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Speaker 1: Seven minutes past the hour as we look at market

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Speaker 1: action with our guest Mohammed Alpapi, head of Asia Trading

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Speaker 1: Strategy at City Group, joining us from Hong Kong. Mohammed,

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Speaker 1: thanks for being with us. There's so many things to

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Speaker 1: talk about. I think we have got to begin with

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Speaker 1: what the FED is up to these days, because of

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Speaker 1: the way in which the dollar has been behaving. We

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Speaker 1: had quite the rally in the US Friday. UH. The

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Speaker 1: survey from the University of Michigan on an inflation expectations

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Speaker 1: really spiked here in early October, and now we have

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Speaker 1: Jim Bullard over the weekend saying we're more likely to

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Speaker 1: get another supersized rate increase in December. I mean, if

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Speaker 1: we if we have a much more aggressive FED, let's

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Speaker 1: say through the first quarter of next year, how much

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Speaker 1: more will markets become unstable? Good morning, and thank you

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Speaker 1: for having me on the program. In fact, it's quite

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Speaker 1: interesting because this morning uh in uh comments to my

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Speaker 1: trade is. I said to them that you know, most

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Speaker 1: of the numbers that I put together which showed them,

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Speaker 1: you know, the S and P falling two thirty two D,

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Speaker 1: the fair value for the SMP for thirty two hundred

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Speaker 1: by the end of the year with the bare case

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Speaker 1: projection of that's all projected by really year end. And

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Speaker 1: I had actually thought that there was going to be

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Speaker 1: a FED pivot by the end of the year. Now

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Speaker 1: if the FED pivot doesn't happen and interest rates continue

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Speaker 1: to go higher and balance sheets, I think there was

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Speaker 1: a line from Mr Bullard saying that he thought that

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Speaker 1: it was premature to pivot even on the balance sheets

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Speaker 1: we could be looking even at at numbers like twenty.

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Speaker 1: But I think, um, you know, we've we've got a

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Speaker 1: fairly significant ten weeks between now and the end of

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Speaker 1: the year where a lot would happen. The region that

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Speaker 1: we're in represents some area of financial instability wherein an

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Speaker 1: unstable equilibrium here in markets. Uh. And the question really

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Speaker 1: is whether something breaks in the financial system between now

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Speaker 1: a year end that causes them to pivot or where

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Speaker 1: they just continue with the policy. And with Craig starting

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Speaker 1: to show up Mohammed, I mean, how much leverage does

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Speaker 1: the FED have to calm markets while trying to fight

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Speaker 1: inflation when you look at stress levels of seeing US

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Speaker 1: government bond liquidity at March twenty twenty levels, Yes, I

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Speaker 1: think there's a lot of potential areas for instability. We've

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Speaker 1: got the ECB starting to talk about doing qt uh.

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Speaker 1: You know, we've talked about the idea that if the

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Speaker 1: ECB wants to do QUT and stop the decline in

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Speaker 1: the euro, stop the rally in the dollar antip equity

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Speaker 1: markets calm, they would need to do something like a

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Speaker 1: hundred and fifty billion euros of qt and of course

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Speaker 1: that would be very destabilizing we think for the European

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Speaker 1: sovereign market as well as for the European banking system.

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Speaker 1: And then close at home in Asia, a concern is

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Speaker 1: really the FX reserves of Asian countries and whether they're

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Speaker 1: going to need to liquidate some of their treasury holdings

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Speaker 1: to get the reserves of dollars that they will need

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Speaker 1: to intervene in the currency markets. But these are just

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Speaker 1: two of the of the risks that we see. We're

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Speaker 1: basically looking potentially a dollar funding shortage perhaps going into

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Speaker 1: the end of the year that could be destabilizing as well.

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Speaker 1: So unfortunately, no good news seems to be on the

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Speaker 1: horizon for now. We just have to I think we're

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Speaker 1: going to see things getting much better, much worse before

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Speaker 1: they're going to get better. So Mohammed, giving everything that

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Speaker 1: you're kind of putting on the table here, it's definitely

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Speaker 1: risk off as you d risk. Do you want to

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Speaker 1: go into cash? Is this a time to build a

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Speaker 1: personal liquidity? I think on the personal side it's a

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Speaker 1: little bit different. I think there are opportunities there for

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Speaker 1: the longer term. So for example, if we are correct

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Speaker 1: in our view that there may be a deflation or

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Speaker 1: a disinflation cliff on the other side of this, where

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Speaker 1: we could see, yes, inflation numbers remaining elevated from now

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Speaker 1: until probably six months, but then six months after that,

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Speaker 1: what you could start seeing is that there is a

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Speaker 1: very significant fall in forward inflation. And that's one of

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Speaker 1: the reasons why the market is pricing rate cuts. Like

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Speaker 1: if you look at one year one year forward inflation,

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Speaker 1: it's at two point three. So yes, cash for now,

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Speaker 1: But we're looking for opportunities. We're watching the yen towards

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Speaker 1: a hundred and fifty and I know you told us

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Speaker 1: last week it could be one sixty and maybe even

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Speaker 1: at what point do we see some further intervention here

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Speaker 1: with the verbal jaw barning not really doing much to

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Speaker 1: detract from the weakness. Yes, I think we've seen even

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Speaker 1: over the weekend, Japanese officials saying that they're uncomfortable with

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Speaker 1: the pace of yend depreciation, and that follows comments also

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Speaker 1: from authorities in Korea and in China as well as

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Speaker 1: other places as well. Um. I think that the problem

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Speaker 1: is that the fundamentals at the moment are against all

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Speaker 1: the other currencies and really arguing in favor of dollars strength.

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Speaker 1: So until that fundamental picture really changes, any intervention will

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Speaker 1: just act to slow the dollars rise, but will not

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Speaker 1: actually change it. So we think for the time being

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Speaker 1: there maybe everyone markets looking really around the one fifty

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Speaker 1: level for intervention. I've got no particular insight into that,

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Speaker 1: but I think for the time being, there is no

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Speaker 1: change in the stronger dollar. You, Mohammed, we've been talking

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Speaker 1: about the twentie Party Congress and the speech about twenty

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Speaker 1: four hours ago from President She. Based on what you

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Speaker 1: heard some of the analysis that you have access to,

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Speaker 1: do you want to be on China right now? Well?

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Speaker 1: I think that you know, we we we think that

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Speaker 1: there was going to be some more policy action in

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Speaker 1: March of last year, and unfortunately there hasn't been as

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Speaker 1: much now. Right now the market is looking a little

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Speaker 1: bit oversold, but that is that we'd be calling for

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Speaker 1: a bounce in the market regardless of whatever happened in

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Speaker 1: the weekend events. The thing that is really driving the

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Speaker 1: Hong Kong equity market at the moment is really the

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Speaker 1: stronger dollar as well as the fall in balance sheet.

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Speaker 1: So if you look at the two of those factors

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Speaker 1: put together, that explains something like of what is going

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Speaker 1: on in Hong Kong equities, And clearly geopolitical risk is

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Speaker 1: also having an impact. If you look at the a

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Speaker 1: versus hate spread, I believe that is now at the

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Speaker 1: highest level that it's been at since two thousand and eleven,

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Speaker 1: So there is very there is a very different um.

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Speaker 1: There's a very marked difference in sentiment towards China between

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Speaker 1: domestic investors and foreign investors. So on the hedge side,

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Speaker 1: we think maybe a small dead cut bounce here before

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Speaker 1: we head lower towards somewhere around the fourteen fourteen and

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Speaker 1: a half thousand level. I'm just saying, the PC keep

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Speaker 1: the one year MLF interest rate unchanged at two point

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Speaker 1: seven five. What kind of further policy our support are

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Speaker 1: you expecting, though? Particularly when we've got these growth trajectory

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Speaker 1: levels for three very low too. I think what would

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Speaker 1: really help in UH in China is actually action on

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Speaker 1: all of the four major sources of growth, whether that's infrastructure, exports,

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Speaker 1: on the property sector, and on the domestic consumer. So

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Speaker 1: clearly zero COVID has got a role to play in that.

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Speaker 1: The falling global demand is also hurting. And what is

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Speaker 1: very clear is that the perception, especially in Hong Kong

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Speaker 1: equity markets, is very much driven by this rising geo

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Speaker 1: political tension. So we need some action on on all

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Speaker 1: of those things. Whether we've got that over the over

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Speaker 1: the weekend, it's not so clear yet. It really depends

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Speaker 1: on yes, we've got the speech from presidency, but really

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Speaker 1: depends on some of the other things that are going

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Speaker 1: to be happening over the rest of this week. But

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Speaker 1: I think overall, we have believed in Chinese exceptionalism, and

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Speaker 1: that had worked in Chinese exceptionalism in terms of markets.

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Speaker 1: That had worked from March of last of this year

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Speaker 1: until about June UH and then it all fell apart again.

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Speaker 1: So that doesn't feel like there's any Chinese exceptionalism in

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Speaker 1: the era of a very strong dollar alright, Mohammed, Always

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Speaker 1: a pleasure. Thank you. Mohammed Apabay, his head of Asia

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Speaker 1: Trading Strategy at City Group, joining us from Hong Kong