Markets and the Middle East

Katie Martin (0:09)

The news from the Middle East is relentlessly grim and getting worse, and yet markets are more or less taking it in their stride. Stocks are holding on okay, certainly not crashing. Oil is up a bit, but not dramatically, so we're not pricing in a blockage in supplies from the region. Gold, a classic haven, is going nowhere, but to be fair, it has had an amazing run recently. And the dollar is up a bit. And if anything, bonds are weakening. So pretty much business as usual. Today on the show, we're asking, do investors not read the news? And if they do, why are they so chill? This is Unhedged, the Markets and Finance podcast from the Financial Times and Pushkin. I'm Katie Martin, a markets columnist here at the FT in an increasingly chilly London. And I'm joined down the line from New York by one of the FT's premium mumblers, which could be fun for a podcast, Nicholas McGaugh. Nick, how are you doing?

Nick Megaw (1:08)

I'm all right.

Katie Martin (1:09)

You're not allowed to mumble.

Nick Megaw (1:10)

I'm just going to try and get through the whole thing without even opening my mouth.

Katie Martin (1:16)

Now listen, so are investors more cheerful than they sort of generally let on? Are they the world's biggest optimists here? What's going on?

Nick Megaw (1:24)

They're not in person. If you actually talk to them, people, one, are obviously concerned about the state of the world. They are human-ish.

Katie Martin (1:33)

Humanoid.

Nick Megaw (1:34)

But also, you get a lot of talk about how they're concerned that all of this could have massive ramifications for markets. And every big asset manager is hiring former NATO generals, and every conference I've been to in the last 12 months is full of foreign ministers and political advisors trying to teach people what's going to happen.

Katie Martin (1:54)

People who understand foreign policy.

Nick Megaw (1:56)

Yeah, but then they're just not trading on any of it.

Katie Martin (1:58)

So the line that fund managers have been coming up to me with for the whole of this year, the whole past 12 months really is this situation is bad. And what we don't want is for it to escalate. And what we don't want is for Iran to get directly involved. And that now has obviously happened. But even after that, like we were saying at the top, like there is a market reaction. It's just not huge. So what do we think is the primary reason for that? I mean, part of it is it doesn't matter how many former NATO foreign policy wonks you have advising you. We just don't know what's going on, right?

Nick Megaw (2:33)

Yeah, there's a certain amount of just uncertainty. And there's like a psychological point, right, of you don't want to be the first person to sell. Like if the entire market crashes because of World War III, you know, you dust yourself off and go again. But if you sell because you're concerned, and then the market rallies, you lose your job. So if no one else is panicking, you just kind of feel uncomfortable, but have to stick with it.

Katie Martin (3:03)

I think from my conversations with people in the market, the thing that would make them not take this more seriously, but take this more seriously as a market moving event is the oil price, right? And even there, we're under $76 a barrel on Brent. We're at the highest since, ooh, I don't know, last week sometime. Like this is, you know, there has been a pickup in prices, but it's just not that dramatic. You compare that to what happened with Russia's full-scale invasion of Ukraine two and a bit years ago, and we're just not in the same territory, right?

Nick Megaw (3:34)

Yeah, although even then, that had a big impact for a couple of weeks and then came back down. Like oil now is cheaper than it was at the end of 2021, which feels wrong, considering there's two massive conflicts going on. The longer term comparison that people bring up a lot is they talk about like the 70s and oil price shocks can have a massive impact on the economy and that's what would really hurt the US market. It's like if you start damaging the US economy, we've had a kind of fragile recovery. But the difference with the 70s is the largest oil producer in the world is the USA. So like it's just way better insulated from a shock in the Middle East than it used to be.

Katie Martin (4:14)

So there's the US bit is one half of this and I guess another is that as I understand it, and I'm not an oil market expert by any stretch of the imagination, but Iran is a much smaller producer than Russia. So if you can effectively take Russia out of the international oil market, then you can afford to lose Iran if it really comes to it. And as you say, you know, America is already a massive producer of fossil fuels and there's lots of, again, not an expert in the oil market, but again, as I understand it, there's lots of like shale pipes that have been dug into the ground and sealed off that you could unseal pretty quickly and get them pumping if you really needed to and if you really needed to bring up supply. So yeah, it's just not the same equation at all, right?