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Canada is clamping down on imports of Chinese made electric vehicles, and at the same time, Beijing has suggested that it would cut tariffs on Germany's large engine cars if Berlin can convince the EU to drop tariffs on Chinese evs. So a couple of angles to this very interesting story. Joining us now in our studios in Hong Kong is Min Min Low, Bloomberg China correspondent. Min Min Thanks very much for coming into three double duty on television and
radio and keeping the audience as well informed. Let's talk first about the Canada moves. So this is Canada clamping down and kind of aligning itself more. I guess with the US position first having a thirty day public consultation period, and then it moves on from there.
Walk us through what we expect might happen.
Yeah, so the thirty day public consultation period is really the first stage before Canada can bring in tariffs.
On Chinese evs.
But the Finance Minister said that it's not just tariffs and focus. They're also examining changes to the list of electric vehicles that are eligible for federal consumer incentives because currently any electric vehicles from foreign countries qualify for the federal rebate. And they're also looking at changes or restrictions to broader investments into the EV sector. So pretty sweeping changes that could be possibly coming for Chinese evs.
So what is the criticism from the Canadian government when it comes to the competition the Chinese evs represent versus some of the domestically manufactured cars in Canada.
Yeah, the strongest pressure is really coming from the Province of Ontario, the Premier. They're saying that Chinese ev makers are able to sell very cheap evs because they have very low labor standards and they're using quote dirty energy as well. So they're putting pressure on Prime Minister Trudeau to really match those terriffs they're imposed by the Biden administration, and of course the Canadian automakers as well as calling for steep terriffs. They say that they want the government
to protect Canadian jobs and Canadian wages. But really there is not actually that much of a threat from Chinese EV makers at the current moment, because there is not a huge presence of Chinese evs in Canada right now. Canada last year saw this fivefold search in evs from China, but most of that are teslas rather than the Chinese brands.
And was there any mention in this about what might happen to Chinese cars if they're manufactured in Mexico, because that could be an issue for both the US and Canada.
Yeah, So I think the intention of this investigation, or perhaps this relooking into possible tariffs, is really to close the back door for Chinese evs to get into America, because Canada, Mexico, and the US have a free trade agreement that's coming up under review in twenty twenty six.
I believe so by getting both Canada and perhaps Mexico, well Mexico hasn't announced that, but we don't know if they would in the future, but getting these countries to be aligned when it comes to their China trade would really close off any potential side doors for China to circumvent those one hundred percent tariffs on Chinese electric vehicles that the Biden administration has imposed.
How carefully does the Canadian government have to tread here? From what I understand, China is Canada's second largest trading partner, and I'm sure beyond electric vehicles there are many other industries that are involved in trade relations between these two countries. I mean, is this something that's going to take a little bit of nuance here and sensitivity on the part of the Canadian government.
Yeah, so Prime minist Trudeau will really have to tread carefully because, as you said, China is the second largest trading partner. But again, you know it's Canada is it's basically the US's neighbor, and if you look at the auto sector in particular, they are very tightly integrated with the US supply chain. Canada sells both finished products and parts to the US, and in fact, majority of their
exports by far is going to the US. So US still is its most important partner if you just look at the overall scheme of things, just by proximity, by trade volume and all that.
Now let's talk about this second aspect of these developments. China offering a perk to Germany. Tell us more about that.
Yes, so apparently this took place over the weekend. According to our sources, it was a conversation between the Chinese Commerce Minister one Went Tau and the German Economic Minister Robert Hebek when he was in China over the weekend. China is now floating this idea of lifting the existing fifteen percent terriffs on vehicles with large engines that come
from Europe. So this would affect companies like BMW, Volkswagen, Mercedes, and it's, you know, really Beijing's way of dangling carrots and sticks for Germany because previously Beijing had hinted that they will impose twenty five percent tariffs on those very same vehicles. So you know, the permutations of this negotiation is just unlimited.
Now, Well, you were talking about the limited demand for Chinese evs in Canada a moment ago, and I'm wondering how the appetite for Chinese evs happens to be in Europe right now? Is it about the same little.
Tepid Well, Europe is a much more important market for Chinese evs. I believe it is forty percent of EVS in Europe that comes from China. I'm not sure I got that number one, but I believe it's forty percent,
So a very important market packed to Canada. And again, as we've previously discussed before, China is now experiencing this over capacity problem and all these EV makers are engaging in a very steep and brutal price war back in China, so they are really looking overseas for higher profit margins. And it's not just Chinese ev is trying to get
market in Europe. Germany as well. Together all these German companies they sell millions of cars to China, and that's why Germany is such an important partner for China to lobby, and Germany can really lean on other countries to break ranks with the EC just by using its weight as the U's largest economy.
All right, me Man, thank you very much for coming into the studios with this min min Low. Bloomberg China correspondent joining us now is Carol Schleive Cio at BEMO Family Office to take a closer look at markets. Carol, thank you for joining us here on the program again. We've seen the broader market hold up pretty well here, even with the leadership getting slammed. We just talked about Nvidia down something like fifteen percent or so in the
past week. What comes next is interesting. Perhaps the broader market falls infected by the lack of leadership here, or maybe you'll get this sort of benign movement that we've seen over the past week, where things broaden out and money flows into laggards and other themes. How do you see things moving here over the next few weeks.
We would definitely err on the side of the or lean towards the side of the ladder, because you need a broadening market for this to have sustainability. We had seen some broadening earlier in the year, and actually, even when you look at today's performance, if you take out the market capitalization waiting and look at an equal weight on the S and P, most stocks did pretty well,
and we need that broadening to sustain this. We actually think as we get into earnings, which will be in the midst of within the next couple of weeks, that you'll see stronger than expected earnings because people are forgetting last year. The comparison to last year will be a very soft last year versus this year. I think there's a lot of potential for some reasonable earnings, and so we think the fundamentals can carry through more industries than just technology.
Is there a difference in theme as we approach the third quarter? How will the third quarter be different than the second?
Hopefully it's a broadening with more sectors, more capitalizations leaning in. You know, it would be lovely if we can keep the US economy floating along like this, where you've got solid low to mid single digit kinds of growth rates from companies on the top line, but reducing costs that a lot of them have seen, and still sturdy consumers spending. You could see a variety of sectors and hopefully some spreading to mid and small caps would be lovely to see as well.
You wonder whether biotech could be ready for a run.
Yep, there's definitely implications when you start thinking about a lot of these companies and industries have really been leaning into building use cases for artificial intelligence and other things. You look at the rapid pace of drug development and what's going on. There's biotechnology, there's medical discovery, there's even
some of the medical technologies. But there's uses all through the services industries too, when you start looking at who's already deploying artificial intelligence and other cost saving methods that in the intermediate, longer run should really help margins, even if it's a hit early on as they're building out data centers and figuring out where they're going to get their energy from.
Obviously, we have an election November first debate, the presidential debate is on Thursday. Is it too soon for you to begin talking with clients about potential changes in tax policy and what a new administration may do to overall economic policy.
No, we're getting We've been getting that question for a very long period of time, and I would assume especially this week, given that you've got fed speak, you've got the debates coming up on Thursday, You've got a lot of focus everywhere but the markets this week. But no clients have been asking us to lay out plans. And it's as as many commentators have noted, it's one of the most difficult to try to to try to place
the odds on the outcomes of this one. And it's been interesting because no matter what strategistic shop you're looking at, there's very few that have you know, solid conviction in more than one halfs. Everyone's playing three or four different potential scenarios, none very high conviction, so it'll be nerve wracking.
We suspect you'll see mark volatility and most likely flatter markets as we get into the throws of the election season this fall, but we do think you're teed up for a pretty reasonable summer before we hit that fall.
It's also probably a fair game to talk a little bit about the FED. It seems like more of the FED speakers now are talking about the impact of higher for longer and how it might have an effect. But when I was digging down into the Merry Daily comments, I found a little bit of a conundrum there because she said that the labor market could be nearing an inflection point and that higher unemployment.
Might result as a outcome of this.
But then she also said that they may need to see a weaker economy to get to the target. So I wonder whether or not in her mind that's a little hawkish or a little dovish.
I think it depends on who was asking the question of which day, maybe, but it is It is tough because I think the FED sensitive to market reaction too we saw what, you know, how the market reacted to Chairman Powell's press conference in December when all of a sudden they were projecting six or seven rate cuts this year, which was insane in our view. But we do think, you know, we keep our eyes focused pretty tightly on the on the jobs market because that is the backbone
and the driver of this economy. We do suspect that you'll you'll see one of the things we'll be watching for is earnings get announced. Is we suspect companies will free up some of the cash that they've got sitting around, if you will, to do some plant expansions, to be thinking about stuff that got sidelined because a year ago, everybody was expecting a recession around every quarter or a corner,
and that pulled in their expectations. So we expect businesses to cease to to start spending a bit again, given that things are still steady. But the employment market is definitely worth watching because there are signs at the margin that it's softening. You've got the weekly claims ticking up a bit, you've got job openings coming into better balance, and who knows how many of those are legit openings.
Versus phantom openings that companies put out there they interview for just to build their pool, but they never really hire for them.
How are you feeling about opportunities offshore? Are you seeing anything at the moment.
Yeah.
We actually recently went to a more neutral rating from an underweight on developed markets, particularly in Europe. We had been overweight. We stepped up our exposure to Japan two or three times over the last year and a half or so. But then looking at the developed markets and you're seeing some of the numbers stabilized there and come in better in terms of economic progress. They're starting to cut there, so they've got pretty solid economies. It's not thrilling,
but there's you know, around the globe. Actually it's there's a lot to be optimistic about in terms of consumers in reasonable space.
But Carol, you mentioned Japan. Do you worry that some of the policies there are leading to continued weakness in the currency and it seems to be kind of impacting the economy Now.
Yeah, to a certain extent, it is, But I think the thing that doesn't get talked about very often is you've got a generation of workers there who have never had salary increases that now have salary increases that are keeping up with that inflation, and so that leads to different behavior.
Yeah, that's a good point.
You know, we haven't really thought about the Japanese consumer coming to life, but I mean that's what they want in China as well. Carol, it's always a pleasure to talk to you. Thank you for joining us. Carol Schleife, CIO at BEMO Family Office. Joining us now for some discussion of markets is Isaac Poole, Global CIO and portfolio
manager at Orienta Financial Services. Isaac, I give you three topics, and you tell me what's most important and what's most interesting the FED and Nvidia or geopolitics involving Europe, the United States and China.
Three tough ones, but three good ones. I think.
Still right now, the FED is absolutely critical. It's still in the driving seat, and you can see that because markets are really struggling to get a grip on exactly when the Fed's going to cut, how quickly they'll cut, and how much they need to cut to head off a harder landing.
What is your sense of exactly what you're laid out here, I mean, right now, the futures market seems to be indicating twenty five basis points in November, maybe another twenty five at the December policy meeting. Is that the way you're viewing the picture right now.
I think that's plausible.
But Mary Daly's comments earlier are really important here. The point that the labor market is perhaps a little more fractious than people are taking on board is really important. The unemployment rate has gone up to four percent from around three point four and never in history does the unemployment rate just stop and plateau and go along that same level for six or twelve months, like the FED is hoping it will. It typically goes up a lot.
And so I worry that if the FED doesn't cut until November or December, it's not going to be a twenty five basis point cut. It could be an emergency cutter half a percent cut, which will be absolutely needed to get the economy even close to a soft landing.
Yeah. I almost stuck my foot in my mouth earlier when Doug was reporting on the FED by following up by saying, so it's either zero, one or two in the next six months.
Who cares?
But you've just laid out why we really should care. Particularly if, and I suppose mainly if the economy goes into a serious downturn. But there aren't really many signs of that either, Isaac.
There's nothing at the moment, or no one thing at the moment at least that you can point to and say, hey, we're right on the precipice of this doom loop. But there are some signs there that I think people really need to take attention of or pay attention to, and that is the retrenchment in consumer spending. We really are seeing retail sales in particular start to slow. It's across all income quintiles. It's starting to put downward pressure on
consumer growth. And if that unemployment rate picks up, that's the doom loop scenario. That's the feedback loop where incomes collapse, household spending retrenches further.
And this is a large part of GDP growth.
And if that doom loop begins, it's going to be really difficult for the FED to cut their way out of it in a hurry.
So, your portfolio manager, you run money at Oreana, I'm curious about giving everything you just laid out, how you play that thesis? Is it a bond market buy you begin lightning up on the equity space. So how are you playing this?
Yeah, I mean that's exactly it. We've seen US treasuries up around five percent along the curve over the last six months, and yes they've come off a bit, but that's a great place to park some money if you're a little bit concerned about the economy's resilience over the next six to twelve months. One thing that we absolutely are not advocating is chasing rallies in the equity market. That's been a great rally. Investors have done very well.
We would say it's time to start locking in some profits and perhaps building a bit of portfolio resilience through fixed income sleeves right now.
Yeah, it's interesting to try to find some areas that have vastly underperformed that might be a combination of safety and value and could provide a little protection if you see continued selling in companies.
Like Nvidia, Broadcom, and AMD.
Yeah, it's not easy to find the real safe havens beyond that, really high quality government bonds, US treasuries for example. Although I would say one of the factors that has performed very well in the equity market has been quality. Now that has a reasonable exposure to the large megacap companies in the US. But for US, we think tilting to that quality value right now might be a place just to build some defensiveness in the equity sleeve.
All right, so we've checked the box on the FED. Let's talk about geopolitics. We had a story a moment ago about China clamping down on imports of Chinese made electric vehicles. That is Canada maybe following what the US is attempting to do here. We know what the situation in Europe is. Are you concerned about how politics may be playing into markets right now in a way that may not be fully discounted.
Yeah, And I think it's worth pointing out that it's always really hard for markets to fully discount some of these geopolitical risks, but they're there, they exist, and they they have the risk of sort of pushing markets down an equilibrium or a dis equilibrium in a hurry. And I think that is what's difficult for markets to price in. Where you might want to watch that is in bed pricing.
So if we do see markets start depricing more rate cuts, I think that could be the bond market saying hang on, there is a little bit of risk there.
Let's just take a little bit of protection against that.
In terms of Asia, if we set aside China for the moment, Japan is one place that a lot of people are still thinking about, but they've been troubled by the weakness in the end. I see here in the notes that you're thinking that the end stands out as an opportunity going forward. Describe why.
Yeah, I mean it has weakened a lot this year, and it's forced the Japan Japanese authorities to intervene in the currency markets, but overall, we still see the end as a as a risk off currency is something that where Japanese nationals will buy yen. If the global economy slows, and we think that the global economy is slowing. In
that environment, you could see the yen strengthen. And I do suspect we'll see some more policy support, whether that's intervention, and that could come very very quickly, according to some of the commentary we're hearing out of Japan recently, or the Bank of Japan actually getting their act together and hiking while they still have a window to do so. I mean, that could leave the yen moving back towards one forty by the end of the year, and that's a pretty significant move.
Last topic before we let you go, Isaac Brian mentioned in Vidia and the downdraft that we have seen in the stock over the last three days. Very quickly. Where do you come when it is about the AI story? I mean, what are you coming down on the bullish side still or are you beginning to get a little worried about the rally that we have seen in many of these names.
I think a good way to put it is there has been a lot priced in to this rally, a real lot, and there's an onus on some of these other companies beyond in Video to show that it's going to deliver earnings growth, and today all we've seen is capek spend. So that is a challenge and we are going to see some competition come through to twin Video over the next six to twelve months.
That's the risk I think.
All right, Isaac, thanks very much for joining us. Isaac Pool an old friend of the program, Global CIO and PM at Orienta Financial Services.
This has been the Bloomberg Daybreak Asia podcast, bringing you the stories, making news and moving markets in the Asia Pacific. Visit the Bloomberg Podcast channel on YouTube to get more episodes of this and other shows from Bloomberg. Subscribe to the podcast on Apple, Spotify, or anywhere else you listen, and always on Bloomberg Radio, the Bloomberg Terminal, and the Bloomberg Business appo