Speaker 1: Bloomberg Audio Studios, Podcasts, radio News. Welcome to the Bloomberg
Speaker 1: Daybreak Asia Podcast. I'm Doug Chrisner. Economic angst re asserted
Speaker 1: itself in US markets. We have the uncertainty around tariffs,
Speaker 1: combined with the escalating trade war between the US and
Speaker 1: China dominating psychology. Now, the White House confirmed that China
Speaker 1: now faces a one hundred and forty five percent levy
Speaker 1: on all goods it sends to the US, and remember
Speaker 1: all other trading partners are dealing with a baseline tariff
Speaker 1: of ten percent. In a moment or two, we'll be
Speaker 1: joined by Patrick Kennedy. He is founding partner at All
Speaker 1: Source Investment Management. But we begin this morning in the
Speaker 1: Lion City. Joining me now, Mark Cranfield, Bloomberg Market Live strategist.
Speaker 1: He joins us now from Singapore. Mark, it's always a pleasure.
Speaker 1: Thank you. I'm sure it's been a busy day where
Speaker 1: you are. And I guess we could start with the
Speaker 1: idea that we're beginning to see signs of a slow
Speaker 1: down in global trade already emerging. You can look at
Speaker 1: the degree to which equity prices are already reflecting that fact.
Speaker 1: But maybe we can begin with the volatility that we're
Speaker 1: seeing in currencies right now, because this is pretty tremendous,
Speaker 1: is it not.
Speaker 2: Well is indeed Bloomberg already running stories that some American
Speaker 2: companies are suspending their flows of goods which are coming
Speaker 2: from China because they're so uncertain about how to prise
Speaker 2: them for the time being, and traders are reading that,
Speaker 2: so they're seeing that as a negative signal for the
Speaker 2: US dollar, among other things, allied with the fact that
Speaker 2: they do expect for the reserve to learn interest rate
Speaker 2: several times this year. So what we're we're seeing is
Speaker 2: particularly demand for the strongest what was perceived to be
Speaker 2: the strongest currency, so the Euro, the yen, the Swiss
Speaker 2: frank they're leading the way as people are shifting some
Speaker 2: money away from the US dollar. We've just seen the
Speaker 2: euro touch a multi year high today. Dollar yen has
Speaker 2: already been down onto a one forty two and or
Speaker 2: haven't seen that for a very long time as well.
Speaker 2: So you can see these are very significant shifts in
Speaker 2: the currency market, and that will give a little bit
Speaker 2: of respite to the Chinese currency in the short term.
Speaker 2: But the Chinese authorities have made pretty clear that they
Speaker 2: are willing to shift the yuan to a weaker stance
Speaker 2: should they need to, but that's unlikely to be seen today.
Speaker 2: They're getting help from their basket arrangement, which is when
Speaker 2: the euro is strongly helps to strengthen the year one.
Speaker 2: But these are very fluid situations in the currency world,
Speaker 2: and people going into this, we're probably thinking that this
Speaker 2: was going to be a good year for the US
Speaker 2: although expecting stronger economic growth in the United States and
Speaker 2: the feed through from that into securities in America. But
Speaker 2: we are obviously getting the reverse situation. A lot of
Speaker 2: people recalibrating their outlook on the US dollar.
Speaker 1: Who we had a lot of dollar weakness in New
Speaker 1: York trading. If you look at the Bloomberg dollar spot,
Speaker 1: I think we were down one and a half percent.
Speaker 1: We are building on those declines now in Asia. And
Speaker 1: to your point about the rally that we're seeing in
Speaker 1: the end at one forty three to thirty five, I
Speaker 1: think in New York trading, the end was up two
Speaker 1: percent against the green back. But to go back to
Speaker 1: the point that you were making about the yuan and
Speaker 1: the PBOC combined with the influence of Beijing allowing it
Speaker 1: to weaken. Do you think that there is a line
Speaker 1: in the sand that represents the real risk of more
Speaker 1: capital flight out of China as a result of a
Speaker 1: weaker currency or is that not even entering the thinking
Speaker 1: at this point.
Speaker 2: Well, I think it certainly enters their thinking, but it's
Speaker 2: more to do with the speed of the moves in
Speaker 2: the currencies. So I think from what we can see
Speaker 2: at the moment, if there's a gradual weakening of the yuan,
Speaker 2: they seem to be reading that there's something that the
Speaker 2: Chinese economy, Chinese investors they can deal with. That they
Speaker 2: can if there's a small amount each day, that's something
Speaker 2: they can help. What they were really scared of is
Speaker 2: a sudden jump. We saw the experiment with that in
Speaker 2: twenty fifteen when they moved the currency by two percent
Speaker 2: in one day, and that just caused haboc across Chinese
Speaker 2: equity markets, bond markets, everything, and people were panicky and
Speaker 2: they started to move money out of the current the country.
Speaker 2: So they're really wary of that. They don't want to
Speaker 2: get people to be really nervous about the situation, So
Speaker 2: it's most likely they're going to continue with a very
Speaker 2: gradual move, something like we saw in twenty eighteen twenty nineteen,
Speaker 2: as the first round of taris came on against China.
Speaker 2: It was a move which lasted over many months before
Speaker 2: it reached a level where the Chinese authorities thought, Okay,
Speaker 2: now we offset the extra costs we're receiving from the
Speaker 2: United States.
Speaker 1: So difficult in this current environment to get any visibility
Speaker 1: in order to kind of react. Treasury Secretary bess And
Speaker 1: during the New York session was telling Fox Business everything
Speaker 1: was on the table. He was asked the question as
Speaker 1: to whether kicking Chinese stocks off US exchanges was an option,
Speaker 1: and he seemed to keep the door open for that.
Speaker 1: How bad could this get? I mean, when you look
Speaker 1: at the potential for a real destruction in relations between
Speaker 1: Washington and Beijing.
Speaker 2: I think we've already seen investors start to move ahead
Speaker 2: of that for some time. Anyway, you could argue that
Speaker 2: the establishment of the Hangsaying Tech Index, which happened about
Speaker 2: four years ago in Hong Kong, was really there as
Speaker 2: a preparation for people expecting that over time Chinese companies
Speaker 2: would do fewer listings in the United States. They may
Speaker 2: even pull their listings all together. And you've seen volumes
Speaker 2: shifting away from the activity in the ETFs which are
Speaker 2: lifted in the United States, shifting more towards those which
Speaker 2: are listed in Hong Kong. That's a transition that's been
Speaker 2: going on for some time. It may accelerate. This has
Speaker 2: been hanging over the threat of Chinese companies being removed
Speaker 2: from US exchanges is a threat which has been there
Speaker 2: for some time, and some Chinese companies are voluntarily putting
Speaker 2: dual listings into Hong Kong to protect them should that
Speaker 2: they come when they need to remove themselves from the US.
Speaker 2: So it's not something that is a complete shock to investors.
Speaker 2: It will still have an impact, of course, should it happen.
Speaker 2: So we're seeing much more attention to people like Ali Baba,
Speaker 2: JD dot com. They've all got listings in Hong Kong,
Speaker 2: and those flows are starting to increase the compensate for
Speaker 2: money coming out of the United States.
Speaker 1: I'm curious about the pressure that you're seeing right now
Speaker 1: that is being put on institutions, government sponsored institutions, pension
Speaker 1: plans in China to absorb a little bit of equity
Speaker 1: flow right now, given the ructions that we've been seeing
Speaker 1: in markets. The so called national team stepping up to
Speaker 1: do some buying. Is that something that you're expecting to
Speaker 1: see a lot more of.
Speaker 2: Well, just a couple of days ago, China Center Bank PBOC,
Speaker 2: they said that they had more funds available for these
Speaker 2: government linked entities which go into the domestic market to
Speaker 2: buy etf so they're providing them with more liquidity. We've
Speaker 2: also seen a lot of activity in the last couple
Speaker 2: of days. Clearly the volumes are very strong. They are
Speaker 2: buying the ETFs, and Chinese equities have been holding up
Speaker 2: much better than other regional exchanges. So clearly it has started.
Speaker 2: There's nothing to suggest that it will stop anytime soon.
Speaker 2: That seems to be part of their plan is to
Speaker 2: as much as they can is to ring fen the
Speaker 2: domestic economy, ring fence domestic securities, try and show that
Speaker 2: they have some strength there that they can withstand this
Speaker 2: no matter what happens in the outside world, that China
Speaker 2: still has a vibrant stock market as companies are in
Speaker 2: good shape. So they're putting their money where their mouth is,
Speaker 2: and they probably will continue to do so because they
Speaker 2: need to show everybody that they're being as affected as
Speaker 2: little as possible by what's happening in the outside world.
Speaker 1: So put yourself in the mind of a trader right
Speaker 1: now in the Asia Pacific, last trading day of the week.
Speaker 1: How do you want to close out your book this week?
Speaker 2: Well, if you haven't exited things already, you will probably
Speaker 2: be looking to even peer down risk even further. It's
Speaker 2: like a steamroller. You can see a situation where you've
Speaker 2: got this this big truck coming towards you. You just don't
Speaker 2: want to get in the way of it. So there
Speaker 2: are some very clear flows that the dollar is the
Speaker 2: dollar is falling, you don't want to get in the
Speaker 2: way of that. Treasury bonds are setting off, Equities are
Speaker 2: very soft as well. So if you still have short
Speaker 2: term exposure to those things, you're probably just going to
Speaker 2: want to reduce it as much as you can. But
Speaker 2: the sense is that people did a lot of that
Speaker 2: over the past week already we can expect to see
Speaker 2: a lot more erratic day to day movements. That uncertainty
Speaker 2: is extremely high. You imagine it's uncertain in the United States.
Speaker 2: Imagine what it's like for people out here in Asia
Speaker 2: who don't have much clarity at all on how these
Speaker 2: things are going to be imposed. So keep risk as
Speaker 2: small as you can. That's the message.
Speaker 1: Okay, Mark, thank you so much. It's always a pleasure.
Speaker 1: Mark Cranfield, Bloomberg Market Live Strategists joining us from Singapore
Speaker 1: here on the Debreak Asia Podcast. Welcome back to the
Speaker 1: Debreak Asia Podcast. I'm Derek Krisner. There was heavy selling
Speaker 1: today in US risk assets less than twenty four hours
Speaker 1: after President Trump backtracked on his tariff policy, ostensibly to
Speaker 1: prevent a meltdown in financial markets. Today we had to
Speaker 1: sell off in US equities, in the dollar, and in
Speaker 1: crude oil as well. All of this seemed to underscore
Speaker 1: the concern about the possibility of global recession. For a
Speaker 1: closer look, I'm joined now by Patrick Kennedy. He is
Speaker 1: founding partner at All Source Investment Management. Let me begin
Speaker 1: with the question around recession. Do you think this is
Speaker 1: a real risk at this point?
Speaker 2: Pat?
Speaker 3: Right, Doug, thanks so much for having me back on
Speaker 3: I do I think that anyone that plays down the
Speaker 3: risk of recession at this point, you know, you just
Speaker 3: haven't seen what's going on the past two weeks. So
Speaker 3: I think you know, if you go back in time
Speaker 3: a month ago and fast forward today, you have to
Speaker 3: acknowledge that recession risk are much higher. You know, I
Speaker 3: think that we avoided worst case scenario yesterday, where we
Speaker 3: would have a you know, a certain recession and a
Speaker 3: very deep one of that if the tariffs were put
Speaker 3: on how they were first laid out. Now, I think
Speaker 3: the risk for a softer recession is still definitely there.
Speaker 3: And if a deal with China isn't made in short order,
Speaker 3: I think that, you know, that's a real possibility, and
Speaker 3: the risk and odds continue to go up the longer
Speaker 3: that we put off a deal with China. You cannot,
Speaker 3: as you know, uproot manufacturing routes overnight and bring them
Speaker 3: back home or anywhere for that matter. And during that time,
Speaker 3: you know, take Apple for example, they can jack up
Speaker 3: their iPhone prices to two or three thousand dollars or
Speaker 3: whatever it would be if they were to move their
Speaker 3: manufacturing plants.
Speaker 1: So right around the time that the retaliatory tariffs were
Speaker 1: announced by the President, we saw a heavy selling in
Speaker 1: US treasuries during the Tokyo session, and the tenure spiked
Speaker 1: and yield something greater than twenty basis points. And a
Speaker 1: few hours later the President hit the pause button on
Speaker 1: those retaliatory tariffs, and I'm wondering whether or not the
Speaker 1: message from the market, particularly the bond market, may have
Speaker 1: been that. Bear in mind here that China does hold
Speaker 1: a trillion dollars worth of US treasuries, and that seems
Speaker 1: to be almost like a sword of damocles hanging over
Speaker 1: these trade negotia. Is it not?
Speaker 2: Am I?
Speaker 1: Am I making too much of that point?
Speaker 3: No, Doug, I think you bring up a very valid point.
Speaker 3: And that was the first thing that we thought about
Speaker 3: yesterday morning, right. So you know, some people were saying, oh,
Speaker 3: it's a negotiating tactic to go up to the eleventh
Speaker 3: hour and inflict maximum leverage, that sort of thing. We
Speaker 3: think when you look at the markets, it had a
Speaker 3: lot to do with what the bond market was yelling. Right.
Speaker 3: So the old saying is the smart money focuses on
Speaker 3: the debt side, right, And there's a reason for that.
Speaker 3: And then simply because the debt side is what can
Speaker 3: really break the economy. So once you start to see
Speaker 3: problems on the bond market side, that means liquidity can dry,
Speaker 3: banks can have issues, so on and so forth. When
Speaker 3: you go back to the COVID low or eight or
Speaker 3: any of the major lows. You usually saw big issues
Speaker 3: within the bond market right before the FED stepped in.
Speaker 3: Now whether or not the Fed can step and this time,
Speaker 3: that's a whole different question. But typically when you see
Speaker 3: a market low, you start to see the bond market
Speaker 3: get a little messy. The Fed doesn't care, in my opinion,
Speaker 3: doesn't care as much about the equity action as they
Speaker 3: do the bond market. If the bond market starts to
Speaker 3: get out of hand and you start to see some
Speaker 3: wild swings that can make meaningful impacts here and abroad,
Speaker 3: and usually that's when you start to form a short
Speaker 3: term bottom. I say short term because again we expect
Speaker 3: volatility over the next ninety days.
Speaker 1: So, Pat, I'm glad you brought up the FED, because
Speaker 1: today we heard from the head of the Chicago Fed,
Speaker 1: Austin Goolsby, and he was saying that these tariffs put
Speaker 1: the Fed's goals of price stability and full employment essentially
Speaker 1: opposed to one another. Now, does that essentially mean that
Speaker 1: the Fed is kind of stuck here and that we
Speaker 1: may not get a rate cut or several rate cuts,
Speaker 1: even though the economy may we can, just because there
Speaker 1: is the risk of some sort of stagflation.
Speaker 3: So, Doug, last time we were on, we mentioned that,
Speaker 3: you know, we really thought that stagflation was becoming a fear, right,
Speaker 3: it was becoming a fear within markets. And that's the
Speaker 3: last thing that Powell wants to be known for, is
Speaker 3: letting stackflation back out of the bottle.
Speaker 2: Right.
Speaker 3: The last time we saw that was the seventies, and
Speaker 3: you know, obviously it wasn't a good outcome then. Now.
Speaker 3: The tough thing is when you provide as you know,
Speaker 3: when you provide liquidity into markets and you lower interest rates,
Speaker 3: you know, it can create inflation if it's done too early.
Speaker 3: Tariffs are inflationary by nature. So if you raise the
Speaker 3: cost of goods by ten percent coming into the US,
Speaker 3: one can think that, okay, the cost of goods are
Speaker 3: going to go up, right, So inflation is going to
Speaker 3: come along with those tariffs, and if it creates economic pain.
Speaker 3: The FED is very limited at what they can do
Speaker 3: simply because, as you said, their two goals are maximum
Speaker 3: employment and to keep inflation in check. Well, if inflation
Speaker 3: is running rampant, they're going to have to weigh out, Okay,
Speaker 3: how high has inflation gone and how low has growth gone.
Speaker 3: You know, there's an interesting comment made over the last
Speaker 3: few days, and that was essentially that Okay, we'll see
Speaker 3: inflation until we don't, which means, okay, TIFFs will come on,
Speaker 3: you'll see inflation really tick up. But what point does
Speaker 3: the consumer stop buying? At what point does the consumer
Speaker 3: throw their hands up and say, you know what, I've
Speaker 3: had enough. I can't afford a fifteen hundred dollars iPhone
Speaker 3: or two thousand dollars iPhone or whatever it may be.
Speaker 3: Right at that point, you could actually start to see deflation.
Speaker 3: And I think at that point the Fed has to
Speaker 3: step in and will step in. However, there could be
Speaker 3: a lot of pain in markets between now and when
Speaker 3: we get to that point.
Speaker 1: This is going to be a very interesting earning season,
Speaker 1: particularly when we're listening for guidance. Tomorrow, we're going to
Speaker 1: hear from the big banks JP, Morgan Chase, Bank of America,
Speaker 1: Wells Fargo. What do you think we're going to hear
Speaker 1: from the banks in terms of forward guidance.
Speaker 3: I think that they're going to be extremely cautious, right,
Speaker 3: I think they're going to be extremely cautious. When you
Speaker 3: listen to some of the market strategists out there, from
Speaker 3: Morgan Stanley, from Goldman, most of them. I've even pulled
Speaker 3: their twelve month guidance for the S and P right,
Speaker 3: They're more focusing on trading ranges over the next two
Speaker 3: to three months. And I think that's prudent. I really
Speaker 3: think it is. I mean, if if you say with
Speaker 3: a degree of certainty, hey, I think X is going
Speaker 3: to happen a year out, it's very tough to do
Speaker 3: that right now because of all the variables that are
Speaker 3: still up in the air. You know, you can't tell
Speaker 3: me that, Okay, you know, the same is going to
Speaker 3: be true for the market and the economy if we
Speaker 3: have a fifteen percent teriff with China or if we
Speaker 3: have a seventy percent tariff with China. Right, So that
Speaker 3: is just such a huge variable right now, it's very
Speaker 3: hard to give guidance. And therefore we think that the
Speaker 3: banks will be light on guidance, cautious, right, and they'll
Speaker 3: probably give their assessment of what the near term volatility
Speaker 3: means for the book of business.
Speaker 1: Would you expect to hear about a much greater level
Speaker 1: of loan loss reserves?
Speaker 3: So it's funny you mentioned that you know we do
Speaker 3: think that there are risk and credit markets right now,
Speaker 3: particularly when you look at some of the real estate
Speaker 3: debt market. Right. So, I saw an interesting chart a
Speaker 3: few days ago where the missed payments on mortgages are
Speaker 3: the highest they've been since owait So that kind of
Speaker 3: caught my eyes.
Speaker 2: And that was.
Speaker 3: Before all of the news on tariffs and such. So
Speaker 3: I do think that credit could start to weaken once
Speaker 3: tariffs are put on. I don't think we've gotten there yet,
Speaker 3: right because these tariffs have not been implemented for a
Speaker 3: good amount of time. I think very quickly, we're going
Speaker 3: to see if credit deteriorates and at what pace.
Speaker 1: So how are you guiding clients through all of this
Speaker 1: turbulence right now? I know that there are different risk
Speaker 1: profiles based on each individual client, But is there kind
Speaker 1: of an umbrella that we can put over the strategy
Speaker 1: that you've adopted right now?
Speaker 3: Yeah, great question, Doug. So, as you know, we work
Speaker 3: with a lot of high net worth people who have
Speaker 3: access to alternative investments. So we use stocks, we use
Speaker 3: hedge funds, private equity, private credit in the like. Right.
Speaker 3: I think right now hedge funds make a lot of sense.
Speaker 3: They've been doing great year today for a hedge fund.
Speaker 3: Volatility is your friend. For the retail investors who listen
Speaker 3: to this show. You know, I think that a long
Speaker 3: short mutual fund serves the same purchase or purpose. Excuse me,
Speaker 3: so long short mutual fund they can bet on stocks
Speaker 3: going up, they can bet on stocks going down, and
Speaker 3: therefore they can do a lot better in a volatile
Speaker 3: environment like this because they can short the market on
Speaker 3: the way down and that serves as a bit of
Speaker 3: a cushion. We still like commodities a lot, right so
Speaker 3: we talked about commodity exposure over the past six months.
Speaker 3: We haven't changed our stance on that. If anything, we're
Speaker 3: leaning in a bit more. You know, commodity prices we
Speaker 3: think overall will go up because of this. You know,
Speaker 3: some won't when you look at what happens with oil
Speaker 3: right now, but for the most part, when you see
Speaker 3: cost increase across the board, at the very least, you're
Speaker 3: going to get some volatility and commodity markets and that's
Speaker 3: good for commodity traders. So we like commodities right now.
Speaker 3: And then private credit. Private credit has been a big
Speaker 3: part of the portfolio. I know there's you know a
Speaker 3: lot of buzz around. Well, you know, it's a huge
Speaker 3: market now and there could be a lot of risks there.
Speaker 3: There could be, but again there's so many different types
Speaker 3: of private credit. We like asset back to private credit
Speaker 3: right now simply because any loan that you give is
Speaker 3: backed by a particular asset and you can go sell
Speaker 3: that asset if the loan is not repaid. Again, for
Speaker 3: a public market investor, it would be the same as
Speaker 3: like a senior secured right, so we'd focus on having
Speaker 3: loans that are senior secure, that have teeth, meaning, hey,
Speaker 3: if they're not repaid, the lender can do something. So
Speaker 3: just to summarize, you know, we like commodities, we like
Speaker 3: hedge funds, private credit. If you're just a public facing investor,
Speaker 3: it would be a long shore mutual fund of basket
Speaker 3: of commodities or a senior secured loan mutual fund.
Speaker 1: Good stuff. We'll leave it there. Thank you so much.
Speaker 1: Patrick Kennedy is founding partner at All Source Investment Management.
Speaker 1: On the line from Connecticut here on the Daybreak Asia podcast.
Speaker 1: Thanks for listening to today's episode of the Bloomberg Daybreak
Speaker 1: Asia Edition podcast. Each weekday, we look at the story
Speaker 1: shaping markets, finance, and geopolitics in the Asia Pacific. You
Speaker 1: can find us on Apple, Spotify, the Bloomberg Podcast YouTube channel,
Speaker 1: or anywhere else you listen. Join us again tomorrow for
Speaker 1: insight on the market moves from Hong Kong to Singapore
Speaker 1: and Australia. I'm Doug Prisoner and this is Bloomberg