WEBVTT - Surveillance: Trade Friction Ahead, CIBC's Stretch Says 0:00:09.880 --> 0:00:13.880 Welcome to the Bloomberg Surveillance Podcast. I'm Tom Keene Jay Leye. 0:00:13.960 --> 0:00:17.560 We bring you insight from the best in economics, finance, investment, 0:00:18.000 --> 0:00:23.520 and international relations. Find Bloomberg Surveillance on Apple Podcasts, SoundCloud, 0:00:23.600 --> 0:00:27.960 Bloomberg dot Com, and of course, on the Bloomberg. Joining 0:00:28.040 --> 0:00:31.720 us now, Tom Marlick, Bloomberg Economics Chief economist. He joined 0:00:31.800 --> 0:00:35.320 us on the latest. Tom from your position, from your perspective, 0:00:35.400 --> 0:00:38.240 looking at how things concluded on Friday, are you surprised 0:00:38.280 --> 0:00:43.879 this Monday morning that the Chinese still want further talks? Certainly, 0:00:44.040 --> 0:00:47.600 the indications coming out of China over the weekend haven't 0:00:47.640 --> 0:00:51.880 added to optimism, Jonathan, As you mentioned, I think it's 0:00:51.920 --> 0:00:55.840 important that the Chinese official media is not using the 0:00:56.000 --> 0:00:59.440 term deal in any of their reporting on what happened. 0:01:00.080 --> 0:01:03.639 That obviously indicates there's some distance still to travel. Um. 0:01:03.680 --> 0:01:07.760 At the same time, relative to where we were a 0:01:07.800 --> 0:01:10.880 month ago, UM, I think we're in a slightly better position, 0:01:11.160 --> 0:01:15.240 and I remain cautiously optimistic that this very very limited 0:01:15.600 --> 0:01:18.960 mini deal could still get done. Tom, do you think 0:01:19.160 --> 0:01:22.800 that China wants materially more concessions or do you think 0:01:22.800 --> 0:01:25.120 that this is just a matter of trying to let 0:01:25.160 --> 0:01:28.240 people know they're trying the best that they can. So 0:01:28.560 --> 0:01:32.320 I think they would certainly want those December fifteen tariffs 0:01:32.400 --> 0:01:35.960 off the table. Um. As you remember, that's the tariffs 0:01:36.000 --> 0:01:41.120 which would hit the consumer electronics sector. That's your iPads, 0:01:41.240 --> 0:01:46.280 your iPhones, your laptops, um and UM. Frankly, I think 0:01:46.280 --> 0:01:50.240 that's actually a really pretty realistic ask by China. Um. 0:01:51.040 --> 0:01:53.960 It would be it would be very painful for the 0:01:54.080 --> 0:01:57.720 US to put those tariffs on just before Christmas, to 0:01:57.840 --> 0:02:01.760 hit so many iconic products, so the iconic brands, just 0:02:01.840 --> 0:02:05.880 ahead of the Christmas shopping season. I think probably the 0:02:06.000 --> 0:02:09.520 US doesn't want to impose those tariffs either, So if 0:02:09.560 --> 0:02:11.960 that's what China wants, I don't see that as a 0:02:12.000 --> 0:02:16.040 significant barrier to making progress on this mini deal. I 0:02:16.080 --> 0:02:17.720 have to agree with you, Tom, I think it's highly 0:02:17.800 --> 0:02:20.280 unrealistic to expect the Chinese president to go down to 0:02:20.360 --> 0:02:23.760 Chile and sign a deal with December terrifis hanging over 0:02:23.840 --> 0:02:27.200 him a month later. Beyond phase one, it's phase two 0:02:27.200 --> 0:02:28.880 where I start to worry, and that's where the hard 0:02:28.880 --> 0:02:31.960 work really starts for me. Over the harder issues. This 0:02:32.040 --> 0:02:33.920 is the easy stuff to come to an agreement on 0:02:34.000 --> 0:02:36.720 We've seen it multiple times over the last eighteen months. 0:02:37.080 --> 0:02:39.840 Phase two. We're told Tom, those talks are going to 0:02:39.880 --> 0:02:43.480 begin almost immediately. How difficult is it going to be 0:02:43.520 --> 0:02:45.400 to come to any agreement? And with that in mind, 0:02:45.840 --> 0:02:47.600 to what degree is to a large risk that this 0:02:47.680 --> 0:02:51.600 just blows up all over again. So I completely agree 0:02:51.600 --> 0:02:54.480 with you, Jonathan, that Phase two where all the difficult 0:02:54.520 --> 0:02:57.760 negotiations take place. That's where the U S and China 0:02:57.840 --> 0:03:02.480 have to talk about market access, intellectual property protection, China's 0:03:02.520 --> 0:03:06.120 program of industrial subsidies, what to do about U S 0:03:06.120 --> 0:03:10.960 sanctions on firms like Huawei and the Chinese surveillance firms 0:03:10.960 --> 0:03:13.919 which the US is accused of being involved in human 0:03:14.000 --> 0:03:17.840 rights violations. So all kinds of really thorny difficult issues there. 0:03:18.520 --> 0:03:21.720 At the same time, I don't think that the US 0:03:21.800 --> 0:03:25.480 and China actually have to solve those issues to put 0:03:25.520 --> 0:03:28.880 a bit of a flaw under global confidence and global growth. 0:03:29.639 --> 0:03:32.840 I think the optimistic case right now is we get 0:03:32.880 --> 0:03:36.680 the mini deal done more agricultural imports, we hold off 0:03:36.720 --> 0:03:40.480 on the tariffs coming in October and December, and we 0:03:40.520 --> 0:03:44.240 agree to have constructive talks on those big difficult questions 0:03:44.840 --> 0:03:47.720 will we solve those big difficult questions or not? In 0:03:47.760 --> 0:03:50.880 a sense, it doesn't really matter. All that matters is 0:03:50.920 --> 0:03:53.120 that the markets have a sense that tariffs aren't going 0:03:53.160 --> 0:03:55.560 to go up and the talks are going to continue. 0:03:56.760 --> 0:03:58.920 Tom Allo, great to catch up with you, as always, 0:03:58.920 --> 0:04:02.000 Tom Olick there joining uh leading guy can almost coverage 0:04:02.000 --> 0:04:18.920 here at Bloombeck. Let's bring it Andrew Holland hold, shall 0:04:18.960 --> 0:04:21.200 we city chief US economist, teacher and just now good 0:04:21.240 --> 0:04:23.800 morning to Andrew. Good morning, let's talk about the deal 0:04:23.880 --> 0:04:25.719 that wasn't a deal in the prospect for a deal 0:04:25.720 --> 0:04:28.960 ahead of a November signing ceremony you'll view this morning. Yes, 0:04:29.040 --> 0:04:30.400 I think I have to agree with a lot of 0:04:30.400 --> 0:04:33.320 what Tom was saying. It's not really surprising to see 0:04:33.400 --> 0:04:36.400 that China and the US are going to be speaking 0:04:36.440 --> 0:04:39.560 more about these issues, and that December teriff hike in 0:04:39.600 --> 0:04:42.479 particular is really the important one. That's where all the 0:04:42.560 --> 0:04:46.000 direct consumer goods are going to come in. And you 0:04:46.040 --> 0:04:48.960 would expect that part of even this phase one of 0:04:49.000 --> 0:04:51.720 the deal would be some agreement or at least some 0:04:52.080 --> 0:04:54.480 understanding about what's going to happen in December. So I 0:04:54.520 --> 0:04:59.000 can't be too surprised James Affy at Aberdeen Standard had 0:04:59.040 --> 0:05:00.800 this to say, we are in the last knockings of 0:05:00.839 --> 0:05:04.320 this cycle. Trade is an irritant, not the disease. Would 0:05:04.320 --> 0:05:07.520 you agree. I think that that's a very insightful comment 0:05:07.600 --> 0:05:10.000 in the sense that a lot of the slowing that 0:05:10.040 --> 0:05:12.359 we're seeing in the global economy, I don't think you 0:05:12.400 --> 0:05:16.279 can tie directly to trade. So it's true that trade 0:05:16.360 --> 0:05:18.960 is a negative and the uncertainty around trade is a negative, 0:05:18.960 --> 0:05:21.200 and that's weighing on the outlook. But if you look 0:05:21.240 --> 0:05:24.560 at the slowdown in Chinese manufacturing, for instance, that began 0:05:24.760 --> 0:05:27.279 well before we had the escalation of trade tensions. On 0:05:27.320 --> 0:05:29.719 the flip side, if there is some sort of trade 0:05:29.720 --> 0:05:32.839 deal as per what has been discussed, how much will 0:05:32.880 --> 0:05:35.280 I give a boost to the U. S. Economy. I 0:05:35.560 --> 0:05:38.279 think the direct boost is actually limited. We're more looking 0:05:38.279 --> 0:05:41.559 at this in the context of an outlook that's fairly 0:05:41.560 --> 0:05:44.360 solid for the U. S economy, even with this trade uncertainty, 0:05:44.400 --> 0:05:46.920 with then a big downside risk that we get a 0:05:46.920 --> 0:05:49.640 big pullback and investment from corporates. We haven't really seen 0:05:49.720 --> 0:05:54.159 that pullback yet, and we would hope that even in 0:05:54.200 --> 0:05:57.440 the kind of scenario where we kind of plot along 0:05:57.520 --> 0:05:59.440 and you don't get a final deal on these issues, 0:05:59.720 --> 0:06:02.360 maybe investment can at least be kind of flat, if 0:06:02.440 --> 0:06:05.560 not increasing. If you do get a deal, that's upside 0:06:05.640 --> 0:06:08.520 risk for investment. But again, since we haven't seen a 0:06:08.560 --> 0:06:11.120 big pullback that's directly related to trade, you're not going 0:06:11.160 --> 0:06:12.960 to get a big boost just because you make a deal. 0:06:13.000 --> 0:06:14.880 And I'm really interesting and you just to get the 0:06:15.000 --> 0:06:17.800 view of an economist on this trade deal if you 0:06:17.800 --> 0:06:19.440 want to call it that, and what it would mean 0:06:19.480 --> 0:06:21.320 for the economy. It is incredibly nuanced. But when you 0:06:21.360 --> 0:06:24.400 look at the market, market pricing was pretty decisive when 0:06:24.440 --> 0:06:26.240 it came to what the Fed shouldn't, shouldn't do or 0:06:26.240 --> 0:06:28.359 will it won't do at the end of this month. 0:06:28.640 --> 0:06:31.800 Why do you think this is shaping FED expectations to 0:06:31.880 --> 0:06:34.039 the degree that it is when you don't have any 0:06:34.040 --> 0:06:36.960 real convection on what it does mean for the broader economy. 0:06:38.200 --> 0:06:41.680 I think it's not surprising to see markets reacting with 0:06:41.720 --> 0:06:44.760 a lot of sensitivity to these issues. UM. On the 0:06:44.760 --> 0:06:46.440 other hand, in terms of what the Fed is actually 0:06:46.520 --> 0:06:48.800 going to do, UM, I think that the FED is 0:06:48.839 --> 0:06:51.479 taking a longer view here, and even if we have 0:06:51.640 --> 0:06:54.560 some phase one. If we have some agricultural purchases, what 0:06:54.640 --> 0:06:56.159 the FED is going to be looking for is have 0:06:56.279 --> 0:06:59.560 you resolved some of these fundamental uncertainties. Um. So, in 0:06:59.640 --> 0:07:01.520 terms of what the market is looking for, the market 0:07:01.560 --> 0:07:03.880 I think is looking for do we get at least 0:07:03.880 --> 0:07:05.840 some kind of true, some kind of the ton so 0:07:05.880 --> 0:07:07.719 that we can kind of take these off of center 0:07:07.800 --> 0:07:09.960 stage for the time being, and that would be positive 0:07:09.960 --> 0:07:12.240 for risk assets. Maybe you price a little bit less 0:07:12.240 --> 0:07:14.520 for the FED. But fundamentally I think the FED is 0:07:14.560 --> 0:07:17.240 going to be largely unchanged despite these development went through 0:07:17.320 --> 0:07:19.840 a couple of weeks away from that FET decision. Then 0:07:19.880 --> 0:07:21.920 you think no change at the end of this month, 0:07:22.320 --> 0:07:24.080 we we think they cut. Now at the end of 0:07:24.080 --> 0:07:26.800 this month, we changed that view um after we saw 0:07:26.840 --> 0:07:29.200 those negative readings in the I s M surveys. Is 0:07:29.240 --> 0:07:32.400 really a pretty pretty negative UM reading that we had 0:07:32.400 --> 0:07:35.480 for I s M manufacturing down at forty seven point eight, 0:07:35.800 --> 0:07:37.800 and we thought that would be enough to just push 0:07:37.840 --> 0:07:40.320 the committee to cut in October UM and then probably 0:07:40.320 --> 0:07:42.200 not cutting further. And so then you have to ask 0:07:42.240 --> 0:07:45.200 this this trade issue change that in any way? Does 0:07:45.240 --> 0:07:48.520 the positive developments around trade change that? And again I 0:07:48.560 --> 0:07:50.440 think the FED is going to be watching the data here. 0:07:50.640 --> 0:07:52.800 Data have been a little bit more negative. That's why 0:07:52.840 --> 0:07:55.000 they'll be cutting in October. And I don't think that 0:07:55.040 --> 0:07:57.760 the trade developments change that. Andrew holding hollis quite to 0:07:57.760 --> 0:08:00.360 catch up with you as AY Cities chief US colomist, 0:08:00.440 --> 0:08:16.640 jointing US here in New York City alongside in this 0:08:16.720 --> 0:08:19.720 morning Bloomberg's Lisa Branmit's and Lisa. We've been talking about 0:08:19.760 --> 0:08:21.720 it through the morning. A lot of happy talk through 0:08:21.800 --> 0:08:24.320 much of last week. This morning, just a little bit 0:08:24.320 --> 0:08:28.080 more skepticism around two key stories, not just trade but 0:08:28.200 --> 0:08:33.520 Brexit too. Again, I am surprised at the incredible optimism 0:08:33.559 --> 0:08:36.480 and today the pessimism, even though it's clear it's not 0:08:36.520 --> 0:08:38.120 going to be so easy to get a China deal 0:08:38.160 --> 0:08:39.400 and it's not going to be so easy to get 0:08:39.400 --> 0:08:42.320 a Brexit deal. I think you are seeing some muted 0:08:42.400 --> 0:08:45.120 responses on both sides at this point, people looking at 0:08:45.559 --> 0:08:48.880 the talk and saying, honestly, the longer this drags out, 0:08:49.040 --> 0:08:51.760 the more the effects are going to happen, regardless of 0:08:51.800 --> 0:08:54.320 what agreements people come to move to. Price Action two 0:08:54.400 --> 0:08:56.320 equity futures are lower this morning, but not by a 0:08:56.320 --> 0:08:58.240 whole lot were down by six points on the SMP 0:08:58.360 --> 0:09:02.000 five down some two sense of one percent in foreign exchangely, 0:09:02.080 --> 0:09:04.560 so it's really really interesting what's going to happen here. 0:09:05.200 --> 0:09:09.240 Very little detail around what this effects packed actually is. 0:09:09.240 --> 0:09:11.160 Is it just words? Does it actually mean? And I 0:09:11.200 --> 0:09:13.280 think is there any kind of enforcement mechanism? Does it 0:09:13.400 --> 0:09:17.000 have any material meaning for foreign exchange markets? A lot 0:09:17.040 --> 0:09:20.000 of people think that a little bit on the edges, 0:09:20.120 --> 0:09:23.600 it puts the pressure and keeping a lid on where 0:09:23.600 --> 0:09:27.080 the U N goes, But there is no enforcement mechanism. 0:09:27.160 --> 0:09:29.000 From what people are saying, this is similar to what 0:09:29.040 --> 0:09:31.360 there was back in February. There was a similar type 0:09:31.400 --> 0:09:34.080 of agreement. It's more something for the U S treasure 0:09:34.120 --> 0:09:35.839 to hang its hat on and for China to kind 0:09:35.840 --> 0:09:39.080 of point to as a win for the US, saying, look, 0:09:39.920 --> 0:09:41.680 we're throwing you a bone and not trying to compete 0:09:41.720 --> 0:09:43.560 with our currency. We've got a perfect guest to weigh 0:09:43.559 --> 0:09:45.480 in on all of that. Jeremy Stretch joins a c 0:09:45.640 --> 0:09:48.440 i PC Head of Detail Effect Strategy. Jeremy would love 0:09:48.480 --> 0:09:51.280 your take on that situation. Some kind of currency agreement 0:09:51.320 --> 0:09:54.400 between the Chinese and the United States. Very little clarity, 0:09:54.440 --> 0:09:57.200 any detail around what that currency packed actually is. What 0:09:57.240 --> 0:10:00.760 does it mean to you Jeremy Good and Jonathan Well. 0:10:00.840 --> 0:10:03.280 I think in a sense, as ever, it is all 0:10:03.320 --> 0:10:05.400 about the details, or the lack of thereof. So in 0:10:05.440 --> 0:10:08.880 a sense, it's an opportunity for both sciences to suggest 0:10:08.920 --> 0:10:11.240 that they're not going to be sanctioning or tolerating a 0:10:11.280 --> 0:10:15.280 significant degree of deviation. But I don't think it signals 0:10:15.280 --> 0:10:19.040 in itself any obvious sort of step change in terms 0:10:19.040 --> 0:10:21.720 of the underlying dynamics. And I think we'll we've seen 0:10:21.760 --> 0:10:23.320 over the course of the last few months is that 0:10:23.440 --> 0:10:26.600 as we've seen the gradually imposition of tariffs, than accordingly 0:10:26.600 --> 0:10:29.880 we've been seeing the CNH depreciate and weaken as the 0:10:29.960 --> 0:10:32.679 Chinese economy is also moderated. So if there is a 0:10:32.720 --> 0:10:35.200 degree of a degree of agreement going forward, and we 0:10:35.200 --> 0:10:38.560 don't see an escalation in tensions, then that might provide 0:10:38.559 --> 0:10:42.160 some stability and ultimately a degree of a reversal in 0:10:42.200 --> 0:10:43.760 the CNH. But I think it is very much a 0:10:43.800 --> 0:10:46.160 case of watching and waiting to see how the political 0:10:46.440 --> 0:10:48.920 factors play out over the course of the next few days, weeks, 0:10:48.920 --> 0:10:53.160 and months. Although even without this sort of f x agreement. 0:10:53.640 --> 0:10:56.400 Isn't there a pressure on China and the PBOC to 0:10:56.480 --> 0:10:59.960 try to reign in how much and how frankly quick 0:11:00.080 --> 0:11:03.040 we the u N it is depreciating just in terms 0:11:03.080 --> 0:11:07.800 of capital outflows and just investments in the in the country. Well, 0:11:07.840 --> 0:11:10.959 I think when we've seen previous episodes of weakness in 0:11:11.000 --> 0:11:13.640 the currency, we have seen a particular concern about the 0:11:13.720 --> 0:11:16.840 degree of capital flight. But the evidence this time doesn't 0:11:16.840 --> 0:11:19.160 look quite as pervasive in terms of the degree of 0:11:19.240 --> 0:11:22.200 capital capital outflows. So I think that does suggest that 0:11:22.200 --> 0:11:25.079 the authorities can be and will be a little more relaxed. 0:11:25.320 --> 0:11:26.800 And in a sense that I say, I think there 0:11:26.800 --> 0:11:28.920 has been a degree of rationality in terms of the 0:11:28.960 --> 0:11:31.200 way that Dollar City in H has traded, because of 0:11:31.240 --> 0:11:34.160 course the dollar has been generally broadly strong across the 0:11:34.400 --> 0:11:37.719 across the board, and so accordingly, uh Dollar City in 0:11:37.840 --> 0:11:40.199 H moving up has been uh, you know, a sort 0:11:40.240 --> 0:11:43.800 of a realistic and rational market market reaction. If we 0:11:43.840 --> 0:11:46.800 can see some stability on the data front, then I 0:11:46.840 --> 0:11:50.360 think we will see a sort of topping out in 0:11:50.400 --> 0:11:52.840 dollar ce in H and we won't see any particular 0:11:52.880 --> 0:11:55.840 concern about capital leakage and capital flight. Further, down the 0:11:55.840 --> 0:11:58.559 track generally, just in terms of the policy outlook from 0:11:58.600 --> 0:12:01.320 here on out October, it's horriffs are now off the table. 0:12:01.480 --> 0:12:04.240 December terifikes are still on the table, though, I think 0:12:04.280 --> 0:12:07.280 most people concluding it's unrealistic to expect these two leaders 0:12:07.320 --> 0:12:09.720 to meet in Chula next month and sign a deal 0:12:10.080 --> 0:12:13.000 with the December tariff hikes hanging over us. Do you 0:12:13.040 --> 0:12:16.200 just see it as inevitable that those December teriffis are 0:12:16.280 --> 0:12:19.920 taken off the table as well? Well, you can never 0:12:19.960 --> 0:12:22.439 see anything as inevitable in this particular process, because of 0:12:22.480 --> 0:12:24.240 course we've been doing and throwing over the course of 0:12:24.240 --> 0:12:26.400 the last four or five months, in particular as the 0:12:26.480 --> 0:12:28.880 as the news flowers are oscillated. But I think it 0:12:29.000 --> 0:12:31.440 is realistic to assume that if there is going to 0:12:31.440 --> 0:12:33.960 be any progress, then it's more likely than not that 0:12:34.440 --> 0:12:37.000 the additional round of tariffs will also be postponed or 0:12:37.000 --> 0:12:40.240 pushed into the middle distance. But I think in reality, 0:12:40.320 --> 0:12:42.040 probably what we are going to have to get used 0:12:42.040 --> 0:12:44.960 to is that whatever the final destination is of these 0:12:45.360 --> 0:12:48.360 trade discussions, we are likely to have a greater degree 0:12:48.400 --> 0:12:51.160 of trade frictional tariff barrier than we would have had 0:12:51.200 --> 0:12:53.200 prior to the start of the process, and so it 0:12:53.200 --> 0:12:55.960 will inevitably end up with a restriction on trade. But 0:12:56.000 --> 0:12:57.360 I don't think we're going to see the sort of 0:12:57.400 --> 0:13:00.320 the extension of the tariffs thresholds because of course that 0:13:00.360 --> 0:13:02.800 would have some particular concerns for the consumer sector in 0:13:02.800 --> 0:13:04.520 the U s is it would be rather more difficult 0:13:04.559 --> 0:13:07.800 to argue that the Chinese producer is paying the tariffs 0:13:07.840 --> 0:13:11.719 once they are extended towards consumer orientated goods. Jeremy, you're 0:13:11.720 --> 0:13:13.800 in London, so we'd be amiss if we didn't hit 0:13:13.840 --> 0:13:16.040 on Brexit. And I'm sure you are so excited to 0:13:16.040 --> 0:13:20.000 talk yet again about Brexit, but I really do want 0:13:20.000 --> 0:13:22.480 to get a sense of just how volatile the pound 0:13:22.520 --> 0:13:25.120 has been and how much it's trading like an emerging currency. 0:13:25.160 --> 0:13:28.000 I mean, at this point, how can how much conviction 0:13:28.040 --> 0:13:32.160 do you have in your recommendations when it comes to Sterling. Um, well, 0:13:32.200 --> 0:13:33.840 if if it had been television, they would have been 0:13:33.840 --> 0:13:35.400 in sing me sort of having a rice smile as 0:13:35.400 --> 0:13:37.600 you talked about the policy list in Sterling. Because of course, 0:13:38.080 --> 0:13:40.160 when we when we look at the performance and reaction 0:13:40.160 --> 0:13:42.360 that we saw in the last two sessions of last week, 0:13:42.360 --> 0:13:45.000 which was the best two sessions that we've seen in 0:13:45.080 --> 0:13:48.280 ten years, and then you know we've almost we're getting 0:13:48.280 --> 0:13:52.040 towards reversing half of that move from Friday just underlines 0:13:52.080 --> 0:13:54.400 the degree of volatility and as you say, if you 0:13:54.440 --> 0:13:56.680 didn't know what currency pay you were looking at, you 0:13:56.760 --> 0:13:59.600 could have been persuaded to suggest it could have been 0:13:59.800 --> 0:14:02.760 some want of a more emerging nature. But it does 0:14:02.840 --> 0:14:06.720 underline the the sort of the high frequency political risk 0:14:06.800 --> 0:14:09.199 that we're really dealing with now, and of course as 0:14:09.280 --> 0:14:11.960 the negotiations go down to the wire for the for 0:14:12.000 --> 0:14:14.520 the Brexit process, I think it is going to be 0:14:14.559 --> 0:14:16.640 a period where we are going to be very very 0:14:16.640 --> 0:14:20.440 susceptible still to these headline risks. Um I think the market, 0:14:20.480 --> 0:14:24.520 which had been largely assuming that the extension was almost inevitable, 0:14:24.680 --> 0:14:28.080 got excited about the prospect of an earlier deal late 0:14:28.160 --> 0:14:29.760 last week. But I think now we're having a dose 0:14:29.760 --> 0:14:32.680 of reality kicking in and on one suspect that it 0:14:32.720 --> 0:14:35.720 will be very much a sort of an oscillating market 0:14:35.800 --> 0:14:38.000 until we get beyond the weekend, when of course we 0:14:38.040 --> 0:14:40.520 have further first parliamentary sitting here in the UK. In 0:14:41.760 --> 0:14:43.320 one thing, we struggle with a lot jare. I mean, 0:14:43.320 --> 0:14:47.240 I'm sure you've struggled with it too. Market participants have 0:14:47.360 --> 0:14:50.720 to be political analysts constantly. We have to read the 0:14:50.720 --> 0:14:53.760 political tea leaves of the political tea leaves in the 0:14:53.800 --> 0:14:55.920 United Kingdom right now, Just what are you focused on 0:14:55.960 --> 0:14:59.920 this week ahead of that EU summit. We're absolutely right 0:15:00.000 --> 0:15:02.560 other needs to be a political analyst. It's it's far 0:15:02.600 --> 0:15:04.960 more so in Sterling terms than you would be necessarily 0:15:04.960 --> 0:15:07.240 a macro analyst, because of course the macro pitch has 0:15:07.280 --> 0:15:10.200 been totally blindsided. Um. I think in a sense for 0:15:10.240 --> 0:15:12.160 the course of the next two days we'll be watching 0:15:12.240 --> 0:15:14.960 I'm waiting to see the news flow or the leaks 0:15:15.000 --> 0:15:18.640 coming out of Brussels visa VI, the negotiations with the EU. 0:15:18.680 --> 0:15:20.880 But I think also one shouldn't lose scited the fact 0:15:20.880 --> 0:15:22.800 that if there were to be a deal agreed, it 0:15:22.840 --> 0:15:24.880 has to be ratified by the UK Parliament, and in 0:15:24.880 --> 0:15:28.000 that regard, I think the key constituents will be the 0:15:28.040 --> 0:15:30.760 Democratic Union, this party, the small Northern Irish party that 0:15:30.800 --> 0:15:33.840 had been and have been supporting the Conservatives in their 0:15:33.840 --> 0:15:35.880 minority government over the course of the last few months, 0:15:36.080 --> 0:15:39.480 and also the tone and appetite for supporting the government 0:15:39.800 --> 0:15:43.920 from the European Research Group the Conservative Euroskeptics. Those are 0:15:43.960 --> 0:15:48.480 two groups are absolutely pivotal to any success in a 0:15:48.560 --> 0:15:51.160 Brexit vote, should a deal be brought back to Parliament 0:15:51.200 --> 0:15:53.600 before the end of the week. Jemmy Stretch always great 0:15:53.640 --> 0:15:55.240 a cat show. Whether you see I p C header 0:15:55.280 --> 0:15:58.600 detain ethicslogy, joining us out of London on the latest 0:15:58.600 --> 0:16:00.840 on the trade deal, the potential for an effexx pack, 0:16:01.000 --> 0:16:03.000 what it looks like and what on earth is going 0:16:03.040 --> 0:16:17.920 on with Brexit. Earning season is almost upon us and 0:16:17.960 --> 0:16:19.760 that means we need to catch up with Betsy Grace 0:16:19.760 --> 0:16:23.120 Sick Morgan, Stanley's head of Banks and Diverse Fied Finance Research. 0:16:23.160 --> 0:16:25.320 Good morning to Betsy. Hey, thanks so much. Good morning. 0:16:25.400 --> 0:16:27.480 Let's talk about these bank numbers you're looking for. Top 0:16:27.560 --> 0:16:31.080 of mind, according to you guys, rate sensitivity. How important 0:16:31.120 --> 0:16:34.400 is that for some of these companies critical look, I 0:16:34.400 --> 0:16:37.680 mean rates is about half of the revenue stream. So 0:16:37.880 --> 0:16:39.760 you have to think about not only where you are 0:16:39.800 --> 0:16:43.680 in three Q, but what the outlook is into How 0:16:43.680 --> 0:16:46.600 do you generate any kind of outlook at the moment, Betsy, 0:16:46.680 --> 0:16:50.520 given how rates of whip sword through the last couple 0:16:50.520 --> 0:16:53.280 of quarters. Yeah, it's fair question. Look, you know, we 0:16:53.400 --> 0:16:56.480 do keep our models live, so as the four words 0:16:56.520 --> 0:17:00.320 are moving up and down, we are flexing our amits 0:17:00.360 --> 0:17:03.000 for that. And and sometimes I get some questions, especially 0:17:03.040 --> 0:17:06.439 from UH investors, some smaller investors, saying, hey, you know, 0:17:06.480 --> 0:17:08.400 you're moving your numbers around a lot, and I'm like, hey, 0:17:08.400 --> 0:17:10.359 it's a reflection of what's going on in the bond market, 0:17:10.480 --> 0:17:13.080 so I gotta keep them live, you know, John, I 0:17:13.119 --> 0:17:16.160 love how excited Betsy is. And she came in. She's 0:17:16.200 --> 0:17:21.880 fired up. She said, she loves best too. I feel 0:17:21.880 --> 0:17:24.480 like we have to just take a moment to appreciate that. 0:17:24.520 --> 0:17:26.399 She was saying, this is what she lives for, is 0:17:26.440 --> 0:17:28.919 the earning season when you actually get a read on 0:17:29.040 --> 0:17:31.320 the banks. What are you expecting when it comes to 0:17:31.480 --> 0:17:34.760 loans and sort of how much that's expanding given the 0:17:34.800 --> 0:17:37.679 low rates. Look, it's so interesting because we have a 0:17:37.760 --> 0:17:41.360 very unusual economic situation right now today where loans are 0:17:41.440 --> 0:17:44.119 actually growing pretty strongly. I mean, you know, we all 0:17:44.119 --> 0:17:47.360 see the h A data five between somewhere between four 0:17:47.400 --> 0:17:49.399 and seven percent, depending on the week. If you're a 0:17:49.400 --> 0:17:51.119 big bank, small bank. What kind of asked the class 0:17:51.119 --> 0:17:54.880 you are. And one of the surprises this quarter relative 0:17:54.920 --> 0:17:58.800 to our models. Two things. One commercial is actually a 0:17:58.800 --> 0:18:02.040 little bit better than we've been looking for. And consumer, 0:18:02.400 --> 0:18:06.119 especially in auto, is a lot better, you mean in 0:18:06.200 --> 0:18:09.600 terms of the loan performance, in terms of loan growth, 0:18:09.760 --> 0:18:12.320 in terms of loan growth. Um. One thing that I'm 0:18:12.359 --> 0:18:16.040 wondering is how much pressure there is from the Blackstones 0:18:16.080 --> 0:18:18.000 of the world and the Carlisles of the world that 0:18:18.040 --> 0:18:21.000 are raising record amounts of money in cash. How much 0:18:21.000 --> 0:18:23.000 are they taking business away from the banks? You know, 0:18:23.320 --> 0:18:26.480 there's obviously some it's it's you know, we have this 0:18:26.560 --> 0:18:29.119 debate internally, as it's structural, as it's like local you know, 0:18:29.119 --> 0:18:32.200 it's a little bit of both, right, Um. And what 0:18:32.240 --> 0:18:35.960 we've seen is that there is about one percentage point 0:18:36.000 --> 0:18:40.040 or so of commercial loan growth. Uh. That looks like 0:18:40.119 --> 0:18:42.679 it's gone to the shadow in each of the past 0:18:42.880 --> 0:18:45.440 you know, over the past ten years, Right, in each 0:18:45.440 --> 0:18:49.600 of the past ten years, ten percentage points over that time. Yeah. Yeah, 0:18:49.720 --> 0:18:52.160 But see, let's move on to mortgages. I hear everybody 0:18:52.200 --> 0:18:56.520 talking about mortgage business, hardly anybody talking about expenses. You want, 0:18:57.280 --> 0:18:59.600 how critical is that to look at both sides of 0:18:59.600 --> 0:19:02.680 this store. Absolutely. You know, when we look at what 0:19:02.840 --> 0:19:06.800 drives alpha and bank stocks, it's operating leverage. So you 0:19:06.840 --> 0:19:09.480 can't just look at revs. You can't just look at expenses. 0:19:09.480 --> 0:19:12.080 You gotta look at both. And you know, we know 0:19:12.200 --> 0:19:13.840 that revenues on the mortgage side are going to be 0:19:13.880 --> 0:19:17.160 a little bit better than expected because of the refi 0:19:17.440 --> 0:19:20.560 activity that's been so strong. But you know, a big 0:19:20.600 --> 0:19:23.280 piece of that is paid out to brokers, so you 0:19:23.320 --> 0:19:25.919 have to add that into your EPs. Which bank do 0:19:25.920 --> 0:19:28.960 you which bank do you think is gonna outperform the 0:19:29.000 --> 0:19:32.879 most in terms of the estimates are in terms of 0:19:32.920 --> 0:19:39.040 the stock price estimates? Okay, um, where we are above 0:19:39.119 --> 0:19:43.000 the street. The most is for names like Discover. Why 0:19:43.119 --> 0:19:45.840 is that? That's mainly because of consumer credit and frankly, 0:19:45.880 --> 0:19:49.800 Discover actually put on Friday their master trust out after 0:19:49.840 --> 0:19:52.320 the close and net charge offs came in, you know, 0:19:52.359 --> 0:19:55.280 a little bit better than seasonality. So that's the main reason. 0:19:55.400 --> 0:19:56.880 But I know you've got to run. It's been great 0:19:56.880 --> 0:19:58.040 to catch up with you. Good luck for the rest 0:19:58.080 --> 0:19:59.600 of the week. All right, thank you. They're gonna be 0:19:59.600 --> 0:20:02.520 exception me busy. Betsy Grisi, Morgan Stanley, head of Banks 0:20:02.520 --> 0:20:19.800 and diversified finance research. My question is whether anyone trades 0:20:20.160 --> 0:20:23.240 on the trade headlines anymore, considering the fact that the 0:20:23.400 --> 0:20:28.600 action is fleeting and rather unreliable. David Sowerby would love 0:20:28.600 --> 0:20:31.440 to weigh in on that. I hope he is Anchor 0:20:31.680 --> 0:20:35.520 Advisors as managing director and portfolio manager joining us on 0:20:35.560 --> 0:20:37.320 the phone. So, David, what is your sense? I mean, 0:20:37.320 --> 0:20:40.280 how how much have you actually traded ever on some 0:20:40.359 --> 0:20:45.200 of the headlines we've gotten on trade? One word never? 0:20:45.800 --> 0:20:50.760 All right, then good good luck predicting politics, particularly politics 0:20:50.800 --> 0:20:52.840 in the last year and a half of this again 0:20:52.920 --> 0:20:58.080