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Welcome to the day Break Gasia podcast. I'm Doug Prisner. We begin in China where French President Emmanuel Macron met earlier with Chinese President Chi Jinping. Now this meeting took place as Paris is trying to rebalance its economic ties with Beijing. Here is Bloomberg China correspondent minmin Low.
Just judging from the tone coming out of these state media commentaries so far, it's been heavily covered in China presidency calling the meeting candid and constructive and fruitful. There has been a range of cooperative agreements signed covering areas
like natural resources, like agriculture, food, education, investments. I think the key focus for Macron is really to deepen trade and investment ties, where he called for more Chinese investment, saying that needs to be a clearer framework framework to
attract Chinese investments. He also warned against supply chain disruption, and that was likely a reference to China's disruption of the rare of access for European countries, although some of those restrictions had been lifted, but it spooked many European partners about over reliance on China. He also urged China to extend its domestic consumption, saying that the one of the worst ways to deal with the trading balance is
to start a trade war. And I think a key focus for him is to correct the trading balance, given that Franz still has about fifteen billion dollars in goods trade deficit in twenty twenty four.
That was Bloomberg China correspondent min Min Low. Now today across the Asia Pacific equity markets are somewhat mixed. A key question looming is on FED policy, not just the high probability of a rate cut next week, but the Fed's outlook for next year. And that's where we begin our conversation with Charu Chanaana Chief Investment just at Saxo. She spoke with Bloomberg TV host April Hong and Paul Allen.
Talk to us about why you saying maybe next year will be even better for risk and Asia in particular.
Absolutely.
Okay, so let's take the broader picture. First, it does seem like we're getting that rate cut from the Fed, and then going into next year if at all, you know, the probability seems to be getting higher for and hast led fed and that does mean that we could get some more rate cuts going into next year. I mean, of course, the market's already looking at three rate cuts for next year. I've seen predictions of about one hundred
basis points of rate cuts as well. It's about three to four rate cuts next day looks very very likely. And on top of that, of course, the tech volatility has gone out, but that has not really kind of questioned the kind of k pix that has been going on in this AI theme. Right, if that continues, especially from the big hyperscalers that do have the ability to in some ways fund it as well, I do think, of course the dispersion would continue and the broadening of
the AI team would continue in the US. But overall, both of these macro dynamics are extremely positive for Asia because if we do get that continued AIKPEX, the hardware backbone off that AI cycle really rests in Asia, and we've seen that theme play out in Taiwan and Korea.
I think it could spread out to some of the other.
Names as well, beyond the big names that have already rallied quite strongly this year. Japan has been a huge participation in Asia, and as I think with the volatility in tech, as investors look to kind of shift away from hype to the real fundamentals, I think the real fundamentals are in Asia. When the US hyperscalers continue to spend with really little insights into where they monetize it, I think that spending continues to benefit Asia who do continue to get strong order books on the back of
that spending. And then you club that with FED rate cuts a softer dollar. Potentially all of those are very positive.
For ratio on the FED rate cuts you say three or four n year. How much does that matter whether we see this first half or second half? And to what extent is it realistic to expect very dubbish fed under potentially a fair chair hazard. Yes, given he's one man, there are other people on the board.
Right exactly, and I think we will start to get a reflection of that within this month as well as to how divided the FED boat is getting. We've already got some meetings we've seen that division play out, but certainly I think this December meeting is even more important because we still have a kind of a data blackout. Even though the government shutdown is over, we haven't had the most recent data for the FED to really judge where.
Things are going.
We've had obviously some political influence playing a part as well, So the division is certainly getting much more starker within the FED, and that will be a theme going into next year as well. But I think within the first half of the year, even if we do not substantially get those rate cuts, certainly depending on where the labor market is going, I think there is a chance that we might get another one at the end of the first quarter if the trend in the labor market sustains
to point towards more weakness. But I think the market obviously reacts a little bit faster than the actual rate cut itself, so I think that potential expectations of rate cuts would also continue to support the markets.
Charie, do you see dollar weakness becoming a major theme in twenty twenty six as we see divergence between major central banks, particularly the FED, And how's that informing your investment strategy?
It certainly seems like I mean, we've obviously seen a lot of the dollar weakness this year as well, but going into next year, I think it will be a dual story of both yes, the FED rate cuts, but also with those federates cuts, I think the fiscal situation in the US will also continue to play a big part. I think we might see, you know, this pivot towards a much more fiscal spending, which could raise concerns for the long end in the US, and that obviously again
points towards you know, the weaker dollar. We've seen global central banks trying to obviously diversify their reserves as well move away from the US dollar. So it does not still spell the end of the US dollar to me, because we know that you know, eighty eight percent of FX transactions one side is still the US dollar even
within trade. I mean, of course we've got a little bit more relevance for the Chinese renmen we in this region, but I think globally again, US dollar continues to dominate in a very significant manner, which is very difficult to overtake by any other, you know, single currency, or even for by goal for that matter.
So I think the dominance really stays.
But at the margin, these fiscal concerns also continue to be a negative for the US all the next year.
In addition to of course the FED rate cuts.
Well, I know you say that while we're waiting on these right cuts, while we're potentially waiting out and AI polls as well, you like to look for assets that pay you well during times of waiting. So can you give us some ideas in that regard?
Absolutely, I think with the yields you know going down as well, especially on the short end, I think it is really important for investors who have parked cash, you know, I think to understand that one your heels are going down. Plus two, I think we're also still in an environment of sticky inflation, so that also continues to erode the
purchasing power for cash. So I think obviously it is very important to understand where you can get some of those better yields if you are an income seeking investor particularly, and in that case, I think it is next year could be a story where we see a lot of these dividend plays, you know, like reads for example, you know an income other income plays very much and focus given of course, because of the volatility in EA, you want a little bit of a defensive balance in your portfolios.
Because of high concentration of techniques even in indices, you want to balance your portfolios with something more defensive, but also because you know, there are income seeking investors who want to continue to generate steady income.
Also just quickly if you can.
When it comes to currencies, what are you saying China is thinking about guiding the vermintya because it seems to make sense that it would be stronger. And then how does that square with what India is thinking when it comes to the currency.
Yes, two very divergent parts there. Avivial certainly, I think. So when we talk about China all year, we've seen that intent from China that they do not mind a stronger Chinese you man now right, it is a signal for them of a stronger economy as well.
And given that.
You know, they do want to kind of, you know, be structurally stronger, strategically independent from the global economy, I think it was very important for them to continue to show that strength. But of course the pace of appreciation in the Chinese yuan has I think obviously given I mean we got that signal yesterday that that's not something they're comfortable with. So my sense is here that they might slow down the pace of appreciation, but they're not going.
To potentially reverse it at this point.
Whereas when you talk about India, obviously it has been you know, the Indian rupee has been extremely weak, and that also comes from I would say a policy stance or an intent to kind of be a bigger player in the global export or the global trade arena. I think the weaker rupee could help them there, and that might be the intention behind it. But again I would say that they might slow down the pace of the fall of the rupee, but I don't potentially see them reversing that trend.
Okay, talking about trend reversals, the yen obviously this year has been coming under a lot of pressure.
What is twenty twenty six it is going to look like?
I think part of the outrageous predictions that ZA actually has is yes, whate hundred to the dollar.
Yes, but just to put it right now in outrageous predictions are not our baseline predictions.
It's just something fun we.
Like to do to obviously, you know, encourage some level of debate. But also I think there is a clear intent to try to look at some of the blind spots in your portfolios. You know, certainly this is not our BAUS case, and it's not like we are telling our clients that you should premire for a dollar yen going two hundred. But what we've come up with, like as a set of ten predictions, which talk about the
risks that investors might have ignored. So we take the trends that are on ready in place, and we take them one or two steps further to really.
Spark that thinking.
You know, what if I'm exposed to this kind of a risk in my portfolio, or what if I'm missing this kind.
Of an opportunity in my portfolio.
So, talking particularly about dollar yen, that is not a trend reversal. For sure, that has been a t and that's ongoing for some time. Right, we're still very close to these record low levels, despite the fact that we are expecting now the market is expecting now the boj to high crates later this month, and that goes to
say a lot of things. One of course, that the interest rate differential for Japanese bonds, which are obviously the yields are rising but still so low that the interest rate differential to the rest of the world are quite high, and I think that continues to pressure the end. But also the fiscal situation again very much what we talked
about for the US as well. Now we do have an intent to be you know, fiscally more accommodative, even more accommodative, i should say, in Japan, and that kind of raises, you know, some concerns when you have two thirty percent of you know, GDP debt, So I think that kind of does raise some concerns. Again, it's not something that will immediately come to them, because a lot of debt is held by the BOJ itself in Japan, but I think it's something that continues to concern investors.
And of course the carry trade itself remains quite attractive still. But things really start to turn if we see FED cutting aggressively next. Yeah, I don't think the buj's small steps of rate hikes could really reverse the situation rapidly. But if the FED really triggers like those hundred basis points of rate cut and a very dabbash policy, we could see dollar yet moving lower in that.
That's Charu Chanana, chief investment strategist at Saxo, speaking with Bloomberg TV host April Hong and Paul Allen here on the Daybreak Asia podcast. Welcome back to the Daybreak Asia Podcast. I'm Doug Chrisner. Today, a bipartisan group of US senators introduced a bill to block in Video from selling its h two hundred and Blackwell chips to China.
Now.
The bill intends to codify existing US restrictions on exports of advanced semiconductors to the Chinese market. It will also halt export lice, instance, for sales of chips to adversaries for at least thirty months. Here is Gene Monster. He is co founder and managing partner of Deepwater Asset Management.
If we don't sell those self some form of chips to China, they'll just go and create their own and we can benefit in the near term of having them dependent on our platform. If you think of like Nvidia, for example, it's.
Not just the chip.
They have a Kuda development platform, and so getting their developers based on that does give the US some form of leverage in terms of how the technology rolls out in the years to come.
Today's shares in Nvidia were a little changed in the US session. Overall, the equity market state side struggle to gain any traction in front of next week's FED decision. Let's take a closer look with James Thorn. He is chief market strategist at Wellington Altist Private Wealth. He joins us from Toronto. Jim, thanks for being here. I think it's fair to say that markets right now are largely betting on the FED cutting interest rates next week by
twenty five bay points. But it's fair to point out that policymakers have rarely been so divided if we focus on the weakness in the labor market. Are you expecting a cut?
Yes, I am. I think the larger question is, you know what is what economists would say is what's the terminal rate or where does the FED stop cutting? Is it going to be a two seventy five? Is it going to be a three twenty five? But one thing we know as investors is that you know in twenty twenty six liquidity is coming into the market, which should be good for risk assets.
So as we know, some members of the FED have highlighted the risk of sticky inflation. On Wednesday. Just the other day, we learned from the ISM that prices of services and materials on an annual basis are holding in at around three percent, and some of the other inflation readings that we have seen recently show inflation still above the fed's two percent target. I'm wondering if that's a concern for.
You, you know, because I look at first, I recognize that shelter is one of the driving components of CPI and PCE, and we know that's lagged. And if we put market based indicators into both of those variables, there
is no inflation problem. And then you know, service inflation has always been sticky since I've been in the business for thirty years, so you know, you know, what the FED can do in terms of its monetary policy is really affect the business the interst rate sensitive sectors of the economy, and I agree with Secretary Present that, you know, the interesst rate sensitive sector and the economy is in a recession, specifically housing, and so they need to.
Cut There's also been some debate as to whether or not lower interest rates can have a meaningful impact on improving the labor market. Maybe we need to consider some of the other forces that have contributed to a restructuring and I'm thinking of AI in particular. Perhaps the labor market is not as sensitive to changes in rate policy as it once was.
That's a fair point, and you know, in these recoveries where you know, technology recovery driven recoveries, labor lags. And I think there is some conversations or some indication coming under the FED that they indicate that the real risk is in the labor market and we need to give support to the interest rate sensitive sector and wait to see if President Trump's supply side policies kick in and all that investment that is supposedly coming in because of terrorists,
and if that happens. The interesting thing about it is that we're not going to go back to you know, secular stagnation and deflation. And the FED can be right in basically saying that the neutral rate is somewhere around two seventy five to three percent. But if they tightened too much, as and they contracted the balance sheet too much, as happened after the Second World War, you could get a real gross scare in debt and deflation really come back.
And once you get those expectations going the other way, it's really hard to put the genie back in the bottle.
So I'm speaking to you from Toronto. Maybe we can talk a little bit about the trade relationship between the US and Canada. Today, President Trump signaled the US could withdraw entirely from the us MCA and renegotiate large parts of that trade accord with both Canada and Mexico sometime next year. Jim, I'm wondering from your point of view, does the USMCA need to be restructured.
Yeah, it has to be restructured, yes, And you know, let's be honest the you know, and this is how I frame it is that, you know, irrespective of President Trump, because interest payments on debt in the United States are greater than military expenditures, we have to or the Americans have to adjust. So let's realize that and figure out
what we're going to do. And so when you think about it, what Canada has to do is they have to basically start exporting their one you know, competitive advantage, right, which is natural resources. And so those areas of the
economy that were protected under the USMCA, for example, autos. Really, you know, we have to be honest with ourselves and to say that Canada doesn't really have a competitive advantage there, right, I mean in Ontario where I live in Toronto, right with Premier Doug Ford, I'm sorry, you know, electricity prices in Ontario are too high. So you know, Canada has needs to do the structural adjustment, just like the United States.
So I think we have to be honest and see how is Canada in the United States going to create a relationship where they both can be stronger. And I really think that Prime Minister Carney and President Trump in his cabinet understand that. So to me, it's not as as scary as some people would bring up.
You mentioned natural resources, and in Canada, I think of the energy complex being a big part of that story. So when we consider the hunger that we have now for power, in particular to drive some of these AI data centers, this seems to represent a big opportunity for Canada. The question is whether there will be cooperation.
Yes, and I think the only thing that needs has to happen is it takes time. Right Canada has you know, I lived in the States for twenty five years. Canada has neglected its core competency, which is now to resources. So you just don't open a mine, just don't build a pipeline, You just don't build a nuclear reactor. You know, Doug, Back in the fifties and sixties, Canada was a world leader in nuclear power. And nuclear technology. So it just takes time. And yes, so and I agree with Prime
Minister Carneia on this. You know, pipelines are boring because really what Canada needs to do is stop exporting its natural resources and start processing it and using those natural resources to create a diversified economy, which would mean AI and I think that's the next step. So we need time. But at the same point in time, Look, I mean and Canada and the United States, it's we're family. We fight, but at the same point in time, we will grow
together in this new environment. And Canada can really help by bringing resources and critical materials and energy and natural resource to the forefront. So I am very constructive on what's going forward. And you know, as Prime Minister Carney said it, the Council and Foreign Relations we have to adjust. We're dealing with the reckoning and so but that takes time. But you know, if you understand that there's lots of opportunities all over the place to take advantage of that.
What about the processing of rare earth minerals. This is an industry that China really dominates. And can you imagine a world where Canada steps up and begins developing a more robust infrastructure for processing rare earths.
Yes, when you think about the problem that Canadians have had in the past, it's been that they do not want to process natural resources because of the pollution. And I really think that Canada really needs to have an honest conversation with themselves. You know, let's talk about the tanker ban on the on the west coast of uh Canada. Yet you know, tankers flow freely on the east coast.
Think about all the pipelines that we've had. So I think what's happened is we've had a decade of what I would call virtue ce doing that has really cost Canada standard of living. And so we're in the early phases of shifting. And what I would say to you is is Mark Kearney is a very smart man. He is a you know, a world class central banker. But don't forget he you know, cut his teeth in the private sector with Goldman Sachs and and later on in Brookfield.
So he understands it. But it's you know, it's one thing for you and I to talk about it, but he's got to play the political battlefield up in Canada to get everything going and he only has a minority government right now, so I think he he has a handle on what's happening, but he's got to move a lot of the chess pieces and so it's going to take time. But power is going to go south. You know, we're going to have a few industries that are going
to get hard because they were protected by USMCA. But when you have an economy that is resource rich, you know, in the long run, we're going to be okay. So Canada has what the world wants. We've just got to get our act together and start getting it to the world market and moving forward with long duration infrastructure projects and saying to the world's the global capital markets, you know, we're open for business and the rules aren't going to change.
So we've talked a little bit about the relationship between Canada and the US, and we're well aware of the tension between China and the US. So I'm wondering whether you see opportunities for Canada to strengthen its relationship with China.
I think the two countries will co exis, but I don't think there will be significant strengthening. I think the Teutonic plates that are happening right now is negotiations between President Trump and mister Putin and also mister she I really think that the powers to be are going to come to some agreement, a peace dividend, as you will say, I will call it, so that we can get a period of time where we can all grow out of
this debt mess that we're in. So no, but I would honest, but I want to say, look, if you know, with Premier Smith and Alberta, we build the pipeline to the West coast and we ship you know, oil to China or to Asia. I think there is going to be a global trading relationship, but I don't think it's going to be anything more than that.
Okay, Chim, well leave it there. Always a pleasure, Thank you so very much. James Thorn is the chief market Strategist at Wellington Altis Private Wealth. Joining from Toronto, Canada. 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 Risner, and this is Bloomberg