Speaker 1: Bloomberg Audio Studios, Podcasts, radio News.
Speaker 2: Welcome to the Daybreak Asia Podcast. I'm Doug Chrisner. It's
Speaker 2: proving to be a mixed day for equities across the
Speaker 2: Asia Pacific. In the US session, stocks drifted lower in
Speaker 2: front of a report on consumer prices, and American markets
Speaker 2: also had to contend with a push higher in the
Speaker 2: price of oil given the lack of a deal to
Speaker 2: restore energy flows through the strait of horror moves. Needless
Speaker 2: to say, higher oil prices have renewed concern about escalating inflation,
Speaker 2: and that's where we begin our conversation with Tea Chow,
Speaker 2: Managing director at UBS. She spoke with Bloomberg TV host
Speaker 2: Sherry On and Heidi Stroud Watts on the Asia trade as.
Speaker 1: Usual, There's a lot of cross currents going on for investors.
Speaker 1: How big is this inflation print in terms of broader
Speaker 1: sentiment going forward for you?
Speaker 3: I think we're just not concerned with the inflation at
Speaker 3: this point.
Speaker 4: I mean, we're still pretty focused on the overall market
Speaker 4: and the strength of the economy. So I mean, even
Speaker 4: even with inflation where it is, I mean, the FED
Speaker 4: is uh.
Speaker 3: Is still on hold and the progress and.
Speaker 4: The hopefully the US I RAN negotiations and uh AI growth.
Speaker 3: We feel like the.
Speaker 4: Economy is still going to be pretty much intact and
Speaker 4: uh and we're positive and very optimistic uh towards equities
Speaker 4: even though it might be bumpy, but UH still we
Speaker 4: have a pretty good price UH target for the s
Speaker 4: MP reaching about eighty two hundred. So I think, uh,
Speaker 4: you know, investors should still continue to stay invested. Uh
Speaker 4: and and hopefully you know, the AI and and the
Speaker 4: strength of the markets will continue uh to help push
Speaker 4: equities higher.
Speaker 1: Yeah, tell us about how you're viewing the constructs of
Speaker 1: the AI. The hyper scale is uh some of the
Speaker 1: developments that we've said in that space, particularly in the US,
Speaker 1: because there's been ongoing concern about obviously the amount of
Speaker 1: infrastructure investment capex levels, but then we're also seeing you know,
Speaker 1: the rotation of huge amounts of funds in these circular
Speaker 1: funding arrangements.
Speaker 3: Right absolutely. I mean, I think, you know, lots of concerns.
Speaker 4: Well, we were reinconstructive on the AI story, but we
Speaker 4: investors will you know, manage the concentration, and we're hoping
Speaker 4: that investors can start to manage some of the concentration
Speaker 4: by just diversifying out of you know, complete AI staffs,
Speaker 4: but maybe into other sectors like healthcare, industrials, financials. Even
Speaker 4: though we feel like AI is still going to push
Speaker 4: the growth for the next probably five ten years, but
Speaker 4: there's still a lot of room for investing in other
Speaker 4: defensive sectors as well.
Speaker 1: One of the non US markets you like, is China.
Speaker 1: Tell us about what you're funding compelling within Chinese equities
Speaker 1: at the moment. Is it that AI play on the
Speaker 1: basis of the gap that is being very quickly closed?
Speaker 3: Yeah, absolutely, I mean Chinese equities.
Speaker 4: I mean, we think China's you know, has a lot
Speaker 4: of room for growth in terms of the tech equities.
Speaker 4: But you know, outside of China, you know, we want
Speaker 4: to focus on you.
Speaker 3: Know, India, Japan, uh Europe.
Speaker 4: Those are also a lot of good valuations in some
Speaker 4: of those markets. So I think, of course China is
Speaker 4: going to drive a lot of the growth just because
Speaker 4: we're located and because all the investments they.
Speaker 3: Are also making an AI, I think.
Speaker 4: It's probably worthwhile to stay with with some of the
Speaker 4: Chinese larger tech names, but also diversify among surrounding countries.
Speaker 4: I mean South Korea was also a big you know,
Speaker 4: a big winner in the in the last few months.
Speaker 3: But I mean we're currently.
Speaker 4: Neutral and we are now more attractive on India, So
Speaker 4: I think China, India, some of the surrounding country are
Speaker 4: also a good place in this market, especially with the
Speaker 4: AI growth.
Speaker 1: When it comes to developments on the ceasefire or an
Speaker 1: ultimate piece deal or at least, you know, a specific
Speaker 1: deal to re open the state of hor moves, is
Speaker 1: that meaningful for markets at the moment? Do you see
Speaker 1: any kind of big change that could could come through.
Speaker 4: I mean, I think negotiations are improving and we do
Speaker 4: absolutely hope for a kind of resolution, but we feel
Speaker 4: like eventual agreement with Iran I mean will likely keep
Speaker 4: pressure on oil by allowing more supply to reach global markets.
Speaker 4: I mean it's going to take some time, so I
Speaker 4: mean this can definitely support gold by easing inflation concerns
Speaker 4: and reducing the risk for further central bank tightening.
Speaker 3: So I mean there's going to be some.
Speaker 4: Impact, but I think eventually there will be a resolution,
Speaker 4: but it's it's still going to be a kind of
Speaker 4: a bump you rode ahead to get there.
Speaker 1: What do you lack within bonds at the moment.
Speaker 3: Well, we like a lot about bonds.
Speaker 4: I mean, we think this is a great time to
Speaker 4: lock in eels, especially with US corporate bonds five to
Speaker 4: seven years. We prefer high quality also emerging markets. But
Speaker 4: I think you know where races are right now, this
Speaker 4: is a really good time to uh to to diversify
Speaker 4: your portfolio within bonds and focus on the high quality
Speaker 4: corporate corporate bonds.
Speaker 1: We talked a little bit about the sort of broader
Speaker 1: opportunities within China. I know that India is one of them.
Speaker 1: Are you constructive on broader ams as a result, Yes.
Speaker 3: Emerging markets absolutely.
Speaker 4: I mean, we think EAM has had a good run
Speaker 4: this year, but a lot of that is volatile as well,
Speaker 4: is depending a lot on China, especially on China, so
Speaker 4: we really have to see a stronger recovery in China's economy.
Speaker 3: And I think, uh, you know, Ian is usually.
Speaker 4: Em emerging markets usually as a smaller allocation for US,
Speaker 4: uh you know, Like, I think it's good to be
Speaker 4: be be participating, but we're still focusing more on.
Speaker 3: Just a core US portfolio at this point.
Speaker 4: And some of the larger developing markets such as China
Speaker 4: and Europe and Germany and the your Eurozone.
Speaker 1: Overall, career has of course been front and center. You've
Speaker 1: downgraded from attractive to neutral. Is that over the froth
Speaker 1: over the AI trade for you?
Speaker 4: Uh? No, I mean that's that's actually a really good point.
Speaker 4: I mean, I mean, career has certainly done very well
Speaker 4: with the memory companies and just you know, but but
Speaker 4: that a lot of that has run up pretty high
Speaker 4: in a short time.
Speaker 3: And you know, we have a lot of clients are
Speaker 3: always favorable.
Speaker 4: On the semi SAMESE and equipment's and founderies, but we
Speaker 4: feel like, you know, focusing if you want to diversify
Speaker 4: among the summes, focusing on some of the compute names
Speaker 4: within sames and there's a lot of opportunities that we
Speaker 4: see in smartphonemakers, payment networks, data centers, reads and.
Speaker 3: Also some select consumer electronics. So a lot of that.
Speaker 3: You know, it's still it's still a good play.
Speaker 4: For some of the Korean companies, but you know, just
Speaker 4: just to diversify out on.
Speaker 3: Pure simes, I mean, these are some of the opportunitiesy.
Speaker 2: How we see that was See Chow, managing director at UBS,
Speaker 2: speaking with Bloomberg TV host Heidi Stroud Watts and Sherry On.
Speaker 2: Coming up, we'll take a look at the end story
Speaker 2: with Bloomberg News macro strategist Michael Ball. That's ahead on
Speaker 2: the Daybreak Asia podcast. Welcome back to the Daybreak Asia Podcast.
Speaker 2: I'm Doug Chrisner. The focus now is on the foreign
Speaker 2: exchange and the Japanese hen in particular. We've seen some
Speaker 2: renewed selling pressure as the market looks for a return
Speaker 2: to that one sixty level against the US dollar. Now
Speaker 2: In New York trading on Tuesday, the end was little changed,
Speaker 2: but it remains clear that there is concern about possible intervention. Again.
Speaker 2: We already know that US Treasury Secretary Scott Bessen has
Speaker 2: said the US is willing to support the Japanese currency,
Speaker 2: and many on Wall Street have speculated that part of
Speaker 2: his motivation is to keep Japanese authorities from selling US
Speaker 2: treasuries as a way of raising dollars. For a closer look,
Speaker 2: I spoke with Bloomberg News macro strategist Michael Ball. It
Speaker 2: was pretty surprising move, but everyone had been kind of
Speaker 2: anticipating this, given the fact that the end had been
Speaker 2: so weak for such a long time. It almost felt
Speaker 2: like the market was waiting for the monetary authority in
Speaker 2: Japan to act unilaterally, but they didn't. It was a
Speaker 2: coordinated effort first time since ninety eight. The market obviously
Speaker 2: was caught a little flat footed. Was it a watershed moment?
Speaker 2: Do you think that it's send a kind of an
Speaker 2: important signaled that maybe has the market a bit in
Speaker 2: check right now or do you think we're making too
Speaker 2: much of it.
Speaker 5: No, I don't think we're making too much of it.
Speaker 5: I think again we've crept up back to this one
Speaker 5: sixtieth area. We're a little bit below it now today,
Speaker 5: and again that seems to be the line in the
Speaker 5: sand that the market has in mind for That's where
Speaker 5: coordinated intervention, both the Treasury and them off and the
Speaker 5: BOJ together all have to basically signal that this is
Speaker 5: where we're going to defend until we get to September
Speaker 5: or potentially October, where you could see rate hikes from
Speaker 5: the BOJ to again give a more fundamental story why
Speaker 5: the yen should appreciate and to change this feedback loop.
Speaker 5: It's just a negative feedback loop of weaker yen be
Speaker 5: getting weaker yen because of positioning.
Speaker 2: So from the US position is Treasury Secretary Bestent looking
Speaker 2: more at what's happening in the US treasury market than
Speaker 2: he is the currency market, and he's concerned that we
Speaker 2: may see a backup in US heields.
Speaker 5: Yes, I think that's the primary goal here, and I
Speaker 5: think he's signaled that in several ways. One obviously for
Speaker 5: his worry that the intervention and will not only be
Speaker 5: the selling of bills, which has been up to date
Speaker 5: now how they've done it, but more on actually the
Speaker 5: long end. So again, if they didn't have access, let's say,
Speaker 5: to the THEMA kind of facility as a backstop, or
Speaker 5: they didn't have access to the international repel market or
Speaker 5: even the repo facilities the other ones that are available
Speaker 5: at the FED, then they would have to sell longer
Speaker 5: end treasuries what are the tens or thirties, and the curve,
Speaker 5: which has already been under pressure since July FMC would
Speaker 5: come under further pressure and that would actually force the hands.
Speaker 2: So you mentioned FEMA, just to unpack that a little bit,
Speaker 2: this is a vehicle that it was essentially allowed Japan
Speaker 2: to borrow dollars to post US treasuries essentially as a
Speaker 2: form of collateral. So they wouldn't be net sellers of
Speaker 2: US treasuries to dump that inventory into the market and
Speaker 2: run the risk of pushing US yields even higher, right exactly.
Speaker 5: And there is a limit to that amount. I think
Speaker 5: it's around sixty billion, which in its sense is a
Speaker 5: little bit small for what is needed. Because let's keep
Speaker 5: in mind the initial intervention that happened last week saw
Speaker 5: about eighty billion dollars of bill selling buy them off
Speaker 5: to actually support an buy yen. So this one itself
Speaker 5: is you know, more of a backstop. It hasn't been
Speaker 5: used yet because it's more expensive. It's about twenty five
Speaker 5: basis points over what a normal repo rate would be
Speaker 5: to do something like this, but in its signaling effect
Speaker 5: it's much larger because again what we may see from
Speaker 5: best in with you know, the new FED leader Kevin
Speaker 5: Warsh is to lift the limit there, which then would
Speaker 5: be a much bigger signaling effect. And overall, with all
Speaker 5: the other tools that they have at their expo that
Speaker 5: their can use, the Japanese then could just have this
Speaker 5: as well as a backstop.
Speaker 2: So take me back to the currency market. What this
Speaker 2: means for not only the dollar, but the Japanese yanic gas.
Speaker 5: Yeah, exactly, And again there's other things going on in
Speaker 5: Japan that is making us worry that they'll be selling
Speaker 5: treasury holdings. And as they sell treasury holdings, obviously then
Speaker 5: they weaken sort of the dollars. They bring money back
Speaker 5: into the end. But specific to what this intervention was about, again,
Speaker 5: it was to initially stop official account selling of the
Speaker 5: treasury market. And what it really means for the dollars,
Speaker 5: you know, for that cross itself, it would weaken the
Speaker 5: dollar against the end and effectually put more pressure even
Speaker 5: on long end real rates, which is counterintuitive because the
Speaker 5: rate differential story would be off there. But then it's
Speaker 5: a capital flow account thing. Or basically you're just seeing
Speaker 5: selling of dollar assets by Japanese holders.
Speaker 2: So we know what the disinflation or deflation story in
Speaker 2: Japan has been like for three decades, and we know
Speaker 2: that the boj these days has been very very conservative,
Speaker 2: moving very gradually. You could make a case, given the
Speaker 2: level of inflation now in Japan that the BOG needs
Speaker 2: to be a little bit more aggressive. That's not happening.
Speaker 2: Is there the risk though, that if they begin to
Speaker 2: lean into more of a tightening that we could see
Speaker 2: a repatriation of Japanese assets leaving global markets like the
Speaker 2: US and coming back to Japan.
Speaker 5: Well, it might actually be the interesting I think you
Speaker 5: actually nailed on the head. I think they took so
Speaker 5: long for them to get inflation to kind of get
Speaker 5: going again, and it has gotten going again. Obviously they
Speaker 5: have more energy sensitivity and we know what's going on there.
Speaker 5: But it took them so long to get rates off
Speaker 5: the zirup and get them off the floor and get
Speaker 5: it inflation back in grain and sort of the day
Speaker 5: to day consumer that they're very worried that if they
Speaker 5: sort of even tighten a little bit, they're going to
Speaker 5: lose that progress. But to your point, if they do tighten,
Speaker 5: if they come out and say September and they issue
Speaker 5: maybe a statement that's more hawkish and expecting in october's
Speaker 5: getting priced up again, because right now September is about
Speaker 5: two third price for a hike, and if they don't go,
Speaker 5: then the expectation to be one hundred percent for October.
Speaker 5: But let's say they just do back to back, you
Speaker 5: would see that curve flattened, so you'd see the long
Speaker 5: end of the treasury curve, their treasury curve over there,
Speaker 5: come off and get a rally, and that actually would
Speaker 5: give you less incentive to repatriate back into the Japanese assets,
Speaker 5: effectively into their bonds, because one liquidity is not great there.
Speaker 5: Two then you're just your rate differential story is not
Speaker 5: as compelling anymore because by hiking in the front end,
Speaker 5: they're effectively showing that they have more responsibility towards the
Speaker 5: back end as far as monetary policy.
Speaker 2: So what's your sense in terms of yend weakness, is
Speaker 2: the worst over at least in the near term.
Speaker 5: Yeah, I mean that's a great question. I think a
Speaker 5: lot of that has to do maybe with energy as well.
Speaker 5: Obviously they have some sort of well not some sort
Speaker 5: of they have a higher correlation here with oil prices.
Speaker 5: Oil where it is is now in the rate to
Speaker 5: change their state stable, then it's less of a pressure
Speaker 5: on them there. I think you're right. I think in
Speaker 5: a lot of ways. Well, not that you're right, but
Speaker 5: what you're hinting at is that the worst could be
Speaker 5: over if we see this coordinated intervention lead to basically
Speaker 5: hold a period of time before you see actual rate hikes.
Speaker 2: To what extent could the market be surprised right now,
Speaker 2: is the trade so crowded that we risk maybe a
Speaker 2: kind of a not I don't want to say violent adjustment,
Speaker 2: but something that could be dramatic.
Speaker 5: So the trades come off. To your point, I think, well,
Speaker 5: a lot of that was last week was that people
Speaker 5: were caught off sides by the coordination and now obviously
Speaker 5: the size it was a somewhat large imprint they had
Speaker 5: in the market, and people were basically still leaning very
Speaker 5: short end and that's cleaned up nicely. We get to
Speaker 5: see FTC data. That's one way to look at it.
Speaker 5: But also we're hearing sort of from flow traders that
Speaker 5: a lot of that has come off and it's a
Speaker 5: much flatter position. People are more nervous. Now there's two
Speaker 5: sided risks to where the end can go. And again
Speaker 5: this one to sixty level is sort of the pivot
Speaker 5: where if we drift above one sixty, I think people
Speaker 5: will be mourned and powered to short it. Traders will
Speaker 5: think that the intervention a one off and they're not
Speaker 5: really disciplined or committed to it. And if it goes
Speaker 5: lower then the feedback loop actually people will probably try
Speaker 5: and rush into it to get ahead of maybe a
Speaker 5: more structural change, which will again be real rate hikes
Speaker 5: coming down the road.
Speaker 2: Do you think I'm going to bring up trade policy,
Speaker 2: because sometimes currency levels are very influential in that regard.
Speaker 2: Is this meaningful in the way they could influence the
Speaker 2: trade conversation?
Speaker 5: Do you think, Well, we know Bess was hounding Taiwan
Speaker 5: and obviously pressuring some of the other sort of Asian
Speaker 5: export powers to basically strengthen their currency, So I think
Speaker 5: that's always lurking in the back. We have a different
Speaker 5: relationship with Japan, so I can't really give you a
Speaker 5: great answer there. That's always a consideration, but I don't
Speaker 5: think it's the driving force here. I think the driving force,
Speaker 5: as we kind of basically hit on the head, is
Speaker 5: Besson's worried about a lot of pressure on the long
Speaker 5: end of the treasury curve, and he sees this as
Speaker 5: one of many tactics he's using, including the recent announcement
Speaker 5: of refunding and all that, to stick still with heavier
Speaker 5: bill issuants to basically take pressure off further sort of
Speaker 5: selling and supply in the back end, and not to
Speaker 5: have that unhinged.
Speaker 2: Michael will leave it there, thank you so very much.
Speaker 2: Bloomberg News macro strategist Michael Ball joining us here on
Speaker 2: the Daybreak Asia Podcast. Thanks for listening to today's episode
Speaker 2: of the Bloomberg Daybreak Asia Edition podcast. Each weekday, we
Speaker 2: look at the story shaping markets, finance, and geopolitics in
Speaker 2: the Asia Pacific. You can find us on Apple, Spotify,
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Speaker 2: Join us again tomorrow for insight on the market moves
Speaker 2: from Hong Kong to Singapore and Australia. I'm Doug Prisner,
Speaker 2: and this is Bloomberg