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Speaker 1: Good morning. I'm Brian Curtis. Here are the stories we're

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Speaker 1: following today. US Treasury Secretary Janet Yellen saying that the

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Speaker 1: US should look for ways to further de escalate tensions

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Speaker 1: with China, but that it's too early to cut tariffs.

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Speaker 1: The story from Bloomberg's Joan Wong.

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Speaker 2: Yellen said the US is close to completing a four

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Speaker 2: year review of the tariffs and post on China. Given that,

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Speaker 2: she says it's premature to eliminate the tariffs. Yellen spoke

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Speaker 2: ahead of the G twenty meetings in India. The Treasury

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Speaker 2: Secretary acknowledged has that a move to lift tariffs would

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Speaker 2: stoke a.

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Speaker 3: Political reaction at home.

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Speaker 2: However, she said this could be an area where progress

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Speaker 2: can be made over time.

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Speaker 3: In Hong Kong. I'm Joan Wang, Bloomberg, Day Brigaesia Well.

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Speaker 1: White House National Security Advisor Jake Sullivan says that China

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Speaker 1: will only harm itself with restrictions on the export of

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Speaker 1: two chip related medals. Sullivan spoke on CBS's face the Nation.

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Speaker 4: I believe that it will only reinforce the determination of

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Speaker 4: many other countries in the world to de risk, to

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Speaker 4: find ways to reduce dependencies and increase the resilience of

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Speaker 4: their own supply chains, including for the kinds of critical

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Speaker 4: minerals that are at issue in this particular decision.

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Speaker 1: Jake Sullivan heard here on Bloomberg. China has said that

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Speaker 1: gallium and germanium will be subject to export controls meant

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Speaker 1: to protect Chinese national security, and those controls will begin

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Speaker 1: on August first. Well, China's economy is struggling to gain

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Speaker 1: some traction. We get the latest data later this morning

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Speaker 1: our time. Bloomberg's Bonniao has a preview from Hong.

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Speaker 5: Kong second quarter GDP probably grew seven point one percent

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Speaker 5: year on year, but only therve point eight percent from

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Speaker 5: the first quarter. The data may look better than the

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Speaker 5: reality because of the COVID lockdown last year in Shanghai,

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Speaker 5: industrial output and retail sales for June are expected to slow.

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Speaker 5: Retail sales growth in particular likely slid to three point

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Speaker 5: three percent from top point seven percent in May. Speculation

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Speaker 5: has grown that China will add more STIMA, but China

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Speaker 5: Central Bank is likely to hold US one year medium

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Speaker 5: term lending facility rate steady at two point sixty five

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Speaker 5: percent after a ten business point cuts last month in

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Speaker 5: Hong Kong. I'm Bonnie Al Bloomberg Daybreak Asia.

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Speaker 1: Well, it's a busy week for earnings after JP Morgan,

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Speaker 1: Wells Fargo, and City Group put investors in an upbeat

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Speaker 1: mood last week they beat on analysts expectations. Let's get

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Speaker 1: a preview of what's up next from Bloomberg's Charlie Pellett.

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Speaker 6: More financials will be reporting this week, including Goldman Sachs, Morgan, Stanley,

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Speaker 6: and Bank of America. The flood of earnings reports come

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Speaker 6: amid questions about whether earnings expectations justify the outlook for stocks.

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Speaker 6: Laura Cooper is senior investment strategist at black Rock International.

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Speaker 1: We really have seen that better than expected earnings backdrop

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Speaker 1: be a key tailwind for equity markets, and I struggled

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Speaker 1: to see that trend persisting in the second half of

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Speaker 1: the year.

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Speaker 6: This week, we'll also be hearing from Railroads, CSX, UAL, IBM,

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Speaker 6: Johnson and Johnson, Lockey, Martin, Netflix, and Tesla in New York.

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Speaker 6: Charlie Pellett Bloomberg PayBreak Asia.

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Speaker 1: Microsoft is promising to keep Call of Duty on Sony's PlayStation.

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Speaker 1: This comes as it gets closer and closer to clearing

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Speaker 1: all the hurdles to buy Activision Blizzard. The story from

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Speaker 1: Bloomberg's Denise Pellegreeney.

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Speaker 3: Microsoft's announcement seeks to address regulators' concerns that the nearly

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Speaker 3: sixty nine billion dollar Activision deal would make more games

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Speaker 3: exclusive to Microsoft's Xbox. The company already inked a tenure

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Speaker 3: deal for the game with Nintendo. This latest move with

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Speaker 3: Sony comes after an appeals court friday Tonight. The US

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Speaker 3: Federal Trade Commissions later suffered to delay the deal. Meantime,

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Speaker 3: UK regulators will be looking at the deal again tomorrow,

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Speaker 3: where Microsoft is apparently offering to sell the cloud based

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Speaker 3: market rights for its games. The company has to close

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Speaker 3: the deal by Tuesday or potentially pay Activision a three

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Speaker 3: billion dollar breakup fee. Denise Pellegrity, Bloomberg Day Break Asia.

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Speaker 1: Denise, thanks very much. Coming up in a little while,

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Speaker 1: we'll be chatting with James Abattem, managing director and chief

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Speaker 1: investment Officer at Center Asset Management. I'm Brian Curtis here

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Speaker 1: in Hong Kong. A couple of other items we'll be

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Speaker 1: looking at with the guests.

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Speaker 6: This morning.

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Speaker 1: We mentioned that China's growth may look pretty good in

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Speaker 1: the second quarter, but then because of the lockdown last year,

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Speaker 1: these numbers are sort of skewed. We'll take a closer

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Speaker 1: look at the stimulus part of this story. All economists

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Speaker 1: surveyed by Bloomberg predict the PBOC will keep its rate

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Speaker 1: on its one year policy loans unchanged today at two

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Speaker 1: point sixty five percent. What else can they do and

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Speaker 1: how much more of our reaching out to the private

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Speaker 1: sector can we expect? And again, looking at the dollar

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Speaker 1: weaker not only on hopes that the Fed will stop

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Speaker 1: hiking interest rates, but the dollar bears are looking even

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Speaker 1: past that onto when we might get some rate cuts

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Speaker 1: from the Fed. So that's another topic that we'll be

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Speaker 1: getting into. And again S and P five hundred firms

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Speaker 1: expected to post a nine percent drop in profits in

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Speaker 1: the second quarter, all during a time when markets quity

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Speaker 1: markets we're racing to the upside. Now it's time for

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Speaker 1: global news. China and Russia are going to hold joint

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Speaker 1: military exercises in the Japan See head backs to with

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Speaker 1: global news from the ninety sixty News from in San Francisco.

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Speaker 7: Ed Yeah Brian Russia saying it will send naval and

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Speaker 7: air forces for the annual drill. China's pla making the

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Speaker 7: announcement also plays into the ever deepening issue of China's

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Speaker 7: attitude toward the war in Ukraine. Meanwhile, US National Security

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Speaker 7: Advisor Jake Sullivan on CBS has heard here on Bloomberg

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Speaker 7: says China's help could be used regarding North Korea and

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Speaker 7: says China's in action is having the reverse effect to

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Speaker 7: what it wants.

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Speaker 4: Frankly, is in fact only creating circumstances in which the

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Speaker 4: United States are allies and partners have to step up

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Speaker 4: our activities and posture to respond.

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Speaker 7: To and Sullivan also says a US as firman saying

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Speaker 7: the recent Microsoft hack came from China.

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Speaker 4: Microsoft has said it was China. We see nothing so

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Speaker 4: far to dispute what Microsoft has said or to second

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Speaker 4: guests their claim that it was China.

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Speaker 7: Sullivan says a deep intrusion into the systems. And Republican

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Speaker 7: Canada for President Chris Christi on ABC has heard here

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Speaker 7: on Bloomberg says China is watching Russia and US actions

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Speaker 7: in Ukraine right now.

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Speaker 8: The Ukrainians are willing to fight this fight for themselves

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Speaker 8: if they have our support to be able to win it.

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Speaker 8: If the Chinese watch us back away from Ukraine, believe me,

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Speaker 8: the next move will be Taiwan.

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Speaker 7: Now politics, Christy says he is going to muscle up

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Speaker 7: on Donald Trump moving forward on issues like this. So

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Speaker 7: Trump last night at a rally.

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Speaker 1: Every time the radical left, Democrats, Marxist communists and fascists

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Speaker 1: indict me, I consider it to be a great badge

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Speaker 1: of honor and courage.

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Speaker 7: I'm doing it for you.

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Speaker 8: He's a liar and a coward. He's not getting indicted

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Speaker 8: for anyone other than because of his own conduct. There's

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Speaker 8: no other of the two hundred million Americans he spoke

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Speaker 8: about who illegally retained classified national secrets.

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Speaker 7: And then Christy also on CNN saying Trump will show

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Speaker 7: up at the debates. He believes his ego I.

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Speaker 8: Think will not permit him to have a big TV

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Speaker 8: show that he's not on. And I think he'd be

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Speaker 8: enormously frustrated sitting back in Bedminster and watching what I'm

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Speaker 8: going to do to him.

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Speaker 7: Yeah, Trump says he probably will not be at the

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Speaker 7: first debate. By the way, US Climate envoy has arrived

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Speaker 7: to Invaijang John Kerry to start up a dialogue on

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Speaker 7: global warming and climate change kind of to reset is

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Speaker 7: the word they're using. Meanwhile, weather is being very mean

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Speaker 7: to Mother Earth at least thirty five people and kill

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Speaker 7: the storms batter South Korea. Hong Kong Observatory has issued

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Speaker 7: a strong signal eight to now until noon. It's said

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Speaker 7: the way it's phasing it is before noon first of

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Speaker 7: the year, as the region gets pummeled by talem as

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Speaker 7: a storm. Heat is causing health alerts in sixteen cities

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Speaker 7: across southern Europe today and probably for the next couple

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Speaker 7: of days, and in New York. The potential of flo floods,

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Speaker 7: extreme weather around the globe global news power by more

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Speaker 7: than twenty seven hundred journalists and analysts and over one

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Speaker 7: hundred twenty countries. In San Francisco, I'm Ed Baxter, and

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Speaker 7: this is Bloomberg.

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Speaker 1: Let's get to our guests. James Abat, Managing Director and

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Speaker 1: Chief investment Officer at Center Asset Management. James Pleasure as usual,

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Speaker 1: thanks for joining us. So investors know that the FED

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Speaker 1: does not want to give the all clear just yet.

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Speaker 1: Markets have reacted, but it seems that we know that

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Speaker 1: the FED will continue to talk tough until they get

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Speaker 1: closer to that two percent deal, So is that discounted

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Speaker 1: in the market. Should we not expect some troubles ahead

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Speaker 1: when the FED does talk tough.

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Speaker 9: I think it's when you have to look at the

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Speaker 9: components of inflation. You know, goods prices are moving lower,

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Speaker 9: non durable goods as well as in dust or production goods,

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Speaker 9: you know, but services still remain in a very sticky uptrend.

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Speaker 9: So I think the real key is that we're looking at,

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Speaker 9: you know, a shifting perhaps of investors' worries from inflation

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Speaker 9: to potentially one of growth. Because if the FED is

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Speaker 9: truly bent on trying to bring down inflation further and

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Speaker 9: really try to bring that services inflation level down, I

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Speaker 9: think investors will start to shift gears and start to

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Speaker 9: worry about whether or not we're going to be moving

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Speaker 9: lower on a growth perspective, because let's not forget you know,

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Speaker 9: if we look at the manufacturing indicies, we've been in

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Speaker 9: contraction since November of last year, and we look at

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Speaker 9: the new orders components, we're ten months of shrinking new orders,

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Speaker 9: which is a subcomponent of the PMI indica. So we've

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Speaker 9: got this dichotomy between services and manufacturing, and I think

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Speaker 9: the risk is that the FED actually overshoots, focusing solely

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Speaker 9: on services inflation, and they drive the inflation aren't even

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Speaker 9: the manufacturing component even further south.

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Speaker 1: So when we see yields come down, some investors might

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Speaker 1: feel good about that because they believe that yields are

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Speaker 1: heading down because inflation is coming down. But it's sending

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Speaker 1: the slightly a wrong signal. Really, it's it's further expectations

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Speaker 1: when the yields drop a lot, that there's trouble ahead

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Speaker 1: on the growth front.

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Speaker 9: That's what you're saying. Yeah, that's exactly right, because I mean,

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Speaker 9: right now, we haven't had I mean, the reason why

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Speaker 9: the markets haven't corrected to the same degree that they

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Speaker 9: did as people were expecting, you know, akin to what

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Speaker 9: happened in two thousand and two thousand and one or

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Speaker 9: even the global financial crisis, is that we haven't had

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Speaker 9: that double digit you know, earnings to client. What we've

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Speaker 9: had really is an environment where you know, profitability has

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Speaker 9: been contracted. But if you look at the components, you know,

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Speaker 9: margins have been you know, remained at relatively high levels.

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Speaker 9: You know, sales growth is positive, but it's continued to

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Speaker 9: slow down. Margins have been impacted by higher costs, and

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Speaker 9: act efficiency has been relatively flat. So we've had, you know,

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Speaker 9: only a slight decrease in earnings projections. Obviously, stock markets

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Speaker 9: declined last year on the inflation scare in the rise

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Speaker 9: and interest rates. The other thing that basically was a

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Speaker 9: missing component this time versus others is that we haven't

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Speaker 9: had a big risk aversion. You know, the events of

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Speaker 9: ft X or a Donnie or other things didn't have

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Speaker 9: the same kind of a polluting effect on people's risk

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Speaker 9: a version that let's say World com Enron or Lehman

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Speaker 9: Brothers or other kind of significant you know disruptions had

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Speaker 9: on investor psyche. We're back to basically where you know,

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Speaker 9: investors are embracing risk in a wholehearted fashion this.

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Speaker 1: Year, and the scare in March because of the banking

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Speaker 1: troubles exactly was not that significant.

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Speaker 9: Yeah, exactly, that's right. That's right.

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Speaker 1: So what about the slight churn that we've seen under

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Speaker 1: the hood in that you have seen a pretty good

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Speaker 1: bid in industrials. You've seen transport rally, there are a

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Speaker 1: number of sectors besides megacap tech that have done well

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Speaker 1: even when we're still concerned about growth. Do you think

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Speaker 1: that that, I mean, are there some idios crowd of

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Speaker 1: factors for that, reasons for that, or do you think

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Speaker 1: that that's investors telling you that the growth scare, while

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Speaker 1: a scare, it's not going to actually take us deeply

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Speaker 1: into recession.

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Speaker 8: Yeah.

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Speaker 9: I think all those things are correct in the sense

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Speaker 9: that you know, clearly what we've had is a return

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Speaker 9: to the secular growth stocks, the fang names as we

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Speaker 9: like to call them, basically this year, as investors have

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Speaker 9: re embraced them as leadership in the market, and simply

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Speaker 9: because of their size in terms of market capitalization, they've

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Speaker 9: had a pronounced impact on what the S and P

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Speaker 9: for one hundred returns have done. That being said, as

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Speaker 9: you're right, we pointed out you've seen, you know, a

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Speaker 9: lot of strength in some of the cruise stocks, Royal Caribbean, Carnival,

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Speaker 9: the airlines and others, because what we've saw was essentially

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Speaker 9: a you know, great operating leverage and the real key

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Speaker 9: and this is this is what might hold the market

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Speaker 9: back but give opportunity at the idiosyncratic level, is that

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Speaker 9: you know, when you're able to basically, you know, bring

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Speaker 9: the trifecta of you know, improving fundamentals from bottom up perspective,

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Speaker 9: where you get a return of sales growth, you get

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Speaker 9: that great profit margin expansion. And then because these companies

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Speaker 9: have cut back so much post COVID and during you know,

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Speaker 9: really stimulated by COVID in terms of their own asset

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Speaker 9: base as they were shutting down so much capacity, they're

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Speaker 9: getting these huge gains in terms of act efficiency. And

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Speaker 9: that's really the operating leverage that's contributed to these stocks

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Speaker 9: doing exceptionally well thus far this year.

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Speaker 1: Well, how much risk are you willing to take on then?

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Speaker 1: And how would you express it?

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Speaker 9: Well? Right now, I mean this we've been given I

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Speaker 9: think a gift. You know. One of the components that

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Speaker 9: we use within our American Select equity strategy is to

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Speaker 9: tactically hedge the portfolio with protective put options when we

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Speaker 9: feel that we can in a cost efficient manner, you know,

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Speaker 9: hedge the underlying risk or the systemic risk that's embedded

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Speaker 9: within the portfolio. So, with the Vicks down to around fourteen,

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Speaker 9: we took the opportunity last week to basically put a

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Speaker 9: full protective hedge on the portfolio to protect us against

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Speaker 9: a significant kind of tail risk, you know, draw down

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Speaker 9: from now until the end of the year, and we

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Speaker 9: could do so in ess since fifty basis points of

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Speaker 9: the portfolio because volatility is so depressed at this point

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Speaker 9: in time. We're heading into a seasonally rising period of volatility.

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Speaker 9: So you know, potentially as the market shifts from inflation

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Speaker 9: worries to growth concerns like we talked about. Plus you

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Speaker 9: know all the achieve political risks that are evident almost

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Speaker 9: every day, whether it's in Ukraine or China or what

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Speaker 9: have you. You know, this is a great opportunity for

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Speaker 9: investors to you know, inexpensively put some hedges and protect

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Speaker 9: their underlying portfolios.

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Speaker 1: I want to get to China. But maybe one more

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Speaker 1: question on the US and on you know, inflation versus

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Speaker 1: a growth slowdown.

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Speaker 9: What's the key to watch?

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Speaker 1: I mean, will it be jobs? Will you get it

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Speaker 1: from the data or the earnings?

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Speaker 9: I think it's going to come from a bottom up

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Speaker 9: because historically you're going to see job losses well inside

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Speaker 9: a recession itself. And again I think you know, when

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Speaker 9: you're looking at the environment that we're in today and

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Speaker 9: we talked about in the past, is that the inability

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Speaker 9: to reconcile the top down indicators to the bottom up research.

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Speaker 9: You know, whether it's you know, ism numbers, it's a

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Speaker 9: yield curve, all of which are basically saying that we

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Speaker 9: should be in a very deeper session right now. You know,

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Speaker 9: none of that is really evident when you're looking at

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Speaker 9: companies from a bottom up perspective because of the distortions

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Speaker 9: that came about from COVID. So I think you're going

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Speaker 9: to have to look at companies and sectors kind of

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Speaker 9: on a one off basis as this rolling recession kind

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Speaker 9: of makes its way through the overall economy.

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Speaker 1: Now, with China, we have seen a little bit of

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Speaker 1: a pick up up in markets, largely because of late

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Speaker 1: policy makers have changed their tune a little. They seem

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Speaker 1: a little friendlier to the private sector. The stimulus hasn't

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Speaker 1: really done it. Neither the fiscal nor the monetary stimulus

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Speaker 1: has been all that strong. It's been cautious and piecemeal.

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Speaker 1: What are you expecting out of China, say, over the

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Speaker 1: next quarter or two.

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Speaker 9: Well, I think if the stimulus stays focused on investment

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Speaker 9: and capacity of manufacturing and exports, it's not going to

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Speaker 9: really have much efficacy. You know, my expectation, you're started

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Speaker 9: to see some rumors about this is that if China

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Speaker 9: is able to shift the focus of its stimulus from

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Speaker 9: investment to consumption, you know, part of that could be

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Speaker 9: loosening you know, urban residency curves that they have. You know,

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Speaker 9: there's a very detailed system with residence permits in China

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Speaker 9: that you know impacts workers as they move through from

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Speaker 9: the countryside into the cities and so forth. I think

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Speaker 9: the real key is to take you know, big significant

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Speaker 9: actions that are going to be able to move the

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Speaker 9: stimulus away from the export driven model, which because of

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Speaker 9: all the tariffs and other restrictions that are going about,

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Speaker 9: I think aren't going to have that same kind of impact.

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Speaker 9: What they have to do is really drive it towards consumption.

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Speaker 9: And there's several ways you can do that, and residency

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Speaker 9: permits is probably one way to start.

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Speaker 1: Okay, just in forty seconds or so, your best option

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Speaker 1: in Asia at.

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Speaker 9: The moment, well, I think you know, right now, if

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Speaker 9: you're looking at Asia, you're starting to see some of

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Speaker 9: the frontier markets do very very well, whether it's Vietnam

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Speaker 9: or other areas. You know, traditionally one of the things

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Speaker 9: that looks very strong when you see dollar weakness is

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Speaker 9: that emerging markets outperform you know, develop markets, and one

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Speaker 9: of the things that we've started to see is a breakout.

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Speaker 9: Well not a technician, but it's hard to ignore, you know,

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Speaker 9: the breakout that you're seeing in some of the emerging

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Speaker 9: in frontier markets, Vietnam being one of them as a

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Speaker 9: place to go in terms of speculative assets.

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