00:00I think the length of conflict just hasn't been helpful. It's really, in our view, has structurally raised the floor
00:04for bond deals.
00:06So the longer the Strait of Hormuz remains closed or impaired, the more global inflationary pressures build,
00:12the higher the risk of second round effects and also the longer it all takes to eventually normalise, right?
00:17Because bottlenecks, they don't just pause, they really compound.
00:20I like to think of it like you're in a traffic jam and the longer you're there, the bigger the
00:24tailback, the longer it takes to clear.
00:27And then if you look at crude oil prices, that's also a bit of a false comfort if you just
00:31look at them,
00:32because I think the real problem really is downstream.
00:35If you look at product prices of things that are refined from crude, like gasoline, jet fuel, diesel and distillates,
00:43the prices there are rising about one and a half to four times faster than oil itself.
00:48So you're really seeing that propagation downstream.
00:50And then finally, we can't not put AI into this as well.
00:53You have this classic supply shock that's meeting this dynamic in AI, the boom,
00:58where you could say that competition for these same resources are.
01:02And I think the demand there is also probably less price sensitive.
01:05So you put that all together and it is looking pretty fragile.
01:08Yes, it's quite a concoction.
01:10I mean, I guess if you're a central bank and we've heard from central banks that keep on saying,
01:13well, they don't really want to do anything on rates because you could see a situation where they have to
01:18hike
01:18and then cut very quickly if the economy is bad.
01:20I think that's certainly going to be the case for someone like ECB, where they're already pricing in three rate
01:25hikes.
01:26And perhaps in order to contain inflation expectations, they're going to have to follow through on those expectations.
01:31I think the Fed is an interesting case because at this juncture, they still have their easing bias.
01:37And they've telegraphed that they're going to have to take away that easing bias,
01:42could then have signaling a hawkish tilt before they even embark on rate hikes.
01:46So increasingly, as this shock persists, they are getting further behind the curve.
01:50We are seeing a tightening in financial conditions with markets pricing in those rate hikes.
01:55But the question is, when will the Fed potentially pivot to try to showcase
01:59that they're going to really try to curtail this inflationary pressures?
02:03Yeah.
Comments