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Speaker 2: One of the stories we've been featuring this morning China
Speaker 2: and the European Union agreeing to start talks on electric
Speaker 2: vehicle tariffs and joining us now in our studios for
Speaker 2: more discussion on this is mid Min Low, Bloomberg China correspondent.
Speaker 2: So this is pretty interesting. We had these very high
Speaker 2: levees as high as forty eight percent on evs that
Speaker 2: have been slapped on Chinese cars going that direction, Minmn,
Speaker 2: and we had Germany's Vice Chancellor Robert Habeck there saying
Speaker 2: this is a first step, but it's a first step
Speaker 2: in an area where the wreknows steps before, so he's
Speaker 2: he's leaning optimistic, but then he says it will require
Speaker 2: many steps.
Speaker 3: Tell us what you know?
Speaker 4: Yeah, I would say it's been a lot of push
Speaker 4: and pull in this dynamic between German, Germany and China
Speaker 4: during the German minister's trip to China, because I mean,
Speaker 4: first of all, well, let's talk about that the EU
Speaker 4: China talks us. Then we'll go to the German ministers later.
Speaker 4: But the German the EU China talk. The Chinese Commerce
Speaker 4: Minister had a video conference call with his EU trade
Speaker 4: counterpart over on Saturday, and the EC spokesperson said that
Speaker 4: the talk was candid and substantive. He said that they
Speaker 4: will continue talks at all levels in the coming weeks,
Speaker 4: but that any negotiated outcome must address what he calls
Speaker 4: injurious subsidization. And again this is what the German ministers
Speaker 4: were in China. For the Vice Chancellor, there was very
Speaker 4: you know, he's been repeatedly emphasizing that these tariffs are
Speaker 4: not meant to be punitive in nature. It's meant to
Speaker 4: compensate for these unfair advantages that China's ev makers get.
Speaker 1: It seems like, I mean, I get the subsidy angle,
Speaker 1: but the fact remains that China at this point seems
Speaker 1: to have a lot of excess capacity in a number
Speaker 1: of industries, and lower cost products are being exported to
Speaker 1: countries let's say in the European Union, which directly threatening
Speaker 1: Brian mentioned Germany. The automobile industry in Germany, right, that's right.
Speaker 4: So Germany is the largest automaker in China, and we
Speaker 4: know that over the past five years, in fact, China's
Speaker 4: imports of German cars had nearly halved as their domestic
Speaker 4: makers really you know, pick up market share in the
Speaker 4: domestic market. And yes, you're right, there has been this
Speaker 4: build up of overcapacity, which is why the overseas market
Speaker 4: is really important for China because that's where these ev
Speaker 4: makers get higher profit margin, and now they're being squeezed
Speaker 4: when it comes to profits with these huge terriers that
Speaker 4: are being slept on China. But some analysts are saying
Speaker 4: that maybe the final outcome is not about you know,
Speaker 4: just removing these tariffs altogether, but eventually to get perhaps
Speaker 4: some Chinese companies to invest in Europe, to pay European
Speaker 4: wages to European workers, that could perhaps you know, lesson
Speaker 4: that kind of cost advantage that Chinese makers get and
Speaker 4: also reduce the threat of taking away jobs from Europeans.
Speaker 2: So there is room for negotiation. There's a lot of
Speaker 2: scope here to find ways to try to make it
Speaker 2: work because obviously the two sides feel as though they
Speaker 2: want and need each other. But it's interesting that there's
Speaker 2: no timetable on this. Is that just you know, just
Speaker 2: a technical thing and it'll get worked out well.
Speaker 4: So we're about one and a half weeks away from
Speaker 4: July fourth, which is when the provisional terrorists will take effect,
Speaker 4: so it's highly unlikely that any outcome will come out
Speaker 4: before that. But again, this July fourth tariffs are provisional.
Speaker 4: The finer tariff reads will be decided in November. It
Speaker 4: has to be backed by the majority of EU members,
Speaker 4: so China has this window until November to convince the
Speaker 4: majority of EU members it needs to. In fact, it
Speaker 4: requires EU members support that represents sixty five percent of
Speaker 4: the EU population. So China has been very strategic here
Speaker 4: because the top foremost populous countries are France, Germany, Italy
Speaker 4: and Spain. So when you look at their terriffs, their
Speaker 4: investigations into these empty dumping you know areas. They have
Speaker 4: looked at pork, which targets Spain, They've looked at brandy,
Speaker 4: which targets France. They've hinted at twenty five percent tariffs
Speaker 4: at vehicles with large engines, which really targets Germany and
Speaker 4: Italy because Italy sells these luxury sports cars. You're Ferraris
Speaker 4: Lamborghinis to China as well. So very strategic here.
Speaker 1: I'm wondering whether or not we need to recognize the
Speaker 1: political winds in Europe and how they seem to be
Speaker 1: shifting and the risk that we get perhaps no compromise,
Speaker 1: that there is a firm line drawn and it results
Speaker 1: in some type of trade war.
Speaker 4: Yeah, that risk is getting higher with the EU elections
Speaker 4: and you see the rights of these right leaning parties
Speaker 4: getting into the parliament. And again, as I said, we
Speaker 4: saw very mixed signals coming out of the German minister's
Speaker 4: trip to China, because you would expect someone of the
Speaker 4: vice chancellor's rank to meet with someone of a similar
Speaker 4: rank in China, and that would be premierly to Young,
Speaker 4: who is the number two men in China. But that
Speaker 4: meeting didn't happen. Habak himself said that he didn't know
Speaker 4: why that didn't work out, but he got to meet
Speaker 4: with other Chinese officials though, including the Commerce Minister, the
Speaker 4: head of the NDRC, which is China's macroeconomic planner. And again,
Speaker 4: as I said, that push pull dynamic, where you have Chinese,
Speaker 4: the Chinese side saying, yes, we're willing to get Chinese
Speaker 4: companies to tap the German market. But Germany, you have
Speaker 4: to step up your leadership here and get the EU
Speaker 4: to quote correct it's wrong. And then you have the
Speaker 4: German Vice Chancellor also managing expectations, saying that this conflict
Speaker 4: will not be resolved in his trip here and he
Speaker 4: cannot negotiate on behalf of the EU as well.
Speaker 2: So many philosophical differences between the two sides. You wonder
Speaker 2: how much can actually be agreed to. Miend men out
Speaker 2: of time unfortunately, but thank you for coming into our studios.
Speaker 2: Midmen Low Bloomberg, China correspondent looking more closely here at
Speaker 2: China and the European Union, and I guess a little
Speaker 2: bit of faith here agreeing to start talks on EVY tariffs.
Speaker 2: Thomas Tadd joins us in our studios at a APAC
Speaker 2: investment strategy at Blackrock. Thomas, thanks very much for traversing
Speaker 2: the traffic and coming into our studios with us. We
Speaker 2: do appreciate it. So it seems like most people, a
Speaker 2: lot of people are basically long US equity, we seem
Speaker 2: like we might be seeing a little bit of a
Speaker 2: selloff here in some of the big momentum plays, particularly AI.
Speaker 2: But one of the things that this market has shown
Speaker 2: us of late is that it has been absorbing some
Speaker 2: of these hits. I've been able to let some of
Speaker 2: the gas out without having the broader market go into
Speaker 2: a really big downturn. We had a little bit, maybe
Speaker 2: five and a half percent down run in April. In
Speaker 2: any case, if one is looking to diversify here, are
Speaker 2: there ways to do it? Or would you switch out
Speaker 2: of US equities and find an overweight elsewhere?
Speaker 5: Yeah, morning, I guess I have no excuse to traverse
Speaker 5: because our offices are about.
Speaker 1: Twenty meters away from each other.
Speaker 5: But yeah, in terms of the US equity market rally,
Speaker 5: time for a breather. It looks like when you talk
Speaker 5: about broader market, small cap, some of the laggard sectors utilities, financials, energy,
Speaker 5: I mean, it's it's obviously important to note that we
Speaker 5: have not seen anywhere near the rally that we've seen
Speaker 5: in large mega mega cap tech, tech and quality, and
Speaker 5: so you know, there's a couple of different scenarios here.
Speaker 5: One is the underlying data in the US starts to
Speaker 5: deteriorate a little bit. We're seeing a little bit of
Speaker 5: that on the margin in terms of housing, housing starts,
Speaker 5: consumer retail numbers, et cetera. Or the US economy continues
Speaker 5: to power on and we start to see a broadening
Speaker 5: out of the US equity rally. So either way, I think,
Speaker 5: you know, now is probably a good time to look
Speaker 5: at diversification and broadening out into some sectors. I think
Speaker 5: most investors will be doing that through kind of a
Speaker 5: factor lens, so continuing to look at quality type of
Speaker 5: companies with strong balance sheets, and then other investors will
Speaker 5: look at sector rotations. And as I mentioned that the
Speaker 5: sectors before are the ones that I think most investors
Speaker 5: are looking at, financials, energy, utilities, consumer staples to some extent.
Speaker 5: And then globally, you know, investors are are still looking
Speaker 5: at really Japan and India. I know there's a lot
Speaker 5: of debate about both of those markets and the valuations
Speaker 5: there and the boj and central banks.
Speaker 4: Et cetera.
Speaker 5: But and then also em X China has been a huge,
Speaker 5: huge beneficiary of the em trade, and how investors tactically
Speaker 5: rotate around China is going to be interesting to watch US.
Speaker 1: So you sketched out two different scenarios very briefly in
Speaker 1: terms of where the US might be headed. Do you
Speaker 1: have a degree of confidence in the tie in one
Speaker 1: particularly well?
Speaker 5: I think you know, the underlying economy is certainly one thing.
Speaker 5: I think investors tend to underestimate how long it takes
Speaker 5: for higher rates to trickle down into the underlying economy
Speaker 5: and for consumers to actually be able to grasp that
Speaker 5: and essentially stop or slow down in spending. And then
Speaker 5: the other thing to mention is, you know, in terms
Speaker 5: of the earnings growth, you know clearly that's been very
Speaker 5: very strong for a megacap. If you look at the valuations,
Speaker 5: they haven't risen that much, but there is a huge
Speaker 5: there's a huge emphasis on forward looking valuations. And you know,
Speaker 5: whether some of those megacap names can continue to grow
Speaker 5: at the significant rates that they have been growing, that
Speaker 5: I'm not so sure of. So I think there is
Speaker 5: a little bit of a more defensive tilt. And let's
Speaker 5: not forget obviously we are going into US election cycle
Speaker 5: pretty soon, so I think investors are looking at maybe rotation,
Speaker 5: maybe taking some profit here.
Speaker 2: So you're looking at Asia Pacific Investment Strategy. I wanted
Speaker 2: to ask you about Japan because you're right. We did
Speaker 2: run a story over the weekend. It said that foreign
Speaker 2: investors are lightning up on Japan. They're starting to worry
Speaker 2: about the weakness in the end, and they're also worried
Speaker 2: about whether or not that has an impact on the economy.
Speaker 2: A couple of a couple of houses mentioned did not
Speaker 2: include you. In fact, you were one of the examples
Speaker 2: of how you're sticking with the Japan story.
Speaker 5: Why yeah, well, I think you know, versus some of
Speaker 5: maybe some of the investment banks analysts, we're much more
Speaker 5: longer term strategic asset allocation, and so, you know, I
Speaker 5: think it's also important to clarify. A couple of months ago,
Speaker 5: we did this big piece on spotlight on Japan and
Speaker 5: how investors can play that, and the story hasn't really
Speaker 5: changed much. So one of the things we said was,
Speaker 5: in terms of the broader index rally that we've been
Speaker 5: seeing over the last year year and a half, that
Speaker 5: first leg of the structurable market could be coming to
Speaker 5: an end. And that basically means, you know, the way
Speaker 5: that investors move into Japan using just broad index funds
Speaker 5: to get any kind of exposure in n K two
Speaker 5: two five topics, et cetera. That structural leg of the bullmarket,
Speaker 5: Phase one was kind of coming to an end, and
Speaker 5: now I think we're in a period of relative calm,
Speaker 5: trading range investors trying to digest what the boj are
Speaker 5: going to do and what the impact of rates are
Speaker 5: going to be, etc.
Speaker 4: Etc.
Speaker 5: And I think phase two and again this hasn't really changed,
Speaker 5: but investors need to be a little bit more tactical
Speaker 5: and granular on Japan because not everything is going to
Speaker 5: keep going up like it has been going up, so
Speaker 5: looking at active funds, value funds, high dividend type of exposures.
Speaker 5: And also the final thing on Japan is, you know,
Speaker 5: I think it makes a lot of sense for investors
Speaker 5: to close underweights there because you know, even if it
Speaker 5: doesn't continue to go up as it has been going up,
Speaker 5: it offers diversification because it's a value driven market and
Speaker 5: investors have so much growth in their portfolio at the moment.
Speaker 1: Given the enthusiasm that has finally taken hold domestically, I'm
Speaker 1: wondering if this market to get rattled in a significant way,
Speaker 1: how SENDEMA just is undermined to such a degree that
Speaker 1: there's really a big setback as a result in terms
Speaker 1: of psychology. Yeah, well, I.
Speaker 5: Mean, let's not forget that. You know, retail investors have
Speaker 5: not really participated that much in the equity, the Japanese
Speaker 5: equity rally over the last couple of years. You know,
Speaker 5: we're still seeing around seven trillion US dollars sitting on
Speaker 5: the sidelines. Yes, there has been more participation in programs
Speaker 5: like NISSA, but it's quite marginal. Inflation is going up,
Speaker 5: you know that there is There are some areas where
Speaker 5: investors are concerned that maybe it's not going up like
Speaker 5: the boj would like it to go up. But you know,
Speaker 5: the equity market has rally, inflation is going up, and
Speaker 5: you have these programs that are incentivizing investors to move
Speaker 5: into equity market. So I think that's really just starting,
Speaker 5: and I think the domestic investors will be part of that,
Speaker 5: if not the majority of that second leg of the
Speaker 5: structural bull market.
Speaker 2: There all right, Thomas, out of time, unfortunately, Thank you
Speaker 2: very much for joining us here in our studios. Thomas Ta,
Speaker 2: Head of APAC Investment Strategy at black Rock. Steve Sosnik,
Speaker 2: chief strategist at Interactive Brokers, Steve, thank you for joining
Speaker 2: us on an early Monday morning in Asia, late Sunday
Speaker 2: for you in the United States. We can talk a
Speaker 2: little bit about how the triple which didn't seem to
Speaker 2: deliver as much volatility as we thought. But I thought
Speaker 2: maybe first we could go to as I mentioned a
Speaker 2: few moments to GOO, Japan's currency chief Masato Conda, threatening
Speaker 2: to intervene in the market. We have seen quite steady
Speaker 2: and quite fast weakening in the Jena late A warning
Speaker 2: like this, does it make a difference?
Speaker 3: Hi, Brian, good morning to you. Thanks for having me. Yeah,
Speaker 3: it does make a difference. You know. I think one
Speaker 3: of the aspects when foreign and when international investors are
Speaker 3: allocating their money is the currency ability or the currency
Speaker 3: outlook for a given country. And in Japan, you know,
Speaker 3: it's tricky. You either have to you either have to
Speaker 3: consider whether you want to hedge the currency because it's
Speaker 3: an interesting problem, right because you know, stocks tend to
Speaker 3: go up when a currency weakens, but your holdings don't
Speaker 3: seem to improve if if the currency balance is balancing
Speaker 3: it out by weakening. So you've got this this issue
Speaker 3: going on, and you know, instability is another word for volatility,
Speaker 3: and that does put investors a little bit on the
Speaker 3: on their heels when it comes to making international allocations.
Speaker 1: Hey, Steve, how much of this is really a story
Speaker 1: about a strong dollar? I mean a dollar that has
Speaker 1: been so supreme it's not even funny.
Speaker 3: Well, Doug, I think some and some and I think,
Speaker 3: you know, across the scope of global currencies, it is
Speaker 3: more of a strong dollar issue. You know, remember of
Speaker 3: course that that this is one of the times where
Speaker 3: the feed is actually a bit behind its peers, where
Speaker 3: we had other central banks, uh, you know, cutting before
Speaker 3: the US did, and so so that you know, that
Speaker 3: interest rate differential, at least even the perceived interest rate
Speaker 3: differential that that might persist, is definitely strengthening the dollar.
Speaker 3: Although that said, the Japan and the end have their
Speaker 3: own unique set of circumstances, you know, regarding yield curve
Speaker 3: control and all the other stuff you've been reporting on.
Speaker 2: So let's go back to US equities because that's very
Speaker 2: much in focus as well, particularly the high flyers, and
Speaker 2: video was slammed pretty good at the end of last week.
Speaker 2: Of course, it's had you know, remarkable gains all year long.
Speaker 2: I'm curious whether or not you think that that's something
Speaker 2: that will continue here. And I want to draw comparison
Speaker 2: because when people were buying Amazon back in the days
Speaker 2: when it had no earnings, it was because of the potential,
Speaker 2: and it was because of perhaps a little bit of hope.
Speaker 2: The same thing with Tesla. But with Nvidia you actually
Speaker 2: have earnings. So it's it's a little bit trickier to
Speaker 2: to try to value the stock when it's it's out
Speaker 2: of sync. The companies growing faster than what it is
Speaker 2: predicting and what analysts are predicting. Does that add up
Speaker 2: to volatility going forward?
Speaker 3: For you, Steve in theory, it should, you know, because
Speaker 3: anytime again, you know, any sort of uncertainty does create volatility.
Speaker 3: You know, we were actually, in this case, fairly certain
Speaker 3: that this is we I mean collectively, you know, the
Speaker 3: investors as a whole seemed pretty collectively certain that this
Speaker 3: was a company that could continue to beat beat on
Speaker 3: the top line, beat on the bottom line, raise their estimates,
Speaker 3: beat the raised estimate, keep doing it and do it
Speaker 3: over and over and over again. That's why the stock
Speaker 3: has had this remarkable run. But at some point you
Speaker 3: have to figure what are the limits to all this?
Speaker 3: How much more you know, how much more AI adoption
Speaker 3: will there be? You guys just reported on you know,
Speaker 3: on cutter in the Middle East, so there's some more
Speaker 3: doing it. But you know, bear in mind that Mark
Speaker 3: Zuckerberg at the last conference call basically said it was
Speaker 3: going to take potentially years for the billions of dollars
Speaker 3: that they're spending on AI pay off on their bottom line.
Speaker 3: And so you do have to run into the situation of, Okay,
Speaker 3: we've got all this AI. You know, we're building all
Speaker 3: this AI potential. I'm going to stipulate, let's say it
Speaker 3: is that is the wave of the future, because with
Speaker 3: Amazon's case, the Internet was everything that was promised and
Speaker 3: then some. But you know, how what if this doesn't
Speaker 3: necessarily pan out as quickly as possible, is there a
Speaker 3: bit of a hangover? And if so, how that is
Speaker 3: a go? And the other part being we've become so
Speaker 3: dependent upon Nvidia and these few market leading stocks. What
Speaker 3: happens if this pullback persists. Obviously, if that does persist
Speaker 3: in a major way, it's probably something really not good
Speaker 3: for the markets.
Speaker 1: So a moment ago, Steve Brian mentioned the fact that
Speaker 1: we did have that triple witching in the States on Friday,
Speaker 1: the expiration of options and futures on equities and stock
Speaker 1: indicies I think about five and a half trillion and
Speaker 1: notional value, which is in and of itself staggering. What
Speaker 1: did we learn from the price action Friday?
Speaker 3: I think what we learned from the price action, or
Speaker 3: or sort of the lack thereof, was two things. First
Speaker 3: of all, we were expecting a bit more price action
Speaker 3: in Apple and Nvidia and Vida. Actually the positive side,
Speaker 3: because the rebalance of the xl K ETF, it's about
Speaker 3: an eighty billion dollar ETF. It needed to buy about
Speaker 3: ten billion dollars of Nvidia and sell a similar amount
Speaker 3: of Apple. I won't get into the details of why.
Speaker 3: It's kind of a weird mechanics of the ETF itself,
Speaker 3: but neither one moved all that much. So it tells
Speaker 3: you the market was pretty good at absorbing that. And secondly,
Speaker 3: it's telling you that we've got all these funds that
Speaker 3: mechanically sell volatility to some extent, they've been under performers
Speaker 3: because really, when the market goes straight up, you know,
Speaker 3: you don't necessarily want to be writing calls you'd rather
Speaker 3: just hold onto things. But as a result, it means
Speaker 3: that a lot of the active hedges, the market makers
Speaker 3: and the professionals who delta hedge, end up long that volatility,
Speaker 3: and as we get close to expiration, it kind of
Speaker 3: puts a It kind of puts a magnet on expiring
Speaker 3: strikes rather than sort of providing a slingshot effect, Which
Speaker 3: is why we sort of find the volatility dampening a
Speaker 3: lot of times on these major explorations, whereas they used
Speaker 3: to kind of expand a bit on these major explorations.
Speaker 2: You're so good at explaining things, Steve explained to our audience,
Speaker 2: how even with all of these huge gains from companies
Speaker 2: like Eli, Lilly and Broadcommon and Video, that realized volatility
Speaker 2: just isn't that great at tomorrow. If you look at
Speaker 2: the vics at thirteen, it suggests that you know that
Speaker 2: there's almost complacency there. And yet it should be a time,
Speaker 2: shouldn't it that we have a ton of volatility.
Speaker 3: It should be because part of it is we're getting
Speaker 3: a bit of dispersion of results, actually quite a bit
Speaker 3: of it, because this is kind of the problem with
Speaker 3: the narrow leadership is the moves are sort of being
Speaker 3: dampened out. You don't have much participation at all, you know,
Speaker 3: from the vast majority of stocks that are trading. But
Speaker 3: yet you've got this cadra of market leaders, you know,
Speaker 3: among the ones that you've mentioned, that are just propelling
Speaker 3: the market higher. So that's sort of you know, if
Speaker 3: you if you thought about having a two stock index
Speaker 3: and stock A goes up by five percent and stock
Speaker 3: D goes down by five percent, well then your net
Speaker 3: move is zero to expand that and scale a little bit.
Speaker 3: And when you think about market capitalization weighted indices, you know,
Speaker 3: the big ones can outweigh, can outwigh all the smaller ones.
Speaker 3: But that's kind of why we're dampening volatility. And VIX
Speaker 3: reflects the historical volatility, but I've always asserted that it
Speaker 3: also it also represents institutional demand for hedging. Our institutions
Speaker 3: buying VIX and VIX related products because it's really the
Speaker 3: easiest way to hedge a portfolio, and quite frankly, they're not.
Speaker 3: This is this is what I used to say when
Speaker 3: I was market making, you know, was you know, we're
Speaker 3: selling umbrellas here, and nobody wants to buy them. When
Speaker 3: there's a drought. That's kind of what's going on in
Speaker 3: terms of VIX.
Speaker 1: The fact that we were so heavy in volume Friday
Speaker 1: is that is that a bullish sign to you? Sixty
Speaker 1: percent above the average for the past month and the
Speaker 1: S and P very quickly.
Speaker 3: Steve, No, that's just expiration. When all those options expire,
Speaker 3: you're going to get bought and you have rebalancing that volume.
Speaker 2: Follows from Matt Okay, all right, all right, Steve, we'll
Speaker 2: let you go back to the barbecue. Have one on us.
Speaker 2: Thanks very much for joining us on Sunday. Steve Saznik,
Speaker 2: Chief strategist at Interactive Brokers.
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