Bloomberg Audio Studios, Podcasts, radio News. Welcome to the Bloomberg Daybreak Asia Podcast. I'm Doug Chrisner. Economic angst re asserted itself in US markets. We have the uncertainty around tariffs, combined with the escalating trade war between the US and China dominating psychology. Now, the White House confirmed that China now faces a one hundred and forty five percent levy on all goods it sends to the US, and remember all other trading partners are dealing with a baseline tariff
of ten percent. In a moment or two, we'll be joined by Patrick Kennedy. He is founding partner at All Source Investment Management. But we begin this morning in the Lion City. Joining me now, Mark Cranfield, Bloomberg Market Live strategist. He joins us now from Singapore. Mark, it's always a pleasure. Thank you. I'm sure it's been a busy day where you are. And I guess we could start with the idea that we're beginning to see signs of a slow
down in global trade already emerging. You can look at the degree to which equity prices are already reflecting that fact. But maybe we can begin with the volatility that we're seeing in currencies right now, because this is pretty tremendous, is it not.
Well is indeed Bloomberg already running stories that some American companies are suspending their flows of goods which are coming from China because they're so uncertain about how to prise them for the time being, and traders are reading that, so they're seeing that as a negative signal for the US dollar, among other things, allied with the fact that they do expect for the reserve to learn interest rate
several times this year. So what we're we're seeing is particularly demand for the strongest what was perceived to be the strongest currency, so the Euro, the yen, the Swiss frank they're leading the way as people are shifting some money away from the US dollar. We've just seen the euro touch a multi year high today. Dollar yen has already been down onto a one forty two and or haven't seen that for a very long time as well.
So you can see these are very significant shifts in the currency market, and that will give a little bit of respite to the Chinese currency in the short term. But the Chinese authorities have made pretty clear that they are willing to shift the yuan to a weaker stance should they need to, but that's unlikely to be seen today. They're getting help from their basket arrangement, which is when the euro is strongly helps to strengthen the year one.
But these are very fluid situations in the currency world, and people going into this, we're probably thinking that this was going to be a good year for the US although expecting stronger economic growth in the United States and the feed through from that into securities in America. But we are obviously getting the reverse situation. A lot of people recalibrating their outlook on the US dollar.
Who we had a lot of dollar weakness in New York trading. If you look at the Bloomberg dollar spot, I think we were down one and a half percent. We are building on those declines now in Asia. And to your point about the rally that we're seeing in the end at one forty three to thirty five, I think in New York trading, the end was up two percent against the green back. But to go back to the point that you were making about the yuan and the PBOC combined with the influence of Beijing allowing it
to weaken. Do you think that there is a line in the sand that represents the real risk of more capital flight out of China as a result of a weaker currency or is that not even entering the thinking at this point.
Well, I think it certainly enters their thinking, but it's more to do with the speed of the moves in the currencies. So I think from what we can see at the moment, if there's a gradual weakening of the yuan, they seem to be reading that there's something that the Chinese economy, Chinese investors they can deal with. That they can if there's a small amount each day, that's something they can help. What they were really scared of is
a sudden jump. We saw the experiment with that in twenty fifteen when they moved the currency by two percent in one day, and that just caused haboc across Chinese equity markets, bond markets, everything, and people were panicky and they started to move money out of the current the country.
So they're really wary of that. They don't want to get people to be really nervous about the situation, So it's most likely they're going to continue with a very gradual move, something like we saw in twenty eighteen twenty nineteen, as the first round of taris came on against China. It was a move which lasted over many months before it reached a level where the Chinese authorities thought, Okay, now we offset the extra costs we're receiving from the United States.
So difficult in this current environment to get any visibility in order to kind of react. Treasury Secretary bess And during the New York session was telling Fox Business everything was on the table. He was asked the question as to whether kicking Chinese stocks off US exchanges was an option, and he seemed to keep the door open for that. How bad could this get? I mean, when you look at the potential for a real destruction in relations between Washington and Beijing.
I think we've already seen investors start to move ahead of that for some time. Anyway, you could argue that the establishment of the Hangsaying Tech Index, which happened about four years ago in Hong Kong, was really there as a preparation for people expecting that over time Chinese companies would do fewer listings in the United States. They may
even pull their listings all together. And you've seen volumes shifting away from the activity in the ETFs which are lifted in the United States, shifting more towards those which are listed in Hong Kong. That's a transition that's been
going on for some time. It may accelerate. This has been hanging over the threat of Chinese companies being removed from US exchanges is a threat which has been there for some time, and some Chinese companies are voluntarily putting dual listings into Hong Kong to protect them should that they come when they need to remove themselves from the US. So it's not something that is a complete shock to investors. It will still have an impact, of course, should it happen.
So we're seeing much more attention to people like Ali Baba, JD dot com. They've all got listings in Hong Kong, and those flows are starting to increase the compensate for money coming out of the United States.
I'm curious about the pressure that you're seeing right now that is being put on institutions, government sponsored institutions, pension plans in China to absorb a little bit of equity flow right now, given the ructions that we've been seeing in markets. The so called national team stepping up to do some buying. Is that something that you're expecting to see a lot more of.
Well, just a couple of days ago, China Center Bank PBOC, they said that they had more funds available for these government linked entities which go into the domestic market to buy etf so they're providing them with more liquidity. We've also seen a lot of activity in the last couple of days. Clearly the volumes are very strong. They are buying the ETFs, and Chinese equities have been holding up much better than other regional exchanges. So clearly it has started.
There's nothing to suggest that it will stop anytime soon. That seems to be part of their plan is to as much as they can is to ring fen the domestic economy, ring fence domestic securities, try and show that they have some strength there that they can withstand this no matter what happens in the outside world, that China still has a vibrant stock market as companies are in
good shape. So they're putting their money where their mouth is, and they probably will continue to do so because they need to show everybody that they're being as affected as little as possible by what's happening in the outside world.
So put yourself in the mind of a trader right now in the Asia Pacific, last trading day of the week. How do you want to close out your book this week?
Well, if you haven't exited things already, you will probably be looking to even peer down risk even further. It's like a steamroller. You can see a situation where you've got this this big truck coming towards you. You just don't want to get in the way of it. So there are some very clear flows that the dollar is the dollar is falling, you don't want to get in the way of that. Treasury bonds are setting off, Equities are
very soft as well. So if you still have short term exposure to those things, you're probably just going to want to reduce it as much as you can. But the sense is that people did a lot of that over the past week already we can expect to see a lot more erratic day to day movements. That uncertainty is extremely high. You imagine it's uncertain in the United States. Imagine what it's like for people out here in Asia who don't have much clarity at all on how these
things are going to be imposed. So keep risk as small as you can. That's the message.
Okay, Mark, thank you so much. It's always a pleasure. Mark Cranfield, Bloomberg Market Live Strategists joining us from Singapore here on the Debreak Asia Podcast. Welcome back to the Debreak Asia Podcast. I'm Derek Krisner. There was heavy selling today in US risk assets less than twenty four hours after President Trump backtracked on his tariff policy, ostensibly to prevent a meltdown in financial markets. Today we had to sell off in US equities, in the dollar, and in
crude oil as well. All of this seemed to underscore the concern about the possibility of global recession. For a closer look, I'm joined now by Patrick Kennedy. He is founding partner at All Source Investment Management. Let me begin with the question around recession. Do you think this is a real risk at this point?
Pat?
Right, Doug, thanks so much for having me back on I do I think that anyone that plays down the risk of recession at this point, you know, you just haven't seen what's going on the past two weeks. So I think you know, if you go back in time a month ago and fast forward today, you have to
acknowledge that recession risk are much higher. You know, I think that we avoided worst case scenario yesterday, where we would have a you know, a certain recession and a very deep one of that if the tariffs were put on how they were first laid out. Now, I think the risk for a softer recession is still definitely there. And if a deal with China isn't made in short order, I think that, you know, that's a real possibility, and the risk and odds continue to go up the longer
that we put off a deal with China. You cannot, as you know, uproot manufacturing routes overnight and bring them back home or anywhere for that matter. And during that time, you know, take Apple for example, they can jack up their iPhone prices to two or three thousand dollars or whatever it would be if they were to move their manufacturing plants.
So right around the time that the retaliatory tariffs were announced by the President, we saw a heavy selling in US treasuries during the Tokyo session, and the tenure spiked and yield something greater than twenty basis points. And a few hours later the President hit the pause button on those retaliatory tariffs, and I'm wondering whether or not the message from the market, particularly the bond market, may have
been that. Bear in mind here that China does hold a trillion dollars worth of US treasuries, and that seems to be almost like a sword of damocles hanging over these trade negotia. Is it not?
Am I?
Am I making too much of that point?
No, Doug, I think you bring up a very valid point. And that was the first thing that we thought about yesterday morning, right. So you know, some people were saying, oh, it's a negotiating tactic to go up to the eleventh hour and inflict maximum leverage, that sort of thing. We think when you look at the markets, it had a lot to do with what the bond market was yelling. Right. So the old saying is the smart money focuses on the debt side, right, And there's a reason for that.
And then simply because the debt side is what can really break the economy. So once you start to see problems on the bond market side, that means liquidity can dry, banks can have issues, so on and so forth. When you go back to the COVID low or eight or any of the major lows. You usually saw big issues within the bond market right before the FED stepped in. Now whether or not the Fed can step and this time,
that's a whole different question. But typically when you see a market low, you start to see the bond market get a little messy. The Fed doesn't care, in my opinion, doesn't care as much about the equity action as they do the bond market. If the bond market starts to get out of hand and you start to see some wild swings that can make meaningful impacts here and abroad, and usually that's when you start to form a short
term bottom. I say short term because again we expect volatility over the next ninety days.
So, Pat, I'm glad you brought up the FED, because today we heard from the head of the Chicago Fed, Austin Goolsby, and he was saying that these tariffs put the Fed's goals of price stability and full employment essentially opposed to one another. Now, does that essentially mean that the Fed is kind of stuck here and that we may not get a rate cut or several rate cuts, even though the economy may we can, just because there is the risk of some sort of stagflation.
So, Doug, last time we were on, we mentioned that, you know, we really thought that stagflation was becoming a fear, right, it was becoming a fear within markets. And that's the last thing that Powell wants to be known for, is letting stackflation back out of the bottle.
Right.
The last time we saw that was the seventies, and you know, obviously it wasn't a good outcome then. Now. The tough thing is when you provide as you know, when you provide liquidity into markets and you lower interest rates, you know, it can create inflation if it's done too early.
Tariffs are inflationary by nature. So if you raise the cost of goods by ten percent coming into the US, one can think that, okay, the cost of goods are going to go up, right, So inflation is going to come along with those tariffs, and if it creates economic pain. The FED is very limited at what they can do simply because, as you said, their two goals are maximum
employment and to keep inflation in check. Well, if inflation is running rampant, they're going to have to weigh out, Okay, how high has inflation gone and how low has growth gone. You know, there's an interesting comment made over the last few days, and that was essentially that Okay, we'll see inflation until we don't, which means, okay, TIFFs will come on, you'll see inflation really tick up. But what point does
the consumer stop buying? At what point does the consumer throw their hands up and say, you know what, I've had enough. I can't afford a fifteen hundred dollars iPhone or two thousand dollars iPhone or whatever it may be. Right at that point, you could actually start to see deflation. And I think at that point the Fed has to step in and will step in. However, there could be a lot of pain in markets between now and when we get to that point.
This is going to be a very interesting earning season, particularly when we're listening for guidance. Tomorrow, we're going to hear from the big banks JP, Morgan Chase, Bank of America, Wells Fargo. What do you think we're going to hear from the banks in terms of forward guidance.
I think that they're going to be extremely cautious, right, I think they're going to be extremely cautious. When you listen to some of the market strategists out there, from Morgan Stanley, from Goldman, most of them. I've even pulled their twelve month guidance for the S and P right, They're more focusing on trading ranges over the next two to three months. And I think that's prudent. I really
think it is. I mean, if if you say with a degree of certainty, hey, I think X is going to happen a year out, it's very tough to do that right now because of all the variables that are still up in the air. You know, you can't tell me that, Okay, you know, the same is going to be true for the market and the economy if we have a fifteen percent teriff with China or if we have a seventy percent tariff with China. Right, So that is just such a huge variable right now, it's very
hard to give guidance. And therefore we think that the banks will be light on guidance, cautious, right, and they'll probably give their assessment of what the near term volatility means for the book of business.
Would you expect to hear about a much greater level of loan loss reserves?
So it's funny you mentioned that you know we do think that there are risk and credit markets right now, particularly when you look at some of the real estate debt market. Right. So, I saw an interesting chart a few days ago where the missed payments on mortgages are the highest they've been since owait So that kind of caught my eyes.
And that was.
Before all of the news on tariffs and such. So I do think that credit could start to weaken once tariffs are put on. I don't think we've gotten there yet, right because these tariffs have not been implemented for a good amount of time. I think very quickly, we're going to see if credit deteriorates and at what pace.
So how are you guiding clients through all of this turbulence right now? I know that there are different risk profiles based on each individual client, But is there kind of an umbrella that we can put over the strategy that you've adopted right now?
Yeah, great question, Doug. So, as you know, we work with a lot of high net worth people who have access to alternative investments. So we use stocks, we use hedge funds, private equity, private credit in the like. Right. I think right now hedge funds make a lot of sense. They've been doing great year today for a hedge fund. Volatility is your friend. For the retail investors who listen to this show. You know, I think that a long
short mutual fund serves the same purchase or purpose. Excuse me, so long short mutual fund they can bet on stocks going up, they can bet on stocks going down, and therefore they can do a lot better in a volatile environment like this because they can short the market on the way down and that serves as a bit of a cushion. We still like commodities a lot, right so we talked about commodity exposure over the past six months. We haven't changed our stance on that. If anything, we're
leaning in a bit more. You know, commodity prices we think overall will go up because of this. You know, some won't when you look at what happens with oil right now, but for the most part, when you see cost increase across the board, at the very least, you're going to get some volatility and commodity markets and that's good for commodity traders. So we like commodities right now. And then private credit. Private credit has been a big part of the portfolio. I know there's you know a
lot of buzz around. Well, you know, it's a huge market now and there could be a lot of risks there. There could be, but again there's so many different types of private credit. We like asset back to private credit right now simply because any loan that you give is backed by a particular asset and you can go sell
that asset if the loan is not repaid. Again, for a public market investor, it would be the same as like a senior secured right, so we'd focus on having loans that are senior secure, that have teeth, meaning, hey, if they're not repaid, the lender can do something. So just to summarize, you know, we like commodities, we like hedge funds, private credit. If you're just a public facing investor, it would be a long shore mutual fund of basket of commodities or a senior secured loan mutual fund.
Good stuff. We'll leave it there. Thank you so much. Patrick Kennedy is founding partner at All Source Investment Management. On the line from Connecticut here on the Daybreak Asia podcast. Thanks for listening to today's episode of the Bloomberg Daybreak Asia Edition podcast. Each weekday, we look at the story shaping markets, finance, and geopolitics in the Asia Pacific. You can find us on Apple, Spotify, the Bloomberg Podcast YouTube channel,
or anywhere else you listen. Join us again tomorrow for insight on the market moves from Hong Kong to Singapore and Australia. I'm Doug Prisoner and this is Bloomberg