WEBVTT - Not So Negative Anymore 0:00:03.840 --> 0:00:07.440 Welcome to Bloomberg Opinion. I'm Bonnie Quinn. This week, Jonathan 0:00:07.440 --> 0:00:10.680 Bernstein wraps up the year in Politics, which included a 0:00:10.720 --> 0:00:13.840 recommendation to the Department of Justice that a former president 0:00:14.040 --> 0:00:17.319 be prosecuted politically, it would have been certainly a big 0:00:17.320 --> 0:00:20.040 deal if they had not recommended this after all that 0:00:20.079 --> 0:00:23.079 they did. And I think it's perfectly okay to celebrate 0:00:23.120 --> 0:00:25.119 the sport as long as we are cognizant of what 0:00:25.200 --> 0:00:27.000 is happening around it. And this World Cup was the 0:00:27.040 --> 0:00:30.200 first time I think both of those things were happening simultaneously. 0:00:30.280 --> 0:00:34.400 Bobby go Shawn Lessons learned from a strange World Cup. First, though, 0:00:34.440 --> 0:00:37.640 to the markets, it was not a quiet week in markets. 0:00:37.760 --> 0:00:40.080 Mid week the Bank of Japan tweaked its yield curve 0:00:40.120 --> 0:00:43.320 control mechanism a little out of the blue Bloomberg Opinions. 0:00:43.320 --> 0:00:46.560 Marcus Ashworth joined me for an all encompassing conversation about 0:00:46.560 --> 0:00:49.840 the year in markets, and then we revisited our conversation 0:00:49.960 --> 0:00:52.280 post b O j move. That's all in part two, 0:00:52.320 --> 0:00:55.040 so stay tuned. Marcus. What do you think were the 0:00:55.080 --> 0:01:00.120 biggest lessons of two for market participants? Oh? Um, I 0:01:00.160 --> 0:01:03.319 think the ability for people to forecast the future has 0:01:03.360 --> 0:01:07.319 been called dramatically into question because in every central bank, 0:01:07.440 --> 0:01:10.279 in particular some very smart economists i'm sure, did predict 0:01:10.319 --> 0:01:13.640 a very unpleasant inflation. But I think the ability for 0:01:13.680 --> 0:01:16.240 people to divine what was going on this year got 0:01:16.360 --> 0:01:18.880 very rattled, and we were left in obviously a terrible 0:01:18.959 --> 0:01:22.440 year for most asset classes. Slight recovery towards the end, 0:01:22.959 --> 0:01:25.679 lastly as the dollar level weakened, but you know, we're 0:01:25.720 --> 0:01:28.920 left looking at ourselves thinking, you know, starks bonds, part 0:01:28.920 --> 0:01:31.360 from mild commodity. You know, pretty much everything went against 0:01:31.440 --> 0:01:34.839 us this year, spreads widens, the worst is probably over, 0:01:35.000 --> 0:01:36.960 but it's just equally as hard to look forward in 0:01:37.120 --> 0:01:40.760 this year and say, okay, will inflation drop and drop 0:01:40.920 --> 0:01:44.440 quickly enough to actually change thinking of central banks, which 0:01:44.520 --> 0:01:47.039 is probably not maybe to hike much more, but to 0:01:47.080 --> 0:01:49.960 a keep rates high levels a longer. And that's not 0:01:49.960 --> 0:01:52.960 gonna be easy for bond markets or indeed stock markets 0:01:52.960 --> 0:01:55.720 to do too well next year. Yeah, and Marcus, it 0:01:55.720 --> 0:01:59.200 seemed like everything was trading in tandem, right, Was there 0:01:59.240 --> 0:02:03.080 anything different about how a classes were traded this year? Well, 0:02:03.120 --> 0:02:05.280 and I think it shows you that was people having 0:02:05.320 --> 0:02:08.320 to liquidate, and it didn't matter whether it was bonds 0:02:08.440 --> 0:02:11.400 or equities. Ever will realized inflation was bad for pretty 0:02:11.480 --> 0:02:13.440 much every asset class bar as I said, to the 0:02:13.440 --> 0:02:16.680 occasional commodity, but even gold didn't do very well at times. 0:02:16.680 --> 0:02:18.880 So I mean, in that context we saw you know, 0:02:18.919 --> 0:02:22.760 everything from crypto to particularly text stocks, meme stocks no 0:02:22.880 --> 0:02:26.440 longer were very meanly and indeed pretty much the safest 0:02:26.480 --> 0:02:29.119 things long ends, guilts and government bonds and different other 0:02:29.120 --> 0:02:32.360 types of normally very safe stuff got absolutely pampered at 0:02:32.360 --> 0:02:34.760 The big lesson is that bonds were really not that 0:02:34.919 --> 0:02:38.760 safety placed or inflation link bonds either, actually right exactly Now, 0:02:38.800 --> 0:02:41.240 do you anticipate that changing, that markets will go back 0:02:41.280 --> 0:02:43.600 to sort of trading each other class on its own merits, 0:02:43.680 --> 0:02:45.800 or are we looking at an environment now where traders 0:02:45.800 --> 0:02:48.960 are just doing things differently. I think it's a change 0:02:49.040 --> 0:02:52.440 environment and less confident, much more volatile. I don't expect 0:02:52.520 --> 0:02:54.480 things over it or to be as bad as twenty 0:02:54.480 --> 0:02:57.720 two was, but I do think volatility is here to 0:02:57.760 --> 0:03:01.200 stay until we've got much more clarity from central banks 0:03:01.360 --> 0:03:03.960 view on inflation. Not too much inflation itself is how 0:03:04.240 --> 0:03:07.720 central bats can feel confident they are not overdoing it 0:03:07.800 --> 0:03:10.000 by tightening too much, planning into recessions. I think it 0:03:10.040 --> 0:03:12.239 is a big risk. Clearly. The risk that center banks 0:03:12.280 --> 0:03:14.639 are most worried about is not doing enough now on 0:03:14.720 --> 0:03:18.000 inflation and having a comeback and do more in a 0:03:18.480 --> 0:03:20.400 later time. They want to make sure they won this battle. 0:03:20.440 --> 0:03:22.440 The price of that very likely is to be recession. 0:03:22.520 --> 0:03:26.040 And from there's various large central banks that come to mind. 0:03:26.160 --> 0:03:28.240 We could talk about any of them, but are they 0:03:28.240 --> 0:03:32.080 on a collision path or working side by side? Well, 0:03:32.120 --> 0:03:35.120 I think clearly the European Central Bank has decided that 0:03:35.240 --> 0:03:37.120 as they were very late to the past, that they 0:03:37.120 --> 0:03:39.280 need to do more, and there is a determined Hawkeach 0:03:39.320 --> 0:03:42.640 element driving that. The FED I think is getting sort 0:03:42.640 --> 0:03:45.400 of towards the close of their peak, maybe one or 0:03:45.400 --> 0:03:47.240 two more hikes. The same for the Bank a Mainlan 0:03:47.280 --> 0:03:49.800 who are clearly sending some dubb signals. But the one 0:03:49.840 --> 0:03:51.480 that really watched, I think the next year's find out 0:03:51.480 --> 0:03:53.560 it is gonna be the back of Japan because they've 0:03:53.600 --> 0:03:56.480 done nothing. But you know, some of their core inflation 0:03:56.560 --> 0:03:59.000 to give England they called super core inflation is really 0:03:59.160 --> 0:04:02.760 quite high in Japanese terms. Well about the two cent target, 0:04:02.800 --> 0:04:05.320 and that's a rare occasional you haven't seen that for 0:04:05.320 --> 0:04:08.160 a few decades. So at some point, possibly by April 0:04:08.160 --> 0:04:10.640 when they changed the governor, we may see a shift 0:04:11.080 --> 0:04:12.800 in the Bank of Japan and that could have very 0:04:12.840 --> 0:04:15.200 big impacts across the rest of the world. Yeah, we 0:04:15.240 --> 0:04:17.000 are hearing that there is going to be a shift 0:04:17.120 --> 0:04:20.000 in policy, which would really be dramatic for the world 0:04:20.080 --> 0:04:21.680 because we haven't seen the Bank of Japan do that 0:04:21.720 --> 0:04:25.640 for a long time. In terms of inflation or recession 0:04:25.680 --> 0:04:27.680 being top of mind in the United States next year, 0:04:27.760 --> 0:04:31.000 which should it be, well, clearly the Fed wants to 0:04:31.400 --> 0:04:35.040 battle the inflation genie back into the bottle if it can, 0:04:35.279 --> 0:04:37.920 and it's prepared to risk recession. I mean, so far, 0:04:38.320 --> 0:04:41.960 the US ECON is very impressive, particularly on the employment 0:04:42.080 --> 0:04:44.480 labor stats. The Fed are trying to do their best, 0:04:44.520 --> 0:04:47.279 but the markets are continuing to try and look for 0:04:47.320 --> 0:04:50.200 the pivot, indeed, pricing in future rate cuts, which I 0:04:50.200 --> 0:04:52.480 don't think is at all the message that the Fed wants, 0:04:52.480 --> 0:04:55.039 because they want to make sure financial condition are tight 0:04:55.160 --> 0:04:57.479 enough to do the work, and the longer or the 0:04:57.520 --> 0:04:59.320 more the stock markets pays up, the harder it is 0:04:59.360 --> 0:05:02.120 for them to their victory, Marcus, if we move theater 0:05:02.279 --> 0:05:04.840 for a moment's China's direction of travel. There's a lot 0:05:04.880 --> 0:05:07.080 of talk about this now. COVID seems to be ripping 0:05:07.120 --> 0:05:10.479 through the economy. Can China achieve a five percent growth 0:05:10.560 --> 0:05:12.640 rate next year? I don't think they can, and and 0:05:12.880 --> 0:05:15.760 fascinating to say that because I mentioned in Japan earlier 0:05:15.880 --> 0:05:18.800 the two most important to we say inflation, the sets 0:05:18.839 --> 0:05:20.800 of numbers are the pan in the sense it's on 0:05:20.839 --> 0:05:23.800 the way up after being in deflation for so many years. 0:05:24.120 --> 0:05:26.520 I'm worried about that because it means Japan will have 0:05:26.560 --> 0:05:29.640 to hype rates and perhaps do some things equally China. 0:05:30.040 --> 0:05:33.040 The real worry on China is how quickly inflation is 0:05:33.120 --> 0:05:36.159 dropping there. It's turning negative on the producer prices and 0:05:36.200 --> 0:05:38.640 it's plunging on the consumer level down to sort of 0:05:38.960 --> 0:05:42.240 one and headed lower. That's a real worry because that 0:05:42.279 --> 0:05:44.400 means that deflation is coming through in China. The Chinese 0:05:44.400 --> 0:05:47.559 economy is in a bad way, and it doesn't seem 0:05:47.600 --> 0:05:50.040 to be much light at them, and there as far 0:05:50.080 --> 0:05:52.040 as belief on that. So I think China is a 0:05:52.160 --> 0:05:54.600 real worry for us, and that peaks through into my 0:05:54.800 --> 0:05:57.000 further worry, which is why the oil price, probably the 0:05:57.040 --> 0:05:59.760 most important chant in the world, is lower, and I 0:05:59.760 --> 0:06:02.880 think very heavily China related. Well, let's dig into this 0:06:02.920 --> 0:06:06.400 a little bit more. How would China goose inflation, assuming 0:06:06.400 --> 0:06:08.920 that China would want to. I guess China would need 0:06:08.960 --> 0:06:12.200 to in order to keep the labor market some way strong. 0:06:12.279 --> 0:06:14.120 I mean the labor markets and tatters at the moment 0:06:14.120 --> 0:06:16.720 in China would seem especially for younger people. Yeah, the 0:06:16.800 --> 0:06:19.400 youth employment of my word, and I think that's they 0:06:19.480 --> 0:06:20.840 used the word goose there, and I think it's quite 0:06:20.839 --> 0:06:23.359 interesting because that's the problem with China is that every 0:06:23.360 --> 0:06:26.479 time they come to a clear evident problem here, whether 0:06:26.480 --> 0:06:29.960 they're they've got real property bubble having burst, they've got 0:06:29.960 --> 0:06:32.320 a real problem with employment as you mentioned, and a 0:06:32.400 --> 0:06:35.440 general lack of Obviously, any momentum in the economy is 0:06:35.480 --> 0:06:38.320 completely gone. So they need to pull on that credit 0:06:38.400 --> 0:06:41.400 lever and get money supply going and breathe inflation in 0:06:41.520 --> 0:06:43.960 some senses back of the system. But that they pull 0:06:44.040 --> 0:06:45.560 on this leaver so many times and it's less and 0:06:45.600 --> 0:06:48.480 less effective. And I think that's a big infrastructure plays 0:06:48.560 --> 0:06:51.480 or the usual boosting of huge building is not going 0:06:51.520 --> 0:06:54.000 to be effective and like as it once was. So 0:06:54.360 --> 0:06:56.320 that's the trouble. They've got a real issu here with 0:06:56.680 --> 0:06:59.200 very aging demographics at the same time as they've got 0:06:59.320 --> 0:07:02.279 ballooning debt, maybe not on a government state level, which 0:07:02.320 --> 0:07:05.039 optically looks low, but across the rest of the economy, 0:07:05.200 --> 0:07:08.760 state banks, and insurance companies, all sorts of other aspects 0:07:08.760 --> 0:07:11.040 spreading the low debtload far and wide. And that's something 0:07:11.040 --> 0:07:12.560 which is going to be very hard. But to get 0:07:12.600 --> 0:07:14.800 the same tact in economy. That's why I'm not saying 0:07:15.160 --> 0:07:17.160 they don't get a better economy in next year. They 0:07:17.200 --> 0:07:19.600 probably almost certainly will have they reopened by the days 0:07:19.640 --> 0:07:21.840 of you know, you mentioned five percent, that's possible, but 0:07:22.120 --> 0:07:24.600 getting up to six, seven, eight percent growth that we 0:07:24.600 --> 0:07:26.680 were used to a few years ago, I think it's 0:07:26.720 --> 0:07:29.440 going to be forms impossible. Marcus, what are the ramifications 0:07:29.440 --> 0:07:32.880 of your three major worries you mentioned Japan, China and oil. 0:07:33.480 --> 0:07:37.160 Will we see ramifications in the bond markets? We may, 0:07:37.400 --> 0:07:39.440 I mean clearly the issue you know, it's looking at 0:07:39.560 --> 0:07:42.800 US market to call for everything. It's it's heavily inverseed 0:07:42.800 --> 0:07:45.080 in the sense that front end yields tier yields are 0:07:45.080 --> 0:07:48.560 really quite interestingly the price at the moment you can get, 0:07:48.920 --> 0:07:51.800 you know, for a quarter percent for to your money, 0:07:51.800 --> 0:07:55.200 and it's it's that makes you know, equities look less attractive. 0:07:55.520 --> 0:07:57.920 But you know, the yields and along end are are 0:07:58.000 --> 0:08:00.760 heavily lower, and I think at the moment too low 0:08:01.160 --> 0:08:03.440 with starting a bit of a correction, but belowly three 0:08:03.440 --> 0:08:05.000 and a half percent for ten years in the US 0:08:05.360 --> 0:08:07.480 is too low and fast fed through. Now already we 0:08:07.560 --> 0:08:09.920 start to see you mentioned the federal hawk is, but 0:08:09.960 --> 0:08:12.840 really what what not bond markets recently was that the 0:08:12.840 --> 0:08:15.880 ECB was much more hawk is as well, and that 0:08:15.920 --> 0:08:18.280 combined effect is starting to hit bond markets. I think 0:08:18.320 --> 0:08:20.880 it's got itself a little bit priced too low and yield, 0:08:21.240 --> 0:08:23.600 and I think they will start to move higher and yield, 0:08:23.800 --> 0:08:26.560 and that may well come with economic recession finding up 0:08:26.560 --> 0:08:29.480 as well. Normally would think that bond yields would will 0:08:29.560 --> 0:08:32.240 go lower as econently weakens. But in some senses, I 0:08:32.240 --> 0:08:35.120 think the markets are pricing ahead of themselves, and I 0:08:35.200 --> 0:08:37.840 steer that bond markets need a bit more of a shakeout, 0:08:37.880 --> 0:08:40.720 and I could see yields headed higher across the board. 0:08:41.400 --> 0:08:44.800 It sounds like an earnings recession is a foregone conclusion 0:08:44.840 --> 0:08:49.000 given everything you've said, Yeah, and this isn't it. And 0:08:49.040 --> 0:08:50.800 I think that's the thing to watch is that is 0:08:50.840 --> 0:08:54.360 that you know where where earnings go. It's very important 0:08:54.400 --> 0:08:56.719 because you know that, Let's face it, the pandemic was 0:08:56.840 --> 0:08:59.160 golden from many many corporates days. A lot of the 0:08:59.200 --> 0:09:01.360 price increases you come through. I think people starting to 0:09:01.400 --> 0:09:04.439 realize that, not just due to commodity prices and people 0:09:04.520 --> 0:09:07.920 moving their prices up ahead of expected commodity rises. So 0:09:08.000 --> 0:09:10.360 I mean a lot of corporate profits have been very 0:09:10.360 --> 0:09:12.559 good the last year or two. It's the music stopped 0:09:12.600 --> 0:09:14.960 this year, and I think that's going to feed through. 0:09:15.040 --> 0:09:17.199 And I think that corporate profits is something to keep 0:09:17.200 --> 0:09:18.719 a very close eye on. Does that all give a 0:09:19.240 --> 0:09:22.439 lead indicated where credit spreads will go? And indeed, probably 0:09:22.480 --> 0:09:24.880 equities because their values had a bit of a comeback 0:09:24.920 --> 0:09:27.920 against growth. Text obviously had a worrying time and things 0:09:27.920 --> 0:09:30.160 like energy stops them. They're able this year. It's gonna 0:09:30.200 --> 0:09:31.880 be much harder work, I think in twenty three. And 0:09:31.880 --> 0:09:33.760 not to say the stop market won't do perssly okay, 0:09:33.760 --> 0:09:35.839 but it's not going to be very much more stop 0:09:35.920 --> 0:09:39.520 pickers market rather than just playing momentum. The UK obviously 0:09:39.520 --> 0:09:41.640 has had a huge amount of political turmoil in the 0:09:41.720 --> 0:09:46.559 last year. What happens, to say the least, what happens 0:09:46.600 --> 0:09:50.520 next a little bit of stability. All this government is 0:09:50.559 --> 0:09:52.640 currently trying to do is do as little as possible 0:09:52.720 --> 0:09:55.120 moment I mean the media all screaming, whereas which she so, 0:09:55.400 --> 0:09:58.360 I tell you exacut it's the hiding um and a 0:09:58.360 --> 0:10:02.280 little bit of calm is very much appreciated appointment. You know. 0:10:02.360 --> 0:10:06.319 He's more of a technocrat, loves a spreadsheet and wants 0:10:06.320 --> 0:10:09.000 to get some competency back in. It's the only chance 0:10:09.040 --> 0:10:12.120 they have to you know, which looks pretty slim of 0:10:12.240 --> 0:10:14.600 retaining any form of parente as time they have to 0:10:14.600 --> 0:10:17.560 have an excellection. So expect more of the same. You know, 0:10:17.600 --> 0:10:21.480 we are going to get very type focused on keep 0:10:21.520 --> 0:10:24.000 trying to get one or two things they can get through. 0:10:24.320 --> 0:10:27.400 There some promising science and on some financial forms, but 0:10:27.440 --> 0:10:29.160 we've got to see delivery. This is what we've not 0:10:29.200 --> 0:10:31.400 seen the last few years is a lot of every 0:10:31.440 --> 0:10:33.360 week there's a new policy and yet nothing comes up 0:10:33.400 --> 0:10:34.760 the back of that. And I think that's what the 0:10:34.760 --> 0:10:36.840 current government is going to try and calm things down 0:10:37.360 --> 0:10:40.280 and at least not make things any worse. And that's 0:10:40.360 --> 0:10:42.480 it's about probably as as better as we can hope for. 0:10:42.960 --> 0:10:46.520 Marcus Ashworth continues with us, including fresh comments following the 0:10:46.520 --> 0:10:48.800 Bank of Japan's move to widen the trading band on 0:10:48.840 --> 0:10:52.400 the tenure bond yield just hours after we spoke. This 0:10:52.480 --> 0:10:56.040 is Bloomberg Opinion. You're listening to Bloomberg Opinion. I'm Vannie 0:10:56.080 --> 0:10:59.199 Quinn and back to my conversation now with Marcus Ashworth. 0:10:59.559 --> 0:11:01.960 Our is after we first spoke this week, the Bank 0:11:02.000 --> 0:11:04.520 of Japan announced a decision to tweak its yield curve 0:11:04.559 --> 0:11:08.200 control mechanism and allow long term yield rise to around 0:11:08.240 --> 0:11:11.439 point five percent, double the previous limit. The b o 0:11:11.559 --> 0:11:13.760 J kept its ten year yield and short term rate 0:11:13.840 --> 0:11:17.760 unchanged at zero and minus point one percent, respectively. Governor 0:11:17.800 --> 0:11:21.120 Howrohko Kuroda said the shift wasn't a rate hike and 0:11:21.240 --> 0:11:25.120 was intended to enhance bond market functionality. Although the government 0:11:25.160 --> 0:11:28.280 bond interest rates will widen as a result of this measure, 0:11:28.640 --> 0:11:31.680 we believe that the effects of monetary easing will spread 0:11:31.720 --> 0:11:34.880 more smoothly. The b o J intends to aim for 0:11:34.960 --> 0:11:39.360 price stability by increasing the sustainability of this monetary easing. 0:11:39.840 --> 0:11:42.480 It's not the beginning of an exit strategy. Traders were 0:11:42.480 --> 0:11:45.200 caught off guard. The end strengthened four percent, and the 0:11:45.200 --> 0:11:48.560 mediate aftermath and speculation began over what the next move 0:11:48.640 --> 0:11:51.160 might be and whether it would wait until horo Heko 0:11:51.240 --> 0:11:54.240 Kuroda's successor takes over at the Bank of Japan in April. 0:11:54.520 --> 0:11:57.920 I called Marcus back, I email you, and you said, Wow, amazing, 0:11:57.960 --> 0:11:59.800 these guys have learned. It's going to cost them a 0:11:59.800 --> 0:12:02.120 four to but I guess it's better take slugs of 0:12:02.160 --> 0:12:05.200 pain than for it to go properly. Bang. Did it 0:12:05.240 --> 0:12:08.840 go properly bang overnight? A well? I mean it was 0:12:08.920 --> 0:12:12.600 clearly a very clever move to perhaps shot the market 0:12:12.720 --> 0:12:15.960 surprise and markets, particularly for foreigners who may have unwound 0:12:16.000 --> 0:12:19.920 their positions ahead of the crisest New year period. Certainly, 0:12:20.280 --> 0:12:24.600 the topics at nick Stockings Sees took it quite badly 0:12:25.280 --> 0:12:28.000 interesting to see the divergence. Nicke down two and a 0:12:28.000 --> 0:12:30.520 half per cent, the topics so much. Why they're index 0:12:30.920 --> 0:12:33.000 only down one and a half, that's because the banks 0:12:33.080 --> 0:12:35.240 are in the topics in next We're not seeing too 0:12:35.280 --> 0:12:38.120 much of reaction here in the US either. No, and 0:12:38.200 --> 0:12:39.760 that's the brilliant bit. I mean you can see it 0:12:39.880 --> 0:12:42.120 in the you know, the US is are, UK's are, 0:12:42.240 --> 0:12:44.800 but I mean clearly you know, the banks did very well, 0:12:44.840 --> 0:12:48.120 and that's princely because the deepening the yeeld curve caused 0:12:48.120 --> 0:12:51.160 by the winding ten you'll bann up to fifty basis 0:12:51.160 --> 0:12:53.760 points only got up to forty basis points. Again, the 0:12:53.760 --> 0:12:55.760 bomb reaction wasn't as big as it could have been, 0:12:56.400 --> 0:12:59.520 but it means the net interest minded for banks is 0:12:59.600 --> 0:13:02.800 wide because the ill curve steeper. We saw that feature 0:13:02.920 --> 0:13:05.800 to US Treasury bonds. You sort of knock on effect 0:13:05.840 --> 0:13:09.400 to European bonds. But as far as Japan's concerned, the yen, 0:13:10.000 --> 0:13:13.680 you know, the currency gained about four percent to the dollar. 0:13:14.120 --> 0:13:16.720 You know, it's been handled pretty well. I always think 0:13:16.720 --> 0:13:19.280 the back of Japan would consider this a win. It 0:13:19.400 --> 0:13:21.480 doesn't get away from the fact that things are going 0:13:21.520 --> 0:13:24.600 to have to be addressed before or by April, when 0:13:24.640 --> 0:13:28.240 the current governor Corona steps down and a new person 0:13:28.320 --> 0:13:31.520 replaced him and almost certainly under pressure to do even more. 0:13:32.160 --> 0:13:34.600 The best things for the Japanese is that were probably 0:13:34.679 --> 0:13:36.960 just as when all of the new central banks will 0:13:37.040 --> 0:13:40.560 be stopping hiking and maybe even start and think about cuttings. 0:13:40.600 --> 0:13:42.760 It means then they will have to hike, will be 0:13:42.840 --> 0:13:45.280 much less exactly and the end strengthen as you say, 0:13:45.280 --> 0:13:48.200 four percent, which will help importers. Will it mean much 0:13:48.280 --> 0:13:54.520 for the Japanese economy this particular move, No, but clearly 0:13:54.720 --> 0:13:57.920 they are really in the bell to their aggressive inflation, 0:13:58.080 --> 0:14:01.400 breeding in booteresting of inflation, beating of deflation. That that 0:14:01.480 --> 0:14:03.800 this is nearing an end, and I think Stony was 0:14:03.800 --> 0:14:07.600 steadily we will see move away from negative brains and 0:14:07.760 --> 0:14:10.160 higher bond yields. About will have something back about it's 0:14:10.280 --> 0:14:14.200 the first early bit of pain Bloomberg Opinions. Marcus Ashworth 0:14:14.240 --> 0:14:16.560 is there. I also got some reaction out of Asia. 0:14:16.720 --> 0:14:20.080 Paul Dobson as an executive editor for Asia Markets at Bloomberg, 0:14:20.120 --> 0:14:22.360 and he gave me his thoughts. After the market had settled. 0:14:22.680 --> 0:14:25.720 We discussed these comments from Middle Potata, head of Emerging 0:14:25.760 --> 0:14:29.560 Market Strategy at t D Bank. It has had global reverberations. 0:14:29.880 --> 0:14:32.480 It's hard to put this back in the bag again, 0:14:32.640 --> 0:14:34.480 and I think it is a start of more steps 0:14:34.520 --> 0:14:37.880 going forward, so we could see further van widening, we 0:14:37.960 --> 0:14:41.600 could see dismantlement of the band altogether. What I do think, though, 0:14:41.680 --> 0:14:43.960 is a governor Corona is probably not in a rush 0:14:44.040 --> 0:14:46.680 to change things now in terms of the policy rate 0:14:46.800 --> 0:14:50.480 and y CEC zero percent target. That may not happen 0:14:50.600 --> 0:14:52.880 until he leaves in April next year we get a 0:14:52.880 --> 0:14:55.440 new Banka Japan governor. But look, the reality is that 0:14:55.840 --> 0:14:59.720 bo j was fighting against an environment with Global Central 0:14:59.720 --> 0:15:03.600 Bank of titan relatively sharply. Last week we had a 0:15:03.600 --> 0:15:07.200 whole bunch of hawkish messages from Central Bags ECB, for example, 0:15:07.240 --> 0:15:09.960 at walking the FED even and it's very hard to 0:15:10.000 --> 0:15:13.240 contend with that, and continued pressure on the top of 0:15:13.280 --> 0:15:15.760 the yield curve target as well, so they have no 0:15:15.840 --> 0:15:17.920 choice in a way. But I don't think this is 0:15:17.920 --> 0:15:19.600 a one and done deal. I think that's going to 0:15:19.640 --> 0:15:22.120 be more to come, and it does spell more bad 0:15:22.160 --> 0:15:25.920 news for global bonds. Japan holds about a trillion dollars 0:15:25.920 --> 0:15:28.480 of treasuries still, so we could still see more selling 0:15:28.520 --> 0:15:31.640 pressure from Japanese investors. So, Paul, you heard there what 0:15:31.720 --> 0:15:34.200 middle Kotecha said, hard to put this back in the box. 0:15:34.480 --> 0:15:37.200 How do Japanese investors react in the new year. Will 0:15:37.240 --> 0:15:40.080 it unsettled markets again? Yeah? I think this is a 0:15:40.200 --> 0:15:44.080 very significant shift for global markets and for global investors 0:15:44.120 --> 0:15:47.200 as well. The Bank of Japan has been that last 0:15:47.360 --> 0:15:50.840 last of the negative, very low interest rate, and the 0:15:50.920 --> 0:15:53.960 fact that it's easing off just that little bit signaling 0:15:54.080 --> 0:15:57.520 a slight shifting policy is going to be enough to 0:15:57.520 --> 0:16:02.120 get investors very excited. Remember, Japanese investors have three trillion 0:16:02.240 --> 0:16:05.920 dollars worth of all over the world, and if they 0:16:05.960 --> 0:16:08.560 see that the home markets are suddenly little more repealing 0:16:08.920 --> 0:16:11.760 and they start bringing that money back to Japan, it's 0:16:11.760 --> 0:16:14.000 going to have two effects. It's going to be very 0:16:14.040 --> 0:16:17.160 supportive for the end. It's also going to be a 0:16:17.240 --> 0:16:21.720 downside for all of those sectors where they've got their funds, 0:16:22.000 --> 0:16:24.480 So not just US treasuries, which is obviously a big one, 0:16:24.520 --> 0:16:28.520 but also government once of France for example, or Australia 0:16:28.560 --> 0:16:32.000 where they own a high concentration of the That's something 0:16:32.040 --> 0:16:34.600 that we're going to be watching very carefully into the 0:16:34.680 --> 0:16:37.600 new year. It should be a sort of slow and 0:16:37.800 --> 0:16:42.320 gradual shift rather than a massive, short sharp move as well, 0:16:42.440 --> 0:16:47.160 so it could influence global markets significantly. Over a period 0:16:47.240 --> 0:16:49.520 of time into the new year. As you said, you 0:16:49.560 --> 0:16:52.680 mentioned three trillion dollars worth of holdings outside of Japan, 0:16:52.760 --> 0:16:54.400 about a trillion of that so or at least a 0:16:54.440 --> 0:16:56.680 third of that as in US treasuries, and surely some 0:16:56.760 --> 0:16:58.440 of that will move back to Japan at a time 0:16:58.440 --> 0:17:02.200 when the Federal Reserve is also changing its relationship with 0:17:02.240 --> 0:17:05.840 the bond market. So how do US investors react? I 0:17:05.840 --> 0:17:08.399 think the U S investors will be very cautious about 0:17:08.440 --> 0:17:12.240 the idea that there could be outflows from Japanese investors, 0:17:12.240 --> 0:17:14.399 which we've already seen the most of this year, but 0:17:15.000 --> 0:17:18.879 as well as a slight shift in the yield differentials, 0:17:19.040 --> 0:17:22.000 hedging costs is still very high as well for those 0:17:22.040 --> 0:17:25.960 Japanese investors taking on exchange rate risks that they probably 0:17:26.000 --> 0:17:28.120 don't want to do that, and so they may continue 0:17:28.160 --> 0:17:31.840 to repatricate funds, the alternative being to lay on extra 0:17:31.880 --> 0:17:35.919 effect hedges and to hold onto those securities. So it 0:17:35.960 --> 0:17:38.120 could be that there's more outflows, which means it could 0:17:38.119 --> 0:17:41.639 be that these extra pressure to the downside on US government. 0:17:41.680 --> 0:17:44.400 They're higher borrowing costs, which could make it a little 0:17:44.400 --> 0:17:46.879 bit more painful for the U S Treasury as it 0:17:46.960 --> 0:17:50.399 seems to refinance that over becoming year. Yeah, the currency 0:17:50.600 --> 0:17:52.600 are going to be fascinating to watch as well. The 0:17:52.640 --> 0:17:54.879 other thing to remember is that the global pile of 0:17:54.920 --> 0:17:58.119 bonds now at sub zero yields. It's under seven hundred 0:17:58.160 --> 0:18:00.440 billion dollars, which sounds like a lot, but the peak 0:18:00.520 --> 0:18:04.440 two years ago was eighteen point four trillion dollars worth. 0:18:04.560 --> 0:18:07.080 I mean, I know these are all sort of just numbers, right, 0:18:07.119 --> 0:18:09.760 but it makes a big difference at the same time. Yeah, 0:18:09.800 --> 0:18:14.720 this is my favorite a conversation Bunny Um. You know. Finally, 0:18:15.080 --> 0:18:18.639 fixed income as a's offering a posit of return wherever 0:18:18.680 --> 0:18:20.960 you are in the world, and that's a really big 0:18:21.000 --> 0:18:23.280 difference to what we've seen over the past ten years. 0:18:23.359 --> 0:18:27.320 So in general, it's going to make bonds a more 0:18:27.400 --> 0:18:30.560 viable perspect for long term investors. It's going to make 0:18:30.560 --> 0:18:33.440 people more confident wherever they are in the world that 0:18:33.880 --> 0:18:37.640 they can have decent earnings on their bonds, on their 0:18:37.640 --> 0:18:41.560 fixed income failure. So after the pretty huge losses that 0:18:41.600 --> 0:18:44.080 we've seen this year, it should writen the outlook for 0:18:44.800 --> 0:18:48.040 in general into three. How will that be seen in 0:18:48.080 --> 0:18:50.240 the market, pol I mean, it seems like we've had 0:18:50.440 --> 0:18:54.800 correlations that have been extraordinarily odd for many years. Now 0:18:54.840 --> 0:18:58.480 that moms are actually you know, returning positive returns, will 0:18:58.480 --> 0:19:01.680 we see those correlations change. Yeah. I think there's something 0:19:01.760 --> 0:19:07.280 people really need to watch very carefully next year. This year, extraordinarily, 0:19:07.400 --> 0:19:12.120 we've seen stocks and bonds moving very closely together and 0:19:12.320 --> 0:19:14.840 are very to take correlation, which is terrible if you 0:19:14.880 --> 0:19:17.199 know you're a sixty for the investor, as terrible as 0:19:17.240 --> 0:19:20.479 you're long only investor. It's terrible if your pension funds 0:19:20.680 --> 0:19:23.479 and have your money trailed up in stocks and bonds 0:19:23.560 --> 0:19:26.680 because you get no shelter. Their stocks sell off because 0:19:26.720 --> 0:19:28.760 bonds are selling off at the same time. So it 0:19:28.800 --> 0:19:32.240 would be really interesting to see whether that relationship breaks 0:19:32.280 --> 0:19:35.520 and tracement the next year or whether it holds. There's 0:19:35.520 --> 0:19:40.119 a big argument in a higher inflation universe, the correlation 0:19:40.160 --> 0:19:43.120 between stocks and bonds stage positive. On the other hand, 0:19:43.160 --> 0:19:46.240 we're very used to risk on risk off stocks to 0:19:46.240 --> 0:19:48.439 go up, bonds go down, and the other way around 0:19:48.520 --> 0:19:52.040 as well. So we'll see whether that re establishes itself 0:19:52.040 --> 0:19:54.480