00:00 Speaker A
We ought to talk about what’s going on today, um, in the markets, I think, and what the sort of Iran rolling reaction because that’s kind of what it feels like.
00:09 Speaker B
Yes.
00:09 Speaker A
Um, because we had the negative reaction yesterday morning in futures, stocks were recovered by the end of the day, but the rest of the world is now also having a second sort of second wave reaction. Korea was closed yesterday for a holiday. Today that market, which has done really well this year is slumping.
00:23 Speaker B
Mhm.
00:23 Speaker A
Um, and we talked a lot yesterday about what’s going to determine the market impact of this conflict is the duration of it.
00:33 Speaker A
But we didn’t really get into why that matters. And I know that’s something that you’ve been thinking about, we’ve been talking a little bit about because it’s about how long is oil going to remain at certain levels and then what kind of effect does that have in turn?
00:47 Speaker B
Yeah, um, so I was looking at something from Bespoke they put out last night, um, in their closer note about
00:53 Speaker B
I can think a couple of reasons why to just go to where you started with, like the overnight reaction has been more negative, right? We saw a bigger reaction in Sunday, Sunday night futures. Um, when we were meeting this morning at 6:00, what, futures were down 2%, now we’re down closer to 1%. Um, there’s the durational, oil, you know, fed part of it. But what is the hottest trade? What has been the hottest trade? XAI over the last year?
01:14 Speaker B
It has been European stocks. And what was most affected and would be likely to be more affected by an extended conflict in the Middle East, just as they were more affected by the outbreak of the Russia-Ukraine war is not just the European economy at large, but European energy inputs, which are then going to be inflationary for the balance of Europe. And if the big story, the big macro story, again, XUSAI buildout, which I think remains the most important macro story, but number two is what’s happening in the European economy. And so if that
01:39 Speaker B
all of a sudden is upset or back to a particular point in time when you have, you know, supply issues, you have a dual track economy again with Europe, I mean, 2023, it was like, I mean, it kind of still is, but 2023, it’s like this meme of, you know, Europe is just doing nothing while US and the rest of the world, you know, goes on their merry way. So I think
1:58 Speaker B
I think that that is this combination of the fundamental problem of an extended conflict in the Middle East, but also the style problem of being overweight Europe, being more excited about international equities instead of US equities, um, being more excited about international fixed income instead of US fixed income. All of those problems come out and that’s really where I think
2:16 Speaker B
um, all of these outbreaks, like to me, you know, there’s the details of, you know, the conflict itself, but what are the cracks within the financial not cracks, but like, what are the preferences? What are the preferences that have been that have been expressed that maybe we’re not like we didn’t realize how forcefully people were on one side of the of one side of the aisle versus the other, one side of the dial, let’s say within a portfolio. And now you have this major problem where
2:38 Speaker A
The vulnerabilities, the pain
2:39 Speaker B
, you know, this is bad for Europe specifically, and you weren’t really thinking about that as a portfolio manager. You were mostly just being like, it’s time to diversify into international equities. And now you got this problem.
2:51 Speaker A
Yeah. Well, and it’s like this reminder, oh, I mean, and just for people who are watching, like the LNG issue, it’s the Nat gas issue that is the most acute issue for Europe because this specifically, they get their natural gas largely through the Middle East, through the straight. And so if they’re not getting it and if prices are going up 44% a day, that’s going to be a big problem.
3:02 Speaker B
Yeah, up 44% yesterday.
3:06 Speaker A
I mean, maybe it’s mitigated to some small extent by the fact that we’re coming out of winter. We’re a little bit fortunate in that perhaps.
3:12 Speaker B
It’s almost the exact same time as the Russia almost to the day of the Russia-Ukraine conflict outbreak.
3:16 Speaker A
It’s true. It’s true. Although, you know, it’s interesting, crude oil prices themselves peaked a little bit after Russia invaded Ukraine and then came down from there.
3:25 Speaker B
Yeah.
3:25 Speaker A
So like they didn’t keep going up. Um, I haven’t looked at the natural gas chart going that far back to see what happened there.
