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Speaker 1: Bloomberg Audio Studios, Podcasts, radio news.

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Speaker 2: This is the Bloomberg Daybreak Asia podcast. I'm Doug Krisner.

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Speaker 2: You can join Brian Curtis and myself for the stories,

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Speaker 2: making news and moving markets in the APAC region. You

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Speaker 2: can subscribe to the show anywhere you get your podcast

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Speaker 2: and always on Bloomberg Radio, the Bloomberg Terminal, and the

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Speaker 2: Bloomberg Business App. Let's bring in our guest. I'm Ed

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Speaker 2: de Riesgo is with us. He is the CIO of Insignio,

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Speaker 2: joining us from Miami, Florida. Ahmed, thank you so much

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Speaker 2: for being with us. Help me make sense of some

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Speaker 2: of the price action that we have seen in the

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Speaker 2: last several hours. I mean, a lot of the yen

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Speaker 2: carried trade being on wound, concern about the FED being

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Speaker 2: behind the curve, maybe some criticism on the part of

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Speaker 2: the Bank of Japan. How do you make sense of this?

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Speaker 3: Right?

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Speaker 4: So, obviously, when markets have the run that they've had

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Speaker 4: over the past couple of days, people are always searching

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Speaker 4: and grasping for answers. Let's kind of cut through the noise. Certainly,

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Speaker 4: there's been a repricing of US recessionary risks. A lot

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Speaker 4: of that due to the weak employment report, but you're

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Speaker 4: seeing some of the moves being exacerbated by technicals and

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Speaker 4: other trading elements, such as the unwinding of yen carry

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Speaker 4: trades around the world, which have exacerbated the losses in

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Speaker 4: some of the more high flying sectors. And usually when

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Speaker 4: you do get a margin call and you need to

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Speaker 4: unwind carry trade, you usually seek to sell what has

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Speaker 4: been performing the best, and obviously the MAC seven, the

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Speaker 4: megacap techs would certainly qualify for that a little lately,

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Speaker 4: they've obviously given back a lot of their gains for

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Speaker 4: the year.

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Speaker 1: What is your sense of the recession risks in the

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Speaker 1: US now given the jobs print though, I mean, the

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Speaker 1: market reaction has been seen as a bit overdone. People

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Speaker 1: have called it an overreaction, but some of the recession

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Speaker 1: indicators are also flashing warning signs.

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Speaker 4: Yeah. So we've sort of had the long held view

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Speaker 4: here at Insignia throughout the year that the market has

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Speaker 4: been systematically under pricing recession risks. The market was basically

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Speaker 4: priced for a Goldilock scenario, a situation where the FED

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Speaker 4: was going to be able to cut rates and the

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Speaker 4: economy was going to slow but slow just enough to

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Speaker 4: not trigger an outright contraction. We always thought that that

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Speaker 4: was a little bit too thin of a needle to thread,

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Speaker 4: and so we do think that some of those ricks

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Speaker 4: are being priced in currently where things stand in our

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Speaker 4: subjective recession and probabilities, we kind of have the probability

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Speaker 4: of a US recession packed at forty percent, So we

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Speaker 4: still think it's there's some runway for this to price out.

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Speaker 4: I think this growth scare is going to last for

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Speaker 4: a while, and the volatility in markets is going to

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Speaker 4: last for a while until we definitively get some word

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Speaker 4: as to whether or not finally the US will fall

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Speaker 4: into recession or not.

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Speaker 1: Okay, amid this period of adjustment, for I think both

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Speaker 1: monetary policy into the economy as well as the market reaction.

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Speaker 1: Do you think the Federal Reserve is, you know, just

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Speaker 1: going to ignore what we're seeing in markets.

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Speaker 4: Well, they have to uh again here, they also need

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Speaker 4: to walk a fine line because the FED has ramored

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Speaker 4: two mandates. It's not just obviously preventing recessions but also

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Speaker 4: maintaining inflation under control. I think if you were to

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Speaker 4: ask the FED in a quiet room with with with

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Speaker 4: no reporters, they would probably tell you, Look, we're willing

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Speaker 4: to risk the chances of a mild recession as long

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Speaker 4: as we get inflation under control and inflation expectations under control.

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Speaker 4: They don't want those unanchored. It's much more difficult for

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Speaker 4: the FED to bring those back under control. If they

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Speaker 4: were to shoot up again, then it is for the

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Speaker 4: FED to cut rates in the face of a mild recession.

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Speaker 4: So the risks to them, I think they rather err

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Speaker 4: on the side of causing a mild recession if that

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Speaker 4: means finally being able to put it put the inflation

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Speaker 4: genie back in the bottle.

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Speaker 1: Now.

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Speaker 4: Obviously they would prefer the scenario where they can thread

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Speaker 4: the needle, but that is exceedingly difficult to do.

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Speaker 2: So I'm seeing a recovery right now in the many

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Speaker 2: futures contracts for the American market that would imply some

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Speaker 2: positivity in the Tuesday session. Does tech regain leadership here

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Speaker 2: on the upside, Well.

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Speaker 4: I think you could see a bit of a bounce

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Speaker 4: in tech. Obviously they've had a very strong sell off,

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Speaker 4: so the technicals look oversold in that space. Now for

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Speaker 4: them to regain market leadership the way that they were

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Speaker 4: earlier in the year that I also find exceedingly difficult.

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Speaker 4: I think it's much more likely that you've passed the

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Speaker 4: baton onto new sectors. Some of the sectors we like

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Speaker 4: for the rest of the year are some of the

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Speaker 4: more defensive sectors of the market. We especially like utilities,

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Speaker 4: we like healthcare, and we like the consumer staples.

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Speaker 1: What about the price action that we've been seeing in

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Speaker 1: the past three sessions today excluding in Japan, do you

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Speaker 1: think that is also an overreaction by markets or is

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Speaker 1: it more this triple whammy of the FED moving to

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Speaker 1: slow and the boj maybe being too aggressive on hikes.

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Speaker 4: Yeah. I think what you're likely to see here in

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Speaker 4: the days ahead, which is, if the end continues its

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Speaker 4: meteoric rise, you could put you could potentially see some

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Speaker 4: central bank intervention, led by the Bank of Japan, because

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Speaker 4: I do think you know, just a few days ago,

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Speaker 4: the central bank governor in Japan was was was warning

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Speaker 4: that the end was too weak. Now it's you know,

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Speaker 4: too strong to move is important. Remember with currency moves, uh,

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Speaker 4: the magnitude is important, and the slope of the curve

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Speaker 4: is important. If they're too quick, too fast, that's disruptive

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Speaker 4: for the financial system. It's disruptive for societies, so central

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Speaker 4: banks don't like to see that. So yes, I would

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Speaker 4: think that some of that trade would slightly be reversed

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Speaker 4: here and you could see the Japanese equity market rebound here.

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Speaker 4: I have to say, on a longer term basis, we

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Speaker 4: do find the Japanese equity market to be quite attractive.

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Speaker 4: We think some of the fundamentals there position it for

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Speaker 4: being for being one of the better performing equity marks

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Speaker 4: over the next several years despite this current episode.

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Speaker 2: I'm ed good stuff. Thank you so much for being

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Speaker 2: with us. I'm Ed Riesgo. He is the CIO of Insignio,

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Speaker 2: joining us from Miami, Florida. Nick showen Maker, he is

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Speaker 2: client portfolio manager at Drummond Capital. He joins us from Sydney, Neck.

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Speaker 2: Thanks for making time. It seems like a perfect storm

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Speaker 2: over the last couple of hours. I mean, how do

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Speaker 2: you make sense of the price action right now?

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Speaker 5: Yeah, good morning. Thanks for having me back on certainly

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Speaker 5: massive amounts of volatility. And if you're putting things in

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Speaker 5: a context, it was only just recently that markets were

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Speaker 5: certainly seasling and we had a positive surprise on US GDP.

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Speaker 5: So I think there's a few things going on at

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Speaker 5: the moment. You had weak economic data, this seasonal weakness,

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Speaker 5: stretch positioning, there was crowding in AI, underwhelming earnings with

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Speaker 5: six of the seven seven disappointing, and on top of that,

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Speaker 5: we've seen massive amounts of volatility manifest itself through the

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Speaker 5: currency markets, given the unwinding of the yen carry trade.

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Speaker 5: And I guess one thing I'd say on that is

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Speaker 5: that usually when you have volatility manifested through currency markets,

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Speaker 5: to sell off in equities tend to be very sharp,

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Speaker 5: but not too prolonged. So I think fears of recession

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Speaker 5: at this stage are probably a little bit overdone, as

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Speaker 5: is the easing priced into the US rate market at

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Speaker 5: the moment.

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Speaker 1: What do you mean of the concerns that, I mean,

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Speaker 1: maybe US recession fears might be overdone, but that the

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Speaker 1: FED is behind the curve given what we're seeing in

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Speaker 1: the jobs market.

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Speaker 5: Yeah, look, it's good. It's a good point, and it's

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Speaker 5: you know, it is one data print. And as you

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Speaker 5: were mentioning just on the call earlier on we did

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Speaker 5: see that IM services data surprised to the outside just yesterday. Look,

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Speaker 5: there's nothing structurally broken. If we go back to periods

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Speaker 5: like two thousand and eight in the gc at issue

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Speaker 5: in the housing market. If we go back to two

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Speaker 5: thousand where we had exuberants in tech, there's obviously massive

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Speaker 5: differences now with earnings and valuation. So nothing in terms

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Speaker 5: of the fundamentals has changed too much from just one

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Speaker 5: data print now. But if we saw a second consecutive

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Speaker 5: week non farm payrolls report, then those fifty basis points

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Speaker 5: cuts being now priced in in both September and November

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Speaker 5: could come to materialize. But I think it's a little

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Speaker 5: bit premature.

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Speaker 2: April and I were talking a short while ago about

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Speaker 2: the sell off that we had Monday in Japan with

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Speaker 2: a NIEK down twelve percent. Yeah, a lot of that Yan, Carrie,

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Speaker 2: we know was being unwound. I'm wondering whether or not

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Speaker 2: you're concerned about possible problems in the banking system in Japan,

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Speaker 2: whether there may be a little bit of stress going

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Speaker 2: on under the hood. One of the reasons that financials

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Speaker 2: were a very hard hit in the Monday session. I

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Speaker 2: think the entire group was down about sixteen percent.

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Speaker 5: Yeah, that was really the driver of the weakness in

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Speaker 5: Japanese equities yesterday, which I think again you may have

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Speaker 5: said earlier programs the weakest day that we've seen since

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Speaker 5: nineteen eighty seven in Japan. So with lower policy rates,

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Speaker 5: you know you had the ten year JGB, you'ld get

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Speaker 5: back down below one percent. It's about nine now, So

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Speaker 5: lower yields tend to be problematic for banks that look.

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Speaker 5: This whole yen carry trade thing something we've been watching

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Speaker 5: for a few years now because it's been a massive

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Speaker 5: phenomena for many many many many yearsn't it and it

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Speaker 5: can ultimately affect every asset class. Despite the fact that

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Speaker 5: we've seen these massive rallies in US treasuries, Japan is

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Speaker 5: the biggest buyer and owner of US treasuries. They're massive

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Speaker 5: buyser structured credit, so it actually can be a major

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Speaker 5: global macro event. They can affect every asset class, but

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Speaker 5: it's so far being transmitted through equities and some currency.

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Speaker 5: So watching the bond market, both rates and credit is

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Speaker 5: really important. And with the en carry trade, and I

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Speaker 5: think the Bank of Japan has done the right thing,

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Speaker 5: taking rates first to all out of negative territory and

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Speaker 5: then having them ount twenty five basis points. Their inflation

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Speaker 5: targets been within their band for over a couple of

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Speaker 5: years now, so it didn't make sense to have such

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Speaker 5: ultracommnitive policy setting where the rest of the G ten

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Speaker 5: has got materially high rates that was obviously always going

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Speaker 5: to lead to financial systemic risk in the system, which

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Speaker 5: is starting to be unwound.

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Speaker 1: Well, there's been you know, the boding has been coming

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Speaker 1: under fire, especially with the market sell off in the

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Speaker 1: past few days, that it pulled the finger too early.

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Speaker 1: I mean, if you look at the data, maybe inflation, yes,

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Speaker 1: kind of in line coming up, but consumer spending is

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Speaker 1: still weak in Japan. And there's also been criticism that

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Speaker 1: the bog might have been you know, listening more to

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Speaker 1: some of what these top politicians and rare statements coming

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Speaker 1: out and talking about the yen weakness, maybe they were

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Speaker 1: playing into that crowd. What do you make of that?

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Speaker 5: Yeah, so I guess there's a big generational shift that

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Speaker 5: needs to take place in Japan. One thing is just

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Speaker 5: corporates getting used to passing on price increases because you

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Speaker 5: had deflation for so many decades. So I think just

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Speaker 5: with the weakness that you saw in the end for

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Speaker 5: such a prolonged period of time now going back really

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Speaker 5: to about twenty twenty two, there was the risk that

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Speaker 5: you kept getting higher inflation from important energy costs. So

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Speaker 5: I do believe the Bank of Japan did the right

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Speaker 5: thing moving It was seen to be a little bit hawkish,

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Speaker 5: moving fifteen basis points on the policy right versus ten,

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Speaker 5: and they're looking to reduce their essentially QI by half

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Speaker 5: over the next couple of years. Again, I think it

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Speaker 5: was reasonable what they did. But what will probably happen

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Speaker 5: now given the market moves that we've seen is that

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Speaker 5: they're a little bit cautious with their next policy moves

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Speaker 5: from here on.

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Speaker 1: So no hike in October, is that what you're seeing.

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Speaker 5: It's looking that it would. You'd have to see some

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Speaker 5: pretty strong data I think again perhaps on wages, but

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Speaker 5: that's already through now for I think to make another

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Speaker 5: hike in the shorter term overcoming months, just given some

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Speaker 5: of the extreme moves that we've seen.

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Speaker 2: Well, speaking of central banks, RBA decision later today, Nick,

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Speaker 2: given everything that we've seen in global markets over the

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Speaker 2: last couple of hours, what are your expectations here?

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Speaker 5: I would say that they're going to be on hold

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Speaker 5: for now. We did have some inflation out of that

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Speaker 5: just came out that was a little bit lower than

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Speaker 5: expectations over the last fortnite. It is higher than again

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Speaker 5: most of the G ten with true meat inflation or

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Speaker 5: core inflation closer to four percent, but I think they're

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Speaker 5: more most likely to be on hold for now.

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Speaker 1: What about what we're seeing in the you bound, in

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Speaker 1: Japanese equities. I think we're seeing the Nike up five percent.

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Speaker 1: Do you think this is going to be sustainable? Given

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Speaker 1: how you know, we need to kind of get a

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Speaker 1: sense of how much further strength we can see in

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Speaker 1: the Japanese currency, the unwinding of carry before this, you know,

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Speaker 1: we can determine where there has legs.

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Speaker 5: Yeah, well, I guess what happened is that just to

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Speaker 5: triggered a massive leveraging event, so there's going to be

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Speaker 5: some reversal of that. There was very crowded positioning in

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Speaker 5: kind of short again long Japanese equities, so again that

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Speaker 5: was unwound and a bit of that will start to

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Speaker 5: come back. So it's hard to say for now exactly

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Speaker 5: how that will transpire overcoming days, but it was very

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Speaker 5: very sharp. Again, as you've said, just even with the

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Speaker 5: equity moves yesterday down twelve percent, you would expect some

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Speaker 5: recovery in the shorter term.

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Speaker 2: Nick, Thank you so much, Nick, Shawn Maker there from

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Speaker 2: Drummond Capital. Israel is bracing for a possible attack from Iran.

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Speaker 2: This would be in retaliation for those assassinations of officials

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Speaker 2: associated with both Hezbollah and Hamas. Let's take a closer

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Speaker 2: look now with our guest Monica, because Kaita she is

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Speaker 2: the public policy director at Key Elements Group. She joins

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Speaker 2: us from London. Monica, thank you so much for being

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Speaker 2: with us. What is the degree of risk right now

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Speaker 2: that this is going to escalate quite dramatically.

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Speaker 3: Yeah, so thank you for having me first of all,

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Speaker 3: and escalation and all out war is not in the

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Speaker 3: interest of any player in the region or the US. However,

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Speaker 3: right now we see that the sticks and temperatures are

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Speaker 3: really high in the region and things can get out

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Speaker 3: of control quickly and not an a calculated be Even so,

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Speaker 3: now further escalation will really depend on Iranian coordinating action

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Speaker 3: given that Iran and its intelligence services have been humiliated

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Speaker 3: with Israel's assassination as you mentioned of Hamas political leader

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Speaker 3: is Mael Hanea, and because of that, Iran's response can

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Speaker 3: be greater than what we have seen for example, in

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Speaker 3: April on April thirteenth, and Iran also born Israel of

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Speaker 3: a missile strike and executed the strike. However, it was

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Speaker 3: intercepted by the Iron Domes successfully and this time it

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Speaker 3: was unprecedented assassination of the Hamas political leader. It was sophisticated,

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Speaker 3: done from within, and indeed exposed all the weaknesses of

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Speaker 3: Iranian security services and the regime, as well as humiliated

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Speaker 3: Iran international stage. Because of that, Iran has promised to

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Speaker 3: punish Israel and it will take substantial action. However, we

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Speaker 3: have to remember that Iran will be very careful of

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Speaker 3: the actions and exact targets that it chooses, because Iran

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Speaker 3: would not want the US to get involved and have

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Speaker 3: a collision between Israel and the best because this is

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Speaker 3: the type of collision that Iranian regime would not be

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Speaker 3: able to counter and survive such retaliation.

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Speaker 2: Yeah, US Secretary of State Antoning Blenken was discussing the

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Speaker 2: urgent need for de escalation in the Mid East, and

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Speaker 2: I'm wondering about the role that countries like Cutter and

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Speaker 2: Jordan may play in this. Is there a chance for

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Speaker 2: some type of diplomacy that will bring the temperature down,

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Speaker 2: so diplomacy, of.

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Speaker 3: Course always has a chance to bring temperatures down. However,

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Speaker 3: right now the station is extremely fragile and diplomatic means

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Speaker 3: may not simply be enough to lower the tensions. And

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Speaker 3: a lot of countries now including the US, of course,

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Speaker 3: are pressuring Israel to go for a ceasfire deal, some

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Speaker 3: sort of peace deal. However, we believe that it is

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Speaker 3: unlikely at the moment because both sites has reasons not

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Speaker 3: to be escalated and not to do it. For Hamas again,

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Speaker 3: they have been humiliated internationally because of the leader being

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Speaker 3: killed by Israel plus a high blow. And for Israel,

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Speaker 3: they do want their hostages back from Hamas, but at

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Speaker 3: the same time they want to destroy Hamas, and because

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Speaker 3: of that, it is very different go to achieve both

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Speaker 3: at the same time. And because of that, the escalation

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Speaker 3: or ceasefire agreement does not seem highly likely, regardless of

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Speaker 3: the other actors that are being involved in the US

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Speaker 3: international actress pushing for such type of the escalation or

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Speaker 3: diplomatic resolution at the moment, It's.

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Speaker 2: Been amazing that the demonstration on the part of Israel

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Speaker 2: in the way in which it was able to assassinate

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Speaker 2: one of these officials right inside Tehran. I mean that

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Speaker 2: goes a long way in kind of underscoring the capabilities

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Speaker 2: that Israel has, does it not?

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Speaker 3: Of course, Israel has great capabilities, and this type of

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Speaker 3: operation that has been planned for months, as you're rightfully mentioned,

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Speaker 3: it has been done from within. So that's a way unprecedented.

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Speaker 3: And what it shows to Iran, to Hamas, to Hasbola

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Speaker 3: is that no one is really safe, because Israel definitely

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Speaker 3: has means if it needs to take action and assassinate

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Speaker 3: their leaders or other really important personnel, or even conduct

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Speaker 3: other types of attacks. However, we have to remember that

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Speaker 3: Israel also does not necessarily want to escalate into an

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Speaker 3: all out war. What they want is to stop theirsm

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Speaker 3: against their country, and they are targeting specific targets and

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Speaker 3: they have concrete intelligence missions.

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Speaker 2: Do that does the new President Iran, who is perceived

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Speaker 2: to be a little bit more moderate, does that change

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Speaker 2: anything about the situation at all? I know that the

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Speaker 2: Supreme Leader is carrying most of the authority right now,

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Speaker 2: but I'm wondering whether the president could help in any way.

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Speaker 3: So, as you're right well, I mentioned the Supreme Leader

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Speaker 3: does hold the power in Iran, and at the same time,

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Speaker 3: with having new president, there's a chance that he will

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Speaker 3: want to show that Iran is not humiliated on the

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Speaker 3: international stage. So I do not think that this will

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Speaker 3: help in a way to do escalate. If anything, this

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Speaker 3: might mean that he will want to show Israel's sorry,

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Speaker 3: Iran's power and to strike back simply rather than the escalate.

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Speaker 2: If you had to speculate, and I hate to put

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Speaker 2: you in that position, what is the outcome of the

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Speaker 2: situation that we're dealing with right now? How do you

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Speaker 2: see this playing out?

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Speaker 3: So I do think that escalation is possible because as

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Speaker 3: I mentioned that, in the situation, Iran will have to

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Speaker 3: respond on someday or another. However, I do think that

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Speaker 3: Iran will think carefully what type of targets to select,

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Speaker 3: whether it would be infrastructure, civilians, or military targets, because

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Speaker 3: if civilians are targeted, we know that Israel will also

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Speaker 3: respond and this will just lead to further escalation. And

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Speaker 3: because of that, Iran might be more careful to choose

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Speaker 3: specific targets. And we also know that last time and

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Speaker 3: Iran was attacking Israel on April thirteenth, they have warned

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Speaker 3: Israel about the looming attack and this time as well.

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Speaker 3: Jerusalem Post has reported that actually Iran has communicated by

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Speaker 3: the Minister for the Affairs of Hungary that they will

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Speaker 3: be attacking Israel, and Israel has been noted of that.

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Speaker 3: So if Iran was going for an all out response,

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Speaker 3: an all out war, then they would not be warning

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Speaker 3: Israel about the blooming attack. So I think that the

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Speaker 3: Nians are calibrating their response and whereas there will be

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Speaker 3: a response, it will not necessarily lead to an all

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Speaker 3: out war.

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Speaker 2: We'll be tracking this closely. Monica. Thank you so much

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Speaker 2: for staying up late. I know it's one thirty in

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Speaker 2: the morning in London where you are, and we really

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Speaker 2: appreciate you joining us here on Daybreak Asia, Monica, because Kaita,

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Speaker 2: who is public policy director for Key Elements Group in London.

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Speaker 2: This has been the Bloomberg Daybreak Asia podcast, bringing you

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Speaker 2: the stories making news and moving markets in the Asia Pacific.

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