00:00Global stocks are lower and crude is spiking higher as an escalation in the Middle East conflict hits markets
00:05prompting investors to trim risk exposure. Joining us now is Deepak Mera, Chief Economist at Commercial Bank of Dubai.
00:12Well, in the region, you know, I was just talking about the local bourses being closed today and tomorrow.
00:19We had the Tadawal down around 2% yesterday. U.S. futures pointed to open up in the red.
00:24Would you say that the scale of the reaction so far is perhaps pretty muted in the context of how
00:33many countries are actually involved in this regional conflict now?
00:38Good morning, Jamana. Indeed, it is. And the reason for this muted reaction this morning is, in fact, the fact
00:47that the markets have already baked in a lot of risk premium.
00:52So if you see oil, Brent is up about 25% in the last six weeks, including the previous week.
01:01And gold is up 13% just in February. So the markets had already baked in a lot of risk
01:07premium.
01:08And that is why this morning you don't see such a panic in the market.
01:13So we did see oil open 13% higher, but it's now trading much, you know, it has eased a
01:20bit from there, up about 7%.
01:22Even gold has eased. Silver is trading flat from where it was last week.
01:28We're seeing very muted reaction in U.S. Treasury yields.
01:33There are just a few basis points because clearly if oil prices go up, there is an inflationary transmission into
01:41the economy.
01:41But we don't see that, at least not right now, in any of the asset classes.
01:49Even equity futures were down, I think, one and a half percent at some stage.
01:53S&P 500 now down about 0.75, 0.8.
01:58Yes. So muted reaction so far.
02:03Yeah. And Deepak, you know, when you talk about the price action in oil today, yes, initially it opened up
02:0813% higher.
02:09Now we're about 6% higher.
02:11Do you think about the knock-on effects that that could have to the global economy and the potential resurgence
02:17of inflationary pressures?
02:20Yes, Jumana, I think so.
02:22That's the key transmission, you know, into the global economy.
02:27But over there, let's keep in mind that the oil importers, essentially emerging markets, China, India, European Union,
02:35they are most exposed, more exposed than, let's say, U.S. is, because U.S., as we know, has become
02:42almost energy independent,
02:46whereas the other regions will definitely face bigger pressures.
02:52But yes, with oil prices going up, there will be inflationary pressures globally, including in the U.S.
02:59And if this conflict prolongs, we could have a re-acceleration of inflation in the U.S.
03:08That then changes the dynamics for the rate cut narrative.
03:15Okay. So then what wins out with 10 U.S. Treasuries?
03:18Today, they are acting like a traditional safe haven tool.
03:21We're trading through 4%, below 4%, I should say.
03:25And that is because of, you know, concerns about the region.
03:30But at the same time, you talk about the potential knock-on effects to inflation.
03:35Which one wins out as far as yields are concerned?
03:38Yes, I think there are two scenarios which are likely to play out, and that will decide what happens.
03:44One is if we have a quick resolution, some sort of a settlement of this conflict,
03:49then we go back to normal times, and the yields go back, 10-year yields go back to where they
03:54were.
03:55But let's say this prolongs for long.
03:58The issue would be, one, inflationary pressures.
04:02Number two, the term premium will build in into the longer-dated Treasuries.
04:07There will be a fiscal impact in the U.S. of this conflict.
04:13And if that happens, then the 10-year Treasury yields could be heading much higher
04:19due to all these factors, inflationary, term premium, fiscal, and so on.
04:24And that would then translate to a risk of environment in equities and in general.
04:32So, yeah, we have to see how this plays out, which of the two scenarios plays out.
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