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Speaker 1: Bloomberg Audio Studios, Podcasts, radio news.

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Speaker 2: Welcome to the Bloomberg Daybreak Asia Podcast. I'm Doug Chrisner.

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Speaker 2: We are less than twenty four hours away from the

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Speaker 2: announcement on US reciprocal tariffs. They will go into effect immediately,

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Speaker 2: and still there are a lot of questions over how

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Speaker 2: this is going to roll out, exactly what it will

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Speaker 2: look like. Right now, we're seeing markets in Asia behave

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Speaker 2: a little skittishly ahead of this announcement, small declines in

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Speaker 2: Japan and South Korea. And in a moment we'll hear

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Speaker 2: from Jeff Grills. He is the head of em Debt

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Speaker 2: at Agon Asset Management. But we begin in the Lion City.

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Speaker 2: Joining me now is Bloomberg FX and rate strategist David Finnerdi.

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Speaker 2: He joins from our radio studio in Singapore. David, it's

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Speaker 2: always a pleasure. Thank you so much for joining us.

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Speaker 2: Give me your sense of what you're looking at, what

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Speaker 2: you're monitoring most closely as you try to gauge the

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Speaker 2: pack that these tariffs will have on markets.

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Speaker 3: I think if I had to pick one thing specifically,

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Speaker 3: it would be the equity market. So let's look at

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Speaker 3: the benchmarks's to be five hundred or of the Nasdaq,

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Speaker 3: which everyone you want ten personally prefer this to be

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Speaker 3: five hundred.

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Speaker 4: But I think.

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Speaker 3: That's the little blometer of you know, how much risk

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Speaker 3: on or risk of sentiment will there be. And I

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Speaker 3: think that will permeate its way through whichever way it

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Speaker 3: goes into the country markets and into the rates markets,

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Speaker 3: so and the markets, you know, the equity markets digest

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Speaker 3: information very quickly, indeed, so you know.

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Speaker 4: Where they end up.

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Speaker 3: I have to say that we're going to get the

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Speaker 3: tariffs in your Asia time. It will be Thursday morning

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Speaker 3: our time, so are come in. We'll see the reaction.

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Speaker 3: But I think it's the key thing to remember, and

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Speaker 3: this is this is sort of a game of I

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Speaker 3: don't want to say game.

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Speaker 4: Because obviously it's not really a game.

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Speaker 3: But in the tariff theater, shall we say this is

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Speaker 3: stage one? And when I mentioned that is because there's

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Speaker 3: a very good chance you'd have to think that other

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Speaker 3: countries maybe or but at least some of them, say

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Speaker 3: Europe and China will retaliate to some degree. They've done

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Speaker 3: that historically, so you think they will do it again.

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Speaker 3: And then the question becomes, okay, so they retaliated what

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Speaker 3: does President Trump do next? And his history has been like,

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Speaker 3: well I'm going to go and I may even go

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Speaker 3: even harder, so and then they go, So you've got

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Speaker 3: it spiral. So the question, I think, certainly for the

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Speaker 3: markets is how high, how long? How high did taris

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Speaker 3: end up going? How long are they in place? Because

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Speaker 3: we also know historically are they could be in and

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Speaker 3: then kick that can down the roads President from they

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Speaker 3: say or as exceptions blah blah blah. So that's the idea.

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Speaker 3: Really at the end of the day we're trying to

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Speaker 3: grapple with is how high do his tatisk go and

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Speaker 3: how long? And obviously but the higher is worse for economy,

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Speaker 3: and obviously the longer in place is the worst for

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Speaker 3: all economies. So you know, tomorrow is the start, i

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Speaker 3: would say, of a process. So whatever market reaction you

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Speaker 3: get tomorrow, that may certainly just be the beginning of it,

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Speaker 3: depending on how this plays out.

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Speaker 2: That's a very good point. Up until this point, there

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Speaker 2: have been very few details, and what we are being

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Speaker 2: told at this point is that there are a number

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Speaker 2: of proposals under consideration talking about it. Maybe a tiered

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Speaker 2: tariff system of some type, another option would be some

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Speaker 2: sort of plan for customized reciprocal tariffs. But it was

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Speaker 2: very interesting to me, not really a big surprise, but

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Speaker 2: one of the FED speakers that we heard from today,

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Speaker 2: Tom Barkin of the Richmond FED, was saying these tariffs

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Speaker 2: could raise both inflation and unemployment. So this creates an

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Speaker 2: enormous challenge for the FED. It seems like it's a

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Speaker 2: stagflation type scenario. We've talked a little bit about this

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Speaker 2: in the past. Is that idea penetrating fixed income markets

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Speaker 2: right now? Are you seeing it play out in the

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Speaker 2: bond space.

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Speaker 3: I think that you're seeing generitely some fears of the

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Speaker 3: stackfation word. I think it could become more and more prevalent.

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Speaker 3: I mean, even if you look at the data IS

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Speaker 3: data that came out yesterday on manufacturing, it's slightly down ticks,

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Speaker 3: you know, and there's more of a services economy with

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Speaker 3: a US but still in manufacturing is are a key component,

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Speaker 3: so the overheadline downtick. But within that that price is

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Speaker 3: paid index jumped higher. So there are signs of statflation.

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Speaker 3: I don't think were they yet, but are we on

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Speaker 3: the path to that?

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Speaker 4: Definitely?

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Speaker 3: And I think you're seeing that to some degree because

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Speaker 3: the market's going Because the FED is a dual mandate,

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Speaker 3: you know, it's based control prices and support growth, and

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Speaker 3: the market's going off are two of those. You're going

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Speaker 3: for growth. And the reason we say that is if

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Speaker 3: you look at the market expectations Fed rate cuts, now

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Speaker 3: there are price then three this year, even though the

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Speaker 3: prices you could say inflation has been a bit sticky.

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Speaker 3: Look at the core PCEE data from last week. That

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Speaker 3: was a bit sticky. The price is paid as worry

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Speaker 3: the market's going to We think the Fed's going to

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Speaker 3: classical and goes can support growth, which it may well do.

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Speaker 3: What's interesting that the Fed, though, if you look at

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Speaker 3: it's rhetoric, they're not going jumping out fully in line

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Speaker 3: with that. They are keep indicating how we are worried

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Speaker 3: about inflation. So they are a bit more hawkish in

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Speaker 3: the market. It doesn't mean they won't converge towards the market,

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Speaker 3: but at the moment it's centually they are more hawkish.

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Speaker 3: Sorry to fully answer your question, is because those FED

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Speaker 3: rate cut expectations, you're seeing those feeding so you're seeing

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Speaker 3: pressure on yields. Now, of course, if equities were to

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Speaker 3: come under pressure as a result of these tories. Again

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Speaker 3: that's an if, but if they were or further pressure,

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Speaker 3: I should say, then obviously you would expect the flows

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Speaker 3: into bonds, which again will push yields even lower and lower.

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Speaker 3: So those two things combined you are starting to see

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Speaker 3: play out. Which one is the bigger like fed's gone

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Speaker 3: slash or it's just worried about growth. It's a bit

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Speaker 3: tough to say, but overall, yes, you are seeing some

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Speaker 3: worries in the bond market of basically slowing growth moving ahead.

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Speaker 2: So I want to get your take on what you're

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Speaker 2: seeing in terms of currency market action, whether the dollar

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Speaker 2: is a beneficiary of everything that we've talked about, maybe

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Speaker 2: there's a little bit of haven buying in the Japanese end.

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Speaker 2: What are you seeing?

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Speaker 3: Yeah, I think it's a good point actually, because it's

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Speaker 3: you would see the dollar and the end and the

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Speaker 3: Swiss frank the classic safe havens benefit in these risk

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Speaker 3: of scenarios. What you have seen is over last week,

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Speaker 3: the SMP obviously is weakened, as we all know, but

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Speaker 3: you haven't seen really a bounce of a dollar that's

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Speaker 3: been heavily sort of range bound.

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Speaker 4: So you're not seeing those natural flows.

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Speaker 3: Now, again, some of that could be distorted by a

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Speaker 3: month end and quarter and positioning, so you've got to.

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Speaker 4: Factor that in.

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Speaker 3: But certainly you're not seeing it as much as you think.

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Speaker 3: And I think some of the catch could be. One

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Speaker 3: of the things is if I'm President Trump and I

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Speaker 3: do tarifs on one country, because US is a bigger economy,

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Speaker 3: you go okay, And even if the other country reciprocates,

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Speaker 3: you go, well, US still will growth be less impacted

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Speaker 3: because it's a bigger economy. The catch here is we'll

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Speaker 3: find out tomorrow, but it looks like that the US

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Speaker 3: will be doing tariff on numerous countries, if not sort

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Speaker 3: of all the countries. Now a question is that of

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Speaker 3: all the countries retaliate, then suddenly that's like okay, that's

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Speaker 3: a big impact on US growth, And arguably it could

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Speaker 3: end up being a bigger impact depending on how this

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Speaker 3: all plays out. So the growth theory of We've entered

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Speaker 3: this year with the idea of US was in a

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Speaker 3: better growth performance, and say Europe, that's all those dynamics

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Speaker 3: now changing. And one thing I would definitely keep an

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Speaker 3: eye on is the Euro and definitely the end because

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Speaker 3: I think the en will benefit. Event you had to

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Speaker 3: pick one currency for me, it would be the end

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Speaker 3: because if you've got say favor and foes benefits from that,

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Speaker 3: if you've got equities downflow, you know, going down, then

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Speaker 3: that will go money into bonds, which uses you were

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Speaker 3: saying straight. So in a straight differential, you know again

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Speaker 3: narrows and favors the end. So risks are skewed towards

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Speaker 3: yen's strength. I would say in a risk of scenario

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Speaker 3: by also keep an eye on the Euro because obviously

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Speaker 3: it looks like one would guess that President Trump will

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Speaker 3: announced its on Europe. You'll have a history saying well,

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Speaker 3: let's go for it, we'll play, will reciprocate, and historically

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Speaker 3: you're weakened. But in the moment, the sentiment it's more

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Speaker 3: biased towards actually.

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Speaker 4: You may win on this.

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Speaker 3: Some of there's obviously to do with the German infrastructure

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Speaker 3: spending bill that they've announced, but again that takes time

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Speaker 3: to fee thro but the again market sentiment will go

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Speaker 3: we're going to run with it. So I would be

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Speaker 3: keeping an eye on how the Euro performs, and I

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Speaker 3: think that's another barometer of the dollar because and also

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Speaker 3: the is the biggest component in the dollar index or

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Speaker 3: the Bloomberg Dollar indix. So really where the euro goes,

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Speaker 3: you know, that's sort of where the dollar goes in

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Speaker 3: the opposite direction.

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Speaker 2: Obviously, I got to get your take on what's been

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Speaker 2: happening with the Chinese currency offshore, the yuan right now

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Speaker 2: at around seven twenty seven, seven twenty eight. Do you

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Speaker 2: have a sense of where this may go from here,

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Speaker 2: particularly if there is greater tension between Washington and Beijing

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Speaker 2: on the tariff story.

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Speaker 3: Yeah, Look, I think the risks have to be towards

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Speaker 3: a WEEKI one, I think a slow grinding you one.

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Speaker 3: I don't think the PBOC is in any hurry to

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Speaker 3: let that fix loosen. Everyone's looking for seven to twenty

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Speaker 3: in the fix as the line, and sand I think

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Speaker 3: it's some point it will gradually ease past that because

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Speaker 3: it is a few methods of valve you can really

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Speaker 3: steam off and support the economy on.

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Speaker 4: But I you know, I don't think this would be

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Speaker 4: a rapid appreciation at all.

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Speaker 3: And I think certainly initially China may stand its ground

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Speaker 3: and go, look, we're keeping the fix in a narrow,

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Speaker 3: tight range just to show like, hey, we're not going

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Speaker 3: to use that cuncy in the end, I think it will,

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Speaker 3: but certainly in the near term.

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Speaker 4: I wouldn't be surprised.

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Speaker 3: If I said that wicking that fix stronger than seven

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Speaker 3: twenty in this seven seventeen seven eighteen range.

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Speaker 2: Okay, David, good stuff, We'll leave it there. Thank you

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Speaker 2: so much. David Finnerdy there. He is Bloomberg FX and

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Speaker 2: rate strategist, joining from Singapore here on the Daybreak Asia podcast.

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Speaker 2: Welcome back to the Daybreak Asia Podcast. I'm Doug Chrisner.

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Speaker 2: Towards the night before tariffs and all across the globe,

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Speaker 2: not a market was stable and the message was simple,

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Speaker 2: mind your risk. So much from my poetry. Joining me

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Speaker 2: now Jeff Grills. He is head of em Debt at

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Speaker 2: Agon Asset Management. Jeff, it's good of you to join us.

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Speaker 2: Thank you so much. There are a lot of issues

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Speaker 2: for markets to consider right now, not the least of

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Speaker 2: which is the uncertainty tied to those tariffs. So how

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Speaker 2: do you understand the risk landscape as it stands right now?

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Speaker 1: Well, with regard to emerging market debt, we've seen very

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Speaker 1: balanced flows and very balanced performance. I mean when you

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Speaker 1: look at what spreads have done so far yere to date,

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Speaker 1: they're wider by fifteen to twenty basis points, which in

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Speaker 1: the grand scheme of historical emerging market debt volatility or

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Speaker 1: uncertainty is pretty benign. And I think a lot of

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Speaker 1: that's driven by the fact that there is this uncertainty,

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Speaker 1: as you mentioned too, what are the tariffs going to be?

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Speaker 1: How bad will they be? There's indications that they're on,

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Speaker 1: they're off, and so the market. But the good part

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Speaker 1: is that nobody has really reacted irrationally in our market,

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Speaker 1: or at least had this massive risk off sentiment to

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Speaker 1: em markets.

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Speaker 2: I was speaking earlier about what we heard today from

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Speaker 2: Human Fedbank President Tom Bark, and he was saying that

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Speaker 2: tariffs could raise both inflation and unemployment. We're talking about

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Speaker 2: a scenario here that feels a lot like stagflation. What

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Speaker 2: is the probability in your view of that type of outcome.

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Speaker 1: So it's definitely a possibility, and I think that those

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Speaker 1: comments were reflective of the recent announcement by Trump to

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Speaker 1: say that he would, instead of doing country by country

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Speaker 1: in case by case, just a universal across the board

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Speaker 1: twenty percent terra and so that would have I mean,

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Speaker 1: that would have from things we've read and the work

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Speaker 1: we've done, have a pretty reasonable chance of causing unemployment

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Speaker 1: to go up, causing inflationary impact, although there is still

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Speaker 1: this concept of it being somewhat transitory. But the big

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Speaker 1: question in terms of your probability is what's the likelihood

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Speaker 1: they're going to do that right? And I think you're

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Speaker 1: already starting to see some you continue to see toned

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Speaker 1: down rhetoric from the administration, from some of the other

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Speaker 1: people that work in the White House. The real big

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Speaker 1: question is going to be how far do these tariffs go.

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Speaker 1: It's not if terriff is to come on, it's going

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Speaker 1: to be how far they go. And when you really

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Speaker 1: look back at the Project twenty twenty five plan, which

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Speaker 1: has been a lot of the underlying basis for the

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Speaker 1: actions that we've seen so far this year, there is

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Speaker 1: a clear desire to see the trade balance or the

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Speaker 1: trade deficit improve. So will that all be done by ferris,

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Speaker 1: could be done by other types of activity, that's to

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Speaker 1: be seen. So I don't think it's a high probability

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Speaker 1: at this stage, but it's definitely possible.

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Speaker 2: So I'm curious what is the impact that you see

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Speaker 2: now for emerging markets.

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Speaker 1: Well, again, merging markets has been going through an interesting

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Speaker 1: transition for the last five years, right really post COVID

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Speaker 1: one where you know, pre COVID, the markets were very

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Speaker 1: reliant on China. China was the big driver it was.

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Speaker 1: That was true for really the global economy as much

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Speaker 1: as it was emerging markets. And since post COVID you've

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Speaker 1: had a China property sector which has been weak growth,

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Speaker 1: which is being stimulus driven but still not but the

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Speaker 1: high single digit double digits that we had pass and

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Speaker 1: those days are behind us. So I think the emerging

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Speaker 1: markets are going to be better insulated, better situated given

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Speaker 1: what's going on, and it's going to be on a

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Speaker 1: case by case basis. So even with Mexico, we've seen

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Speaker 1: terifts be announced and then be modified so that the

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Speaker 1: USMCA rules still are in effect. So I don't anticipate

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Speaker 1: it being too big of an impact from a tariff standpoint.

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Speaker 1: If we do get to that recession or a very

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Speaker 1: severe slowdown, then naturally they're all going to get be impacted,

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Speaker 1: as they do export a lot of their goods and

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Speaker 1: services to the rest of the world.

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Speaker 2: I'm curious as to whether or not you're seeing any

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Speaker 2: safe harbors. It was interesting that yesterday a senior lawmaker

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Speaker 2: of the ruling party in Japan was warning that these

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Speaker 2: tariffs may cause a big economic crisis for Japan, particularly

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Speaker 2: when you consider the auto tariffs that would have huge

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Speaker 2: implications across many regions in Japan. Are you finding any

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Speaker 2: area in global markets right now where you're seeing some

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Speaker 2: type of haven.

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Speaker 1: Yeah, Haven's maybe a little bit of a way that

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Speaker 1: I wouldn't quite describe it, but I do think that

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Speaker 1: interesting enough there could be safer bond investments in some

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Speaker 1: of the emerging markets. Then you get in even the

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Speaker 1: developed markets, and with one caveat, we still are tied

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Speaker 1: to US treasuries, right, So if you get that inflationary

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Speaker 1: stagflation type of scenario, rates go higher, which leads to

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Speaker 1: to negative returns. There's really not gonna be anybody who's immune.

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Speaker 1: But from a spread perspective, there are very high quality

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Speaker 1: names in this universe that you can take advantage of.

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Speaker 1: Middle Eastern credits like Cutter Kuwait. They're actually being taken

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Speaker 1: out of the index because they're just so high quality.

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Speaker 1: But those are very safe investments. Even some of the

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Speaker 1: other Middle Eastern higher qualities. But in Latin America, you

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Speaker 1: have Chile, which you know trades at reasonably tight spreads

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Speaker 1: and probably will continue to be pretty really low insulated.

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Speaker 1: And then you go all the way to even the

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Speaker 1: Asia credits. Right, Philippines has done very well. Indonesia's starting

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Speaker 1: to show some cracks, but likely much safer than other

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Speaker 1: high yields double B single B type of investments that

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Speaker 1: will take the brunt of a negative shock to to

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Speaker 1: the global market.

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Speaker 2: So, Jeff Geography aside for a moment, what industries would

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Speaker 2: you be avoiding under the curtain regime? I mean, obviously

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Speaker 2: something like an industrial or an auto you want to

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Speaker 2: probably try to avoid. But I'm wondering whether or not

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Speaker 2: we need to be talking about a broader group of

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Speaker 2: industries that are vulnerable right now, and for that reason,

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Speaker 2: you want to take a look at perhaps the risk

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Speaker 2: of maybe greater defaults.

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Speaker 1: So the way I would answer that is two fold.

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Speaker 1: One is do you definitely need to be somewhat cognizant

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Speaker 1: of the exporters versus the importers, Right, So the exporters

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Speaker 1: are where you're going to see both the any slowdown

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Speaker 1: in growth or other types of terrorists potentially hit them.

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Speaker 1: So Brazil, Mexico, China probably come to top of mind.

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Speaker 1: There as ones that are going to be impacted. The

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Speaker 1: other one that's been a sort of cautious theme for US,

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Speaker 1: which has worked reasonally well, but a lot of the

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Speaker 1: energy related countries and companies have done very well for

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Speaker 1: the last four to five years. Oil prices are starting

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Speaker 1: to come off. You have a slow down and growth

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Speaker 1: coupled with likely at some point in the US more

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Speaker 1: actions to increase the oil production and other things that

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Speaker 1: you didn't see under the Biden administration. So I would

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Speaker 1: say things tied to the oil industry are probably more

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Speaker 1: at risk. On ac counter that, I do think metals mining,

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Speaker 1: those sectors are going to be reasonably well supported. Copper

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Speaker 1: maybe a little bit more daunting, but you are seeing

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Speaker 1: sort of the general support to that type of market. Otherwise,

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Speaker 1: it's going to be very strong balance sheets. It's really

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Speaker 1: going to be those that are higher credit quality. So

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Speaker 1: instead of an industry, I would think focus on triple

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Speaker 1: B sweet spots, some double b's, and try to keep

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Speaker 1: your credit quality as clean as possible as we go

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Speaker 1: through this.

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Speaker 2: When the administration took office in January, there was a

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Speaker 2: lot of anticipation about a flurry of m and a

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Speaker 2: activity that really hasn't played out. Do you expect that

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Speaker 2: to be delayed as a result of these tariffs or

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Speaker 2: will that be an eventuality been pushed out a little bit.

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Speaker 1: I think it's been pushed out. You're seeing that again

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Speaker 1: across the board for emerging markets, both from the issue inside.

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Speaker 1: We saw a flurry of on the fixed income side

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Speaker 1: of flurry of activity in January into February, and now

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Speaker 1: you've seen that start to slow down. Actually enough, the

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Speaker 1: sort of green sustainable deals has definitely declined, and I

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Speaker 1: think there is a little bit of a link both

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Speaker 1: from an investor appetite, but just some caution for people

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Speaker 1: to issue those around the changes that we're seeing with

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Speaker 1: the objectives and what's going to be rewarded. But I

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Speaker 1: don't Again, we are not currently forecasting a recession. We're

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Speaker 1: not anticipating that, so I don't think that that. I

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Speaker 1: think that anything that's happening is a delay. And once

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Speaker 1: we get the key is getting back to clarity, and

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Speaker 1: I don't know when that's going to happen. That may

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Speaker 1: take some time, but once we get back to some clarity,

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Speaker 1: I think you'll start to see a renormalization of markets

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Speaker 1: probably in the second half of this year.

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Speaker 2: So what I'm hearing underneath the surface there is that

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Speaker 2: you don't think there's going to be an appreciable increase

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Speaker 2: in default risk right now?

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Speaker 4: Is that right?

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Speaker 1: No? And and for emerging markets, we've actually gone through

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Speaker 1: a period where a number of credits restructured over the

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Speaker 1: last two to three years, right So Sri Lanka was

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Speaker 1: one of the restructures we've set. We've had Ghana, Ethiopia

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Speaker 1: and just to name a few. So we've actually got

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Speaker 1: them into better places. There's still concerns. The big concern

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Speaker 1: for emerging markets today is the large size of fiscal deficits.

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Speaker 1: I mean, frankly, that's the that's the concern for developed

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Speaker 1: economies quite frankly. But as long as rates remain relatively

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Speaker 1: low or stable, and you know, through all of this,

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Speaker 1: the ten year treasury has come down from four to

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Speaker 1: eighty to four today, fiscal deficits are not a concern

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Speaker 1: when you have rates at are low. Where it will

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Speaker 1: become a major concern is if we get that inflationary

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Speaker 1: shock rates go up and you get starting those financing

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Speaker 1: costs ballooning. Then you could have some countries that can't stimulate,

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Speaker 1: can't adjust, and have too high of a deficit. But

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Speaker 1: right now most of the markets are generally in cleaner

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Speaker 1: spots than they have been over the last couple years.

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Speaker 2: All right, great stuff, Jeff, Thank you so much for

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Speaker 2: joining us. Jeff Grills there. He is head of em

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Speaker 2: Debt at Agon Asset Management, joining from Greenwich, Connecticut. Here

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Speaker 2: on the Daybreak Asia Podcast. Thanks for listening to today's

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Speaker 2: episode of the Bloomberg Daybreak Asia Edition podcast. Each weekday,

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Speaker 2: we look at the story shaping markets, finance, and geopolitics

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Speaker 2: in the Asia Pacific. You can find us on Apple, Spotify,

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Speaker 2: the Bloomberg Podcast YouTube channel, or anywhere else you listen.

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Speaker 2: Join us again tomorrow for insight on the market moves

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