Dire Straits, Cashing in Chips and Slave Labour Tariffs

28.07.2026

In this episode of SB Talks, Vincent O’Neill and Nick Ryder discuss the impact of renewed Middle East tensions on oil prices and interest rate expectations, the return of US tariffs under new legal frameworks, and growing investor concerns around AI spending as Nvidia and other technology giants face scrutiny over capital expenditure and free cash flow. They also explore what to watch this reporting season, expectations for the US Federal Reserve and the RBA, and the key economic data likely to influence markets in the weeks ahead.

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Transcript

Vincent: Welcome to SB Talks. Today is Tuesday, July 28th. I am Vincent O’Neill and joined, as ever, by our Chief Investment Officer, Nick Reiter. Welcome, Nick.

Nick: Thank you, Vinny.

Vincent: Now, today Nick and I will be discussing the oil price spike following renewed hostilities in the Middle East, Nvidia share price under pressure as AI funding concerns escalate, and a quick run through on reporting season so far and what comes next.

Welcome to all our listeners. It feels like, déjà vu is a very overused term, but it’s hard to think of any other way to describe, I guess, the situation in the Middle East right now with escalating tensions and strikes and another pause in recent days.

Nick: Yeah, it does seem like there’s this sort of range for the oil price.

So if the oil price gets below $70, then the Iranians may be a bit more provocative. If it gets above $100, then you get this sort of ceasefire and negotiations start again. So I’m not sure whether that’s a hard and fast rule, but it does seem to be what we’ve seen.

Vincent: And we’ve been through that over the last few days to test it.

Nick: Yeah. So we had oil, Brent crude, above $100 late last week after 13 successive days of US attacks on Iran and Iran responding, and then come Friday, the Americans have paused. And the Iranians have said, “Well, we won’t retaliate while you’ve stopped attacking.”

And we have Donald Trump, once again, saying the Iranians want to negotiate, and there’s a good chance of a deal. So we’ve seen oil come down.

There were also some sort of peripheral actions in the Red Sea with the Houthis. Some Iranian proxies in Iraq sending drones towards Saudi oil facilities. You’ve had Ukraine attacking a Kazakh oil terminal in the Black Sea and some ships in the Caspian Sea. So oil—

Vincent: Infrastructure under attack on many fronts.

Nick: On many fronts, yeah. So for now, they all seem to have died down and we saw a 9% fall in the oil price last night.

So we’ve been here before.

Vincent: Well, we’ve gone through a protracted period now where I guess oil reserves have been tested and are probably continuing to be tested, and the longer this drags on, just the more uncomfortable it all becomes.

Nick: Well, that’s right. And then, you know, we are ticking down to the midterms.

I think there’s 99 days to the US midterms. We know US voters are very sensitive to oil prices. And so, yeah, there are some constraints, I guess, on what the US administration wants to do.

There’s also reports that they’ve completely depleted a lot of their Patriot missile stocks, so no one’s quite sure about that. But given the sustained bombing programs and defending against incoming drones from Iran, it’s fair to assume that they have depleted—

Vincent: At the very least, it’s been an incredibly expensive exercise.

Nick: Yeah.

Vincent: Yeah. And unfortunately as well, some of the casualty toll mounts. So all those things play terribly with the voters.

Nick: Yeah.

Vincent: And understandably so.

Nick: And we understand also Iran and Oman are negotiating potentially some sort of deal around the Straits and how ships might be allowed to pass through different channels, and maybe that is also a circuit breaker.

Vincent: So watch this space, but it doesn’t feel like we’re heading for a concrete peace deal and conclusion any day soon.

Nick: No.

Vincent: And as it lingers on, those higher oil prices do impact inflationary expectations, which we’ll come to in time.

Tariffs, our favourite topic du jour in 2025, have been knocked off the headlines for most of this year but came back to the fore. We know that some of the prior tariffs have been struck out by Supreme Court decisions, but we’ve got a new wave: forced labour tariffs. What can you tell us?

Nick: Yeah, so when the Supreme Court struck down the IEEPA ones, the emergency powers ones that were part of Liberation Day tariffs last year, the Trump administration introduced these temporary ones that lasted for 150 days.

And they’ve now been replaced with more permanent ones under a more legally defensible section. So Section 301, which allows for things like forced labour.

So they’re using the forced labour argument to introduce tariffs of 10% on 14 countries and 12.5% on another 46 countries, including Australia.

So we’re part of the 12.5%. There’s carve-outs, though, for things like beef and gold, which are our largest exports to the US, so they’re not covered by that 12.5% tariff.

Vincent: What sits behind this?

Nick: Well, they’re trying to basically re-establish the average tariff rate that they had last year through these other mechanisms.

So the Section 301 tariffs for forced labour only get them about 60% of the way back to where they were under the previous ones that got struck down.

So there’s also potential for additional ones. In addition to forced labour, they’re looking at countries that have excess manufacturing capacity. So they would stack on top of the other ones.

So we’re not through this. Tariffs are back on the agenda. Clearly the White House wants to get that revenue back, and so they’re looking at different mechanisms.

Vincent: Whatever mechanism necessary.

And I guess some of those rationales might sound somewhat tenuous at best, but you feel they have a potentially more durable legal footing in terms of surviving challenge in the US judicial system?

Nick: Yeah. I guess people will probably still try and challenge them.

Vincent: Everything gets challenged in the US regardless.

Nick: So, you know, it’s fair to say Australia has pretty strict forced labour rules on modern slavery and all that sort of stuff, as do, I’m sure, a lot of other countries.

So we’ll see where it goes.

But at the moment, the government was actually refunding more money in tariffs than they were receiving. So they’re actually pumping money into the economy. It was a form of fiscal stimulus.

So I guess that will reverse as these tariffs start to take effect.

Vincent: I guess given that it is trying to largely restate the position that we were in, this new tariff regime coming into play doesn’t substantially alter your views on how you see things?

Nick: Not really. I think the market had kind of priced it in. We’d already seen a lot of pass-through.

Ninety percent of the tariffs had been passed through to US consumers. So I think we’d already seen a lot of the economic effects of last year’s tariffs. So I don’t think there’ll be any major impact.

Vincent: There hasn’t been necessarily any huge market reaction to it either.

Nick: No. Certainly not.

Vincent: A lot of attention in recent weeks, and we’ve talked about it on the podcast around just what’s happening in the chip space and AI infrastructure rollout and AI funding more generally. It’s really come into the spotlight, particularly for Nvidia in recent days, as their share price has been dampened significantly by some of these circular financing concerns.

Can you explain a bit more?

Nick: Yeah. So Nvidia stock was off 5% last night after they announced yesterday that they were exploring providing a US$250 billion guarantee to OpenAI to help fund potentially a 10-gigawatt data centre complex being built in Ohio.

So that money would be used to provide the debt for this massive data centre.

And then in addition to that, there’s potentially another US$350 billion of financing that Nvidia could provide for chips that would then go into the data centre.

Vincent: Where would they get those chips, Nick?

Nick: Well, that’s the whole circular financing argument.

So, at the moment, I guess Nvidia’s generating $100 billion a year in free cash flow. They’ve got a strong financing capacity, which OpenAI doesn’t have. They’re a sort of loss-making business. So you can see why they’re trying to do this.

Vincent: But there are question marks around the sustainability of this whole repeated transaction.

Nick: Yeah. I mean, it’s just more of what we saw last year, but maybe even on a step up.

So we’re seeing the market clearly doesn’t like that. It changes the risk profile for Nvidia.

We’re seeing debt costs for a lot of previously highly rated companies like Meta and Alphabet blow out as they start to worry about how much capital is being sucked up for data centres.

And there are also shortages. There are shortages of chips, there’s shortages of memory, so for every Nvidia chip, there needs to be memory chips on that. It’s creating a lot of question marks over the whole AI sustainability story.

And then, coming at a time where we’ve had the launch of Chinese models such as Moonshot’s Kimi K3, which is almost as good as OpenAI’s top ChatGPT models and Anthropic’s models at maybe a third of the price, the whole economics is being questioned by investors.

Vincent: Yeah. And we talked on the last podcast about heading into reporting season, and I know you’ll talk through it in a bit more detail, but it has been catching the market’s attention in reporting season in particular — a new focus on, or heightened focus on, free cash flow in companies.

When we looked historically at the Magnificent Seven, they were cash cows, just building cash mountains. That’s not the case.

Nick: Yeah. So last week we had Alphabet report their Q2 earnings, which were broadly in line with estimates, but they did raise guidance for capex for the year to $205 billion.

That’s up $15 billion on where it was previously, and they’ve gone to negative cash flow for the first time, I think ever, or certainly in a long time.

So they’ve actually got more cash going out than coming into the company when you take into account the amount they’re investing in data centres.

So that saw their stock off, I think, about 7%.

Oracle is another one of these hyperscalers. They’re also negative free cash flow. So the market’s really going, “Oh, okay, this is very different to the companies that used to be huge cash generators and use that cash to pay out dividends and buy back stock.”

Vincent: Buybacks, yeah.

Nick: And now these companies are actually issuing shares. So Alphabet, I think, issued $85 billion of fresh stock. So no longer buying back, actually raising capital.

So the market didn’t really like that.

Vincent: Now, obviously, the question mark is when you raise that capital and spend the money, what’s the return going to be?

Nick: And we’ve spoken about this many times on the podcast. What is the return on investment? Where are they going to get the money back?

At the moment, their cloud services division is growing strongly, but I think there are question marks over that.

And so we’ve had the Magnificent Seven stocks, which includes Tesla. That’s another company that was down quite sharply last week on concerns around capex, and in their case it’s less about data centres and more about robots and self-driving cars and taxis, where timelines have been pushed back.

So we’ve seen the Magnificent Seven down about 5.5% year to date, whereas the S&P 500 is up 7.6%.

And the chip stocks, which have sold off sharply over the last month or so, are still up 55% year to date.

Vincent: Yeah. They’ve just taken a lot of heat out of those.

I guess we look at a lot of this and think it’s probably rational market behaviour. It’s probably broadly positive.

Nick: Yeah, it is. It’s part of the healthy debate that goes on.

You can’t just have trees grow to the sky and these stocks continue to go up without anyone questioning the sustainability of that.

So I think it is healthy to some degree.

Vincent: What are you most looking forward to, or looking for, in the rest of the reporting season?

Nick: So, big expectations for this reporting season. Someone called it the Super Bowl.

We’ll be looking for further colour on the whole AI build-out, whether companies are upgrading guidance for the coming quarter and the rest of the year.

That’ll be important to help drive the market higher.

The expectations, and this is phenomenal, are for 38.8% year-on-year growth this quarter versus the same quarter a year ago. So that’s just massive.

We’ve already had the banks report. The big investment banks had really, really good results.

Vincent: Pretty healthy results.

Nick: Yeah. So I think it’ll be interesting to see what comes out through the rest of reporting season.

Vincent: Those expectations are very high, so we could see some tremendous growth numbers and still see disappointment.

Nick: Yeah.

At the moment we’ve had 85% of companies beat expectations. That’s above the long-run average.

There’s a lot of enthusiasm and exuberance built into expectations.

So we’ll see if they can “beat and raise”, as they say — beat expectations and raise guidance for the rest of the year.

I think that will be important if we want to see further equity gains for the rest of the year.

Vincent: The Fed meets again this week, and fair to say that expectations for rate cuts are well and truly off the agenda.

Nick: Yeah. I mean, it’s likely that they’ll be on hold, although the market does have a 38% chance of a hike, so it’s not quite 50-50, but it’s fairly material.

Kevin Warsh has discussed the good old family fight that he’s expecting at this meeting, and certainly the tone from Fed speakers over the last few months has been that many think rates are not restrictive enough given how strong the US economy is and given everything that’s going on with inflation, even stripping out food and energy prices.

So it’ll be very interesting to see what comes of it.

Vincent: And how much of it will we even get to hear about?

You’ve talked a few times on the pod about plans to minimise communication potentially, so…

Nick: Well, that’s right. We got, was it, just 141 words after the last meeting.

Vincent: The family fights in private.

Nick: Yeah, that’s right.

So it’ll be very interesting to see. We might be none the wiser come Thursday morning as to what the Fed’s thinking, if they hold, and where to next.

So it’ll be an interesting thing to watch.

Vincent: We’ll be very much watching the data and, I guess, that thread through conflict in the Middle East and obviously the impact of energy prices on inflation and interest rates is a very relevant one.

And hence why we are potentially operating in that oil price range that you describe.

Nick: Yeah.

And then I guess the other thing I’ll be watching is tomorrow we get the June quarter CPI for Australia.

Vincent: What’s the expectation?

Nick: So the expectation is for the headline rate to stay at 4.1%, and the trimmed mean to be 0.9% for the quarter and 3.7% year-on-year.

That’s up from 3.5% in the prior quarter.

The RBA had, I think, 1% in their forecast.

So we’ll be interested to see what that does. If it comes in on the high side, it could just be enough to tip the RBA into another rate rise.

It’s only 30% priced, but we did have quite a strong employment print last week that suggests the labour market is still growing pretty strongly.

Vincent: Flexibility.

Nick: Yeah.

Vincent: In conjunction with oil prices lingering as attacks continue, that puts more pressure on the RBA.

Nick: Yeah.

But then we have anecdotes of a lot of softness in the housing market, terrible auction clearance rates and things like that.

Vincent: And flow-through to some consumer spending too.

Nick: And flow-through to consumer spending. I think Myer had a poor sales result yesterday.

So I guess they’ll have to balance all of that up when they meet on 11 August.

Vincent: How is the market currently pricing?

Nick: They’re 30% priced—

Vincent: By year-end?

Nick: Oh, 70% by year-end.

Vincent: By year-end. Yeah. So still material pricing for an increase there.

An excellent run-through as always, Nick. Thank you very much, and thank you to you, our listeners.

 

 

 

 

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