Speaker 1: Welcome to the Bloomberg Surveillance Podcast. I'm Tom Keane. Along
Speaker 1: with Jonathan Ferrell and Lisa Abramowitz. Daily we bring you
Speaker 1: insight from the best and economics, finance, investment, and international relations.
Speaker 1: To find Bloomberg Surveillance on Apple podcast, SoundCloud, Bloomberg dot Com,
Speaker 1: and of course on the Bloomberg terminal. When we invented
Speaker 1: Bloomberg Surveillance, folks, it's about bringing in the experts. John
Speaker 1: and I think we can say John is Jordan Rochester
Speaker 1: and Nomura is nuanced and different than George Saravellis at
Speaker 1: Deutsche Bank, is nuanced and different than the giants Stephen
Speaker 1: Englander over at Standard Charter. And to talk to all
Speaker 1: those people to read their research helps us call a
Speaker 1: around this shock that we have. Should we bring in
Speaker 1: Jordan Rochester? We bring him in right now? You bring
Speaker 1: him name Jordan. Why don't you get the extra down
Speaker 1: side from on your daughter? From where we are down to,
Speaker 1: say ninety five in August, warning everyone, afternoon, everyone. Well,
Speaker 1: in terms of why we think euro carries on, the
Speaker 1: risk is, of course these gas flows, but there's also
Speaker 1: a global recession story building up. So I think most
Speaker 1: analysts have now only just realized euro can keep heading lower.
Speaker 1: There was actually quite a bit of a fight in
Speaker 1: the sort of cell side community around the one oh
Speaker 1: six level when the ECB turn hawk ish. Well now
Speaker 1: it's quite clear the gas flows dominating, and the reason
Speaker 1: it goes to is probably three reasons. The first one
Speaker 1: is the gas flows. We think that there's a high
Speaker 1: chance that not Turing doesn't resume its operations, and what
Speaker 1: we're seeing is a fundamental macro story. Euro dollar is
Speaker 1: heading lower because European importers of gas are buying whatever
Speaker 1: they can buy from the US, from Qatar, from as
Speaker 1: bai Jan. They're just throwing money at the wall to
Speaker 1: make sure the EU achieves the gas storage aims the
Speaker 1: roughly around sixty two or sixty six percent full, so
Speaker 1: they've got a lot more to do and that's forced
Speaker 1: euros selling all the way until that target is reached.
Speaker 1: The second reason, it's China, Okay, continue, sorry, continue continue.
Speaker 1: The second reason is China. China's COVID business cycle. Before
Speaker 1: the break, we had a little first word. They're telling
Speaker 1: us that Shanghai might be going into lockdowns again. That's
Speaker 1: the biggest trading partner for the euro Area. So demand
Speaker 1: has just come out of the curve for European exports.
Speaker 1: And the third one is recession risks, the US raising
Speaker 1: rates the way they have, the way the world has
Speaker 1: moved to the supply chain, and inflation. The ECB is
Speaker 1: going to raise rates in July, September, October, and so on.
Speaker 1: But we're talking about rate cuts here at number of
Speaker 1: next year. I think that's the next trade. And I
Speaker 1: find it really interesting how there's so much fed cuts
Speaker 1: price for next year. The curves inverted, but that hasn't
Speaker 1: happened in euro yet. So that's the next story, and
Speaker 1: that's gonna weigh on euro as well. So not just
Speaker 1: all about gas flows. It's a bigger story. Two stents
Speaker 1: spread moving from negative ten to a negative eleven basis points.
Speaker 1: Get your attention, Jordan. You and I were wained on
Speaker 1: reading Duly fokars landau Garber David fokars landau Over at
Speaker 1: the big German Bank. Makes real clear at some point
Speaker 1: we have to step in using euro as a praxie.
Speaker 1: Are we anywhere near and a Jordan Rochester zero point
Speaker 1: nine five where institutions will step in to stanch the
Speaker 1: dollar strength it's definitely possible, but I think it's unlikely.
Speaker 1: It's definitely not my base case. I can say that.
Speaker 1: So when the euro was invented, there was FX intervention,
Speaker 1: that was the authorities around the world stepped in the
Speaker 1: Federal Reserve of the Bank of eng and so on
Speaker 1: to help support the currency. That so that it didn't
Speaker 1: spur a Eurozone crisis in its early infancy. So there
Speaker 1: was a joint effort there, and at the same time,
Speaker 1: inflation was not as much of a problem as it
Speaker 1: is today. Right now, every central bank around the world
Speaker 1: pretty much wants a stronger currency. It helps tame inflation
Speaker 1: from from import costs. So that's why we're seeing even
Speaker 1: the likes of the SMB, who have for years fought
Speaker 1: the curve and try to not have a stronger currency,
Speaker 1: they're pretty much asking for one. Well, the Eurozone, they
Speaker 1: can do that via rate hikes, and I think that's
Speaker 1: the main way they're going to possibly do that. But
Speaker 1: as I said earlier, the growth story is much bigger
Speaker 1: than just the rate hikes. Is what's going on gas
Speaker 1: in China, but FX intervention is being talked about in
Speaker 1: Japan as well. Another great example, the authorities there say
Speaker 1: the move is detached from fundamentals, where most of the
Speaker 1: charts we look at say actually the move is quite
Speaker 1: in line with fundamentals. That's the same with the euro
Speaker 1: We've had a huge terms of trade shot Tom and
Speaker 1: German exports have now become very uncompetitive. The cost of
Speaker 1: electricity and energy in Europe is roughly around six times
Speaker 1: higher than America. So to make a piece of manufactured
Speaker 1: equipment you're paying six times more in electricity costs. You're
Speaker 1: uncompetitive versus an American firm. You need a weaker currency
Speaker 1: to help you out. Jordan, I want to tease out
Speaker 1: the potential cases that you lay out in euros. Recent
Speaker 1: note is the most likely that you see by mid
Speaker 1: August or the end of August. I should say that's
Speaker 1: according cheer latest note. But you said that a ninety
Speaker 1: print could actually be reasonable to look for over the winter.
Speaker 1: If we do get a nord Stream one cut down
Speaker 1: cut off, if a Russia does not restore the gas supplies,
Speaker 1: at what point does something break? At what point is
Speaker 1: there a level at which you start to see a
Speaker 1: contagion that perhaps is not linear? Well, I think nine
Speaker 1: five to ninety is non linear. What breaks well. I
Speaker 1: think credit channels would be much more the area where
Speaker 1: things breaks. The rise and interest rates we've seen and
Speaker 1: the drying up a consumer demand, we're gonna see a
Speaker 1: lot of business models really challenged, and that's where you
Speaker 1: have something breaks. The irony of that is if you
Speaker 1: have credit spreads wide and that leads to a dovish
Speaker 1: central bank typically and that would mean in lower euro
Speaker 1: So I still think the exchange rate is the release valve,
Speaker 1: and I don't think the exchange rate is what's going
Speaker 1: to cause that stress. It's coming from the supply and
Speaker 1: the demand side of the equation when it comes to
Speaker 1: those risks. But look, when we get to five, we're
Speaker 1: kind of basing that on the north stream one flows
Speaker 1: maybe coming back to of their capacity. What ninety cents
Speaker 1: is that's the scenario where north Stream one does not
Speaker 1: come back on and the euro area does not get
Speaker 1: enough gas storage and the German manufacturers get their gas rationed.
Speaker 1: The Bunder's Bank in Germany have already done the analysis.
Speaker 1: They expect that's a five percent hit to German GDP
Speaker 1: if we have gas rationing outside of COVID. That's one
Speaker 1: of the biggest economic shocks we've ever seen. So that's
Speaker 1: a crisis you need that we can currently to help
Speaker 1: you out, John, and just quickly, we've got to squeeze
Speaker 1: this in. We're rationing flight to Heathrow. He throw out
Speaker 1: this morning, basically putting a cast passenger limit on airlines
Speaker 1: through September eleventh. What did you make of that? How
Speaker 1: important is that story for you? It's the summer of
Speaker 1: discontent For a lot of people. This is a personal
Speaker 1: story for their own lives. I'm flying next week. I'm
Speaker 1: flying with British Airways, so maybe this will disrupt my flights.
Speaker 1: But on on a on a macro scale for the UK,
Speaker 1: it's going to lead to a summer of discontent. It
Speaker 1: could lead to higher wages more broadly speaking, and that
Speaker 1: makes life trickier for the central banks. They're looking at
Speaker 1: high inflation, looking at rising wages. They should be raising
Speaker 1: rates in that scenario, but they're also seeing economic crisis
Speaker 1: building up in the future in their pipeline. If we have,
Speaker 1: especially with the gas situation gets worse, so that the
Speaker 1: center bank is in a really weird place. They need
Speaker 1: to raise rates to tame inflation, but they'll be looking
Speaker 1: at negative growth, so that's somewhere of discontent, just keeps
Speaker 1: central bank in that weird place. What a tough spot, Jordan,
Speaker 1: Thank you, Jordan Rochester the of the more Cathy Jones
Speaker 1: with his chief fixed income strategist at CHERYLS. Schwab. Is
Speaker 1: a great mystery here, Cathy, that we're gonna be want
Speaker 1: to be in fixed income with price up, yield lower. Yeah.
Speaker 1: I think that the time to to move into a
Speaker 1: little bit more duration has come. And we've been suggesting
Speaker 1: that for a while now. You know, when you get
Speaker 1: tenure yields above three, especially up in that three and
Speaker 1: a half percent area at a time when the featist
Speaker 1: tightening and the economy, the global economy is under a
Speaker 1: lot of stress, I think that that safe haven move
Speaker 1: and that yield move uh is the way to go.
Speaker 1: Cathy Anahn was on with a wonderful discussion of the
Speaker 1: tail risk out there off Curtosis. We rarely talk about
Speaker 1: tail risk in the bond market. I want to go
Speaker 1: there right now. How uncertain is the determination of what
Speaker 1: price will do in fixed income? Now? How malleable are
Speaker 1: the tail risks of the bond market? Yeah, it's a
Speaker 1: great question, Tom. I think the question is we're in
Speaker 1: the bond market, are we talking about? So we still
Speaker 1: see a lot of tail risk and credit, particularly lower
Speaker 1: quality credit, high yield, and even in the private debt markets,
Speaker 1: there's a building amount of stress there. So I think
Speaker 1: the tail risk there is pretty high. I think in
Speaker 1: treasuries obviously there's some. I don't think it's uh, it's
Speaker 1: immense anymore, simply because we've had such a massive upward
Speaker 1: parallel shift in the yield curve and we've got the
Speaker 1: FED tightening. That combination typically will you know, flatten the curd,
Speaker 1: invert the yield curve, and so that probably diminishes some
Speaker 1: of the tail risk at the long end. Kathy, we
Speaker 1: were talking earlier about Marko Klanovic being an uber bowl
Speaker 1: and moving to being just a bull when it comes
Speaker 1: to risk assets. If you look at his note, it's
Speaker 1: actually really nuanced, and he has a pretty bold call
Speaker 1: on credit saying that that is not pricing in as
Speaker 1: much risk right now as stocks. Would you agree with that? Well,
Speaker 1: I don't do stocks, so I can't compare the two,
Speaker 1: but I will say I think credit still has some
Speaker 1: ways to go in terms of pricing in recessionary conditions.
Speaker 1: For a further deterioration in UM credit quality and credit performance,
Speaker 1: both domestically globally. So when we look at the high
Speaker 1: yield spread, you know it's moved up quite a bit,
Speaker 1: but we think it can move up another hundred and
Speaker 1: fifty basis points or so if we get into a
Speaker 1: pretty sharp downturn here, which looks like that's where we're
Speaker 1: headed towards the second half of the year, sounds like
Speaker 1: it could be controlled or could be uncontrolled based on
Speaker 1: the pace of it. And I think about what Michael
Speaker 1: Schowell said yesterday on the show, where he was saying
Speaker 1: that we could start to see real market dysfunction that
Speaker 1: could actually get the fence attention. Do you see corporate
Speaker 1: credit as being vulnerable to that type of fissure that
Speaker 1: he's talking about. I think the problem in corporate credit
Speaker 1: is the liquidity issue UM So, yes, at the at
Speaker 1: the very low credit quality, we could run into some
Speaker 1: problems there, and I think access to the market would
Speaker 1: be really difficult and probably is getting more difficult for
Speaker 1: say triple C rated low rate of UH corporate issuers.
Speaker 1: But I think in the investment grade space, what we
Speaker 1: worry about is just liquidity because the dealers are not
Speaker 1: holding as much the banks. The dealers are not holding
Speaker 1: as much. A lot of it has moved into the
Speaker 1: private market. If there is a dislocation, it's simply the
Speaker 1: inability for the market to get the liquidity it needs
Speaker 1: to get that the price and yield right, and we
Speaker 1: could see some problems. They're not anticipating it, but it
Speaker 1: certainly could happen if things deteriorate quickly. Kathy, thank you,
Speaker 1: always wonderful to catch out with you. One of my favorites,
Speaker 1: Kathy Jones, that have challenged swamp and joining us now
Speaker 1: I could he stranagis at Wells Fargo Securities and this volatility,
Speaker 1: this mess, whatever you want to call it, do we
Speaker 1: need to get comfortable, get used to it. Is it
Speaker 1: going to stick with us for a while. Well, I
Speaker 1: don't know if you can say comfortable, but we do
Speaker 1: think it's going to stick around. John, I think a
Speaker 1: lot of the volatility we're going to continue to see
Speaker 1: somewhat ever outlier moves on the day. Aggressive rips up,
Speaker 1: aggressive drops down, and that's gonna probably persist until we
Speaker 1: really see a science from the said that they're easing
Speaker 1: off the gas pedal in terms of their hiking schedule
Speaker 1: and know your notice brilliant. It goes all massa tellub
Speaker 1: where you say, forget about the probability distribution, forget about
Speaker 1: the center tendency of crude hostess and such. Look at
Speaker 1: the tails. Look at the tails. What does the left tail,
Speaker 1: the sweat of the left tail, the fear of the
Speaker 1: left tail. What's it look like right now? We would
Speaker 1: put it in context of really what sort of investment
Speaker 1: style we're thinking about. At the left tail, we're thinking
Speaker 1: about what have been the worst performers. What does that
Speaker 1: low momentum basket really signaling? And we have this kind
Speaker 1: of stress scenario and what looks to be for us
Speaker 1: base case of recession. You've heard it time and again,
Speaker 1: base case base case. What's driving that you're seeing these
Speaker 1: really poor performers be the broken stories here? And when
Speaker 1: you have that situation, we think that can persist, so
Speaker 1: to us where advising clients avoid that low momentum basket,
Speaker 1: don't go bottom fishing here, and also avoid the high
Speaker 1: risk basket and lean more towards that low volatility if
Speaker 1: you're worried about that recession that's at least in the
Speaker 1: investment styles but you also have to think of this
Speaker 1: in context of inslation. What are the potential drive is
Speaker 1: that might bring inflation off the boil? What are the
Speaker 1: extreme cases and we don't see those extreme cases really
Speaker 1: relieving us of a CPI print below eight and a
Speaker 1: half for the rest of this year. Inflation has been
Speaker 1: a story that a lot of people have been talking
Speaker 1: about and obsessing over for most of the year. But
Speaker 1: now it's the strong dollar and what that does to
Speaker 1: the SMP two companies that derive about thirty percent of
Speaker 1: their revenues from overseas. How much of that has been
Speaker 1: baked in and how much do you expect that to
Speaker 1: be really a headwind during the setting earning season for
Speaker 1: what equity valuations do well, Lisa, I don't think it's
Speaker 1: fully really baked in now, you know. I wish I
Speaker 1: could pinpoint and put a number on it for you,
Speaker 1: But you bring up a great point. You know, the
Speaker 1: dollar is strengthening, and that strengthening is coming from the
Speaker 1: different pace in which we are tightening monetary policy versus
Speaker 1: countries in comparison, and what that does to earnings and
Speaker 1: already earnings and margins that are under pressure, it's going
Speaker 1: to add another weight to the US corporate earning season,
Speaker 1: and I think that itself has cause some of that
Speaker 1: volatility we're talking about. People are worried can we continue
Speaker 1: to grow earnings at the pace at which people are
Speaker 1: hoping for and what looks to be a slowing GDP
Speaker 1: growth a weakening consumer and that growth is going to
Speaker 1: be really what drives confidence and equities and what really
Speaker 1: what dictates the direction for the rest of the year,
Speaker 1: and the cause of a lot of this has been
Speaker 1: the energy industry and the price accrued, the price of energy,
Speaker 1: the price of gas. Do they become the victim of
Speaker 1: the solution? Can I belong those names into year end?
Speaker 1: If I'm expecting that kind of GDP deceleration, Well, I
Speaker 1: think there are ways to be exposed to the energy
Speaker 1: markets and play that carefully. But for us, we think
Speaker 1: on a broad scale, looking at oil and commodities, they
Speaker 1: may be peaking here. Now that doesn't mean that they're
Speaker 1: going to be rolling over quickly or rolling over strong
Speaker 1: enough that CPI comes down aggressively. But we do think
Speaker 1: that in many instances and cases that we may be
Speaker 1: seeing the top here and other aspect of that and
Speaker 1: where we might see part of that being a hinted
Speaker 1: at is you look at how much the market believes
Speaker 1: that the impact of energy has on cp I might
Speaker 1: be reduced. As you look at break evens, you see
Speaker 1: break even rolling off from what had been above three
Speaker 1: hundred basis points now down to maybe three seventy three
Speaker 1: to thirty excuse me, two basis points now. That's telling
Speaker 1: you that it's starting to weaken as an impact. And
Speaker 1: that's where we're getting our signal that maybe oil and
Speaker 1: commodities really are reaching their peak. An awesome stuff. As
Speaker 1: always at once Founder Securities, thank you right now. Ellen
Speaker 1: Wald was a senior fellow in Atlantic Council on Oil
Speaker 1: on strong dollar, which harkens back to another time in
Speaker 1: place and petro dollars. Ellen, what does a strong dollar
Speaker 1: mean for your oil world? Yeah, it's you know, things
Speaker 1: are things are quite uh incredible in oil right now.
Speaker 1: And as we're seeing, um, you know, prices are kind
Speaker 1: of going on on a rather almost like a roller
Speaker 1: coaster up and down. Um. Fears of recession uh tend
Speaker 1: to send the prices down because there's a sense that
Speaker 1: this will reduce demand. But then the next thing you
Speaker 1: hear is, you know, demand is so strong, uh still,
Speaker 1: and so then you you see prices going up. I
Speaker 1: think that the news of Heathrow reducing capacity could actually
Speaker 1: are putting capacity limits. The idea that that could potentially
Speaker 1: reverberate across other airports could put a damper on on
Speaker 1: travel and jet fuel demand as well. Is there a
Speaker 1: linkage of petro dollars to declining oil demand? You know,
Speaker 1: that's a really good question, and I think at this point,
Speaker 1: you know, we're not really seeing a drop in demand.
Speaker 1: You know, we've looked at gasoline stats. You know, some
Speaker 1: weeks we're seeing a drop, in other weeks we're seeing
Speaker 1: an increase. So um, I think that we have seen
Speaker 1: some declines in terms of demand instruction, but not a
Speaker 1: whole lot. Uh. There's a lot of pent up demand.
Speaker 1: It doesn't seem like the dollars really affecting demand all
Speaker 1: that much at this point, Ellen, which raises a question
Speaker 1: of when we're going to see a pop in oil prices,
Speaker 1: given that even fought b role as we were just
Speaker 1: hearing from the i A came out and said, this
Speaker 1: is a global energy crisis in a sense that we
Speaker 1: have never seen before in terms of complexity and speed.
Speaker 1: When do we see that translate into the higher prices
Speaker 1: that so many people are expecting and the prinkly you're
Speaker 1: seeing in the physical market. You know, it's so interesting
Speaker 1: because we're seeing a lot of calls for either you know,
Speaker 1: oil will either go to two hundred and thirty dollars
Speaker 1: of barrel or it could go down to sixty dollars
Speaker 1: a barrel, and that's a that's a huge, huge margin here,
Speaker 1: and I do think that it reflects a lot of
Speaker 1: the uncertainty. Uh And and facty Bureau is correct to
Speaker 1: call attention to a lot of the issues that we're
Speaker 1: seeing today. I mean, look at what happened in Sri Lanka.
Speaker 1: That could be next for many, many more countries and
Speaker 1: not just developing nations. But we could absolutely see fuel
Speaker 1: crisis around the globe. And uh you know, part of
Speaker 1: that is due to historically low investment in fossil fuels,
Speaker 1: and you know that that trend is not really reversing
Speaker 1: itself at any point, and this is precipitating a huge
Speaker 1: energy crisis. Ellen, does any part of the capping of
Speaker 1: energy prices from rush or at least the energy prices
Speaker 1: that they receive. Does it make sense to you in
Speaker 1: terms of its feasibility and a rollout and getting everyone
Speaker 1: on board. Or is this basically highlighting the lack of
Speaker 1: tools right now available to really curtail the crisis that
Speaker 1: people are talking about. Yeah, I I just don't see
Speaker 1: how imposing a cap on Russian oil prices is at
Speaker 1: all feasible because, uh, you know, say you even get
Speaker 1: Indian China, which are the biggest buyers of Russian food
Speaker 1: right now, you say to them, okay, only pay this
Speaker 1: amount for Russian food. And the idea is that Indian
Speaker 1: China will want to pay less. Of course they want
Speaker 1: to pay less, but will the Russians want to sell
Speaker 1: them for less? Russia's in. Russia's holding the cards right
Speaker 1: now because if Indian China want their oil, they can say, sorry,
Speaker 1: you know, we're not going to sell it for you know,
Speaker 1: forty under under the benchmark. We're offering you a twenty
Speaker 1: dollar discount. And our Indian China really going to say no.
Speaker 1: Are they going to risk, especially India, having a fuel
Speaker 1: crisis in their country? Uh? Just because the West is
Speaker 1: saying we want you to cap the price of Russian
Speaker 1: oil so that you know it'll hurt putin In his
Speaker 1: war against Ukraine. They're they're probably looking at saying Ukraine,
Speaker 1: what Ellen you just mentioned Sri Lanka. And I'm very
Speaker 1: curious about the contagion effect here. When a given poorer country,
Speaker 1: beleaguered by high oil prices provide subsidies domestically, where do
Speaker 1: they get that money? Do they issue debt or is
Speaker 1: it a bail out from the I m F. I'm
Speaker 1: guessing that they first issue debt and then they're hoping
Speaker 1: for a bail out from the I m F. And
Speaker 1: if that's not, you know, coming uh, then then they're
Speaker 1: gonna see some serious problems. And we're seeing not just uh,
Speaker 1: you know, developing countries do this, but we're seeing it
Speaker 1: in more developed countries as well. Offering these kind of subsidies,
Speaker 1: are trying to to subsidize their cap energy prices, and
Speaker 1: in some cases they're saying to the utilities, you can't
Speaker 1: charge more than X. Well, if the utilities have to
Speaker 1: pay more than X for their fuel, then that's just
Speaker 1: gonna put the utilities in a bankruptcy situation and likely
Speaker 1: cause them to be nationalized. And then the government's going
Speaker 1: to take that debt and uh, so on and so forth.
Speaker 1: So they're not really solving the problem. They're just kind
Speaker 1: of kicking it to UH, to other people or to
Speaker 1: other entities. And well and the Amanti cant so, and
Speaker 1: thank you. This is the Bloomberg Surveillance Podcast. Thanks for listening.
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