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Welcome to the Daybreak Asia podcast. I'm Doug Chrisner. So markets are now dealing with a new thread of tariffs on US imports. Last Friday, President Trump declared a thirty percent tariff on goods from both the European Union and Mexico effective August first. It was just the day before Trump threatened Canada with a thirty five percent tariff. So markets have been somewhat well behaved as if they are counting on mister Trump to back down, having seen you
turns before. The question is whether that remains the best bet In a moment, we'll travel to Singapore and speak with Bloomberg Markets Live strategist Mary Nicola. We begin in the States, though, as we look ahead to second quarter earnings. Joining me now is Rod Van Lipsey. He is managing director at UBS Private Wealth Management. On the line from Washington, DC. Rod, thank you so much for making time to chat with me.
So earnings from a couple of the big banks are on the list this week, we'll also get numbers from TSMC and Netflix. I'm curious, how do you feel about the quality of the results that we're going to see for Q two.
You know, this is going to be a very interesting quarter over quarter year over year look in part because we go back just to a quarter ago and the whole tariff scenario really put corporations in a very strange place. The estimates right now on the street, we're looking at under five percent earnings for EPs growth year every year.
We at UBS believe are going to come in closer to about six percent when we look at twenty twenty five and growing to call it two hundred and sixty five dollars a share on the S and P five hundred. I think that this busy week, you know, you're really going to see some acceleration in the earnings reports, you know, from Monday Tuesday, Wednesday, the big banks really start to kick off on Tuesday, and our expectation is that those
estimates are going to beat consensus. They're going to be pretty strong in one case, because the higher interest rates, especially for financials, have been very very supportive of NII and that interest income and that interest margin for these banks.
So we'll see some good numbers there. And I expect that some of the economic activity has been pulled forward in this second quarter, especially since tariffs have been threatened and delayed and postponed, so lots of activity, but it's going to be a strange one and everyone is going to be looking at not just the second quarter results, but what will be the forecast for third quarter and looking forward.
Before we leave the banks, I want to ask about whether trading revenue has the potential to be a real standout here given the volatility that we had in markets in the second quarter, whether banks really benefited from that on the trading side.
Anecdotally, dug absolutely. And that's why we are not only sort of very very bullish, if you will, on financials and the asset manager because we think the trading activity in this second quarter was just off the charts, especially during April, and so with that pick up an activity, with all of that uncertainty and all of the activity that went around that, I think it's going to be a pretty strong, strong especially for the broker dealers, is going to be a very very strong second quarter.
We mentioned earlier the impact of the tariffs, and I thought it was very interesting. Last Thursday we heard from ConAgra the outlook well below expectations, and the company pointed out that rising cost for tin plate steel used for food cans due to tariffs is going to have a very consequential negative impact. Is this something that's going to be more predominant when we talk about margins? Just how this begins to manifest.
It's interesting. The UBS base case is that we're going to end up somewhere around the fifteen percent, you know, sort of across the board tariff rate, and that the consumer is going to be asked to bear the brunt of much of that, and so that works into our echnomic forecast numbers. But the commodity prices, quite frankly, are just all over the charts because of the dramatic uncertainty.
Most of our investors are focused on commodities like gold and oil and don't dig too far into the commodity indices. But when we look at commodities, they truly are really all over the charts because it's very difficult to understand how the policy and the tariffs and the trade considerations will affect those utter blank commodities. But I think it manifests itself at least in our forecasts on inflation that remains fairly pernicious in stays above the FED state of two percent.
Target interesting, and yet with all the risk out there, we've got an S and P five hundred trading at twenty four times earnings. Is that a little bit of a headscratcher for you?
It truly is, because we have different things, especially if we look at our ubs macro economic forecasts see for example GDP growth in the Americas for twenty twenty five, estimating you know, one and a half percent GDP growth. But we're looking at CPI or inflation. Can we have
some releases this week that will tell us. But we see inflation coming in almost to three percent and actually accelerating into twenty twenty six, and that is directly because of this concern about how tariffs are going to flow through to the consumer and how they're going to keep inflation fairly high. Now, the markets seem to be unfhazed
by the tariff talks. The markets seem to believe that we're going to get to August first and either we'll have a favorable outcome or things will get pushed back again, and so they are completely unfazed. At least if we look at the you know, at all time highs and continuing to be there and so on. A macro level.
We think that this bull market that we've been experiencing continues to have legs, it continues to have momentum, But the real place to keep an eye out is going to be the market, because at some point in time, a lot of the things that were in the big beautiful bill, a lot of the things that are coming into the economy because of increasing tariffs, at some point in time, the bond market is going to give us a signal. And that's really where we have a cautious outlook.
So, if you were going to be in the fixed income space, where do you want to hide out the belly of the curve or do you want to be maybe more exposed to the short end. What's the strategy?
Listen, we think that in the belly of the curve, and we think that on balance again with our forecasts looking one year out, with ten year rates coming back down to four percent, we think that the bond market provides an opportunity for the long term investor. These are actually attractive levels, especially when you look at spreads for high quality municipal bonds for taxable investors in the US,
or corporate corporate bonds. We're seeing an opportunity there to get nice returns, but that does not mean it's not going to be volatile in the short term. And that's the real challenge for the bond investor is to take a look at it, dick your yield, say this is the yield that I think is going to work, and recognize that next week, next month, that might feel like a bad decision, but by next year you'll be glad that you're sitting on that high quality paper.
Does the Big Beautiful Bill at any point in the future begin to negatively impact the muni market, particularly at the state level.
Well, that's a fantastic question, and I think that that has been structurally appears to be something that's been pushed down the road a little bit. Doug. I've got to say that I have not read The Big Beautiful Bill, and I don't know very many people who have actually
been able to read that book cover to cover. But it's my understanding that much of the good news has been baked in and takes immediate effect, and then some of the ways to pay for that good news have been pushed back, some of it beyond the midterm elections, and so that is going to create some challenges. It's going to create pressure for things that are being put
on states and municipalities. There's been a lot of bond issuance, especially by municipal issuers there this year to try to get out in front of this before rates potentially go up. So I yes, I do think there's some challenges that'll be ahead, but I don't know that those are near term. I think those are pushed into twenty twenty six and beyond.
Okay, fair enough, But I'm wondering whether or not, given everything that we've been laying out that you're attempted to look a little offshore right now to remain diversified, do you want to look at foreign markets.
Our investors have been the clamoring to understand ways to diversify against either monetary or fiscal pressures and challenges here in the US, and so listen. That's why we're seeing gold prices in the current range. But we're also seeing lots of great performance out of the international markets. I think one of the questions is whether the international equity markets, especially the Eurozone, whether it's it's fully caught up or
is there more room to grow. We think that selectively looking offshore holding foreign currency holding gold that those are nice hedges, But when it comes to actually making an investment that will outperform the US markets, that becomes a little bit more of a murky question, very very difficult to us to look at European equity market growth in US equity market growth, especially when we look at the focus of it and financials here in the US and
believe that there's a lot of room for outperformance there. In the developed international markets, emerging markets, both on the debt and the equity side, do show some grain shoots and do show some very very strong either sovereign balance
sheets or good positions for these corporations. But the path of tariffs will really really make a difference, and so that makes it a little bit of a challenge for US investors to go too deeply and go too far either out of dollar investing or entered national equities.
House Republicans have declared the week ahead is crypto week, and I'm curious to get the take from the private wealth management perspective. How is the cryptocurrency space viewed? Is is bitcoin something that represents opportunity or do you see it pretty much as kind of noise around the edges? Of what the market is involved in these days.
Boy, that is a really challenging one. It's also very challenging for someone in a broker dealer, especially a big firm facing the FED, to really understand the path and the fate of cryptocurrencies. I think three points though, One is that these are certainly with us, and they're going
to stay with us. To believe that there are many of the cryptocurrencies themselves that are highly speculative, and we are now starting to see a number of stable coins that are actually buying treasuries and basing them on treasury.
And so one of the interesting things, interesting dynamics that we're seeing in the stable coin or the crypto assets is the purchase of treasuries, which is, you know, if you would had sort of thought about it initially or off the cuff, you would think that that the crypto or emergence of more crypto options would actually be a move away from from treasuries, when in fact, the underlying securities and the underlying issuers are actually buying treasuries to make
sure that they get that stability. So I think that it's going to be a very very interesting thing. Obviously, there's administration and on the hill there's support for crypto assets, but we continue to look at them as being highly speculative.
Okay, we'll leave it there, Rod, thank you so much for joining us. Rod van Lipsey there, Managing director, UBS Private Wealth Management, on the line from Washington, d C. Here on the Daybreak Asia podcast. Welcome back to the Daybreak Asia Podcast. I'm Doug Krisner. So we know last Friday, President Trump declared a thirty percent tariff on goods from both the European Union and Mexico. They are effective August first, unless there is some sort of trade deal with both jurisdictions.
Over the weekend, we heard from Ursula vander Lyon. She is the President of the European Commission, and she said the EU will extend the suspension of trade countermeasures against the US until August first, and that in fact will allow for further trade talks. We also heard from Mexican President Claudia Sinbaum. She said that her team had already begun discussions with the US on Friday. Joining me now for a closer look at the tariff story is Mary Nicola,
Bloomberg Markets Live strategist. Mary joins us from Singapore, It's always a pleasure to chat with you. I'm curious as to get your take on the tariff headwinds where you are and what's being said about whether President Trump may be bluffing.
I think that is very much the case, especially if you saw the way Asian equities had reacted last week, and it looked like they were shrugging off a lot of the noise that was coming through on tariffs. They shrugged off the noise on fifty percent on Brazil. Obviously this morning, Japanese stocks are down, but actually if you look at the Cosby in Korea, that's holding up quite well.
So there has been this disparity in terms of they're shrugging it off because doors are still open for negotiations, and I think that's key for market and also the fact that we could potentially see President Trump backpedaling. Also, the fact is that the data is holding up quite well.
So I don't think you'll start seeing cracks coming through into markets until we actually see some of the data come through fruition or the fact that you're seeing weakness coming through, And because we haven't seen that, it looks like, you know, the markets here in Asia are holding up relatively.
Well, it's interesting tonight here in the US. So we had Trump saying that South Korea wants to make a trade deal. Now that's coming from mister Trump's perspective. I'm not so sure that the same thing could be said for the South Korean side. Isn't it really difficult to kind of get a sense of where we are in the negotiating process.
Yeah, it's interesting too because if you look at Korea, the US has a free trade agreement with Korea, so obviously the building blocks are solid and they're already there. But it's a matter of what more is the US looking for? And I think that keeps coming up, especially in negotiations. So for example, which a pan you've had
a set back because of agriculture. Agriculture is always a key sticking point when you're discussing trade negotiations and trade agreements because obviously agriculture is considered some sort of national security issue as well. And then but for Korea specifically, it's interesting because you do have solid building blocks, you do have a free trade agreement, but of course it's a matter of the twenty five percent tariffs on cars.
That's obviously a key sticking point for the Koreans, and they want it to go away because obviously cars are a big part of what they're sending and what they're selling to the US. So unless those sectoral tariffs, which are still some of the bigger issues, go away, I think that might still hold Korea back and hold off an agreement between the two nations.
So I'm curious Mary as to whether or not we have any data, high frequency or otherwise that might give a little bit of insight into how this trade war is impacting not only Japan but South Korea as well economically. Do we know anything, Yeah, so so far.
Actually, if you look at some of the Korea, for example, releases export data ten days, twenty days, and then also if you look at the current account data, actually all of them have been quite solid. So that's another key reason as to want the Asian. Asian markets have been
holding up relatively well. Not to mention the fact that China as well has been holding holding up relatively well as well in addition to that, but if you look at some of the trade data coming out of Korea, there's no real indications that there has been a real slump, and that's really helping a lot of the markets, and I think as long as you see the strength in the current account, the strength in the external sector, that's going to keep equity markets, at least in the region robust.
So I know, we get a couple of key data points for the Japanese economy this week, machine tool orders, industrial production. I think there's some inflation data in there as well. What are you going to be looking at?
Yeah, I think the main thing for investors right now for the Japanese economy is on CPI. Obviously there's a
lot of concern about inflation. There's a lot of concern about what because especially we're seeing yields rise, and there's this toxic mix for Japan, whether you're seeing it because of quantitative tightening, whether you're seeing it because of inflation, whether you're seeing it because of worries about fiscal profligacy, and especially with the elections coming through and the potential for more fiscal spending. So there is really the heightened
focus is on CPI. Is CPI still high? And of course we know that the Bank of Japan has been quite reluctant to high grates, so real rates remain quite high, and as a result, I think you're seeing investors just incredibly wary of especially Japanese bonds. That's also going to weigh on the yen in addition, So I think the focus for investors this week is going to be not only on CPI, but also on the election.
So is the BOJ in a little bit of a bind here. I mean, if there is upward pressure on price action, or to say, upward pressure on inflation and the risk of more economic slowing, I mean, how do you engineer your way out of that?
Absolutely, and that's a really good question in terms of what do they do. And so far they've sent a message that, especially on the tightening side, that they're sitting on their hands, They're weighing what is happening externally. They're concerned more about the external challenges and the implications on the economy than inflation. And that has actually been to the dutchment of the Japanese bond market and will likely
hurt the end as well. But in the meantime we are seeing quantitative tightening, and it's interesting to see the bond market reaction that despite the tweaks they've made. So for example, the Ministry of Finance has already decided to reduce issuance in the back end, and we've seen some of those tweaks, yet we're still seeing pressure on bonds. So it's almost like they've let out their tools, but the tools aren't working, and that's just very much indicative
of the bind that they're in. And of course adding to that is just the potential of fiscal expansion and that will just only add to the pressures on the bond market.
So I know, based on our history of conversations over the last several years, you pay very close attention to what the FED is doing. And we've got President Trump and some of his allies who have been very critical of FED Shair J. Powell's handling of some of the renovations being done at the FED headquarters, and a few people in the administration have been now building the case to remove Powell from the fed's Board of Governors. Were that to happen, it's probably a very extreme type scenario.
What would the reaction do you think in Asian markets be under that scenario?
Yeah, I think it's actually still a very dangerous game to play where where you're potentially cracking and ruining the credibility of the FED. And that's essentially what's been happening with all this pressure on the FED. Where you do see is a potential reaction, is that a move and a shift away from the dollar, and that actually could
be beneficial to a lot of the Asian currencies. We've seen the dollar slowly decline, actually more than slowly decline since the start of this year, and I think that
just precipitates it. And what you'll see is a switch over to a lot of the Asian currencies, for example, the c and y, the Korean wan as well, where they are likely to get a bid as a result because of the fact that you know, there is just this loss of credibility because if you do put someone who is in that is complies with what the fiscal policy and what the administration wants, that just risks where we could see inflation and how potential policy monetary policy
just gets out of control. So I think in general what you'll see is just that shift continue away from the dollar as a result, if you see further cracks in the fence credibility.
Mary, we'll leave it there. It's always a pleasure. I hope you have a productive week in the Lion City. Mary, Nicola. There Bloomberg Markets Live Strategists joining from Singapore 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 Chrisner, and this is Bloomberg