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The Japanese yen weakening to the lowest level against the dollars since way back in December of nineteen eighty six, it's raising the risk of intervention less than a couple of months after the boj stepped in to prop up the currency. Dominic Constam, head of Macro's strategy at Mizuho Americas, says the weekend is hurting Japanese consumers.
When the currency is weakening. There's obviously terms of trade effect, which means the real income of the Japanese people in some sense will be less global terms, So there's definitely a depreciation from that side of things. But at the same time, I mean, at the end of the day, you know their potential growth is very low. There's a lot of damage has been done with very low negative inflation over the years.
Dominant constem of Mizuho America is there. The Japanese currency at the moment is training or dollar yen is at one sixty fifty three. That blows past the figure when officials intervened Back in April, Japan's Vice Minister of Finance, Masanto Kanda said that officials are watching with a high degree of urgency, and he said that they would take appropriate steps as needed. We've got our guest coming up, Stephanie Lung, chief investment officer at Stashaway. Hopefully we'll get
some broad discussion about all of these factors. Stephanie, thank you for coming into our studios with us. Let's start off with the end. Well, we mentioned the possibility of intervention by Japanese authorities, but we're running a piece that says it's kind of a grim reality that's setting in that the yen is not really going to stop weakening until the FED pulls the plug on the higher for
Longer policy. I wonder if you see it that way, it seems like that angle means the boj has to stay patient even if the market is not.
Yeah, absolutely, I think.
I mean, we've seen some intervention in the Japanese and market by the BOJ. However, I think the force is that the overarching micro kind of reality is that US inflation or developed markets inflations are not coming down as quickly as expected. Therefore, would expect the Fed to have to kind of keep interest rates higher for longer. And obviously, I mean the last CPI number was quite encouraging in the direction that this inflation started seems to have started
reaccelerating again. But again it's only one month of figure, and we all know that inflation data tends to be actually quite volatile, So a lot of attention now comes down to this Friday, Actually the PCE number will be coming out, and Pocket generally expects I mean PCE to be quite in line with the CPI. However, if I mean the CPI, the PCE actually comes out kind of
stronger than what the market is looking for. That means that we may actually not get the turn or get the acceleration in this inflation as of yet, and that puts a lot more pressure on the end.
Speaking of pressure, the BOJ has got to be feeling a little bit of it. We had a Bloomberg survey recently showing about a third of the economists that we spoke with believe the BOJ will raise interest rates in July, and they also expect the BOJ to unveil a roadmap for quantitative tightening, buying far fewer of those jgbs.
What is your.
Expectation right now? What are we going to get from the BOJ that is really going to convince the market that the era, the three decades really of easy money is over.
Yeah, I think it.
If you put yourself into a BOJ kind of official, you haven't had to do this kind of tightening before, right, because I think for the last three decades there was consistent perissure of deflation, and they were very very good at coming up with policies to actually flight fight deflation. Now the direction is kind of the other way, in the sense that they have this kind of early on inflation force that is setting in in the economy.
Wavetrove is surprising on the webside.
And more importantly, I think the overall kind of macro environment for the US and other develop markets support a high inflation environment for the Japan economy. And I think if you are a BOJ official, you will be very very careful in not trying to extinguish what they've actually hoped for the last three decades. So I think even though they are set to kind of start to tighten policy, they would do it actually in a very very cautious way.
And I mean coming back to the end, right, the other consideration that they need to take into account, it's what's happening in the neighbor. Actually, the biggest neighbor was is China. Obviously, I think we all have seen some turning around of Chinese data. However, it's also been quite slow, right, so there's still somewhat of a deflation pressure going on in China, which pressures a currency, which of course translates into how to think about the Japanese zen as well.
Yeah, I think a lot of investors think that the BOJ and the PBOC are kind of in the same spot that they're waiting for the for the FED to act first. So that probably takes July off the table. But I'm curious about the FED meeting in July whether or not. Well, let's back up and let's let's say, is it possible that the PCE this week is enough for the July meeting to become live. Many think no. But would it be enough maybe then to get the Fed speakers to change the forward guidance.
I think, I mean, perhaps they could become a bit less less hawkish, because I mean the last policy meeting was actually quite hawkish in the direction of kind of the decision itself. Now, of course, Powell said during the press conference that the committee members actually had the chance to change their projections, given that they knew that the CPI number would have come out kind of below expectations. They chose not to. I think partly that's because it's
only one month of data. And I mean when the Fed kind of make decisions typically, I mean they look at at least kind of a three month average. So if like committee members look at a three month average, things haven't like really turn so I think, unless I mean the pc number have surprised a lot of the downside, there's not a room for a lot of room for them to support a set of can change direction. However, some members could come out with kind of softer language.
I think that's what Powell actually signaled as well.
Right at at the press conference, he did say that everything is kind of up to the data and it's very very much data dependent.
Stephanie, before we let you go, you are an expert in computer science, especially artificial intelligence, and I want you to weigh in on this phenomenon that's been happening right now across developed markets, mostly the US in particular, this enthusiasm around AI and the computing boom that we will derive as a result of it. I mean, where do you stand. How do you see this right now playing out?
Yeah?
I think it's As a computer scientist myself, it's actually very very exciting times. I would actually compare the impact to society or kind of everyday life and work with the invention or revolution of kind of popularization of the Internet during the two thousands. So what happened in the two thousands We had a real change, real improve intel technology. However, we also had the dot com bubble, so we're see a bit of that today right with names I and Vidiot.
Arguably there's a bit of a bubble.
When I saw Jensen Huang kind of being a pop starle on headlines and my mom started talking about it, I knew this is kind of history repeat ticket Solf.
So there's a bit of bubble that.
However, if you look kind of beyond that, I think I love the rest of my market actually looks quite reasonable, and you're seeing kind of rotation as well. Right names like Amazon, Google, which habit laggards, are starting to catch up. So there's definitely a lot more to play that.
Yeah, in that same theme, I think it was really about the time that Nvidia became the most valuable company in the whole world that we saw that fifteen percent pullback in a matter of five days. So Stephanie, thank you. Stephanie Lung, chief investment officer at Stastaway formerly of Golden Self. Joining us on the program is Charo Shanana, Global market strategist and head of FX strategy at Sagzo. Charro, thank
you so much for joining us. I'm going to find a way to blend the two hats that you wear as a general market strategist and then also the FX side of things by just asking you point blank, is the weakening year in killing the long the long equity story in Japan?
Hi Goodmaning, thank you for having me. No, totally, I am, and I think for now it has been obviously seen that a weaker yen has been helping the Japanese exporters and those blue chip names continue to push the equity markets in Japan higher. And you know, in the case for Japanese equities is a very structural case. It's driven by corporate reforms that are happening in Japan. It's driven
by that exit from deflationary trends in Japan. So I would I would not be worried about excessive weakness in the yen and how that can fuel a little bit of a pullback in probably consumption in the in the short term. Of course, the weakness in the yen is going to continue for now as it appears, you know,
with the FED delaying it's rate cuts. But if you're in Japan markets, in japan equities, from a very structural perspective, this weakness in the end is potentially bound to turn around once we get to that, you know, the FED rate cut cycle. But it certainly is a point in time where we should be looking at our Japanese equity exposures and potentially turning a little bit more selective there. I mean, certainly there are some great dividend place in
that market. Geopolitical risk has also obviously helped Japanese equities in some way or the other, as investors have been trying to diversify out of China. So I think those sections of the Japanese equity markets still remain quite attraction.
So, Charu, how would you handicap the risk of intervention from the monetary authority in Japan right now? I mean you mentioned the FED, and we're waiting for that pivot. We haven't received it yet. The first rate cut may be likely to create a shockwave through the foreign exchange, But how are you assessing the risk of intervention from the monetary authority?
Having seen how miserably this intervention potential intervention we saw in April has failed and we're back at these one sixty plus levers, I would think that Japanese authorities want to really see a strong case of intervention, and I don't see that right now. They certainly more worried about the base at which the end decline is not so
much about the levels it's trading at. And what we've heard from the FX chief in Japan Kanda earlier is that they usually get worried when there is a move of about ten per US dollars within one month, or even a four percent depreciation in the end in two weeks, and none of those two conditions seem to have been met yet. So the pace of decline is something that
would not be potentially worrying Japanese authorities. Now, we might obviously see some verbal job owning here and there, but I don't see any reason why they should be wasting tons of money again to really get them nowhere while they wait for those federate cuts to begin.
Yeah, we we ran a story on the Bloomberg terminal getting just at that point that that the Japanese authorities will probably have to wait to see what happens with the PCE this week and then later with the FED at the July meeting. The reason I brought up stocks was that obviously, you know, the Japan market was one of the real favorites, so one of the real darlings for investors for a period of time. Now you have to go you know, since March, we've we've traded lower.
So it's it's been you know a number of months now that we've traded lower, and I guess part of that could be the reaction to the rapid gains that we saw from December. Over those couple of months. So if we think that that story is intact, what's the what's the key component for it?
Certainly, I mean, we've seen some amount of pullback, some amount of sideways trading in the Japanese equity markets, and that's obviously potentially coming from some of those investors who were more like tactical and short term investors, obviously locking in their games after the rapid run that we've seen in the last year or so. Uh But like I said, you know, I mean, for me, Japan is a story about exit from deflation. Japan is a story about corporate
reforms and more dividend payouts, more buybacks. For me, Japan is a story about higher geopolitical risk in the global economy, which means japan equity has become a little bit of a safe hayn in that sense. Uh So, I'm still looking at it from a very selective lens. Of course, the pullback in uh, you know, the Japanese end has
been helping once again in recent weeks. But if we were to continue to position for the strengthening of the year and the eventual start of the federate cut cycle, that means the index level can obviously see a deeper pullback as well, because you know, all those high market cap names are potentially those that are exporters and dependent on the weakness of the end to really continue to gain as well.
Charro, very quickly thirty seconds. What would cause you to change your opinion on Japanese equities?
I mean, on a very positive note, if we were to see geopolitical tensions and and US China on a very you know, coordial happy note, then I think Japan would face outflows as far as investors would rush back into the China markets. I think that would be one downside risk.
Charo, thank you for joining us. Charo Chanana, global market strategist and head of X Strategy. Let's get to our guests. Terry Spath, founder and CIO at Zuma Wealth. Terry, one of the markers of what's been happening in the US equity market of late has been that you've had quite a lot of volatility in individual stocks, not so much
at the index level. The indexes have managed to hold pretty close to all time highs, even with some pretty torred selling in even the high flyers, like in video last week, trading down thirteen to fifteen percent in the number of days, and yet the indexes were Okay, you think that continues or is that about to change?
Yeah, Hi, Brian, I'm glad you brought that up.
You know, it is an interesting divergence between individual stock volatility and the relative calm of the broader benchmarks, and that calm really strikes us.
I mean, we were taking a look, it's been.
Sixteen months since the S and P five hundred had a two percent down day. I've there were months during COVID where we had multiple five percent down dates, So that's you know, it's very calm. The max draw downs this year only five percent for the S and P five hundred, seven percent for the NASDACK. So our view and our recommendation is, you know, don't step in front
of a strong market. We're in a Cinderella moment. It's not too hot, it's not too cold, and the trend is really your friend, so keep exposed to those broad benchmarks.
At this stage, that said, if you had to put on a hedge, what would your strategy be.
Heads for the US equity market down.
To the downside. I mean putting in a put so to speak, so that you could protect everything that you've enjoyed so far this year, if there is some kind of corrective behavior.
Yeah, I mean, I think you know, that's an interesting question. It's a two pronged answer that we would give for how do you protect the profits that you may have made over the past year, year and a half, because you do want to protect those, you know one the symbol one is that market have drawdowns and that happens, and timing exactly, you know, when you get out and when you get back in can be pretty tricky. In fact, if you tried to do that this year, you missed
out on some potential profits. So just bearing in mind that you know there can be declines in the markets and just you know, don't get too panicky over that.
And then on the flip side, what we also do as a barbell.
To the equity markets is just plain old treasuries. We keep investing over and over again in treasuries earning five percent.
It's a really nice, steady.
Zero downside, you know, five plus percent upside. So that's that's our recommendation.
One of the things that struck me last week with what happened with Nvidia and Broadcom and some of the other AI plays is that you know, you had in Nvidia down fifteen percent on no bad news. What happens when you actually get some bad news, you know that that's the thing. We haven't had a warning yet. We haven't really had anything that tells us that, oh, that's a setback when you get it, I don't know, you know. So that's one of the reasons why people probably are
looking at hedges. And if you look at like the power producers and the HVAC companies and everything, they're not going to help you because they're training pretty much in lockstep with.
Nvideo they are.
And you know, and if we're talking about how do you put a hedge on Nvidium particular, you know, the answer issue is you buy a put for something like that. But we don't think you want to put like a big allocation of your portfolio into an individual stock, especially one that's had the type of, you know, really outsized performance in a very short period of time. We like the tech sector definitely, we think you want to keep exposure to that, but you can look to other sectors
as well. Energy, for example, doesn't always move in the same lockstep with the tech sector, and energy stocks are doing really well due to high oil prices, they have really high quality earnings, they have good interest coverage ratios, they have great dividends.
Still, like I said, earnings, and so making sure.
That you have you know, some sector exposure that can be a little bit different than just you know, what is driving an individual stock is makes sense to us.
So we're wrapping up the second quarter. If I was one of your clients and I had to maybe raise capital to pay estimated taxes based on the gains that I've had, you know in Q two, what would you tell me to do? How would I raise that money?
Well, I mean that's going to be an individual as you know, an individual response to any particular.
Person. But there are certain rules of thumb that you want to follow.
You want to you know, you can definitely look at your portfolio and see where you have too much exposure. And if you are going to have a fifteen percent decline in an individual stock, you know, is that going to be too painful in your portfolio?
So that would be something to trim. But you know, making sure that you've got a great allocation.
And one again, we think it makes sense to have exposure to US stocks and to continue to hold that right now. So if you have a little bit of liquidity on your bond side or if you have some in cash, that's where we think you want to, you know, pay and pay those.
Taxes so quickly.
On the FED, we had a bad January in terms of inflation and then kind of warm in February March, and we've had a little bit of weakness in the coming months the last couple of months. Is it time for them to take a little uh, you know, to to maybe start hinting at cutting rates or do you think they just stay higher for longer?
Yeah, I mean the FED has been really frustrating for us and probably for some other people too. I mean they've really gotten I think cold feed about cutting rates. Obviously, the market was over at skis earlier this year when they were, you know, cheering on six to seven cuts this year.
I think the market and the FED are a little bit better aligned now than they were.
But this, you know, this concept that the FED needs to be confident that they're going to see a two percent level.
I don't know how you quonify something like that.
So we're looking at things like Friday's core PCE number that's going to be coming out jobs, jobless claims. Those are the two big ones that I think we can closely watch. That core PCE inflation is expected to come down on Friday to its lowest level in a couple of years. That'll be good jobless claims, all right, or something we're watching as well, so we hope to see them pivot in the fall.
Thanks Terry, Thanks so much, Terry Spath, Founder in CIO at Zuma Wealth.
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 App.