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Speaker 2: We wanted to take a closer look at the conflict
Speaker 2: between Israel and Iran, and we're joined by Kirsten Fontenrose,
Speaker 2: now president at Red six International. Well, it doesn't appear
Speaker 2: at the moment, Kirsten, that Israel will respond in the
Speaker 2: short term to the Iranian attacks this past weekend, Israel
Speaker 2: has reopened schools and Iran has opened its airspace. But
Speaker 2: we do have these other complications Jenny Yellen, for instance,
Speaker 2: saying that the US will apply new sanctions or more
Speaker 2: sanctions on Iran. What are some of those options that
Speaker 2: the US holds at the moment on sanctions.
Speaker 3: The US already has a host of sanctions on Iran,
Speaker 3: mostly based on counter terrorism laws in our domestic law books,
Speaker 3: but law authorizes US to sanction Uran's energy sector, financial sector,
Speaker 3: including its central bank, shipping, construction, mining, textiles, automotive manufacturing industries,
Speaker 3: it's arms trade, as well as components of their government,
Speaker 3: including the Supreme Leader and the Islamic Revolutionary Guard Corp
Speaker 3: or the IRGC, plus any entities that conduct transactions with
Speaker 3: these or otherwise support them.
Speaker 4: So it's a really broad writ.
Speaker 3: We expect that any new sanctions will be focused on
Speaker 3: export of petroleum and petroleum products or import of components
Speaker 3: for their drone or missile programs. A lot of those
Speaker 3: components are commercial and off the shelf, and the Islamic
Speaker 3: Revolutionary Guard Corps often sets up cover or front companies
Speaker 3: that will import from UNWA actors who provide parts to
Speaker 3: the commercial sector. So sometimes it's a whack a mole
Speaker 3: game of the US contacting these companies and saying, we
Speaker 3: know you didn't mean to do this, but you're going to.
Speaker 4: Have to stop doing it.
Speaker 3: One of the criticisms of the Biden administration has been
Speaker 3: that the sanctions that have been in place have not
Speaker 3: been enforced, so we'll probably see a lot more than
Speaker 3: wave of enforcement as well. In fact, the Congress the
Speaker 3: US House of Representatives passed four new bills yesterday, two
Speaker 3: of which really are intended to kind of hold the
Speaker 3: Biden administration to enforcement, and two others that focus on,
Speaker 3: for instance, secondary sanctions and the humanitary exemptions piece in
Speaker 3: the existing sanctions. I'm happy to go into a little
Speaker 3: more on those sanctions if you like.
Speaker 1: I'd like to get your sense on to what extent
Speaker 1: Iran is reliant on Russia for some of these weapons
Speaker 1: that we're talking about.
Speaker 4: The trade is actually in the other directions, so Russia
Speaker 4: tends to stick by Iran, and a lot of this
Speaker 4: is because Russia is relying on Iran for much of
Speaker 4: the weaponry it is using in its war on Ukraine.
Speaker 3: It has a couple of its own really capable drones,
Speaker 3: but the drone it's been having the best luck with
Speaker 3: is the shot HAD one thirty six, which is an
Speaker 3: Iranian model, and Iran agreed to a technology transfer that
Speaker 3: is allowing Russia to build these domestically. Now they expect
Speaker 3: to have four factories up and coming years, and some
Speaker 3: are already being produced. We don't know how much is disinformation,
Speaker 3: how much is sort of a military deception campaign, or
Speaker 3: how much is really being produced of those drones domestically yet,
Speaker 3: but The reason this relationship is meaningful for Iran is
Speaker 3: not only the income from those arms transfers, but also
Speaker 3: because of Russia's veto in the UN Security Council that
Speaker 3: has been used and will probably continue to be used
Speaker 3: to protect Iran, to defeat attempts to mitigate its import
Speaker 3: of a lot of these weapons components, to block arms
Speaker 3: and bargoes, to hold it responsible for certain kinds of
Speaker 3: support to proxy militias around the rest of the Middle East.
Speaker 3: Russia has been a very use full aid to Iran
Speaker 3: in the Security Council with that VITO, So a lot
Speaker 3: of the technology is actually going the other way, but
Speaker 3: the political support is.
Speaker 4: Coming this way.
Speaker 2: And the sanctions on Russia haven't led to China, for instance,
Speaker 2: not buying oil from Russia or getting gas. So you
Speaker 2: wonder if some new sanctions are applied by the United
Speaker 2: States and even the EU, because the EU could could
Speaker 2: well join in with some new sanctions. But if the
Speaker 2: sanctions aren't enforced, and we're seeing that, you know in
Speaker 2: day to day life, you know, you wonder whether or
Speaker 2: not really a pledge to crack down more is more
Speaker 2: important than new.
Speaker 3: Sanctions exactly, And that is part of what the House
Speaker 3: of Representatives is thinking. So, for instance, we're seeing one
Speaker 3: of these bills that was just passed is called the
Speaker 3: Iran China Energy Sanctions Act of twenty twenty three. So
Speaker 3: it's been in process, but there's been a sense of
Speaker 3: urgency obviously this week. And it expands the secondary sanctions
Speaker 3: regime evolving Iran to include all transactions between Chinese financial
Speaker 3: institutions and the banks in Iran, which of course are
Speaker 3: already sanctioned that handle any sort of petroleum product trade.
Speaker 3: So you're seeing China wrapped in there, and you know
Speaker 3: these additional secondary sanctions coming on. Congress is also saying, okay,
Speaker 3: administration in Washington, we want you to prohibit the Treasury
Speaker 3: from issuing any licenses to a US financial institution to
Speaker 3: engage in trade with Iran other than humanitarian aid, and
Speaker 3: we want you to oppose IMF assistance to Iran. And
Speaker 3: in order to make that happen, we're going to make
Speaker 3: it law. So they've passed the No US Financing for
Speaker 3: Iran Act Act of twenty twenty three. Of course, these
Speaker 3: are just coming out of the House. You know, they're
Speaker 3: not complete yet. There's also the around sanctions accountability Act
Speaker 3: of twenty twenty three. All these names sound the same,
Speaker 3: but this one requires the president to issue regulations that
Speaker 3: ensure those humanitarian exemptions to US sanctions don't actually go
Speaker 3: toward facilitating terrorism internationally or trading.
Speaker 4: Weapons of mass destruction. Well, and there was a final one.
Speaker 1: I'm sorry to interrupt. I was just going to get
Speaker 1: your take on what we know of what's happening at
Speaker 1: the war cabinet in Israel and the extent to which
Speaker 1: the conversation is going on between Washington and the war cabinet,
Speaker 1: to the extent that the US has any influence over
Speaker 1: what happens next.
Speaker 3: It's an ongoing conversation between Washington and this war cabinet.
Speaker 3: And then Europe is weighing in. Arab governments are weighing in.
Speaker 3: A lot of folks are out from outside, are trying
Speaker 3: to encourage restraint, saying, you run a couple of risks here. One,
Speaker 3: you start a retaliatory cycle. Two, the world is giving
Speaker 3: you a little bit of goodwill because you shot down
Speaker 3: with all of our help ninety nine percent of this
Speaker 3: barrage of weaponry that came at you. And this is
Speaker 3: reinstated belief in the fact that Israel has impenetrable air defenses.
Speaker 3: You know, after October seventh, they lost a little bit
Speaker 3: of that belief in their strength of defense because of
Speaker 3: the intelligence failures on October seven. But now with the
Speaker 3: defeat of this deluge in the sky, they have restored
Speaker 3: some of that and it's probably going to be really
Speaker 3: good for their defense industry, their domestic defense industry, and
Speaker 3: it's good for their relationships in the region. People want
Speaker 3: this kind of partner and it required this coalition of
Speaker 3: Arab partners with Israel that sent COOM.
Speaker 4: The US Central Command has been building for years to
Speaker 4: create this umbrella of Aaron missile defense. But all of
Speaker 4: these partners are saying.
Speaker 3: Please don't start a cycle of escalation, and please don't
Speaker 3: make it hard for us with our publics, because they
Speaker 3: are not particularly fond of the idea that we are
Speaker 3: defending quote unquote Israeli sovereignty right now. They are instead
Speaker 3: messaging that this is truly an issue of their own
Speaker 3: sovereignty and that no matter where a drone or missile
Speaker 3: comes from, they will knock it out of their airspace.
Speaker 3: They've all been Jordan, UAE, Saudi, even Egypt have been
Speaker 3: really clear that This is not an issue of defending
Speaker 3: one country over the other. This is an issue of
Speaker 3: national sovereignty and the desire not to see these things
Speaker 3: fall out of the sky onto their own citizens.
Speaker 2: Kirsen, are we learning that sanctions just don't really work
Speaker 2: as well as perhaps administrations believe they would, because we
Speaker 2: mentioned the Russian sanctions and now we have all these
Speaker 2: sanctions already on Iran. And you know, by the way,
Speaker 2: if the EU were to join in, would that make
Speaker 2: a difference.
Speaker 3: It makes a difference on the messaging, and it makes
Speaker 3: a difference whether we can get other parts of the
Speaker 3: world to also join these sanctions, places where the US
Speaker 3: doesn't have as much leverage. Perhaps we get countries in Africa,
Speaker 3: Latin America, places used as transit places, used for cover companies.
Speaker 4: But it really all comes down to enforcement.
Speaker 3: And evasion, and those two things impact how successful any
Speaker 3: sanction is going to be. So the Biden administration, while
Speaker 3: in talks about a renewed nuclear agreement, let off the
Speaker 3: pedal on the sanctions enforcement, hoping that this would be
Speaker 3: a signal of goodwill to the Iranian regime and they
Speaker 3: would then be willing to negotiate in greater faith that
Speaker 3: didn't happen. And again, as I mentioned, you're now seeing
Speaker 3: Congress kind of tie their hands on potentially tyler hands
Speaker 3: through the house. We'll see the Senate says on enforcement.
Speaker 3: And then Iran has been really active in trying to
Speaker 3: devise ways of evading sanctions. Some of this is operating
Speaker 3: outside the US and Western financial systems. So but their
Speaker 3: clients for this kind of activity happen to include the
Speaker 3: largest purchaser of energy in the world, which is China.
Speaker 2: Kirsten Fonton Rose, president at Red six International.
Speaker 1: We're joined now by Bloomberg opinion columnist Chuli Wren talking
Speaker 1: about her column on China Von Kah and the company
Speaker 1: denying that it's running into difficulty. Wonka is a China's
Speaker 1: second largest property builder bry Sales, and I think Shuly
Speaker 1: feels as this says a lot maybe everything about what's
Speaker 1: happening right now in the China property market. Surely it's
Speaker 1: always a pleasure expand on that. How is von Kau
Speaker 1: kind of giving us a window into everything that's going
Speaker 1: on with the property market in China.
Speaker 5: It can be surprising how fast China's a property developers
Speaker 5: run out their cash one by the way, It's nothing
Speaker 5: like a China Evergrand or Country Garden. It is one
Speaker 5: of the best run and the well managed companies in China.
Speaker 5: But what we are seeing is that the cash level
Speaker 5: is drinkling really fast, even though it's achieving operating positive
Speaker 5: operating cash flow. In other words, that the company's call
Speaker 5: business can be still profitable and lucrative, but in the
Speaker 5: end it's running into cash troubles.
Speaker 2: Well, yeah, it's cash is not sufficient to cover the
Speaker 2: bonds maturing this year, so I mean it needs extra funding.
Speaker 2: It needs that extra capital. I think it would be
Speaker 2: difficult to sell shares right now or even dead. So
Speaker 2: I suppose that means, you know, going to the banks,
Speaker 2: and we saw yesterday they set aside seventeen to eighteen
Speaker 2: billion dollars were of assets to service collateral. But the
Speaker 2: question must be how stable are those assets given that
Speaker 2: they are tied to property.
Speaker 5: Right, So that was a news report, and then the
Speaker 5: company did not come from or deny it, which to
Speaker 5: me is a reference to be honest, exactly like what
Speaker 5: you said, Brian, A lot of They do have a
Speaker 5: lot of investment assets. They own a lot of shopping
Speaker 5: malls across China, but The question is how much are
Speaker 5: these assets work? And that, by the way, are these
Speaker 5: assets being pledged away already? I mean, what we are
Speaker 5: seeing in China is that the remaining real estate developers
Speaker 5: they're trying to puzzle out their assets and flow them
Speaker 5: as some form of reds right, and then like a
Speaker 5: stay owned enterprises can say, Okay, I don't want to
Speaker 5: they are a real estate developer, but I can buy
Speaker 5: a publicly traded ate. Question is how much are these
Speaker 5: assets worth? And that's yes, that's a big question marketing
Speaker 5: in China rants is.
Speaker 1: That the only solution that the regulators, the leadership in
Speaker 1: China is able to come up with, I mean to
Speaker 1: kind of go the route that you just described, carve
Speaker 1: them up into reads and let kind of the investment
Speaker 1: dollars from kind of the domestic pension industry to be
Speaker 1: invested in these companies.
Speaker 5: Well, so far, the Chinese government wants to is still
Speaker 5: talking about so called the market oriented solutions. Basically, they
Speaker 5: don't want to do anything else, and they're hoping that
Speaker 5: the financial markets will take up the reads just like
Speaker 5: what you said, pension and insurance companies will do that.
Speaker 5: But it's really hard to do because I mean, the
Speaker 5: whole economy is in the deflation right, and which means
Speaker 5: that its asset prices should also be in a downward
Speaker 5: spiral trend, and we just don't know how to value
Speaker 5: these opaque commercial assets.
Speaker 2: It could one of the options I didn't mention was
Speaker 2: it could go to its largest shareholder, Shenjan Metro, But
Speaker 2: it seems that that company is not that willing. What
Speaker 2: are the difficulties in that relationship at the.
Speaker 5: Moment, Well, Shinjin Metro only owns twenty seven percent, so yes,
Speaker 5: it is the largest shareholder, but it can say I'm
Speaker 5: not the majority shareholder. And the one CU has been
Speaker 5: listed since nineteen ninety one, so basically, all the mom
Speaker 5: and pops and minority shareholders, we are actually majority LEA
Speaker 5: shareholders and we are not going to take a responsibility.
Speaker 5: How are one Could's financial triples?
Speaker 2: Ye?
Speaker 1: So how are the difficulties at one coh impacting entrepreneurship?
Speaker 1: More broadly? You make that point, and I'm curious about that.
Speaker 4: I think One.
Speaker 5: Could is a very interesting case study because it's so
Speaker 5: famous and it went public before Danshakin came to Shanjan.
Speaker 5: For the Southern who are in nineteen ninety two when
Speaker 5: the previous leader talked about the economic reforms and opening
Speaker 5: up China. And one is also based in Shanshan, and
Speaker 5: Chenchhan was the first city in mainland China that opened up.
Speaker 5: It's a property market and allow people to own homes.
Speaker 5: Right before that, we no Chinese own any homes. So
Speaker 5: if one Curt fails, I think it really is a
Speaker 5: best sentence unfortunately to Dan Shoppings edision.
Speaker 2: So it seems that the government is probably the final
Speaker 2: straw here that it can't let evergrand and country garden
Speaker 2: and one could go down because the municipalities and the
Speaker 2: provinces have to have somebody to sell their land to. Right,
Speaker 2: So is that the most likely outcome is a state
Speaker 2: backed bail out?
Speaker 5: I think so. I mean one cur is really one
Speaker 5: of the very few privately health developers left. I mean
Speaker 5: everyone else is day old, right, Like, it's basically still
Speaker 5: the state's money buying its own land. But I think
Speaker 5: right now the Chinese government it knows it's trouble, and
Speaker 5: then the trouble is just so big and daunting that
Speaker 5: it's just paralyzed. It just hopes for the best. I
Speaker 5: think at this point.
Speaker 1: Surely it's always a pleasure. Thanks for making time to
Speaker 1: chat with us. Bloomberg opinion columnist Truly Wren talking about
Speaker 1: the situation with property developer China Wonka.
Speaker 2: We look at markets all throughout the program here on
Speaker 2: Bloomberg Daybreak Asia. And joining us now for some closer
Speaker 2: analysis is Dominic Schneider, head of Global Commodities and four
Speaker 2: Exit UBS Global Wealth Management. Dominic, thanks very much for
Speaker 2: coming in. So if we take the big broad macro view,
Speaker 2: it's been a risk on environment here for most of
Speaker 2: the early part of this year. I just over the
Speaker 2: past month or so it's gotten a little bit more
Speaker 2: sticky with you inflation readings in the United States, and
Speaker 2: we've seen the S and P five hundred go from
Speaker 2: a gain of ten percent to only up about six
Speaker 2: percent year to date. And the commentary that we got
Speaker 2: from j. Powell today was a little bit of a change.
Speaker 2: He's really talking now about higher for longer, not being
Speaker 2: convinced that inflation is coming down to the extent that
Speaker 2: they would need it. And so one end result of
Speaker 2: that is a strong dollar. Is the strong dollar as
Speaker 2: likely as anything to disrupt the sort of positive feelings
Speaker 2: that we've had for most of this year, and is
Speaker 2: it about ready to get serious?
Speaker 6: Well, if you look at the dollar in general, I
Speaker 6: would say we still have a little bit more to
Speaker 6: go on the strength side. I mean we can still
Speaker 6: price out all the cuts. There are still some cuts
Speaker 6: in there, so I think from that angle, dollar strength
Speaker 6: has a little bit room to runs. That means, for example,
Speaker 6: your dollar goes to one point h five from a
Speaker 6: temporarily below Do I think it needs completely to alter
Speaker 6: the macro landscape? Probably not. Just pricing out in itself
Speaker 6: would not derailed economy. Obviously, if we start to think
Speaker 6: about hiking rates, that will be a complete different game changer.
Speaker 6: But we're still the opinion that inflation dusty salerate, which
Speaker 6: growth comes down and earnings are maybe outside some of
Speaker 6: the tech names not as strong, So we don't need
Speaker 6: to make that drastic change. But it's pours a little
Speaker 6: bit cold water, as you said, over some of the
Speaker 6: risk one story, and maybe that's not so bad off
Speaker 6: the good rally a consolidation, that's good. Then we need
Speaker 6: to see if growth is better outside the US. If
Speaker 6: that comes through, the rally can continue.
Speaker 1: I'm wondering whether or not you feel the market is
Speaker 1: a little complacent, not a lot, but a little complacent
Speaker 1: on the level of geopolitical risk right now. I mean
Speaker 1: you could make the case yes, obviously a lot of
Speaker 1: the dollar strength is tied to this rate environment here
Speaker 1: that we're dealing with in the US, but there may
Speaker 1: have been some haven buying recently, particularly given this escalation
Speaker 1: that we've seen over the last couple of days in
Speaker 1: the Mid East. And then the second part of that
Speaker 1: is whether geopolitical risk has the potential to push commodity
Speaker 1: prices up just a little bit.
Speaker 6: Well, I must say, I mean, at the end of
Speaker 6: the day, the Middle Eastern crisis hinges or for the
Speaker 6: global market, it's all about what happened to oil, And
Speaker 6: I think the old market so far thinks, okay, nobody's
Speaker 6: really interested. Things are definitely escalating, but nobody wants any
Speaker 6: disruptions on oil supply for maybe also presidential reason. You know,
Speaker 6: when you go for an election, you don't want to
Speaker 6: have necessarily a higher oil price. And everybody else also
Speaker 6: here in the East. So I think everybody's mind is
Speaker 6: keep oil flowing, and I think that keeps the uncertainty constraint,
Speaker 6: at least for the broader market. We also could say
Speaker 6: that in case of oil, there's probably already a five
Speaker 6: dollars up to ten dollars risk premium there on the
Speaker 6: supply side. But clearly if something would happen and we
Speaker 6: get straight up for most something like blocked and or
Speaker 6: at least we lose one or two million barrels suddenly,
Speaker 6: I think then the prices will jump quite a fair bit.
Speaker 6: And in that context, I think oil is actually a steal.
Speaker 6: If you think about you get an insurance asset, normally
Speaker 6: you pay for it, and here you get actually probably
Speaker 6: paid with the forward curve being downward slopes.
Speaker 2: But one of the issues is the strong dollar. Obviously,
Speaker 2: I mean oil priced in dollars, so if the dollar
Speaker 2: is strong and it sort of mitigates perhaps the gain
Speaker 2: in the oil price. And I'm just wondering whether or not,
Speaker 2: you know, the lack of safe havens at the moment
Speaker 2: could be you know, changing mix a little bit. I mean,
Speaker 2: bonds are being sold off here and yields are running
Speaker 2: to the upside, so it's not exactly that investors are
Speaker 2: buying bonds as a safe haven. What is a safe
Speaker 2: haven at the moment besides gold and the dollar.
Speaker 6: You rightfully said there is not really much. I think
Speaker 6: still in that environment it would hold some commodities, to
Speaker 6: be honest, because I think in the context of the
Speaker 6: Middle Eastern crisis, holding oil makes a lot of sense.
Speaker 6: But in terms of obviously that comes with a fair
Speaker 6: bit of volatility close to thirty. There is not many
Speaker 6: safe haven you might want to think about. More towards
Speaker 6: Latin America. You're going to go for some of these
Speaker 6: higher yielding currencies. They're not safe haven, but they are
Speaker 6: closer to the US economy. They give you good yield.
Speaker 6: I mean that's something to maybe hide or look for
Speaker 6: a middle through pass, I would say. But beyond I
Speaker 6: would say dollar goal not much. You can look at
Speaker 6: the Swiss franc but story is a little bit broken
Speaker 6: given what we have seen with the SMB and the
Speaker 6: policy change here. But that could come back at some point.
Speaker 1: Talk about things that are broken in terms of haven's
Speaker 1: the Japanese currency. I mean, we're flirting here with one
Speaker 1: fifty five. We've got JP Morgan Private Banking saying along
Speaker 1: with Bank of America both saying one fifty or one sixty.
Speaker 1: I'm sorry, it could be the next milestone. What's your
Speaker 1: outlook for the end, I.
Speaker 6: Will be thinking that basically in the short term dolly
Speaker 6: into trade more towards the one hundred and fifty. Obviously
Speaker 6: that was under the regime of thinking there's still going
Speaker 6: to be three rate cuts. Now rates stay high, I
Speaker 6: mean one hundred and fifty five, we're higher, clearly possible.
Speaker 6: It's probably too early to position yourself in a long
Speaker 6: ym position, given where yield differentials are and how focused
Speaker 6: the market is at this point in time. So at
Speaker 6: this point in time would say yen clearly not to touch. However,
Speaker 6: I mean look at let's look at the longer term picture.
Speaker 6: I mean it's it is cheap, the economy does well,
Speaker 6: but we obviously really need to see the buch a
Speaker 6: little bit moving the needle here.
Speaker 2: Well, your pretty equity is conversing. So if we had
Speaker 2: more time, I'd ask you if the megacaps could be
Speaker 2: a safeye it well.
Speaker 6: Save that for next time.
Speaker 2: Was a pretty strong balance sheets, Dominic. Thank you so much,
Speaker 2: Dominic Schneider from UBS.
Speaker 1: This has been the Bloomberg Daybreak Asia podcast, bringing you
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