Speaker 1: Bloomberg Audio Studios, Podcasts, radio News.
Speaker 2: Welcome to the Daybreak Asia podcast. I'm Doug Chrisner. So
Speaker 2: markets are now dealing with a new thread of tariffs
Speaker 2: on US imports. Last Friday, President Trump declared a thirty
Speaker 2: percent tariff on goods from both the European Union and
Speaker 2: Mexico effective August first. It was just the day before
Speaker 2: Trump threatened Canada with a thirty five percent tariff. So
Speaker 2: markets have been somewhat well behaved as if they are
Speaker 2: counting on mister Trump to back down, having seen you
Speaker 2: turns before. The question is whether that remains the best
Speaker 2: bet In a moment, we'll travel to Singapore and speak
Speaker 2: with Bloomberg Markets Live strategist Mary Nicola. We begin in
Speaker 2: the States, though, as we look ahead to second quarter earnings.
Speaker 2: Joining me now is Rod Van Lipsey. He is managing
Speaker 2: director at UBS Private Wealth Management. On the line from Washington, DC. Rod,
Speaker 2: thank you so much for making time to chat with me.
Speaker 2: So earnings from a couple of the big banks are
Speaker 2: on the list this week, we'll also get numbers from
Speaker 2: TSMC and Netflix. I'm curious, how do you feel about
Speaker 2: the quality of the results that we're going to see
Speaker 2: for Q two.
Speaker 3: You know, this is going to be a very interesting
Speaker 3: quarter over quarter year over year look in part because
Speaker 3: we go back just to a quarter ago and the
Speaker 3: whole tariff scenario really put corporations in a very strange place.
Speaker 3: The estimates right now on the street, we're looking at
Speaker 3: under five percent earnings for EPs growth year every year.
Speaker 3: We at UBS believe are going to come in closer
Speaker 3: to about six percent when we look at twenty twenty
Speaker 3: five and growing to call it two hundred and sixty
Speaker 3: five dollars a share on the S and P five hundred.
Speaker 3: I think that this busy week, you know, you're really
Speaker 3: going to see some acceleration in the earnings reports, you know,
Speaker 3: from Monday Tuesday, Wednesday, the big banks really start to
Speaker 3: kick off on Tuesday, and our expectation is that those
Speaker 3: estimates are going to beat consensus. They're going to be
Speaker 3: pretty strong in one case, because the higher interest rates,
Speaker 3: especially for financials, have been very very supportive of NII
Speaker 3: and that interest income and that interest margin for these banks.
Speaker 3: So we'll see some good numbers there. And I expect
Speaker 3: that some of the economic activity has been pulled forward
Speaker 3: in this second quarter, especially since tariffs have been threatened
Speaker 3: and delayed and postponed, so lots of activity, but it's
Speaker 3: going to be a strange one and everyone is going
Speaker 3: to be looking at not just the second quarter results,
Speaker 3: but what will be the forecast for third quarter and
Speaker 3: looking forward.
Speaker 2: Before we leave the banks, I want to ask about
Speaker 2: whether trading revenue has the potential to be a real
Speaker 2: standout here given the volatility that we had in markets
Speaker 2: in the second quarter, whether banks really benefited from that
Speaker 2: on the trading side.
Speaker 3: Anecdotally, dug absolutely. And that's why we are not only
Speaker 3: sort of very very bullish, if you will, on financials
Speaker 3: and the asset manager because we think the trading activity
Speaker 3: in this second quarter was just off the charts, especially
Speaker 3: during April, and so with that pick up an activity,
Speaker 3: with all of that uncertainty and all of the activity
Speaker 3: that went around that, I think it's going to be
Speaker 3: a pretty strong, strong especially for the broker dealers, is
Speaker 3: going to be a very very strong second quarter.
Speaker 2: We mentioned earlier the impact of the tariffs, and I
Speaker 2: thought it was very interesting. Last Thursday we heard from
Speaker 2: ConAgra the outlook well below expectations, and the company pointed
Speaker 2: out that rising cost for tin plate steel used for
Speaker 2: food cans due to tariffs is going to have a
Speaker 2: very consequential negative impact. Is this something that's going to
Speaker 2: be more predominant when we talk about margins? Just how
Speaker 2: this begins to manifest.
Speaker 3: It's interesting. The UBS base case is that we're going
Speaker 3: to end up somewhere around the fifteen percent, you know,
Speaker 3: sort of across the board tariff rate, and that the
Speaker 3: consumer is going to be asked to bear the brunt
Speaker 3: of much of that, and so that works into our
Speaker 3: echnomic forecast numbers. But the commodity prices, quite frankly, are
Speaker 3: just all over the charts because of the dramatic uncertainty.
Speaker 3: Most of our investors are focused on commodities like gold
Speaker 3: and oil and don't dig too far into the commodity indices.
Speaker 3: But when we look at commodities, they truly are really
Speaker 3: all over the charts because it's very difficult to understand
Speaker 3: how the policy and the tariffs and the trade considerations
Speaker 3: will affect those utter blank commodities. But I think it
Speaker 3: manifests itself at least in our forecasts on inflation that
Speaker 3: remains fairly pernicious in stays above the FED state of
Speaker 3: two percent.
Speaker 2: Target interesting, and yet with all the risk out there,
Speaker 2: we've got an S and P five hundred trading at
Speaker 2: twenty four times earnings. Is that a little bit of
Speaker 2: a headscratcher for you?
Speaker 3: It truly is, because we have different things, especially if
Speaker 3: we look at our ubs macro economic forecasts see for
Speaker 3: example GDP growth in the Americas for twenty twenty five,
Speaker 3: estimating you know, one and a half percent GDP growth.
Speaker 3: But we're looking at CPI or inflation. Can we have
Speaker 3: some releases this week that will tell us. But we
Speaker 3: see inflation coming in almost to three percent and actually
Speaker 3: accelerating into twenty twenty six, and that is directly because
Speaker 3: of this concern about how tariffs are going to flow
Speaker 3: through to the consumer and how they're going to keep
Speaker 3: inflation fairly high. Now, the markets seem to be unfhazed
Speaker 3: by the tariff talks. The markets seem to believe that
Speaker 3: we're going to get to August first and either we'll
Speaker 3: have a favorable outcome or things will get pushed back again,
Speaker 3: and so they are completely unfazed. At least if we
Speaker 3: look at the you know, at all time highs and
Speaker 3: continuing to be there and so on. A macro level.
Speaker 3: We think that this bull market that we've been experiencing
Speaker 3: continues to have legs, it continues to have momentum, But
Speaker 3: the real place to keep an eye out is going
Speaker 3: to be the market, because at some point in time,
Speaker 3: a lot of the things that were in the big
Speaker 3: beautiful bill, a lot of the things that are coming
Speaker 3: into the economy because of increasing tariffs, at some point
Speaker 3: in time, the bond market is going to give us
Speaker 3: a signal. And that's really where we have a cautious outlook.
Speaker 2: So, if you were going to be in the fixed
Speaker 2: income space, where do you want to hide out the
Speaker 2: belly of the curve or do you want to be
Speaker 2: maybe more exposed to the short end. What's the strategy?
Speaker 3: Listen, we think that in the belly of the curve,
Speaker 3: and we think that on balance again with our forecasts
Speaker 3: looking one year out, with ten year rates coming back
Speaker 3: down to four percent, we think that the bond market
Speaker 3: provides an opportunity for the long term investor. These are
Speaker 3: actually attractive levels, especially when you look at spreads for
Speaker 3: high quality municipal bonds for taxable investors in the US,
Speaker 3: or corporate corporate bonds. We're seeing an opportunity there to
Speaker 3: get nice returns, but that does not mean it's not
Speaker 3: going to be volatile in the short term. And that's
Speaker 3: the real challenge for the bond investor is to take
Speaker 3: a look at it, dick your yield, say this is
Speaker 3: the yield that I think is going to work, and
Speaker 3: recognize that next week, next month, that might feel like
Speaker 3: a bad decision, but by next year you'll be glad
Speaker 3: that you're sitting on that high quality paper.
Speaker 2: Does the Big Beautiful Bill at any point in the
Speaker 2: future begin to negatively impact the muni market, particularly at
Speaker 2: the state level.
Speaker 3: Well, that's a fantastic question, and I think that that
Speaker 3: has been structurally appears to be something that's been pushed
Speaker 3: down the road a little bit. Doug. I've got to
Speaker 3: say that I have not read The Big Beautiful Bill,
Speaker 3: and I don't know very many people who have actually
Speaker 3: been able to read that book cover to cover. But
Speaker 3: it's my understanding that much of the good news has
Speaker 3: been baked in and takes immediate effect, and then some
Speaker 3: of the ways to pay for that good news have
Speaker 3: been pushed back, some of it beyond the midterm elections,
Speaker 3: and so that is going to create some challenges. It's
Speaker 3: going to create pressure for things that are being put
Speaker 3: on states and municipalities. There's been a lot of bond issuance,
Speaker 3: especially by municipal issuers there this year to try to
Speaker 3: get out in front of this before rates potentially go up.
Speaker 3: So I yes, I do think there's some challenges that'll
Speaker 3: be ahead, but I don't know that those are near term.
Speaker 3: I think those are pushed into twenty twenty six and beyond.
Speaker 2: Okay, fair enough, But I'm wondering whether or not, given
Speaker 2: everything that we've been laying out that you're attempted to
Speaker 2: look a little offshore right now to remain diversified, do
Speaker 2: you want to look at foreign markets.
Speaker 3: Our investors have been the clamoring to understand ways to
Speaker 3: diversify against either monetary or fiscal pressures and challenges here
Speaker 3: in the US, and so listen. That's why we're seeing
Speaker 3: gold prices in the current range. But we're also seeing
Speaker 3: lots of great performance out of the international markets. I
Speaker 3: think one of the questions is whether the international equity markets,
Speaker 3: especially the Eurozone, whether it's it's fully caught up or
Speaker 3: is there more room to grow. We think that selectively
Speaker 3: looking offshore holding foreign currency holding gold that those are
Speaker 3: nice hedges, But when it comes to actually making an
Speaker 3: investment that will outperform the US markets, that becomes a
Speaker 3: little bit more of a murky question, very very difficult
Speaker 3: to us to look at European equity market growth in
Speaker 3: US equity market growth, especially when we look at the
Speaker 3: focus of it and financials here in the US and
Speaker 3: believe that there's a lot of room for outperformance there.
Speaker 3: In the developed international markets, emerging markets, both on the
Speaker 3: debt and the equity side, do show some grain shoots
Speaker 3: and do show some very very strong either sovereign balance
Speaker 3: sheets or good positions for these corporations. But the path
Speaker 3: of tariffs will really really make a difference, and so
Speaker 3: that makes it a little bit of a challenge for
Speaker 3: US investors to go too deeply and go too far
Speaker 3: either out of dollar investing or entered national equities.
Speaker 2: House Republicans have declared the week ahead is crypto week,
Speaker 2: and I'm curious to get the take from the private
Speaker 2: wealth management perspective. How is the cryptocurrency space viewed? Is
Speaker 2: is bitcoin something that represents opportunity or do you see
Speaker 2: it pretty much as kind of noise around the edges?
Speaker 2: Of what the market is involved in these days.
Speaker 3: Boy, that is a really challenging one. It's also very
Speaker 3: challenging for someone in a broker dealer, especially a big
Speaker 3: firm facing the FED, to really understand the path and
Speaker 3: the fate of cryptocurrencies. I think three points though, One
Speaker 3: is that these are certainly with us, and they're going
Speaker 3: to stay with us. To believe that there are many
Speaker 3: of the cryptocurrencies themselves that are highly speculative, and we
Speaker 3: are now starting to see a number of stable coins
Speaker 3: that are actually buying treasuries and basing them on treasury.
Speaker 3: And so one of the interesting things, interesting dynamics that
Speaker 3: we're seeing in the stable coin or the crypto assets
Speaker 3: is the purchase of treasuries, which is, you know, if
Speaker 3: you would had sort of thought about it initially or
Speaker 3: off the cuff, you would think that that the crypto
Speaker 3: or emergence of more crypto options would actually be a
Speaker 3: move away from from treasuries, when in fact, the underlying
Speaker 3: securities and the underlying issuers are actually buying treasuries to make
Speaker 3: sure that they get that stability. So I think that
Speaker 3: it's going to be a very very interesting thing. Obviously,
Speaker 3: there's administration and on the hill there's support for crypto assets,
Speaker 3: but we continue to look at them as being highly speculative.
Speaker 2: Okay, we'll leave it there, Rod, thank you so much
Speaker 2: for joining us. Rod van Lipsey there, Managing director, UBS
Speaker 2: Private Wealth Management, on the line from Washington, d C.
Speaker 2: Here on the Daybreak Asia podcast. Welcome back to the
Speaker 2: Daybreak Asia Podcast. I'm Doug Krisner. So we know last Friday,
Speaker 2: President Trump declared a thirty percent tariff on goods from
Speaker 2: both the European Union and Mexico. They are effective August first,
Speaker 2: unless there is some sort of trade deal with both jurisdictions.
Speaker 2: Over the weekend, we heard from Ursula vander Lyon. She
Speaker 2: is the President of the European Commission, and she said
Speaker 2: the EU will extend the suspension of trade countermeasures against
Speaker 2: the US until August first, and that in fact will
Speaker 2: allow for further trade talks. We also heard from Mexican
Speaker 2: President Claudia Sinbaum. She said that her team had already
Speaker 2: begun discussions with the US on Friday. Joining me now
Speaker 2: for a closer look at the tariff story is Mary Nicola,
Speaker 2: Bloomberg Markets Live strategist. Mary joins us from Singapore, It's
Speaker 2: always a pleasure to chat with you. I'm curious as
Speaker 2: to get your take on the tariff headwinds where you
Speaker 2: are and what's being said about whether President Trump may
Speaker 2: be bluffing.
Speaker 1: I think that is very much the case, especially if
Speaker 1: you saw the way Asian equities had reacted last week,
Speaker 1: and it looked like they were shrugging off a lot
Speaker 1: of the noise that was coming through on tariffs. They
Speaker 1: shrugged off the noise on fifty percent on Brazil. Obviously
Speaker 1: this morning, Japanese stocks are down, but actually if you
Speaker 1: look at the Cosby in Korea, that's holding up quite well.
Speaker 1: So there has been this disparity in terms of they're
Speaker 1: shrugging it off because doors are still open for negotiations,
Speaker 1: and I think that's key for market and also the
Speaker 1: fact that we could potentially see President Trump backpedaling. Also,
Speaker 1: the fact is that the data is holding up quite well.
Speaker 1: So I don't think you'll start seeing cracks coming through
Speaker 1: into markets until we actually see some of the data
Speaker 1: come through fruition or the fact that you're seeing weakness
Speaker 1: coming through, And because we haven't seen that, it looks like,
Speaker 1: you know, the markets here in Asia are holding up relatively.
Speaker 2: Well, it's interesting tonight here in the US. So we
Speaker 2: had Trump saying that South Korea wants to make a
Speaker 2: trade deal. Now that's coming from mister Trump's perspective. I'm
Speaker 2: not so sure that the same thing could be said
Speaker 2: for the South Korean side. Isn't it really difficult to
Speaker 2: kind of get a sense of where we are in
Speaker 2: the negotiating process.
Speaker 1: Yeah, it's interesting too because if you look at Korea,
Speaker 1: the US has a free trade agreement with Korea, so
Speaker 1: obviously the building blocks are solid and they're already there.
Speaker 1: But it's a matter of what more is the US
Speaker 1: looking for? And I think that keeps coming up, especially
Speaker 1: in negotiations. So for example, which a pan you've had
Speaker 1: a set back because of agriculture. Agriculture is always a
Speaker 1: key sticking point when you're discussing trade negotiations and trade
Speaker 1: agreements because obviously agriculture is considered some sort of national
Speaker 1: security issue as well. And then but for Korea specifically,
Speaker 1: it's interesting because you do have solid building blocks, you
Speaker 1: do have a free trade agreement, but of course it's
Speaker 1: a matter of the twenty five percent tariffs on cars.
Speaker 1: That's obviously a key sticking point for the Koreans, and
Speaker 1: they want it to go away because obviously cars are
Speaker 1: a big part of what they're sending and what they're
Speaker 1: selling to the US. So unless those sectoral tariffs, which
Speaker 1: are still some of the bigger issues, go away, I
Speaker 1: think that might still hold Korea back and hold off
Speaker 1: an agreement between the two nations.
Speaker 2: So I'm curious Mary as to whether or not we
Speaker 2: have any data, high frequency or otherwise that might give
Speaker 2: a little bit of insight into how this trade war
Speaker 2: is impacting not only Japan but South Korea as well economically.
Speaker 2: Do we know anything, Yeah, so so far.
Speaker 1: Actually, if you look at some of the Korea, for example,
Speaker 1: releases export data ten days, twenty days, and then also
Speaker 1: if you look at the current account data, actually all
Speaker 1: of them have been quite solid. So that's another key
Speaker 1: reason as to want the Asian. Asian markets have been
Speaker 1: holding up relatively well. Not to mention the fact that
Speaker 1: China as well has been holding holding up relatively well
Speaker 1: as well in addition to that, but if you look
Speaker 1: at some of the trade data coming out of Korea,
Speaker 1: there's no real indications that there has been a real slump,
Speaker 1: and that's really helping a lot of the markets, and
Speaker 1: I think as long as you see the strength in
Speaker 1: the current account, the strength in the external sector, that's
Speaker 1: going to keep equity markets, at least in the region robust.
Speaker 2: So I know, we get a couple of key data
Speaker 2: points for the Japanese economy this week, machine tool orders,
Speaker 2: industrial production. I think there's some inflation data in there
Speaker 2: as well. What are you going to be looking at?
Speaker 1: Yeah, I think the main thing for investors right now
Speaker 1: for the Japanese economy is on CPI. Obviously there's a
Speaker 1: lot of concern about inflation. There's a lot of concern
Speaker 1: about what because especially we're seeing yields rise, and there's
Speaker 1: this toxic mix for Japan, whether you're seeing it because
Speaker 1: of quantitative tightening, whether you're seeing it because of inflation,
Speaker 1: whether you're seeing it because of worries about fiscal profligacy,
Speaker 1: and especially with the elections coming through and the potential
Speaker 1: for more fiscal spending. So there is really the heightened
Speaker 1: focus is on CPI. Is CPI still high? And of
Speaker 1: course we know that the Bank of Japan has been
Speaker 1: quite reluctant to high grates, so real rates remain quite high,
Speaker 1: and as a result, I think you're seeing investors just
Speaker 1: incredibly wary of especially Japanese bonds. That's also going to
Speaker 1: weigh on the yen in addition, So I think the
Speaker 1: focus for investors this week is going to be not
Speaker 1: only on CPI, but also on the election.
Speaker 2: So is the BOJ in a little bit of a
Speaker 2: bind here. I mean, if there is upward pressure on
Speaker 2: price action, or to say, upward pressure on inflation and
Speaker 2: the risk of more economic slowing, I mean, how do
Speaker 2: you engineer your way out of that?
Speaker 1: Absolutely, and that's a really good question in terms of
Speaker 1: what do they do. And so far they've sent a
Speaker 1: message that, especially on the tightening side, that they're sitting
Speaker 1: on their hands, They're weighing what is happening externally. They're
Speaker 1: concerned more about the external challenges and the implications on
Speaker 1: the economy than inflation. And that has actually been to
Speaker 1: the dutchment of the Japanese bond market and will likely
Speaker 1: hurt the end as well. But in the meantime we
Speaker 1: are seeing quantitative tightening, and it's interesting to see the
Speaker 1: bond market reaction that despite the tweaks they've made. So
Speaker 1: for example, the Ministry of Finance has already decided to
Speaker 1: reduce issuance in the back end, and we've seen some
Speaker 1: of those tweaks, yet we're still seeing pressure on bonds.
Speaker 1: So it's almost like they've let out their tools, but
Speaker 1: the tools aren't working, and that's just very much indicative
Speaker 1: of the bind that they're in. And of course adding
Speaker 1: to that is just the potential of fiscal expansion and
Speaker 1: that will just only add to the pressures on the
Speaker 1: bond market.
Speaker 2: So I know, based on our history of conversations over
Speaker 2: the last several years, you pay very close attention to
Speaker 2: what the FED is doing. And we've got President Trump
Speaker 2: and some of his allies who have been very critical
Speaker 2: of FED Shair J. Powell's handling of some of the
Speaker 2: renovations being done at the FED headquarters, and a few
Speaker 2: people in the administration have been now building the case
Speaker 2: to remove Powell from the fed's Board of Governors. Were
Speaker 2: that to happen, it's probably a very extreme type scenario.
Speaker 2: What would the reaction do you think in Asian markets
Speaker 2: be under that scenario?
Speaker 1: Yeah, I think it's actually still a very dangerous game
Speaker 1: to play where where you're potentially cracking and ruining the
Speaker 1: credibility of the FED. And that's essentially what's been happening
Speaker 1: with all this pressure on the FED. Where you do
Speaker 1: see is a potential reaction, is that a move and
Speaker 1: a shift away from the dollar, and that actually could
Speaker 1: be beneficial to a lot of the Asian currencies. We've
Speaker 1: seen the dollar slowly decline, actually more than slowly decline
Speaker 1: since the start of this year, and I think that
Speaker 1: just precipitates it. And what you'll see is a switch
Speaker 1: over to a lot of the Asian currencies, for example,
Speaker 1: the c and y, the Korean wan as well, where
Speaker 1: they are likely to get a bid as a result
Speaker 1: because of the fact that you know, there is just
Speaker 1: this loss of credibility because if you do put someone
Speaker 1: who is in that is complies with what the fiscal
Speaker 1: policy and what the administration wants, that just risks where
Speaker 1: we could see inflation and how potential policy monetary policy
Speaker 1: just gets out of control. So I think in general
Speaker 1: what you'll see is just that shift continue away from
Speaker 1: the dollar as a result, if you see further cracks
Speaker 1: in the fence credibility.
Speaker 2: Mary, we'll leave it there. It's always a pleasure. I
Speaker 2: hope you have a productive week in the Lion City. Mary, Nicola.
Speaker 2: There Bloomberg Markets Live Strategists joining from Singapore here on
Speaker 2: the Daybreak Asia podcast. Thanks for listening to today's episode
Speaker 2: of the Bloomberg Daybreak Asia Edition podcast. Each weekday, we
Speaker 2: look at the story shaping markets, finance, and geopolitics in
Speaker 2: the Asia Pacific. You can find us on Apple, Spotify,
Speaker 2: the Bloomberg Podcast YouTube channel, or anywhere else you listen.
Speaker 2: Join us again tomorrow for insight on the market moves
Speaker 2: from Hong Kong to Singapore and Australia. I'm Doug Chrisner,
Speaker 2: and this is Bloomberg