Good morning. This is "Horizons: Middle East & Africa." Our top stories this morning: Yemen says its forces have taken and are closing in on Bab el-Mandeb, a key oil route, as Hormuz remains under fire. All-time high: a tech rally on Wall Street pushes the Nasdaq 100 to a fresh record. Asia stocks continue the momentum. And Middle East money: OpenAI is said to be in talks with multiple UAE funds on a $30 billion financing round. It has just gone 8:00 a.m. across the Emirates. I'm Abeer Abu Omar in Dubai.
Let's show you a glimpse of what markets are doing. We're looking at a positive picture when it comes to U.S. futures, trading a little bit higher, 0.1% higher, following the tech rally on Wall Street yesterday. We alluded to that in the headlines. But Nasdaq 100 futures doing pretty much the same thing. The Nasdaq 100 closed at another record high yesterday, did the same thing early in the week. But we saw some megacaps, Microsoft, Nvidia, also closing in the green, turning the picture positive across the board. And that is seeping into the Asia session this morning. MSCI Asia Pacific is tilting higher and been fluctuating in its gains, but tilting higher this morning. Oil prices also fluctuated, still above $100 a barrel, barely above $100 a barrel, but 0.4% higher. We will discuss this story of Brent and energy prices, the East-West pipeline, what is happening between Saudi Arabia and the Yemen-based Houthis. Let's turn to the 10-year yield.
5.32% almost at this point, still roaming around multi-year highs. It is about one basis point higher this morning, of course. And that gain in yields is also seeping into bonds in Asia, New Zealand, Australia, that are also dropping this morning. Now, let's turn to Asia and see what markets are doing there. And we've got Winnie Hsu in Hong Kong. What are you looking at?
Good morning, Abeer. Well, we are seeing Asian stocks edging higher today around those highest levels in about a month. Now, as you just mentioned, it seems quite resilient when we have the elevated oil prices and elevated bond yields. And today, it seems like we are seeing a bit of a mixed picture, perhaps a bit of a rotation away from the chip makers into the chip equipment makers. And that's perhaps why you're seeing South Korea here down about 1%, while Japan is actually gaining. Now, Hong Kong shares are also actually outperforming today, given sentiment being supported by that license deal between Qualcomm and Huawei. Now, we flip the board and cross-asset, we got the results from the 10-year JGB bond auction. Pretty solid demand, and in fact it was seeing demand way above the 12-month average. So most likely going to provide a nice relief to the G10 bonds. However, at this point, as you just pointed out, we have Asia bonds overall still tracking those losses from Treasuries. And when it comes to the Japanese yen, because of the recent weakness in euro, we continue to see the yen right now around that 177 level. And this is coming after it has already strengthened against the euro for the past seven sessions. And because of that overweight that Japanese investors hold around the French bonds, that perhaps this unwinding that's happening right now also is accelerating the moves in the yen against the euro as well. Back to you, Abeer.
Winnie, thank you for that update. Let's turn to the usual and the geopolitical picture here in the region. Saudi-backed government said its armed forces have recaptured the Red Sea city of Mocha. This is one day after announcing a campaign to recapture territory held by Houthi fighters. Capturing the port city puts the internationally recognized government closer to taking over the vital Bab el-Mandeb strait. Meanwhile, Saudi state media says the military has also destroyed a ballistic missile launch platform in the capital Sanaa. Let's bring in Stewart Livingstone Wallace, our executive editor for the Middle East and North Africa, to give us the latest on what has happened. Quite a quick turnaround, Stewart. This was announced over the weekend, and now we have the Saudi coalition-backed Yemeni forces capturing Mocha, vital territory that is very close to... What can you tell us about the latest?
Stewart Livingstone Wallace
4:46 ↗
I think you need to put in some caveats. One, we are relying on the claims being made by the Yemeni government or the internationally recognized government. Secondly, as we know from Russia-Ukraine, you know, front lines are always somewhat muddled and confused. And then the third thing is, can they hold it? Because so far, their track record in holding territory has been somewhat patchy. Having said that, you know, if this turns out to be true and something they can hold, that is strategically very important. Of course, they have those more northern coastal areas and for years have been firing on shipping, so it doesn't remove the threat entirely. But it's an interesting development, and one we will keep watching. And the second thing is, what exactly is the Houthi response? Do they focus it on the south, or do they focus it on the north, specifically Saudi Arabia, and what damage could that do? So it's a complicated situation, and one that will develop.
And one that's been going on for quite some time at this point. Stewart, what about oil? We have a lot of reports yesterday. Brent crude prices were moving on some reports that the East-West pipeline might be shut. But then Bloomberg did come up with a report suggesting that it's operating as normal as possible, still 80% capacity. What can you tell us about that?
Stewart Livingstone Wallace
6:01 ↗
It does seem to be running at the capacity it was, we said, a couple of days ago. At least that's based on our reporting. And on top of that, you have Kuwait that's come out and said it's producing at 75% of pre-war capacity. You've got Iraq in the market looking for new tankers to take supply out through Hormuz, and all of which points to a better supply situation. On the other side of that equation, you've got the head of Aramco saying that, by his estimate, down 12 million in oil, and that's a huge number to make up and take a very long time to get back up to those pre-war levels, which I think at $100 a barrel and probably stay there for a while, because the market is looking at the supply situation in the longer term.
You noted that multiple times. Oil still very much close to $100 on the barrel when it comes to Brent. Stewart, thank you for those insights. Stewart Livingstone Wallace, Bloomberg's executive editor for the Middle East and North Africa. Just like he was noting, Kuwait is pumping oil at about 75% of the level seen before the Iran war, as more tankers take the risk of navigating the Strait of Hormuz. The chief executive officer of Kuwait Petroleum says the country is producing about two million barrels a day, compared with about 2.6 million barrels before the conflict began at the end of February. Kuwait's output fell below one million barrels a day in the opening months of the conflict as Iran blocked shipping through the waterway. And Bloomberg understands that Iraq is set to hire additional tankers as the country looks for greater control over moving its oil through the heavily contested Strait of Hormuz. Bloomberg understands that state-owned Iraqi oil tankers expect to... one very large crude carrier and a smaller Suezmax in the coming days. The company is separately planning to reissue a tender for more tankers after a previous effort was canceled because it did not get acceptable offers.
And now back to markets. Investors are seeking safety in German bonds while French and Italian debt remains under pressure amid mounting concerns over Europe's fiscal outlook. French risk is hovering near levels last seen during the euro debt crisis, with investors closely watching for signs of broader market contagion. Gene Tannuzzo is the global head of fixed income at Columbia Threadneedle and joins us to discuss everything that's happening in Europe and wider market moves. Gene, good morning. Good to have you with us. Let's start with the euro picture, the contagion that I guess we could say had stemmed from France's political and fiscal situation. Do you expect a wider contagion in Europe? Because we are also reporting on a political situation that is about to take place in Spain now?
Yes, we definitely are concerned about the fiscal situation in France spreading to other parts of Europe. If you look now and compare this situation to where we were in 2011, valuations are very different. This is a very acute issue right now in France. And if you look at the credit spread of France over Germany, that's about double the average of the other so-called PIGS, if we think back to the old acronym from that time: Portugal, Italy, Ireland, Greece, and Spain. So we haven't seen it spread to the other countries yet, really. We also haven't seen it spread to corporate markets. And so those would be the bulls we would be looking at to see if this is truly a situation like we saw back at that time, 15 years ago.
Okay. Let's bring back the monetary situation, the global one, really, because we're not just looking at what is happening from the Federal Reserve. We're looking at the central banks across the globe. But to focus in on the Federal Reserve, looking at where yields are right now, Gene, what concerns you the most about the continued elevation and the movement there?
Well, look, I think the biggest concern here is that the Fed has to do more than a credibility-enhancing move as it relates to a few interest rate hikes early on in Kevin Warsh's tenure. What we've seen so far is the new Fed chair trying to establish himself as one who's not going to look past elevated inflation. And we would estimate something perhaps along the lines of three interest rate hikes, taking out the interest rate cuts of 2025. If we really do need to go much further than that, I think that could be a true problem for markets. And that's something that can really disrupt pricing and risk, including credit spreads and equities.
Okay. And speaking of pricing in some expected outcomes, let's say the Fed, the BOJ, the ECB decide to go in diverging paths going forward, and to the end of this year, and certainly into 2027, what impact does that have, and what asset class would break?
Well, I think it has to be credit markets that we look at here as a primary variable. Other periods when we've seen such an interest rate shock, it takes a little bit of time for that to feed into credit markets and credit fundamentals. We've been in such a borrowing binge as it relates to capex funding for artificial intelligence infrastructure that at some point, the cost of capital begins to matter for all kinds of other uses of that capital beyond just that specific acute sector in terms of technology and AI. So what we're looking for really is spreading of that volatility, spreading of that interest rate shock into a credit shock. And I think that ultimately will tighten financial conditions. In September, we're just seeing the very beginning of that with high-yield corporate bond spreads about half a percent wider.
Okay. And Gene, we talk a lot about what Kevin Warsh is going to do. We spoke a lot about the September hike as a credibility hike. But do you think we're entering a world where bond markets are pricing in a new regime, if you will, that central banks have no control over at least long-term or longer-end yields?
The way we think about that is really resetting to a period of more normalized term premium. So the first thing is to set the expectations for the short-term interest rate. But then we have to think about longer maturity yields and what's the natural premium above short-term interest rate expectations. If we go back to the period before quantitative easing, that would have been between 1% and 1.5%. Term premium was remarkably depressed when we went through the period after the financial crisis and after the pandemic. But those days are over. And now as we reset to a more normalized level, that's where I think longer-term interest rates have room to continue to rise just a bit and have yield curves be steeper as that premium comes back into the market.
Okay. And just finally, I want to bring it back to Europe because it is a very timely story right now. Starting again with France. You've alluded to the fact that it is quite dangerous. But when do you think it starts to really send danger signs to the wider market? When does it start to become a big euro area problem, and the situation that is stemming out of France? But again, we're talking France, Germany, and even the UK to some extent, and now Spain?
Yeah, you're absolutely right to bring up that. And I look at two very specific things. First is a fundamental catalyst, and the other is a valuation catalyst. On the fundamental side, we would be looking at pension reform and some willingness to move toward a lower deficit from France. In the absence of that, the valuation monitor we would be looking at is corporate spreads, which in other periods when French spreads over Germany were this wide, we saw corporate spreads more than twice as elevated. And so we haven't seen that reaction with European corporate bond investment-grade spreads still around 1%. If we start to see a reaction of those going substantially wider, that would be a catalyst for us to think about: A, is there a fundamental change here? Or should we be more concerned?
Okay. So I guess we'll have to keep an eye on those catalysts that you're mentioning. Gene, thank you as always for your time. Gene Tannuzzo of Columbia Threadneedle with his latest insights. And up next, Australian lawmakers are giving executives from OpenAI and other AI firms a grilling over safety concerns. More details on that next. This is Bloomberg.
Welcome back to "Horizons: Middle East & Africa." Bloomberg has been told that President Trump is preparing to ease limits on a tax-exempt variety of diesel. It is a bid to lower the price of the essential fuel ahead of the November midterm elections. Sources say the plan allows more widespread use of so-called red diesel, which is usually reserved for farming and construction. Top officials in the U.S. and India are signaling that trade talks have reached an impasse that is making it difficult to clinch an agreement. The two sides agreed to an interim deal earlier this year and have been locked in negotiations ever since. Indian Finance Minister Nirmala Sitharaman says talks have reached a plateau beyond which compromise will be difficult. Germany and France are urging the EU to adopt powers that could block China and other countries from accessing its single market during a major trade dispute. The proposal was outlined in a letter to EU chief Ursula von der Leyen in a bid to reduce reliance on foreign supply chains. Both countries also want broader investigations into subsidized imports, which could lead to new tariffs. Spanish Prime Minister Pedro Sanchez has called a snap election amid a housing affordability crisis. It comes after parliament rejected the plan to intervene in the housing market following protests across the country. Polls suggest the center-right People's Party could topple the minority government led by Sanchez, who's been in office since 2018. And coming up, Bloomberg has learned that Chinese AI startup Moonshot is targeting an early Hong Kong IPO after reaching a $50 billion valuation in its latest fundraising round. We will bring you the details later this hour. This is Bloomberg.
When it comes to the impact on the economy, clearly, if we do this right, there will be a productivity dividend for Australia and for every economy around the world if we get it right. That's why we put so much time and effort and energy into making sure that we do get it right.
Australian Treasurer Jim Chalmers speaking to us exclusively earlier about the opportunities and risks posed by artificial intelligence. Now, OpenAI is in talks with multiple investment funds from the United Arab Emirates to help anchor a $30 billion round of financing. The UAE funds have discussed putting in as much as $10 billion altogether, and BlackRock is in discussions to participate. Top AI firms have previously turned to deep-pocketed investors in the Middle East to meet their large capital needs. And sticking with AI, OpenAI's chief strategy officer Jason Kwon has apologized to Australian lawmakers after one of its AI models breached a government website. Kwon made an apology while testifying to the Australian parliamentary inquiry on AI safety.
I want to begin with an apology. During internal training and value and evals, our models accessed websites in ways they were not directed to. That should not have happened. We also should have handled our response better. We are sorry, and we know we have work to do to rebuild trust with the Australian people.
Bloomberg's Paul Allen joins us now from outside the inquiry venue at the New South Wales Parliament. Paul, good morning. Good to have you with us. Walk us through what's happening. We heard that apology, but walk us through the intricacies of that hearing.
Suggesting Jason Kwon, not the only AI executive to be appearing here. But OpenAI was at the center of that incident back in June where an OpenAI agent breached a Medicare statistics website. Now, this is not a public-facing website. It jumped guardrails to do so. Anthropic didn't even find out about it themselves until August, and then didn't tell the government until September 10, and then did so via email. So that's the basis of that apology there. Under questioning, he was asked, well, look, if you hadn't told the government, would we have even known now? To which Mr. Kwon responded that that was a reasonable assumption. And after another question, he conceded that not even Sam Altman, the OpenAI CEO, knew about the breach either when he met the Australian Deputy Prime Minister Richard Marles back in September. So a number of terrible missteps which were behind that apology. And important to note that no personal or private information was leaked publicly as a result of that breach. But obviously the concern is that they got lucky rather than that being good management. So Mr. Kwon saying a number of procedures have been put in place to prevent that from happening again. And they have already detected and prevented a few breaches of a similar nature.
