Contagion From Brazil to EM Is Relatively Limited, Dennis Says

head of a global emerging market strategy at UBS Securities. Jeff, I'm so glad that you could join us, because yesterday we did see, uh, the potential demise of the presidency of Michele Tamair, although he refuses to resign um, but certainly this and Jack's quite a bit more turmoil into the Brazilian economy, which already is struggling. I want to

get your take. Do you think have you've seen any signs that there is some level of contagion that's moving away from Brazil and into other emerging markets ASTs as well. I think what's really interesting is you haven't seen very

much contagion at all. Now. Obviously, when you get an event like Brazil's sudden deterioration of the political situation, you will get some heavy selling in Brazil MSCI Brazil the doll adjusted index was down early fifteen percent yesterday, and you did get some fall out over the rest of EM.

But in general we have the view here that particularly if you look at some of the allegedly vulnerable currencies in them, some of the high interest rate deficit currencies like a Turkey or South Africa, UM, they've all held up. They've both held up relatively well. So I think it's fair to say that you've got a shock effect. Of course, it looks like a one day shock effect at the moment, but the contagion into EM has been has been actually relatively limited. So is this just because low rates are

here forever? People are just looking for that yield and they don't really care government, No government turmoil, no turmoil, doesn't really matter. More yield, that's all you need to know. Well, I mean, I think to a certain extent that it

is that. I mean, our vi you on EM for this year has continued to be UM low, US bond deals flat to week a dollar, sucking money towards the emerging mars, pushing money towards the emerging markets, with some of these high interest rate markets, you know, doing quite well because currencies have been strong, and we're not sure that scenario is particularly damaged by this Brazil story, although of course Brazil was your ultimate number one carry trade story, if you like, with an e M And also, I

think what people are doing is they're saying, look, this is a uniquely Brazilian situation that's developed, which is obviously very uncertain. We've published a note on it, and really the the issue here is how does the political scenario play out in Brazil now? But m a lot of

uncertainty about that. But it's seen, I think by investors has really been a rather unique Brazilian situation and the global market backdrop, notwithstanding, of course, also a dramatic cell off in the US market on Wednesday, it's still seen as it's fairly benign, and I think that's why e

m IS is held up very well. You know, Jeff, we've heard some comments from muhammadal Area and of Aliens and others talking about the increase of leverage in the market and given the sort of low rate environment that

nothing can seemingly shake. I mean, yes, as you point to, there is what a day of volatility and then things are back to normal again, even though we still haven't resolved anything with the Brazilian situation of late uh So, Jeff, I'm wondering from your perspective, have you seen or are you worried about increasing leverage in emerging markets trades? Not really, I mean, I'm certainly not in a position to know how much leverage there is in terms of you know,

people's positioning within the market. Well, we focus on much more is how much leverage there isn't there isn't economies and what that is doing for the economic outlook. And there's no doubt that since the global financial crisis there's been a tremendous increase in leverage in in e M countries.

Obviously everybody always talks about that with respect to China, but other countries as well, such as career and the way we think that plays out as we think it, it is kind of a dampener, if you know, if you like, for growth um in these economies. Rather necessarily being a significant financial market risk, it just makes it hard for these countries to grow given how much debt

has been taken on board. At the same time, our data tells us that over the last few quarters, corporates and e M have begun to shed some of that leverage. So um, I don't think leverage within these economies is a new problem at all. It's a constraint on growth. Where we are in terms of perhaps to be making leverage bets in the market that may be very different, But I'm you know, that's not something that I've got a tremendous amount of data on at this point in time.

So do you think that there's still are opportunities in emerging markets debt and if so where well, I'm I don't do debt, and so I'm not going to common any detail on that. Although certainly why it's benign global environment continues, I think there is going to be You're going to continue to see yields potentially staying well to be low on on em dead as a whole. But I think overall, overall, on the equity side, we need to see if the markets are indeed going to settle down.

We need see how the Brazilian story will play out, and where do you get any further US market weakness. But while yields are low, and while the dollars flats are weaker. Um, I think you'll find that emerging markets

will will stabilize. We've got tremendous inflows coming into e M. UM, we're looking for strong earnings growth this year also across em ALO that's now at some risk as our Latin strategies to argue this morning in Brazil because of these events and so um, and of course everybody is talking about the seasons you know, selling main go away and that. Obviously that sort of thing is always a concern. But frankly, we think the fundamental backdrop to e M is still

relatively good. And I think it's impressive how this Brazilian crisis which suddenly developed in a market that people have generally wanted to be in. I think the way it's had limited effect on the markets generally is quite impressive. Just real quick, Do you think that this complacency over the long run is going to be problem addict Um, I don't think it is at this level. And I'm talking about that Visa v as an e M strategist.

Looking at valuations, I mean, valuations are a little on the high side in the M, but they're nothing like as stretch as they've been let me rephrase that they have not as stretch as they've been sometimes in the past. They're not as stretch as they are in the US. So I continue to believe that while is benign scenario plays out, most of the market risks actually exist in the developed world. Are we going to see further US market weakness, for example? Are we going to see an

upside surprise and inflation that pushes bondial time? You know nothing neither of those, particularly being in our scenario, but those are the concerns and I don't I don't think Mark, given where global markets are, I don't see em as being complacent at all. Jeff Dennis, thank you so much for joining us. Jeff Dennis as head of Global Emerging Market Strategy at UBS Securities. He is based in Boston. I want to bring in someone to sort of help

understand what's really driving this. Mike mclog joins US now in our Bloomberg eleven three our studios. Mike McLoone is a commodity strategist for Bloomberg Intelligence, and Mike, how much is this a story of a supply demand dynamic that's improving for oil? And how much is this the weakening dollar that is giving rise to the price of crude. I guess the answers yes to that, all right, I understood,

it's it's both um. One thing that was when we talked about oil earlier in there's oil needed a flush. It was all bullish at fifty five and fifty three early in the year, and all the positions were very long. We all knew supply was coming on and it's had its flushed. We had that and what's happened. We flushed out a lot of hedge fund positions, so it got down to forty five. Now it's bouncing again. One thing that's really changed for oil is it got rid of

the positions. We are we you know, we kind of took the tide away, so saw what the market had and open and brought out opex resolve to cut. So that seems to be happening, and the dollars weaken this year. The dollar has been stronger four years in a row, so that's been a bit of a pressure factor in all CA money. So I see oil is stabilizing, not bullish, but it looks like we got rid of the flush. I mean, anytime it goes higher, we get more production. From the US. But it's done for now. It's it's

a market. It's stuck, and it's in the middle of the range between forty five and fifty five. Although then you have to wonder if people are just getting rid of their shorts and going long, could the market be in for a swing to the downside later on if there isn't the same kind of support to sort of keep it up, you know, in other words, people who are have short bets that they're going to close out

and sort of prop up or the market. Yeah, that's another yes, all right, I have to look my fare and put it up for the air and the wind. Because which way it goes now I don't know. But one thing that really had our ax to grind early in their as positions were way too long. There's still

a little bit long, but they're mostly flushed. And which way it goes next, I don't know, but it looks like it's very well supported around forty five, very good resistance around fifty five, and we might be in arrange for who knows how long. And one way you can really tell the range of position emotions get really extreme at the at the ends, and we just got that again. So here we are in the middle. What do you do?

You know, the momentum right now is up well. So next week OPEC members are going to meet and talk about prolonging the output cuts is they're widely expected to do. Given the recent bounce up in prices, how will that affect these negotiations? So I think that's what happened. This This bounce in prices is in the last few days, but for the year, crude oil is down or so it got down to forty five. To me, that brought out their resolve and they have made the point clear

we're going to be cutting offsetting US production. It looks like it's happening. It looks like it should continue, and they have bested interest in doing something. They have rush on their side, so it looks like it's gonna work for now. One thing we did recent analysis and if you look all the estimates of production of OPEC crude O help US US liquid fuels, that drop in production has been is the first time it's strap below month moving average since the crisis. So if this is sustained,

it should at least support the market. Now do bullmarket that's another story. You know, a couple of years ago, when we talked about the dramatic decline in crude values, people were using it as a proxy for global growth. People were saying that there isn't as much demand from China, that the US inventories are too full. Now it's a totally different game. Why is it not considered a proxy at all for economic growth or you know, maybe it should. People be reading more into it with respect to the

global expansion. That is the key question. And you have to blame technology. That's what crude oil has going against it, and that's why I like to bring out that's one of the key commodities you can grow crude oil. I used to have a farm, we grew we get a lot of our patroying in this country are gasoline from corn. Now so technologies well no, hell, I had a farm and we we grew corn, and you know it's a lot of it's now used for ethanol. Thirty of the

corn in this country. So basically ten percent of our gasoline nousrom methanel. So that's what crudels going against it, and that's why I always go back to the metals. You can't grow metals, gold, copper, They've been mind since antiquity and so looking ahead and commodities with the weaker dollar, metals usually perform the best. And that's part of the reason we put out a bit today that looks like the pillars of a line for commodities. UM energy is

stopped going down, Crudel stopped going down. Looks like the the dollar has peaked, and the agriculture market should be doing well. With massive US exports corn beans, wheat meat, their exports off the chart, and the really the main way to suppress those exports is higher prices. Mike mclogan,

thank you so much for joining us. Truly fascinating. I'm looking at iron ore contracts which are up almost five percent today, so to your point, uh, they would be the beneficiaries of some of this good news for them, the lower dollar, as well as a generally benign environment. Mike McLoone is an industrials analyst a commodity strategist for Bloomberg Intelligence, and he joins us in our Bloomberg eleven

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Bloomberg's news and data with you. It's pretty amazing. Download our io s app or search for the Bloomberg extension on the Chrome Store to try it out. Learn more at Bloomberg dot com slash lens. Well. We heard from Steven manuch In, the head of the Treasure Department here in the US yesterday. He gave his first Congressional testimony since taking office, and it was a really why arranging

discussion from tax reform h to financial regulatory reform. Nathan Dean was listening closely, and he had some pretty compelling thoughts. Nathan Deed is a government analyst at Bloomberg Intelligence and he comes to us from our Bloomberg studios in Washington, d C. Nathan, thank you so much for joining us. I want to just start with a bit of research that you put out today, throwing some cold water on some of the promises and the hopes that have been

reflected in markets for tax reform and financial regulation. Could you just sort of give us a sense of what your view is here. Yeah, you know, for tax reform, this is something that we've seen in the financial sector for ever since the election. I think everybody's seen what's happened to financial stocks. You know. One of the things that we point to is in late March, when you know, they failed to pass the Obamacare's vote for the first time. You know, bank stocks took about a teen percent hit.

Why because they wanted tax reform and it showed that there wasn't the stability to agree on something, and we just seemed to play out, you know, with the turmoil that's going on in the White House right now and some of the testimony from the Senate from Stephen Manuchin yesterday, you know, the financial sector wants a tax reform and there's just really no clear line to getting it done this year. Well, did did Treasury Secretary Manuchin say anything

yesterday that gave you hope about anything concrete? So you know, one of the things that I think from yesterday's hearing that really surprised us with the amount of focus on housing reform and specifically Fannie and Freddie, you know, Senator crape of the chairman of the Senate Banking Committee, came out and spent good deal of his opening statement talking

about housing reform. Secretary Menuchin came back and said, well, you know, housing reform is something that we're going to get to after dot Frank, so that probably is around the July August time frame, and so there's seems to be some momentum building for actually to try and do something before the capital buffers of the g SS go

to zero, which is on January one. Well, and I'm looking at the shares of Fanny May and they did spike up after the election of President Trump and after Stephen Manuchin made some comments that gave people a sense that it was going to be re vamped reform to possibly give more money back to shareholders, but then it came right back down and really didn't move much. So it's not that necessarily the market doesn't seem to be pricing in because I'm kind a big reform or shift exactly.

And the one thing that we're telling our clients to be careful of our comments from his the h f A director Mel Watt, you know, he said that he may stop the dividend payments to help with that capital situation. You know, they asked the Secretary Treasury about that yesterday and he just said, you know, I'm looking forward to working with the f h f A on that um. But you know, when I say that there's a momentum,

just have to remember it's also it's Congress. You know, big things don't usually happen right now, and so you know, as long as there's a silabuster in the Senate, and this would actually be you know, a silibuster type entity housing reform would would be subject to a filibuster, a lot of things have to happen before it actually gets done,

you know, Nathan. One thing that I'm struck by is that the bulk of financial regulation really doesn't come from say Dodd Frank, but from some of these regulatory agencies. And one thing that Treasury secretariest you have venution with Minutum, was asked about yesterday was the sort of backdoor appointment of someone to lead the Office of the Controller of the Currency without having to get confirmed by Congress um.

And this actually leads to the potential for some of these agencies to work together and change regulations outside of the purview of Congress, can you talk a little bit about what the scope for regulatory changes from the agency level. So this is exactly how dot frank is going to be rolled back. If you come in two twenty and look back and what's happened, this is how it's going

to happen. So you can essentially roll back majority of dot frank via the regulatory process and bypassed Congress what they did at the o c C by putting in a new you know, acting director that's only going to be for a hundred thirty days, you know, but look at them to actually start winding down the compliance and the interpretive guidance and how people should react or some

comply with dot frank. There's a lot of things that they can do to the vocal rule, to you know, mutual fund regulations, to even capital change how things are calculated. And so the regulatory process is the easiest way to roll back dot frank. The problem is it just takes a lot of time. Have we seen any progress whatsoever in any regulatory body toward lighter regulation? Not yet. I mean, I think the SEC and the CFTC are the ones that are ahead of the game. You know, they're they're

now led by Trump appointees. You know, the Fund of Reserve and the fd i C are still led by Obama pointees. In the prudential banking space, they usually have to agree, so that's going to be a little bit later. But on the sec CFTC front, things actually impacting the markets. We've begun to see some technical changes, but you know the whole part, you know, most of the Dot Frank

still remains as is today, and real quick, Nathan. On the tax reform side, are there any deadlines we should be keeping an eye out that would prompt some real kind of soul searching with respect to our tax code? You know, I think I think if you look at what Congress has to do, June and July is probably gonna be spent a lot of time talking about the FBI director. August is recess September, they're going to have

to be doing government shutdown and debt ceiling. So I think October November is really when I think you're going to see some more debate. But again, a lot of it depends on what's going to go on with healthcare and what's going to happen with the President. I love how you say, you know, June and July, people are gonna be looking at the FBI. I thought you're gonna say people are gonna be sending a lot of time

in the beach, you know, contemplating their political careers. Imagine it's been a bit of exhausting of an exhausting time to keep track of both developments as well as potential uh you know, red flags it really ought to be paying attention to that could actually have a change. Uh. And we really appreciate you following all that for us. Nathan Dean is a government analyst of for financial services.

He works at Bloomberg Intelligence. He is coming to us from a Bloomberg newsroom in Washington, d C. Talking about what the implications are leading to as far as financial reform and tax changes. Well, we've heard a lot about President Trump's upcoming odyssey around the world. He's going to be spending eight days across the Mideast and Europe. And Marty Shanker is the senior executive editor of Global Economics

and Government here at Bloomberg News. He comes to us now from Washington, d C. Marty, can you just start by explaining what the purpose of this trip is other than a nice uh, a bunch of photo opportunities in a nice distraction. Well, every president test of his first trip abroad, and this is it, all right? So the purpose really is for Donald Trump to establish his presidential stature in the world stage. Um. So it's a carefully

choreographed exercise in being presidential. And I think a lot of people are anxious to see just how he performs this. This White House is not been a hallmark of organization and car choreography, um, but they have put a tremendous effort in this one. So uh, let's see how it turns out. Well. And when you talk about careful choreography, I think that the big fear here is that President Trump goes off script right. Well, yes, and that it's not just outside the White House. I think that that's

true inside the White House. Um So Uh, some of his more senior and trusted aids will be traveling with him at various points, um, try and making sure he stays on message. What is the messages? You know, these are important relationships that uh, if he wants to fulfill his agenda of making America great again, it's not something

he can do in a vacuum. UH. He is going to need the help and cooperation of various people he's going to see on this trip, so he has to make sure that those relationships are not upset and in fact, strength of Saudi Arabia being a great example of that. And we've heard a lot about, you know, the potential fight against ISIS Islamic state UH is just as well as just terrorism in general. But will there be any trade negotiations or anything beyond just the general spirit of cooperation.

I don't think you're going to see any any trade issues come up with any specificity. UM. We have we Bloomberg has reported that the on the receiving side of Donald Trump, they've had a tough time figuring out who to talk to in preparation for his arrival for the G seven and UM and in in those venues in the in the past couple of months, they've had rather vague communications come out of those UM. But you will see deals UM, you know, UH, contracts, UH investments in

the US. UM. The foreign leaders are also interested in making sure that this goes smoothly, so that part of it has been well coordinated among world leaders. They are expecting the unexpected so they should be prepared. Yes. Indeed, in Saudi Arabia, I believe has an actual clock counting

down the seconds to when President Trump arrives. I want to highlight a comment by Secretary of State Rex Tillerson in a recent Bloomberg story talking about quote, the people in the rest of the world do not have the time to pay attention to what's happening domestically here. Is that true? Well, I don't. I don't think that that's necessarily true. Um, the U s economy is, you know, the largest in the world. Um. What we do here on a policy, in policy and um in practical measures

has a great impact around the world. So obviously I don't think who they are as domestic be focused as Donald Trump would like to take this nation. But you can't forget about Congress too. They h this is a uh and the Republicans have always had a global approach to how the US governs itself. So, UM, I'm not quite sure where that takes us. But uh, I think you will hear a very positive message coming out of

Donald Trump throughout his trip. Well, I mean, I think that this was in reference to some of the controversy that we've seen recently with the firing of James come as head of FBI and then the subsequent memos that we got. I think that there's this feeling that in the U. S. There's a lot of focus on the internationally, at least the White House is trying to project the sense that there is not any sort of really broader consequence.

But is that true. I don't think you can. Basically, you can dismiss what's happening here as of little consequence. And I think that we have a story out this morning that talks about how the swamp is fighting back. Um. Official, the permanent Washington government that has ruled this town views presidents as transients, and UM that the the gears that run government continue regardless of NEOs president. So when those gears get uh somewhat stuck when a special counsel was appointed,

everything slows down in this town. It's already slow, and this will slow things down even more so. UM. I think that that's extraordinarily consequential to how this White House governs. Um, they're going to find it much harder to get things done as a result of this. Yeah, well, I'm just wondering. I mean, when we talk about the staying on message.

What are the opportunities that people are pinpointing for President Trump to have a little bit more leeway and and sort of how he comes across Well, I mean he's actually if you if you've looked in the past of his encounters with world leaders when they've been coming to Washington, has been able to do those pretty well. Um, he is, uh. And and in fact, those world leaders look like they want to make Donald Trump look good. Um, so that is probably something that's going to be replicated on this

overseas trip. There's not going to be any interest in confronting them. And we even hear that the Pope will not be preaching to Donald Trump about policy issues. So um, if if that stays true, I think he's He's actually this trip could could help change the narrative here. Marty Schenker, thank you so much for joining and joining us. Marty Schenker a senior executive editor of Global Economics and Government for Bloomberg News in Washington, d C. Thanks for listening

to the Bloomberg P and L podcast. You can subscribe and listen to interviews at Apple Podcasts, SoundCloud, or whatever podcast platform you prefer. I'm pim Fox. I'm on Twitter at pim Fox. I'm on Twitter at Lisa Abramoids one before the podcast. You can always catch us worldwide on Bloomberg Radio