00:00Mark, the strait is still closed. The conversations, the negotiations continue.
00:05Fresh strikes by the U.S. What do you make of the market reaction so far?
00:11I'm struggling a little bit right now, Tom.
00:14Look, I think the way you've got to look at this is March, we traded the war.
00:17Since April, we traded the idea that the tail risk on the war was kind of ruled out
00:23because they're going for a ceasefire.
00:24And therefore, let's get fully invested in the AI kind of stock market boom again.
00:29I kind of actually, that narrative made sense to me.
00:32Both the trade in the war in March and trade in the more positive scenario in April
00:35until about a week ago.
00:36And the reason I'm now struggling with the fact that we're still trading the AI boom
00:40is that the tail risks of the war are back on the radar.
00:44While we seem to have completely discounted the idea of a major military escalation,
00:48which I'm already a bit suspicious of,
00:50we have another tail risk that the strait just doesn't reopen.
00:53It doesn't even matter if there's no military re-escalation.
00:55It's now almost three months.
00:57It'll be three months this week for the strait still being closed.
01:00And I think the economic damage continues to deepen.
01:03And yet we're continuing to ignore it.
01:05And so I think that disconnect between AI and the rest of the world has to close at some point.
01:09Now, it obviously can close positively if we do get some wonderful grand deal announced soon
01:14where the strait actually gets reopened, not just promised.
01:18But unless we get that scenario, I think they reconnect in a much more negative way.
01:23And that's why, having been fine with the narrative up until about the last week,
01:26I'm now turning more negative and more bearish and more gloomy about it all.
01:30Well, Mark, I was going to say, if you want to trade the AI trade, then you get exposure to
01:35equities.
01:35If you want to trade the macro, then you probably have to look at commodities and fixed income markets here.
01:42Yeah, I think the commodities one is a much more long-term theme.
01:48But unfortunately, some of the commodities are trading like AI meme stocks.
01:51So I think it's one of these classic cases where we've got to disconnect in timespans of how people want
01:56to trade this.
01:57I think in short-term trading dynamics, it is very dangerous in some of the commodity space.
02:00But I think things like copper have very much a structural story.
02:04They're overheated around that at the moment.
02:05The structural story is good.
02:06They become more like the AI trade than the infrastructure build-out trade.
02:10I think in fixed income, it made sense that we were in negative bonds the last few weeks.
02:15I think the story on bonds is churning a little bit more nuanced because growth issues are going to become
02:20a factor the longer the straight stays closed.
02:22And therefore, I think long-end yields are going to have certainly some kind of flattening pressure come in as
02:26well.
02:28OK, so flattening pressure on long-end.
02:30Do you think overall, Mark, the bond markets have priced this and gotten this kind of a clearer read on
02:36the risks around the Straits of Hormuz?
02:38I mean, is there potentially an opportunity for a bond rally if the market, or at least if the strait
02:46reopens?
02:49I think there is, short-term.
02:51But you've got to remember that, A, the inflationary impact to the war will linger, even if there's a resolution
02:56here,
02:56just because oil prices stayed high for so long and we're seeing a little bit of a change impact in
03:01inflation expectations.
03:02So, yeah, there'll be a short-term rally, but not long-term.
03:05And also because part of the bond set-off was around fiscal concerns.
03:08As for whether bonds have largely got this right,
03:10I'm always biased that bond traders get these things quicker than stock traders, but that's a separate issue.
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