Speaker 1: Good morning. I'm Brian Curtis. Here are the stories we're
Speaker 1: following today. US Treasury Secretary Janet Yellen saying that the
Speaker 1: US should look for ways to further de escalate tensions
Speaker 1: with China, but that it's too early to cut tariffs.
Speaker 1: The story from Bloomberg's Joan Wong.
Speaker 2: Yellen said the US is close to completing a four
Speaker 2: year review of the tariffs and post on China. Given that,
Speaker 2: she says it's premature to eliminate the tariffs. Yellen spoke
Speaker 2: ahead of the G twenty meetings in India. The Treasury
Speaker 2: Secretary acknowledged has that a move to lift tariffs would
Speaker 2: stoke a.
Speaker 3: Political reaction at home.
Speaker 2: However, she said this could be an area where progress
Speaker 2: can be made over time.
Speaker 3: In Hong Kong. I'm Joan Wang, Bloomberg, Day Brigaesia Well.
Speaker 1: White House National Security Advisor Jake Sullivan says that China
Speaker 1: will only harm itself with restrictions on the export of
Speaker 1: two chip related medals. Sullivan spoke on CBS's face the Nation.
Speaker 4: I believe that it will only reinforce the determination of
Speaker 4: many other countries in the world to de risk, to
Speaker 4: find ways to reduce dependencies and increase the resilience of
Speaker 4: their own supply chains, including for the kinds of critical
Speaker 4: minerals that are at issue in this particular decision.
Speaker 1: Jake Sullivan heard here on Bloomberg. China has said that
Speaker 1: gallium and germanium will be subject to export controls meant
Speaker 1: to protect Chinese national security, and those controls will begin
Speaker 1: on August first. Well, China's economy is struggling to gain
Speaker 1: some traction. We get the latest data later this morning
Speaker 1: our time. Bloomberg's Bonniao has a preview from Hong.
Speaker 5: Kong second quarter GDP probably grew seven point one percent
Speaker 5: year on year, but only therve point eight percent from
Speaker 5: the first quarter. The data may look better than the
Speaker 5: reality because of the COVID lockdown last year in Shanghai,
Speaker 5: industrial output and retail sales for June are expected to slow.
Speaker 5: Retail sales growth in particular likely slid to three point
Speaker 5: three percent from top point seven percent in May. Speculation
Speaker 5: has grown that China will add more STIMA, but China
Speaker 5: Central Bank is likely to hold US one year medium
Speaker 5: term lending facility rate steady at two point sixty five
Speaker 5: percent after a ten business point cuts last month in
Speaker 5: Hong Kong. I'm Bonnie Al Bloomberg Daybreak Asia.
Speaker 1: Well, it's a busy week for earnings after JP Morgan,
Speaker 1: Wells Fargo, and City Group put investors in an upbeat
Speaker 1: mood last week they beat on analysts expectations. Let's get
Speaker 1: a preview of what's up next from Bloomberg's Charlie Pellett.
Speaker 6: More financials will be reporting this week, including Goldman Sachs, Morgan, Stanley,
Speaker 6: and Bank of America. The flood of earnings reports come
Speaker 6: amid questions about whether earnings expectations justify the outlook for stocks.
Speaker 6: Laura Cooper is senior investment strategist at black Rock International.
Speaker 1: We really have seen that better than expected earnings backdrop
Speaker 1: be a key tailwind for equity markets, and I struggled
Speaker 1: to see that trend persisting in the second half of
Speaker 1: the year.
Speaker 6: This week, we'll also be hearing from Railroads, CSX, UAL, IBM,
Speaker 6: Johnson and Johnson, Lockey, Martin, Netflix, and Tesla in New York.
Speaker 6: Charlie Pellett Bloomberg PayBreak Asia.
Speaker 1: Microsoft is promising to keep Call of Duty on Sony's PlayStation.
Speaker 1: This comes as it gets closer and closer to clearing
Speaker 1: all the hurdles to buy Activision Blizzard. The story from
Speaker 1: Bloomberg's Denise Pellegreeney.
Speaker 3: Microsoft's announcement seeks to address regulators' concerns that the nearly
Speaker 3: sixty nine billion dollar Activision deal would make more games
Speaker 3: exclusive to Microsoft's Xbox. The company already inked a tenure
Speaker 3: deal for the game with Nintendo. This latest move with
Speaker 3: Sony comes after an appeals court friday Tonight. The US
Speaker 3: Federal Trade Commissions later suffered to delay the deal. Meantime,
Speaker 3: UK regulators will be looking at the deal again tomorrow,
Speaker 3: where Microsoft is apparently offering to sell the cloud based
Speaker 3: market rights for its games. The company has to close
Speaker 3: the deal by Tuesday or potentially pay Activision a three
Speaker 3: billion dollar breakup fee. Denise Pellegrity, Bloomberg Day Break Asia.
Speaker 1: Denise, thanks very much. Coming up in a little while,
Speaker 1: we'll be chatting with James Abattem, managing director and chief
Speaker 1: investment Officer at Center Asset Management. I'm Brian Curtis here
Speaker 1: in Hong Kong. A couple of other items we'll be
Speaker 1: looking at with the guests.
Speaker 6: This morning.
Speaker 1: We mentioned that China's growth may look pretty good in
Speaker 1: the second quarter, but then because of the lockdown last year,
Speaker 1: these numbers are sort of skewed. We'll take a closer
Speaker 1: look at the stimulus part of this story. All economists
Speaker 1: surveyed by Bloomberg predict the PBOC will keep its rate
Speaker 1: on its one year policy loans unchanged today at two
Speaker 1: point sixty five percent. What else can they do and
Speaker 1: how much more of our reaching out to the private
Speaker 1: sector can we expect? And again, looking at the dollar
Speaker 1: weaker not only on hopes that the Fed will stop
Speaker 1: hiking interest rates, but the dollar bears are looking even
Speaker 1: past that onto when we might get some rate cuts
Speaker 1: from the Fed. So that's another topic that we'll be
Speaker 1: getting into. And again S and P five hundred firms
Speaker 1: expected to post a nine percent drop in profits in
Speaker 1: the second quarter, all during a time when markets quity
Speaker 1: markets we're racing to the upside. Now it's time for
Speaker 1: global news. China and Russia are going to hold joint
Speaker 1: military exercises in the Japan See head backs to with
Speaker 1: global news from the ninety sixty News from in San Francisco.
Speaker 7: Ed Yeah Brian Russia saying it will send naval and
Speaker 7: air forces for the annual drill. China's pla making the
Speaker 7: announcement also plays into the ever deepening issue of China's
Speaker 7: attitude toward the war in Ukraine. Meanwhile, US National Security
Speaker 7: Advisor Jake Sullivan on CBS has heard here on Bloomberg
Speaker 7: says China's help could be used regarding North Korea and
Speaker 7: says China's in action is having the reverse effect to
Speaker 7: what it wants.
Speaker 4: Frankly, is in fact only creating circumstances in which the
Speaker 4: United States are allies and partners have to step up
Speaker 4: our activities and posture to respond.
Speaker 7: To and Sullivan also says a US as firman saying
Speaker 7: the recent Microsoft hack came from China.
Speaker 4: Microsoft has said it was China. We see nothing so
Speaker 4: far to dispute what Microsoft has said or to second
Speaker 4: guests their claim that it was China.
Speaker 7: Sullivan says a deep intrusion into the systems. And Republican
Speaker 7: Canada for President Chris Christi on ABC has heard here
Speaker 7: on Bloomberg says China is watching Russia and US actions
Speaker 7: in Ukraine right now.
Speaker 8: The Ukrainians are willing to fight this fight for themselves
Speaker 8: if they have our support to be able to win it.
Speaker 8: If the Chinese watch us back away from Ukraine, believe me,
Speaker 8: the next move will be Taiwan.
Speaker 7: Now politics, Christy says he is going to muscle up
Speaker 7: on Donald Trump moving forward on issues like this. So
Speaker 7: Trump last night at a rally.
Speaker 1: Every time the radical left, Democrats, Marxist communists and fascists
Speaker 1: indict me, I consider it to be a great badge
Speaker 1: of honor and courage.
Speaker 7: I'm doing it for you.
Speaker 8: He's a liar and a coward. He's not getting indicted
Speaker 8: for anyone other than because of his own conduct. There's
Speaker 8: no other of the two hundred million Americans he spoke
Speaker 8: about who illegally retained classified national secrets.
Speaker 7: And then Christy also on CNN saying Trump will show
Speaker 7: up at the debates. He believes his ego I.
Speaker 8: Think will not permit him to have a big TV
Speaker 8: show that he's not on. And I think he'd be
Speaker 8: enormously frustrated sitting back in Bedminster and watching what I'm
Speaker 8: going to do to him.
Speaker 7: Yeah, Trump says he probably will not be at the
Speaker 7: first debate. By the way, US Climate envoy has arrived
Speaker 7: to Invaijang John Kerry to start up a dialogue on
Speaker 7: global warming and climate change kind of to reset is
Speaker 7: the word they're using. Meanwhile, weather is being very mean
Speaker 7: to Mother Earth at least thirty five people and kill
Speaker 7: the storms batter South Korea. Hong Kong Observatory has issued
Speaker 7: a strong signal eight to now until noon. It's said
Speaker 7: the way it's phasing it is before noon first of
Speaker 7: the year, as the region gets pummeled by talem as
Speaker 7: a storm. Heat is causing health alerts in sixteen cities
Speaker 7: across southern Europe today and probably for the next couple
Speaker 7: of days, and in New York. The potential of flo floods,
Speaker 7: extreme weather around the globe global news power by more
Speaker 7: than twenty seven hundred journalists and analysts and over one
Speaker 7: hundred twenty countries. In San Francisco, I'm Ed Baxter, and
Speaker 7: this is Bloomberg.
Speaker 1: Let's get to our guests. James Abat, Managing Director and
Speaker 1: Chief investment Officer at Center Asset Management. James Pleasure as usual,
Speaker 1: thanks for joining us. So investors know that the FED
Speaker 1: does not want to give the all clear just yet.
Speaker 1: Markets have reacted, but it seems that we know that
Speaker 1: the FED will continue to talk tough until they get
Speaker 1: closer to that two percent deal, So is that discounted
Speaker 1: in the market. Should we not expect some troubles ahead
Speaker 1: when the FED does talk tough.
Speaker 9: I think it's when you have to look at the
Speaker 9: components of inflation. You know, goods prices are moving lower,
Speaker 9: non durable goods as well as in dust or production goods,
Speaker 9: you know, but services still remain in a very sticky uptrend.
Speaker 9: So I think the real key is that we're looking at,
Speaker 9: you know, a shifting perhaps of investors' worries from inflation
Speaker 9: to potentially one of growth. Because if the FED is
Speaker 9: truly bent on trying to bring down inflation further and
Speaker 9: really try to bring that services inflation level down, I
Speaker 9: think investors will start to shift gears and start to
Speaker 9: worry about whether or not we're going to be moving
Speaker 9: lower on a growth perspective, because let's not forget you know,
Speaker 9: if we look at the manufacturing indicies, we've been in
Speaker 9: contraction since November of last year, and we look at
Speaker 9: the new orders components, we're ten months of shrinking new orders,
Speaker 9: which is a subcomponent of the PMI indica. So we've
Speaker 9: got this dichotomy between services and manufacturing, and I think
Speaker 9: the risk is that the FED actually overshoots, focusing solely
Speaker 9: on services inflation, and they drive the inflation aren't even
Speaker 9: the manufacturing component even further south.
Speaker 1: So when we see yields come down, some investors might
Speaker 1: feel good about that because they believe that yields are
Speaker 1: heading down because inflation is coming down. But it's sending
Speaker 1: the slightly a wrong signal. Really, it's it's further expectations
Speaker 1: when the yields drop a lot, that there's trouble ahead
Speaker 1: on the growth front.
Speaker 9: That's what you're saying. Yeah, that's exactly right, because I mean,
Speaker 9: right now, we haven't had I mean, the reason why
Speaker 9: the markets haven't corrected to the same degree that they
Speaker 9: did as people were expecting, you know, akin to what
Speaker 9: happened in two thousand and two thousand and one or
Speaker 9: even the global financial crisis, is that we haven't had
Speaker 9: that double digit you know, earnings to client. What we've
Speaker 9: had really is an environment where you know, profitability has
Speaker 9: been contracted. But if you look at the components, you know,
Speaker 9: margins have been you know, remained at relatively high levels.
Speaker 9: You know, sales growth is positive, but it's continued to
Speaker 9: slow down. Margins have been impacted by higher costs, and
Speaker 9: act efficiency has been relatively flat. So we've had, you know,
Speaker 9: only a slight decrease in earnings projections. Obviously, stock markets
Speaker 9: declined last year on the inflation scare in the rise
Speaker 9: and interest rates. The other thing that basically was a
Speaker 9: missing component this time versus others is that we haven't
Speaker 9: had a big risk aversion. You know, the events of
Speaker 9: ft X or a Donnie or other things didn't have
Speaker 9: the same kind of a polluting effect on people's risk
Speaker 9: a version that let's say World com Enron or Lehman
Speaker 9: Brothers or other kind of significant you know disruptions had
Speaker 9: on investor psyche. We're back to basically where you know,
Speaker 9: investors are embracing risk in a wholehearted fashion this.
Speaker 1: Year, and the scare in March because of the banking
Speaker 1: troubles exactly was not that significant.
Speaker 9: Yeah, exactly, that's right. That's right.
Speaker 1: So what about the slight churn that we've seen under
Speaker 1: the hood in that you have seen a pretty good
Speaker 1: bid in industrials. You've seen transport rally, there are a
Speaker 1: number of sectors besides megacap tech that have done well
Speaker 1: even when we're still concerned about growth. Do you think
Speaker 1: that that, I mean, are there some idios crowd of
Speaker 1: factors for that, reasons for that, or do you think
Speaker 1: that that's investors telling you that the growth scare, while
Speaker 1: a scare, it's not going to actually take us deeply
Speaker 1: into recession.
Speaker 8: Yeah.
Speaker 9: I think all those things are correct in the sense
Speaker 9: that you know, clearly what we've had is a return
Speaker 9: to the secular growth stocks, the fang names as we
Speaker 9: like to call them, basically this year, as investors have
Speaker 9: re embraced them as leadership in the market, and simply
Speaker 9: because of their size in terms of market capitalization, they've
Speaker 9: had a pronounced impact on what the S and P
Speaker 9: for one hundred returns have done. That being said, as
Speaker 9: you're right, we pointed out you've seen, you know, a
Speaker 9: lot of strength in some of the cruise stocks, Royal Caribbean, Carnival,
Speaker 9: the airlines and others, because what we've saw was essentially
Speaker 9: a you know, great operating leverage and the real key
Speaker 9: and this is this is what might hold the market
Speaker 9: back but give opportunity at the idiosyncratic level, is that
Speaker 9: you know, when you're able to basically, you know, bring
Speaker 9: the trifecta of you know, improving fundamentals from bottom up perspective,
Speaker 9: where you get a return of sales growth, you get
Speaker 9: that great profit margin expansion. And then because these companies
Speaker 9: have cut back so much post COVID and during you know,
Speaker 9: really stimulated by COVID in terms of their own asset
Speaker 9: base as they were shutting down so much capacity, they're
Speaker 9: getting these huge gains in terms of act efficiency. And
Speaker 9: that's really the operating leverage that's contributed to these stocks
Speaker 9: doing exceptionally well thus far this year.
Speaker 1: Well, how much risk are you willing to take on then?
Speaker 1: And how would you express it?
Speaker 9: Well? Right now, I mean this we've been given I
Speaker 9: think a gift. You know. One of the components that
Speaker 9: we use within our American Select equity strategy is to
Speaker 9: tactically hedge the portfolio with protective put options when we
Speaker 9: feel that we can in a cost efficient manner, you know,
Speaker 9: hedge the underlying risk or the systemic risk that's embedded
Speaker 9: within the portfolio. So, with the Vicks down to around fourteen,
Speaker 9: we took the opportunity last week to basically put a
Speaker 9: full protective hedge on the portfolio to protect us against
Speaker 9: a significant kind of tail risk, you know, draw down
Speaker 9: from now until the end of the year, and we
Speaker 9: could do so in ess since fifty basis points of
Speaker 9: the portfolio because volatility is so depressed at this point
Speaker 9: in time. We're heading into a seasonally rising period of volatility.
Speaker 9: So you know, potentially as the market shifts from inflation
Speaker 9: worries to growth concerns like we talked about. Plus you
Speaker 9: know all the achieve political risks that are evident almost
Speaker 9: every day, whether it's in Ukraine or China or what
Speaker 9: have you. You know, this is a great opportunity for
Speaker 9: investors to you know, inexpensively put some hedges and protect
Speaker 9: their underlying portfolios.
Speaker 1: I want to get to China. But maybe one more
Speaker 1: question on the US and on you know, inflation versus
Speaker 1: a growth slowdown.
Speaker 9: What's the key to watch?
Speaker 1: I mean, will it be jobs? Will you get it
Speaker 1: from the data or the earnings?
Speaker 9: I think it's going to come from a bottom up
Speaker 9: because historically you're going to see job losses well inside
Speaker 9: a recession itself. And again I think you know, when
Speaker 9: you're looking at the environment that we're in today and
Speaker 9: we talked about in the past, is that the inability
Speaker 9: to reconcile the top down indicators to the bottom up research.
Speaker 9: You know, whether it's you know, ism numbers, it's a
Speaker 9: yield curve, all of which are basically saying that we
Speaker 9: should be in a very deeper session right now. You know,
Speaker 9: none of that is really evident when you're looking at
Speaker 9: companies from a bottom up perspective because of the distortions
Speaker 9: that came about from COVID. So I think you're going
Speaker 9: to have to look at companies and sectors kind of
Speaker 9: on a one off basis as this rolling recession kind
Speaker 9: of makes its way through the overall economy.
Speaker 1: Now, with China, we have seen a little bit of
Speaker 1: a pick up up in markets, largely because of late
Speaker 1: policy makers have changed their tune a little. They seem
Speaker 1: a little friendlier to the private sector. The stimulus hasn't
Speaker 1: really done it. Neither the fiscal nor the monetary stimulus
Speaker 1: has been all that strong. It's been cautious and piecemeal.
Speaker 1: What are you expecting out of China, say, over the
Speaker 1: next quarter or two.
Speaker 9: Well, I think if the stimulus stays focused on investment
Speaker 9: and capacity of manufacturing and exports, it's not going to
Speaker 9: really have much efficacy. You know, my expectation, you're started
Speaker 9: to see some rumors about this is that if China
Speaker 9: is able to shift the focus of its stimulus from
Speaker 9: investment to consumption, you know, part of that could be
Speaker 9: loosening you know, urban residency curves that they have. You know,
Speaker 9: there's a very detailed system with residence permits in China
Speaker 9: that you know impacts workers as they move through from
Speaker 9: the countryside into the cities and so forth. I think
Speaker 9: the real key is to take you know, big significant
Speaker 9: actions that are going to be able to move the
Speaker 9: stimulus away from the export driven model, which because of
Speaker 9: all the tariffs and other restrictions that are going about,
Speaker 9: I think aren't going to have that same kind of impact.
Speaker 9: What they have to do is really drive it towards consumption.
Speaker 9: And there's several ways you can do that, and residency
Speaker 9: permits is probably one way to start.
Speaker 1: Okay, just in forty seconds or so, your best option
Speaker 1: in Asia at.
Speaker 9: The moment, well, I think you know, right now, if
Speaker 9: you're looking at Asia, you're starting to see some of
Speaker 9: the frontier markets do very very well, whether it's Vietnam
Speaker 9: or other areas. You know, traditionally one of the things
Speaker 9: that looks very strong when you see dollar weakness is
Speaker 9: that emerging markets outperform you know, develop markets, and one
Speaker 9: of the things that we've started to see is a breakout.
Speaker 9: Well not a technician, but it's hard to ignore, you know,
Speaker 9: the breakout that you're seeing in some of the emerging
Speaker 9: in frontier markets, Vietnam being one of them as a
Speaker 9: place to go in terms of speculative assets.
Speaker 1: This is Bloomberg Daybreak Asia, your morning brief on the
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