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Speaker 2: This is Bloomberg Daybreak Weekend, our global look at the
Speaker 2: top stories in the coming week from our Daybreak anchors
Speaker 2: all around the world. Straight Ahead on the program, we
Speaker 2: looked to some key housing data in the US. I'm
Speaker 2: Nathan Hager in Washington.
Speaker 3: I'm Stephen Caron and London, who are looking ahead the
Speaker 3: next economic indicators for Europe and what it signals about
Speaker 3: the trajectory for stocks on the economy for the rest
Speaker 3: of the year.
Speaker 4: I'm Doug Prisner looking at the fate of the Japanese
Speaker 4: yen and a reality check for Hong Kong.
Speaker 1: That's all straight ahead on Bloomberg Daybreak Weekend on Bloomberg
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Speaker 5: Good day to you. I'm Nathan Hager.
Speaker 2: We begin today's program with a look at the US
Speaker 2: housing market. This week, we get figures on housing starts
Speaker 2: and pending home sales for the month of July. For
Speaker 2: more on this and the latest in the home building sector,
Speaker 2: we are joined by Drew Redding, us homebuilding analyst for
Speaker 2: Bloomberg Intelligence. Great as always to speak with you, Drew,
Speaker 2: And of course it's been a pretty hot summer, so
Speaker 2: are we expecting many projects to have gotten off the
Speaker 2: ground in the last month.
Speaker 6: So when we think about housing starts, you know, we're
Speaker 6: down about five percent year to date on the single
Speaker 6: family side, and we expect to see further pressure from
Speaker 6: that side of the market. You know, we see builders
Speaker 6: that are continuing to scale back production, giving in an
Speaker 6: already elevated supply of speck home inventory that they still
Speaker 6: need to work through. And you know, we've got sales
Speaker 6: in the new home market that are up just about
Speaker 6: two percent year to date, so it's a little taken
Speaker 6: a little bit longer to clear that inventory. You know. Now,
Speaker 6: the large public homebuilders have done a pretty good job
Speaker 6: in drawing down their complete at home inventories. Of course,
Speaker 6: they've had to remain pretty aggressive in their use of
Speaker 6: incentives to do so. But we are starting to see
Speaker 6: more of a shift away from that spec production model,
Speaker 6: which is building the home before you have a buyer
Speaker 6: you know, many of the builders are looking for a
Speaker 6: better balance, so they're what they're trying to do is
Speaker 6: basically match production with the sales pace rather than you know,
Speaker 6: putting more specs into a slow market.
Speaker 2: Sounds like that speaks to an overall trend of the
Speaker 2: home market in general moving away from a buying toward renting.
Speaker 2: Is that kind of what you're pointing to as an
Speaker 2: overall trend here?
Speaker 6: Yeah, So I think when you look at the for
Speaker 6: sale market relative to rentals, when you think about affordability,
Speaker 6: the high price of the homes, mortgage rates back towards
Speaker 6: seven percent. You know, the math certainly does favor renting
Speaker 6: over over owning. We've done some survey work that shows
Speaker 6: the same. And it's not that it's that current renters
Speaker 6: don't want to own. We find a majority of them do.
Speaker 6: It's simply the economics of it don't make sense right now.
Speaker 2: So what does that do for the overall sentiment in
Speaker 2: the home building market when we're seeing a trend toward
Speaker 2: more of those multi family projects as opposed to the
Speaker 2: single families that you would think have better profit margins.
Speaker 6: Well, it's a good question, and you know I mentioned
Speaker 6: that in the new home market, we have sales paces,
Speaker 6: you know, they're down significantly from last year. The market
Speaker 6: as a whole is up only about two percent year
Speaker 6: to date. And really the way builders are having to
Speaker 6: grow is to expand their community count, so they're not
Speaker 6: seeing it on the pace side, but really by increasing
Speaker 6: the number of subdivisions that they're operating from. You know.
Speaker 6: So it's really a tough growth environment on the single
Speaker 6: family side. And you know, if you think about the market,
Speaker 6: certainly there are pockets of relative strength and relative weakness.
Speaker 6: When you think about you know, the entry level buyer,
Speaker 6: who is typically someone that may be coming out of
Speaker 6: a rental situation, we see more stress as you would
Speaker 6: expect to cross that part of the market because those
Speaker 6: tend to be the most priced sensitive home buyers. On
Speaker 6: a relative basis, we have seen more strength at the
Speaker 6: move up in luxury segments. These are typically the buyers
Speaker 6: that are coming out of an existing home, so they've
Speaker 6: built up equity over the last couple of years. In
Speaker 6: the luxury side, they're benefiting from the run up in
Speaker 6: equity markets. They tend to be less sensitive to mortgage rates.
Speaker 6: We're seeing relative strength on that side, but you know,
Speaker 6: there's really not a parket part of the market that
Speaker 6: is completely immune, you know, to what's happening in the
Speaker 6: broader economy, you know, affordability, economic and political uncertainty. So
Speaker 6: you know, there's broad challenges, but there are pockets of
Speaker 6: relative strength.
Speaker 2: Oh, we are going to hear from one of those
Speaker 2: luxury home builders when Toll Brothers reports earnings this week.
Speaker 2: Are we expecting some positive signs there in terms of
Speaker 2: a lot of the factors you've just been talking about.
Speaker 6: Yeah, so we like the relative position of Toll Brothers.
Speaker 6: You know, as you know, they cater to the luxury market,
Speaker 6: so their buyer is more affluent. You know, they're, as
Speaker 6: I said, the customers are less sensitive to interest rates
Speaker 6: compared to the entry level. About a quarter of their
Speaker 6: buyers pay cash. For those that do take out a mortgage,
Speaker 6: they put about thirty percent down, So the buyer is
Speaker 6: very strong. So they're certainly more insulated to the macro.
Speaker 6: In terms of the upcoming print, I think, you know,
Speaker 6: the the KPIs will be looking at our order growth
Speaker 6: and gross margin, and we particularly are interested in hearing
Speaker 6: how demand has trended intra quarter, you know, with mortgage
Speaker 6: rates climbing back up towards seven percent. But that being said,
Speaker 6: you know, we still expect Toll to report high single
Speaker 6: digit growth in orders, and importantly, you know, that's being driven,
Speaker 6: as we mentioned before, by community count growth, which is
Speaker 6: helping to offset muted sales absorptions. And that's really what
Speaker 6: sets Toll Brothers apart from a growth perspective, both for
Speaker 6: twenty twenty six and looking out into twenty twenty seven. Now,
Speaker 6: on the margin side, gross margins have been very strong.
Speaker 6: The outlook's really going to come down to how aggressive
Speaker 6: they've had to be on their use of sales incentives.
Speaker 6: Bull primarily prescribes to a price over paced strategy, so
Speaker 6: we do think that near term margins should hold pretty well.
Speaker 2: Thank you for this, Drew, great having you on with us.
Speaker 2: That's Drew Redding, us home building analyst for Bloomberg Intelligence.
Speaker 2: Let's take a look now add some stocks making news
Speaker 2: in the week ahead. I'm Nathan Hager, joined by Bloomberg
Speaker 2: Equities reporter Avalon Purnell. We're sort of winding down earning
Speaker 2: season here Avalon, but we're going to hear from some
Speaker 2: of the biggest names in big box retail this week,
Speaker 2: starting with Target on Wednesday. There has been a lot
Speaker 2: of drama around this stock.
Speaker 5: What are we expecting this week?
Speaker 7: Absolutely, We're definitely gonna get a lot of visibility on
Speaker 7: the state of the American shopper, sales trends, and progress
Speaker 7: on Target's broader recovery will definitely be tough top of
Speaker 7: mind for investors, especially as they head into their second
Speaker 7: quarter earnings next Wednesday. The company is still really trying
Speaker 7: to regain its sparkle and pinpoint what exactly made the
Speaker 7: company tarje as opposed to just Target. One thing of
Speaker 7: note though, is that definitely analysts remain remixed on the
Speaker 7: company's performance moving forward, especially giving guidance they had in
Speaker 7: their earnings call last quarter, noting that they did have
Speaker 7: a little bit of concerns about tougher comparisons moving forward.
Speaker 7: You have ubs as Michael Lasser remaining quite bullish expecting
Speaker 7: the results to provide the next proof point that broader
Speaker 7: recovery may actually be sticking around for the company, whereas
Speaker 7: Barclays Seth Sigmund saying that you know, meaningful upside to
Speaker 7: results will really be needed to push the stock from here.
Speaker 7: He notes also that he believes a big box store
Speaker 7: likely had a solid quarter. However, he still views improvement
Speaker 7: as just recovering from last year's issues as opposed to
Speaker 7: moving forward into the next chapter. So Worth noting that
Speaker 7: the options data that we're currently seeing at the moment
Speaker 7: is implying about a six point two percent move after
Speaker 7: those results.
Speaker 2: Well, you wonder if we're going to see something of
Speaker 2: a similar move from Walmart when they report on Thursday.
Speaker 2: If you think about some kind of indicator of the
Speaker 2: American consumer, it's hard to think of a company that's
Speaker 2: more of one than Walmart.
Speaker 7: Absolutely, and a similar story that we were seeing in
Speaker 7: Target definitely still playing a role here for Walmart as well.
Speaker 7: Analysts still quite mixed on how exactly this big box stores,
Speaker 7: e commerce and also delivery businesses will perform as they
Speaker 7: report second quarter earnings. Key Bank is expecting pretty healthy
Speaker 7: results from the store, noting that the company remains one
Speaker 7: of their top picks as growth initiatives and also further
Speaker 7: share gains continue to build momentum despite a fairly volatile
Speaker 7: macro and geopolitical environment. They also expect Walmart to be
Speaker 7: fairly vocal about how exactly they're using those tariff refunds
Speaker 7: to fund rollbacks and ultimately drive future business gains by
Speaker 7: bringing people back into the store with slightly lower prices.
Speaker 7: Others are not necessarily as rosy about the company's outlook,
Speaker 7: Barclay's noting that the optics don't look too great given
Speaker 7: expectations for sales moderation from the last quarter. Barclays, though
Speaker 7: still saying that they believe this could be the trough
Speaker 7: as price investments in other initiatives support accelerating share gains
Speaker 7: in the second half of the year. Worth noting, like
Speaker 7: retaillers are still expecting you know, back to school sales
Speaker 7: and Black Friday, which obviously won't be penciled in for
Speaker 7: the start of the year.
Speaker 2: Right, but definitely something to keep an eye on as
Speaker 2: we wait to see what the outlook is going to
Speaker 2: be from both Target and Walmart. Also on Thursday, we're
Speaker 2: going to hear from one of the biggest names in
Speaker 2: the AG sector. What are we expecting from Deer in company?
Speaker 7: Yes, investors will be looking for more data that reinforces
Speaker 7: Deer's view that twenty twenty six will be the trough,
Speaker 7: the bottom of this quite complicated situation for the company.
Speaker 7: The world's biggest farm machinery makers second quarter results are
Speaker 7: expected to be slightly mixed again this quarter, Bloomberg Intelligence
Speaker 7: expecting the results to still reinforce that expectation that twenty
Speaker 7: twenty six will mark a trough in large ag demand
Speaker 7: as attention shifts towards how fast will that recovery be
Speaker 7: next year. However, that analyst is also noting that they're
Speaker 7: still expecting large agriculture retail cells to remain quite soft,
Speaker 7: though they do appear to be tracking better than industry
Speaker 7: forecasts as inventories continue to normalize. RBC also highlighting that
Speaker 7: their big question is continuing to be what exactly does
Speaker 7: the pace of deer's recovery look like, especially as there
Speaker 7: continues to be a lot of holatility in the macro environment,
Speaker 7: and also the tariff situation that is somewhat improved but
Speaker 7: still kind of in the balance o previously kind of interesting,
Speaker 7: especially with the Iran war in the background, as to
Speaker 7: how exactly that's going to be impacting farmers who are
Speaker 7: continuing to struggle to manage prices, not necessarily keeping pace
Speaker 7: with very elevated cost in the options market, also continuing
Speaker 7: to price She'll move of nearly five percent after the
Speaker 7: company reports learnings.
Speaker 2: Yeah, still a lot of back and forth when it
Speaker 2: comes to that situation in the Middle East and of
Speaker 2: the post tariff.
Speaker 5: Situation as well.
Speaker 2: Just time to talk about another stock that's reporting this week,
Speaker 2: Esday Lotder. There is a lot more competition in the
Speaker 2: beauty space. How are we thinking Esday Lotter is going
Speaker 2: to be handling it?
Speaker 1: There?
Speaker 7: Sure is, And I mean to say the least, this
Speaker 7: company has had a rollercoaster ride of a quarter. I mean,
Speaker 7: just a couple of months ago they were talking about
Speaker 7: merger talks with the Spanish brand Pooch, which was on
Speaker 7: the table and then later scrapped after investors were quite
Speaker 7: negative on that idea. And like a lot of other
Speaker 7: companies that we've already mentioned, they are in the midst
Speaker 7: of a broader recovery as consumers are continuing to kind
Speaker 7: of pull back from spending on these various like luxury
Speaker 7: brands that are under the Stay Ltder umbrella. That being said,
Speaker 7: RBC does continue to favor their turnarounds, say noticing that
Speaker 7: potentially important brands continue to outperform, and they also noted
Speaker 7: that the broader turnaround at MAC continues to kind of
Speaker 7: bode well for the company, though they do still question
Speaker 7: how Esday Lauder will continue to fare with holding onto
Speaker 7: smash Box and two Face, which are fairly popular brands
Speaker 7: amongst maybe millennial crowds, and whether it still makes sense
Speaker 7: for es Day Lauder to hold on to them or
Speaker 7: maybe look for a play to sell them at some point.
Speaker 2: We'll see, Yeah, we'll see if a lot of those
Speaker 2: sales are happening in Tarjay as well. Thanks for Evlon,
Speaker 2: as always good to have you with this. That's Avlon Parnell,
Speaker 2: Equities reporter for Bloomberg News, and coming up on Bloomberg
Speaker 2: Daybreak weekend, we'll look at whether Europe's future economic data.
Speaker 5: Can live up to the promise of a bumper second.
Speaker 2: Quarter when it comes to Europe's earnings. I'm Nathan Hager
Speaker 2: and this is Bloomberg. This is Bloomberg Day Break Weekend,
Speaker 2: our global look ahead at the top stories for our
Speaker 2: investors in the coming week are Nathan Higer and Washington.
Speaker 5: Later in the program.
Speaker 2: Will take a closer look at the feet of the
Speaker 2: Japanese yen, plus how Hong Kong's competitiveness as a financial
Speaker 2: center is about to be tested. But first Europe's Biggest
Speaker 2: Economies report of inflation and Purchasing Managers Index data next
Speaker 2: week against a backdrop of geopolitical uncertainty and higher energy
Speaker 2: costs driven by the Warriner ran. Let's get more now
Speaker 2: from Bloomberg Daybreak europe banker Stephen Carroll Nathan.
Speaker 3: European economies and companies have defied the doom laden forecast
Speaker 3: that the Iran war would tip the continent into stagflation.
Speaker 3: We've seen the best earning season in nearly four years,
Speaker 3: pushing keystock indexes to new records, and the signals for
Speaker 3: the months ahead look strong too. In the coming days,
Speaker 3: PMIS and the Zew survey in Germany will give fresh
Speaker 3: insight into how the biggest economies are performing, along with
Speaker 3: updated readings on inflation. And investors seem bullish on European
Speaker 3: stocks too. Benedict's Low is equity derivative strategist at BMP Pariba.
Speaker 3: Here's what she tells Bloomberg's Tom McKenzie earlier this week.
Speaker 8: So it's undeniable that the macro story is speaking up
Speaker 8: in Europe.
Speaker 9: We've got growth that.
Speaker 8: Is surprising to the upside, activity on the right, and
Speaker 8: earnings that have been good actually, earnings have been exceptionally
Speaker 8: strong in the US but also very good in Europe.
Speaker 8: It's been one of the best earning seasons over the
Speaker 8: past few years. And all of this is happening in
Speaker 8: the context where positioning is low to neutral, So that
Speaker 8: points a positive picture of stocks. Now, the comfort point
Speaker 8: to that is that a lot of positive news is
Speaker 8: already in the price and with seasonality that is not
Speaker 8: supportive for higher stock price up until the end of
Speaker 8: September October. We like to position for what we call
Speaker 8: a grind higher in stocks, and we like to minimize
Speaker 8: the premiums that investor are spending on website positioning.
Speaker 10: How do you mitigate risks around inflation, whether it's soft
Speaker 10: commodities where there's these or where there's gas oil prices.
Speaker 10: If this is the status quo right now around Iran
Speaker 10: and that is prolonged, how do you hedge around that.
Speaker 8: So one of our top pick at the moment is
Speaker 8: the banking sectors. We think the banking sectors is one
Speaker 8: of the best sector position for end of your First
Speaker 8: of all, pmis are on the rise. As I mentioned
Speaker 8: activity speaking up, earnings that have been good, but also
Speaker 8: higher inflation mean higher rates. We're expecting the UCB to
Speaker 8: rise rates concept number meeting, and that is positive for
Speaker 8: the banking sector, a cyclical sector that has yes really
Speaker 8: performed well over the past few years. But we think
Speaker 8: this is some website poler sector.
Speaker 3: So Betexil from Bimpe Parriba optimistic there, but there are
Speaker 3: risks to the outlet, not least from oil and gas
Speaker 3: prices grinding higher. Let's discuss now with David Powell, Bloomberg's
Speaker 3: senior Euro Area economist, and Sagarika Jackson Ghani, who covers
Speaker 3: EMEA Equities, macro and investment strategy. David, let's start with you.
Speaker 3: We're looking ahead to these economic surveys coming in the
Speaker 3: next few days. What are we expecting to learn about
Speaker 3: the state of europe'svegas economies.
Speaker 9: Well, essentially, we're going to be focusing on the PMI
Speaker 9: survey and that's going to give us sy indications to
Speaker 9: whether the strong growth we saw the second quarter continued
Speaker 9: in the third quarter. Your area GDP spended by zero
Speaker 9: point four percent in the second quarter this year. That
Speaker 9: was basically double consensus. Part of that is because of
Speaker 9: a rebound in Ireland, but even without that distortion caused
Speaker 9: by iris GDP, the economy probably would have expanded by
Speaker 9: about zero point three, which is above expectations and is
Speaker 9: certainly defying the negative forecasts or the gloomy forecasts that
Speaker 9: were put out after the sharp rise and commodity prices
Speaker 9: earlier this year.
Speaker 3: Zagreca, we've just wrapped up, or just wrapping up rather
Speaker 3: a very strong earning season in Europe. But can you
Speaker 3: give us a sense of perspective on this. How good
Speaker 3: has it been when we look back at how European
Speaker 3: companies have reported.
Speaker 11: It's taken a lot of market participants, both investors and
Speaker 11: sell side strategists by surprise. And I want to put
Speaker 11: that in context a little bit, because European companies in
Speaker 11: the last two years have had essentially zero profit growth,
Speaker 11: and that was underpinned by poor economic growth, both a
Speaker 11: lot of it domestically. But this year what happened was
Speaker 11: European stock started off the year on a really solid footing. Right.
Speaker 11: You had the AI trade cracking in the US, but
Speaker 11: at that time Europe was turning attractive because it had
Speaker 11: these There was a new buzzword on Wall Street at
Speaker 11: the time. It was called halo heavy assets low obselescence.
Speaker 11: So suddenly the asset heavy old economy stuff was becoming attractive.
Speaker 11: But before that could really take off, you had the
Speaker 11: US Iran war, and that exposed a lot of European
Speaker 11: companies to the potential for higher oil prices. Would it
Speaker 11: there were worries that European economies would tip into stagflation,
Speaker 11: so expectations had on the macro front been tempered a bit.
Speaker 11: But coming into the second quarter earning season, unless expectations
Speaker 11: were incredibly strong, and as we're expecting MSCI Europe companies
Speaker 11: to post a twelve percent increase in profits versus a
Speaker 11: year earlier. As I said previously, after two years of
Speaker 11: no growth, that was already a high bar. What's been
Speaker 11: astounding is that not only have the companies met that bar,
Speaker 11: they've actually beaten it by quite a wide margin. So
Speaker 11: they've posted seventeen percent increase in profits, and that's the
Speaker 11: best since late twenty twenty two. Of course, the economy
Speaker 11: has been surprisingly resilient to the oil price shock. We
Speaker 11: haven't quite seen that feed through to inflation to a
Speaker 11: degree that had been feared, So that's been underpinning that.
Speaker 11: But the really big takeaway for US this season has
Speaker 11: been that. You know, the typical pattern in a year
Speaker 11: is generally that analysts start the year really bullish and
Speaker 11: then through the year they downgrade earnings expectations. This year,
Speaker 11: it's been the opposite. Not only have they come in bullish,
Speaker 11: but they've actually raised earnings expectations for twenty twenty six
Speaker 11: by five percent, which is really atypical. So that bodes
Speaker 11: well for further bullishness.
Speaker 3: Okay, I mean the inflation concerns, David, really are central
Speaker 3: to what things look like for the rest of the
Speaker 3: year as well. We've talked about the resilience in the
Speaker 3: European economies that we've seen so far, but given that
Speaker 3: energy prices still remain elevated, how big is the inflation
Speaker 3: risk when we're thinking about the picture for the coming months.
Speaker 9: There were these fears of stagflation. We haven't had the
Speaker 9: stag but we've had the flation. So if we look
Speaker 9: back at headline CPI in January, it was one point
Speaker 9: seven percent. Commodity prices started to rise in February and
Speaker 9: anticipation of a conflict in the Middle East, and then
Speaker 9: when it actually began at the very end of February,
Speaker 9: commodity price is shot up, and the latest inflation reading
Speaker 9: is two point nine percent, so well above the ECB's
Speaker 9: two percent target, and that is really what's driving the
Speaker 9: ECB's decisions right now. We expect another hike from the
Speaker 9: ECB in September, and that's universally expected by most economists
Speaker 9: and priced into the market. And really what's going to
Speaker 9: drive their decision after that is how commodity prices are
Speaker 9: affecting inflation, and that of course is tied up with
Speaker 9: the outcome of the conflict in the Middle East, and
Speaker 9: no one can say with exact certainty where we're going
Speaker 9: to be at the end of the year in terms
Speaker 9: of that, but on track for another hike, and if
Speaker 9: this persists, we could have more tightening as the ECB
Speaker 9: worries about worries about inflation. However, the good news is
Speaker 9: is that core inflation is unlikely to rise as much.
Speaker 9: We have had some increase things that are particularly vulnerable
Speaker 9: to commodity prices like airfares have gone up, but the
Speaker 9: weakness in the labor market is unlikely to allow workers
Speaker 9: to ask for huge increases in pay that we saw
Speaker 9: after the pandemic that really boosted inflation. Keeping underlying inflation
Speaker 9: pressures limited this year.
Speaker 3: Indeed, so that the risk of a wage price spiral
Speaker 3: not looking at looming large at the moment, Sagrico in
Speaker 3: the earnings pictures, did we hear much from companies about
Speaker 3: their inflation fears?
Speaker 11: I think in terms of inflation, the sentiment from management
Speaker 11: has been really positive. They have sounded really confident on
Speaker 11: profit margins and actually a really key part of that,
Speaker 11: and this goes back to the AI story in the US.
Speaker 11: One of the other fundamental reasons why this polishness toward
Speaker 11: European companies and the European stock market is that changing
Speaker 11: attitude from investors on who are the next AI winners?
Speaker 11: So that was a key focus for how are companies
Speaker 11: in Europe being able to monetize productivity efficiency from AI?
Speaker 11: And we're seeing nascent signs of that now. Initially in
Speaker 11: the first leg of the AI rally, it was all
Speaker 11: focused on the big spenders on AI, on developing AI,
Speaker 11: and those companies are based in the US, so Europe
Speaker 11: had been at a disadvantage then it had underperformed US
Speaker 11: indexes because you don't have those big AI developers here,
Speaker 11: but what you do have are both sides of the
Speaker 11: other sides of that supply chain, where you've got the
Speaker 11: semiconductor paths makers that allow for AI to be deployed.
Speaker 11: But you then also have companies in Benedict was mentioning
Speaker 11: this earlier in her snippet, you have companies like banks
Speaker 11: who have already started to show that they can monetize
Speaker 11: AI in a way that is translating into earnings growth
Speaker 11: and margin growth, and they're confident that they can defend
Speaker 11: that going forward. So that's keeping optimism alive as well.
Speaker 3: What about the other asset classes. We're talking specifically about
Speaker 3: equities so far, but I mean in terms of other
Speaker 3: European assets, are there interesting trends to be watched at.
Speaker 11: Watching out for Definitely. We were looking into this theme
Speaker 11: earlier with Micross asset colleagues and it's quite notable. Economically speaking,
Speaker 11: or economicsly speaking, stocks and bonds generally behave in opposite directions.
Speaker 11: That's the fundamental rule of economics. This time around, we
Speaker 11: noticed that European stocks are rallying at the same time
Speaker 11: as this growing polishness on bonds and the reason for
Speaker 11: that is that and David mentioned this earlier as well.
Speaker 11: The economy isn't a sweet spot at the moment where
Speaker 11: economic momentum is picking up from lows. So there's a
Speaker 11: City Group index which measures the degree to which data
Speaker 11: are coming in better than expected, and that economic momentum
Speaker 11: is the highest since March twenty twenty three. But at
Speaker 11: the same time, absolute growth figures are still trailing the US,
Speaker 11: and there is more policy certainty at the moment in Europe,
Speaker 11: at least it's been viewed that way versus the US,
Speaker 11: so investors are certainly bullish on stocks and bonds at
Speaker 11: the same time, which is really rare.
Speaker 3: David, we're sort of belying the dismal science of economics
Speaker 3: by being so positive about the picture going ahead for
Speaker 3: the rest of the year. I just wonder what risks
Speaker 3: we should have our eyes on when we're thinking about
Speaker 3: what could derail this momentum and this resilience for the
Speaker 3: European economy.
Speaker 9: Probably the biggest risk is the obvious one of commodity
Speaker 9: prices shooting higher and much higher again the conflict in
Speaker 9: the Middle East were to escalate, And beyond that, it's
Speaker 9: probably that the increase in commodity process that's driving up
Speaker 9: headline inflation. If that starts to appear more strongly in
Speaker 9: underlying inflation, even though the labor market is weaker than
Speaker 9: it was several years ago, because that would probably cause
Speaker 9: the ECB to tighten much more aggressively than we currently
Speaker 9: think it will.
Speaker 3: Okay, Zachary, The question of investors diversifying away from the US,
Speaker 3: looking for other options away from the US hasn't something
Speaker 3: that's benefited Europe in the past. Is there any sign
Speaker 3: that that momentum could continue or be a theme as
Speaker 3: we're looking towards the rest.
Speaker 9: Of the year.
Speaker 11: Absolutely, and that underpins the broadening trade that has been
Speaker 11: going on this year. So investors are looking out of
Speaker 11: They're looking within the US but outside of tech. But
Speaker 11: that is also leading them to other more attractively valued
Speaker 11: stocks which are in Asia or Europe. And again it
Speaker 11: goes back to the economic momentum, because Europe is chock
Speaker 11: full of sector is that are very closely linked with
Speaker 11: the economic cycle. Again, banks, industrials, miners, these companies tend
Speaker 11: to do well when the economic growth is sustainable and
Speaker 11: it's resilient. That's what's drawing investors this time around, and
Speaker 11: we've seen that in the earnings picture as well. It
Speaker 11: is the miners' energy, industrial's financials which have really contributed
Speaker 11: the most to profit growth.
Speaker 3: Okay, zagrec Jason Ghanny, who is covering EMEA Equity's macro
Speaker 3: and investment strategy at Bloomberg.
Speaker 5: Thank you.
Speaker 3: And from Bloomberg Economics, David Powell, our senior Euro Era economist. Well,
Speaker 3: have more on those data points on the PMI surveys
Speaker 3: for France, Germany in the Euro Area on Bloomberg Radio
Speaker 3: this week. I'm Stephen Carroll in London. You can catch
Speaker 3: us every weekday morning for Bloomberg Daybreak Europe, beginning at
Speaker 3: six am in London and one am on Wall Street.
Speaker 2: Nathan, Thanks Stephen, and coming up on Bloomberg Daybreak weekend,
Speaker 2: we'll take a closer.
Speaker 5: Look at the feet of the Yen. I'm Nathan Hager,
Speaker 5: and this is Bloomberg.
Speaker 2: This is Bloomberg day Break Weekend, our global look ahead
Speaker 2: at the top stories for investors in the coming week.
Speaker 2: I'm Nathan Hager in Washington. The persistent weakness of the
Speaker 2: yen continues to be a troubling issue for Japanese policymakers.
Speaker 2: For a closer look, let's get to the host of
Speaker 2: the Bloomberg Daybreak Asia Podcast Doug.
Speaker 4: Chrisner, Thanks Nathan. The yen's weakness is a problem for
Speaker 4: the US as well, so much so. The two weeks ago,
Speaker 4: the US and Japan's surprised markets with a coordinated effort
Speaker 4: to strengthen the yen for the first time since nineteen
Speaker 4: ninety eight. The problem is since that intervention, half of
Speaker 4: the EN's gains have been wiped out. Now several factors
Speaker 4: are weighing on Japan's currency, including the gap between Japan's
Speaker 4: ultra low interest rates and those in the US and
Speaker 4: other major economies. Now, the situation could be remedied to
Speaker 4: some extent if the Bank of Japan were to raise rates.
Speaker 4: We know that in inflation in Japan has been above
Speaker 4: target for years now. In the week ahead, we'll get
Speaker 4: fresh price data for Japan with the GDP deflator for
Speaker 4: a look at the dynamics. I spoke with Bloomberg News
Speaker 4: macro strategist Michael ball. I started the conversation by asking
Speaker 4: whether the intervention was a watershed moment or whether we're
Speaker 4: making too much of this move.
Speaker 12: No, I don't think we're making too much of it.
Speaker 12: I think again, we've crept up back to this one
Speaker 12: sixtieth area, and again that seems to be the line
Speaker 12: in the sand that the market has in mind.
Speaker 5: For that's where.
Speaker 12: Coordinated intervention, both the Treasury and them OFF and the
Speaker 12: BOJ together all have to basically signal that this is
Speaker 12: where we're going to defend until we get to September
Speaker 12: or potentially October, where you could see rate hikes from
Speaker 12: the BOJ to again give a more fundamental story why
Speaker 12: the yen should appreciate and to change this feedback loop.
Speaker 12: It's just a negative feedback loop of weaker yen be
Speaker 12: getting weaker yen because of positioning.
Speaker 4: So from the US position, is Treasury Secretary Besnt looking
Speaker 4: more at what's happening in the US treasury market than
Speaker 4: he is the currency market, and he's concerned that we
Speaker 4: may see a backup in US fields.
Speaker 12: Yes, I think that's the primary goal here, and I
Speaker 12: think he signaled that in several ways. One obviously for
Speaker 12: his worry that the intervention will not only be the
Speaker 12: selling of bills, which has been up to date now
Speaker 12: how they've done it, but more on actually the long end.
Speaker 12: So again, if they didn't have access, let's say to
Speaker 12: the THEEMA kind of facility as a backstop, or they
Speaker 12: didn't have access to the international repel market or even
Speaker 12: the repo facilities, the other ones that are available at
Speaker 12: the FED, then they would have to sell longer end
Speaker 12: treasuries what are the tens or thirties, and the curve,
Speaker 12: which has already been under pressure since July FMC would
Speaker 12: come under further pressure and that would actually force the hands.
Speaker 4: So you mentioned FEMA, just to unpack that a little bit,
Speaker 4: this is a vehicle that it was essentially allowed Japan
Speaker 4: to borrow dollars to post US treasuries essentially as a
Speaker 4: form of collateral, so they wouldn't be net sellers of
Speaker 4: US treasuries to dump that inventory into the market and
Speaker 4: run the risk of pushing US yields even higher, right exactly.
Speaker 12: And there is a limit to that amount. I think
Speaker 12: it's around sixty billion, which in its sense is a
Speaker 12: little bit small for what is needed, because let's keep
Speaker 12: in mind the initial intervention that happened last week saw
Speaker 12: about eighty billion dollars of bill selling buy the moth
Speaker 12: to actually support and buy yen. So this one itself
Speaker 12: is more of a backstop. It hasn't been used yet
Speaker 12: because it's more expensive. It's about twenty five basis points
Speaker 12: over what a normal repo rate would be to do
Speaker 12: something like this, but in its signaling effect it's much
Speaker 12: larger because again what we may see from best in
Speaker 12: with you know, the new FED leader Kevin Warsh is
Speaker 12: to lift the limit there, which then would be a
Speaker 12: much bigger signaling effect. And overall, with all the other tools,
Speaker 12: the Japanese then could just have this as well as
Speaker 12: a backstop.
Speaker 4: So take me back to the currency market. What this
Speaker 4: means for not only the dollar but the Japanese yanic gas.
Speaker 5: Yeah, exactly.
Speaker 12: And again there's other things going on in Japan that
Speaker 12: is making us worry that they'll be selling treasury holdings,
Speaker 12: and as they sell treasury holdings, obviously then they weaken
Speaker 12: sort of the dollars they bring money back into the end.
Speaker 12: But specific to what this intervention was about, again, it
Speaker 12: was to initially stop official account selling of the treasury
Speaker 12: mark market. And what it really means for the dollars,
Speaker 12: you know, for that cross itself, it would weaken the
Speaker 12: dollar against the end and effectively put more pressure even
Speaker 12: on long end real rates, which is counterintuitive because the
Speaker 12: rate differential story would be off there, but then it's
Speaker 12: a capital flow account thing, or basically you're just seeing
Speaker 12: selling of dollar assets by Japanese holders.
Speaker 4: So we know what the disinflation or deflation story in
Speaker 4: Japan has been like for three decades, and we know
Speaker 4: that the boj these days has been very very conservative,
Speaker 4: moving very gradually. You could make a case, given the
Speaker 4: level of inflation now in Japan, that the BOG needs
Speaker 4: to be a little bit more aggressive. That's not happening.
Speaker 4: Is there the risk though, that if they begin to
Speaker 4: lean into more of a tightening, that we could see
Speaker 4: a repatriation of Japanese assets leaving global markets like the
Speaker 4: US and coming back to Japan.
Speaker 12: Well, it might actually be the interesting I think you
Speaker 12: actually nailed on the head. I think they took so
Speaker 12: long for them to get inflation to kind of get
Speaker 12: going again, and it has gotten going again. Obviously they
Speaker 12: have more energy sensitivity and we know what's going on there,
Speaker 12: But it took them so long to get rates off
Speaker 12: the zup and get them off the floor and get
Speaker 12: it inflation back in grain and sort of the day
Speaker 12: to day consumer that they're very worried that if they
Speaker 12: sort of even tighten a little bit, they're going to
Speaker 12: lose that progress. But to your point, if they do tighten,
Speaker 12: if they come out and say September and they issue
Speaker 12: Maymi a statement that's more hawkish and expected in october's
Speaker 12: getting priced up again because right now September is about
Speaker 12: two third price for a hike, and if they don't go,
Speaker 12: then the expectation to be one hundred percent for October.
Speaker 12: But let's say they just do back to back, you
Speaker 12: would see that curve flattened, so you'd see the long
Speaker 12: end of the treasury curve, their treasury curve over there
Speaker 12: come off and get a rally, and that actually would
Speaker 12: give you less incentive to repatriate back into the Japanese assets,
Speaker 12: effectively into their bonds, because one, liquidity is not great there,
Speaker 12: two then you're just your rate differential story is not
Speaker 12: as compelling anymore because by hiking in the front end,
Speaker 12: they're effectively showing that they have more responsibility towards the
Speaker 12: back end as far as monetary policies.
Speaker 4: So what's your sense in terms of yend weakness is
Speaker 4: the worst over at least in the near term.
Speaker 12: Yeah, I mean that's a great question. I think a
Speaker 12: lot of that has to do maybe with enery as well.
Speaker 12: Obviously they have some sort of well not some sort
Speaker 12: of they have a higher correlation here with oil prices
Speaker 12: of oil where it is now and the rate to
Speaker 12: change their state stable, then it's less of a pressure
Speaker 12: on them there. I think you're right. I think in
Speaker 12: a lot of ways, well, not that you're right, but
Speaker 12: what you're hinting at is that the worst could be
Speaker 12: over if we see this coordinated intervention lead to basically
Speaker 12: hold a period of time before you see actual rate hikes.
Speaker 4: To what extent could the market be surprised right now?
Speaker 4: Is the trade so crowded that we risk maybe a
Speaker 4: kind of a not I don't want to say violent adjustment,
Speaker 4: but something that could be dramatic, So.
Speaker 12: The trades come off. To your point, I think a
Speaker 12: lot of that was last week was that people were
Speaker 12: caught off sides by the coordination and now obviously the
Speaker 12: size it was a somewhat large imprint they had in
Speaker 12: the market, and people were basically still leaning very short end,
Speaker 12: and that's cleaned up nicely. We get to see FTC data,
Speaker 12: that's one way to look at it. But also we're
Speaker 12: hearing sort of from flow traders that a lot of
Speaker 12: that has come off, and it's a much flatter position.
Speaker 12: People are more nervous now there's two sided risks to
Speaker 12: where the end can go. And again this one to
Speaker 12: sixty level is sort of the pivot where if we
Speaker 12: drift above one sixty, I think people will be mourned
Speaker 12: and powered to short it. Traders will think that the
Speaker 12: intervention was a one off and they're not really disciplined
Speaker 12: or committed to it. And if it goes lower then
Speaker 12: the feedback loop actually people will probably try and rush
Speaker 12: into it to get ahead of maybe a more structural change,
Speaker 12: which it will again be real rate hikes coming down
Speaker 12: the road.
Speaker 4: Michael will leave it there. Thanks for your perspective on
Speaker 4: the yen story that is, Bloomberg macro strategist, Michael Ball.
Speaker 4: We turn next to Hong Kong and how its competitiveness
Speaker 4: as a financial center is about to be tested by
Speaker 4: two opposing forces. Bloomberg opinion columnist July Wren is based
Speaker 4: in Hong Kong and she has been writing about what
Speaker 4: she calls a reality check. Truly joins us now from
Speaker 4: Hong Kong. Thank you for being here. You've been writing
Speaker 4: in your latest piece that last year Hong Kong overtook
Speaker 4: Switzerland as the world's largest cross border wealth hub. I
Speaker 4: didn't realize that. Talk to me about the positive forces
Speaker 4: that could further cement that position.
Speaker 13: What we are seeing is rebounded in Hong Kong's asset
Speaker 13: management industry. Last year, a lot of global hetch fans
Speaker 13: they were opening shop in Hong Kong and they were
Speaker 13: actually expanding their office space. We're talking about Citadel James
Speaker 13: Street point seventy two. One reason is that they want
Speaker 13: to be close to the deep talent in mainland China.
Speaker 13: For educated the small mainland Chinese to move to Hong Kong,
Speaker 13: it's very easy, whereas it would be very difficult for
Speaker 13: them to move to say London or New York. And
Speaker 13: with global hedge fens stuck in a very heated talent
Speaker 13: fight and paying more and more money to young analysts,
Speaker 13: they find Hong Kong quite attractive.
Speaker 4: So when you look at the possibility that things could change,
Speaker 4: let's go to the negative side of the equation now,
Speaker 4: which would maybe erode Hong Kong's standing in terms of
Speaker 4: the asset management industry. What could be a negative in
Speaker 4: this story.
Speaker 13: At the end of the day, Hong Kong is still
Speaker 13: very integrated into China. Sure, Hong Kong is the world's
Speaker 13: largest cross border wealth management hub, but according to Boston
Speaker 13: Consulting Group estimates, sixty percent of the money still came
Speaker 13: from mainland China. And right now the problem is that
Speaker 13: the Chinese government is a bit short out catch, so
Speaker 13: they want the mainland Chinese to cough up unpaid capital
Speaker 13: gains taxes. The Chinese government is a little bit short
Speaker 13: on catch, so they want to so they're in a
Speaker 13: global tax hunt for capital gangs that mainland Chinese made overseas,
Speaker 13: and a lot of that money is in Hong Kong.
Speaker 13: So we're talking about billions of the dollars of unpaid
Speaker 13: tax bills that mainland Chinese will somehow have to cough
Speaker 13: up to liquidate the existing assets in Hong Kong, and
Speaker 13: that hurts Hong Kong's asset management industry.
Speaker 4: So we've talked about the polarity here the two opposing polls.
Speaker 4: One that would prove to be very positive for the
Speaker 4: asset management industry in Hong Kong that tax reform. The
Speaker 4: other is obviously the influence on the negative side that
Speaker 4: Beijing would have in terms of the crackdown on a
Speaker 4: lot of cross border activity, including a leveon overseas capital gains,
Speaker 4: which I think is twenty percent. Do you have a
Speaker 4: sense of how this may shake out and what may
Speaker 4: happen at the end of the day.
Speaker 13: I think what will happen is that traditional investment banking
Speaker 13: services for instance, clime brokerages, sales and trading, they will
Speaker 13: do very well. On the other hand, private wealth management,
Speaker 13: which has been the fastest growing sector, they're likely to
Speaker 13: have peaked.
Speaker 4: So it's an issue of whether or not Hong Kong
Speaker 4: is going to preserve its competitive edge as a financial center.
Speaker 4: Do we need to talk about what's happening with the
Speaker 4: IPO market, particularly as mainline Chinese companies are concerned.
Speaker 13: Well that the IPO market is doing very well, and
Speaker 13: that's the thing the Chinese government is happy with that.
Speaker 13: They think, oh it's great. You know, Hong Kong could
Speaker 13: be a good capital allocation hub for mainland Chinese companies
Speaker 13: to get financing, to develop their AI capabilities, etc. And
Speaker 13: that is where Hong Kong politically stands on the good
Speaker 13: side of Beijing. On the other side, Hong Kong shouldn't
Speaker 13: be shouldn't continue to be seen as a place where
Speaker 13: wealthy Chinese hide their assets from the government, from their
Speaker 13: government's watchful eye.
Speaker 4: So you know very well, when we talk about talent
Speaker 4: in the financial services industry, we have to talk about
Speaker 4: the technology that some of these firms are using. Talk
Speaker 4: to me about the extent to which asset managers in
Speaker 4: Hong Kong are using artificial intelligence these days.
Speaker 13: Well, this is an interesting development because you know, like
Speaker 13: the Western artificial intelligence labs, they don't allow to people
Speaker 13: in Hong Kong to use their products. For instance, we
Speaker 13: can now use open AI or anthropics products. So what
Speaker 13: will happen is that these global assem managers will end
Speaker 13: up using cheap Chinese models because they have no choice, right,
Speaker 13: And I think that actually might help the proliferation of
Speaker 13: Chinese models in the assem management industry.
Speaker 4: Truly, we'll leave it there, thank you so very much.
Speaker 4: That is Bloomberg opinion columnist Shuly Wren her latest piece,
Speaker 4: Hong Kong's low tax lure is getting a reality check.
Speaker 4: I'm Doug Prisner. You can catch us weekdays for the
Speaker 4: Daybreak Asia podcast. It's available wherever you get your podcast Nathan.
Speaker 2: Thanks Doug, And that does it for this edition of
Speaker 2: Bloomberg Daybreak Weekend. Join us again Monday morning at five
Speaker 2: am Wall Street Time for the latest on markets overseas
Speaker 2: and the news you need to start your day. I'm
Speaker 2: Nathan Hager. Stay with us stop stories and global business
Speaker 2: lines are coming up right now.