This hour. Yousef first, european governments this week agreed to assemble a Naval Mission to provide safe passage for ships through the persian gulf. That is after iran seized a British Oil Tanker in the region. The act was condemned by the the u. K. Foreign secretary jeremy hunt, but defended by his iranian counterpart. Under international law, iran had no right to obstruct the ships passage, let alone bored her. Board her. It was an act of state piracy which the house will have no hesitation in condemning. Even more worryingly, this incident was a flagrant breach of the principle of free navigation on which the Global Trading system and World Economy the u. K. Ship had turned off it signaling for more than the time that it was allowed to do so. It was passing through the wrong channels, endangering the safety and security of shipping and navigation in the strait of hormuz, for which we are responsible. Yousef we have more with our executive editor for the middle east. Reporter we dont know much yet. We know the u. K. Has announced it. Its not surprising that the u. K. Is going to its european allies and asking for help. And that they would join in an effort to try to make sure that the strait of hormuz stays open, limiting irans ability to disrupt it. I think in terms of extra pressure, you may be referring also to the u. S. Move against the Chinese Company, to put sanctions on that Chinese Company for dealing with iranian oil. I dont think the two things are necessarily directly linked. Because the u. K. Seems to be very keen to separate itself from what the u. S. President is doing, jeremy hunt was clear about that. Saying they are sticking to the policy of wanting to ensure that a nuclear deal sticks and continues, and are not aligned with President Trump on his policies. Tracy good morning. Lets focus on that naval escort. Would you expect that to deescalate tensions between the u. K. And iran . Or would the involvement of the military there end up ratcheting those tensions . It depends on what iran the sites to do. If iran decides to try to disrupt navigation further, to get another oil tanker, then yes, having more military ships in the gulf may lead to extra tensions. From the u. K. Perspective, the european perspective, the idea really is to make it harder and thus avoid some of these tensions. Yousef great to get your insight. Thats our executive editor for the middle east and north africa. Lets get some additional context with shane oliver. He is the head of investment and chief economist at amt capital investment. He joins us from our studio in sydney. You dont think a war is likely. You look throughout history, we were in similar situations where war wasnt likely and happened anyway because others dragged certain countries into that. Is that what could happen this time around again . It certainly could. The risks are high. President trump has been using what he calls maximum pressure on iran to get them to renegotiate the nuclear treaty. But by the same token, a ron iran might decide, why should we get into this . Tensions continue to escalate. Tensions escalated over the last month or so. If that goes on, theres a risk of a war in the middle east. It will be contrary to what President Trump was elected on. That was the basis of not getting into further wars in the middle east which tend to bob the u. S. Town. Im hopeful that there will be a negotiated solution here. But you have to say the risk is pretty high. Tracy on that point, there are a lot of Trump Supporters in the u. S. Who care a lot about gas prices. When you see provocations in the gulf region start to drive those up, you can imagine a lot of Trump Supporters arent necessarily going to be happy about that. Do you see maybe trump trying to deescalate the situation because of pressure from his base . Thats an important point. It is a similar argument that could be applied in relation to the trade war with china. That yes, his base wants to see him standing strong. Against china, iran, so on. They dont want to see they wont be happy of unemployment goes up and they have to pay more for their gasoline. I think trump is driving a fine line here. If you want he wants to see progress in terms of improving the situation with iran. By the same token, he doesnt want the oil price to go up too much. Because that would really threaten his reelection prospects. The worst thing for him would be warscalation in the trade with china and a war in the middle east pushing oil prices to 100 per barrel. That would really dampen his hopes for reelection next year. Yousef up next, a 29 rise in firsthalf profit following what the ceo of Peter England called a solid six months. Hear our interview with the with him next. This is bloomberg. Yousef welcome back to the best of bloomberg daybreak middle east. Red Bank Reported a 29 rise in firsthalf profit following on what the ceo called a solid six the ceo, Peter England, called a solid six months. He joined us on the line on tuesday. Theres two factors driving it. One was that we repaid our bond program at the end of june. We were actually carrying a lot of excess liquidity for the last couple of months of the quarter. So that had some impact on them. The other main one is that we have continually been changing mix gradually over the last four years. The whole approach really is to rebalance the portfolio and take a little bit of risk out of the book. Basically balance things out. Things will continue to decline a little bit. They were adversely affected by this excess liquidity we were carrying in the second quarter. But you will see them continue to graduate down over the next couple of years. Tracy peter, its so good to talk to you again. You mentioned the loan mix in your overall portfolio. We have seen some investors and analysts expressing some concern over loan quality in the uae region. Im curious if you could give us some color on what you are seeing in terms of bad loans. What are the trouble spots right now . Last time, we had a big default cycle in the uae, it was mostly sme lending. Are you seeing that again . Or is it an issue with Real Estate Lending . We are the largest sme bank in the country. We struggled, to be frank, four or five years ago with sme default. What we have seen over the last 3. 5 years is gradual improvement rather than things going in the wrong direction. On the sme side, we are seeing improving asset quality. Part of that is because we changed the way that we lend quite significantly about four years ago. The benefits of that are starting to come through. In our case, across the board, we are doing a lot more Financial Institutions. Lending and wholesale banking. We are not seeing real signs of stress. In the longer term, real estate, if we continue to see this downward pressure on prices, you would assume that could start to bring some challenges through. In our case, we are in a probably slightly different space because of our loan mix. We are gradually improving asset quality rather than the other way around. Yousef the fed is expected to cut at the end of the month. At the end of the day, a cut is a cut. How is that likely to affect you . Interestingly, rakbank seems to be in a different space than most banks in most areas. Its the same when it comes to Interest Rates. Globally, generally speaking, banks benefit when interestrate rates rise. We benefit marginally when Interest Rates fall or are flat. That is simply because a very large portion of our loan book a fixed rate contractually or by practice. Credit cards, personal loans, so forth. A largely fixed rate for the time they have been written for. In our case, we do a little bit better when Interest Rates fall. I think its fair to say globally most banks would find the reverse, they tend to do better when Interest Rates rise. So in our case, i dont see it as an issue. We are thankful that this pot on pause on rates is happening. Not only from a new perspective, but also from asset quality. If they continue to rise, it would become increasingly difficult for clients. Tracy im curious. How would you expect those lower rates to actually feed into loan growth . I believe you forecast Something Like 4 loan growth for the full year. I think you said that back in april. Do you think you will be able to meet that forecast . Do you think that lower benchmark rates will encourage more businesses to take out loans . Yes and no. The thing is, it probably wont discourage. Rates were heading upwards, and people were starting to be more cautious in terms of borrowing money. Thats not a bad thing. With the expectations that rates would remain flat or come down, for some time, it may improve loan growth a little bit. Our numbers are not misleading, exactly, but we have a relatively large Financial Institutions book we have built up over the last three or four years which is not shown in our gross low numbers. Gross customer assets. That has grown about 3. 1 for the year. That has added to loan growth, higher than what you see in the peer groups lines. Yousef m a has been a big thing in the united arab emirates. Are you currently looking into either being acquired, making an acquisition, or being part of a merger . The way i think things will probably can now, it is not uncommon. It just happens there are four very large banks in australia and a number of niche players. I think thats the way things are going to pan out for the uae. They will end up with four or five, maybe six relatively large players. And some players that have a leash. In the case of rakbank, we are the National Bank which has relevance. But we also are the largest Small Business bank in the country. I think that is really our niche. In the sme space, and to support the ongoing growth of the economy as well. Now, at this stage, theres nothing on the table. We always look at the situations. There certainly nothing being considered actively at all. Yousef up next, President Trump attacks the fed again. His take for the central bank he is backing a half percentage point rate cut this month. This is bloomberg. Yousef welcome back to the best of daybreak middle east. President trump backs a half percentage point cut for policymakers. The president attacked the fed again, tweeting that the central bank was misguided in keeping rates so high. Elsewhere, the bank of japan governor says hes monitoring concerns about Global Growth. Uncertainties regarding the Global Economy have been heightened. And some nervousness has been seen in Global Financial markets. The bank needs to play close pay close attention to the tracks of these developments on the grounds of Economic Activity and crisis. Yousef we got more with shane oliver. I think one should see this as the fed taking out insurance. Such as they did, say, in 1998. Bottom line, u. S. Growth is still strong. Unemployment is very low. Inflation is below target, but not dramatically so. 1. 7 compared to 2 is not a massive shortfall. I think this is about the fed saying, there are threats to the growth outlook. A lot of which relate to President Trumps on policy and terms of trade. We still have low inflation, below target inflation. Theres a case for us to take out insurance. That is the way i see it. When you are doing an insurance cut, you can afford to do the 25, not the 50 that some have been talking about. Which i think is what they will do, 25 points. Id say it is proactive. It is proactive to the extent that the u. S. Economy has not slowed down dramatically in terms of private demand. I think its a proactive move. Taking out insurance, basically. Yousef im looking at a disparity between Asset Managers and speculators that is growing. We put together a fabulous graphic for our clients. This is a story of Asset Managers that have stuck to their short positions and increase them. There is some skepticism about increasing the amount of easing that has been priced in. Which side of the conversation are you on . Im skeptical about the degree of easing that has been priced in. I think it is still about 100 basis points on a 12 month horizon. That seems excessive to me. I suspect that what the fed will do is 25 next week. Another 25 in september. And their september meeting. Its possible that will be it in terms of this easing cycle. That said, a lot depends on what happens on the trade front. If the trade war escalate from here, sure, you will get the monetary easing that the market has been talking about. I suspect that there will be some sort of deal. It may take longer. Ultimately, there will be some sort of deal. Therefore, i would stick to 50 basis points in total. And therefore, i think the money markets are factoring in a lot more and its way too negative. Tracy since we are talking speculative positioning, i have a chart of my own. Using the most recent data. This one shows short positions on the volatility index. Those have been picking up again as it has been trailing test relatively lower. Its in an environment of lower Interest Rates with the Central Bank Put fully in place now. You would expect to see lots of investors betting that low volatility is going to continue. My question is, do they risk complacency at this moment in time . Are we getting too used to the notion of that Central Bank Cut . Possibly. Im also conscious of the saying, dont fight the fed. That applies to other central banks, as well. That little sign says, if you stretch it out longer, the fed will ultimately win. Share markets will go up in response to interestrate cuts. As long as theres no recession. My view is that theres not going to be a recession in the u. S. Anytime soon. Therefore, on a six to 12 month horizon, if the fed cuts a couple of times this year, it will contribute to stronger share markets on a 12 month view. On a six to 12 month view. There is a bit of complacency in the short term. Theres a risk we could go through a correction. Theres plenty of potential triggers out there. The trade situation could take a turn for the worse before gets better. Before it gets better. There are the issues around iran. Yesterday, there were issues around the debt ceiling. There are plenty of issues out. Out there. We are going through the Earnings Report that says we did have upset around that. We could see soft Economic Data out of the u. S. And we are in the seasonally weak September Quarter which is also worth mentioning. Yes, we could have a shortterm correction. But i think on a 12 month horizon, in the absence of a u. S. Recession, i think share markets will hit higher. Yousef we have the u. S. President meeting with top tech ceos. We understand that the Chinese State media hails progress when of progress when it comes to huawei. The rhetoric is improving on both sides of the conversation. Is it time to get more bullish into some of these Asset Classes . Go along, perhaps, on some of the equity calls. Just be more risk on generally in anticipation of a breakthrough. Perhaps. There has been so many swings in the story. And roundabouts in this story. It could almost go either way. I think its a good sign that it looks like they will have facetoface meetings next week or same. Or soon, anyway. Its a good sign that they are talking about buying more soybeans. And likewise, the u. S. Is doing something about the bands on huawei. Lets all positive. Its all positive. It was positive six months ago as well. Look at where it ended up. Theres a long way to go on this. There will be lots of volatility around it. Im hopeful that there will be a deal. But you want to look at it on a sixmonth horizon. I think a positive but will bet will pay off. In terms of the next two months, its incredibly risky. Yousef lets get more on the rising regional tensions now. We spoke to the head of equities at rocksolid investment bank. We asked him how his clients are reacting. The spectacular performance we have seen from the market until the end of april. The events or escalation of geopolitical tensions with iran was a good reason to derisk on those profits. Its understandable when you think of all the paper profits investors are sitting on. Coupled with the fact that we have to ongoing wars in the two ongoing wars in the region. People have all the reasons to take money off of the table. When you look at valuation, that also supports taking money off of the table. The pullback or derisking was understood. Its just that it happened to happen very quickly in one month. Thats what we saw in may. There was a little bit of rebound in june. We continue to see that small rebound in july. But we are nowhere near where we ended in april. Yousef i think back to the first gulf war and second gulf war, it was a series of dominoes. Once it got going, it was hard to stop. If you asked most players a year or two before hand, most of them wouldve said that wouldve not there would have not been a war in iraq. With this iran and United States tension, standoff, we are seeing gulf markets come under pressure. This graphic tells the story powerfully. Do you stay back and see how this plays out . Or could this be a buying opportunity . Because ultimately, a lot of these assets rebound. Give or take. Volatility on one hand, definitely creates dislocations and prices. Creates some opportunities. But then basically, the impairment of visibility is the problem. How do you go from here in your forecasting ability in case of a war . Really, its completely impaired. What we look for is the chances of how things are escalating, where are we in the process. Really, trading some of