Why War Isn’t Spooking Wall Street—Yet

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0:33Gulf leaders insist on crippling Iran's regime before ending the war. Plus, as fighting drags on, we'll look at why Wall Street isn't freaking out, at least not yet. So we see the shorter this conflict will be, the smaller the impact should be on the economy and the consumer. But as of now, we're actually having a stagnationary risk that is growing by the day without a quick de-escalation. And bad news for the struggling U.S. Postal Service as Amazon plans to take its business elsewhere. It's Wednesday, March 18th. I'm Luke Vargas for The Wall Street Journal, and here is the AM edition of What's News, the top headlines and business stories moving your world today.

1:17Gulf officials say they want the U.S. to keep up the fight against Iran in order to render it incapable of future attacks. a major pivot from a region that once courted Tehran. Speaking to the journal, Emirati and Qatari officials described Iran as the belligerent party, citing its attacks on infrastructure and civilian targets, while another senior Gulf official said the only acceptable outcome of the war would be an Iran so enfeebled that it could never imperil its neighbors again. Iranian leaders in recent days have said they'd only accept a ceasefire with the U.S. and Israel if the country received reparations and ironclad guarantees against future attacks.

1:58Meanwhile, Iran struck central Israel with missiles overnight, causing heavy damage and killing two people, raising the death toll in Israel since the start of the war to at least 14. And authorities in Iraq report that the U.S. embassy in Baghdad suffered a fresh attack without providing more details. The compound was hit by a missile over the weekend and targeted by rockets and drones Monday and Tuesday. Well, with the war dragging on, the effective closure of the Strait of Hormuz sending energy prices soaring, and inflation warnings now cropping up around the world, why are U.S. equity markets off just a few percentage points since before the fighting started?

2:36Emmanuel Coe is the head of European Equity Strategy at Barclays, and he joins me now to discuss why that is and whether that trend will continue. Emmanuel, Wall Street's reaction thus far has been much less negative compared to past conflicts in the Middle East, in spite of concerns that this all could become a protracted situation. Why is that? Hey, look, I think the market is pretty comfortable with the view that President Trump cannot afford to have a long-lasting shock and staccionary heat to the U.S. economy, right? And I think there's still a lot of trauma from investors having sold equities after liberation a year ago, which was a big mistake.

3:19So I think investors are hopeful of a swift resolution to this conflict on the view that Trump will ultimately do whatever is good for the US economy. And that includes triggering a swift policy response, pushing in particular the IEA to release all of this oil. I think this is part of the toolbox. But I guess what we can conclude from Trump communication in the last couple of days is that the oil price has touched its paint threshold. So So that was already seen a week ago when Trump was starting to talk about this de-escalation after all price went above$120. Obviously, it's not just about him tweeting about the end of the conflict.

3:58We need to see the other parties, whether it's Israel or Iran, willing to support this de-escalation effort. So I think this is where we have a bit of a question mark about whether the market is too complacent about the outcome of this conflict and whether you could get the situation too worse before it gets better. So I think what we said is that typically for a 30 % move up in oil, we had about 10 % to 15 % drop in equity market. And so far, the global equity market is down only 4%. So it's not the typical risk off we had in previous oil supply shocks. Yeah, and we've spoken on the show in recent days about some of the factors that have insulated the U.S.

4:37economy in particular from this crisis, more so than the rest of the world. It really helps, for instance, to be a net energy exporter. What else? Look, I think the U.S. markets, whether it's U.S. equity market or the U.S. dollar, have behaved as a safe haven again, right? And think about this in the context of the past six months, where the only game in town was sell America and rotation towards international market. What we saw in the last couple of weeks is the safety of the U.S. market prevailing again. And yes, I think the most hit markets are those which are the most energy sensitive. So we've seen Asian equities, European equities coming down quite a lot more than the US equity market, which is, again, less directly impacted by this kind of stagflationary fears.

5:23And even if you look at the rate market, we had a pretty hawkish repricing in European rates because now the market is looking for the ECB to hike rate as a consequence of this inflationary shock, while I think the market is still looking for one cut from the Fed this year. So the market is really seeing that this stagflationary shock will be much more acute in Europe than it will be for the U.S. The consumer outlook worsening in your view? I would say today compared to two weeks ago, yes, the consumer outlook is worsening because, you know, we have lower growth and higher inflation as a consequence of this oil shock.

5:58And again, if you look at gasoline prices as are going through the roof in the U.S. and some of the sentiment surveys are starting to be hit, right? So we see the shorter this conflict will be, the smaller the impact should be on the economy and the consumer. But as of now, we're actually having a stagflationary risk that is growing by the day without a quick de-escalation. Emmanuel, I want to talk about central banks. The Fed is making a rate announcement today. Could central banks here inadvertently dial up stagflation fears if it looks like their focus is returning back to fighting inflation instead of supporting growth?

6:32Yeah, absolutely. I think the key will be how central banks around the world respond to this development. And, you know, we have a busy week with the Fed. We have the ECB, the Bank of Finland as well, meeting on Thursday and the Bank of Japan as well. So all the main central banks around the world are going to have to tell us what they make of this oil shock and whether they are starting to shift away from what has been a pretty dovish communication so far. And whether they start to embrace what the market seems to be pricing, which is basically a higher rate in the case of Europe or less rate cut in the case of the US.

7:04Emmanuel Koh is the head of European equity strategy at Barclays. Emmanuel, thank you so much for being with us on What's News. Thank you.

7:13Well, as we mentioned there, the Fed's latest interest rate decision is due this afternoon. An announcement that Journal Chief Economics Correspondent Nick Timmero says comes as officials are contending yet again with a familiar foe, inflation. It has a feeling of deja vu for the Fed. First, it was the aftershocks of the pandemic. Then it was Russia's war in Ukraine. Last year, you had sweeping tariff policy changes. And now it's the war in the Middle East. What the war does is that it freezes up your ability to make big judgments. So if you thought the bigger problem before all of this was still in the labor market, you may look at the possible destruction of demand that comes from higher oil prices and say, well, now the labor market is going to be in an even more fragile position and we should focus on that.

8:03If, on the other hand, before this conflict, you were worried that inflation wasn't getting better, you also can look at that and say, geez, inflation was not getting better. It was actually getting a little bit worse. And now we're going to have a new round of potential supply problems. While the war is likely to reinforce the consensus around holding rates steady, Nick says there's less clarity about where policymakers should head after that. Policymakers around the table this week face a question that would have seemed unlikely a few months ago when they were cutting interest rates. And that question is no longer when will they next cut interest rates, but rather can they credibly suggest that the next move in interest rates is still more likely to be a move down than a move up?

8:48And there were some officials even before this who wanted to get rid of that guidance that suggested that the next move was more likely to be a cut. They wanted to go to a more neutral bias. And so that debate, I think, will continue. Today's rate announcement is due at 2 p.m. Eastern, followed by a press conference by Chair Jerome Powell. Coming up, the U.S. Postal Service risks losing business from its largest customer, Amazon. And Illinois Governor J.B. Pritzker dodges political embarrassment in a Senate primary. Those stories and more after the break.

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9:56Illinois. Illinois's Lieutenant Governor Juliana Stratton has won the state's Democratic Senate primary, putting her in poll position to replace retiring Senator Dick Durbin, who's held a seat since 1997. Tonight we showed what's possible when you listen to the people and give the people what they want. You got it! Journal-National political reporter John McCormick says the win is a boost for Stratton's boss, Governor J.D. Pritzker, as he eyes a potential White House run in 2028. The primary race tested Pritzker's political clout in a state where he has leveraged his wealth to dominate the Democratic Party.

10:35Stratton's victory comes as he's working to raise his national profile with the party's base nationally. Helping elect Stratton could prove useful to Pritzker should he run for the party's nomination after likely securing a third gubernatorial term for himself in November's election. The victory by Stratton could also help soothe some of the bad feelings about Pritzker among members of the Congressional Black Caucus, which had backed another candidate in the race and was critical of the governor's financial involvement backing Stratton. If elected, Stratton would become only the sixth black woman to serve in the U.S.

11:08Senate. Voice of America could soon be back on the air. A federal judge yesterday ordered that the Trump administration restart the government-run outlet after effectively shutting it down last year, putting hundreds of employees back to work. The ruling comes after the same judge last week ruled that Trump's pick to lead the U.S. Agency for Global Media, Carrie Lake, lacked the authority to slim down VOA's operations. We are exclusively reporting that Amazon plans to slash the number of packages it sends through the U.S. Postal Service by at least two-thirds as early as this fall. That's after Postmaster General David Steiner solicited bids from Amazon and others for its last-mile delivery service for the first time.

11:54But with Amazon's existing contract ending in October and the results of the bidding not released until the second quarter, we report that Amazon grew concerned it would have little time to adjust operations if its bid wasn't accepted. An Amazon spokesman said that the e-commerce retailer initially wanted to increase volumes with the Postal Service, where it's long been the largest customer, and was surprised by the new bidding process. The USPS delivered more than a billion Amazon packages last year, and the pullback comes as its finances are in dire straits. Here was Steiner testifying yesterday on Capitol Hill.

12:29At our current rate, we'll be out of cash in less than 12 months. So in about a year from now, the Postal Service would be unable to deliver the mail if we continue the status quo. Steiner is asking Congress to raise the Postal Service's debt limit and lift regulations on its ability to raise prices for stamps and other services.

12:53And finally, celebrations in Caracas. Venezuela last night beat out the heavily favored U.S. in the World Baseball Classic in Miami, sparking celebrations in cities with large Venezuelan populations from Santiago to Madrid. Following the win, Venezuela's interim president, Delce Rodriguez, declared today a national holiday, while Donald Trump took to Truth Social to suggest making the oil-rich nation the 51st state. And that's it for What's News for this Wednesday morning. Today's show was produced by Hattie Moyer. Our supervising producer is Daniel Bach. And I'm Luke Vargas for The Wall Street Journal.

13:33We will be back tonight with a new show. Until then, thanks for listening.

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