WEBVTT - Bond Traders Boost Bets on Half-Point Fed Rate Cuts by Year-End

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<v Speaker 1>Bloomberg Audio Studios, Podcasts, radio News.

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<v Speaker 2>Welcome to the Bloomberg Daybreak Asia podcast. I'm Doug Chrisner.

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<v Speaker 2>Global markets are very much focused on the Federal Reserve.

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<v Speaker 2>The fed's newest governor, Stephen Myron, was sworn in Tuesday,

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<v Speaker 2>just in time for this critical two day policy meeting.

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<v Speaker 2>Nominated by President Trump. Myron is the chair of the

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<v Speaker 2>White House Council of Economic Advisors. Now he's taken lead

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<v Speaker 2>from that role, but he hasn't resigned. Here's Bloomberg's Michael McKee.

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<v Speaker 3>We're not going to feel the imprint of his presence either,

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<v Speaker 3>except that he might dissent if the FED does a

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<v Speaker 3>twenty five basis point cut, and he might call for

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<v Speaker 3>a fifty basis point cut, because that seems to be

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<v Speaker 3>the reason he's been sent over to the FED.

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<v Speaker 4>By Donald Trump.

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<v Speaker 2>In a moment or two, we'll get the views of

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<v Speaker 2>Sean Darby. He is managing director at Misaho Securities Asia.

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<v Speaker 2>But we begin here in the States. Joining me now

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<v Speaker 2>is Bob Dahl. He is President CEO also the CIO

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<v Speaker 2>at cross Mark Investments. Bob, thank you so much for

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<v Speaker 2>making time to chat with me. Are you in the

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<v Speaker 2>camp for a twenty five basis point rate cut.

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<v Speaker 4>I am as most of the rest of the world

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<v Speaker 4>is doug a very important meeting because of what's going

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<v Speaker 4>to be said around it. I think much less about

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<v Speaker 4>what the decision is people are expecting twenty five.

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<v Speaker 2>There has been some speculation, maybe you've heard of it,

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<v Speaker 2>kind of the sell the news theme after the Fed's decision,

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<v Speaker 2>maybe a gap down for the equity market, given the

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<v Speaker 2>fact that this rate cut is pretty much widely priced in.

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<v Speaker 5>As you just.

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<v Speaker 4>Said, yeah, I think that a lot will depend on

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<v Speaker 4>what the verbiage is around it. In particular, what does

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<v Speaker 4>the chairman say in the press conference that follows. If

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<v Speaker 4>he indicates that there are more coming, that is more cuts,

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<v Speaker 4>and the market might like that. If he says we're

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<v Speaker 4>really worried about inflation is going to have to watch

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<v Speaker 4>the data, the market may not particularly take a shine

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<v Speaker 4>on that. So will depend on what is said in

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<v Speaker 4>the conference.

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<v Speaker 2>So I saw the latest survey from Bank of America

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<v Speaker 2>Fund Manager Survey net twenty eight percent still overweight equities.

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<v Speaker 2>With what we're talking about in terms of FED policy,

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<v Speaker 2>the likelihood for subsequent rate cuts, are you still constructive

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<v Speaker 2>on stocks reasonably?

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<v Speaker 1>So?

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<v Speaker 4>I've sort of hedged by saying we are in a

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<v Speaker 4>high risk bull market. Bull market obviously means the path

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<v Speaker 4>of least resistance is updug, but the high risk means,

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<v Speaker 4>but be careful. Stocks are very expensive relative to history,

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<v Speaker 4>and you know, we have some question marks. We just

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<v Speaker 4>talked about the question mark around the jobs market, a

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<v Speaker 4>little bit about inflation. It's not anywhere near the fed's

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<v Speaker 4>two percent target, so lot could go wrong. But till now,

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<v Speaker 4>the market has said earnings are fine, leave me alone

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<v Speaker 4>with all that other disturbing and in set of issues

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<v Speaker 4>that don't make a difference quote unquote.

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<v Speaker 2>So, Bob, if you do have questions, I'm curious about

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<v Speaker 2>the strategy that you're using. Are you taking money off

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<v Speaker 2>the table where it relates to equities maybe, are you

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<v Speaker 2>looking at the bond market at all?

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<v Speaker 4>So, yes, we have some money in the bond market

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<v Speaker 4>now that has run as well as you know, with

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<v Speaker 4>a ten year treasury yield approaching four percent from being

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<v Speaker 4>higher not that long ago. So the bonds are not

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<v Speaker 4>all that attractive either. Now we'll say this if the

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<v Speaker 4>FED or when the FED lowers rates, and if they

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<v Speaker 4>hint at more shorter maturities probably will do well as

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<v Speaker 4>interest rates come down the front end of the curve

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<v Speaker 4>out past ten years, they may worry about inflation. If

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<v Speaker 4>the Fed is threatening to reduce rates more so, we

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<v Speaker 4>could end up with a steeper yield curve, if you will.

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<v Speaker 2>So I know that a lot of the expectations here

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<v Speaker 2>on this rate CUD are perhaps founded on this notion

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<v Speaker 2>that we have seen deterioration in the labor market. But

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<v Speaker 2>if you look at the day's economic news today, the

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<v Speaker 2>retail sales number that was pretty upbeat, I mean, a

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<v Speaker 2>rate of six tens to one percent in August. And

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<v Speaker 2>if you look at the control group sales that's obviously

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<v Speaker 2>a part of the calculation for GDP, we saw an

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<v Speaker 2>increase of seven tents of one percent. That suggests a

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<v Speaker 2>pretty healthy quarter. So net net, I mean, the American

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<v Speaker 2>economy looks like it's still pretty strong right now.

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<v Speaker 4>It certainly does. The contemporaneous numbers are generally been pretty good,

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<v Speaker 4>and of course earnings for the first two quarters of

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<v Speaker 4>the year we're brilliant, and many are expecting that again

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<v Speaker 4>in the third quarter. The question is will jobs being weaker,

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<v Speaker 4>will inflation being higher get in the way of all

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<v Speaker 4>that so far, so good, But we'll have to watch

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<v Speaker 4>both of those carefully. And that's, of course the balancing

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<v Speaker 4>act that the fit has. Their job's never easy, but

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<v Speaker 4>they're between a rock and a art place. Labor market

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<v Speaker 4>seems to be weakening, inflation seems to be firm.

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<v Speaker 2>What are they going to do When it comes to

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<v Speaker 2>a lot of the power that we have seen in

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<v Speaker 2>the equity market, you have to look no further than

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<v Speaker 2>artificial intelligence. That trade kaptech has been a big theme

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<v Speaker 2>for much of the year. How are you feeling about

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<v Speaker 2>that right now?

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<v Speaker 4>Constructive? It's for real. AI is for real. Now that's

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<v Speaker 4>come into the price of stocks in a pretty big way,

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<v Speaker 4>So we could debate is it too much too soon?

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<v Speaker 4>Often Wall Street gets a hold of these new if

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<v Speaker 4>I can call AI new new concepts, and they get

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<v Speaker 4>it right in terms of direction, but they overdo it

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<v Speaker 4>and do it too quickly. Are we going to have

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<v Speaker 4>a so off time? We'll tell. Obviously in the first

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<v Speaker 4>quarter the so called mag seven and other AI stocks struggled,

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<v Speaker 4>but they came back with a vengeance off those aprilows.

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<v Speaker 2>So we're talking about the TikTok deal earlier. It looks

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<v Speaker 2>like We've got a new entity here in the US

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<v Speaker 2>that will take ownership of the US assets of that platform.

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<v Speaker 2>So maybe a little bit of positivity in US China

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<v Speaker 2>trade relations. We also have news coming out of the

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<v Speaker 2>UK that the British government essentially is accepting fact that

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<v Speaker 2>this twenty five percent US tariff on British steel will

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<v Speaker 2>remain in place.

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<v Speaker 3>Now.

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<v Speaker 2>I know that the Prime Minister was hoping to address that,

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<v Speaker 2>maybe getting the Levey removed out right, How do you

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<v Speaker 2>understand US trade relations globally right now? If we can

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<v Speaker 2>focus a little bit about China, maybe to a lesser

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<v Speaker 2>extent Europe and include the UK in that.

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<v Speaker 4>So, I would say the trade relationships and the tariff

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<v Speaker 4>implementations have gone generally better than many of us feared.

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<v Speaker 4>Now China, we're not done there. We got to dot

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<v Speaker 4>some ies across some te's and we're not ready to

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<v Speaker 4>do that yet. A lot of basics to be decided.

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<v Speaker 4>Getting China done is going to be really important. Europe

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<v Speaker 4>is they've groused along the way, but they've gone along

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<v Speaker 4>with it. The UK the same. Look, you wonder at

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<v Speaker 4>any point in time will one of these countries there's

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<v Speaker 4>or a block of them saying, you know, the deal

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<v Speaker 4>is not a good deal for us, We're not going

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<v Speaker 4>to observe it anymore. What are the consequences of that?

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<v Speaker 4>We're not sure. So so far, so good, but a

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<v Speaker 4>lot of tough days coming.

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<v Speaker 2>I'm wondering whether you're finding opportunity offshore right now in

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<v Speaker 2>the midst of everything that we're talking about that's terrif related,

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<v Speaker 2>where other jurisdictions are involved, and maybe a little bit

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<v Speaker 2>of question as to whether or not that would be

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<v Speaker 2>a headwind for some of those economies.

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<v Speaker 4>Certainly it will be a headwind, there's no question about

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<v Speaker 4>it for most of them. And yet we think a

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<v Speaker 4>lot of that is in the price of those stocks.

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<v Speaker 4>As you know, generally speaking, non US markets are a

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<v Speaker 4>lot less expensive than US markets, and for some good reasons.

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<v Speaker 4>But we find a lot of Americans have almost nothing

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<v Speaker 4>outside the US and they're looking there to do some buying.

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<v Speaker 4>So I think that will create some upward momentum over

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<v Speaker 4>the months to come in non US markets.

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<v Speaker 2>One of the big reversals that we have seen this

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<v Speaker 2>year has been in the US dollar, and there was

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<v Speaker 2>some weakness in the New York session. I think the

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<v Speaker 2>Bloomberg dollar spot index was down by more than a

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<v Speaker 2>half of one percent. That's a pretty big move. How

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<v Speaker 2>are you feeling about the dollar in the path that

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<v Speaker 2>it is on right now?

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<v Speaker 4>So a bit oversold at the moment, and as you

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<v Speaker 4>probably know, the consensus, almost to a man and a woman,

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<v Speaker 4>is a long term negative on the dollar. I find

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<v Speaker 4>myself there too, particularly his interest rates in the US

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<v Speaker 4>come down, perhaps more than outside the US. As rates

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<v Speaker 4>come down, that usually hurts a currency, So watch it carefully,

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<v Speaker 4>but I would not be surprised to see some more

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<v Speaker 4>weakness in the months to come.

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<v Speaker 2>So you mentioned a moment ago that there are opportunities

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<v Speaker 2>that you are seeing in the bond market right now.

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<v Speaker 2>And I'm wondering what part of the curve interest you

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<v Speaker 2>the most.

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<v Speaker 4>The shorter end of the curve, call it two to

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<v Speaker 4>five years, maybe out to eight, but certainly not past

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<v Speaker 4>ten because of that concern we have about steepening and

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<v Speaker 4>about the fact that the inflation rate seems to be

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<v Speaker 4>ticking higher, not lower.

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<v Speaker 2>Bob, believe it there. Thank you so very much. Bob

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<v Speaker 2>dol He is President's CEO, also the CIO at Cross

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<v Speaker 2>Market Vestment's joining us here on the Daybreak Asia podcast.

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<v Speaker 2>Welcome back to the Daybreak Asia podcast. I'm Doug Chrisner.

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<v Speaker 2>Equity markets across the Asia Pacific are showing some weakness

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<v Speaker 2>after a down day in the US, where the S

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<v Speaker 2>and P five hundred and the Nasdaq composits slipped from

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<v Speaker 2>record highs. American markets appear to refrain from making any

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<v Speaker 2>big bets in front of tomorrow's FED decision on interest rates.

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<v Speaker 2>Let's get the views now of Sean Darby. He is

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<v Speaker 2>managing director at Misoho Securities Asia. He spoke earlier with

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<v Speaker 2>Bloomberg TV host Cherry On and Annabel Droolers on the

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<v Speaker 2>Asia trade.

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<v Speaker 5>I think it's interesting because the stage sort of seems

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<v Speaker 5>set for this cut, and it's that big focus on

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<v Speaker 5>the projections. Now you've got Stephen Myron in there as well.

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<v Speaker 5>It's going to be that big focus on the descenders

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<v Speaker 5>as well, the ones that are agitating for larger cuts.

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<v Speaker 5>And again it just seems like this is all kind

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<v Speaker 5>of positive for equities.

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<v Speaker 4>Well it is really.

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<v Speaker 6>I mean, we're in one big reflation trade and oil

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<v Speaker 6>prices remain low, the dollars drop nearly twelve percent from

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<v Speaker 6>its peak. You've got steep yield curse, particularly in the

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<v Speaker 6>United States, and you've got this on running loosening of

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<v Speaker 6>financial conditions where credit spreads are also very tight. So

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<v Speaker 6>almost anything that you throw at the equity markets, it's

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<v Speaker 6>bouncing back. I think the irony maybe is that three

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<v Speaker 6>to four months from now, as we go into the

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<v Speaker 6>year end, the economic data points are going to come

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<v Speaker 6>really important because this has all got to have some

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<v Speaker 6>follow through it later on in terms of some earnings changes,

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<v Speaker 6>and although economic forecasts have been marginally upgraded, it's nowhere

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<v Speaker 6>near enough to sort of meet the expectations that the

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<v Speaker 6>equity markets have priced in over the last three to

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<v Speaker 6>four months.

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<v Speaker 5>So then how long does the good run continue and

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<v Speaker 5>when does that sort of reality check set in, I

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<v Speaker 5>mean markets move ahead of of those economic projections or results.

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<v Speaker 6>Well, the paradox is that the bond market's going to

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<v Speaker 6>do a lot of the work for you. If we

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<v Speaker 6>do get a real slow down and are not a

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<v Speaker 6>soft landing, then that's going to be lower bond yields

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<v Speaker 6>bad for equities. If we're going to get a reacceleration

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<v Speaker 6>of growth, which is what our case is, then bond

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<v Speaker 6>yields will sell off and that's going to be very

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<v Speaker 6>difficult for equity markets, so in terms of valuations, so

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<v Speaker 6>the actual As the further we go on this rally,

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<v Speaker 6>the narrower narrower, the ability for equity markets to manage

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<v Speaker 6>around bond yields, I think is going to be the

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<v Speaker 6>main constraint.

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<v Speaker 1>Despite the fact that we continue to see a solid

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<v Speaker 1>economy Sean, especially in the US, earnings estimates continue to

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<v Speaker 1>move higher, and we just saw consumer spending also remaining strong.

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<v Speaker 4>Well, that's really the paradox.

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<v Speaker 6>It's not just the United States seeing these better earnings numbers.

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<v Speaker 6>Most of the equity markets we cover at the moment.

0:11:51.760 --> 0:11:55.040
<v Speaker 6>Earning revisions have been actually quite positive over the last

0:11:55.679 --> 0:12:00.440
<v Speaker 6>three months, so you are getting some upgrade which is

0:12:00.480 --> 0:12:04.600
<v Speaker 6>allowing this rally to continue. I think one very important

0:12:04.679 --> 0:12:07.600
<v Speaker 6>point is that for the best part of the last

0:12:07.720 --> 0:12:11.760
<v Speaker 6>eighteen to twenty four months, bonds and equities have been

0:12:12.679 --> 0:12:16.440
<v Speaker 6>positively correlated the prices, which is very sort of rare

0:12:16.520 --> 0:12:18.959
<v Speaker 6>in the last twenty years, and we're going back to

0:12:19.000 --> 0:12:22.040
<v Speaker 6>a period where bond and equity prices are negatively correlated,

0:12:22.320 --> 0:12:25.360
<v Speaker 6>which is what I think is really producing this big,

0:12:25.480 --> 0:12:31.040
<v Speaker 6>big tailwind for equity market. So maybe any change in

0:12:31.080 --> 0:12:35.600
<v Speaker 6>the inflation data might actually upset that apple cart going forward,

0:12:35.640 --> 0:12:39.119
<v Speaker 6>But you're right, you know, earnings numbers have been relatively

0:12:39.120 --> 0:12:41.680
<v Speaker 6>better than expected, and certainly when we look at the

0:12:41.760 --> 0:12:44.880
<v Speaker 6>NASDA K earnings revisions, they're melting up at the moment.

0:12:45.000 --> 0:12:49.280
<v Speaker 6>So again it's I think investors are really more focused

0:12:49.320 --> 0:12:51.680
<v Speaker 6>on the fact that there are you know, these big

0:12:51.720 --> 0:12:55.160
<v Speaker 6>growth areas and that that's really what's driving the rally.

0:12:55.480 --> 0:12:57.760
<v Speaker 6>Bond deals, I think are going to be perhaps a

0:12:57.840 --> 0:13:01.679
<v Speaker 6>later story, but they're actually using a fantastic tailwind for

0:13:02.040 --> 0:13:02.920
<v Speaker 6>equity markets.

0:13:03.760 --> 0:13:07.080
<v Speaker 1>How much of that dynamic with BONNYARLDS is at play

0:13:07.120 --> 0:13:10.240
<v Speaker 1>here in the Japanese market that has also other idiosyncratic

0:13:10.320 --> 0:13:13.640
<v Speaker 1>stories like the BOJ normalizing and hiking rates, and at

0:13:13.640 --> 0:13:16.400
<v Speaker 1>the same time we're seeing this uncertainty over the LDP

0:13:16.559 --> 0:13:17.360
<v Speaker 1>leadership election.

0:13:18.400 --> 0:13:22.000
<v Speaker 6>Well, I think the way to describe Japanese monetary policy

0:13:22.280 --> 0:13:25.600
<v Speaker 6>is that it's ultra loose. At the moment. Real interest

0:13:25.679 --> 0:13:30.440
<v Speaker 6>rates are very deeply negative, so the economy and the

0:13:30.480 --> 0:13:34.360
<v Speaker 6>equity marketer responding responding to that. In fact, if you

0:13:34.400 --> 0:13:37.920
<v Speaker 6>look at the best part of the JGB, you'll curve

0:13:38.040 --> 0:13:41.480
<v Speaker 6>up to ten years that whole yel curve is in negative.

0:13:41.520 --> 0:13:46.719
<v Speaker 6>Real rates so highly stimulative even without any other additions

0:13:46.760 --> 0:13:50.200
<v Speaker 6>to it. I think for Japan, the story really is

0:13:50.240 --> 0:13:53.280
<v Speaker 6>that you're going to get a very strong set of

0:13:53.440 --> 0:13:57.880
<v Speaker 6>nominal GDP numbers and that's going to continue to uplift earnings.

0:13:57.920 --> 0:13:59.920
<v Speaker 6>And if you look at the small cap in deb

0:14:00.280 --> 0:14:03.440
<v Speaker 6>in Japan as well as looking at the Russell when

0:14:03.440 --> 0:14:06.760
<v Speaker 6>you get these big bouts of nominal GDP growth, it's

0:14:06.800 --> 0:14:09.960
<v Speaker 6>small cap stocks that tend to do very well, and

0:14:10.040 --> 0:14:11.440
<v Speaker 6>Japan is no different from that.

0:14:11.840 --> 0:14:13.840
<v Speaker 5>One of the names that's doing well so far as

0:14:14.280 --> 0:14:16.800
<v Speaker 5>the open in Tokyo is Tokyo Electron that's had an

0:14:16.880 --> 0:14:20.400
<v Speaker 5>upgrade from Bank of America. It's still that broader tech story.

0:14:20.640 --> 0:14:23.520
<v Speaker 5>The resilience we see in terms of AI spending as well.

0:14:24.160 --> 0:14:27.640
<v Speaker 5>This is very much the mainstream view. So how do

0:14:27.720 --> 0:14:29.240
<v Speaker 5>you find value right now?

0:14:29.760 --> 0:14:32.000
<v Speaker 6>Well, I think the mainstream view is, as you said,

0:14:32.080 --> 0:14:34.440
<v Speaker 6>it's very much on the AI spending by the four

0:14:34.480 --> 0:14:38.200
<v Speaker 6>big megateech. What we're finding is actually that spending is

0:14:38.200 --> 0:14:41.920
<v Speaker 6>broadening out, so everything from computer peripherals all the way

0:14:41.960 --> 0:14:46.040
<v Speaker 6>through the supply chain. So the real story maybe is

0:14:46.040 --> 0:14:48.800
<v Speaker 6>that what you saw from Oracle last week, which was

0:14:49.040 --> 0:14:51.640
<v Speaker 6>sort of a non AI player in the sense that

0:14:51.680 --> 0:14:54.240
<v Speaker 6>it wasn't part of the mega tech story is probably

0:14:54.240 --> 0:14:57.880
<v Speaker 6>going to get replicated in large parts of the Nasdaq.

0:14:58.040 --> 0:15:01.720
<v Speaker 6>So from our point of view, you've seen with some

0:15:01.800 --> 0:15:04.960
<v Speaker 6>of these AI stocks like Navidia, that story seems to

0:15:04.960 --> 0:15:07.120
<v Speaker 6>be well priced in. It's going to be all of

0:15:07.160 --> 0:15:11.640
<v Speaker 6>the relative other part of the chain of tech spending

0:15:11.640 --> 0:15:13.520
<v Speaker 6>that's actually going to do quite well. And we think

0:15:13.760 --> 0:15:16.240
<v Speaker 6>again this has probably got a three to six nine

0:15:16.240 --> 0:15:19.280
<v Speaker 6>month story. A lot of it focused on the tax

0:15:19.800 --> 0:15:24.080
<v Speaker 6>the tax benefits from the depreciation changes from one big

0:15:24.160 --> 0:15:26.640
<v Speaker 6>bill at three months ago.

0:15:26.960 --> 0:15:29.640
<v Speaker 5>Yeah, yeah, that certainly has played into it. What about

0:15:29.640 --> 0:15:31.560
<v Speaker 5>ben for career, because I know you just upgraded your

0:15:31.640 --> 0:15:33.480
<v Speaker 5>view on that. Is that the tech story or is

0:15:33.480 --> 0:15:35.440
<v Speaker 5>that sort of all sort of the value up program

0:15:35.480 --> 0:15:38.040
<v Speaker 5>as well starting to take more effect and more investors

0:15:38.080 --> 0:15:39.760
<v Speaker 5>also paying attention to it.

0:15:40.280 --> 0:15:43.080
<v Speaker 6>I think the value up story has been one part

0:15:43.160 --> 0:15:45.760
<v Speaker 6>of the move. I think the economics story has been

0:15:45.840 --> 0:15:49.680
<v Speaker 6>that the semiconductor companies in career, as you've seen in elsewhere,

0:15:49.720 --> 0:15:52.680
<v Speaker 6>it's got pricing power. This is an industry that very

0:15:52.760 --> 0:15:56.240
<v Speaker 6>very rarely you see companies being able to raise prices,

0:15:56.280 --> 0:16:00.240
<v Speaker 6>and flash and memory prices have been surging, so the

0:16:00.240 --> 0:16:04.040
<v Speaker 6>big constituents in the Cosby that's been a very big boost.

0:16:04.520 --> 0:16:07.160
<v Speaker 6>The second is that following the elections, now you've got

0:16:07.160 --> 0:16:10.800
<v Speaker 6>to consumer confidence starting to improve, and we've actually seen

0:16:10.840 --> 0:16:15.360
<v Speaker 6>retail sales numbers both by value and volume all picking up.

0:16:15.440 --> 0:16:19.320
<v Speaker 6>So stories outside of the tech sector and career are

0:16:19.360 --> 0:16:22.480
<v Speaker 6>also got some sort of franchise value. So I think

0:16:22.600 --> 0:16:25.160
<v Speaker 6>the Cosby, as you've seen with most of the North

0:16:25.200 --> 0:16:29.360
<v Speaker 6>Asian markets at the moment, still got room to room

0:16:29.400 --> 0:16:29.880
<v Speaker 6>to rally.

0:16:30.280 --> 0:16:34.320
<v Speaker 2>Bet Sean Darby, he is Managing director of Misoho Securities Asia.

0:16:34.440 --> 0:16:39.000
<v Speaker 2>In conversation with Bloomberg TV host Cherry On and Annabel

0:16:39.120 --> 0:16:45.320
<v Speaker 2>Droolers here on the Daybreak Asia podcast. Thanks for listening

0:16:45.400 --> 0:16:49.640
<v Speaker 2>to today's episode of the Bloomberg Daybreak Asia Edition podcast.

0:16:49.960 --> 0:16:53.080
<v Speaker 2>Each weekday, we look at the story shaping markets, finance,

0:16:53.440 --> 0:16:56.520
<v Speaker 2>and geopolitics in the Asia Pacific. You can find us

0:16:56.520 --> 0:17:00.760
<v Speaker 2>on Apple, Spotify, the Bloomberg Podcast YouTube channel, or anywhere

0:17:00.760 --> 0:17:03.880
<v Speaker 2>else you listen. Join us again tomorrow for insight on

0:17:03.920 --> 0:17:08.040
<v Speaker 2>the market moves from Hong Kong to Singapore and Australia.

0:17:08.480 --> 0:17:10.960
<v Speaker 2>I'm Doug Prisoner and this is Bloomberg