Good morning. I'm Brian Curtis. Here are the stories we're following today. US Treasury Secretary Janet Yellen saying that the US should look for ways to further de escalate tensions with China, but that it's too early to cut tariffs. The story from Bloomberg's Joan Wong.
Yellen said the US is close to completing a four year review of the tariffs and post on China. Given that, she says it's premature to eliminate the tariffs. Yellen spoke ahead of the G twenty meetings in India. The Treasury Secretary acknowledged has that a move to lift tariffs would stoke a.
Political reaction at home.
However, she said this could be an area where progress can be made over time.
In Hong Kong. I'm Joan Wang, Bloomberg, Day Brigaesia Well.
White House National Security Advisor Jake Sullivan says that China will only harm itself with restrictions on the export of two chip related medals. Sullivan spoke on CBS's face the Nation.
I believe that it will only reinforce the determination of many other countries in the world to de risk, to find ways to reduce dependencies and increase the resilience of their own supply chains, including for the kinds of critical minerals that are at issue in this particular decision.
Jake Sullivan heard here on Bloomberg. China has said that gallium and germanium will be subject to export controls meant to protect Chinese national security, and those controls will begin on August first. Well, China's economy is struggling to gain some traction. We get the latest data later this morning our time. Bloomberg's Bonniao has a preview from Hong.
Kong second quarter GDP probably grew seven point one percent year on year, but only therve point eight percent from the first quarter. The data may look better than the reality because of the COVID lockdown last year in Shanghai, industrial output and retail sales for June are expected to slow. Retail sales growth in particular likely slid to three point
three percent from top point seven percent in May. Speculation has grown that China will add more STIMA, but China Central Bank is likely to hold US one year medium term lending facility rate steady at two point sixty five percent after a ten business point cuts last month in Hong Kong. I'm Bonnie Al Bloomberg Daybreak Asia.
Well, it's a busy week for earnings after JP Morgan, Wells Fargo, and City Group put investors in an upbeat mood last week they beat on analysts expectations. Let's get a preview of what's up next from Bloomberg's Charlie Pellett.
More financials will be reporting this week, including Goldman Sachs, Morgan, Stanley, and Bank of America. The flood of earnings reports come amid questions about whether earnings expectations justify the outlook for stocks. Laura Cooper is senior investment strategist at black Rock International.
We really have seen that better than expected earnings backdrop be a key tailwind for equity markets, and I struggled to see that trend persisting in the second half of the year.
This week, we'll also be hearing from Railroads, CSX, UAL, IBM, Johnson and Johnson, Lockey, Martin, Netflix, and Tesla in New York. Charlie Pellett Bloomberg PayBreak Asia.
Microsoft is promising to keep Call of Duty on Sony's PlayStation. This comes as it gets closer and closer to clearing all the hurdles to buy Activision Blizzard. The story from Bloomberg's Denise Pellegreeney.
Microsoft's announcement seeks to address regulators' concerns that the nearly sixty nine billion dollar Activision deal would make more games exclusive to Microsoft's Xbox. The company already inked a tenure deal for the game with Nintendo. This latest move with Sony comes after an appeals court friday Tonight. The US
Federal Trade Commissions later suffered to delay the deal. Meantime, UK regulators will be looking at the deal again tomorrow, where Microsoft is apparently offering to sell the cloud based market rights for its games. The company has to close the deal by Tuesday or potentially pay Activision a three billion dollar breakup fee. Denise Pellegrity, Bloomberg Day Break Asia.
Denise, thanks very much. Coming up in a little while, we'll be chatting with James Abattem, managing director and chief investment Officer at Center Asset Management. I'm Brian Curtis here in Hong Kong. A couple of other items we'll be looking at with the guests.
This morning.
We mentioned that China's growth may look pretty good in the second quarter, but then because of the lockdown last year, these numbers are sort of skewed. We'll take a closer look at the stimulus part of this story. All economists surveyed by Bloomberg predict the PBOC will keep its rate on its one year policy loans unchanged today at two point sixty five percent. What else can they do and how much more of our reaching out to the private
sector can we expect? And again, looking at the dollar weaker not only on hopes that the Fed will stop hiking interest rates, but the dollar bears are looking even past that onto when we might get some rate cuts from the Fed. So that's another topic that we'll be getting into. And again S and P five hundred firms expected to post a nine percent drop in profits in the second quarter, all during a time when markets quity markets we're racing to the upside. Now it's time for
global news. China and Russia are going to hold joint military exercises in the Japan See head backs to with global news from the ninety sixty News from in San Francisco.
Ed Yeah Brian Russia saying it will send naval and air forces for the annual drill. China's pla making the announcement also plays into the ever deepening issue of China's attitude toward the war in Ukraine. Meanwhile, US National Security Advisor Jake Sullivan on CBS has heard here on Bloomberg says China's help could be used regarding North Korea and says China's in action is having the reverse effect to what it wants.
Frankly, is in fact only creating circumstances in which the United States are allies and partners have to step up our activities and posture to respond.
To and Sullivan also says a US as firman saying the recent Microsoft hack came from China.
Microsoft has said it was China. We see nothing so far to dispute what Microsoft has said or to second guests their claim that it was China.
Sullivan says a deep intrusion into the systems. And Republican Canada for President Chris Christi on ABC has heard here on Bloomberg says China is watching Russia and US actions in Ukraine right now.
The Ukrainians are willing to fight this fight for themselves if they have our support to be able to win it. If the Chinese watch us back away from Ukraine, believe me, the next move will be Taiwan.
Now politics, Christy says he is going to muscle up on Donald Trump moving forward on issues like this. So Trump last night at a rally.
Every time the radical left, Democrats, Marxist communists and fascists indict me, I consider it to be a great badge of honor and courage.
I'm doing it for you.
He's a liar and a coward. He's not getting indicted for anyone other than because of his own conduct. There's no other of the two hundred million Americans he spoke about who illegally retained classified national secrets.
And then Christy also on CNN saying Trump will show up at the debates. He believes his ego I.
Think will not permit him to have a big TV show that he's not on. And I think he'd be enormously frustrated sitting back in Bedminster and watching what I'm going to do to him.
Yeah, Trump says he probably will not be at the first debate. By the way, US Climate envoy has arrived to Invaijang John Kerry to start up a dialogue on global warming and climate change kind of to reset is the word they're using. Meanwhile, weather is being very mean to Mother Earth at least thirty five people and kill the storms batter South Korea. Hong Kong Observatory has issued
a strong signal eight to now until noon. It's said the way it's phasing it is before noon first of the year, as the region gets pummeled by talem as a storm. Heat is causing health alerts in sixteen cities across southern Europe today and probably for the next couple of days, and in New York. The potential of flo floods, extreme weather around the globe global news power by more than twenty seven hundred journalists and analysts and over one
hundred twenty countries. In San Francisco, I'm Ed Baxter, and this is Bloomberg.
Let's get to our guests. James Abat, Managing Director and Chief investment Officer at Center Asset Management. James Pleasure as usual, thanks for joining us. So investors know that the FED does not want to give the all clear just yet. Markets have reacted, but it seems that we know that the FED will continue to talk tough until they get closer to that two percent deal, So is that discounted in the market. Should we not expect some troubles ahead when the FED does talk tough.
I think it's when you have to look at the components of inflation. You know, goods prices are moving lower, non durable goods as well as in dust or production goods, you know, but services still remain in a very sticky uptrend. So I think the real key is that we're looking at, you know, a shifting perhaps of investors' worries from inflation
to potentially one of growth. Because if the FED is truly bent on trying to bring down inflation further and really try to bring that services inflation level down, I think investors will start to shift gears and start to worry about whether or not we're going to be moving lower on a growth perspective, because let's not forget you know, if we look at the manufacturing indicies, we've been in contraction since November of last year, and we look at
the new orders components, we're ten months of shrinking new orders, which is a subcomponent of the PMI indica. So we've got this dichotomy between services and manufacturing, and I think the risk is that the FED actually overshoots, focusing solely on services inflation, and they drive the inflation aren't even the manufacturing component even further south.
So when we see yields come down, some investors might feel good about that because they believe that yields are heading down because inflation is coming down. But it's sending the slightly a wrong signal. Really, it's it's further expectations when the yields drop a lot, that there's trouble ahead on the growth front.
That's what you're saying. Yeah, that's exactly right, because I mean, right now, we haven't had I mean, the reason why the markets haven't corrected to the same degree that they did as people were expecting, you know, akin to what happened in two thousand and two thousand and one or even the global financial crisis, is that we haven't had that double digit you know, earnings to client. What we've had really is an environment where you know, profitability has
been contracted. But if you look at the components, you know, margins have been you know, remained at relatively high levels. You know, sales growth is positive, but it's continued to slow down. Margins have been impacted by higher costs, and act efficiency has been relatively flat. So we've had, you know, only a slight decrease in earnings projections. Obviously, stock markets declined last year on the inflation scare in the rise
and interest rates. The other thing that basically was a missing component this time versus others is that we haven't had a big risk aversion. You know, the events of ft X or a Donnie or other things didn't have the same kind of a polluting effect on people's risk a version that let's say World com Enron or Lehman Brothers or other kind of significant you know disruptions had on investor psyche. We're back to basically where you know, investors are embracing risk in a wholehearted fashion this.
Year, and the scare in March because of the banking troubles exactly was not that significant.
Yeah, exactly, that's right. That's right.
So what about the slight churn that we've seen under the hood in that you have seen a pretty good bid in industrials. You've seen transport rally, there are a number of sectors besides megacap tech that have done well
even when we're still concerned about growth. Do you think that that, I mean, are there some idios crowd of factors for that, reasons for that, or do you think that that's investors telling you that the growth scare, while a scare, it's not going to actually take us deeply into recession.
Yeah.
I think all those things are correct in the sense that you know, clearly what we've had is a return to the secular growth stocks, the fang names as we like to call them, basically this year, as investors have re embraced them as leadership in the market, and simply because of their size in terms of market capitalization, they've had a pronounced impact on what the S and P
for one hundred returns have done. That being said, as you're right, we pointed out you've seen, you know, a lot of strength in some of the cruise stocks, Royal Caribbean, Carnival, the airlines and others, because what we've saw was essentially a you know, great operating leverage and the real key and this is this is what might hold the market back but give opportunity at the idiosyncratic level, is that you know, when you're able to basically, you know, bring
the trifecta of you know, improving fundamentals from bottom up perspective, where you get a return of sales growth, you get that great profit margin expansion. And then because these companies have cut back so much post COVID and during you know, really stimulated by COVID in terms of their own asset base as they were shutting down so much capacity, they're
getting these huge gains in terms of act efficiency. And that's really the operating leverage that's contributed to these stocks doing exceptionally well thus far this year.
Well, how much risk are you willing to take on then? And how would you express it?
Well? Right now, I mean this we've been given I think a gift. You know. One of the components that we use within our American Select equity strategy is to tactically hedge the portfolio with protective put options when we feel that we can in a cost efficient manner, you know, hedge the underlying risk or the systemic risk that's embedded
within the portfolio. So, with the Vicks down to around fourteen, we took the opportunity last week to basically put a full protective hedge on the portfolio to protect us against a significant kind of tail risk, you know, draw down from now until the end of the year, and we could do so in ess since fifty basis points of the portfolio because volatility is so depressed at this point in time. We're heading into a seasonally rising period of volatility.
So you know, potentially as the market shifts from inflation worries to growth concerns like we talked about. Plus you know all the achieve political risks that are evident almost every day, whether it's in Ukraine or China or what have you. You know, this is a great opportunity for investors to you know, inexpensively put some hedges and protect their underlying portfolios.
I want to get to China. But maybe one more question on the US and on you know, inflation versus a growth slowdown.
What's the key to watch?
I mean, will it be jobs? Will you get it from the data or the earnings?
I think it's going to come from a bottom up because historically you're going to see job losses well inside a recession itself. And again I think you know, when you're looking at the environment that we're in today and we talked about in the past, is that the inability to reconcile the top down indicators to the bottom up research. You know, whether it's you know, ism numbers, it's a yield curve, all of which are basically saying that we
should be in a very deeper session right now. You know, none of that is really evident when you're looking at companies from a bottom up perspective because of the distortions that came about from COVID. So I think you're going to have to look at companies and sectors kind of on a one off basis as this rolling recession kind of makes its way through the overall economy.
Now, with China, we have seen a little bit of a pick up up in markets, largely because of late policy makers have changed their tune a little. They seem a little friendlier to the private sector. The stimulus hasn't really done it. Neither the fiscal nor the monetary stimulus has been all that strong. It's been cautious and piecemeal. What are you expecting out of China, say, over the next quarter or two.
Well, I think if the stimulus stays focused on investment and capacity of manufacturing and exports, it's not going to really have much efficacy. You know, my expectation, you're started to see some rumors about this is that if China is able to shift the focus of its stimulus from investment to consumption, you know, part of that could be
loosening you know, urban residency curves that they have. You know, there's a very detailed system with residence permits in China that you know impacts workers as they move through from
the countryside into the cities and so forth. I think the real key is to take you know, big significant actions that are going to be able to move the stimulus away from the export driven model, which because of all the tariffs and other restrictions that are going about, I think aren't going to have that same kind of impact. What they have to do is really drive it towards consumption. And there's several ways you can do that, and residency permits is probably one way to start.
Okay, just in forty seconds or so, your best option in Asia at.
The moment, well, I think you know, right now, if you're looking at Asia, you're starting to see some of the frontier markets do very very well, whether it's Vietnam or other areas. You know, traditionally one of the things that looks very strong when you see dollar weakness is that emerging markets outperform you know, develop markets, and one of the things that we've started to see is a breakout.
Well not a technician, but it's hard to ignore, you know, the breakout that you're seeing in some of the emerging in frontier markets, Vietnam being one of them as a place to go in terms of speculative assets.
This is Bloomberg Daybreak Asia, your morning brief on the stories making news from Hong Kong to Singapore and Wall Street. Look for us on your podcast feed every day, on Apple, Spotify, and anywhere else you get your podcasts. You can also listen live each day on Bloomberg eleven three to zero in New York, Bloomberg ninety nine to one in Washington, Bloomberg one oh six to one in Boston, and Bloomberg nine sixty in San Francisco. Our flagship New York station
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