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The Macro Brief – Rising risks
1.2k Plays29 days ago
Kim Fustier, Head of European Oil & Gas Research, and Murat Ulgen, Global Head of Emerging Markets, discuss how the conflict between Iran and Israel has introduced yet more uncertainty into financial markets.
Disclaimer: https://www.research.hsbc.com/R/101/nwbqSGc
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Transcript
Introduction to HSBC Global Viewpoint
00:00:01
Speaker
Welcome to HSBC Global Viewpoint, the podcast series that brings together business leaders and industry experts to explore the latest global insights, trends, and opportunities.
00:00:13
Speaker
Make sure you're subscribed to stay up to date with new episodes. Thanks for listening, and now onto today's show.
Podcast Release and Disclosures
00:00:24
Speaker
This podcast was recorded for publication on the 19th of June 2025 by HSBC Global Investment Research. All the disclosures and disclaimers associated with it must be viewed on the link attached to media player.
00:00:34
Speaker
And don't forget to like and subscribe to The Macrobrief wherever you get your podcasts.
Analysis of Israel-Iran Conflict's Economic Impact
00:00:48
Speaker
Hello, I'm PS Butler in London and this is The Macrobrief. where we look at the issues driving financial markets across the globe. Now the intensifying conflict between Israel and Iran is dominating the headlines, and the events have introduced yet more uncertainty into the global economy.
00:01:04
Speaker
So today we're looking at the potential implications for markets. To do that, we have Kim Fustier, Head of European Oil and Gas Research, here in the studio. And joining us on the line is Murat Olgun, Global Head of Emerging Markets Research.
00:01:17
Speaker
Kim and Murad, great to have you here. Great to be here. Thanks, Piers. So we obviously can't offer views on the direction of the Middle East conflict between Israel and Iran, but we can firstly take stock of what's happened in markets and perhaps give some sense of the implications if there is no quick resolution.
00:01:35
Speaker
So, Kim, if I can turn to you first.
Impact of Middle East Conflict on Oil Prices
00:01:38
Speaker
Where are we on the oil price? In fact, the last time you were on the podcast, I recall we were discussing you lowering your forecast based on the anticipation of OPEC Plus plans to increase production. Is that still the case? And to what extent can that...
00:01:52
Speaker
increase, offset ah perhaps the impacts of any production cutbacks in Iran. Sure, thanks Piers. So yeah, oil prices have jumped by something like $10 a barrel, um at least at the time of recording this.
00:02:05
Speaker
um I think it's worth just recalling that the last two times um There was a conflict between Israel and Iran last year and in April and October. Oil prices jumped by a similar amount, about $8.
00:02:16
Speaker
But the geopolitical risk premium did not stick because oil supplies were not affected.
Significance of the Strait of Hormuz
00:02:21
Speaker
And so what we've seen is so far some regional energy infrastructure being hit. There was a refinery being hit, a fuel depot, even a gas field.
00:02:29
Speaker
But crucially, no oil fields and no oil export terminals. So if the conflict does not escalate from here and oil supplies are not affected, then we would expect the current geopolitical risk premium to eventually unwind.
00:02:43
Speaker
ah But then conversely, if supplies are disrupted, whether that's production or flows, then we we should expect some further oil price upside from current levels. Iran is a very large oil producer. it Give us ah a sense of scale. Yeah, it's it's about 4.5%.
00:03:00
Speaker
Of world production? the world Yeah, world oil production. ah Exports about 2%, so barrels a day, mostly to China. And if that were to be disrupted, on paper, OPEC Plus should be able to absorb that ah through its spare capacity, which is currently about 6 million barrels a day. It is slowly going down as they're increasing production, but right now it's very comfortable levels, about 6 million barrels a day.
00:03:24
Speaker
ah But in that scenario, because that spare capacity cushion would diminish, you would still expect prices to to go up. How long in practical terms, it they can't just switch on this extra capacity, can It takes a while.
00:03:36
Speaker
In theory, should not take that long. Spare capacity is defined as capacity you could turn on within 30 days. In some cases, it could take a little longer, but roughly think about a month or two.
00:03:47
Speaker
So we had a webcast earlier this week um for clients to discuss the Middle East conflict situation, and I was struck by how many questions there were on the Straits of Hormuz.
00:03:59
Speaker
What's their significance? It's a very important artery for oil flows. and Around 18% of world oil transits through Hormuz, and it's all outbound to export markets, right? So about 80% of that oil goes to China.
00:04:14
Speaker
And it's just true it's very narrow. yeah you From our listeners' perspective, where is the Strait of Hormuz? It's basically the strait that closes the the Persian Gulf. Right. And it is actually remarkably narrow, it? It very narrow at its narrowest point. And it has a lot of traffic going through it. It does, yes. In in fact, there was a tanker collision earlier this week, which it was just completely unrelated to the um to the current conflict, but just due to navigational issues, just goes to show it is ah it is a choke point. It is very narrow.
00:04:43
Speaker
So 18% of world oil transits through there, and its oil being exported out of Saudi, so multiple countries, Saudi, Iraq, Kuwait, the UAE, and of course Iran itself.
00:04:55
Speaker
Now, it's worth bearing in mind a closure has never happened before in the 80s or in the first Gulf War. um But let's say if trade was disrupted for whatever reason, there would not be enough spare capacity to redirect that trade elsewhere.
00:05:10
Speaker
um The most spare capacity you have is through the ah Saudi East-West pipeline that crosses the country and goes to the Red Sea, right which would provide another export route.
00:05:22
Speaker
It's not fully utilized today, but it it would only be able to deal with a portion of just the Saudi export volumes, but not the rest of it. um And then for gas markets, Hormuz is even larger. It's a quarter of global LNG trade. wow And we've already seen gas prices go up on the back of the current events.
00:05:40
Speaker
So Murat, just listening to Kim, there's a lot of uncertainty, but is it fair to say that there was already a quite significant uncertainty premium factored into markets based on everything else that had been going on in the markets?
Market Reactions to Geopolitical Tensions
00:05:55
Speaker
But does that account for the fairly muted reaction in the in the markets up till now? Thanks, Piers. I mean, indeed, in the first few days of you know, of the after the escalation of geopolitical events, we can say market reaction was fairly muted. Although I see that a bit of a risk on behavior is picking up over the last few days as investors are trying to understand how this situation will unfold, but it will intensify, escalate, et cetera.
00:06:21
Speaker
We've seen, i mean, to Kim's point, a further upward pressure on oil prices, maybe geopolitical risk premium. We've seen dollar actually reversing some of its losses. um Some people call it a short squeeze.
00:06:33
Speaker
There has been bit of a demand for U.S. treasuries where, you know, yields have fallen, prices have gone up a bit. ah But overall, I think you're right. I think you can say that there are already a lot of other things going on in the background for the investment environment. And obviously, the most important one is the trade tension tariffs.
00:06:53
Speaker
And then we had bond market volatility over the past few months. And tariffs may come back to the agenda again because ah the reciprocal tariffs have been on hold since early April for three months, the so-called truce period. And that is ending in early July, although further delays are always possible.
00:07:10
Speaker
We don't know. But the attention might turn back to tariffs. There are so many things going on. You're absolutely right. Already a lot of risk premiums. But now markets are trying to make sense, you know, ah what is going to happen with the geopolitical ah environment and whether actually that will kind of overwrite or ah become more important.
00:07:31
Speaker
And the tariff issues will affect the back burner again throughout the summer months. So lots going on. In the beginning, a bit of a mutated reaction. But over the past few days, we are sensing some risk of behavior as there are some worries about what's you know what's what's happening in the Middle East.
00:07:47
Speaker
Just listening to your response, is time a key variable, and in particular in the context of inflation? After all, there was a general sort of sense, I guess, that the specter of inflation had been beaten into submission.
00:08:01
Speaker
How long um does does this situation have to prevail before markets start worry that inflation could become a negative factor again? Yeah, I mean, it all hinges on oil prices.
00:08:12
Speaker
And, you know, obviously, um as Kim has mentioned, you know, we we haven't changed our baseline scenario, but clearly there are now risks. And, you know, global economy is impacted by oil prices pretty rapidly, especially emerging markets. They have a much higher share of energy in their consumption basket ah compared to the developed world. And to your point, inflation, well, I wouldn't say completely beaten, but definitely has been in the moving in the right direction.
00:08:38
Speaker
Center banks, found the room to cut rates. I mean, even today we had Swiss National Bank, Norgis, Philippines cutting interest rates. It's been ECB. It's been New Zealand, ah India, South Africa, Korea.
00:08:53
Speaker
um I mean, left, right and center. There have been a lot of monetary easing going on. We are in a global easing cycle. Yes, the Fed is on hold, but we expect them to resume rate cuts later in the year. So it's a global easing cycle on the back of moderating inflation and pressures.
00:09:07
Speaker
It has provided the room. for interest rates to come down the policy rates. But now we're faced with an upside risk here. You know, the if the oil price increase is persisting, then obviously it's going to impact headline inflation, maybe less so core inflation.
00:09:22
Speaker
But I think the center banks will take note of it and, you know, they may have to reevaluate and reassess. Is there danger, ah sort of wearing your strategist hat, that the markets are so focused on what's going on in the Middle East that ah they don't pay attention to other developments? i ask this a loaded question because I ask it in the context of ah signs that the economic data out of the US is beginning to deteriorate.
00:09:46
Speaker
Certainly. i mean, Piers, we live in such a complicated investment environment and the themes impacting markets are changing. you know, weak, if not on a daily basis.
00:09:57
Speaker
We've been through a lot over the you know last six months since the beginning of the year. And many of them, they still are lurking in the background. And as I mentioned, the tariff trade issue might come back to the fore again.
00:10:10
Speaker
i mean, yesterday we had the FOMC meeting and the Fed They still want to wait and see, it you know, how the tariff situation is going to impact the economy, both employment and inflation.
00:10:22
Speaker
And they've been pointing to upside risk to unemployment, meaning downside risk to growth and upside risk to inflation. you're You're absolutely right. I mean, that is another major uncertainty in the background. Now, further compound of what's happening in the Middle East.
00:10:35
Speaker
I mean, you're right that you know we we
Resilience of Emerging Markets
00:10:37
Speaker
have to deal with a lot of issues at the same time, and that makes the investment environment very uncertain and very, very complex.
00:10:46
Speaker
Now, I'm not going to say how many years you've been covering emerging markets, but long enough to have seen many, many cycles. ah Traditionally, emerging markets in times of crisis have tended to accentuate the reaction exhibited by developed markets.
00:10:59
Speaker
Is it fair to say that today some of them are actually much more resilient? You can say that. And as a matter of fact, upon these geopolitical events, ah there was almost like a consensus in the market that this is a pretty good environment for emerging markets. And right after the Liberation Day, we've actually come up with a call of you know being quite positive and constructive on emerging market local currency denominated assets, local debt and equities. Why?
00:11:27
Speaker
Well, first of all, US s dollar is no more headwind. If anything, it's a tailwind, or at least it has been so far. Then you have emerging markets offering you pretty significant real and nominal risk premium interest rate buffer.
00:11:41
Speaker
And now emerging market central banks, they have the room to cut them, which helps local that which helps local equities. It has been an. You know an asset class with very little investment over the past few years since COVID, it was predominantly investment in U.S. financial markets and emerging markets have actually seen a lot of outflows. So you can argue even technical positioning is actually, you know, ah pretty attractive.
00:12:04
Speaker
And the valuations, emerging market assets, you know, be it debt or equities, they present pretty attractive, compelling valuations. So because all these reasons, we thought emerging markets are in the right place.
00:12:15
Speaker
And a lot of the fiscal issues you see elsewhere around the world, you know, of the bond market volatility, be it in the US or in Japan earlier or in the UK, lot of emerging markets have been through that and the fiscal policy was moving in the right direction. Even in countries like Brazil, where we had a risk premium late last year, recently all the news flow on the fiscal side ah was actually quite encouraging, meaning that the fiscal issues or the risk premium ah has been gravitating more towards the developed world. So everything together peers.
00:12:47
Speaker
You're right. I mean, there is a case you can make that emerging markets are more resilient, generally running good macroeconomic policies, generally offering pretty compelling risk premium, risk premium buffer, ah given the uncertainty in the investment backdrop. And ah we've been quite constructive. We still are. But obviously, we need to watch what's happening with the geopolitical risk very closely.
00:13:09
Speaker
I don't want to get too technical, but your team did an interesting analysis of the Treasury market going back to 1963. What was the takeaway that oil prices matter, but so does context?
00:13:21
Speaker
100%. generally speaking, U.S. Treasuries trade in a relatively tight range on the back of geopolitical developments. Unless it's a major oil price shock, then the rates are trending more upwards. But but as you say, could the context matters.
00:13:36
Speaker
I mean, the last time we saw this, ah was actually in ah early 2022, the Russia-Ukraine war, where actually treasuries tended to go, the yields tended to go higher in the aftermath, but the context was high inflation or spiking inflation after COVID and the commencement of the Federal Reserve's rate hiking, monetary tightening cycle. So the context matters.
00:14:00
Speaker
But if it's not a major oil price shock, we tend to treat them more probably in ranges. That kind of is valid for equities as well. Alistair Pinda, our global and EM equity strategist, he did a similar analysis um and he was mentioning the webcast that you referred to that generally equity markets tend to fade the geopolitical risk premium.
00:14:22
Speaker
Again, you know, of long history, we've seen S&P and other U.S. markets um recovering some of the immediate losses in the following ah three months. post major geopolitical events, but if it's like a major oil price shock, then the behavior is different. Then perhaps you can argue ah that equities could be a bit weaker and rates could be trending higher if the geopolitical event is accompanied by a major oil price shock that is persisting.
00:14:47
Speaker
Okay, we're nearly out of time here, but Kim, can I come back to you?
OPEC's Role in Stabilizing Oil Prices
00:14:50
Speaker
yeah Obviously, you'll be watching the oil price, we all will, ah but what other data are you keeping your eye on? um It's hard to get away from the oil price. And so with that in mind, I would watch OPEC strategy and what they do.
00:15:03
Speaker
How often do you get data on their production? A few times a month. we get We get it from different data sources. We also watch what they're going to say and announce in terms of the future production increases. So maybe the context is that OPEC strategy was one of two major developments before last Friday that was impacting oil prices together with, of course, U.S. tariffs.
00:15:22
Speaker
So they've started to unwind their production cuts, which had been in place since late 2022. They surprised the market earlier this year when they announced accelerated output hikes, and that put downward pressure on oil prices. But now with prices back above $75 and risk of disruption, OPEC will likely feel even more comfortable pushing on with those accelerated supply hikes, right?
00:15:46
Speaker
And that could help to cool the market and to lower oil prices. So we're watching that. And their next meeting is in two weeks. So stay tuned. Well, I'm also watching China from a couple of angles. Oh, yes, of course. So um so they they can be quite nimble in terms of buying oil for their strategic reserves. So until very recently, oil was still in the 60s. So they they might still be purchasing oil for for to fill up their strategic reserves. so But more kind of fundamentally, China is approaching peak oil demand. And on Tuesday, the IAEA said that China's oil demand will peak in two years time in 2027.
00:16:21
Speaker
And if they're right about that, it could be deflationary for oil prices. Very interesting. And Murat, do we expect much from policymakers and central banks
Central Bank Actions and Interest Rates
00:16:30
Speaker
over the summer? Was it Christine Lagarde who basically implied that it was time to go to the beach?
00:16:35
Speaker
Well, Piers, that is our expectation as well. Relatively quite summer. Well, hopefully not famous last words. Yeah, I think, we you know, we believe European Centre Bank is done.
00:16:46
Speaker
ah The Fed will probably pick up or resume rate cuts in September. We've got September cut and December cut Bank of England. We have ah the next cut in August.
00:16:58
Speaker
But up until then, generally quite also across emerging market centre banking universe, ah rates are biased to go lower. ah If not, you know, maybe sideways.
00:17:10
Speaker
I mean, we had one major center bank who has been in a hiking cycle bucking the trend. That's Brazil with the rate hike yesterday. We think they'll be on hold for a while and potential next move is down.
00:17:22
Speaker
So yes, overall, we're hoping for a quiet summer. We expect center banks being rode the on hold across the developed world universe. Well, least the major ones, ah Bank of Finland cutting the next one in August and emerging market center bank being biased lower or sideways.
00:17:39
Speaker
ah But again, you know, there's so many layers of complexity and uncertainty. We need to be very vigilant. But currently, that's the beef. I can say with some certainty that we'll be having you back on the podcast before too long.
00:17:51
Speaker
But for now, thank you very much for joining us, Kim and Murat. Thank you. Thank you, Piers.
00:18:00
Speaker
That was Kim Fustier and Murat Olgun on market reactions to the Iran and Israel conflict. If you're an HHSBC client and want know more, then take a look at our report published earlier this week where our global economists and strategists tackle key questions about the escalation.
00:18:15
Speaker
You can also keep up to date with our latest research by downloading our app from Apple's App Store or Google Play. If you have any questions or comments, then please email us at askresearch at hsbc.com.
00:18:30
Speaker
And don't forget to like and subscribe to The Macrobrief wherever you get your podcast.
00:18:38
Speaker
So that's a wrap. Thanks very much for listening, and we'll be back again next week.
00:19:06
Speaker
Thank you for joining us at HSBC Global Viewpoint. We hope you enjoyed the discussion. Make sure you're subscribed to stay up to date with new episodes.