WEBVTT - John Woods on the Markets (Audio)

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<v Speaker 1>Let's get to our guest, John Woods Asia Pacific CIO

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<v Speaker 1>at credit Sweez Well, John, it appears that we have

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<v Speaker 1>something like three to six months of pain coming up

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<v Speaker 1>if your long risk assets. But after that there will

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<v Speaker 1>be some opportunities. And we've got a couple of big

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<v Speaker 1>catalysts that would be looming, the FED perhaps hinting that

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<v Speaker 1>job done, and maybe a change in the COVID policy

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<v Speaker 1>in China, which one happens first. Gosh, that's a that's

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<v Speaker 1>a complex, um and well judged question. It's a brilliant,

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<v Speaker 1>brilliant question. My my senses, actually, we are quite some

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<v Speaker 1>way from any sense of FED pivot, given the message

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<v Speaker 1>which reverberated from Jackson Hole just a few days ago.

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<v Speaker 1>My senses, the FED will not even consider easing at

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<v Speaker 1>least until we see inflation at or very close to

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<v Speaker 1>that two target or two to three percent target, and

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<v Speaker 1>not only hitting that target but remaining there consistently up

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<v Speaker 1>for a number of months. So I think one of

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<v Speaker 1>the reasons why the markets so aggressively sold off Friday

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<v Speaker 1>was the fact that we are what eight nine currently

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<v Speaker 1>in terms of headline cp A c p I. I

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<v Speaker 1>can't imagine us getting down to that sort of two

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<v Speaker 1>percent area at least for six to nine months. Regarding

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<v Speaker 1>zero COVID, well, um, I think that's an event for

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<v Speaker 1>a post the Party Congress, which is scheduled. I believe

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<v Speaker 1>for October. I suspect that there will be a number

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<v Speaker 1>of months before that's re calibrated UM and repackaged, possibly

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<v Speaker 1>something for the new year three. So on balance, I

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<v Speaker 1>suspected zero COVID rather than UM any sense of a

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<v Speaker 1>pivot by the FED, and just getting back to the

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<v Speaker 1>impact of what we're expecting from the FED on risk assets.

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<v Speaker 1>If you've seen September the second worst month on average

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<v Speaker 1>for the SMP fix over the past two decades, how

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<v Speaker 1>much fur the pain a we're expecting next month? Well,

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<v Speaker 1>I think it was noteworthy that in his short, sharp shock,

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<v Speaker 1>which was that eight minutes speech, FED Chairman Powell made

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<v Speaker 1>zero reference whatsoever to financial conditions and financial markets. That

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<v Speaker 1>says to me that both the economy and the market

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<v Speaker 1>is likely to endure a substantial amount of pain um

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<v Speaker 1>in uh in as an inflation is engineered lower and

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<v Speaker 1>by the way, one of the reasons Credit Swiss unusually

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<v Speaker 1>moved its a tactical allocation to underweight equities for the

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<v Speaker 1>first time in a very long time, in anticipation of

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<v Speaker 1>a deceleration in economic growth, a compression in margins, and frankly,

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<v Speaker 1>a higher ability of recession. I did say three to

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<v Speaker 1>six months of pain, and it seems like you're saying

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<v Speaker 1>it could be more. Well. Absolutely, it's really a function

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<v Speaker 1>of inflation and how enduring and how sticky that is

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<v Speaker 1>likely to be. Investors will want to get out in front.

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<v Speaker 1>Right At some point, they'll be looking perhaps beyond the recession. Yes,

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<v Speaker 1>I guess they will be looking for opportunities and cheapened valuations.

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<v Speaker 1>We're not there yet. We're not anywhere close, I think,

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<v Speaker 1>to these sort of levels which would be attractive, by

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<v Speaker 1>which I mean sort of to threat two or sorry,

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<v Speaker 1>one or two standard deviations below a ten or even

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<v Speaker 1>fifteen year mean. Brian. We're not there yet, and I

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<v Speaker 1>suspect it will take some time for that to happen.

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<v Speaker 1>You touch quickly on China's COVID zero, but just quickly.

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<v Speaker 1>How weaker these pms expected to be when we get

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<v Speaker 1>them in about twenty minutes. Well, I don't think they're

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<v Speaker 1>going to be substantially weaker, although I think they are

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<v Speaker 1>going to tick lower. I mean, one of the big

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<v Speaker 1>problems we have with China right now is the hesitancy

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<v Speaker 1>both of the central government and provincial governments to aggressively

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<v Speaker 1>roll out the stimulus that has already been announced. And

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<v Speaker 1>until that actually happens, until US provincial governments in particular

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<v Speaker 1>step up and aggressively invest, well, then I suspect PMS

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<v Speaker 1>and particularly for PM eyes will remain under pressure. I

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<v Speaker 1>just wanted to get your thoughts though on the PBOC

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<v Speaker 1>setting that stronger than expected, you unfixed for a sixth day,

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<v Speaker 1>getting more aggressive in pushing back against this weekly one. Well,

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<v Speaker 1>I think the p BOC is between a rock and

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<v Speaker 1>hard place right now. You have obviously the FED signaling

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<v Speaker 1>an intention to raise rates, perhaps more aggressively than originally anticipated,

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<v Speaker 1>and yet you have the p BOC at the same

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<v Speaker 1>time seeking to ease rates to support underlying economic conditions.

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<v Speaker 1>And of course the Fed constrains the p BOC's ability

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<v Speaker 1>to do that, and the only way really to offset

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<v Speaker 1>that is through the currency. So we've seen a substantial

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<v Speaker 1>amount of volatility uh remnant b both on shore and offshore.

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<v Speaker 1>I suspect that will continue. The PBOC will seek to

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<v Speaker 1>smooth as much as it can the underlying trend of

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<v Speaker 1>remnin B, but in our view it's likely to weaken further.

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<v Speaker 1>We're calling for around six point nine in the next

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<v Speaker 1>three months or so, but frankly, I wouldn't be at

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<v Speaker 1>all surprised if we get a little more volatility in

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<v Speaker 1>the interim period. So many Asian currencies have weakened even

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<v Speaker 1>more so the comparative advantage is not really that big

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<v Speaker 1>for China. Um I mentioned QT because I am not

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<v Speaker 1>quite sure how to measure it, So I'm hoping to

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<v Speaker 1>get some expertise from you out you know how much

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<v Speaker 1>QT is priced into the markets, and and what is

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<v Speaker 1>the best way to measure it? Well, I mean, I

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<v Speaker 1>think it's certainly the case that Jackson Hole and interest

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<v Speaker 1>rates have captured the attention of the market, but absolutely

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<v Speaker 1>underlying that we have the endure risk of QT. And

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<v Speaker 1>of course, the Federal Reserve this week is set to

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<v Speaker 1>raise that double uh that program from some sixty billion

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<v Speaker 1>to a month to some thirty thirty five billion, So

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<v Speaker 1>there's a substantial increase in the runoff of treasuries being held,

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<v Speaker 1>the extent to which it influences market pricing, market behavior

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<v Speaker 1>again it's less certain, but certainly I think it speaks

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<v Speaker 1>to um the draining of liquidity from the market. The

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<v Speaker 1>type of support that previously existed to both the economy

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<v Speaker 1>and particularly equity markets, I suspect is likely to diminish,

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<v Speaker 1>and again just speaks to a more challenging set of

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<v Speaker 1>circumstances in the next three to six months, and and

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<v Speaker 1>and probably and confirms those investors which are seeking to

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<v Speaker 1>manage and reduce risk in such an environment. John I

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<v Speaker 1>mentioned the weakness that you're seeing in crude headed for

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<v Speaker 1>its longest declining streak in more than two years. Have

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<v Speaker 1>we started to see a little bit of the tightness

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<v Speaker 1>in the crude markets though crude market ease um certainly,

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<v Speaker 1>and I think purely from the fundamentals perspective, we will

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<v Speaker 1>anticipate lower oil prices in the weeks and months to come.

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<v Speaker 1>I mean, it doesn't help that on the supply side

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<v Speaker 1>there seems to be a reluctance to cut production amongst

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<v Speaker 1>certain OPEC members, and that was the message communicated in

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<v Speaker 1>the last few days. But my senses, as we reprice

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<v Speaker 1>growth at the global level, actually underlying premium for crude

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<v Speaker 1>will will diminish and we would anticipate further downward pressure

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<v Speaker 1>on prices. John, how big of a story is the

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<v Speaker 1>reshoring of key manufacturing back home for a lot of

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<v Speaker 1>A lot of countries, particularly United States, have made the

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<v Speaker 1>most noise, but others will likely do so as well.

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<v Speaker 1>And and how much of an impact on China Is

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<v Speaker 1>there going to be a massive medium to long term impact?

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<v Speaker 1>I would suspect over the near term less so, it

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<v Speaker 1>takes decades to set up UM and establish the infrastructure

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<v Speaker 1>for a supply chain UM and unwinding it over the

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<v Speaker 1>near term is very, very difficult. Is it a net positive, Well,

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<v Speaker 1>I mean it's a it's a net positive for the

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<v Speaker 1>reshore that the country is benefiting from that reshoring. I'm

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<v Speaker 1>less convinced it's a it's a positive for countries like China.

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<v Speaker 1>But again, it speaks to the end of globalization, and

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<v Speaker 1>it speaks to a rise in multipolar world. It speaks

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<v Speaker 1>to the geopolitical divisions that are now impacting the political,

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<v Speaker 1>sorry the economic outlook for our global economy, and again

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<v Speaker 1>I don't see that changing anytime soon. So over the

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<v Speaker 1>medium term, absolutely countries in and around the United States,

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<v Speaker 1>for example, Mexico, Canada will all be major beneficiaries of

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<v Speaker 1>reassuring and something similar comparably in the EU as well.

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<v Speaker 1>John always a pleasure. John Woods joining us in Hong Kong, Asia,

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<v Speaker 1>Pacific ce IO at Credit Swiss