This is an audio transcript of the Unhedged podcast episode: ‘What the Israel-Iran war means for markets’

Katie Martin
You don’t need to be a super smart geopolitical strategist these days to see that the situation in the Middle East is pretty grim. It’s all very fluid, stuff is changing quite quickly and we humble markets monkeys of the Unhedged podcast know our limits. We are not here to give you a read on what happens next between Israel, Iran and the US. What we can do though is unpack what this all means for the global economy and for global markets.

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Is that all more important than the human lives at risk here? Obviously not. But geopolitical shocks, especially in the Middle East, can have ripple effects to jobs, livelihoods, and prosperity around the rest of the world, and that’s the bit that we can help you understand. Today on the show, we’re all freaking out. Why are the markets not freaking out? This is Unhedged, the markets and finance podcast from the Financial Times and Pushkin. I’m Katie Martin, a markets columnist here at FT towers in quite hot and stuffy London, finally shaking off my hot and stuffy cold, and I’m joined down the line from New York City by fellow markets monkey, alpha primate of the Unhedged newsletter, Rob Armstrong. (Robert Armstrong makes monkey-like noises) Rob, stop that!

Robert Armstrong
(Laughter) That was my alpha monkey noise.

Katie Martin
(Laughter) I gather from the last podcast that you were long short shorts. If it’s not too personal a question, I would like to ask you, are you sporting short trousers today?

Robert Armstrong
No, I have big-boy pants on right now. I do not . . . I’m not a shorts at work kind of a person. Shorts are for the weekend and the weekend only.

Katie Martin
Where do you stand on linen suits?

Robert Armstrong
I don’t like wrinkles. I like linen in principle, but in practice, it seems like a lot of ironing and you’d, like, have to take an iron to work to do a quick midday ironing.

Katie Martin
You’re possibly overthinking this.

Robert Armstrong
Yeah, so no, the answer is no on linen suits.

Katie Martin
(Laughter) That’s a relief for us all. Now, our vibe, right, our whole thing on this podcast is kind of loose, kind of light-hearted, very markets-focused. I just wanna state for the record that we are not terrible people. We care about what’s going on in the Middle East.

Robert Armstrong
Obviously, the important thing about this situation is the civilians who are caught in the crossfire here, and the people of Iran and the people of Israel are what matters here, is the human beings. We are a tiny little sideshow to that, which is called, what does this mean for markets?

Katie Martin
Yeah, and markets are like very dispassionate, right? They don’t care about your feelings. They sort of in a way don’t care about humans that much.

Robert Armstrong
They don’t care if you live or die, yeah, in most cases.

Katie Martin
Yeah. So listeners, don’t judge us, but we’re gonna get stuck in. So matters have gone from bad to worse between Israel and Iran. There are rockets flying in both directions. What has the market reaction been, Rob?

Robert Armstrong
Well, the most striking thing is that oil hasn’t moved very much. It’s moved a bit, it’s jiggled around. Let me call up an oil price chart here. I should have this in front of me.

Katie Martin
I can save you the bother.

Robert Armstrong
OK, please. Save me the bother.

Katie Martin
There was a big jump in the price of oil, which is pretty much what you would expect from an escalation of Middle East tensions, because Iran is an oil producer. So the price rushed higher, like by 12 per cent, but it’s calmed down a lot since then and we’re still now only at about $73 a barrel for Brent. That’s higher than it was, but it’s the highest since ooh, April. Like, it’s not a huge move. And if you compare it to Russia’s full-scale invasion of Ukraine in 2022, then you saw oil go to $110 a barrel like in a pretty straight line, and that was much more dramatic. Now, you know, I’m old enough to remember that tension with Iran was one of those things that had a really meaningful impact on oil prices. Like why is that just not happening now in that old-school way?

Robert Armstrong
There is a bunch of reasons and the most important is probably that since we were wee little market analysts in the 1970s . . . 

Katie Martin
(Laughter) Speak for yourself, Armstrong. 

Robert Armstrong
(Laughter) . . . The United States has emerged as the global energy superpower. I mean, every time I look at these numbers, they amaze me. So let’s look at top producers of oil worldwide. United States, this is 2023, this from the Energy Information Administration of the United States. 22mn barrels a day, United States. That’s more than a fifth of the world total, and it’s twice as much as Saudi Arabia. I mean, I just can’t get my head around that. America produces not only more oil than Saudi Arabia, way more oil, to say nothing of Iran, with 4 per cent of the worldwide supply coming from Iran. So 4 per cent matters. If that 4 per cent disappears from the world market, that price is gonna move. But, you know, this ain’t the ’70s. And on the natural gas side, the stats are roughly analogous — America the world leader and the rest of the world kind of bringing up the tail.

Katie Martin
Yeah. Now as we chat here on Tuesday afternoon, the other thing is that Iran’s still pumping, right?

Robert Armstrong
Correct.

Katie Martin
So it’s not as important a part of the global market as it once was. And right now — who knows if this will still be true by the time the podcast runs but — it’s still flowing, right? So again, that just means that there’s just not that much reason to really panic.

Robert Armstrong
This is an area where I will plead ignorance. A dynamic that I simply don’t understand is that the Israelis and the Iranians seem to be having this war in which there is a tacit agreement about how far each side will go. And I don’t know how that works out or what the rules of that are and, you know, when each side breaks the tacit agreement or whatever, totally above my pay grade, but one part of the agreement seems to be that Israel has decided it will attack Iran’s domestic energy infrastructure. In other words, it will make it a pain for Iranians to get a hold of Iranian gasoline and Iranian oil.

They will not attack the export facilities most prominently on this place called Kharg Island, which is where most of the Iranian oil comes out of. And what a lot of people said to me when I was trying to call around and figure out what was going on in the last couple of days is if Israel decides it will attack those facilities, the export facilities, then the war has reached a very, very different level because then you’re just cutting off the economic lifeblood of the country and it’s an existential issue for Iran, right? And then who knows what the Iranians will do in response? They are totally unrestrained at that point because they have nothing to lose.

Katie Martin
The other thing that Iran can do is shut the Strait of Hormuz, right, which would be a kind of putting a cork in a lot of global energy supply. Again, at the time that we’re recording this, this is not the case right now so for now that part . . . 

Robert Armstrong
Yeah, that’s their side of the things they’ve decided not to do. Israel is implicitly saying, we’re not gonna destroy your export facilities. Iran is implicitly saying, we’re not gonna mine the Strait of Hormuz, which then gets everybody involved, and it’s a big, hairy, nasty, unpleasant regional conflict rather than a war between Iran and Israel, which is serious enough. But if you get the Saudis involved, whoo boy, you know, it’s on.

Katie Martin
Yeah. Then it’s a whole different kettle of fish. But for now, for as long as you’ve got oil trading in the kind of low 70s on the Brent benchmark, so we did have, just like we had the spike in the oil price when things first got really hairy recently, we did see a bit of a step back in stock markets globally, but again, nothing too dramatic really. So if you look at markets, you really wouldn’t know there was anything happening here most of the time.

Robert Armstrong
And this is part of a larger phenomenon that we come around to, is the incredible resilience of global equity markets in the face of first the trade war and now a war in the Middle East. The dip is just getting bought in most cases, regardless. And there’s a kind of general question to ask is whether that is a phenomenon of euphoria or rationality. And I bet I know which side you’re on, Katie.

Katie Martin
No, you bet wrong. (Robert laughs) I am fully in the I don’t know how this is gonna pan out camp. But I do know if you look at some of the analysis from investment banks, you can sketch out a world where the oil price rockets to like $120 a barrel depending on what kind of clampdowns come from both sides of this conflict, from the Iranian side and from the Israeli side. But you can also sketch out a world in which we fall back to the even lower 70s and it’s really like nothing has happened.

So that’s the difficult thing for investors and for the rest of us, is that we’re sort of staring down the barrel of this world where the oil price could go crazy or it could do nothing. And markets are all about uncertainty and not having perfect vision of the future but that seems like quite binary and quite scary and not a perfect time for markets, given that we’ve already got lots of other bits of uncertainty out there. So this is very unhelpful for investors.

Robert Armstrong
Katie, you give me a wonderful opportunity to roll out my favourite Wall Street cliché, which is tail risks. Just saying that phrase makes me feel like I’m a smart person. (Katie laughs) Oh, you gotta think about the tail risks. And, you know, the gag here is yeah, the central case is that this remains a contained regional conflict and everybody gets talked down off the ledge and nothing really happens. But if one of the things we described earlier starts happening — mining of the strait, bombing of Kharg Island, regional conflagration — then suddenly you have a tail event. Again, Robert feels smart because he said the word tail event.

And so a reader of the column, Michael Chin of Allocation Strategy, sent me a really interesting chart, which is a chart of the options-implied probabilities of a big jump in the oil price. And he reckons on the basis of his work on options that the probability of a 10 per cent or greater increase in the price of oil is 17 per cent, which is a much thicker tail than you used. So one in five chance, basically, the market is saying, we’re gonna see a pop somewhere here of $10 or more. And if you go up $10 all at once . . . I guess it’s probably worth talking about though, Katie, why the oil price did go up so much in the Ukraine war, the Russian invasion of Ukraine, and that did seem to have a big effect on the price.

Katie Martin
Yes, because, like, you know, Russia is such a huge supplier, particularly to Europe, or at least it was. And, you know, we’re still working through that process of figuring out how Europe can survive long-term without Russian oil. I mean, there is a reasonable possibility that the oil price just kind of roofs it one day and heads up to $110, $120 a barrel.

Robert Armstrong
And then we have a shock on, and then central banks around the world have to give it a think, right? If suddenly the oil price is much higher, oil and inflation are famously connected, and it’s debated territory exactly how central banks should respond to oil price shocks. But they gotta start thinking because if people start, if inflation expectations start to take off in the face of a much higher oil price and people start getting jumpy, then you’re in a bad situation as a central banker or indeed, as a human being. And some, I should note, by the way, that some central bankers are also human beings.

Katie Martin
Some of them, yes.

Robert Armstrong
Some of them. Anyway, because an oil shock both slows growth and increases inflation, right, so you’re getting it from both ends of your mandate. Central banker is supposed to keep employment high and keep inflation low.

Katie Martin
Well, the American ones are anyway, yeah.

Robert Armstrong
Yeah, yeah, I’m sorry, the American one is. So suddenly, if you have an oil price shock, the American central bank is getting it from both sides of its mandate, and they have a problem on their hands.

Katie Martin
Yeah, not helpful, because all things being equal, that means higher inflation, which means higher interest rates, which is very much against the run of play. So the oil price is not screaming in alarm here, but if you look at other bits of the markets, you can see some quite interesting patterns.

So I will come back to my favourite point, which is that the dollar and US government bonds are not really responding in a kind of nervy way right now. Maybe that’s because holders of those assets are not nervous, but maybe it’s because some of the use of fear as a driving force in pushing the dollar and US government bonds higher has reduced recently.

Robert Armstrong
Yeah, so the flight-to-safety trade, your view is that the flight-to-safety trade in the dollar and dollar assets is not what it once was.

Katie Martin
No, it’s a little bit different because you can see some signs of nerves. Like if you look at gold it’s up a bit. The price is near records. We’re about $3,390.

Robert Armstrong
Which is just, that’s just an amazing price.

Katie Martin
We had a really interesting Big Read on our pages just the other day from Ian Smith and Leslie Hook about how gold has overtaken the euro as the second most important reserve asset for central banks. So big holders of kind of government or quasi-government money around the world do appear to be edging out of the dollar and putting a lot more of that to work in gold instead as a kind of safe hidey hole.

Robert Armstrong
Bloomberg had a news story the other day that struck me, Katie, which was it was basically an interview with a currency trader at a big bank, and you know what currency traders do a lot at big banks is they help importers settle their accounts when they bring stuff into the United States. And this banker was saying more and more of my importers don’t wanna settle their trades in America in dollars. They wanna settle in euros or in Chinese currency or whatever, and this is a big change.

Now these stories are slightly a dime a dozen in the sense that banker says thing, you know it’s anecdotal evidence. But I was still, I was struck by the colour of that, that there is something going on here.

We strayed away from oil and into the dollar but these things are going on at the same time. We have a disturbance in the oil universe at a time when things were already changing in the dollar universe and so the way they interact is particularly interesting right now.

Katie Martin
Yeah, there has been a disturbance in the force. I think that we are gonna see the euro playing a much bigger role in global trade from here.

But also, if you’re looking for signs that markets are a little bit nervous and the oil price is not doing it for you, you have got gold that’s up near record highs. You’ve got the Swiss franc, which shot up around the “liberation day” super-crazy US tariffs announcements at the beginning of April, and it stayed up. So the Swiss franc is one of those currencies that people really like to buy and hold when they’re nervous about stuff.

So it’s there. Markets are kind of nervous and I think investors have got themselves to the place where if things go really pear-shaped really quickly in Iran then they can jump on that. They’re kind of . . . They’re ready. But right now there’s just no reason to really freak out which I know is kind of again, very sort of . . . 

Robert Armstrong
Inhumane, in some way.

Katie Martin
Yes, but that’s markets for you, I’m afraid.

Robert Armstrong
This is the business we’ve chosen, Katie. This is the Godfather.

Katie Martin
(Laughter) This is the business we’ve chosen. So who would want to be Jay Powell in this situation?

Robert Armstrong
Yeah, that’s a great topic.

Katie Martin
Chairman of the Fed, you know, we’ve got a rates decision coming up from the Fed a little bit later this week. The other day Donald Trump called Jay Powell a “numbskull” for not cutting interest rates as quickly or as hard as he would like.

Robert Armstrong
Yes, to which Jay Powell responded: sticks and stones may break my bones.

Katie Martin
So na-na-na-na-na. (Robert laughs) A very dignified silence from the Fed on this and really, what can you say to that (overlapping speech)?

Robert Armstrong
I can tell you what Jay Powell is gonna say at his press conference later this week. Some intrepid reporter is gonna raise their hand and say there’s a war on, the oil price is scaring people a little bit, it could go up at any time. What are you gonna do? And the summary of what big-game Jay Powell is gonna say is we’re gonna watch this situation very closely.

Katie Martin
Yes. And the question from the journalist is also gonna be, Donald Trump says you’re a numbskull, what do you say to that?

Robert Armstrong
Are you in fact a numbskull? (Laughter)

Katie Martin
(Laughter) Really? What do you say? I know you must get asked this a lot. Maybe you could give him some tips on what to say.

Robert Armstrong
I know. (Laughter) Deny, deny, deny.

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Katie Martin
We live in extremely childish times. And very much along those lines, we will be back in just a little moment with Long/Short.

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Okie doke, listeners, it’s time for Long/Short, that part of the show where we go long a thing we love or short a thing we hate. Rob, what you got?

Robert Armstrong
I am long New York City pizza, Katie.

Katie Martin
Oh.

Robert Armstrong
My wife had a bunch of her friends in town from the West Coast. And sometimes in New York because we’re spoiled, we forget how good the pizza is here. But we ordered from our local Luigi’s and we had pizza. And these friends from California were in ecstasy at how much better the pizza is here than out there. I’ve never seen four happier people in my life. So we still got it.

Katie Martin
Was there lots of lady petrol involved in this gathering of friends?

Robert Armstrong
Lady petrol?

Katie Martin
Lady petrol is like cheap booze. (Laughter)

Robert Armstrong
Oh yeah. (Laughter) I’m long lady petrol too.

Katie Martin
(Laughter) I am long Trump mobile — you know, these $500 gold phones. (Robert laughs) I just . . . I, you know, just lay it all out there. I just, I admire it. And I think anything that people can do to advertise their Trump fanboy or fangirl credentials makes them easier to identify and either avoid or cosy up to depending on your world view. So I’m all in favour of people waving around ridiculous gold phones with Trump written on them.

Robert Armstrong
I agree. Strongly agree

Katie Martin
Strong agree. Now listeners, we are not gonna be back in your ears on Thursday because the US is out for Juneteenth, the annual celebration and commemoration of the end of slavery.

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Americans, enjoy your holiday. Everyone else, we will be back on Tuesday. Until then, it’s muggy out there. Stay cool, choose light fabrics.

Unhedged is produced by Jake Harper and edited by Bryant Urstadt. Our executive producer is Jacob Goldstein. We had additional help from Topher Forhecz. Cheryl Brumley is the FT’s global head of audio. Special thanks to Laura Clarke, Alastair Mackie, Gretta Cohn and Natalie Sadler.

FT premium subscribers can get the Unhedged newsletter for free. A 30-day free trial is available to everyone else. Just go to FT.com/unhedgedoffer.

I’m Katie Martin. Thanks for listening.

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