Access Middle East - 28-May-26

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[00:00:11]Welcome everyone to Access Middle East.

[00:00:12]I'm Sri Jegarajah in Singapore. Here are the top stories today. US and Iran exchanging fire on Wednesday. Iran says it targeted a US airbase and has vowed to deliver more decisive action in a response if US strikes continue.

[00:00:29]Oil prices rebounding in Asian trade rising nearly 4% with WTI back above $90 a barrel.

[00:00:40]>> Three months into this war, central bankers are convened in Tokyo to attend a conference of the Bank of Japan as inflation grips the global economies.

[00:00:49]Two Federal Reserve presidents presidents, excuse me, joined us on CNBC and had this to say about inflation.

[00:00:57]>> I'm more attuned to the inflation risk in the immediate term than to the labor market risk.

[00:01:04]>> I am focusing heavily on inflation. I'm not ignoring it all the labor market. We need to pay attention to both sides, but the labor market is in decent shape right now while inflation is simply much too high.

[00:01:24]>> Speaking of which, we'll be getting a glimpse of the inflation print from stateside with the PCE, the Fed's preferred gauge of inflation stateside later on tonight. So, that will be very important in terms of informing the outlook for the interest rates of the Fed. Let's get a snapshot of how the markets across Asia are doing and in a word, cautious. Reports of US strikes against Iran undermining optimism for a peace deal. And then as we said, there is the release of US inflation data.

[00:01:59]PCE, the Fed's preferred gauge, expectations are putting the headline at a 3-year high of 3.8% core at an annual rate of 3.3% and they are well above the Fed's 2% target. If that does materialize, then that will have implications for the policy outlook at the Fed.

[00:02:20]Oil prices are rising again today. Let's take a look at the two global indicators.

[00:02:28]There you are.

[00:02:29]WTI in Asian trade, sharp spike there, up by 4%, 92.31. Brent crude 98.05, also up by 4%.

[00:02:39]This on the back of Iran saying that it launched a retaliatory strike on a US airbase after the US attacked one of its airports. Iran also vowing more decisive action in the response if US strikes continue.

[00:02:53]This after a US official told Reuters that the US struck an Iranian military site that it sees as a threat to traffic on the Strait of Hormuz.

[00:03:03]The official also said that the US military shot down multiple Iranian drones. Meanwhile, President Trump discussed peace talks at a cabinet meeting overnight. He told reporters he's still unsatisfied with Iran's offer and is not in any rush to secure a peace deal.

[00:03:20]Disagreements seem to come from three key issues: control over the strait, Iran's uranium stockpiles, and Iran's access to $24 billion in frozen funds. Here's what President Trump had to say at a cabinet meeting overnight.

[00:03:37]>> Would you be comfortable with Russia or China taking their stockpile of highly enriched uranium and have they offered to do that?

[00:03:41]>> No, I wouldn't be comfortable.

[00:03:43]>> Mr. President, >> That would not make me comfortable.

[00:03:45]>> Is the US considering easing sanctions on Iran to allow Iran to sell its crude to market?

[00:03:51]>> No, we're not talking about any easing of sanctions or giving money. No sanctions, no money, no nothing.

[00:03:57]Uh We have control of money that they claim is theirs.

[00:04:03]We'll keep control of that money. When they behave properly and when they do what's right, we'll let them have their money. But right now, we're not doing that and it's One thing is not contingent on the other.

[00:04:15]>> US Secretary of State Marco Rubio was also at the meeting having returned from the Quad Summit in India.

[00:04:22]Rubio said there's been some progress in peace talks and that the US would prefer to exhaust all diplomatic options before escalating further.

[00:04:31]>> The bottom line is Iran's never going to have a nuclear weapon. And if recent events have done anything, it's just reminded us once again that they are the world's leading sponsor of terrorism. Um and they can never have a nuclear weapon. Now, the president's preference, which President your preference has told us repeatedly, is always to negotiate these things and to figure out if you can have agreements. Diplomacy is always the first option.

[00:04:53]>> Now, back to this region and the Bank of Korea has left its policy rate unchanged this morning, but data is showing that there was a hawkish split, some divergence among policy makers. Lisa Kim has the details and joins me now.

[00:05:05]>> Hey, Shery. So, Bank of Korea delivered a hawkish hold keeping rate steady at 2.5% as widely expected. And this was the eighth time in a row that the bank kept rates steady and it was the first meeting that the new governor Shin Hyun-Song chaired. And the key takeaway is that uh he said during his post-meeting press conference that given the weak won, given South Korea's stronger than expected growth and higher than expected inflation, the path forward is clear. In the updated quarterly Fed-style dot plot system, so it's this forward guidance that looks that uh sort of gives the board members estimates for the next 6 months. And according to that guidance, a majority of board members now expect a 50 basis point hike in the next 6 months to 3% followed closely by a 25 basis point hike to 2.75% and this is in line with investor expectations that the bank would hike one or two times throughout the year and BOK revised upward its inflation forecast for this year to 2.7% and now sees the South Korean economy growing at growing by 2.6% versus its previous estimates of 2% and Bank of Governor Shin Hyun-Song said, according to the bank's analysis, growth might even overshoot 2.6% if the Iran war ends sooner rather than later. And as we've talked about many times on CNBC, South Korea's GDP growth has really been sustained and exports stronger than expected, all thanks to the boom in AI and this insatiable demand for a South Korea's memory chips. The South Korean won today is slightly weaker and it continues to trade in the 1500 handle to the dollar. In fact, it's weakened by 4/10 of a percent, so a lot more than this morning. And South Korean government bond yields are higher across the curve, Sheree.

[00:07:01]>> Yes, it's South Korea's fortunate in many ways, isn't it? The AI trade is the saving grace given this external shock.

[00:07:09]At the same time, thank you, Lisa. Let's take a look at Treasury yields ahead of the Fed's preferred inflation gauge later today and a lot of the action has been on longer dated Treasury yields.

[00:07:19]30-year yielding 5.0538 and benchmark 10-year yielding 4.5321.

[00:07:27]We've also been hearing from top Fed officials at the Bank of Japan and Institute for Monetary and Economic Studies conference in Tokyo. Chicago Fed President Austan Goolsbee, who is not a voting member of the FOMC this year told CNBC earlier that the current energy shock may not be transitory. He also spoke about productivity, AI, and what that could mean for the Fed.

[00:07:57]>> I have cautioned against front loading of rate cuts and the the way the voting works in the US, I was a voter last year, I'm not a voter this year. In the last FOMC meeting of December of last year, I dissented against the the final rate cut on not on the ground I I do I'm still optimistic that if inflation starts heading back to 2%, I believe rates will ultimately settle at some place well below where they are today, but I wanted evidence that the inflation was not going to end up being persistent.

[00:08:36]I don't regret dissenting at that meeting because the inflation has not proved as temporary as as was advertised at the beginning. On AI though, my concern is that future increases in productivity that make us rich may fuel high equity prices. That they are a increase in your wealth today to know that you're going to be rich sometime in the future and that can encourage people to spend out of this wealth in the stock market or or others and and before the AI has actually increased the productivity, you can overheat the economy in the near term. So, I have cautioned, I want people to just pay attention to are you seeing big increases in consumer spending fueled by stock market wealth increases?

[00:09:33]Are you seeing data center investment driving up the cost of electricity, of construction workers, and having this short-run impact on inflation in the US.

[00:09:46]I think it's quite critical that we think about that.

[00:09:49]And I think that lesson is also important for Asia in the sense that no general-purpose technology stays in the country where it's invented. If you look at electricity, if you look at telephones, computers, all of those the product if there is productivity growth to be had from from AI, it will be coming soon to Asian countries, too. And the same dynamic that people know that they're going to be richer in the future, and that could be fueling spending now, I I think it's worth thinking about.

[00:10:23]>> And what are you seeing in terms of AI CapEx versus non-AI CapEx? Because I feel like at some point, cuz right now, at least in the markets, everything is a running hot, memory prices going up, and a data center build-out is happening. A lot of money being sucked into that. But what about non-AI part of the US economy, and really the global economy, that should be supportive of things when AI story gets stalled a little bit?

[00:10:55]Because it cannot really go up in a straight line.

[00:10:58]>> Yeah, they're struggling a bit. I mean, they're they're grappling with the increased cost of computer chips, of electricity, of construction workers, as I described. And you hear that a lot throughout the US as as I'm traveling around.

[00:11:14]We're in rural parts of the of the district, like Cedar Rapids, Iowa, kind of right in the center of the country.

[00:11:21]And I said, "What's the biggest problem facing the economy in Cedar Rapids?" And they said the data centers using up all the power, we you know, our electricity, and we can't find anyone to to build out housing for for our workers. So, and I I I think the non-AI economy, the hotter that gets, the more frothy that feels, um they they can it in a sense pay pay the price. It's a little hard to separate out though from what was the impact of tariffs that that hit the supply chain and raised the cost of of production, too, and what's the impact of oil prices. All of these in surveys and just on on the ground when personally talking to folks, there's a [clears throat] very heavy emphasis on affordability, costs, and prices as as being people's biggest concern on the economy.

[00:12:13]>> So, if you were to vote tomorrow, if you were to be voting this year, Austin, >> [laughter] >> where do you go? I mean, inflation upside, there's the risk, but then there's also the downside growth risks.

[00:12:29]>> I I think that the US Fed has what they call the dual mandate. The law says that when setting monetary policy, we're supposed to do two things only, maximize employment, stabilize prices.

[00:12:42]I My read of the US labor market is it's been quite stable.

[00:12:47]And the thing that is going wrong is inflation stopped It was making progress.

[00:12:53]It stopped making progress last year and now has been rising. It's going the wrong way. So, I'm more attuned to the inflation risk in the immediate term than to the labor market risk.

[00:13:06]>> Let's bring in Kaori Enjoji who was at that BOJ conference this morning in Tokyo. And Kaori, you've been reporting powerfully about this. And for the Japanese public, this debate on inflation is not academic. It's real. There is increasingly a cost of living crisis developing in Japan.

[00:13:29]>> Absolutely. It was there before the war erupted and it's just compounded by the fact that Japan is so energy uh, dependent. As I mentioned, we did have a chance to speak to two Fed presidents and I also spoke with the Minneapolis Fed president, um, uh, Neel Kashkari. And of course, as uh, you were hearing earlier, the dual mandate that the Fed has is inflation and jobs. But, you know, there's a discrepancy on the region a regional discrepancy as well in the US as well.

[00:13:56]Uh, so it depends I think it's important to get a handle on how the inflation looks from the Minneapolis side as well.

[00:14:03]But, here's what he had to say on that point.

[00:14:09]>> We look at everything and we've said when the two sides of our mandate, the labor market and inflation are in tension, that we will take a balanced approach. For me, as one policy maker, what I would say is inflation has now been elevated for more than 5 years. And we all the longer it goes on, the more we run the risk of inflation expectations uh, unanchoring and starting to drift higher, which we cannot let happen. If that were to happen, then we'd have to respond even more aggressively. So, we're much better off doing what we need to do to keep inflation expectations anchored. That means for me, uh, I am focusing heavily on inflation. I'm not ignoring at all the labor market. We need to pay attention to both sides, but the labor market is in decent shape right now while inflation is simply much too high.

[00:14:53]>> So many variables, but I think one element that's changed and we also need to look at is change at the Federal Reserve as an institution with the new chair, Kevin Warsh coming in. And he said many times that reducing the balance sheet is going to be a priority.

[00:15:08]So, I did ask the Minneapolis Fed president whether he agrees to this and if so, how it should be done. Take a listen.

[00:15:15]>> Well, I think whatever we were do, I think we would want to do it gently and slowly because the the Fed balance sheet is so large, you know, as compared to history, the US Treasury market plays such an important role in the global economy. I think any changes that we would make, we would want to communicate well in advance and explain the rationale for it. And so I I would go into such discussions with an open mind and let's examine everything and see what makes sense for the next 10 years.

[00:15:44]>> These are some of the issues that are on top of the of the mind of the central bankers convene here today. It's not just the Fed that's here, the Bank of England, the Bank of Thailand, of course the Bank of Japan who's hosting, and all of them and to some degree Shrey are are faced with similar issues.

[00:15:59]>> Yes, and quite the dilemma if we do have a stagflationary situation not stubbornly higher inflation and slower growth. What do central banks do then?

[00:16:10]Food for thought. Uh thank you very much indeed for that Carrey. Let's take a look at the dollar index climbing towards the 100 level. Cedric Shahab from BMI will be joining me after the break to talk global growth and inflation risks. We're back in two minutes.

[00:18:41]>> Welcome back. I'm delighted to say that Cedric Shahab joins us now chief economist at BMI. Cedric, welcome to the program and great to see you. Let's start with the Strait of Hormuz and are markets mispricing the duration of disruption to energy supply from the effective closure still of the Strait?

[00:19:00]>> I think that's a great question and good to be back in in the studio with you.

[00:19:04]So, the question whether markets are mispricing the the risk has one that we've been asking ourselves for over a month, maybe two months because you have equities hitting new highs and you have oil markets, you know, trading higher but not in the danger zone just yet. And I think what markets are probably telling the world is that they are optimistic that a resolution to the conflict will happen in the near term before there's a non-linear impact on the global economy. And what I mean by that is if you look at the ceasefire, it's clear that both Trump and the Iran have been really working hard to keep that ceasefire alive even though there were some skirmishes. And both Trump and Iran have huge incentives to resolve this conflict as soon as possible. And I think that's what markets are pricing in and because of that the global economy has been able to absorb the shock over the near term.

[00:19:55]However, if it were to extend for another, let's say, 2-3 months, I think that's when markets would become much more uh the knock-on impact from shortages emerging and from from a lack of oil, potentially higher oil prices, and potentially higher inflation.

[00:20:11]Cuz I think the big change that we've seen here is that most economists have knocked down their growth forecast a little bit. But what they've done more significantly is increased their inflation forecasts. And that now has a lot of central banks and bond markets on the back foot. We saw that in a rise in bond yields over the past few weeks. And we also saw a lot of um somewhat larger than expected hikes by several central banks around the world. And I think that becomes an inflection point for markets if rates start to rise further.

[00:20:41]>> The challenge though is even if the strait does fully reopen tomorrow, the damage to infrastructure, to oil supply has already been done and it's going to take weeks if not months to recover. So there is there is going to be uh quite frankly a bid in the oil market that will continue to keep prices supported and inflation high.

[00:21:06]>> Yeah, I think that's right. So, it'll it'll take maybe anywhere between 1 month and 2 to 3 months for the Strait to reopen fully and for vessels to start the passage rates to start and the transit rates to normalize. That depends on insurance companies, the willingness of the shipping companies themselves, the crews, and the type of vessel, of course.

[00:21:25]Now, the way we're looking at it is while there might be a continued physical shortage in certain markets, that's known.

[00:21:34]The important thing is financial markets are forward-looking. So, as long as they know the direction of travel is for more transits, then financial markets, oil futures, equity markets should look through that while there is some shortages over the short term. The financial markets will be forward-looking in that regard. And I think that is will be looked at optimistically.

[00:21:53]>> Again, the difficulty here is coming up with a model of ownership for the Strait of Hormuz.

[00:22:01]And there are so many different actors involved in this. And Trump has already said that the is not going to work.

[00:22:09]That's a non-starter. He's already talked about imposing a toll. He won't tolerate the Iranians imposing a toll. What is required is an international solution for an international waterway, and that continues to be very elusive.

[00:22:28]>> It does, and I think that's one of the major factors which is delaying the resolution of the crisis. Now, the Iranians have been extremely adept at negotiating. Despite being in a very vulnerable position, they were able to secure basically the Strait of Hormuz passage rights in the sense that they are able to determine whether there's ships passing or not. And so, that's a fantastic bargaining chip from their perspective.

[00:22:48]Now, going back to the question of should anybody control the Strait, I think the answer is no, and that's kind of the approach that Trump and the international community is is taking as well because then it raises the question for every single strait in the world now comes under whose control. and then that is disastrous for global trade and for people basically taxing the world asymmetrically in order to extract gains. So, Iran, for example, in the Strait of Hormuz.

[00:23:13]You know, Strait of Malacca. Do we Do we Do we close that one up, for example?

[00:23:18]And that becomes hugely problematic for the global economy. And I think they don't want to set the precedent, A, and they don't want to give Iran that leverage.

[00:23:25]>> However you slice it, inflation is moving higher.

[00:23:30]Is it going to be transitory? Is it going to be prolonged?

[00:23:34]>> So, we think it's going to be transitory in the sense that most of the shock is coming from oil. So, and we can see that in the data. There have been some other factors which have impacted inflation.

[00:23:46]So, for example, in the US, shelter, there was a double counting that pushed it higher. And while we expect oil prices to remain high for the near term, once we get to a resolution, oil futures will start to come down. Markets will start pricing in lower interest lower oil prices. And I think that's going to feed through to the other direction on a month-on-month basis, for sure. So, the the inflation the energy inflation component will be transitory, and I think that'll relieve some pressure. The problem is that some economies are growing quite well, and so you're starting to see the service side of the of the economy still doing okay. We have a little bit of pressure from kind of let's say chips demand. We just heard that in the previous interviews, that that's pushing up costs for electricity, etc. So, while the economy remains in an okay situation, that will keep inflation maybe a little bit higher than than central bankers would want, but from the oil perspective, that'll come down. And so, well, while inflation, for example, in the US can maybe head a little bit above 4% in the next few months or so, by the end of the year, we think it's going to be closer to 3.3. But that's still too high for central banks. And we've seen central banks in the Philippines and Indonesia, for example, all hike interest rates in recent months in response to concerns about inflation.

[00:25:01]>> And you're quite right, and let's take the narrative to India where this is a classic supply side shock which could very well morph into demand destruction or a demand slowdown. Next week, there is going to be an RBI meeting, and then on top of that, India has to deal with currency depreciation, and that raises the cost of imported inflation.

[00:25:30]Does a hike make sense in this environment?

[00:25:33]>> So, I think that's one of the most hardly debated questions right now in India, and there are four there are a few reasons there. First of all, the good news is that inflation in India came or started the year quite low, and so the increase from oil prices has only pushed it to about 3-4%, which is lower than where it was a couple of years ago.

[00:25:52]So, inflation in India is not as bad as, let's say, Philippines right now. The second thing is the government also has policy tools to subsidize some of the the feed-through, right? And so, over the near term, maybe policy makers are looking at this and say, "Well, we have a couple of more months before we need to really do anything."

[00:26:10]Um and if that's the case, then maybe we just wait a little bit.

[00:26:14]And if oil prices then start to come down, then we know we kind of we didn't have to do anything. But if oil prices remain high, and they think, "Actually, this is going to start feeding through to inflation," then they can they still are in time to to hike if needed. So, I think the central bank has been given a little bit of a Well, they've been signaling a little bit maybe of a wait-and-see approach, uh but, you know, look at what happened to Indonesia, they hiked by 50 basis points, maybe they get ahead of it. And to the point of reserves, they've been intervening, they have a lot of Sorry, in terms of the currency, they have a lot of reserves, they've been intervening in the currency, but the Indian currency has been one of the worst performing alongside the Indonesian rupiah, for example, over the past 3 months. So, it is certainly something that they're they're mindful of.

[00:26:55]>> Yes, and that's really symptomatic of uh some deep-seated structural economic challenges that India uh does need to address.

[00:27:01]>> Well, it's not only India. So, actually, on a currency basis, a lot of people were talking about, you know, a stronger dollar being a risk-off trade and money capital flight to to kind of safe havens like the US. But, that's not actually what we've seen. Yes, the dollar has strengthened a little bit, but what we've seen is it's a terms-of-trade shock, and that's being reflected in currencies. So, if you're an energy exporter like Brazil, Australia, for example, your currency is a little bit stronger. If you're Malaysia, it hasn't depreciated that much. If you're energy importer like India, Indonesia, for example, South Korea, Chile, currencies have been hit more uh more aggressively. And in that sense, I think it's a terms-of-trade story.

[00:27:38]>> Cedric, we've got to leave it there. So, always great catching up with you. Thank you very much indeed for those insights and analysis. Cedric Chehab there from BMI. Coming up on the program, as US-Iran negotiations continue, disruptions to the Strait of Hormuz has caused maritime traffic to fall to new lows. We'll speak with Paresh Jain from HSBC about this after the break.

[00:30:10]>> Welcome back to Access Middle East. Some stories on our radar this morning.

[00:30:13]Israel's military says it began striking Hezbollah infrastructure in the Lebanese city of Tyre. It comes after the IDF declared a wider expanse of southern Lebanon as a combat zone, advising residents to evacuate all areas south of the Zarani River.

[00:30:31]More than 3,200 Lebanese have been killed and 1.2 million Lebanese have been displaced by Israeli strikes since March the 2nd.

[00:30:41]Palestinians mourning the loss of one of Hamas's most senior figures after Hamas's armed wing chief, Muhammad Odeh, was killed in an attack by Israeli forces. Odeh was the head of the group's intelligence service and was killed just days after the death of his predecessor in an Israeli [music] strike. Sources say he was possibly the last remaining living member of the Hamas armed wings higher leadership council.

[00:31:09]And Norway has agreed to join France's nuclear umbrella, becoming the latest country to receive France's nuclear protection. The move was announced by both leaders at a Paris meeting on Wednesday and signals a shift by Norway towards closer defense cooperation with Europe, reflecting growing concerns in the region over US commitments to security.

[00:31:31]Under the agreement, Norway would take part in what France calls forward nuclear deterrence.

[00:31:37]And Kuwait has approved the route for a new 500 km high-speed rail link connecting Kuwait City to Riyadh. The rail line is expected to be completed by the year 2030 with travel time between the two capitals projected at under 2 hours.

[00:31:54]The project is part of a broader regional push to strengthen logistics connectivity amid shipping disruptions linked to the Iran conflict. Saudi Arabia has issued tenders for sections of the wider GCC railway network linking Gulf states, while the UAE recently completed its first passenger rail station in Fujairah, strategic port city outside the Strait of Hormuz.

[00:32:19]Speaking of the strait, Iran and the US indicating they're still far apart on control of the crucial waterway.

[00:32:27]Iranian media claimed yesterday that Iran and Oman would jointly manage the strait to restore traffic back to pre-war levels, but at a cabinet meeting overnight, President Trump dismissed those reports saying no one would control international waters.

[00:32:43]>> The strait's going to be open to everybody. It's >> And who would control it?

[00:32:46]>> It's international waters. Nobody's going to control it. We're going to watch over it. We'll watch over it, but nobody's going to control it. That's part of the negotiation that we have.

[00:32:55]They would like to control it. Nobody's going to control it. It's international waters, and Oman will behave just like everybody else who will have to blow them up. They understand that. They'll be fine.

[00:33:07]>> And European logistics giant Kuehne + Nagel Group spoke to CNBC about how the disruptions from the Strait of Hormuz are impacting its Asian clients and how they are rerouting supply chains. Here's more from that interview.

[00:33:23]>> We see a couple things. The first is the Chinese giants are rising quickly, and with their rising maturity in supply chain and their rising uh distribution of their product, we're seeing them take greater control over the supply chain in international markets.

[00:33:39]What that means is instead of uh selling goods FOB here in China, they're taking delivery of the goods all the way through to the final industrial customer in the United States, in Europe, in South and Central America. And that's led to a change in the dynamic of the market. So, we see a rising amount of business in our industry that's controlled, decided, shipped, and paid for here in China.

[00:34:00]>> Mhm.

[00:34:01]>> Um and we see that in the big emerging industries of China. So, in automotive, in battery production, in technology, in um consumer electronics goods. Uh and we basically see this trend where when the China-based supply chain management organization is more mature than the destination market or where you've got rapid change in an industry, the Chinese companies are choosing to take control over that supply chain. That's leading to a lot more business activity here uh for us in China uh and a lot of the change in in our ability to kind of grow our business here based on prepaid China cargo, which has been really exciting for us. And that's what one of the reasons why I'm here in Hong Kong today.

[00:34:40]>> Yeah, and talk to us about your shift to work more closely with some of the Chinese exporters.

[00:34:48]And reducing reliance on European or American importers.

[00:34:54]What led you to execute that shift, and how has that paid off so far?

[00:35:00]>> So, I I think so we've been working on this for a little over a year.

[00:35:03]>> Yeah.

[00:35:04]>> Um >> Was it tariffs?

[00:35:07]>> So, tariffs sped up the process. It's acted as an accelerator to that change that was coming. And that's really about industrial maturity um and international supply chain density across the world, right? And the Chinese companies, you see them disrupting, you know, European automotive industry. We see them taking the lead in wind, and taking the lead in solar. And as part of that, the a lot of that discussion becomes how do you take control and deliver your supply chain at best quality. Uh and that we're seeing much more control here.

[00:35:35]We have positioned that we're bringing more and more resources here in terms of solution engineering, supply chain design. These resources that we need to have here in China in order to make sure that we can cater to that market. And it's a fast-growing market for us. We're really excited about the potential of that.

[00:35:54]>> Let's get more on the global logistics and a shipping market and industry.

[00:35:59]Bring in Parash Jain now, global head of transport and logistics at HSBC Global Research. Parash, welcome to the program. First of all, are markets underpricing or mispricing the duration of disruption from the Strait of Hormuz?

[00:36:16]>> Uh I would rather say that the shipping market is pricing it in real time. As if you see pretty much since the start of COVID, and industry was first to recognize that chaos is no longer an exception, and it is increasingly becoming a norm. And that's why you are seeing the flexibility in terms of supply chain, and seas merging with the road, road is merging with the rail, we are adding aviation into it.

[00:36:43]Now, if you see what does that mean um on the ground? In So, we are now third month into this uh into this crisis, and you have seen actually different subsectors has has performed the way you would have expected in a in a crisis scenario. We have seen a surge in the tanker rates at the start of the war, and as the supply eventually navigated where the demand is, we have seen the freight rates rolling over. We have seen the peak of air cargo rates, and now they are also slowly grinding lower, but high enough to to capitalize on the on the fuel price increase. So, yes, I I think market is pricing in, but yes, there's certainly a disconnect on how equity investors are looking at these changes.

[00:37:24]>> Yes.

[00:37:25]And let's talk about that. The global shipping market sending some very uh mixed signals, isn't it, Parash? Current pricing suggests tanker rates are fading, dry bulk is strengthening, containers remain resilient.

[00:37:38]What do you make of all this? Which sector's valuations appear most inconsistent with the underlying fundamentals?

[00:37:47]>> And in fact, actually and it's a great question. In fact, we have started to see a divergence within the subsectors itself. And it's not only limiting to the shipping, but also on the aviation side, right? For example, in in a shipping, if you see and the dry bulk companies who has a more uh exposure to the capsize have outperformed the shipping companies which has exposure to a smaller vessels. And on on the tanker, more most interestingly, you would have expected the crude tankers to do well, and don't get me wrong, they did well, but if you see what has happened in the last 1 month or so, the product tanker guys have we started to outperform the crude. And as they say, right, the biggest villain of higher price is the higher price itself. So, the reason that we have a cautious view on the on the crude tanker shipping stocks is because if this crisis stays longer than what most people think, you have started to see that that will have an impact on the demand. And you will see the excess supply eventually will lead to a collapse in freight rate, which is pretty much what some of those stocks have we started to price in.

[00:38:52]>> Parash, I was talking to my previous guest and asking him about his expectation on when he sees the Strait of Hormuz fully reopening, and he gave it probably a few weeks, maybe maybe mid to late June. Does that sound right to you? And once the Strait of Hormuz transit volumes do normalize, would that call into question the sustainability of the $400,000 a day Middle East Gulf VLCC rates that we have seen?

[00:39:27]>> So, certainly, I mean, 400,000 we have seen it was it was at that moment. I think what market is pricing in is that once the Strait of Hormuz opens, there will be a pent-up demand because most of the countries will try to build a strategic reserve, which is would be somewhat higher than the pre-war scenario. But what market need to bear it in mind that the capacity that we have lost, the peak oil production may take more than several months to get back to the pre-crisis level. And that's where we see a disconnect between the supply and demand.

[00:40:03]Uh in terms of the timing, I mean, to be honest, uh anybody's guess is as good as anybody's guess. What I have learned since COVID is that more often than not, any of these crisis last longer than what most people think. Whether it was COVID, whether it was Russia-Ukraine, whether it was Red Sea, and now it's the Strait of Hormuz. So, when we advise to the investors, our our view is that your base case should be that these things [clears throat] will last longer, and based on that, you plan your investment thesis, and probably hedge your bet in a in a different scenario outcome.

[00:40:36]>> And Parash, we heard from President Trump uh reject outright the Iranian-Omani model for ownership of the of the Strait of Hormuz. Is there an an ownership model or a structure that the global shipping market perhaps favors, or are they largely agnostic about that as long as uh tankers and container ships can can easily pass?

[00:41:04]>> It's all about setting precedent, right?

[00:41:07]Because mind it, from the container shipping perspective, a Strait of Malacca, right? Now, does it mean that if the Strait of Hormuz has a new model emerge, will it have a rub-on effect on the other choke points in the world? So, it's an uncharted territory, and and to be honest, I I don't think that I have a strong view, or anybody would know actually what shape or form it will take in the coming days or weeks.

[00:41:32]>> Let's go back to the to the divergence that we've seen in these these markets. Tankers have been have enjoyed the most obvious geopolitical tailwind, yet non-Middle East Gulf rates are already below pre-COVID levels. Dry bulk rates continue to strengthen, though. What is that telling you, Parash, about about uh that these markets?

[00:41:57]>> It tells you that the ships follow where the dollar is.

[00:42:02]So, the freight rates went up. The ships have started to sail as fast as they can.

[00:42:08]As the export out of Gulf reduces, the ships started to reposition themselves to the Atlantic. So, the freight remains higher till the time ships relocated to the place where the oil is. As soon as those ships were made available in the Atlantic, you have you started to see the supply exceeding demand and therefore a decline decline in the freight rates. With respect to bulk, actually the dynamics are slightly different because typically they carry somewhat lower value cargo. So, a higher oil price incentivized shipowners to sail slow.

[00:42:41]And that coincided with strong grain growth, strong iron ore growth, probably a bit of bit of coal trade started to warming up in an absence of gas. We have seen Korea is importing importing coal.

[00:42:56]We are talking about some of the mothballed capacity in Europe is being reactivated. So, the dry bulk because the expectation was very low, it's surprising on out on upside. On the tankers, there was so much bullishness and optimism not only from the shipowners, but also from the industry guys to the investors. Probably the risk reward certainly still remains on the downside.

[00:43:18]>> And just a quick one on tanker rates outside the Middle East Gulf which have fallen below pre-conflict levels. Is that an early sign that the market is already pricing in normalization?

[00:43:34]>> On the contrary, actually what market is pricing in now is that this is status quo will remain.

[00:43:40]Because hypothetically, let's say one day the crisis gets over and the 8% of the capacity which is trapped on the on the other side of Strait of Hormuz releases, oil production in the Middle East get back to the normal sea, you will again see a trend of lot of the capacity from the Atlantic will revert back to the Gulf region.

[00:44:02]And at that point of time again you will see because the demand will be in the Gulf region, all the vessels are in the Atlantic. So, again, you will see a surge in rates. And then, as the time goes by, you will start to see freight normalizing. So, I I think it's very, very dynamic. And, in fact, the one thing that that we have often often asked why equity investors have never been appreciative or never made enough money in the shipping is because of the duration mismatch.

[00:44:28]A ship owner can take a 25-year view, but as an equity investor, probably 25 weeks these days looks too long.

[00:44:34]>> All right. So, let let me put that money question to you in that case. If you had to invest in only one of these segments within the global shipping industry and logistics for the next 12 months, which would it be? And what is the key variant perception that work here?

[00:44:54]>> Yeah. So, I mean, see, it all depends on what our base case assumptions with respect to what's going on. But, there are there are certain themes which has emerged in in my wider coverage. And what we've been saying is that uh the companies like uh shipbuilding, they are intended beneficiary of this extension extended disruptions. We are seeing probably some of the aircraft lessors will will get a boost because of the strong demand of the narrow-body new tech uh new tech planes. Uh on the other hand, some of the global businesses like some of the global freight forwarders, uh some of the global port operators who have exposure to the non-US, non-China trade routes, those would be some of the consistent winners and which can withstand the either outcome of this crisis. But, just focusing on what's going on in the Strait of Hormuz, uh where we stand today, our preference is that bulk are better positioned, containers in a short term has an upside, whereas tanker is where we see the most downside.

[00:45:54]>> Interesting point on shipbuilding. Why are shipbuilders ordering so ship holders, pardon me, ordering so aggressively uh despite the geopolitical and uh the macroeconomic uncertainty.

[00:46:08]>> So, this very good point actually. If you look around all the previous down cycles or a crisis versus this, this is very very different. This time around shipping industry has made lot of money.

[00:46:21]Everybody is flushed with cash, and which means that more capital is chasing fewer slots in terms of the shipyard capacity because minded shipyard capacity has gone through a 15 year of down cycle.

[00:46:33]And on the other hand, if you see this particular cycle while the asset prices are at a record level. Whereas if you look at the steel prices because of what's going on in China, steel prices are at a at pretty much a break even level. There is not much labor inflation. There is a plenty of labor available in China. So, it is pretty much a perfect perfect playground for the for the shipbuilders, and we have seen how how these stocks has performed whether they are Koreans or Chinese.

[00:47:03]>> And that's interesting, isn't it?

[00:47:04]Chinese yards have captured a 71% market share. Are Korean and Japanese yards losing competitiveness, or are they choosing to focus on higher value vessels?

[00:47:18]>> It's a combination. I mean it is the trend which probably is unlikely to revert. What we have seen is in the last 12 months since the onset of USD disruptions, the Chinese shipyard has gained the entire lost market share. The Japanese shipyards were the losers because bear it in mind that there is not much capacity to be come out of the Korean shipyards or the Japanese shipyards.

[00:47:42]Whereas we have seen some of the mothballed shipyards in China has been reactivated especially in the north of China. You are seeing a productivity gain also, and in terms of quality, we have seen like 20 years back China were building the small bulk vessels, then they moved into the larger bulk and tanker, then they pretty much dominate now the large containers. So so far as gas carrier concern, and the Koreans still have a dominant market share and an edge. And uh probably 10 years 10 years down the line probably we will see even that will be tilted towards the Chinese CPRs.

[00:48:18]>> And the final question Parashar on uh profitability uh with regards to container shipping, uh what's the biggest threat uh to margins? Is it lower freight rates or rising operating costs? And how much uh pricing power ultimately uh does the system have?

[00:48:37]>> So I mean everything boils down to demand and supply. I mean we have seen shipping lines making money in 2020 when the global demand was down. We have seen shipping lines losing money when Brent was $20 back in 2016. So at the end of the day, the industry has an ability to absorb every shock, whether it's a demand shock, whether it's a supply shock, whether it's a cost shock. As long as demand exceeds supply, they have a pricing power.

[00:49:06]>> Parashar, we'll wrap it up there. It's always a fascinating conversation with you. Thank you very much indeed for those insights. Parashar Jain from HSBC Global Research.

[00:49:16]>> Now as we tail into a break, we are taking a look at cryptocurrencies.

[00:49:20]Bitcoin at near a six-week low.

[00:49:23]Access Middle East will be back in two minutes.

[00:51:42]>> Welcome back. Ties between Germany and Beijing are in in after Germany's economy minister said both competition and cooperation are needed to create shared progress. Our China reporter, Lei Yu, has this story.

[00:51:58]>> Hey, Sheree. So, Germany's economy minister, Katharina Reiche, visited Beijing joined by dozens of business leaders. So, this is a trip coming after Chancellor Merkel's visit just 3 months after and also comes at a critical juncture where the EU is set to debate its China policy. You have major member states like France, Italy, Spain, and the Netherlands pushing for a tougher stance to address things like China's overcapacity, but notably Berlin is not part of that call. So, we're seeing a growing divide within the block on how to approach China. Now, the minister said, "We seek dialogue with China because fair competition is needed." She said, "Competition is good and ensures that we improve together, but it must be designed to mutual benefit." Now, another central point of discussion for Germany is securing a reliable access to critical minerals in China. This is what Minister Reiche said in Beijing. Take a listen.

[00:53:00]>> Competition makes us stronger, cooperation creates stability, and innovation creates shared progress. We have talked about critical raw materials. Our companies, not only those that have invested here in China, but also downstream companies, need access to critical minerals, to rare earths, because the modern world, modern technologies, are inconceivable without these raw materials. I have explored with my counterparts ways to create access that our companies can rely on, so that China and Germany can grow together.

[00:53:33]>> So, the minister and her delegation met with China's vice premier, He Lifeng, and the commerce minister, Wang Wentao, and the commerce minister had some pretty strong words saying quote protectionist EU trade restrictions have seriously disrupted cooperation between Chinese and European companies, but he said that China is willing to expand areas of cooperation and narrow the list of differences. Now with this widening divide within the block, we see the German Minister making her position clear saying that thousands of German companies depend on being able to export to the large Chinese market. But of course, underpinning that is Germany's growing trade deficit with China, which reached a record 87 billion euros last year. So we'll see how that debate this Friday shapes up and it will reportedly review a proposal to have these resilience tools compelling European importers to diversify supply chains. Sri, it's back to you.

[00:54:36]>> Elaine, thank you very much indeed for that.

[00:54:39]Now, before SpaceX filed to go public, it took on a $20 billion bridge loan and that payment is due in just over a year. The company plans to use the IPO proceeds to fund growth, not to pay down that debt.

[00:54:53]CNBC's Leslie Picker takes a closer look.

[00:54:56]>> SpaceX is known for its engineering talent, but pour one out for the financial engineers, too. Following SpaceX's acquisition of X, AI in February, the company secured a $20 billion bridge loan to retire 17 and a half billion of high interest junk debt accumulated largely through the buyout of X, formerly Twitter. The bridge loan dramatically cut SpaceX's interest costs with the legacy bonds carrying rates as high as 12 and a half percent and the new bridge loan at 4.58% as of late March. This is a huge balance sheet cleanup post X AI merger. If you recall the $44 billion buyout of Twitter in 2022 became the worst hung debt deal since the financial crisis because banks couldn't syndicate amid deteriorating performance and a jump in interest rates. Wall Street held the debt for years tying up capital that could otherwise be deployed elsewhere. The same banks that orchestrate the bridge loan though, Goldman Sachs, Morgan Stanley, Bank of America, Citigroup and JP Morgan are also the lead managers of the IPO. So, this is ultimately a fee bonanza for them. SpaceX was hit with a penalty for early repayment of the junk debt, but that's been mostly negated by the interest savings. So, why does this matter for the IPO? Well, in the prospectus it says that the bridge loan is quote required to use the net proceeds of the IPO to repay the loan within 6 months following receipt of such proceeds. The same is true for the cash of other types of financings as well. So, in other words, even though the S-1 says the use of proceeds are for funding their growth strategy including the expansion of AI compute infrastructure, enhancements to launch infrastructure and launch vehicles, increases in scale and capacity of satellite constellations, there's another less sexy, down-to-earth, near-term potential use, which is paying off debt. For CBC Business News, I'm Leslie Picker.

[00:56:46]>> That's all the time that we have today for Access Middle East Europe [music] Early Edition is up next. Have a good day.

[00:58:53]>> Mhm.