This is Horizons, Middle East and Africa. Our top stories this morning: crude factor, oil pushes higher as traders weigh increased flows through the Strait of Hormuz against a fresh wave of attacks on vessels. The RBA is set to hike for the first time in nearly four years, but hawkish Fed minutes may already be looking dated, and Asian stocks slip despite Wall Street's record-setting rally as enthusiasm over the earnings outlook fails to carry over.
It's just gone past 6:00 a.m. in South Africa, 8:00 a.m. across the Emirates. I'm Jennifer Zafar in Johannesburg. Happy Wednesday to you, and we are going to take a look at the market picture before we get to some of those stories. Wednesday is starting out a bit like a risk-off sentiment setting in, especially if you take a look at where we're seeing the Asian session at this point in time.
And really, that's in contrast to what we did see on Tuesday on Wall Street. As we were just noting there, if you take a look at U.S. equity futures, S&P futures are marginally up right now. But we should note that what we saw on Tuesday was the S&P 500 closing at its first record high since August, even as we did get some data that showed a wider-than-expected U.S. trade deficit. And also, there's still these concerns about inflation that is factoring into the picture, but we still had a positive session on Wall Street. We'll get to an issue in just a bit, about to talk us through what we're seeing in Asia.
But really, it's looking like a bit of that positivity fading a bit in the Wednesday session to start us off, with European futures looking a bit lower as well. This morning, we have the U.S. 10-year yield on the board, of course, as well, selling off across the curve, which of course is what we've been seeing over the past few days. But still, we're looking at the U.S. 10-year yield at about 5.31% there.
Later today, though, we are awaiting an auction for 10-year notes that really might prove critical to what we will see across the curve and really where we'll see yields going, especially as we continue to talk through these multi-decade highs that we've been speaking through over the past few days and weeks now. Brent crude on the board: Brent is back above $101 a barrel there, up just about 1%.
Of course, we mentioned some of the confluence of factors that are still factoring into the energy sector, especially as it pertains to what we're seeing in the Middle East. We'll talk through that in just a bit. But Brent crude is back up again. And we also have Bitcoin on the board, down just over 1.69% there, showing a bit of weakness as we do get some more dollar strength, the dollar strengthening against most of its G10 peers.
And of course, we mentioned we will get an auction for some Treasuries later today, but then we also get Fed minutes. So potentially that changes the picture from what we are looking at right now. But that's just a quick look at where we're looking at the markets picture from where I sit. Let's check in, though, on how markets in Asia are faring. When issue is standing by in Hong Kong for us. When? What are you watching?
Yeah, good morning, Jen. Well, as you mentioned, that divergence between the performance today here in Asia versus how we saw the strong performance in the U.S. overnight. Now, actually, a couple of different factors weighing on Asian markets today. You have the higher oil prices, the higher yields, and also a slightly stronger dollar in our session, all weighing on Asian stocks.
Now, when it comes to the recent underperformance of Asia versus the U.S., some actually also point to how overall the higher yields are actually pressuring Asia in different ways, whether it's valuation, currencies, or even the capital fund flows. So perhaps that is why you are seeing the picture that we are seeing today.
Now, when it comes to the Japanese yen, we're actually seeing weakening by a third day. And in fact, we can pass that 158 level against the dollar after the Bank of Japan board member Sato's comments fueling bets that the Bank of Japan will likely be more cautious going forward with its rate hike. Now, in stocks, Korea is actually underperforming today.
However, as you flip the board and take a look at how it has really been underperforming recently and giving up its position as the world's best-performing stock market this year to Taiwan, which actually sees shares up about 72% so far this year, as we see investors rotate away from Korea after that big sell-off, the big volatility earlier this year, and with concerns rising around how there is a slowdown in the memory price going forward.
And you're seeing investors rotating into some of the names that can continue to benefit from the other bottlenecks that we see in the AI trade. And we have many of those in Taiwan, and hence you are seeing that switching hand in the world's top-performing market. Back to you, Jen.
Thanks so much. When we see you in Hong Kong, we'll check back in with you in just a bit. Now, oil prices are pushing higher as a fresh wave of attacks on vessels in the Strait of Hormuz puts supply risks back in focus. Iran stepping up attacks just as energy flows through the waterway were seen recovering, raising questions over how sustainable that recovery will be.
Let's bring in Stuart Livingston Wallace, Bloomberg's executive editor for the Middle East and North Africa. Stuart, are we seeing a meaningful escalation in the Strait of Hormuz? Give us a sense of what we're looking at as we start the day.
Stuart Livingston Wallace
5:38 ↗
Good morning, Jennifer. Yeah. So, I mean, it certainly appears to be that way in terms of the number of reported attacks. They've just been increasing in frequency really for the last several weeks. Now, remember, we're in a situation where not necessarily all the reports—sorry, all the attacks get reported, and they will be varying in terms of the actual impact on shipping itself.
So this comes at a time, as you said, when the volume through Hormuz really is picking up. We're not quite sure just how many barrels are getting through, but all the indicators are that it's getting pretty close now to pre-war levels. So in terms of immediate supply to the market, that's a big positive.
I think the continuing issue here and why we remain above $100 a barrel is that ongoing risk. You know, so long as missiles and drones are flying over that waterway, I think the market's going to be very reluctant to believe that everything is back to normal. It clearly isn't, right?
And even if we do, as you were just pointing out there, see flows recovering slightly, how vulnerable is the disruption?
Stuart Livingston Wallace
6:39 ↗
I mean, I think the answer to that is very not. By and large, we haven't had too many ships sunk. So there is, when damage when it does happen, you know, is obviously of concern, but it's not necessarily stopping the ships in their tracks. However, the fact that that's going over there is doing two things. One is obviously going to make a lot of carriers reluctant to go through that, too.
It's raising the cost of basically hiring one of these vessels to do that. And then you've got the insurance costs, which are either non-existent—no one's prepared to insure them—or they're incredibly expensive. So a lot of companies and nations are having to do it for themselves, which they're prepared to do, and that's fine. But again, this is not a typical situation.
And when so much of the world's energy supply is coming through the strait, you know, that is a concern for the entire global economy and all the knock-on effects that has in terms of the inflationary pressure, and then from that, from that, fiscal policies across every country on the planet.
And Bloomberg is also reporting, Stuart, that the Trump administration is resisting a deeper role in Saudi's fight against the Houthis. Why do we know, or what do we know about why Washington is holding back?
Stuart Livingston Wallace
7:50 ↗
I mean, I think on two counts, really. One, as you recall, you know, they spent a long time bombing the Houthis with, frankly, very little effect. And number two, they don't want to be overstretched. I mean, they are already overstretched to some extent because of the concentration they have on Iran and around the Strait of Hormuz.
As you know, they're moving a third strike carrier group here, which we're not sure if that's in addition to the two that are already here or that's going to replace one of them. But nonetheless, it speaks to a U.S. military that is highly concentrated, its forces in one very specific area.
Does it necessarily want to open a second front in Yemen, in perhaps a type of conflict that in the past has not proved to be wholly successful, at a time when certain types of munitions certainly are being run down? I mean, there's some debate about whether the, you know, how critical that is. So I think the calculation is that perhaps other countries need to step up here and get involved.
We know that that is happening to some degree. Washington doesn't necessarily feel that it's in its fight right now, and that that situation can to some extent be contained and separated from their realm. Whether that's right or not, of course, is a matter of opinion.
Stuart Livingston Wallace, Bloomberg's executive editor for the Middle East and North Africa. Stuart, thank you so much for joining us. Let's stick in the Middle East. The Iran war is leaving the Middle East with a massive energy infrastructure bill, and the region's biggest producers say they shouldn't have to shoulder it alone.
For more, we're now joined by Anthony De Paola, Bloomberg's energy markets reporter. Anthony, what exactly are we hearing from energy giants in the region, and what are they asking for?
Good morning, Jennifer. You're right. They're saying that they shouldn't have to deal with it alone because they are, in their view, pushing out a lot of their barrels on their own ships, running through the Strait of Hormuz. Often they are running at night. They're turning off their satellite transponders so they can put those ships through undetected.
But that's not without risk, because vessels have been attacked, as Stuart was saying earlier. We do have an uptick, a seeming uptick in the number of vessels that have been attacked, really since last weekend and going through this week. A lot of focus had shifted from looking at the Strait of Hormuz to looking at the Red Sea with all the attacks by the Houthis and some of those Iraqi militias on Saudi facilities.
They've been mainly hitting a lot of Saudi facilities along the Red Sea, Aramco refineries, pipelines. So that has been a focus as Aramco has repaired that pipeline, started flows again, resumed some activity in the north of the Red Sea.
We're looking back again now at Hormuz, and we have seen those exits take up. They're running about 12 million barrels a day at the moment, it seems, according to some of the big traders. This was the CEO of saying that yesterday at a conference, running through Hormuz. That's crude oil only. But this is a risky venture.
It's not the situation as usual, because they do have to take those risks. The Gulf producers are looking at setting up alternatives, meaning other pipelines, international storage that would pre-position some of their oil outside of the region. So they're looking for contingencies. Of course, those things are not free.
Storage is a cost because you need to pay for the tanks. You need to build them, and you need to pay for holding that supply idle for a long period of time. Pipelines as well. Not necessarily always used. That East-West pipeline that the Saudis had was largely unused. It took about 2 million barrels a day of oil across the country to refineries on the Red Sea coast.
The capacity is 7 million barrels a day. That flex of those extra 5 million barrels per day came in handy when global markets needed it. The companies are saying that they want to be a little bit compensated for some of those investments that may sit idle for a while until they're needed. So that's really what they're asking—not to have to shoulder the loan. Jennifer.
Anthony De Paola, our Bloomberg energy reporter, joining us today. Anthony, thank you so much. Bloomberg's energy markets reporter joining us there. Now, coming up, we speak with AG Capital's Casey Brake, who says the Fed's September hike marked a policy turn. That's next. This is Bloomberg.
You can't borrow endlessly and spend endlessly. And it's been going on for a long time. But if you look at the buildup in debt around the world, actually, you're going left. I mean, you kind of tapped out at one point, but America has gone from your 50% of GDP to 100%. Your countries around the world are borrowing money, and I think we can't be complacent. And the lesson is, there will be a point where the market will ask for more and more and more.
That was JPMorgan CEO Jamie Dimon speaking exclusively with Bloomberg. Now, Treasury Secretary Scott Percent says the U.S. can very quickly begin bending its debt curve through stronger economic growth and spending restraint, even as Treasury yields remain near their highest levels since 2002.
Casey Sprague, market strategist at AG Capital, says the Fed's September hike marked a turn in policy and the Bank of England may be close to the same point. She joins us now from Cape Town. Casey, thanks so much for being with us. So maybe just walk us through that point that you're making, because right now we're seeing Fed pricing signaling a bit of a divergence about what the market is expecting over the next few meetings. Where do you get that conviction from?
Yeah. Good morning, Jennifer. And I would say in simple terms, I mean, government debt has had a rough few months. Investors are rightly so worried about inflation and fiscal deficits, have kids, you know, selling in a volatile month-long news. And we're getting to the point now where we are starting to pick winners and losers.
I mean, if you just put a little bit of context, I think what the U.S. 10-year, that's when it hits a high of 5.34%. That's been a high since 2002. France's 10-year yields also sitting at around the highest since 2002. I believe the UK 2-year above 6%, which is the first time since 1998. And even in Japan, the 10-year is at a two-decade high.
So, you know, the point to really make here is that some of these spikes have reversed within hours. Of course, U.S. and German yields have fallen as investors move towards what I would say is perceived safer issues. Well, French, Italian, Greek yields have also stayed here. But what we are seeing at the moment is that sovereign curves have generally flattened, and a flatter curve points to markets pricing sort of near-term policy tightening more than a long-run fiscal crisis. And I think that's important to highlight.
So I would say the pressure is greatest where deficits are large and spending is high, of course. France really being the obvious example here. But again, if you look at the U.S., you know, debt has passed around $40 trillion. Investors have been more than willing to buy short-dated Treasuries since the soft inflation prints. But through all of this, really just sort of largely expecting the volatility to persist.
And bond markets are essentially sort of reacting now to central banks reaching, though, their pain points on inflation.
Casey, how does that factor into the headwinds and the potential optimism and the tailwinds then facing risk assets? How do we factor that into the current outlook?
Yeah, I mean, it's quite simply a Fed hiking cycle. These elevated yields that I've mentioned and soaring energy prices are really remaining sort of the chief headwinds for risk assets, as you mentioned. I mean, it's quite simple. The Iran conflict is now in its eighth month. We're still seeing an area where petrol or energy prices at the moment are all remaining elevated.
And it's these expensive energy feeds straight into inflation, and it's really forcing sort of central banks to respond. But it's really interesting the economy at the moment, because at the same time, we see last week's data coming out of the U.S. from a consumer point of view that's still giving us a little bit of comfort, even with that sort of weak payrolls print. The U.S. economy is still, all intents and purposes, holding strong.
So how that filters through to the rest of the world, particularly in emerging markets, is what we think is really key to watch right now.
Well, in case we're still seeing tech outperforming despite what we're seeing with the bonds.
Yeah. So that's the interesting underpin. You know, there's so much debate at the moment. Are we going to reach that sort of tech bubble? Where is that AI spending sort of going? And I think the durability of what we're seeing around this AI investment cycle is being quite remarkable. And if you look at sort of the Q2 results, it's really suggesting that AI is really starting to stack it up.
I mean, that's really what's powered the sort of strong large-cap tech performance towards around Q3 as well. But I think it's an interesting point that tech particularly is usually packaged as a long-duration asset. It's really been the only game in town during what's been a quarter of heavy bond selling as well.
But I would say the market's return really depends on a very narrow sort of group of companies. And it's that sort of concentration is actually creating quite unusual problem for anyone trying to diversify more broadly across the equity market. It's a fascinating time.
Certainly, Casey Sprague, market strategist at AG Capital. Casey, thanks so much for your insights and for joining us as always. All right. Coming up, a Falcon AI has launched a new model that's more attuned to the Emirati dialect. We'll hear from Feisal Al Bonny, UAE presidential adviser, about the strategy behind the launch. That's next. This is Bloomberg.
Faisal Al Banai, adviser to the president of the United Arab Emirates, says the UAE has launched a new Falcon AI model that's more attuned to the Emirati dialect. Al Banai discussed the strategy behind the model with Bloomberg's Alex Duller at the AI Everything conference in Abu Dhabi.
As we all know, when Falcon started releasing the models and their videos, we were one of the early frontiers of releasing open-source models. At that time, the focus was on the larger models, and we multiple times released the best-performing larger models. Maybe a year and a half down the line, we felt that the future need is not really about the much larger models.
And the thing about creating more specialized models that can actually do practical use cases and solve things for enterprise, for governments, and for clients. So we shifted our focus to focusing on very specific domain-focused models. And I think that's what we're getting a lot of traction with clients. So we used our experience there to really deliver very focused, impactful models.
And can we expect to see any new models being announced or released anytime soon?
So we are announcing today the releasing of the Falcon Emirati model, which has much more in the Emirati dialect. The Falcon OCR to recognize Arabic text, and the text-to-speech and the speech-to-text. That's what we released now. But we've been releasing multiple models related to engineering, related to a number of areas that we feel are very tailored focus to what our clients need.
But today, we've definitely launched the Arabic Falcon Emirati model.
And will that be released today, or when it's released today?
Oh, wow. And people can come today. They should be able to download.
Okay. And there are some new exciting startups emerging from technology developed at the Technology Innovation Institute. How ambitious are you about commercializing that research? And should we expect to see more ADQ-backed companies to own more of the strategic technologies that Abu Dhabi sees as critical for its future?
I think what you will see in Q4 of this year, which is kind of now, you will see multiple unicorn companies launched where ADQ technology is going into them, where there is a very clear partnership between private sector investment and investment entities and technologies from TII that are really launching multiple unicorn companies.
So I say stay tuned between now and end of the year, and you'll hear about two pretty significant companies launching using a good part of the ROI technology in them.
I know that any startups that you're most excited about currently in Abu Dhabi?
