Speaker 1: Yeah, welcome to the Bloomberg Surveillance Podcast. I'm Tom Keane Jailey.
Speaker 1: We bring you insight from the best in economics, finance, investment,
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Speaker 1: want to bring in an expert who can help us
Speaker 1: figure out what the Federal Reserve means for investors. Don
Speaker 1: ris Miller is the chief economist for Strategious Research. He
Speaker 1: joins me here in the studio. Don, maybe you could
Speaker 1: explain the relationship between what we did or didn't learn
Speaker 1: from the Federal Reserve and the stock market and bond
Speaker 1: market reaction this week. Yeah. Sure, Well, it's good to
Speaker 1: be here. So let me say a couple of things
Speaker 1: to start out. First, the FED was trying, I really
Speaker 1: do believe that with the statement and what came out
Speaker 1: in the press conference, they were trying to thread the
Speaker 1: needle to say the US economy, when we look at
Speaker 1: things like the labor market is in good shape. So
Speaker 1: if you look at the unemployment rate or jobless claims
Speaker 1: or some of those data series, that part of the
Speaker 1: economy is doing quite well. What I think was Missing
Speaker 1: from the FED statement was some mention of the interest
Speaker 1: rate sensitive sectors that included things like housing. I thought
Speaker 1: it would have been relatively easy to say something like
Speaker 1: housing data was mixed. If you didn't want to say week,
Speaker 1: you could have just acknowledged some of the mixed data
Speaker 1: they're including some of the survey data. Also, there was
Speaker 1: a note that inflation expectations were a little changed, and
Speaker 1: that's hard to square with what you're seeing in some
Speaker 1: of the commodity space, especially the big drop in oil.
Speaker 1: So maybe that's going to be changed in future statements.
Speaker 1: But these are things that the stock market's going to
Speaker 1: pick up on to say, hey, maybe there's a disconnect
Speaker 1: with what I thought could come out of this statement.
Speaker 1: What the Fed's view of what's going on is how
Speaker 1: it differs from my view, and I think that's what
Speaker 1: generated some of the market reaction. All Right, well, don
Speaker 1: just to sort of follow along with that, because it's
Speaker 1: not just a domestic situation, and from Guy Johnson's perspective
Speaker 1: in London, is the Federal Reserve now the central bank
Speaker 1: to the world. So they will never say that, and
Speaker 1: I think they respect the idea that there are a
Speaker 1: lot of differences in different parts of the world. But
Speaker 1: what we do see is a big reaction when the
Speaker 1: balance sheet comments came up, and when share Powell said
Speaker 1: that the balance sheet was declining on this autopilot type
Speaker 1: of trajectory. I do think that mattered to global investors.
Speaker 1: I do think that started off some of the serious
Speaker 1: risk off moves, and I think that was partly the
Speaker 1: global situation that came into play. Good Morning Guy in London.
Speaker 1: Um don has has the President done permanent damage to
Speaker 1: the relationship between the White House and the FED? I
Speaker 1: think that's a little premature. I do think some of
Speaker 1: the techniques here, in terms of how it's come out
Speaker 1: publicly our novel, I think this is a bit different
Speaker 1: than we might have seen in other administrations. But I
Speaker 1: think it's hard to say that this has never happened before,
Speaker 1: that we've never seen a politician interested in what the
Speaker 1: FED is doing. Certainly this is being conveyed in a
Speaker 1: unique way. But if there's permanent damage, I don't think
Speaker 1: it's very large. If the President were to try and
Speaker 1: remove the FED chair, would that cause permanent damage? So
Speaker 1: I think that would rise to a different standard. You
Speaker 1: can remove a FED chair for clause, it's really challenging
Speaker 1: to think of another way that that could be done.
Speaker 1: And so again, barring something out there for cause, which
Speaker 1: I think is something that would be really strange, that
Speaker 1: would start to rise to the standard of more permanent damages,
Speaker 1: don just a little bit more on the connection between
Speaker 1: the Federal Reserve and what happens in markets. You get
Speaker 1: a call from a client that says, I don't understand
Speaker 1: how we can get a one thousand point move in
Speaker 1: the Dow Jones Industrial Average more than one hundred point
Speaker 1: move in the SMP five hundred. I received a text
Speaker 1: message yesterday from a money manager saying President Donald Trump
Speaker 1: had not tweeted during the day. He was obviously on
Speaker 1: his route to Iraq. Can you draw any conclusions that
Speaker 1: if we were to have none of this new messaging
Speaker 1: that you just described from either the Fed or the President,
Speaker 1: that we would see a less volatile market. We might
Speaker 1: see a less volatile market for a while. But the
Speaker 1: information that's coming out, whether it's there's a concern at
Speaker 1: the FED, whether it's there's a concern with how the
Speaker 1: trade situation is going, there's a concern with what's going
Speaker 1: on in China's local economy, there's a big drop in
Speaker 1: oil prices. Those I think are the fundamental drivers of
Speaker 1: some of this risk off trade. So maybe you could
Speaker 1: change where the volatility enters the system. You could change
Speaker 1: how that's going to express itself. But I wouldn't say
Speaker 1: we want to complete blackout. Is the market being overly
Speaker 1: pessimistic about the U S economy? Like I look at
Speaker 1: the U. S. Consumer, and it's always amazing to look
Speaker 1: at the consumer kind of from afar. The U. S
Speaker 1: consumer seems to still be firing on all cylinders. I
Speaker 1: think that's right, And so the challenge is the consumer
Speaker 1: is still the bulk of the economy. There are good
Speaker 1: supports there and that's the labor market story coming through.
Speaker 1: So the consumer should be a support. In twenty nineteen,
Speaker 1: the challenge is going to be if the economy growth
Speaker 1: rate slows, it's probably going to come from the investment
Speaker 1: side rather than the consumption side. And so the pathway
Speaker 1: forward to a long cycle to a sustainable economic expansion
Speaker 1: is you see investment. You see the capital spending that
Speaker 1: gets you productivity. That productivity pays for some of the
Speaker 1: higher wage games that are coming through at full employment.
Speaker 1: So it's capex to productivity too wages that gets you
Speaker 1: the sustainable cycle. So that's where I think the challenges.
Speaker 1: It isn't so much that the economy is in trouble
Speaker 1: right now, but looking forward, we'd like to see more
Speaker 1: on the I part of the C plus I plus
Speaker 1: G equation to make the sustainable economic argument. And do
Speaker 1: you do you have faith in the ability of the
Speaker 1: FED to communicate how it's working through this process. The
Speaker 1: communication over the last few months has been a little
Speaker 1: hit and miss, and I'm just wondering whether or not,
Speaker 1: kind of to circle back to where we sort of started,
Speaker 1: whether or not the FED needs to up the game
Speaker 1: here and find it find a better way of communicating.
Speaker 1: I do think we could get some clarity on a
Speaker 1: couple key items. What do they think of housing? What
Speaker 1: do they think of inflation expectations in a world where
Speaker 1: oil prices have declined? Do they really think the balance
Speaker 1: sheet is on autopilot indefinitely? Could that change? If we
Speaker 1: can answer some of those questions, I think FED communication
Speaker 1: would be a lot better. What is the most undervalued
Speaker 1: asset right now? Don Well, when we look at US equities,
Speaker 1: you're pricing in a good chunk of a recession. When
Speaker 1: you're looking at some of the global equities, you're pricing
Speaker 1: in a good chance of a downturn. So if you
Speaker 1: get a FED pause, if you get a trade deal
Speaker 1: with China in the US, if you get stimulus in
Speaker 1: the local Chinese economy, if you get stability in oil prices,
Speaker 1: and that downturn, that recession does not happen. I do
Speaker 1: think there's a lot of value there, value in equities
Speaker 1: global as well as US equities. Yes, trickier there, but yes,
Speaker 1: all right, thanks very much for being with us. Much appreciated.
Speaker 1: Don ris Miller is the head of economic research at
Speaker 1: Strategious Research. He is their chief economist. Talking about the
Speaker 1: future and the potential for gains in equities, Let's talk
Speaker 1: a little about what impact the trade talks are likely
Speaker 1: to have on the agricultural commodity complex. In talks are
Speaker 1: going to restart, we understand at a relatively low level
Speaker 1: on January the seventh. So how closely will the agricultural
Speaker 1: complex be watching what happens. Let's find out now. Kona
Speaker 1: huck is E. D and F Man's head of commodity
Speaker 1: research and joins us in our London studio. Good morning.
Speaker 1: So let's talk a bit about what the trade story
Speaker 1: is going to mean for for your world in en
Speaker 1: Is it going to be the kind of the dominant theme.
Speaker 1: Is the trade story going to set the narrative? Yes,
Speaker 1: in the sense at least for the sentiment, because it's
Speaker 1: had a massive negative bearing on the market. Um. The
Speaker 1: fact that the US is not able to shift its
Speaker 1: massive crops this year because China is not buying mixed
Speaker 1: on the on the back of these tariffs has meant
Speaker 1: that the U s docks are really really heavy. Um.
Speaker 1: And ultimately what happens in the US has a massive
Speaker 1: underpinning on the Chicago futures markets because that's what sets
Speaker 1: a down there. So the US supplied amount of balances
Speaker 1: are really key here and um, Ultimately, the US supplied
Speaker 1: amound bounces will only start shifting if they're able to
Speaker 1: start exporting a lot more of their excessive volumes of soybeans, corn,
Speaker 1: and wheat, none of which have happened this year, all
Speaker 1: of which has huge potential the following year if they're
Speaker 1: able to come to some kind of deal. Okay, so
Speaker 1: kind of let's talk about risk. I'm trying to figure
Speaker 1: out how if I'm a trader. Am I making money
Speaker 1: in the risk sounds quite asymmetric. There's a lot of
Speaker 1: negative news by the sounds of things already priced into
Speaker 1: the market, into into the various crops. Is the kind
Speaker 1: of is the easier trade there for to look for
Speaker 1: the upside? Is that kind of what we're looking at here?
Speaker 1: Is all the negative news priced in? Am I going
Speaker 1: to get a pop? Not necessarily? The reason being is UM.
Speaker 1: Although the US farmers will probably look at this year's
Speaker 1: dismal price action and think about reducing their planted acres
Speaker 1: for next year. UM. That might sound good for US
Speaker 1: supply demand balances UM. But on the world market spectrum,
Speaker 1: you have a situation where Brazilian and Argentinian crops are
Speaker 1: likely to become massive. In fact, we're talking about a
Speaker 1: record Brazilian crop. And Brazil, if you remember, have been
Speaker 1: the biggest beneficiaries of this trade trade tariff dispute because
Speaker 1: they have been the beneficiaries of massive amounts of Chinese buying.
Speaker 1: So they're gonna they're planting like crazy. They're going to
Speaker 1: have a record crop. It's an anne your year, which
Speaker 1: actually helps some of the the soil moisture levels there
Speaker 1: so even if the US as its part in terms
Speaker 1: of reduction reducing production South America could more than offset
Speaker 1: that corner. Are we entering a new commodity cycle or
Speaker 1: are we already in it? No, We're already in it.
Speaker 1: Um I think if we're looking at commodities as an
Speaker 1: asset class, generally, I think key will be the U. S. Dollar. Obviously,
Speaker 1: two thousand and eighteen was all about a strong U.
Speaker 1: S dollar, at least the second half was, and that
Speaker 1: massively um led to a sell off in commodities, whether
Speaker 1: it's grains or soft or metals or a crude all
Speaker 1: it is so massively important how the dollar trades. And
Speaker 1: I think if two thousand nineteen brings a peak dollar
Speaker 1: story on the back of you know, slow down in
Speaker 1: the U. S. Economy or FED reducing the amount of
Speaker 1: times it hikes rates, and any resulting reduction in the
Speaker 1: in the US dollar strength will support commodities, so fundamental decide,
Speaker 1: I think you know that that is something I would
Speaker 1: look at them on more positive lighting the fact that
Speaker 1: the dollar could start to um softened by a second
Speaker 1: half of two thousand nineteen and that would ultimately help
Speaker 1: commodities AGGS included. Is there a specific commodity that you
Speaker 1: believe is the most over sold right now? Um. One
Speaker 1: commodity that I followed closely as sugar, and that has
Speaker 1: fallen massively on the back of two years of very
Speaker 1: big surpluses. It's also suffered on the back of a
Speaker 1: very weak Brazilian real. Now two thousand nineteen should see
Speaker 1: the market move into a deficit number one and number
Speaker 1: two the Brazilian real on the back of the election
Speaker 1: of both Sonaro in Brazil could start bringing some positive
Speaker 1: influence into the Brazilian real, and so both of those
Speaker 1: factors could help sugar prices recover quite nicely in two
Speaker 1: thousand nineteen, but not necessarily the first half the second half.
Speaker 1: Just very briefly, Technology is playing an increasingly large hole
Speaker 1: in this sector. How how easy is it to understand
Speaker 1: how that's going to affect pricing going forward. You look
Speaker 1: at the big car girls and all the sort of
Speaker 1: these companies. They are increasingly focusing on the technology aspects
Speaker 1: of farming, and this is kind of an area it's
Speaker 1: right for this right for disruption. Yeah, no, absolutely, Um,
Speaker 1: the ways in which we'll actually you know, if you
Speaker 1: look about if you if you think about why agricultural
Speaker 1: commodities have done so badly price wise in the last
Speaker 1: five years. We've had surpluses year after year. One massive
Speaker 1: reason is because agriculture has spent a huge amount of
Speaker 1: money in developing seeds the kind of drought resistance seeds,
Speaker 1: flood resistant, pastris resistant. And so despite all of this,
Speaker 1: you've you've seen record deals. Been great to see you.
Speaker 1: Thank you very much indeed for coming to see us
Speaker 1: both on Bloomberg Television and on Bloomberg Radio. Kind of
Speaker 1: hack E D and F Man's head of commodity research.
Speaker 1: So what do we make of the price action over
Speaker 1: the last couple of days, massive rally in US stocks
Speaker 1: yesterday today, fading. What lessons can we learn from all
Speaker 1: of this? Well, let's find out. Marvin Bath is the
Speaker 1: head of FFX and EM macro strategy research at Barclay's
Speaker 1: and joins us now on the line. Marvin, what do
Speaker 1: you make of the price action? Well, I think it's
Speaker 1: a typical holiday liquidity, right, Um. So you combine that
Speaker 1: with some of all a toy from US policymakers in
Speaker 1: terms of the risk that people had felt with said tampering,
Speaker 1: and that seemed to be evistrated yesterday by the comments
Speaker 1: from Haszard as well as Secretary Manu nu Chin and UH.
Speaker 1: Today we go back to well, people are still worried
Speaker 1: about earnings going forward. Does that tell us anything about
Speaker 1: how we're going to make money in twenty nineteen or
Speaker 1: is this just a kind of of idiosyncrassic I would
Speaker 1: I would definitely avoid in extrapolating this into the new year.
Speaker 1: My guess is that you will see some of it
Speaker 1: in the first couple of weeks of of the new year.
Speaker 1: This is the typical pattern people do extrapolate patterns UH
Speaker 1: forward UH, and we roughly around the second or third
Speaker 1: week of January we get some sort of major reversal.
Speaker 1: So look, the underlying fundamentals here are still quite good.
Speaker 1: The U S economy is tracking about three in the
Speaker 1: fourth quarter. It looks like the fundamentals are quite good
Speaker 1: for the year ahead. The reactions we've seen so far
Speaker 1: seem to be a bit over the top end our view.
Speaker 1: Marvin Barth, you and your team a roup chatter Ge
Speaker 1: and Hamish Pepper. You've done a great job putting together
Speaker 1: the FFX and Emerging Market Macro Strategy Forecast update. Tell
Speaker 1: Us does it describe dollar strength continue wing in Yeah,
Speaker 1: so we are looking for relative dollar strength. I mean
Speaker 1: if you look at it in in fact, it's mostly
Speaker 1: range trading versus the G ten, but continue strength versus
Speaker 1: emerging markets. I think relative to where I understand consensus
Speaker 1: to be. That does put us at the upper end
Speaker 1: spectrum for dollar strength. But again this comes back to
Speaker 1: where do we see weakness in the world. It's in
Speaker 1: the rest of the world, not in the US. The
Speaker 1: US is actually doing quite well despite the sell off
Speaker 1: in US equity markets, uh, and the underlying fundamentals are strong,
Speaker 1: so you're going to get a continued carry divergence. The
Speaker 1: reason why we have that rough flat profile versus G ten, however,
Speaker 1: is the dollar does look um pretty excessively valued at
Speaker 1: these these levels um and so it's a balance between
Speaker 1: carry on one side and valuation on the other that
Speaker 1: keeps you in a Raine trade. You've got to help
Speaker 1: guide and tell him whether he should be converting all
Speaker 1: of his pounds sterling into US dollars. Now, what happens,
Speaker 1: and that happens if we don't get a Brexit deal,
Speaker 1: do we still trade around one the pounds sterling against
Speaker 1: the dollar now, I think if if if we failed
Speaker 1: to get a deal, we would see a significant self
Speaker 1: in sterling. Now a lot of that's increasingly in the
Speaker 1: price before increasingly expecting that. What I think is important
Speaker 1: here is that once you get to about one twenty,
Speaker 1: that's that's our our our view, you are going to
Speaker 1: see a lot of long term buyers coming because at
Speaker 1: the end of the day, this is still an economy
Speaker 1: of the UK that has a highly educated workforce, lots
Speaker 1: of technical skills, top universities, um, a tremendous amount of
Speaker 1: value in it, and you've got sterling trading near fifty
Speaker 1: year lows on a real trade weighted basis. So as
Speaker 1: we get down to those levels, you're gonna see a
Speaker 1: lot of long term buyers come in to scoop the
Speaker 1: that up. So, yeah, could we trade below one twenty
Speaker 1: on an inter day basis, maybe even for a couple
Speaker 1: of days, sure, But will we sustainable of that? I
Speaker 1: think that's highly unlikely. Well, do you really want to
Speaker 1: get directional? This is like the volatility in the pound
Speaker 1: has been eyewatering, and I appreciate that we've been going
Speaker 1: down for a very long period of time, but getting
Speaker 1: directional the pound seems like it seems like a difficult
Speaker 1: thing to do right now. Well, I think I think
Speaker 1: you've got it right on there, guy. This is one
Speaker 1: of the reasons why we've avoided putting out trade recommendations
Speaker 1: in Sterling right now. Um, I don't think that it
Speaker 1: makes a lot of sense given the amount of alatility
Speaker 1: that you have in there, and that's on top of
Speaker 1: all the other volatility in markets. But I would say that, yeah,
Speaker 1: if if you do get down towards one, that's just
Speaker 1: such a good value that you should be coming in
Speaker 1: to buy there. Let's take it back to the States. Um,
Speaker 1: has President Trump done lasting damage to the relationship with
Speaker 1: the FED? I don't think so. I mean, I think
Speaker 1: people get a little bit exercised with these things, in
Speaker 1: part because as President Trump does cause such a vicial
Speaker 1: reaction in many people, um, but also because memories are short.
Speaker 1: I mean, there was no more institutional president, uh than
Speaker 1: the late President George H. W. Bush who just passed
Speaker 1: passed away. And let's recall that back in he too
Speaker 1: decides to FED for hiking raids, right. Um, so uh,
Speaker 1: he he was. He was pretty aggressive in talking about
Speaker 1: HUM president or chair chairman Greenspan at the time. Look,
Speaker 1: I think that President Trump made a mistake. I think
Speaker 1: that he and his advisors have learned in the last
Speaker 1: couple of days that that is a mistake to undermine
Speaker 1: people's confidence in the US institutions. That's the whole reason
Speaker 1: why people invest in the US, because the institutions are
Speaker 1: stronger than anywhere else. Um And uh, my guess is
Speaker 1: they'll take this this this lesson home. Marvin. Are many
Speaker 1: people driving all across the United States. They're interested in
Speaker 1: things such as gasoline prices. Tell us about the US
Speaker 1: dollar versus commodity currencies. The Australian dollar has dropped about
Speaker 1: ten percent in value against the green back, and if
Speaker 1: you take a look at the Canadian dollar, the looney
Speaker 1: down seven and a half percent year today against the
Speaker 1: US dollar. Yeah. Well, this is something that uh, um,
Speaker 1: my colleagues Hamish Pepper and Nick s Aropolis wrote about
Speaker 1: a year or two ago about the effects of Dutch
Speaker 1: disease um. Uh in terms of we saw this massive
Speaker 1: commodity supercycle in the last decade. Um. You saw a
Speaker 1: tremendous expansion of these economies over this over that period,
Speaker 1: and now you're seeing the downside effects of this, and
Speaker 1: this is one of the reasons why people keep pushing
Speaker 1: back their expectations for the RB eight uh to hike
Speaker 1: um uh. You know, the Bank of Canada is hiking,
Speaker 1: but only because it's a atch, you know. Can This
Speaker 1: attached to the strongest economy in the world right now,
Speaker 1: the US, but even there people have tempered their expectations.
Speaker 1: All of these things are associated with a UM long
Speaker 1: term structural Dutch disease issue that they had overvalued currencies
Speaker 1: during a commodity boom and they're starting to see the
Speaker 1: after effects of that. Marvin, is there an emerging market
Speaker 1: currency that, in your mind is currently undervalued against the dollar? Yeah, well,
Speaker 1: I think that, um some of the East Asian currencies
Speaker 1: are are are looking more interesting at this point um uh.
Speaker 1: You know, especially if we look at um krean Wan,
Speaker 1: Thailand dollar. These are all these are all currencies um
Speaker 1: that are well positioned uh um relative to others in
Speaker 1: terms of their their balance sheet profiles. Unfortunately, they are
Speaker 1: really uh exposed to um trade issues more so than others.
Speaker 1: UM to the extent that does have been priced in.
Speaker 1: I think there's some value there if you want to
Speaker 1: get uh and this gets the guys directional point in volatility.
Speaker 1: If you want to uh get a lot more hairy,
Speaker 1: you could go for the Turkish laera. It does look
Speaker 1: like it's adjusted quite a bit um, but given the
Speaker 1: underlying institutional issues there, you're in for a volatile ride
Speaker 1: if you want to pick up that. Kerry, thanks very
Speaker 1: much for being with us. As always, Marvin Barth of Barclays.
Speaker 1: He is the head of X and Emerging Market macro
Speaker 1: Strategy Research, calling for a continued strength a US dollar
Speaker 1: relative to those G ten currencies. We're going to talk
Speaker 1: a little bit about currencies. We've got Mark McCormick, t
Speaker 1: D Securities, North American, head of f X Strategy. Mark,
Speaker 1: always a pleasure. Thanks for being with us. We're in
Speaker 1: the Bloomberg Interactor broker's studios. You're here to tell us
Speaker 1: what is going to happen with the US dollar in
Speaker 1: is it going to maintain its strength against its G
Speaker 1: ten trading partners? Sure? Thanks for having me so that.
Speaker 1: I guess the one thing I'd like to highlight on
Speaker 1: that is that we think that the strength is the
Speaker 1: strength of dollar is going to reverse next year. So um,
Speaker 1: I think the way you have to kind of think about,
Speaker 1: is there's a there's a couple of different dollars in play.
Speaker 1: You've got your emerging market US dollar basket, you've got
Speaker 1: a dollar block ausy Kiwi cat dollar dollar basket, and
Speaker 1: then you also have the reserve currencies like the euro, Sterling, Swiss, Yen.
Speaker 1: So our biggest conviction view for next year is those
Speaker 1: reserve currencies start to strengthen again, and it's partly reversal
Speaker 1: of the what we've been calling the Maga teme where
Speaker 1: make America great again as a kind of momentum trade
Speaker 1: in US assets, whether it be corporate bonds, equities, US
Speaker 1: dollar is going to give way back towards a little
Speaker 1: bit more of what we'd call kind of a global
Speaker 1: reflation trade, where the rest of the world central banks
Speaker 1: can start to tighten policy a little bit more ketch
Speaker 1: back up with the FED and also see undervalued currencies,
Speaker 1: particularly in Europe in Asia start to outperform again. Well
Speaker 1: mark that reflation trade. I mean, that's that's sort of
Speaker 1: the fear that a lot of folks in the market,
Speaker 1: particularly and equities have u that you know, it could
Speaker 1: sort of end up being kind of the self fulfilling
Speaker 1: prophecy where we end up sort of where the market
Speaker 1: sort of tips the economy into recession rather than the
Speaker 1: FED itself. And I wonder how much of a risk
Speaker 1: is that right now. Yeah, it's a great point, I think.
Speaker 1: I think the way you want to think about it
Speaker 1: is is an element of how are the US assets
Speaker 1: performing right now as a signal for where the US
Speaker 1: economy should be maybe next year, maybe even you know,
Speaker 1: we go out to two thousand twenty versus how does
Speaker 1: the rest of the world as sets performing at this
Speaker 1: point as well? So I think a nice way to
Speaker 1: think about it is that one of the main drivers
Speaker 1: for the dollars throughout this year really wasn't interest rates.
Speaker 1: It wasn't that the US had a higher yield than
Speaker 1: the rest of the world that are fed was tightening.
Speaker 1: It really came through the equity market for formants in
Speaker 1: the US versus the rest of the world. M s
Speaker 1: c I ratio benchmark basically, which peaked around the mid terms,
Speaker 1: was showing that rest of world capital was coming back
Speaker 1: into the United States, and largely I think what it
Speaker 1: was is a repatriation of American investors pulling money out
Speaker 1: of Europe, pulling money out of emerging markets, pulling money
Speaker 1: out of out of Asia. But I think the story
Speaker 1: for next year kind of focuses on the rest of
Speaker 1: the world. Growth has kind of gone through the major
Speaker 1: pain that we saw through the parts of this year.
Speaker 1: U S data surprises outperformed most major economies for the
Speaker 1: better part of two thousand and eighteen. Equity prices again,
Speaker 1: that story has already been kind of starting to reverse already.
Speaker 1: But I think the reflation trade is one where the
Speaker 1: markets expecting a global recession, and I would say our
Speaker 1: FX views are kind of predicated on the fact that
Speaker 1: it's really more of a correction of US assets um,
Speaker 1: particularly off the you know, the ebbing of the fiscal support,
Speaker 1: the ebbing of the repatriation of capital flows, which I
Speaker 1: think was a big underappreciated factor that drove US assets
Speaker 1: this year, and all of that is a rotation of
Speaker 1: US investment and other investors which have large savings back
Speaker 1: into higher yielding assets outside of the US, which is,
Speaker 1: you don't need a re acceleration of global growth, but
Speaker 1: you just don't need to see the downside has been
Speaker 1: priced into the rest of the world throughout two thousand eighteen,
Speaker 1: and I think That's where the upside surprice comes is
Speaker 1: that the rest of the world looks okay and US
Speaker 1: markets correct at a much faster pace, which is what
Speaker 1: we've seen since the mid terms. Well, market looks as
Speaker 1: though they're correcting in today's trade. Taking a look at
Speaker 1: stocks right now, the Dow Jones industrial leverage lower by
Speaker 1: more than three hundred points, SMP five hundred down, twenty nine,
Speaker 1: NASDAC falling one point three percent, It's lower by eight
Speaker 1: five If this continues, what does that do to the dollar? Yeah,
Speaker 1: it's It's another good point too, because I think what's
Speaker 1: very interesting is when you think about kind of the
Speaker 1: performance of broad effects this year. Emerging markets where the
Speaker 1: big pain trade throughout two thousand eighteen, and you could
Speaker 1: see that they suffered going into the summer. But since
Speaker 1: US assets have been correcting since since around the mid
Speaker 1: terms or we're markets have been okay. So the beta
Speaker 1: of emerging market currencies or even emerging market equities to
Speaker 1: US equities has been ebbing um and the currencies that
Speaker 1: should perform well are actually starting to perform well. Currencies
Speaker 1: like the end, and what's interesting is that the end
Speaker 1: has not been correlated with emerging markets, and when there's
Speaker 1: a lot of pain going on in emerging markets, particularly
Speaker 1: in the summer, dollar yen was moving higher. But now
Speaker 1: what we're starting to see is US assets are correcting.
Speaker 1: I think a big element here is what I think
Speaker 1: another underappreciated fact is that dollar yen is not really
Speaker 1: trading off of interest rate differentials per se. It was
Speaker 1: trading off of the fact that the Japanese have one
Speaker 1: of the world's largest current account surpluses. They are a
Speaker 1: net global saver, and basically they were pushing a lot
Speaker 1: of unhedged capital into the United States for the bulk
Speaker 1: of two thousand and eighteen. And I think what you're
Speaker 1: seeing now is that U s assets are correcting and
Speaker 1: Japanese investors are now repatriating those flows. You know, they
Speaker 1: invested in things that were unhedged. They were very short
Speaker 1: term their money market like securities and even corporate bonds
Speaker 1: and some equity plays. And now the US as are
Speaker 1: are correcting much faster than the rest of the world.
Speaker 1: Japanese investors are pulling their money home. But at the
Speaker 1: exact same time, you're not seeing emerging markets roll over.
Speaker 1: At emerging markets, currencies are actually performing relatively well, so
Speaker 1: I think this fits with that thesis that it's really
Speaker 1: kind of is this a I guess the global reflation
Speaker 1: trade not the same flavor that it was in two
Speaker 1: thousand seventeen, but it's it's kind of the maga make
Speaker 1: American assets great again, is kind of underperforming relative to
Speaker 1: the rest of the world. And I think that's the
Speaker 1: the element of where you go into two thousand nineteen
Speaker 1: where the US dollar was going to continue to underperform
Speaker 1: on a broader basis, but it will depend on those
Speaker 1: different baskets we were talking about, like dollar block currencies Australia,
Speaker 1: New Zealand and Canada. I think they're all set to
Speaker 1: continue to underperform, largely because of the end of easy money,
Speaker 1: which is which is another major another major theme in
Speaker 1: in FX markets. You made a good point about the
Speaker 1: current account over in Japan, and I mean, the part
Speaker 1: of the whole goal of this trade war or that
Speaker 1: we've sort of found ourselves in I guess ostensibly was
Speaker 1: the sort of address the current account deficit that we have.
Speaker 1: And I wonder do you see any real hope for
Speaker 1: for US making any sort of dent in that on
Speaker 1: the U S side, and that could potentially give a
Speaker 1: little bit more left to the dollar. I don't think so.
Speaker 1: I think the problem is is that the rhetoric versus
Speaker 1: the actual economic policies that are put in place. Are
Speaker 1: the policies that are put in action are ones that
Speaker 1: are designed to make the current account deficit worse. And
Speaker 1: so whether we talk about the different values of currencies
Speaker 1: or trying to eliminate the trade gaps across different countries,
Speaker 1: you know, there's a there's a function here that the
Speaker 1: US is the reserve currency and having the reserve currency
Speaker 1: and essentially running a current account deficit and essentially having
Speaker 1: if you think about where the twin depths, it's going
Speaker 1: to be in two thousands twenty, it's gonna be close
Speaker 1: to nine percent of GDP. So the budget deficit plus
Speaker 1: the current account means that the US is going to
Speaker 1: have a ton of funding requirements coming through over the
Speaker 1: next two years. And now you've seen that the growth
Speaker 1: impulse that comes along with the fiscal stimulus on a
Speaker 1: forward looking basis is already largely priced in. So the
Speaker 1: the concept of kind of introducing fiscal stimulus at the
Speaker 1: late cycle part of where the U S business cycles at.
Speaker 1: I think comes to the detriment where this is actually
Speaker 1: going to make only make the current account that you know,
Speaker 1: the accounting of the budget plus the current account is
Speaker 1: what's going to make it very challenging for the U. S. Dollar.
Speaker 1: Our guest is Mark McCormick, TV Securities, North American head
Speaker 1: of f X Strategy, Mark McCormick. Who or what actually
Speaker 1: moves for X markets? That's a great question. I think
Speaker 1: there's a lot of different actors that kind of move it.
Speaker 1: They all have different um incentives for what they want
Speaker 1: to try to do. So you have major corporations, you
Speaker 1: have major retail investors. You also have major institutional accounts,
Speaker 1: and then you've got you know, leverage players like hedge funds.
Speaker 1: So you kind of have all these different players, some
Speaker 1: of them being headtors, some of them just having business
Speaker 1: um production process they have to work through different accounting flows.
Speaker 1: And then you also have people who who want to
Speaker 1: try to make money in affects. So it's kind of
Speaker 1: a combination of all those people. Now, do you see
Speaker 1: that the that the corporate borrower and the corporate player
Speaker 1: in the FX market, do they react to these day
Speaker 1: by day changes in forex relationships? They don't. They're the
Speaker 1: really big ones, the big multinationals are tuned in UM,
Speaker 1: so they're they're trying to make sense of a lot
Speaker 1: of this stuff that comes through on a day to
Speaker 1: day basis, especially the geopolitics. UM. They're tuned into big
Speaker 1: data releases and they're tuned into kind of the things
Speaker 1: that happen in markets, but they're not as hyper sensitive
Speaker 1: to that information as other style of investors would be.
Speaker 1: I guess the easiest way to say it in in
Speaker 1: terms of market pilance, there's no one tapping a corporate
Speaker 1: on the shoulder to kind of be like, well, you know, so,
Speaker 1: how is your portfolio doing right now? So there's an
Speaker 1: element of where they're there tune in because there's definitely
Speaker 1: impacts their business, impacts their accounting flows, but it's not
Speaker 1: the same level of engagement that you'd get from a PM,
Speaker 1: either at a at a hedge fund or some other
Speaker 1: you know, or an institutional account mark. When you look
Speaker 1: at the market sentiment and some of the technical levels
Speaker 1: with regards to the dollar, and you go back to
Speaker 1: the FED meeting a couple of weeks ago on the
Speaker 1: twenty or whenever it was, we had that sell off
Speaker 1: in the dollar that day after the FED announcement, and
Speaker 1: ever since then, it's kind of been hugging that fifty
Speaker 1: day moving average and we really haven't broken free from that,
Speaker 1: and I'm wondering how much UH sentiment has sort of
Speaker 1: been uh battered, I guess by what we learned from
Speaker 1: the Fed that day. Yeah, it's a good point. It's uh.
Speaker 1: I think it's interesting in so far as the Fed
Speaker 1: is kind of obviously dial things back a little bit.
Speaker 1: The rhetoric has changed. UH. They're very comfortable and talking
Speaker 1: about before that meeting the concept that they're a long
Speaker 1: way from neutral, which means there's probably a lot more
Speaker 1: runway for interest rates to run high. And they've they've
Speaker 1: done a very kind of orchestrated pullback from that. And
Speaker 1: now we even get from the recent meeting that we
Speaker 1: may only see, you know, not directly, but we've seen
Speaker 1: a big move in the in the dot plot, which
Speaker 1: to me was the most kind of the biggest glaring
Speaker 1: takeaway is that again there's a period of time where
Speaker 1: the dots are coming to the market and the markets
Speaker 1: still not moving towards the dots, and so it's more
Speaker 1: about the FED is kind of coming into where the
Speaker 1: market thinks they should be, and so there's an element
Speaker 1: here of some kind of pause potentially next year. But
Speaker 1: I think for the dollar kind of if you're thinking
Speaker 1: d X Y terms, you know, the six of that
Speaker 1: basket is the Euro. So there's still an element here
Speaker 1: where the European news flow is still very sensitive to
Speaker 1: all the global dynamics. Um it's also very sensitive to
Speaker 1: the growth dynamics in Europe, which all of our short
Speaker 1: term kind of high frequency growth models haven't seen a
Speaker 1: turn yet. So we're not overly bullish the Euro kind
Speaker 1: of the next couple of weeks or you know, if
Speaker 1: you were talking about in technical terms, in the very
Speaker 1: short run, but we're actually very bullish the Euro kind
Speaker 1: of second half of next year. I'd even say early
Speaker 1: second quarter where I think you're gonna start to see
Speaker 1: a turn in the Euro, largely because a lot of
Speaker 1: those growth dynamics been holding them back or are temporary.
Speaker 1: So yeah, I think there's an element here where what
Speaker 1: we try to do is is we've re engineered C
Speaker 1: t A trading models, we look at other kind of
Speaker 1: proxies for for sentiment in kind of positioning, and so
Speaker 1: all of those signals kind of even running up into
Speaker 1: the FED are all super stretched long US dollars. So
Speaker 1: this is part of that coiling spring where the market
Speaker 1: is kind of sitting in one direction and now you
Speaker 1: get an impetus, you get a trigger, and uh, I
Speaker 1: think the FED plus the correction of US assets is
Speaker 1: really kind of the force that's propelling the dollar lower
Speaker 1: right now. But it kind of depends on again, which
Speaker 1: what which dollar you're looking at, because right now, you
Speaker 1: know dollar e M is something that's been very stable
Speaker 1: in the environment where you have lots of volatility, which
Speaker 1: is which is telling you a signal that you know,
Speaker 1: there's there's other things kind of going on in the
Speaker 1: FX market. Mark, what are your signals telling you about
Speaker 1: the Chinese currency, the yuan? The remember, is it overvalued
Speaker 1: against the US dollar or as many you've already described,
Speaker 1: is it undervalued? Yeah, it's it's probably an element of
Speaker 1: it's still slightly overvalued relative to where Chinese growth should
Speaker 1: land next year. So I think there's still a story
Speaker 1: that dollar CNH is going to break through seven um,
Speaker 1: but I think it's something that's already kind of been
Speaker 1: priced in, has kind of worked through the market's understanding
Speaker 1: of where we think these dynamics will land. So the
Speaker 1: impulse you have there is the US economy and the
Speaker 1: Chinese economy are are diverging. And also if you think
Speaker 1: about the impact of the trade wars, there's you know,
Speaker 1: there's an added beta that I guess comes through the
Speaker 1: impact of the trade war specifically on China. But the
Speaker 1: big driver of the Chinese growth story is really China leveraging.
Speaker 1: So China has been trying to slow down its economy
Speaker 1: because it's trying to move capital from inefficient parts to
Speaker 1: potentially more productive parts, and that process in itself is
Speaker 1: actually generates slower growth in the short term. So our
Speaker 1: view is that dollar CNH will still kind of break seven,
Speaker 1: but the weakness in cnn or or the remn to
Speaker 1: be would come through other major currencies. So it's really
Speaker 1: and Chinese policymakers have been trying to focus people on
Speaker 1: this as it's think more about the basket. So the
Speaker 1: currency can still weaken against everything, but it's not um
Speaker 1: you know, it's not a big dollar, you know, dollar
Speaker 1: remn to be reevaluation or or stronger uh bilateral cross.
Speaker 1: It's really that the rem to be could weaken against
Speaker 1: all these other currencies like the Euro, the yen, uh Norway, Sweden, um,
Speaker 1: some of the other major currencies, and even some of
Speaker 1: the emerging markets like India and Indonesia some of those others.
Speaker 1: But the basket around c N is really a Taiwan
Speaker 1: South Korea c and why essentially low yielding Asian currencies
Speaker 1: still probably have some element of depreciation next year. You
Speaker 1: talk about, well, you talk about that CNH could weekend.
Speaker 1: I mean, I guess in a in a sort of
Speaker 1: a completely sort of free floating market, I would buy
Speaker 1: into that. But do you buy into this idea that
Speaker 1: the Chinese government is willing to sort of allow that
Speaker 1: to happen. Yeah, I think they want to manage it.
Speaker 1: I don't think they want a big I don't think
Speaker 1: they want a big movements in the currency. So whether
Speaker 1: it goes up or down, I think they wanted to
Speaker 1: be relatively contained because um, I think one of the
Speaker 1: biggest stories for next year is going to be and
Speaker 1: this kind of goes back to the view around the dollar,
Speaker 1: which is China is going to be a capital importer,
Speaker 1: which which means essentially that their current accounts surplus is
Speaker 1: gone and next year they will be reliant on foreign
Speaker 1: investment to maintain a stable balance of payments and also
Speaker 1: to plug the current account. So I think what they're
Speaker 1: trying to do is kind of manage the currency in
Speaker 1: a way where they're showing foreign investors that it's a
Speaker 1: stable form of investment, and so they will be more
Speaker 1: reliant on portfolio flows, equity and fixed income flows and
Speaker 1: so kind of not I think. I guess reducing the
Speaker 1: volatility of the currency and creating some months more certainty
Speaker 1: around what the bands of direction are is something that
Speaker 1: would be much more important for them. So I think,
Speaker 1: especially when you kind of look at the forward markets
Speaker 1: and things that have already been priced in, people are
Speaker 1: kind of expecting dollars c H to rally next year.
Speaker 1: So I think your their ability to kind of let
Speaker 1: these market forces operate a little bit better. Also understanding
Speaker 1: that they will have to import more capital, I think
Speaker 1: we'll reassure investors that it's a it's a stable place
Speaker 1: to at least part more equity and more fixed income flow,
Speaker 1: which is part of the the process of kind of
Speaker 1: moving towards different forms of reserve currencies. Well, we're moving
Speaker 1: towards a process of lower lows. Right now in the
Speaker 1: S and P five hundred, we are down more than
Speaker 1: forty five points. That's a drop of one point eight
Speaker 1: per cent. That translates into a decline of more than
Speaker 1: nine percent year to date. Mark McCormick, At what point
Speaker 1: did these US assets start looking attractive and attract foreign
Speaker 1: capital into the US? Well, then I think that's going
Speaker 1: to be the tricky part for next year is because
Speaker 1: what you're seeing is US rates on a rate of
Speaker 1: change perspective are dropping. US real rates are are dropping
Speaker 1: as well. The U S yield curve is flattening. And
Speaker 1: so if you think about who the marginal savers are
Speaker 1: around the world, it's the Europeans, and it's actually the Japanese.
Speaker 1: It's not it's the current account surplus countries no more,
Speaker 1: no longer, the Petrol States and China. It's actually g
Speaker 1: ten countries like China are like Japan and the Eurozone.
Speaker 1: So the question becomes, why would the Europeans and the
Speaker 1: Japanese want to reinvest in the United States? And this
Speaker 1: is where it comes back to the shape of the
Speaker 1: yield curve. It comes back to the hedging costs. So
Speaker 1: for US, the major story for next year is yield
Speaker 1: curves outside the US are much steeper, Thanks very much,
Speaker 1: and that's where we're gonna be looking next year, a
Speaker 1: steeper yield curves. Mark McCormick TV Securities, North American head
Speaker 1: of FX Strategy. Thanks for listening to the Bloomberg Surveillance podcast.
Speaker 1: Subscribe and listen to interviews on Apple Podcasts, SoundCloud, or
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Speaker 1: I'm Bloomberg Radio