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Speaker 1: Bloomberg Audio Studios, podcasts, radio news. This is the Bloomberg

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Speaker 1: Daybreak Aisia podcast. I'm Doug Krisner. You can join Brian

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Speaker 1: Curtis and myself for the stories, making news and moving

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Speaker 1: markets in the APAC region. You can subscribe to the

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Speaker 1: show anywhere you get your podcast and always on Bloomberg Radio,

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Speaker 1: the Bloomberg Terminal, and the Bloomberg Business app.

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Speaker 2: We wanted to take a closer look at the conflict

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Speaker 2: between Israel and Iran, and we're joined by Kirsten Fontenrose,

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Speaker 2: now president at Red six International. Well, it doesn't appear

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Speaker 2: at the moment, Kirsten, that Israel will respond in the

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Speaker 2: short term to the Iranian attacks this past weekend, Israel

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Speaker 2: has reopened schools and Iran has opened its airspace. But

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Speaker 2: we do have these other complications Jenny Yellen, for instance,

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Speaker 2: saying that the US will apply new sanctions or more

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Speaker 2: sanctions on Iran. What are some of those options that

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Speaker 2: the US holds at the moment on sanctions.

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Speaker 3: The US already has a host of sanctions on Iran,

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Speaker 3: mostly based on counter terrorism laws in our domestic law books,

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Speaker 3: but law authorizes US to sanction Uran's energy sector, financial sector,

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Speaker 3: including its central bank, shipping, construction, mining, textiles, automotive manufacturing industries,

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Speaker 3: it's arms trade, as well as components of their government,

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Speaker 3: including the Supreme Leader and the Islamic Revolutionary Guard Corp

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Speaker 3: or the IRGC, plus any entities that conduct transactions with

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Speaker 3: these or otherwise support them.

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Speaker 4: So it's a really broad writ.

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Speaker 3: We expect that any new sanctions will be focused on

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Speaker 3: export of petroleum and petroleum products or import of components

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Speaker 3: for their drone or missile programs. A lot of those

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Speaker 3: components are commercial and off the shelf, and the Islamic

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Speaker 3: Revolutionary Guard Corps often sets up cover or front companies

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Speaker 3: that will import from UNWA actors who provide parts to

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Speaker 3: the commercial sector. So sometimes it's a whack a mole

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Speaker 3: game of the US contacting these companies and saying, we

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Speaker 3: know you didn't mean to do this, but you're going to.

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Speaker 4: Have to stop doing it.

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Speaker 3: One of the criticisms of the Biden administration has been

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Speaker 3: that the sanctions that have been in place have not

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Speaker 3: been enforced, so we'll probably see a lot more than

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Speaker 3: wave of enforcement as well. In fact, the Congress the

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Speaker 3: US House of Representatives passed four new bills yesterday, two

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Speaker 3: of which really are intended to kind of hold the

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Speaker 3: Biden administration to enforcement, and two others that focus on,

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Speaker 3: for instance, secondary sanctions and the humanitary exemptions piece in

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Speaker 3: the existing sanctions. I'm happy to go into a little

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Speaker 3: more on those sanctions if you like.

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Speaker 1: I'd like to get your sense on to what extent

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Speaker 1: Iran is reliant on Russia for some of these weapons

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Speaker 1: that we're talking about.

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Speaker 4: The trade is actually in the other directions, so Russia

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Speaker 4: tends to stick by Iran, and a lot of this

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Speaker 4: is because Russia is relying on Iran for much of

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Speaker 4: the weaponry it is using in its war on Ukraine.

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Speaker 3: It has a couple of its own really capable drones,

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Speaker 3: but the drone it's been having the best luck with

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Speaker 3: is the shot HAD one thirty six, which is an

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Speaker 3: Iranian model, and Iran agreed to a technology transfer that

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Speaker 3: is allowing Russia to build these domestically. Now they expect

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Speaker 3: to have four factories up and coming years, and some

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Speaker 3: are already being produced. We don't know how much is disinformation,

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Speaker 3: how much is sort of a military deception campaign, or

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Speaker 3: how much is really being produced of those drones domestically yet,

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Speaker 3: but The reason this relationship is meaningful for Iran is

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Speaker 3: not only the income from those arms transfers, but also

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Speaker 3: because of Russia's veto in the UN Security Council that

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Speaker 3: has been used and will probably continue to be used

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Speaker 3: to protect Iran, to defeat attempts to mitigate its import

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Speaker 3: of a lot of these weapons components, to block arms

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Speaker 3: and bargoes, to hold it responsible for certain kinds of

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Speaker 3: support to proxy militias around the rest of the Middle East.

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Speaker 3: Russia has been a very use full aid to Iran

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Speaker 3: in the Security Council with that VITO, So a lot

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Speaker 3: of the technology is actually going the other way, but

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Speaker 3: the political support is.

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Speaker 4: Coming this way.

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Speaker 2: And the sanctions on Russia haven't led to China, for instance,

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Speaker 2: not buying oil from Russia or getting gas. So you

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Speaker 2: wonder if some new sanctions are applied by the United

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Speaker 2: States and even the EU, because the EU could could

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Speaker 2: well join in with some new sanctions. But if the

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Speaker 2: sanctions aren't enforced, and we're seeing that, you know in

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Speaker 2: day to day life, you know, you wonder whether or

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Speaker 2: not really a pledge to crack down more is more

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Speaker 2: important than new.

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Speaker 3: Sanctions exactly, And that is part of what the House

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Speaker 3: of Representatives is thinking. So, for instance, we're seeing one

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Speaker 3: of these bills that was just passed is called the

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Speaker 3: Iran China Energy Sanctions Act of twenty twenty three. So

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Speaker 3: it's been in process, but there's been a sense of

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Speaker 3: urgency obviously this week. And it expands the secondary sanctions

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Speaker 3: regime evolving Iran to include all transactions between Chinese financial

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Speaker 3: institutions and the banks in Iran, which of course are

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Speaker 3: already sanctioned that handle any sort of petroleum product trade.

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Speaker 3: So you're seeing China wrapped in there, and you know

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Speaker 3: these additional secondary sanctions coming on. Congress is also saying, okay,

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Speaker 3: administration in Washington, we want you to prohibit the Treasury

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Speaker 3: from issuing any licenses to a US financial institution to

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Speaker 3: engage in trade with Iran other than humanitarian aid, and

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Speaker 3: we want you to oppose IMF assistance to Iran. And

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Speaker 3: in order to make that happen, we're going to make

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Speaker 3: it law. So they've passed the No US Financing for

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Speaker 3: Iran Act Act of twenty twenty three. Of course, these

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Speaker 3: are just coming out of the House. You know, they're

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Speaker 3: not complete yet. There's also the around sanctions accountability Act

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Speaker 3: of twenty twenty three. All these names sound the same,

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Speaker 3: but this one requires the president to issue regulations that

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Speaker 3: ensure those humanitarian exemptions to US sanctions don't actually go

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Speaker 3: toward facilitating terrorism internationally or trading.

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Speaker 4: Weapons of mass destruction. Well, and there was a final one.

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Speaker 1: I'm sorry to interrupt. I was just going to get

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Speaker 1: your take on what we know of what's happening at

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Speaker 1: the war cabinet in Israel and the extent to which

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Speaker 1: the conversation is going on between Washington and the war cabinet,

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Speaker 1: to the extent that the US has any influence over

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Speaker 1: what happens next.

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Speaker 3: It's an ongoing conversation between Washington and this war cabinet.

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Speaker 3: And then Europe is weighing in. Arab governments are weighing in.

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Speaker 3: A lot of folks are out from outside, are trying

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Speaker 3: to encourage restraint, saying, you run a couple of risks here. One,

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Speaker 3: you start a retaliatory cycle. Two, the world is giving

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Speaker 3: you a little bit of goodwill because you shot down

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Speaker 3: with all of our help ninety nine percent of this

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Speaker 3: barrage of weaponry that came at you. And this is

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Speaker 3: reinstated belief in the fact that Israel has impenetrable air defenses.

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Speaker 3: You know, after October seventh, they lost a little bit

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Speaker 3: of that belief in their strength of defense because of

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Speaker 3: the intelligence failures on October seven. But now with the

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Speaker 3: defeat of this deluge in the sky, they have restored

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Speaker 3: some of that and it's probably going to be really

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Speaker 3: good for their defense industry, their domestic defense industry, and

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Speaker 3: it's good for their relationships in the region. People want

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Speaker 3: this kind of partner and it required this coalition of

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Speaker 3: Arab partners with Israel that sent COOM.

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Speaker 4: The US Central Command has been building for years to

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Speaker 4: create this umbrella of Aaron missile defense. But all of

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Speaker 4: these partners are saying.

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Speaker 3: Please don't start a cycle of escalation, and please don't

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Speaker 3: make it hard for us with our publics, because they

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Speaker 3: are not particularly fond of the idea that we are

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Speaker 3: defending quote unquote Israeli sovereignty right now. They are instead

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Speaker 3: messaging that this is truly an issue of their own

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Speaker 3: sovereignty and that no matter where a drone or missile

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Speaker 3: comes from, they will knock it out of their airspace.

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Speaker 3: They've all been Jordan, UAE, Saudi, even Egypt have been

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Speaker 3: really clear that This is not an issue of defending

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Speaker 3: one country over the other. This is an issue of

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Speaker 3: national sovereignty and the desire not to see these things

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Speaker 3: fall out of the sky onto their own citizens.

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Speaker 2: Kirsen, are we learning that sanctions just don't really work

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Speaker 2: as well as perhaps administrations believe they would, because we

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Speaker 2: mentioned the Russian sanctions and now we have all these

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Speaker 2: sanctions already on Iran. And you know, by the way,

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Speaker 2: if the EU were to join in, would that make

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Speaker 2: a difference.

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Speaker 3: It makes a difference on the messaging, and it makes

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Speaker 3: a difference whether we can get other parts of the

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Speaker 3: world to also join these sanctions, places where the US

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Speaker 3: doesn't have as much leverage. Perhaps we get countries in Africa,

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Speaker 3: Latin America, places used as transit places, used for cover companies.

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Speaker 4: But it really all comes down to enforcement.

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Speaker 3: And evasion, and those two things impact how successful any

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Speaker 3: sanction is going to be. So the Biden administration, while

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Speaker 3: in talks about a renewed nuclear agreement, let off the

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Speaker 3: pedal on the sanctions enforcement, hoping that this would be

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Speaker 3: a signal of goodwill to the Iranian regime and they

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Speaker 3: would then be willing to negotiate in greater faith that

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Speaker 3: didn't happen. And again, as I mentioned, you're now seeing

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Speaker 3: Congress kind of tie their hands on potentially tyler hands

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Speaker 3: through the house. We'll see the Senate says on enforcement.

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Speaker 3: And then Iran has been really active in trying to

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Speaker 3: devise ways of evading sanctions. Some of this is operating

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Speaker 3: outside the US and Western financial systems. So but their

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Speaker 3: clients for this kind of activity happen to include the

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Speaker 3: largest purchaser of energy in the world, which is China.

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Speaker 2: Kirsten Fonton Rose, president at Red six International.

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Speaker 1: We're joined now by Bloomberg opinion columnist Chuli Wren talking

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Speaker 1: about her column on China Von Kah and the company

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Speaker 1: denying that it's running into difficulty. Wonka is a China's

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Speaker 1: second largest property builder bry Sales, and I think Shuly

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Speaker 1: feels as this says a lot maybe everything about what's

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Speaker 1: happening right now in the China property market. Surely it's

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Speaker 1: always a pleasure expand on that. How is von Kau

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Speaker 1: kind of giving us a window into everything that's going

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Speaker 1: on with the property market in China.

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Speaker 5: It can be surprising how fast China's a property developers

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Speaker 5: run out their cash one by the way, It's nothing

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Speaker 5: like a China Evergrand or Country Garden. It is one

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Speaker 5: of the best run and the well managed companies in China.

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Speaker 5: But what we are seeing is that the cash level

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Speaker 5: is drinkling really fast, even though it's achieving operating positive

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Speaker 5: operating cash flow. In other words, that the company's call

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Speaker 5: business can be still profitable and lucrative, but in the

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Speaker 5: end it's running into cash troubles.

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Speaker 2: Well, yeah, it's cash is not sufficient to cover the

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Speaker 2: bonds maturing this year, so I mean it needs extra funding.

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Speaker 2: It needs that extra capital. I think it would be

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Speaker 2: difficult to sell shares right now or even dead. So

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Speaker 2: I suppose that means, you know, going to the banks,

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Speaker 2: and we saw yesterday they set aside seventeen to eighteen

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Speaker 2: billion dollars were of assets to service collateral. But the

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Speaker 2: question must be how stable are those assets given that

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Speaker 2: they are tied to property.

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Speaker 5: Right, So that was a news report, and then the

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Speaker 5: company did not come from or deny it, which to

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Speaker 5: me is a reference to be honest, exactly like what

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Speaker 5: you said, Brian, A lot of They do have a

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Speaker 5: lot of investment assets. They own a lot of shopping

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Speaker 5: malls across China, but The question is how much are

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Speaker 5: these assets work? And that, by the way, are these

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Speaker 5: assets being pledged away already? I mean, what we are

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Speaker 5: seeing in China is that the remaining real estate developers

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Speaker 5: they're trying to puzzle out their assets and flow them

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Speaker 5: as some form of reds right, and then like a

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Speaker 5: stay owned enterprises can say, Okay, I don't want to

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Speaker 5: they are a real estate developer, but I can buy

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Speaker 5: a publicly traded ate. Question is how much are these

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Speaker 5: assets worth? And that's yes, that's a big question marketing

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Speaker 5: in China rants is.

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Speaker 1: That the only solution that the regulators, the leadership in

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Speaker 1: China is able to come up with, I mean to

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Speaker 1: kind of go the route that you just described, carve

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Speaker 1: them up into reads and let kind of the investment

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Speaker 1: dollars from kind of the domestic pension industry to be

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Speaker 1: invested in these companies.

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Speaker 5: Well, so far, the Chinese government wants to is still

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Speaker 5: talking about so called the market oriented solutions. Basically, they

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Speaker 5: don't want to do anything else, and they're hoping that

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Speaker 5: the financial markets will take up the reads just like

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Speaker 5: what you said, pension and insurance companies will do that.

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Speaker 5: But it's really hard to do because I mean, the

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Speaker 5: whole economy is in the deflation right, and which means

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Speaker 5: that its asset prices should also be in a downward

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Speaker 5: spiral trend, and we just don't know how to value

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Speaker 5: these opaque commercial assets.

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Speaker 2: It could one of the options I didn't mention was

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Speaker 2: it could go to its largest shareholder, Shenjan Metro, But

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Speaker 2: it seems that that company is not that willing. What

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Speaker 2: are the difficulties in that relationship at the.

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Speaker 5: Moment, Well, Shinjin Metro only owns twenty seven percent, so yes,

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Speaker 5: it is the largest shareholder, but it can say I'm

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Speaker 5: not the majority shareholder. And the one CU has been

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Speaker 5: listed since nineteen ninety one, so basically, all the mom

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Speaker 5: and pops and minority shareholders, we are actually majority LEA

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Speaker 5: shareholders and we are not going to take a responsibility.

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Speaker 5: How are one Could's financial triples?

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Speaker 2: Ye?

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Speaker 1: So how are the difficulties at one coh impacting entrepreneurship?

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Speaker 1: More broadly? You make that point, and I'm curious about that.

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Speaker 4: I think One.

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Speaker 5: Could is a very interesting case study because it's so

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Speaker 5: famous and it went public before Danshakin came to Shanjan.

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Speaker 5: For the Southern who are in nineteen ninety two when

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Speaker 5: the previous leader talked about the economic reforms and opening

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Speaker 5: up China. And one is also based in Shanshan, and

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Speaker 5: Chenchhan was the first city in mainland China that opened up.

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Speaker 5: It's a property market and allow people to own homes.

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Speaker 5: Right before that, we no Chinese own any homes. So

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Speaker 5: if one Curt fails, I think it really is a

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Speaker 5: best sentence unfortunately to Dan Shoppings edision.

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Speaker 2: So it seems that the government is probably the final

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Speaker 2: straw here that it can't let evergrand and country garden

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Speaker 2: and one could go down because the municipalities and the

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Speaker 2: provinces have to have somebody to sell their land to. Right,

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Speaker 2: So is that the most likely outcome is a state

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Speaker 2: backed bail out?

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Speaker 5: I think so. I mean one cur is really one

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Speaker 5: of the very few privately health developers left. I mean

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Speaker 5: everyone else is day old, right, Like, it's basically still

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Speaker 5: the state's money buying its own land. But I think

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Speaker 5: right now the Chinese government it knows it's trouble, and

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Speaker 5: then the trouble is just so big and daunting that

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Speaker 5: it's just paralyzed. It just hopes for the best. I

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Speaker 5: think at this point.

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Speaker 1: Surely it's always a pleasure. Thanks for making time to

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Speaker 1: chat with us. Bloomberg opinion columnist Truly Wren talking about

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Speaker 1: the situation with property developer China Wonka.

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Speaker 2: We look at markets all throughout the program here on

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Speaker 2: Bloomberg Daybreak Asia. And joining us now for some closer

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Speaker 2: analysis is Dominic Schneider, head of Global Commodities and four

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Speaker 2: Exit UBS Global Wealth Management. Dominic, thanks very much for

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Speaker 2: coming in. So if we take the big broad macro view,

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Speaker 2: it's been a risk on environment here for most of

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Speaker 2: the early part of this year. I just over the

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Speaker 2: past month or so it's gotten a little bit more

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Speaker 2: sticky with you inflation readings in the United States, and

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Speaker 2: we've seen the S and P five hundred go from

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Speaker 2: a gain of ten percent to only up about six

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Speaker 2: percent year to date. And the commentary that we got

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Speaker 2: from j. Powell today was a little bit of a change.

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Speaker 2: He's really talking now about higher for longer, not being

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Speaker 2: convinced that inflation is coming down to the extent that

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Speaker 2: they would need it. And so one end result of

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Speaker 2: that is a strong dollar. Is the strong dollar as

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Speaker 2: likely as anything to disrupt the sort of positive feelings

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Speaker 2: that we've had for most of this year, and is

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Speaker 2: it about ready to get serious?

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Speaker 6: Well, if you look at the dollar in general, I

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Speaker 6: would say we still have a little bit more to

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Speaker 6: go on the strength side. I mean we can still

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Speaker 6: price out all the cuts. There are still some cuts

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Speaker 6: in there, so I think from that angle, dollar strength

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Speaker 6: has a little bit room to runs. That means, for example,

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Speaker 6: your dollar goes to one point h five from a

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Speaker 6: temporarily below Do I think it needs completely to alter

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Speaker 6: the macro landscape? Probably not. Just pricing out in itself

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Speaker 6: would not derailed economy. Obviously, if we start to think

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Speaker 6: about hiking rates, that will be a complete different game changer.

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Speaker 6: But we're still the opinion that inflation dusty salerate, which

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Speaker 6: growth comes down and earnings are maybe outside some of

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Speaker 6: the tech names not as strong, So we don't need

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Speaker 6: to make that drastic change. But it's pours a little

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Speaker 6: bit cold water, as you said, over some of the

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Speaker 6: risk one story, and maybe that's not so bad off

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Speaker 6: the good rally a consolidation, that's good. Then we need

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Speaker 6: to see if growth is better outside the US. If

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Speaker 6: that comes through, the rally can continue.

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Speaker 1: I'm wondering whether or not you feel the market is

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Speaker 1: a little complacent, not a lot, but a little complacent

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Speaker 1: on the level of geopolitical risk right now. I mean

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Speaker 1: you could make the case yes, obviously a lot of

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Speaker 1: the dollar strength is tied to this rate environment here

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Speaker 1: that we're dealing with in the US, but there may

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Speaker 1: have been some haven buying recently, particularly given this escalation

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Speaker 1: that we've seen over the last couple of days in

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Speaker 1: the Mid East. And then the second part of that

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Speaker 1: is whether geopolitical risk has the potential to push commodity

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Speaker 1: prices up just a little bit.

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Speaker 6: Well, I must say, I mean, at the end of

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Speaker 6: the day, the Middle Eastern crisis hinges or for the

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Speaker 6: global market, it's all about what happened to oil, And

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Speaker 6: I think the old market so far thinks, okay, nobody's

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Speaker 6: really interested. Things are definitely escalating, but nobody wants any

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Speaker 6: disruptions on oil supply for maybe also presidential reason. You know,

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Speaker 6: when you go for an election, you don't want to

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Speaker 6: have necessarily a higher oil price. And everybody else also

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Speaker 6: here in the East. So I think everybody's mind is

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Speaker 6: keep oil flowing, and I think that keeps the uncertainty constraint,

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Speaker 6: at least for the broader market. We also could say

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Speaker 6: that in case of oil, there's probably already a five

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Speaker 6: dollars up to ten dollars risk premium there on the

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Speaker 6: supply side. But clearly if something would happen and we

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Speaker 6: get straight up for most something like blocked and or

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Speaker 6: at least we lose one or two million barrels suddenly,

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Speaker 6: I think then the prices will jump quite a fair bit.

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Speaker 6: And in that context, I think oil is actually a steal.

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Speaker 6: If you think about you get an insurance asset, normally

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Speaker 6: you pay for it, and here you get actually probably

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Speaker 6: paid with the forward curve being downward slopes.

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Speaker 2: But one of the issues is the strong dollar. Obviously,

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Speaker 2: I mean oil priced in dollars, so if the dollar

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Speaker 2: is strong and it sort of mitigates perhaps the gain

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Speaker 2: in the oil price. And I'm just wondering whether or not,

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Speaker 2: you know, the lack of safe havens at the moment

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Speaker 2: could be you know, changing mix a little bit. I mean,

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Speaker 2: bonds are being sold off here and yields are running

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Speaker 2: to the upside, so it's not exactly that investors are

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Speaker 2: buying bonds as a safe haven. What is a safe

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Speaker 2: haven at the moment besides gold and the dollar.

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Speaker 6: You rightfully said there is not really much. I think

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Speaker 6: still in that environment it would hold some commodities, to

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Speaker 6: be honest, because I think in the context of the

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Speaker 6: Middle Eastern crisis, holding oil makes a lot of sense.

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Speaker 6: But in terms of obviously that comes with a fair

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Speaker 6: bit of volatility close to thirty. There is not many

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Speaker 6: safe haven you might want to think about. More towards

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Speaker 6: Latin America. You're going to go for some of these

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Speaker 6: higher yielding currencies. They're not safe haven, but they are

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Speaker 6: closer to the US economy. They give you good yield.

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Speaker 6: I mean that's something to maybe hide or look for

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Speaker 6: a middle through pass, I would say. But beyond I

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Speaker 6: would say dollar goal not much. You can look at

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Speaker 6: the Swiss franc but story is a little bit broken

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Speaker 6: given what we have seen with the SMB and the

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Speaker 6: policy change here. But that could come back at some point.

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Speaker 1: Talk about things that are broken in terms of haven's

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Speaker 1: the Japanese currency. I mean, we're flirting here with one

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Speaker 1: fifty five. We've got JP Morgan Private Banking saying along

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Speaker 1: with Bank of America both saying one fifty or one sixty.

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Speaker 1: I'm sorry, it could be the next milestone. What's your

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Speaker 1: outlook for the end, I.

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Speaker 6: Will be thinking that basically in the short term dolly

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Speaker 6: into trade more towards the one hundred and fifty. Obviously

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Speaker 6: that was under the regime of thinking there's still going

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Speaker 6: to be three rate cuts. Now rates stay high, I

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Speaker 6: mean one hundred and fifty five, we're higher, clearly possible.

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Speaker 6: It's probably too early to position yourself in a long

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Speaker 6: ym position, given where yield differentials are and how focused

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Speaker 6: the market is at this point in time. So at

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Speaker 6: this point in time would say yen clearly not to touch. However,

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Speaker 6: I mean look at let's look at the longer term picture.

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Speaker 6: I mean it's it is cheap, the economy does well,

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Speaker 6: but we obviously really need to see the buch a

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Speaker 6: little bit moving the needle here.

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Speaker 2: Well, your pretty equity is conversing. So if we had

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Speaker 2: more time, I'd ask you if the megacaps could be

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Speaker 2: a safeye it well.

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Speaker 6: Save that for next time.

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Speaker 2: Was a pretty strong balance sheets, Dominic. Thank you so much,

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Speaker 2: Dominic Schneider from UBS.

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Speaker 1: This has been the Bloomberg Daybreak Asia podcast, bringing you

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