1 00:00:05,900 --> 00:00:08,738 Speaker 1: Welcome to Copy Time, a podcast series on Markets and 2 00:00:08,750 --> 00:00:11,939 Speaker 1: Economies from D BS Group Research. I'm the chief economist, 3 00:00:11,949 --> 00:00:17,149 Speaker 1: welcoming you to our 138th episode and I will apologize 4 00:00:17,159 --> 00:00:20,308 Speaker 1: in advance for the sound quality and the likely sirens 5 00:00:20,319 --> 00:00:22,459 Speaker 1: of New York City, police cars and fire engines in 6 00:00:22,469 --> 00:00:26,620 Speaker 1: the background. So here goes the animal meetings of the 7 00:00:26,629 --> 00:00:26,909 Speaker 1: IMF 8 00:00:27,155 --> 00:00:29,864 Speaker 1: and the World Bank held at Washington DC last week. 9 00:00:30,055 --> 00:00:35,424 Speaker 1: We're characterized by relief over global economic resiliency. Juxtaposed by 10 00:00:35,435 --> 00:00:39,314 Speaker 1: heightened concerns about a variety of risks. There was an 11 00:00:39,325 --> 00:00:44,235 Speaker 1: element of satisfaction among developed and emerging market. Government officials 12 00:00:44,444 --> 00:00:48,014 Speaker 1: that the post pandemic rebounded. Inflation has largely abated 13 00:00:48,418 --> 00:00:52,020 Speaker 1: and the short interest rate increase phase has come and 14 00:00:52,029 --> 00:00:55,319 Speaker 1: gone without causing economic growth to stumble around the world. 15 00:00:55,700 --> 00:00:58,200 Speaker 1: This is a sharp departure from the case just two 16 00:00:58,209 --> 00:01:01,860 Speaker 1: years ago when there was near panic about the stickiness 17 00:01:01,869 --> 00:01:05,190 Speaker 1: of inflation and the likely spike in unemployment that would 18 00:01:05,199 --> 00:01:07,720 Speaker 1: be caused by necessary monetary policy tightening. 19 00:01:08,349 --> 00:01:10,529 Speaker 1: It has of course turned out to be quite different. 20 00:01:10,830 --> 00:01:14,489 Speaker 1: Labor markets have barely loosened and asset markets are buoyant 21 00:01:14,620 --> 00:01:17,330 Speaker 1: while goods inflation has disappeared considerably. 22 00:01:17,980 --> 00:01:21,589 Speaker 1: China, a major source of commodity demand has been on 23 00:01:21,599 --> 00:01:24,929 Speaker 1: a slowing path. A contrast from the US economy which 24 00:01:24,940 --> 00:01:28,900 Speaker 1: has been going strength to strength this opposing dynamic has 25 00:01:28,910 --> 00:01:32,839 Speaker 1: offered a degree of balance to the global supply demand picture. 26 00:01:32,849 --> 00:01:36,878 Speaker 1: A stable commodity price environment. Despite escalating warfare in the 27 00:01:36,889 --> 00:01:39,660 Speaker 1: Middle East has also been a source of support 28 00:01:39,940 --> 00:01:43,930 Speaker 1: global and ASEAN five growth is expected to remain stable 29 00:01:43,940 --> 00:01:48,059 Speaker 1: between 24 and 25 in the ifs world economic outlook 30 00:01:48,069 --> 00:01:52,150 Speaker 1: forecasts released during the meetings. Global real GDP is expected 31 00:01:52,160 --> 00:01:56,970 Speaker 1: to rise by 3.2% in both 2024 and 2025. While 32 00:01:57,230 --> 00:02:00,989 Speaker 1: ASEAN five is expected to rise by about 4.5% in 33 00:02:01,000 --> 00:02:01,660 Speaker 1: both years. 34 00:02:02,300 --> 00:02:05,959 Speaker 1: Some slowing of China and India's economies could be also 35 00:02:05,970 --> 00:02:11,059 Speaker 1: in store about 50 bips each from 4.8 and 7% respectively. 36 00:02:11,250 --> 00:02:15,279 Speaker 1: But overall global consumption and investment would chug along as 37 00:02:15,288 --> 00:02:18,360 Speaker 1: part of the IMF we think that it may be 38 00:02:18,369 --> 00:02:22,350 Speaker 1: too early to declare victory over inflation or take comfort 39 00:02:22,360 --> 00:02:26,600 Speaker 1: in the apparent resiliency from higher rates. Services inflation remain 40 00:02:26,610 --> 00:02:27,960 Speaker 1: on the sticky side. 41 00:02:28,220 --> 00:02:32,619 Speaker 1: Strong growth may spill over onto or into higher prices 42 00:02:32,949 --> 00:02:35,339 Speaker 1: and the tensions in the Middle East could reach a 43 00:02:35,350 --> 00:02:39,910 Speaker 1: tipping point already in recent weeks. The overwhelming expectations of 44 00:02:39,919 --> 00:02:44,119 Speaker 1: sustained rate cuts have begun to recede with a great 45 00:02:44,130 --> 00:02:46,750 Speaker 1: deal of uncertainty building up over how many rate cuts 46 00:02:46,758 --> 00:02:48,160 Speaker 1: are possible next year. 47 00:02:48,820 --> 00:02:52,429 Speaker 1: One or two more strong jobs than birds and higher 48 00:02:52,440 --> 00:02:56,029 Speaker 1: than expected. CP I prints could cause a sharp change 49 00:02:56,038 --> 00:02:57,758 Speaker 1: in rates pricing for next year. 50 00:02:58,699 --> 00:03:01,960 Speaker 1: The recent rise in long term US, interest rates which 51 00:03:01,970 --> 00:03:04,869 Speaker 1: has resulted in mortgage rates rising as well could be 52 00:03:04,880 --> 00:03:09,008 Speaker 1: a harbinger for things to come. Higher rates could also 53 00:03:09,020 --> 00:03:13,919 Speaker 1: materialize under Trump election presidency or Trump election victory, which 54 00:03:13,929 --> 00:03:17,119 Speaker 1: could lead to the expectations of higher us fiscal deficit 55 00:03:17,339 --> 00:03:22,258 Speaker 1: and erosion of fed independence. That plus Trump's tariff plans 56 00:03:22,270 --> 00:03:25,240 Speaker 1: could lead to forming of the US D hurting some 57 00:03:25,250 --> 00:03:28,080 Speaker 1: US D borrowing sovereigns, firms and households. 58 00:03:28,460 --> 00:03:31,000 Speaker 1: These risks will need to be assessed in light of 59 00:03:31,008 --> 00:03:33,720 Speaker 1: the result of the November Us presidential elections. 60 00:03:34,699 --> 00:03:38,199 Speaker 1: There was no shortage of concerns over the US ranging 61 00:03:38,210 --> 00:03:42,449 Speaker 1: from an increasingly untenable fiscal position impact of higher tariffs 62 00:03:42,460 --> 00:03:45,580 Speaker 1: on the rest of the world and to Americans and 63 00:03:45,589 --> 00:03:49,550 Speaker 1: a possible re acceleration and inflation. Under a no landing scenario, 64 00:03:50,429 --> 00:03:55,039 Speaker 1: we even heard ideas akin to an eu style border 65 00:03:55,050 --> 00:03:58,690 Speaker 1: carbon adjustment tax on imports being floated by some Trump 66 00:03:58,699 --> 00:04:03,729 Speaker 1: loyalists while such things are less likely under a Harris presidency. 67 00:04:04,059 --> 00:04:07,740 Speaker 1: No one that I met expects a meaningful improvement in 68 00:04:07,750 --> 00:04:10,660 Speaker 1: the frictions, characterizing us, trade and commerce vis a vis 69 00:04:10,669 --> 00:04:11,570 Speaker 1: the rest of the world. 70 00:04:12,860 --> 00:04:15,410 Speaker 1: There was however some degree of comfort with the US 71 00:04:15,419 --> 00:04:20,170 Speaker 1: outlook among many actually given the strong state of asset markets, 72 00:04:20,178 --> 00:04:24,010 Speaker 1: a buoyant investment environment commanding lead of the global A 73 00:04:24,019 --> 00:04:28,279 Speaker 1: I race and sell corporate and household balance sheets. 74 00:04:29,079 --> 00:04:32,109 Speaker 1: As has been the case lately, the meetings contained a 75 00:04:32,119 --> 00:04:36,368 Speaker 1: great deal of discussion and presentations on geo economic fragmentation, 76 00:04:36,470 --> 00:04:39,969 Speaker 1: climate finance. And of course China from the so called 77 00:04:39,980 --> 00:04:44,290 Speaker 1: excess capacity charges to the scale and effectiveness of the 78 00:04:44,299 --> 00:04:49,760 Speaker 1: ongoing stimulus measures from the security environment, external, internal to 79 00:04:49,769 --> 00:04:54,700 Speaker 1: the China plus one dynamic. The arguments were unfortunately largely binary. 80 00:04:55,269 --> 00:04:58,010 Speaker 1: There is a great deal of group thing among DM 81 00:04:58,019 --> 00:05:02,269 Speaker 1: economies about China and the thinking is largely about threats 82 00:05:02,279 --> 00:05:06,519 Speaker 1: and risks rather than opportunities and gains from cooper operation. 83 00:05:07,059 --> 00:05:10,649 Speaker 1: We expect this polarization to persist with more tariffs and 84 00:05:10,660 --> 00:05:14,070 Speaker 1: other restrictive measures in the pipeline. The key is to 85 00:05:14,079 --> 00:05:17,809 Speaker 1: do the best given that inevitable and adverse dynamic. 86 00:05:18,920 --> 00:05:22,989 Speaker 1: This is where opportunities for em are being seen. Supply 87 00:05:23,000 --> 00:05:26,909 Speaker 1: chain relocation should help the likes of India, Mexico, Southeast 88 00:05:26,920 --> 00:05:30,540 Speaker 1: Asia and a few other countries. Investments from Western MN 89 00:05:30,549 --> 00:05:33,450 Speaker 1: CS as well as from Chinese companies are being spread 90 00:05:33,459 --> 00:05:34,720 Speaker 1: more widely around the world. 91 00:05:35,510 --> 00:05:38,649 Speaker 1: It remains to be seen if this relocation process would 92 00:05:38,660 --> 00:05:41,399 Speaker 1: take place without a drop in productivity displayed by China's 93 00:05:41,410 --> 00:05:45,709 Speaker 1: manufacturing stack. But the choices to do so have been made, 94 00:05:46,019 --> 00:05:47,140 Speaker 1: no doubt about that. 95 00:05:48,070 --> 00:05:50,670 Speaker 1: Authorization of the US dollar was another widely discussed. The 96 00:05:51,380 --> 00:05:54,390 Speaker 1: surveys show that central banks are increasingly inclined to hold 97 00:05:54,399 --> 00:05:58,940 Speaker 1: more gold and non US dollar assets. Fintech solutions make 98 00:05:58,950 --> 00:06:03,540 Speaker 1: deferred barter feasible under which countries running trade deficits. Vis 99 00:06:03,570 --> 00:06:06,890 Speaker 1: A vis China can receive RMB for what they sell 100 00:06:06,899 --> 00:06:10,709 Speaker 1: to China and send those RMB proceeds back through the 101 00:06:10,720 --> 00:06:11,549 Speaker 1: import channel. 102 00:06:11,910 --> 00:06:15,829 Speaker 1: This is not a theoretical construct. It is an increasingly 103 00:06:15,839 --> 00:06:18,169 Speaker 1: deepening phenomenon, especially in the Middle East. 104 00:06:19,619 --> 00:06:23,390 Speaker 1: There are reasons for this US eu efforts to seize 105 00:06:23,399 --> 00:06:25,970 Speaker 1: or freeze the assets of the central banks of Afghanistan 106 00:06:25,980 --> 00:06:29,260 Speaker 1: and Russia along with the multitude of restrictions over Western 107 00:06:29,269 --> 00:06:32,959 Speaker 1: payment systems like swift are adding impetus for many governments 108 00:06:32,970 --> 00:06:34,920 Speaker 1: to reduce our reliance on the US dollar. 109 00:06:35,619 --> 00:06:38,678 Speaker 1: There are already cases where central banks are repatriating their 110 00:06:38,690 --> 00:06:42,880 Speaker 1: gold reserves custody from London, New York to their home jurisdictions. 111 00:06:43,690 --> 00:06:47,029 Speaker 1: Now reducing the reliance on the US dollar is akin 112 00:06:47,040 --> 00:06:50,380 Speaker 1: to the de risking of supply chain strategy that is 113 00:06:50,390 --> 00:06:53,630 Speaker 1: touted a great deal just like the pandemic, pushed companies 114 00:06:53,640 --> 00:06:58,029 Speaker 1: to reconsider the efficiency, resiliency, trade off over loads of manufacturing. 115 00:06:58,209 --> 00:07:01,429 Speaker 1: Similar considerations are at play with regard to the risks 116 00:07:01,440 --> 00:07:02,950 Speaker 1: of holding us dollar assets. 117 00:07:03,450 --> 00:07:08,160 Speaker 1: Alternatives like barter purchase and localization of gold holdings and 118 00:07:08,170 --> 00:07:13,850 Speaker 1: adding Euro or RMB to reserves are somewhat second best options. 119 00:07:13,859 --> 00:07:17,040 Speaker 1: They have some associated frictions but they are now very 120 00:07:17,049 --> 00:07:20,589 Speaker 1: much on the table. The extraordinary rise in US debt 121 00:07:20,600 --> 00:07:24,359 Speaker 1: issuance adds to these considerations in many corners of the world. 122 00:07:25,329 --> 00:07:28,119 Speaker 1: All right, I'm gonna switch gears a little bit and 123 00:07:28,130 --> 00:07:31,390 Speaker 1: I want to talk about a specific chapter that was 124 00:07:31,399 --> 00:07:35,489 Speaker 1: published by the IMF uh it was the um IMF 125 00:07:35,500 --> 00:07:39,109 Speaker 1: Global Financial Stability Report or GFSR and it contained a 126 00:07:39,119 --> 00:07:43,170 Speaker 1: very interesting chapter on the potential impact of A I 127 00:07:43,179 --> 00:07:45,109 Speaker 1: and Ja I on capital markets. 128 00:07:45,920 --> 00:07:48,329 Speaker 1: The premise of the analysis was that A I and 129 00:07:48,339 --> 00:07:51,450 Speaker 1: related breakthroughs have the potential to increase the efficiency of 130 00:07:51,459 --> 00:07:55,049 Speaker 1: capital markets and that includes trading investment and asset allocation 131 00:07:55,290 --> 00:07:59,579 Speaker 1: through assisted process automation and analysis of complex unstructured data. 132 00:08:00,399 --> 00:08:04,649 Speaker 1: The report cited early evidence that these effects are already 133 00:08:04,660 --> 00:08:08,040 Speaker 1: being felt in the financial sector. Financial firms are hiring 134 00:08:08,049 --> 00:08:10,970 Speaker 1: a large number of A I talent developers are filing 135 00:08:10,980 --> 00:08:15,519 Speaker 1: for patterns and these are up sharply. While pricing patterns 136 00:08:15,529 --> 00:08:18,958 Speaker 1: and trading dynamics already show changes in some markets. Consistent 137 00:08:18,970 --> 00:08:23,040 Speaker 1: with the adoption of these new technologies, major gains from 138 00:08:23,049 --> 00:08:25,829 Speaker 1: such a wave would materialize in the medium term for 139 00:08:25,839 --> 00:08:26,579 Speaker 1: the time being. 140 00:08:26,829 --> 00:08:29,420 Speaker 1: The typical short term use case for A I is 141 00:08:29,429 --> 00:08:33,289 Speaker 1: extension of existing trends in the use of machine learning 142 00:08:33,349 --> 00:08:35,489 Speaker 1: and other advanced analytical tools. 143 00:08:36,299 --> 00:08:40,239 Speaker 1: The IMF researchers argue in the report that A I 144 00:08:40,249 --> 00:08:44,718 Speaker 1: may reduce financial stability risks by enabling superior risk management, 145 00:08:44,729 --> 00:08:49,148 Speaker 1: deepening market liquidity and improving market monitoring, but it's not 146 00:08:49,158 --> 00:08:54,039 Speaker 1: all good. There are some risks to consider. Firstly, um 147 00:08:54,049 --> 00:08:57,439 Speaker 1: the risk is if trading strategies of A I models 148 00:08:57,448 --> 00:09:00,218 Speaker 1: all respond to a shock in a similar manner, then 149 00:09:00,229 --> 00:09:03,439 Speaker 1: that could create exaggerated price movements or market disruption. 150 00:09:04,289 --> 00:09:07,390 Speaker 1: Also, there could be further migration of market making and 151 00:09:07,400 --> 00:09:10,799 Speaker 1: investments activities to hedge funds for priory trading firms and 152 00:09:10,809 --> 00:09:14,549 Speaker 1: other non bank financial intermediaries, which could create a degree 153 00:09:14,559 --> 00:09:17,229 Speaker 1: of opacity in the financial sector, 154 00:09:18,020 --> 00:09:21,229 Speaker 1: firms and government should also take into cognizance the increase 155 00:09:21,239 --> 00:09:23,880 Speaker 1: in operational risks as there are only a handful of 156 00:09:23,890 --> 00:09:27,039 Speaker 1: key third party A I service producers. There's also the 157 00:09:27,049 --> 00:09:29,988 Speaker 1: risk that A I enabled bad actors could carry out 158 00:09:30,000 --> 00:09:33,830 Speaker 1: cyber attacks and market manipulation with a far greater potency 159 00:09:33,840 --> 00:09:35,239 Speaker 1: than anything we have seen. So far. 160 00:09:36,940 --> 00:09:40,400 Speaker 1: Global regulators are working on creating a framework to address this. 161 00:09:40,409 --> 00:09:45,080 Speaker 1: These risks considerations include calibration of circuit breakers and a 162 00:09:45,090 --> 00:09:47,880 Speaker 1: review of marketing practices. In case of rapid A I 163 00:09:47,890 --> 00:09:50,929 Speaker 1: driven price moves as well as enhanced monitoring and data 164 00:09:50,940 --> 00:09:54,109 Speaker 1: collection of the activity of large traders including non bad 165 00:09:54,119 --> 00:09:55,309 Speaker 1: financial intermediaries. 166 00:09:56,109 --> 00:09:58,729 Speaker 1: There will be an increased need to stay on top 167 00:09:58,739 --> 00:10:03,130 Speaker 1: of dependency on data models and technological infrastructure firms should 168 00:10:03,140 --> 00:10:07,869 Speaker 1: be expecting to regulators, expecting regulators to demand risk mapping 169 00:10:08,140 --> 00:10:11,719 Speaker 1: covering internal external data, interconnections and interdependencies. 170 00:10:12,640 --> 00:10:16,270 Speaker 1: So in conclusion, the IMF meetings did not bring forth 171 00:10:16,280 --> 00:10:20,589 Speaker 1: any new ambitious calls to action. Key cyclical and structural 172 00:10:20,599 --> 00:10:23,659 Speaker 1: issues remain the same from sustainable growth to dealing with 173 00:10:23,669 --> 00:10:27,669 Speaker 1: climate change, to issues like increasing the voice of developing 174 00:10:27,679 --> 00:10:31,510 Speaker 1: economies in the multilateral system remain on the sideline. The 175 00:10:31,520 --> 00:10:35,400 Speaker 1: continuous erosion of a rules based free trade oriented global 176 00:10:35,409 --> 00:10:39,739 Speaker 1: system is noted and those costs are highlighted 177 00:10:40,090 --> 00:10:42,109 Speaker 1: but there is little in the power of the well 178 00:10:42,119 --> 00:10:44,829 Speaker 1: meaning staff of the World Bank and IMF to push 179 00:10:44,840 --> 00:10:45,909 Speaker 1: back against the trend 180 00:10:47,059 --> 00:10:49,809 Speaker 1: in the coming meetings. More of the same can be 181 00:10:49,820 --> 00:10:52,690 Speaker 1: expected and that's just about it. 182 00:10:53,190 --> 00:10:55,940 Speaker 1: So that's it for today. Copy Time was produced by 183 00:10:55,950 --> 00:10:58,848 Speaker 1: Ken Delbridge from Spy studios, Violet Lee and Daisy Shermer 184 00:10:58,859 --> 00:11:03,118 Speaker 1: provided additional assistance. This podcast is for information only and 185 00:11:03,130 --> 00:11:06,989 Speaker 1: does not provide any trade recommendations. All 138 episodes of 186 00:11:07,000 --> 00:11:09,439 Speaker 1: copy time are available on youtube as well as on 187 00:11:09,450 --> 00:11:14,250 Speaker 1: all major platforms of podcasts including Apple and Spotify. As 188 00:11:14,260 --> 00:11:16,880 Speaker 1: for our research publications and webinars. You can find them 189 00:11:16,890 --> 00:11:20,409 Speaker 1: all by Googling D BS Research Library. Have a great day.