WEBVTT - Stocks Rise, Fed Hike Bets Ease After Tame US CPI

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<v Speaker 1>Bloomberg Audio Studios, Podcasts, radio News.

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<v Speaker 2>Welcome to the Bloomberg Daybreak Asia Podcast. I'm Dog Krisner.

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<v Speaker 2>Equity markets in the Asia Pacific are poised for gains

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<v Speaker 2>in the Thursday session. This is after the latest print

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<v Speaker 2>on US inflation matched expectations and that seemed to ease

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<v Speaker 2>concerned about an imminent rate hike from the Fed. We

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<v Speaker 2>had the S and P five hundred coming within striking

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<v Speaker 2>distance of a record high. Chip makers rallied and that

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<v Speaker 2>seemed to lift the Nasdaq one hundred to a one

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<v Speaker 2>month high. Coming up, we'll hear from Aaron Si, senior

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<v Speaker 2>multi asset strategist at Pictet Asset Management. But we begin

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<v Speaker 2>in the Lion City. Joining me now is Mark Cranfield,

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<v Speaker 2>Bloomberg m Live strategist. He joins from our studio in Singapore.

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<v Speaker 2>I appreciate you being here and can I ask for

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<v Speaker 2>you to give me a kind of your sense of

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<v Speaker 2>what's going on with the Japanese yen. I mean, it

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<v Speaker 2>seems like two weeks ago you had the US in

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<v Speaker 2>Japan essentially surprising the market with a coordinated intervention. It's

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<v Speaker 2>is it too much to say that this has failed?

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<v Speaker 3>I wouldn't say failed. They bought some time. I mean

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<v Speaker 3>there was a possibility that if they had done nothing

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<v Speaker 3>but not again, would have just continued to grind higher.

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<v Speaker 3>And who knows where the top side could could be

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<v Speaker 3>Under those circumstances, If you allow traders to think that

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<v Speaker 3>the market's become a one way bet, you could risk

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<v Speaker 3>sending it to unprecedented levels, and of course the contagion

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<v Speaker 3>risk as well. It may have spread across Asia, other

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<v Speaker 3>currencies may have got involved, may have gone global, It

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<v Speaker 3>may have stirred up markets in Europe and South America

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<v Speaker 3>as well. So certainly the consequences of doing nothing could

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<v Speaker 3>have been quite extreme. If the let's say the yen

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<v Speaker 3>had drifted onto one seventy one eighty something like that, you

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<v Speaker 3>could have had a global crisis on your hands. So

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<v Speaker 3>certainly they bought themselves some time. Clearly, from a big

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<v Speaker 3>picture point of view, unless monetariy authority comes alongside currency intervention,

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<v Speaker 3>you will not get a long term impact on the

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<v Speaker 3>currency unless the Bank of Japan steps up and does

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<v Speaker 3>its job and convinces investors that it is ready to

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<v Speaker 3>really take rates to the neutral level to address the

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<v Speaker 3>inflationary problems. In Japan, then people will start to say, Okay,

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<v Speaker 3>both hands are clapping together. Here, We've got full commitment

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<v Speaker 3>from the Central Bank, from the monitor authorities. Everything is

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<v Speaker 3>coming together. Here we are it's a change in direction

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<v Speaker 3>of the end. Until you see that, then the yen

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<v Speaker 3>will basically stay as an undervalued currency.

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<v Speaker 2>So, speaking of hands, what if the FED were to

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<v Speaker 2>essentially sit on its hands and do nothing in a

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<v Speaker 2>rate environment, that may argue for higher interest rates. If

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<v Speaker 2>the Fed were to just remain on hold for a

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<v Speaker 2>while longer, does that necessarily provide a little bit more support.

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<v Speaker 3>Maybe not that much. The issue is that the markets

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<v Speaker 3>can see there's a bit of a disconnect here. We

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<v Speaker 3>just just last night we had the the budget deficit

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<v Speaker 3>numbers came out above four hundred billion for July when

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<v Speaker 3>it was forecast to be three hundred something, more than

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<v Speaker 3>twenty five percent above forecast. That number is extraordinary and

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<v Speaker 3>it doesn't seem to have a cap just investors are

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<v Speaker 3>not convinced that the US authorities are trying their best

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<v Speaker 3>to rain in the deficit in the United States. That

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<v Speaker 3>means that the long end of the treasury curve will

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<v Speaker 3>continue to be under upward yield pressure. We saw yesterday

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<v Speaker 3>the ten year auction needed the highest yield since two

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<v Speaker 3>thousand and seven to get the bonds cleared, and we

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<v Speaker 3>have a thirty year auction coming to day. Prospects are

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<v Speaker 3>not great for that thirty year auction today. As long

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<v Speaker 3>as you have that continuous upward pressure in the long

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<v Speaker 3>end of the U s Treasury yal curve, it will

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<v Speaker 3>gradually filter through even towards the shorter maturities. Regardless of

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<v Speaker 3>whether the Fed is on hold or not on hold

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<v Speaker 3>the bond, Thenjilantis will decide for themselves where they say

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<v Speaker 3>interest rates should be. And of course, at a certain level,

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<v Speaker 3>high yields will support the US currency, so that makes

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<v Speaker 3>the carry trade more attractive again for the Japanese and

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<v Speaker 3>other currencies as well, not just the Swiss frank. We're

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<v Speaker 3>seeing under pressure as what relative pressure at the moment

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<v Speaker 3>as well, So whether the FED keeps on hold for

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<v Speaker 3>the rest of this year or not, the Treasury yr

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<v Speaker 3>curve will decide for itself where it thinks is the

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<v Speaker 3>fair compensation based on the inflation data it sees, based

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<v Speaker 3>on the budget deficit in the United States and other factors,

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<v Speaker 3>which will it always affect the bond market regardless of

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<v Speaker 3>what the central Bank does.

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<v Speaker 2>So I'm curious as to whether or not you suspect

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<v Speaker 2>that we could see another intervention on the part of

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<v Speaker 2>monetary authorities in Japan, maybe not in coordination with US authorities.

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<v Speaker 2>And if we wind up in that situation, is there

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<v Speaker 2>the risk that Japan could essentially sell US treasuries to

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<v Speaker 2>raise dollars?

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<v Speaker 3>They really really appear to have sold some treasuries to

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<v Speaker 3>help with the most recent intervention that seems to have

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<v Speaker 3>already happened, so you would expect that should they need

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<v Speaker 3>to intervene again, that's the first place that we go.

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<v Speaker 3>They haven't. Although Scott Besson was talking about this FEMA

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<v Speaker 3>situation where they could go to borrow essentially money through

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<v Speaker 3>sup arrangements to get the US dollows they need without

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<v Speaker 3>needing to sell US treasuries, that issue was raised, the

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<v Speaker 3>Japanese don't seem to have taken any advantage of that

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<v Speaker 3>so far. Maybe they will be pushed into into a future,

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<v Speaker 3>but traditionally they will wear down their sovereign investments before

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<v Speaker 3>they get to such issues. So from the Japanese point

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<v Speaker 3>of view, yes, if they need to do arrest their

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<v Speaker 3>intervention again, you would expect the first place they will

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<v Speaker 3>go is to reduce some of their holdings of US bonds.

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<v Speaker 2>So in terms of the macro story in Japan, we

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<v Speaker 2>have a lot of economic data in the coming week,

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<v Speaker 2>including second quarter GDP figures. Give me a sense of

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<v Speaker 2>your read on the Japanese economy right now. How are

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<v Speaker 2>things holding up?

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<v Speaker 3>It's going well. I mean, Sanaei Takichi, the Prime Minister,

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<v Speaker 3>has got a clear objective of reflating the Japanese economy.

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<v Speaker 3>They're getting fantastic investments because of they do have some

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<v Speaker 3>AI sectors which are very attractive at the moment. So

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<v Speaker 3>you've got companies like Taiwan Semiconductor, biggest chip maker in

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<v Speaker 3>the world, making huge investments into Japan to build plants

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<v Speaker 3>to help to maintain it's amazing production. It's already production levels.

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<v Speaker 3>People are buying whatever chips they make, and their order

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<v Speaker 3>books are full well into twenty twenty seven. They can

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<v Speaker 3>make as many chips as the world can take, and

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<v Speaker 3>Japan is now becoming a big base for them. So

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<v Speaker 3>you're seeing and that's just one example of companies who

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<v Speaker 3>are going to the specialized kind of AI products which

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<v Speaker 3>Japan can produce. So that's very very good for the economy.

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<v Speaker 3>And under Takichi, the government has a clear sense of

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<v Speaker 3>what it needs to be done to get the Japanese

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<v Speaker 3>economy back on track, and we're beginning to see signs

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<v Speaker 3>of it already. Japanese companies are making very good profits.

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<v Speaker 3>Company at stock market's pretty brilliant, and of course the

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<v Speaker 3>relatively weak yen helps their situation. I think that's partly

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<v Speaker 3>what investors can see is that Japan doesn't have a

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<v Speaker 3>very big incentive to change the direction of the yen.

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<v Speaker 3>If they can keep it a relatively weak but stable

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<v Speaker 3>that's the ideal environment for Japan. So for them to

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<v Speaker 3>really change the mindset that the yen is suddenly a

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<v Speaker 3>strong currency that doesn't really suit them at the time

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<v Speaker 3>this time anyway.

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<v Speaker 2>All right, Mark, good stuff, Always a pleasure. Thank you.

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<v Speaker 2>Bloomberg's Mark Cranfield, m Live Strategist, Joining from our studios

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<v Speaker 2>in Singapore here on the Daybreak Asia podcast. Welcome back

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<v Speaker 2>to the Daybreak Asia Podcast. I'm Doug Krisner. Information tech

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<v Speaker 2>shares are higher in early Asian trading. That's after the

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<v Speaker 2>Philadelphia Semiconductor index rose two and a half percent in

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<v Speaker 2>the US session. There were some disappointments after the US close.

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<v Speaker 2>Cisco Systems earnings failed to impress, and Cerebraus Systems reported

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<v Speaker 2>a decline in sales for its hardware business. For a

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<v Speaker 2>closer look at the AI trade and markets more broadly,

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<v Speaker 2>we spoke with Aaron Sai. He is senior multisset strategist

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<v Speaker 2>at Pictet Asset Management. Aaron spoke with Bloomberg TV host

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<v Speaker 2>Heidi Stroud Watson sherry on on the Asia trade.

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<v Speaker 1>Aaron, really great to have you with us. Let's start

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<v Speaker 1>off with these sort of AI heavy markets. We're seeing

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<v Speaker 1>that recovery in the Korean markets again. What do you

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<v Speaker 1>make of the volatility and where do you see the

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<v Speaker 1>opportunities in these AI heavy spaces like Korea by extension,

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<v Speaker 1>also a bit in Japan Taiwan for example.

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<v Speaker 4>Yeah, I mean, the good thing is that we have

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<v Speaker 4>managed to digest a historical unwind in the momentum trade.

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<v Speaker 4>And part of the reason we have why equity back

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<v Speaker 4>at an all time high despite that is there is

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<v Speaker 4>an element of a rotation within the AI space. If

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<v Speaker 4>you look at the AI trade, we think we're already

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<v Speaker 4>in the third phase of the trade. The first phase

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<v Speaker 4>was the rising tide lifted all AI boats. Anything with

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<v Speaker 4>an AI in the ticker went up. The more capex

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<v Speaker 4>the better. That then transitioned into a phase where we

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<v Speaker 4>saw rotations between hyperscalers and capex beneficiaries, and that has

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<v Speaker 4>played out for pretty much the last year. Where we

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<v Speaker 4>are today, we think is going to be a more

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<v Speaker 4>nuanced phase where single stock differentiation and dispersion matters. We

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<v Speaker 4>think if you take the hyper scalers, for instance, they're

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<v Speaker 4>going to tread a very fine balance between keeping capex up,

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<v Speaker 4>but still because they're now relying on the market for

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<v Speaker 4>additional capex spending, they would have to continue to provide

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<v Speaker 4>evidence for monetization. So it's a fine balance, and we

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<v Speaker 4>don't think all companies can pull that off equally well.

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<v Speaker 4>So that's why we're kind of seeing the dispersion between

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<v Speaker 4>names at the single stock level, and we think that

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<v Speaker 4>would continue. But overall, by and large, we still think

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<v Speaker 4>that we are in the early innings of the capex

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<v Speaker 4>built out. We are going to have cycles around it.

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<v Speaker 4>Of course, we have digested a fair bit of uncertainty

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<v Speaker 4>in the AI ecosystem and we're reasonably constructive now, but

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<v Speaker 4>it's important to be selected.

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<v Speaker 1>Does the broader monetary policy backdrop, particularly if we have

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<v Speaker 1>inflations daying benign as recent reading seems to suggest, does

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<v Speaker 1>that paint a longer runway when it comes to how

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<v Speaker 1>much more we could see from the AI rally.

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<v Speaker 4>Absolutely so, in a way we had the perfect print

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<v Speaker 4>on yesterday. It was in a way a dull print.

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<v Speaker 4>But sometimes boring is good because what that lets you

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<v Speaker 4>do is then focus on the micro, on the fundamentals

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<v Speaker 4>of the AI ecosystem, and that we think is still

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<v Speaker 4>very wrong. Right, So we're still in the middle of

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<v Speaker 4>the first genuine earnings up cycle since the commodity supercycle.

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<v Speaker 4>We are in a phase where demand is hive and

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<v Speaker 4>supply is constrained, and companies are earning what we can

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<v Speaker 4>call super normal profitability. So what you don't need is

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<v Speaker 4>for the macro picture to moddel that story too much,

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<v Speaker 4>which is why it's important that the US long end

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<v Speaker 4>bond deals remain contained. So we were getting a little

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<v Speaker 4>worried about the FED kind of withdrawing forward guidance and

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<v Speaker 4>the bond market not digesting that very well. But given

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<v Speaker 4>that we've had a couple of soft prints, as you say,

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<v Speaker 4>that kind of definitely is is a sigh of relief

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<v Speaker 4>for the market, and that lets the focus go back

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<v Speaker 4>to the micro fundamentals.

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<v Speaker 1>We spoke a little bit about, you know, obviously not

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<v Speaker 1>all companies are going to thrive in this new era.

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<v Speaker 1>More scrutiny on AI spending. Where do you prefer to

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<v Speaker 1>place your bets then? Is it still overweight when it

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<v Speaker 1>comes to the US? Are you looking more at a

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<v Speaker 1>diversification in China, for example, because that's obviously where that

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<v Speaker 1>major threat is also coming from.

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<v Speaker 4>Yeah, so we still are relatively constructive of the US.

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<v Speaker 4>We think the earnings upswingers is quite strong. We expect

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<v Speaker 4>about thirty percent earnings growth this year. That's quite a

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<v Speaker 4>powerful tailwind. But the real differentiator of performance within equity

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<v Speaker 4>markets would be along sector lines. We think not so

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<v Speaker 4>much between regions, because if you think of a team,

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<v Speaker 4>if you're constructive memory, you'd probably consider Micron and Skhinex

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<v Speaker 4>if you're constructive broadening out of the AI team into

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<v Speaker 4>data centers and spending of data centers. If you're looking

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<v Speaker 4>for cap goods names, we wouldn't differentiate too much between

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<v Speaker 4>a Schneider Europe or a Caterpillar in the US for instance.

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<v Speaker 4>For US, it's not really a regional diversification but more

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<v Speaker 4>about being in the right sector. So we still selectively

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<v Speaker 4>constructive tech. We think that the AI ecosystem broadens out

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<v Speaker 4>from here, but we're also constructive banks banks, both across

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<v Speaker 4>emerging markets and the US, and finally, we like areas

0:13:21.960 --> 0:13:23.160
<v Speaker 4>of industrials as well.

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<v Speaker 1>I wanted to also ask about what we're seeing with

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<v Speaker 1>treasury markets. We've got that thirty year auction coming up soon.

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<v Speaker 1>Where do you see yields? You've talked about the potential

0:13:33.000 --> 0:13:34.880
<v Speaker 1>for becoming unanchored from here.

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<v Speaker 4>Right So thankfully we've got a couple of soft prints.

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<v Speaker 4>We had a soft labor market print and we had

0:13:41.040 --> 0:13:44.120
<v Speaker 4>a pretty benign CPI print, So that kind of takes

0:13:44.160 --> 0:13:47.720
<v Speaker 4>the heat of what was the central debate in the

0:13:47.760 --> 0:13:51.520
<v Speaker 4>bond market, which was the sudden withdrawal of forward guidance.

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<v Speaker 4>Essentially means that bond managers now have to continue doing

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<v Speaker 4>their job with one less tool in their toolkit, something

0:13:59.200 --> 0:14:03.920
<v Speaker 4>they've relied on on for pricing, for pricing bonds, and

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<v Speaker 4>especially if you think of the long duration they're demanding

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<v Speaker 4>and I think rightfully so, an additional uncertainty premium, given

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<v Speaker 4>that it's not obvious what the new framework is going

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<v Speaker 4>to be or even what the new right data series

0:14:18.720 --> 0:14:20.880
<v Speaker 4>is going to be in terms of inflation for them

0:14:20.920 --> 0:14:26.600
<v Speaker 4>to look at. So I think in a way it's

0:14:26.600 --> 0:14:28.560
<v Speaker 4>a sigh of relief that we had a couple of

0:14:28.600 --> 0:14:32.720
<v Speaker 4>soft prints because the conversation moves away from what is

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<v Speaker 4>happening in the long end in terms of the term premium,

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<v Speaker 4>and the data is letting some of these hikes which

0:14:39.880 --> 0:14:44.000
<v Speaker 4>were previously priced and unwind. So that's giving some relief

0:14:44.000 --> 0:14:47.160
<v Speaker 4>to the bond market. So we would be a bit

0:14:47.320 --> 0:14:51.200
<v Speaker 4>more uncomfortable if the data picks up again, and then

0:14:51.280 --> 0:14:57.840
<v Speaker 4>it's back to how the wash FED decides to signal

0:14:58.240 --> 0:14:59.680
<v Speaker 4>their framework going forward.

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<v Speaker 1>You talked about outdated notions of sector and styles. How

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<v Speaker 1>does that play into how you're investing at the moment.

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<v Speaker 1>Can you give us an example.

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<v Speaker 4>Right, So, coming back to the hyperscalers, I mean, if

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<v Speaker 4>you think of the traditional definition of how benchmarks like

0:15:15.520 --> 0:15:19.280
<v Speaker 4>LENESSEI I look at it. You have Amazon, for instance,

0:15:19.280 --> 0:15:23.840
<v Speaker 4>in consumer discretionory, you have Meta in communication services, you

0:15:23.880 --> 0:15:28.280
<v Speaker 4>have Microsoft in software and information technology. So if you're

0:15:28.320 --> 0:15:33.320
<v Speaker 4>following a strictly top down approach of selecting asset allocation

0:15:33.480 --> 0:15:37.280
<v Speaker 4>first and then regions and then sectors what you often

0:15:37.400 --> 0:15:41.320
<v Speaker 4>do or you're going into buckets which don't very well

0:15:41.440 --> 0:15:44.280
<v Speaker 4>capture the opportunity set. So if you want to be

0:15:44.360 --> 0:15:48.920
<v Speaker 4>constructive hyperscalers and if you want to diversified basket, you

0:15:49.600 --> 0:15:53.960
<v Speaker 4>need the ability to invest across a few different sectors.

0:15:54.360 --> 0:15:57.120
<v Speaker 4>So the world has moved on, markets have moved on

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<v Speaker 4>in terms of these definitions, these labels not really being

0:16:02.360 --> 0:16:06.280
<v Speaker 4>fit for purpose anymore, but we are still catching up

0:16:06.320 --> 0:16:09.680
<v Speaker 4>in terms of how the nomenclature works. So that's why

0:16:09.720 --> 0:16:12.400
<v Speaker 4>it's important not to be straight jacketed by some of

0:16:12.440 --> 0:16:17.440
<v Speaker 4>these definitions. And as another kind of the point, there

0:16:17.760 --> 0:16:21.080
<v Speaker 4>is the importance of value as as growth. We think

0:16:21.280 --> 0:16:24.840
<v Speaker 4>is overestimated today. I mean in the past this used

0:16:24.880 --> 0:16:29.479
<v Speaker 4>to be the single different single biggest differentiator of performance

0:16:29.520 --> 0:16:32.800
<v Speaker 4>within equities. We think that'll be no longer the case.

0:16:32.840 --> 0:16:35.680
<v Speaker 4>If you think of AI, if you think of electrification.

0:16:36.320 --> 0:16:40.960
<v Speaker 4>These are broad mega themes which have winners on both

0:16:41.160 --> 0:16:43.600
<v Speaker 4>the value side and the growth side of the market.

0:16:43.920 --> 0:16:47.240
<v Speaker 4>So it's no longer about just picking one style definition

0:16:47.440 --> 0:16:51.800
<v Speaker 4>or sticking strictly to sector definitions, but having the ability

0:16:51.840 --> 0:16:55.920
<v Speaker 4>to be flexible and nimble and not be straight jacketed

0:16:56.960 --> 0:16:58.360
<v Speaker 4>by outdated labels.

0:16:58.760 --> 0:17:02.120
<v Speaker 2>That was Aaron Size, senior multi asset strategist at Pictet

0:17:02.240 --> 0:17:06.359
<v Speaker 2>Asset Management, in conversation with Bloomberg TV host Cherry On

0:17:06.680 --> 0:17:09.960
<v Speaker 2>and Heidi Stroud Watts, bringing you their conversation here on

0:17:10.000 --> 0:17:15.960
<v Speaker 2>the Daybreak Asia Podcast. Thanks for listening to today's episode

0:17:16.040 --> 0:17:20.040
<v Speaker 2>of the Bloomberg Daybreak Asia Edition podcast. Each weekday, we

0:17:20.080 --> 0:17:23.960
<v Speaker 2>look at the story shaping markets, finance, and geopolitics in

0:17:24.000 --> 0:17:27.159
<v Speaker 2>the Asia Pacific. You can find us on Apple, Spotify,

0:17:27.320 --> 0:17:30.800
<v Speaker 2>the Bloomberg Podcast YouTube channel, or anywhere else you listen.

0:17:31.240 --> 0:17:34.119
<v Speaker 2>Join us again tomorrow for insight on the market moves

0:17:34.200 --> 0:17:38.720
<v Speaker 2>from Hong Kong to Singapore and Australia. I'm Doug Chrisner,

0:17:38.880 --> 0:17:40.280
<v Speaker 2>and this is Bloomberg