We've replaced ballpark 5 to 7 million barrels a day through the East to West pipeline. We've probably replaced say a little more than that if we include some of the tankers that are now allowed to sail through. We've also seen how India and Iran held direct talks to try and get some of these tankers to India. And that is what we should remember here. All of the flows out of Hormuz are typically directed to China, India, Japan, South Korea, etc. So take India and China as two core names here.

9:32Andreas Steno:They're obviously super interested in getting this flow up and running again. So I don't really think Iran has many friends in terms of keeping this flow in turmoil. And maybe the only friend in that negotiation or in that part is Russia, right, as you just described. They've been the clear win of this so far. So I think you're right that we have alleviated some of the concerns, especially around oil. we wrote a whole article on Friday of the byproduct supply chains, which are probably slightly more vulnerable, to say the least, to a prolonged conflict or to a prolonged closure of the strait. We're talking about sulfur.

10:18Andreas Steno:We're talking about helium. We're talking about fertilizers overall. We're talking about PGG and stuff like that. So as I've said, and let me repeat it, because that's basically the main takeaway from a macro perspective. When you see a straight like the straight of Moose closed for a couple of weeks, there is an initial shock, which is an input cost shock. But it turns into a two phase shock should the straight be closed for long. But the growth impact is not immediate. The input price shock is immediate, but the growth impact shock is not. And therefore, my takeaway is still that, you know, if this sort of fizzles out a little bit and we get a positive rate of change and it flows out of the strain of Amoose, et cetera, over the coming weeks, then this will turn out to be a nothing burger for the business cycle.

11:15Not for the input price level, but for the business cycle, especially in the US, which is mostly shielded from this.

11:24Andreas Steno:And it is, by the way, also the clear input that Trump receives from his economic team that we can deal with this. It is slightly less certain that, to say the least again, that China and India, et cetera, could deal with the prolonged closure of the strait. So in that sense, I actually think the US can be a little bit more patient around the consequences here than many of its peers, which leaves them in an okay-ish spot if this sort of fizzles out a little bit.

12:00Mikkel Rosenvold:Yeah, there's an interesting duality to this as well, because Iran is still, as far as we know, exporting quite large amounts of oil to China. And that's obviously keeping Iran in the war. It's keeping cash coming in. It's the main revenue stream. But it also keeps the world market prices of oil down because supply is supply to some extent here. So as long as China can get its oil from Iran, it doesn't have to buy it from the world markets. And there is this duality to it that the US would probably like to shut that down, but it can't really. And that leaves China in an OK position as well from this.

12:38Mikkel Rosenvold:We've talked about Russia as the big winners. I think China is quite OK with this. They're known to be, as we call it, regime agnostic. They don't care who's in charge in Iran as long as they can get their oil out. And they're seeing the U.S. expend a lot of resources in this fight. So a quick break in your regular programming. If you're serious about your future, grab my free report called Prepare for 2030. I think you've got five years to make as much money as possible. And this guide will help you navigate what's coming. The link is in the description. Download it now. And that leads me to the next perspective address before we get to talk more into the business cycle and the macro backdrop here, because one major fallout of this could be the upcoming Trump-Xi summit.

13:27Mikkel Rosenvold:We've talked a lot about it. It's going to be a huge deal for commodities, for metals, for the entire decoupling trade that we've talked about. Trump is now signaling a possible delay to these talks. That's both to put pressure on China to help him reopen the strait, but maybe also because Trump knows that he's going to be in a very, very, very poor position if he shows up in Beijing or wherever these talks are going to be held with this problem still ongoing. And it could look like that, I mean, if it's only two weeks away. So how do you see this dynamic playing out? What are your expectations for that summit at this moment?

14:03Andreas Steno:So I got this question from a family office with a lot of investments, both in the tanker space, but also with a large presence in the region, both close to China, but also close to Dubai, Iran, etc. Last week, is there any rational reason why the US is involved in this? They really struggled to see what the rational reasoning was. And my answer, and I still think there is some merit to that, is that if the US actually controls the Strait of Amuse, if they also control the Iranian part of the outflow of the Strait of Amuse, then they actually have something to negotiate with when it comes to these trade talks with China.

14:51So I guess that is the rationale behind all of this, if there is one.

14:59Andreas Steno:And you're right, currently they're not in a good negotiation position because they're not in control of what's going on in the strait. If they came to Beijing right now, they would not feasibly be able to threaten with a closure of the Iranian exports to China because that would kind of counteract the whole purpose of the exercise right now. So I think they need to be in a situation where they control it to a larger extent than now. And it's a very good question whether they can control this trade without a new machine in Tehran. I mean, one thing is to take Karat Island, but if you keep seeing drone swarms, et cetera, then you're not really in control of it, are you?

15:46Mikkel Rosenvold:No, no, no, no, that's it, that's it. But we'll have to see what steps are made. But I think this is a very overlooked backdrop to all of this, is this upcoming summit that's obviously very, very important to both Trump and Xi. We are hearing a lot of rumors, I will call it, around Chinese military activity around Taiwan. I would put them in the rumors bucket because some of it was due to, you had a big meeting in the Chinese Communist Party where the military activity is usually lower around Taiwan, that it spiked a little bit. I'm not seeing anything resembling the buildup needed for not at all an invasion, but neither a blockade of Taiwan.

16:30Mikkel Rosenvold:But it's obviously, you know, if you end up getting half the U.S. Navy entangled in the Strait of Hormuz, I mean, the Chinese are going to look at that as well and use that fear of action against Taiwan. So Andreas, let's try and sum up a little bit here about Iran and then move on to the macro backdrop and what's happening this week as well. Polymark, it seems quite divided on when we'll have a ceasefire, but mostly leaning towards a rather long conflict here before we have an actual ceasefire. That's also my feeling that this is more a case of the conflict fizzling out, going to a lower level of intensity and probably shifting focus a little bit to some policing action around the strait rather than an outright ceasefire.

17:15Mikkel Rosenvold:And then the question is, how much can be shipped through the strait or through other channels to gauge the real effect on the economy and how much can the U.S. economy do or the U.S. military do? So, Andreas, let's just focus a little bit and try and cut away all this Iran noise, which is obviously more than noise. We know that. But try and look at it through our data lenses as we usually do. So, we have the regime model here. And we are seeing some effects, seemingly, from the Iran war and inflation or what, Andreas? Yeah, without a doubt.

17:52Andreas Steno:I mean, the obvious impact is on energy. The less obvious impact is on anything energy related and the byproducts. So think of it this way. If the price of net gas goes up, the price of fertilizers goes up and the price of food ultimately goes up. We've already seen how the Trump administration has talked about a potential aid package to the farmers hit by higher fertilizer prices. So this is something, you know, there's a whole timeline of events here. Once you see an energy price spike that is slightly prolonged in nature, first you see it in energy prices. Then you see it in some of the inputs needed for the food chain, supply chain, et cetera.

18:36Andreas Steno:And therefore, one thing is the inflation report from March, which will obviously show some early signs of inflation in energy. But the next couple of quarters will be very interesting in terms of the byproducts and the ramifications for the broader supply chain. And I think it goes without doubt that we will have an inflationary impact from this crisis now, especially in those countries on the receiving end of the outflows of the Strait of Hormuz. I'm thinking about Japan here. I'm thinking about South Korea. I'm thinking about Eurosol in particular. and we know that we have a pretty big week upcoming from from central banks maybe you can actually show that that little calendar there michael yes because you know first of all if we start with the fed um you know no one expects them to do anything and you know given that paul is very close to getting to the finish line at one piece here uh why would he risk anything really on Wednesday.

19:41Andreas Steno:My main takeaway would just be that I think he's in a decent position to say, I mean, we don't know about the impact and how long this will last. So why do anything about it right now? I mean, that's probably what he will say, right? For the European Central Bank, it's a slightly more peculiar situation because we've had quite a few of the members of the committee, some of the more hawkish members out already saying that, I mean, We need to contain these price pressures. And as far as I can judge, I mean, the market is already chasing a right hike from the ECB in either June or July. For it to arrive in June, we'll probably already have to see the main messaging referring to that risk already this week at the very latest at the meeting in April.

20:38Andreas Steno:So the stakes are much higher for Christine Lagarde when she takes center stakes on Thursday because she needs to deal with questions around, do you actually think you should hike interest rates now, more or less? And my best guess is that she's not ready. So I think that she'll push back on what we see in the market. market, we almost have a couple of interest rate hikes priced in come the end of this year for the European Central Bank. While to compare, we have a little less than a rate cut priced in to the very latter part of this year for the Fed. I mean, the market kind of took out the probability of rate cuts from the Fed this year, but the lean is still in that direction, while the lean is certainly in the direction of rate hikes for the European Central Bank.

21:29And then we, of course, have Japan, which is already on a path towards higher interest rates. And we have a new PM in Japan.

21:41Andreas Steno:And even though it hasn't really been explicitly stated on a press conference, it's pretty clear that behind closed doors, she's telling Central Bank not to hike. while the central bank tries to at least lean in the direction of the more hawkish policy, but without really committing to the timeline. I think the best guess is that they'll move in April, not here in March. No one expects them to move on Friday morning, while it's pretty high certainty if you look at the forward pricing for the meeting later in April. And this is probably, trying to sum up these three central banks, this is probably the main question right now.