The Stock Market’s ‘Curious Exuberance’ Despite the Iran War

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It's a time of intense global uncertainty.

The US and Israeli militaries have carried out

more than 1,000 strikes in the last three days.

Iran vowing to retaliate, unleashing fears

the energy crisis is dangerously spiraling.

Retail gasoline prices have surged by more than a dollar,

a gallon.

A man armed with guns and knives stormed the lobby

outside the ballroom at the Washington Hilton,

where the annual White House Correspondence

dinner was being held.

Typically, headlines like these panic investors.

But if you look at the stock market right now,

it tells a different story.

It's almost as if nothing has happened in the past two months

when you look at how markets lumped

and then now making record highs.

That's Bloomberg's Winnie Sue, who covers equities markets

from Hong Kong.

So it seems like, you know, right now they're pricing in

that the worst is over and that the peak of uncertainty

is over as well.

Central banks and economists have cautioned that the worst

actually may be yet to come.

But even if a ceasefire holds and the straight of her moves

reopens to global oil traffic,

they're a longer term economic risks for companies

and consumers.

But investors have gotten good at shrugging off these warnings.

When I went for coffee the other day with a hedge fund trader,

he looked at stock markets and said there is a very curious

exuberance that's incredibly hard to explain.

And it's true.

Bloomberg's Ruth Carson, who covers the bond market

and currencies from Singapore.

Now, is there going to be a tipping point when some lead

people wake up to the reality that a war hasn't gone away?

That oil is still disrupted.

That soon we're going to see this coming out

in the economic data.

I'm Sarah Holder and this is the big tick from Bloomberg News.

Today on the show, so far markets have been brushing off

the Iran War.

What explains today's investor confidence?

And what could shake it?

MUSIC

Bloomberg's Ruth Carson and Winnie Sue say there are

a handful of reasons why the markets are so far more resilient

than expected.

This obviously the focus on fundamentals people are focusing

on AI and its disruption and all that.

But when you look at where we are,

week nine, week 10, week 11 into the Iran War,

nothing's really changed here.

So I was having a chat with an analyst

who was holidaying in Australia.

And he's been following markets unable to switch off

because of the war.

And he basically set this people in general,

not just investors, are becoming ever more

disensitized to both good news and bad.

So think about it, right?

Where multi weeks now into the war, markets are signalling

that, you know what, by stocks, this is fantastic.

And bond markets are going, no, it's really not,

but the stuck between a rock and a heart

plays and not really moving, went in,

which does not make sense in theory.

They should be gaining a lot more than stocks

for that safety bid that we at disconnect

is showing how people have become desensitized to the war.

Right, I mean, Winnie, we've been seeing this pattern

over the past few weeks where the Trump administration escalates

or looks like it's about to escalate attacks in Iran,

markets dip, then the Trump administration pivots

or softens at stance and investors who bought that dip

stand to win when the market inevitably bounces back.

It's been called the taco trade.

Trump always chickens out.

How is that cycle, that assumption,

booing the markets right now and influencing investors?

Investors are pretty much just betting on the Trump foot

to come through.

And as we talked about how it has shown up

last year during Liberation Day,

and also what we saw back in the Russia Ukraine more.

So with investors betting on that to happen,

it actually makes it more difficult for them

to bet towards one side heavily

just because the risk of being caught wrong footed.

And hence we're seeing that trading volume remains very thin

because of the lack of conviction.

And when the investor put it this way, actually,

that markets are right now in this no war, no cheese zone.

So right in between, that means there's no durable macro

conviction at the point.

And we're only looking at some technical relief

whenever escalation does not worsen.

And what that means for markets is that

money still has to go somewhere and somewhere credible.

That's where we're seeing right now.

It's flowing into the ones that have good fundamentals,

which in this case are areas that are showing earnings strength

as well as adding on the AIC.

Well, let's talk a little bit more about AI

because excitement and skittishness

around this technology has pushed the markets up and down

over the past few months, even before the Iran War, of course.

What role have AI and tech stocks played

in sustaining this recent rally?

That's a very interesting question

because at the beginning of the war,

actually they were the ones that got hit the worst

because they were the ones that have surged

the most into the war.

And also investors were talking about

because of these expectation or inflation

that it's going to hurt growth stocks more.

In fact, these data centers rely heavily on energy.

So the higher energy prices actually

are supposed to be weighing on tech stocks,

even more when it comes to the AI theme.

However, recently what we are seeing

is that the earnings really prove

that the demand itself remains very strong.

And we saw that in kip makers like SK Heinex,

like TSMC posting massive profit growth.

And that goes to show how it is actually quite insulated

so far just because the demand is so strong.

And you've also been tracking earnings,

the vast majority of S&P companies

that have already reported their first quarter results

have beaten analyst earnings expectations.

So what does that say about how businesses

are weathering the uncertainty?

Yeah, actually surprisingly,

we're seeing earnings season having pretty robust

so far, showing you that the run risks

so far have been quite contained.

But it's worth noting that it's just first quarter earnings.

And that includes two months

that was not impacted by the war.

So only one month into the round war.

And obviously there's also kind of some delayed effect as well.

So while some investors may see this

as very positive signs,

we actually should be expecting the impact

to come further down the road.

That can make a more painful Q2

that might not even show up in second quarter earnings,

but somewhere down the road,

maybe showing up third quarter or fourth quarter.

Because so far with this oil cushion

that we're seeing actually that some of the economies

have been releasing these oil supplies

and companies have all these extra oversupply as well.

So these are helping companies to weather the impact so far.

So Ruth, when you just mentioned this idea

of an oil cushion that countries all over the world

have tapped their emergency reserves

to help mitigate the impact of price spikes,

that's especially true in Asia,

which is the final destination

for the vast majority of the oil

that normally moves through the straight-of-form moves.

How important is that oil cushion

and how long can it last?

So context is incredibly important.

We were talking about cushion, for instance, right?

The cushion buys this time not safety.

So even if prices are, let's call it $100 per barrel today,

if suddenly the world wakes up

or thinks that investors think that markets

are mispricing this risk,

and it suddenly turbocharges higher to 120, 130,

then we're talking about a big shock and a sudden one.

There are more and more people

across the entire spectrum of markets

who are sort of sounding the alarm here

to longer this goes on.

The more desensitized people are too, in markets,

the more that breeds complacency.

But no, when you look at the volatility

and when you look at how long this takes,

the cushion buys time not actual safety, right?

The risks are very much there still

for elevated oil prices,

and bond markets are kind of signaling that.

You said this cushion buys time, but not safety.

How much time does it buy?

How long is the piece of string?

If the war ends tomorrow, that's fantastic.

You know, use of the time.

But if we're talking about if the oil crisis,

the energy crisis continues,

we're in that a three months, six months,

the longer the obstruction, the longer the choke hold,

supply losses suddenly deep and beyond

what reserves can be replaced.

That's critical.

Coming up, why there's less exuberance in the bond market

and the signals investors will be watching for

from central banks.

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The stock market has largely barreled ahead

despite the headlines of the past couple months,

same with commodities and bets on emerging markets.

But Bloomberg's Ruth Carson and Winnie Sue say

there is one area that's flashing caution.

Bonds. Bonds have just flatlined.

Ruth says that's especially concerning

because the bond market is considered

to be a strong predictor of downturns and recessions.

So it shows that bond investors are really scratching

their heads that curious conundrum.

Why on earth is there such exuberance in markets

when clearly there are two major risks here?

One, inflation.

So that's bad for bonds.

But number two, which is the harder risk to quantify right now,

an actual, real, huge, whacking ball

to the global economic growth picture.

And when bond investors grapple with these two,

do I sell bonds because it rotates the value of what I hold

because of inflation?

Or do I buy the heck out of bonds?

Because it'll give me safety right now when I know

in two years or five years or 10 years' time,

the world will still be paying the price of this disruption.

What do you do?

Until bonds move one way or another,

if bonds sell off from here a lot more,

it means hey, everything is well,

stock investors are right.

But if you suddenly see a big drop in yields, watch out.

Well, this week is a huge week for rate decisions, right Ruth?

The US Fed, Central Banks in Japan, the UK, Canada,

they're all making rate decisions.

What might that mean for the bond market?

What are they looking out for?

So everyone that I've spoken with

and also swaps markets indicate

that all the big central banks

are going to keep their rates on hold.

So it's kind of boring in that aspect.

So what's really perking their interests right now

is how they signal the risks from the Iran War.

Now, if they turn around and they say,

we need to fight this inflation hit.

We are going to at some point have to raise interest rates

or lean that way to tighten monetary policy,

then that is a signal to sell bonds

at least in the short term.

But if central banks turn around and they say,

we're actually worried, sure there's an inflation shock,

but we do worry about our economy.

Our supply only goes that far.

We're running out of oil, okay?

We got to figure out how to bolster our economy.

Then, then you will see bonds getting bored.

And that's a clear signal.

Remember, bonds always tend to move way, way faster than equities.

In terms of its harbinger status of, you know,

your doom and gloom.

Even if this war ends tomorrow,

last week the Washington Post reported

that the Pentagon had informed Congress

that it could take six months from the end of the war

to fully clear the straight-of-war moves from mines.

I'm wondering what that kind of extended obstruction

could mean for global oil markets and markets more broadly.

Is this something that's been priced in?

That kind of potential long-term impact.

So at this point, I don't think at least the equity market

hasn't really been pricing in that longer term impact.

And we're seeing more calculations coming through

for sure.

And we're talking about, for example,

Germany having already slashed their economic growth

forecast in half.

And the IMF also expecting a lower growth projection

due to the war.

So these seem to be factored in in the economic outlook,

but a bit less when it comes to the equity space.

But the risk right now is really further jump in energy prices.

The physical supply shortages and the demand destruction

that is yet to come.

I mean, the potential for demand destruction

does seem elevated.

In April, consumer sentiment in the US hit record lows

despite the stock markets gains that we've been talking about.

For me, it's just another reminder that as the adage goes,

the stock market is not the economy.

But what does it mean that the confidence levels

of Wall Street and Main Street have diverged so much?

I think a good way to look at this is as simple

as your cost of living.

If you know a war is going on and an unpopular one

and it's showing up in your guest bill and your guest pump,

that is not good for your confidence.

How are you going to bring your kids to school?

How are you going to get to work?

You know, things like that way on the US consumer.

Ironically, there is also this cycle going on

where if consumer confidence is bad,

if the economy is bad,

the Fed would likely potentially cut rates at some point.

And if you can't rate, that's actually great for stocks.

So you kind of go, oh, okay,

bad news is good news,

perhaps that's also driving some of that

because we know easy monetary conditions is great

for equities regardless if you're in a US

or the UK or Australia or Japan.

So bad news could be good news.

This is The Big Take from Bloomberg News.

I'm Sarah Holder.

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The World Cup is coming.

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the biggest decisions,

and the truth about the US national team.

It wouldn't be a huge surprise if our team ends up

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Listen, Inside American Soccer with Tom Boge and Tab Ramos

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It was a big moment.

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I was representing all taquetos.

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