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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 Prisner. 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 Apec 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: Let's turn out to Homan Lee, senior macro strategist at

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Speaker 2: Lombard Odier with a little bit of a closer look

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Speaker 2: here at China. So you're neutral on the market with

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Speaker 2: kind of a cautious view.

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Speaker 3: Why, well, I guess the economy has, especially the manufacturing

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Speaker 3: sector has done pretty well due to robust demand overseas

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Speaker 3: and this increasing success at getting more market share overseas.

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Speaker 3: So the combination of this will definitely create a bit

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Speaker 3: of offside for twenty twenty four, so you know, the

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Speaker 3: growth will be closer to five percent target. But can

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Speaker 3: the economy do better? You know next year and the

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Speaker 3: year after. We still have some structural issues that have

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Speaker 3: not been resolved. The real estate sector continues to struggle

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Speaker 3: despite you know, many easing measures from basing. It's also

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Speaker 3: pretty clear that with their main asset class struggling, the

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Speaker 3: domestic consumers are still relatively cautious. If you look at

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Speaker 3: the bank loans for instance, four households, it's actually pretty weak.

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Speaker 4: It was pretty weak in May.

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Speaker 3: At the sentiment indicators is still pretty depressed, so and

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Speaker 3: the prices.

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Speaker 4: Are still pretty low.

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Speaker 3: So the domestic you know, manufacturers and supplies are still

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Speaker 3: struggling to get the secure margins for their own businesses.

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Speaker 3: And the share of loss making business for the industrial

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Speaker 3: sectors about a third. So in this kind of combination,

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Speaker 3: it's very difficult to get the enthusiasm up well the

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Speaker 3: medium to long term. But it's also true that the

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Speaker 3: leadership is aware of this situation, so in.

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Speaker 4: July it's possible to try to deliver.

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Speaker 3: Some new reform measures for the real estate. So you know,

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Speaker 3: these two factors basically, you know, cancel each other out,

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Speaker 3: and that's the reason why we are still comfortable to

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Speaker 3: maintain a neutral position on the market.

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Speaker 1: That's an interesting point. It's kind of consistent with what

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Speaker 1: the government is saying about really making sure that the

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Speaker 1: manufacturing economy is doing well so that you know, the

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Speaker 1: real estate segment can heal if that's the right word

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Speaker 1: to use. I guess it's fair to say that China

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Speaker 1: has really perfected the manufacturing economy. I mean, the efficiency,

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Speaker 1: the modernization, automation, robotics, everything that's being deployed right now

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Speaker 1: and has been for a number of years is really

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Speaker 1: kind of you know, unmatched globally. But are you concerned

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Speaker 1: now that we're talking about trade wars potentially in geopolitical

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Speaker 1: risk that may be shifting slightly?

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Speaker 3: That's exactly right. The part of this development is actually

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Speaker 3: not sustainable in the long run because it will you know,

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Speaker 3: definitely intensify frictions with the trading partners. We already had

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Speaker 3: you know, reaction from European Union for the EV sector.

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Speaker 3: But that dispute, even though the recent announcement was a

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Speaker 3: bit mild and I will expect it so uh, that's

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Speaker 3: that was slightly encouraging. But the thing is that dispute

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Speaker 3: will spread to the other sectors as well, like solar panels,

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Speaker 3: you know, wind turbines, semiconductors and uh and the other sectors.

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Speaker 4: So and and you know, you you're aware that you know.

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Speaker 3: Canada is beginning to think about the e V related tariff. UH.

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Speaker 3: You know, Japan is now beginning to increase restrictions for

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Speaker 3: a trade related to maybe you know, Russia and Ukraine.

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Speaker 3: So so these issues are as set to worsen. So

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Speaker 3: the fact that China is genny gain in the market.

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Speaker 4: Share is partly in the near term.

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Speaker 3: But that tension is definitely there and it will be

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Speaker 3: it will be even more.

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Speaker 4: Difficult for the exporters are going forward the medium to

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Speaker 4: long term.

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Speaker 2: It's the first time in a long time that China

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Speaker 2: seems to be a little bit more concerned about this

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Speaker 2: than Europe and the United States. I mean, you look

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Speaker 2: at the speech from Chinese Premier Li Chiang yesterday at

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Speaker 2: the World Economic Forum, and basically he's talking about the

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Speaker 2: regressive actions of decoupling and that there would be negative consequences.

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Speaker 2: He thinks that it would drag the world into a

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Speaker 2: destructive spiral. You're not hearing Europe and the United States

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Speaker 2: talk about, you know, losing a bit of contact with

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Speaker 2: China as being that big of a thing on the

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Speaker 2: global front, but China is. Does that show you that

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Speaker 2: they're quite significantly nervous about this.

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Speaker 3: This decoupling, the decompanying is real, and it's already happening,

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Speaker 3: and it'd be very difficult to reverse it given the

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Speaker 3: political sensitivities and different capitals around the world, you know,

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Speaker 3: including Beijing. So the loss of trust here in the

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Speaker 3: system is really sad thing to watch, and you will

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Speaker 3: definitely reduce efficiency at the global economic level, at the

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Speaker 3: global level going forward.

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Speaker 4: So it's really you know, a setback, you know for

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Speaker 4: a long term outlook.

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Speaker 3: But you're absolutely right, you know this, Uh, you know,

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Speaker 3: loss of trust is going to stay.

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Speaker 4: And you know, especially with the you know, the political

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Speaker 4: you know event coming up in the US.

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Speaker 3: You know the dialogue will likely worse. And and you know,

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Speaker 3: as far as the Chinese exporters outlook is concerned, uh,

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Speaker 3: you know, they're doing well.

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Speaker 1: Uh.

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Speaker 4: And and you know part of this is in fact, you.

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Speaker 3: Know, the actual innovation happening in China, but the reaction

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Speaker 3: to it will will definitely get stronger.

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Speaker 1: So we know that because I'm sorry home and the

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Speaker 1: challenges in China typically create rippel effects across the apex.

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Speaker 1: You're in South Korea, can you give us a sense

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Speaker 1: of how you're seeing what China is going through kind

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Speaker 1: of resonate through the South Korean economy.

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Speaker 3: So for sure, one of the successes of you know,

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Speaker 3: the factors that drove the success of South Korea in

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Speaker 3: past twenty years was the globalization and the collaboration with China.

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Speaker 3: So the fact that the coupling is happening, you will

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Speaker 3: create some ramifications for.

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Speaker 4: The business sector. Here.

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Speaker 3: For instance, if you think think about the memory sector

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Speaker 3: in South Korea, a huge chunk of the instaal capacity

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Speaker 3: is still in China, and you know, the leading manufacturers

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Speaker 3: need to figure out how to you know, manage that

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Speaker 3: the exposure going forward, especially because they're not beginning to

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Speaker 3: build facilities in the US under the US conditions. So

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Speaker 3: these are the issues that they need to deal with.

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Speaker 3: But at the same time, some businesses, you know, feeling

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Speaker 3: a bit more optimistic because you know, there is this

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Speaker 3: expectation that may be the greater restrictions from the US

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Speaker 3: in Europe could create opportunities. But South Korea a battery sector,

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Speaker 3: for instance, the leading battery manufacturers in South Korea, they

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Speaker 3: were losing market share to China, so potentially this new

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Speaker 3: tariff that's coming up could open the door for them.

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Speaker 3: So it cuts both ways. But definitely the navigation devigating

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Speaker 3: this is not going to be easy so.

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Speaker 2: Put that all together, like, for instance, this morning, we're

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Speaker 2: seeing a rebound in in Tokyo Electron and ske Heinex

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Speaker 2: is some more than three percent. What's your number one

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Speaker 2: call at the moment, Well.

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Speaker 3: The number one call in Asia is that we are

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Speaker 3: still long dollar against the select Asian currencies.

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Speaker 4: We do think yen yuen.

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Speaker 3: Will soften a bit against dollar going forward given the

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Speaker 3: macro challenges there, and for Japan, we do think the

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Speaker 3: adjustments by Banko Japan will come up in the July

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Speaker 3: policy meeting.

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Speaker 2: All right, well, we've got weakness in the end. This morning,

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Speaker 2: dollar yen's at one fifte seventy eight. Homan, thank you

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Speaker 2: for joining us. Homan Lee, senior macro strategist at Lombard Odier.

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Speaker 2: Well joining us now on the program to take a

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Speaker 2: closer look at markets. Is Jeff you, senior EMEA market

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Speaker 2: strategist to at B and why Jeff, thanks very much

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Speaker 2: for being with us inequities. We've actually had considerably more

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Speaker 2: volatility in some of the individual stock performance than we

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Speaker 2: have seen at the index level. So in some ways,

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Speaker 2: I suppose you could say that what that translates to

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Speaker 2: is it's a good time to be a stock picker,

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Speaker 2: are you that, dude?

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Speaker 5: Well, at this point, I think with respect to stock markets,

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Speaker 5: we've got to take into account seasonality. You know, there's

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Speaker 5: month ender, so somebody balancing going on as course to

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Speaker 5: rend as well, so it amplifies things. But I think

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Speaker 5: it's not just in equity markets where you want to

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Speaker 5: be a stock picker. I want to be a quote

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Speaker 5: unquote stockpicker in currency markets as well, and bond markets.

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Speaker 5: To idiosyncratic risk and countries are the same as looking

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Speaker 5: at company fundamentals as well. So to your point, broadbrush

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Speaker 5: risk on environment that certainly doesn't really apply, and more

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Speaker 5: especially with effet common so that you've just played, especially

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Speaker 5: if it's a high for longer environment, then you've got

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Speaker 5: to be very careful in ass allocation where you want

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Speaker 5: to own, who you want to own, and how you

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Speaker 5: deploy money.

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Speaker 1: Yeah, we're fortunate to be speaking with you from Beijing,

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Speaker 1: so i'd like to get your take on the overall

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Speaker 1: economy in China, But talk to me about some of

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Speaker 1: the geopolitical risks that you see right now. Yesterday we

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Speaker 1: were talking about Canada imposing terrorff sun Chinese evs. We

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Speaker 1: know the state, what the situation here in terms of

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Speaker 1: the terror of situation is with the US also Europe,

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Speaker 1: and then a moment ago we were talking about open

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Speaker 1: AI taking additional steps to curb Chinese access to AI software.

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Speaker 1: How do you view the geopolitical environment right now, the

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Speaker 1: US versus China.

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Speaker 5: Well, I think, you know, broadly, all of this is

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Speaker 5: being factored into ass allocation, right so, you know, to

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Speaker 5: the point we're regarding the last question about you know,

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Speaker 5: stop picking, and I think these premiums or discounts are

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Speaker 5: being factored in as well, you know, but all sides

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Speaker 5: are talking at this point, you know, China, EU discussing

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Speaker 5: the situation with you know, tariffs up ahead, how that's

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Speaker 5: going to impact industry. But broadly speaking, when it comes

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Speaker 5: to the domestic economy, I think that still is going

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Speaker 5: to be the focus. How to continue to a lift

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Speaker 5: sentiment and an asse allocation terms for much of Asia

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Speaker 5: where we see significant underweights from our own client flow,

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Speaker 5: there is an opportunity there. But at the same time

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Speaker 5: we need to see policies follow up as well. So

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Speaker 5: let's not get too distracted on the international side of things,

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Speaker 5: and let's see if Asia as a whole can pick

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Speaker 5: itself up in terms of generating growth and a challenging environment.

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Speaker 2: I like ad One of the things about stock picking

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Speaker 2: that I think resonates is it's about the stories. And

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Speaker 2: I think you could apply that to all asset classes,

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Speaker 2: including your specialties the bond market and currencies for instance.

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Speaker 2: You know, these are these are comments that play out

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Speaker 2: pretty well within video. It's probably, you know, a difficult

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Speaker 2: thing to short at this time, to get your head

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Speaker 2: handed back to you basically just because of valuation. You know,

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Speaker 2: it's a story that seemingly is still intact. Don't overthink it.

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Speaker 2: Are there some parallel stories that you see with other

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Speaker 2: asset classes?

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Speaker 5: Well to one or two weeks ago, when we're talking

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Speaker 5: about the situation in France and we're asked about safe havens, right, so,

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Speaker 5: what would you consider as a safer asset right now?

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Speaker 5: The European government dead or tech stocks in the US.

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Speaker 5: And I suppose a lot of asset allocators would pivot

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Speaker 5: towards the latter right now, which does sound counterintuitive to

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Speaker 5: some extent, but many times now I would say clients

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Speaker 5: take the approach, if it ain't broke, don't fix it,

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Speaker 5: right and being in tech being invested in the US

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Speaker 5: has worked. You know, we actually have to acknowledge that.

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Speaker 5: So rather you know, think about valuations in the US,

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Speaker 5: let's think about the discounts in Europe. Why European companies

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Speaker 5: are why you're bonds struggling to attract the kind of

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Speaker 5: flows that US tech is generating right now on a

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Speaker 5: volatility adjusted basis as well. I look at real rates

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Speaker 5: in the US, and then I look at real rates south.

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Speaker 4: Of the border in Mexico.

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Speaker 5: We're talking one percent in the US compared to four

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Speaker 5: or five percent for a Mexican equivalent. You know, Yet

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Speaker 5: over the last few weeks or so, we've seen the

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Speaker 5: dollar outperformer as well. So is it too much of

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Speaker 5: a premium in US assets or a discount elsewhere? That's

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Speaker 5: worthy of discussion. But time and time again US stocks

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Speaker 5: have shown their worth and so I think that is

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Speaker 5: basically cornering market investments right now.

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Speaker 1: So what is the level of risk in Europe? Even

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Speaker 1: if the ECB begins to accommodate and apply a few

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Speaker 1: more rate cuts here, is that enough to assuage your

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Speaker 1: concerns at all?

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Speaker 5: Actually, if I look at the euro where it's some trading,

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Speaker 5: what I am concerned about somewhat counter into is the ECB.

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Speaker 5: And if there are many, many reasons and to be

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Speaker 5: bearish on the Euro right now, and perhaps the European

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Speaker 5: economy politics, oddly enough, is actually not one of them.

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Speaker 5: So the French debt reaction, I think that was more

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Speaker 5: due to overpositioning ahead of time, ahead of the election announcement,

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Speaker 5: rather than fundamentals itself. I look at manufacturing PMI in Europe,

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Speaker 5: the cornerstone of European industry, the car industry in particular,

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Speaker 5: that has been contracting for god knows how long now,

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Speaker 5: Yet the ECB's focused on the more narrowly defined services inflation.

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Speaker 5: So I do think that the PO will need to

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Speaker 5: cut a lot what that would assuage my concerns. So,

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Speaker 5: if anything, ECB is not cutting enough right now.

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Speaker 2: Yeah, and that wouldn't even strengthen a dollar more. Yeah,

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Speaker 2: I'm curious what you think about this. I've listened to

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Speaker 2: so many sessions with you and Tom Keane on surveillance.

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Speaker 2: I feel like I know you and.

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Speaker 4: I know you.

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Speaker 2: Look at the US, I think most people would probably

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Speaker 2: think that the neutral rate on the economy in the

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Speaker 2: US is somewhere between two and a half and three percent,

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Speaker 2: the funds rates at five thirty seven and a half.

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Speaker 2: How long can that go on without doing some damage?

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Speaker 5: Well, how can that go on, you know in terms

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Speaker 5: of you tightening financial conditions. But we just have to

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Speaker 5: go back to the data and the data right now

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Speaker 5: as many FED members of highlighters just not showing signs

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Speaker 5: are slowing down. So there may be an argument that

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Speaker 5: for high for longer or long term equilibrium rates are being.

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Speaker 4: Pushed higher now.

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Speaker 5: A recent speech by the Swiss National Banks President Thomas

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Speaker 5: Jordan also highlighted that equilibrim rates in the in Switzerland,

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Speaker 5: known for low inflation in the past, may be a

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Speaker 5: bit harder than expected. So to your point about a

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Speaker 5: structural level of rates and the level at which they

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Speaker 5: need need to be to do some damage, maybe higher

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Speaker 5: across the board than we previously expected. So I think

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Speaker 5: now that is a really supportive of the dollar right now.

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Speaker 5: And to be frank, apart from the Swiss and the Yen,

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Speaker 5: you know, maybe dollar downside is going to be quite

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Speaker 5: limited at this point.

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Speaker 1: Jeff, very quickly, before we let you go, since you're

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Speaker 1: in China, let's do a little bit of walk about economics.

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Speaker 1: What is the situation there on the ground.

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Speaker 5: So you know, right now, you know, we always say

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Speaker 5: this can be a stronger, you know than we would

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Speaker 5: like it to be. But there is an effort scene

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Speaker 5: to try to support the economy. And also the PBOC

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Speaker 5: comments I think throughout the yeah, they are redoubling efforts

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Speaker 5: to do so, you know, what are the castalysts And

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Speaker 5: for some I just don't think with my international hat on,

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Speaker 5: there is enough focus and on some of the opportunities.

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Speaker 4: I'm here at this point.

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Speaker 5: So we remain positive on ass allocation in China, mostly

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Speaker 5: because the extent of waitings is actually quite soft. Okay,

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Speaker 5: so you know sometimes you think about price action. No

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Speaker 5: one owns China at this point, you know, that's the

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Speaker 5: point I look at our flows. No one owns emerging

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Speaker 5: markets in general. Yeah, that's where the opportunities are.

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Speaker 2: We got to go, Jeff. But that's why I was wow,

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Speaker 2: you know, it's it's it's it's it's interesting to hear.

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Speaker 2: We'll say that for the next time. Details Jeff, you

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Speaker 2: from BN one. Let's get to our guest, Mark Machini,

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Speaker 2: chief investment strategist Jenny Montgomery Scott, Mark, thank you for

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Speaker 2: coming on the program. We had the FED Governor Michelle Bowman, actually,

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Speaker 2: I'm worried about upside risk on inflation. It's a little

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Speaker 2: counter to what we've seen in the past couple of months.

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Speaker 2: And the FED Governor Lisa Cook went the other direction,

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Speaker 2: saying that she sees inflation gradually improving this year. We

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Speaker 2: had Steve Eisman on surveillance last night, my time, and

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Speaker 2: he said, it doesn't matter. You know, five hundred and

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Speaker 2: fifty basis points of upside one move here, one or two,

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Speaker 2: It just doesn't matter. How do you see this?

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Speaker 6: Well, I think there's a case be made that could

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Speaker 6: probably defend both Fed Governor's positions. At the same time,

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Speaker 6: though several of the leading indicators that we consider in

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Speaker 6: factoring in the somewhat guesstimate work that goes into ascertaining

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Speaker 6: the likely direction of inflation suggests it's more likely to

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Speaker 6: continue to cool than necessarily reh Now, maybe in the

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Speaker 6: case of Governor Bowman, there was an acknowledgement of the

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Speaker 6: earlier in the year readings that came in a little

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Speaker 6: bit hotter than expected. That can't obviously be dismissed at

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Speaker 6: this juncture just because we've stacked a couple of good

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Speaker 6: inflation readings subsequent to that. So again it's a heavy

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Speaker 6: reliance and data and lack of commitment or conviction on

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Speaker 6: the part of the Federal Reserve members with regard to

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Speaker 6: what their next move might be, allowing for the data

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Speaker 6: to serve their reaction function as opposed to speculating.

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Speaker 1: So, if you're right and we do see evidence of cooling,

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Speaker 1: it may manifest Friday with that PCEE data. If we

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Speaker 1: know it's the feds preferred measure, will that change consumer behavior?

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Speaker 1: I mean, if we start to see inflation come down.

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Speaker 1: I noted today that the Conference Board's consumer sentiment index

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Speaker 1: eased a bit. I mean, the survey also pointed to

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Speaker 1: a more muted outlook for business conditions and some softness

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Speaker 1: in the labor mard and an incomes as well. I mean,

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Speaker 1: so I'm wondering whether if inflation comes down, that the

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Speaker 1: consumer may react in a way that suggests a little

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Speaker 1: bit of positivity.

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Speaker 6: Perhaps ultimately, certainly, the University of Michigan survey is tied

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Speaker 6: more closely to inflation readings, and is that of the

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Speaker 6: Conference Board, which tends to be a little bit more

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Speaker 6: waged and job market driven, but nonetheless you know, I

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Speaker 6: think the angst in the consumer at the moment is

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Speaker 6: not so much the fact that they don't recognize that

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Speaker 6: inflation has been cut by two thirds from its peak

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Speaker 6: back in June to twenty two of nine point one percent.

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Speaker 6: Is that prices in general aren't falling, and so is

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Speaker 6: the elevation of prices rather than the rate of change

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Speaker 6: in inflation that is causing some anxiety on the part

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Speaker 6: of the consumer that you're seeing by way of perhaps

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Speaker 6: some modest slowdown weakness and spending. That evidence in the

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Speaker 6: most recent retail sales figures. So you know, it's always

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Speaker 6: the function to watch what they do, not what they say.

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Speaker 6: But at the same time, you can't ignore those confidence

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Speaker 6: ratings that do suggest, particularly as it relates to their

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Speaker 6: responses to their intentions to buy durable goods items or

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Speaker 6: take vacations or what have you, are still really weak.

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Speaker 2: But you know, that's where time figures in, because in

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Speaker 2: time people would get used to the current rates as

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Speaker 2: long as they're not going up. But I think it's

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Speaker 2: kind of interesting when you think about, Okay, if you

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Speaker 2: have growth faltering a little and you have inflation coming down,

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Speaker 2: it's kind of a no brainer that the FED might

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Speaker 2: want to cut. You still don't know when. But what's

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Speaker 2: interesting is what if you have inflation come down but

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Speaker 2: growth remains firm. Could the Fed stay higher for longer

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Speaker 2: in that environment?

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Speaker 6: I think they could if inflation would come down, though

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Speaker 6: they'd have no reason to. I mean, their battle right

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Speaker 6: now seems to be solely focused on inflation, since they're

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Speaker 6: still at or maybe even slightly below what they deem

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Speaker 6: to be all employment in the country, so that side

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Speaker 6: of their dual mandate is still in line with their goal.

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Speaker 6: So if they've in fact feel increasingly confident they can

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Speaker 6: declare victory over stamping out the ravages of rapidly rising inflation,

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Speaker 6: then there's no reason for them to continue to hold

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Speaker 6: interest rates high. If in fact, the economy seems to

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Speaker 6: be motoring along at a trend or above trend base

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Speaker 6: and at the same time concurrent with falling inflation that

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Speaker 6: is on a slide path that they have a high

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Speaker 6: degree of certainty is going to land adder near their

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Speaker 6: two percent target.

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Speaker 1: So, Mark, I'd like to apply everything that you've been

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Speaker 1: saying into an investment strategy. What would that look like

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Speaker 1: at this point?

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Speaker 6: Well, I think you know, for me, it tends to

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Speaker 6: be that you know, your bias should be at worse

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Speaker 6: to be you know, market weight whatever that is congluned

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Speaker 6: with one's target weighting for equities in a portfolio, sent

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Speaker 6: or balanced in a sixty forty allocation, whatever might be appropriate,

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Speaker 6: and go overweight at times in which we've seen a

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Speaker 6: deep enough pullback that would weren't, you know, either shifting

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Speaker 6: money into equities from bonds or adding new moneys to

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Speaker 6: the equity market. I think the only time you'd want

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Speaker 6: to consider underweighting equities is when we're in the midst

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Speaker 6: of a condition that, by all accounts, appears that a

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Speaker 6: recession is inevitable, because that's where you experience the bear

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Speaker 6: market drawdowns of significant orders of magnitude, and for the moment,

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Speaker 6: that doesn't seem to be an imminent threat. So I

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Speaker 6: think the window for equity prices to continue to advance,

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Speaker 6: perhaps not quite at the same pace as we've seen

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Speaker 6: over the first call it half of twenty twenty four,

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Speaker 6: but nonetheless advance is still open, and I think investors

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Speaker 6: therefore should stay committed to their equity positions.

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Speaker 2: But mark is this a better time for stock pickers

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Speaker 2: than index buyers?

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Speaker 6: Well, the index buyer has been rewarded by the fact

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Speaker 6: that the disproportion or represents of tech and tech related

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Speaker 6: companies have really done all the heavy lifting. If you

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Speaker 6: consider the Magnificent seven's return of call it thirty six

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Speaker 6: percent year to date versus the fifteen percent of return

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Speaker 6: for the even cap weighted s and P five hundred,

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Speaker 6: you've benefited from being an index or if you will,

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Speaker 6: in that respect. At the same time, though, I can't

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Speaker 6: help but think going forward, it may be more rewarding

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Speaker 6: to spread bets around because valuations are extremely demanding.

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Speaker 2: All right, Mark, thank you so much, Mark Luceini. There

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Speaker 2: from Jenny Montgomery.

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Speaker 4: S God.

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Speaker 1: the stories making news and moving markets in the Asia Pacific.

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