Bloomberg Surveillance TV: November 4, 2024

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This is the Bloomberg Surveillance Podcast. I'm Jonathan Ferrow, along with Lisa Bromwitz and Amrie Hordern. Join us each day for insight from the best in markets, economics, and geopolitics from our global headquarters in New York City. We are live on Bloomberg Television weekday mornings from six to nine am Eastern. Subscribe to the podcast on Apple, Spotify or anywhere else you listen, and as always on the Bloomberg

In markets, good morning, Thanks for having me. So to us. Within the equity market that I cover, the biggest, the most important call for a Trump win has been.

Of course overweight to the US versus the rest of the world.

And just like all this macro trade that you've been talking about through the morning.

Stronger dollar or higher yields, this trade has also played out substantially. So at its peak it's been seven percent higher. There is a sense of the market taking off a bit of this profits, so it's up six percent. I would argue a lot of Trump win is still in the price and that performance, of course means that positioning is very stretch on the US versus Europe. In fact, it's one of the most stretched on relative basis positionings we've been having since the pandemic.

So there is a very very.

Setup of the investors going into the election day.

And as Paul suggests, anything can happen.

Well, let's talk about Europe. I'd love a European perspective on this. How nervous European based investors are about the potential Trump victory and are they rethinking that domestic European allocations to equities because of it? How is their approach changing.

European investors and global investors have been very, very nervous about allocation into the European equities, but that has already started around June with the political risks of French election earnings for Europe coming off substantially, China worries, right, so we are entering We've entered this pre election period with a lot of bearishness, a lot of underperformance actually underlying EPs recessions for many cyclical sectors in Europe, which leaves

Hasn't shown up in the performance right now.

But should Harris win, that's definitely a very positive trigger.

For the rest of the world and Europe in particular.

But on the other hand, if Trump points a lot of that trade has been already played out in Europe, perhaps of Trump trade, continental Europe looks less attractive. But within the the European equities the UK, which tends to be more defensive and has a lot of energy weight in it, so puts you one hundreds. I'm talking about this is the one that looks more interesting to go after.

If Trump was to win and it.

Hadn't played out here, there is a lot to unpack there, and I want to just go to what you expect in the immediate aftermath of US getting some sort of result from the election, because a lot of people are going to be up all night at their desks trying to figure out how much volatility there is and how they should play it. Are you saying that if it looks like Harris is winning, you could see a massive migration away from US equities into European equities.

Is that your base case, the.

Basic case, Yes, the rest of the rest of the world would outperform the US equities should Harris win. And in terms of the volatiinity, of course, as the Trump trades have moved so fast, so quickly.

Investors have been.

Anticipating higher volatility that has been already playing out, especially last week.

It is volative. It is on truck of historically.

Historical trends in pre election, so it is playing out.

But I really think investors are in.

A siteguate mode to really we are so close to the results that they'll take option once we have the results.

Yeah, well be out of There is a sort of flying the ointment.

And this is something a lot of people have pointed out, which is typically momentum tends to continue after an election, regardless of who wins. And then there's also the sense that if you look at fiscal stimulus, if you look at deficits, the trend is the same across the world, regardless of whether it's the US or whether it's Europe, with the exception of Germany, which dances to its own music. I mean, how much are we talking about a world that is looking to stimulate cut rates and do the

Absolutely, And that is a very fair point that you are making.

So election is an important event, but it is about everything else as well that will push equities higher or lower in the months to come, and one thing is certain that yields will stay higher. Rates despite the cuts that we have on the forecast, will still be high for longer.

And if this trend of the economic economic surprises around the world continuous, positive surprises continuous, this would be an interesting setup for this improving balance of risks where the rest of the world equities versus the US should be better positioned.

So wonderful to hear from you appreciate the perspective on the other side of the Atlantic. The automantic city begin this hour, but the equity raally stolen, coming into a defining way for financial markets worldwide, where some trade is beginning to unwind Trump trade as the latest New York Times CNPO shows Vice President Kamala Harris ahead in five of seven key swing states, and Walpole giving Harris the edge in Iowa, a state from one with ease in

They're not strong at.

All, because I mean, like at the end of the day, the business cycle and earnings and also interest rates will determine kind of worre stocks trade over the next year or two. And in twenty sixteen, as you recall, we went into that election with a lot of slack in the economy, right, things were slow, We had a manufacturing recession around the world. In fifteen sixteen, the FED was you know, rates were pretty low. Generally there was the economy.

Today we don't have that.

Here's what does it make sense to me then about the Trump Trade. If you get bond yields that climb, how can risk assets keep rallying.

Well, I think it depends on why they're rallying. Okay, So I do think that equity markets are still nervous about growth concerns. I mean, the labor market's all over the place. I mean, you can people can make excuses for why it's better or worse month a month, but the general trend in labor is down. We're in a late cycle economy. So the equity market is worried about growth slowing, and you know that's why the Fed's cutting

That, then it could be okay for equities.

If bond market yields gow up because term premium is widening because of fiscal sustainability issues, then it's a problem.

Well.

I guess the reason why I ask this is because the Trump trade is the new jerk reaction supposedly is bond yields go up and equities, particularly in the more cyclical sectors. I'm thinking of financials. Based on the idea that you're not necessarily getting some sort of economic impulse. It's immediately overlaid onto this scenario. Why should risk acids continue to rally if yields continue to surge simply on this idea that the deficits increasing and that bond vigilantes suddenly could be back.

Well, I mean, first of all, the financials is a little bit different, because that's a drag sort of call, and I do think that one's fairly visible. I think if you have a Trump presidency and maybe even a red sweep, you could get more lenient regulatory environment, maybe m and A picks up. That's kind of the financials trade. But that's unique, and we don't think the financials have

So I think.

There's scope for further follow through in certain quote unquote Trump trades. At the same time, there's probably, you know, the other side, which is I think a lot of the negative.

Trades have played out for the Trump trades.

I mean, bonds have sold off probably too much, and the renewables and things like consumer goods companies will be hurt by tariffs have really been hammered. So if Harris wins, you could see a really a pretty big rebound in some markets, you know. So there's a lot of permutations here. This is is not as clear cut. I think you said exactly right. It's all about the setup. Okay, Stocks and asset prices move based on positioning as much as they do about the actual news. I'm looking for a

Clear when it comes to a clearing event.

Would you agree with Kit Jukes that it's either likely going to be a Republican sweep or Harris with Gridlock aka Republican Senate.

Yeah, I think that's probably.

I mean, that's what the prediction markets Stayman, Who am I to argue with that? And but there are but it's not like it's a slam dunk Okay, I think the mark I think, but I do not agree with the view that a Republican sweep is the best outcome for equities. I think it's probably Trump with a divided Congress.

A publicans means a fifteen percent corporate tax rate, potentially.

Potentially potentially, I mean, let's see if they can actually get that through. I mean, I mean the bomb vigilanis may come for them if they try to cut taxes in that sort of form or fashion. And they're not even talking about they're talking about at the margin, trying to reduce some taxes, maybe extending some certain things.

I think the bomb margins.

The whole election has been a tax cut election.

Yeah, but I mean I don't think that's price. Just like in twenty sixteen. Remember in twenty sixteen, nobody priced that bond cut until December of seventeen when the Senate actually passed it. I mean, the whole year is like, there's never gonna happen. It's never gonna happen. I think the markets are they always wait for the actual evidence to actually trade those types of events, particularly when it comes to Congress.

You said the most beneficial Trump with divanded government. Yeah, can you explain that just a little bit more.

Well, I mean, the market's like uncertain, they don't want one party in power. I do think that a Trump we said this all along, Trump presidency is probably more pro growth. Okay, maybe that's good for bonds. Harris would be probably a little less growth, but probably better for bonds. And that's been our general view even prior to the last couple of weeks of things have kind of traded through. Now at the margin is going to be dramatically better.

So at Giantenny VIANTNY Research was on the program early this morning and essentially said to us Choppy wrote to nowhere flat market into year end. You share that.

View, well, chopping meaning here could still be some big swings. I mean, maybe we end up flat from here to there, but there's going to be some big trading opportunities between here and there. I think we could see six thousand potentially, you know, in some sort of a clearing event that isn't you know, there's.

Not a lot of consternation. People feel good about things.

But then I think it's really hard for us to get past six six thousand, sixty one hundred in any scenario because then you're, I mean, you're so stretched on value, and I don't see growth accelerating in a kind of way which would justify even higher multiples for twenty twenty five.

Can you explain what this clearing event for a month looks like?

No? I can't.

Okay, all right, but the sense of what that could mean, I mean, is it basically just whip sawing every single day or is it basically that you see one trade in particular that you could see really getting blown up during that period of time.

Well, I could see many trades getting blown up, not just because of the election, but because once again, we're very stressed we're into the FOMO season, right people need to perform the next two months.

There's a lot of things going on here.

And so what could I could see a blowoff move of some kind post election, a clearing event, but then reality sets in that we're gonna have to have some kind of fiscal consolidation next year no matter who wins, and my view, I think that has to happen, and that you know, that's going to create uncertainty akein and then positioning gets kind of whipped around. The other thing that's going on is a mag seven which reported last week was a very was a mixed bag.

What I was, we've been more procifical.

What I was worried about last week was that they would come in with such great results they would suck all the oxygen.

Out of the markets. Again. So that didn't happen.

But if we were to get a new theme, for example, let's see a new theme pops up, I can guarantee you this some money is going to flock to that theme very quickly, because that's that's what that's what we need right now. We need something to get excited about, and we're kind of lacking in that.

We're kind of lacking that. But some people will happen.

In other words, the market will find something, a new shiny toy, and we'll move to that shiny toy.

Right now, the FED is not the shiny toy. We have barely mentioned the Fed's meeting on Thursday. How much does that matter to this entire equation?

Isn't it Wednesday? Moved it back?

Yeah?

I know it's yeah, but I mean, but Wednesday. I mean, they're meeting their meeting on Wednesday.

They're meeting on Wednesday, but we're still meeting.

They're gonna know what happened or think anyways, Yes, what do I think?

I mean, they don't have any they don't have any crystal ball. They don't.

I don't think the election is going to change their decision making. So right now it's twenty five basis points.

Did they change years?

We look?

I mean, at the end of the day, the Fed's on someone on an autopilot. Assuming we don't the economy does take a really bad turn and they got to cut bit more rapidly. I think that the trick for the equity market is going to be what's their tone? The dubbish tone or hawkish tone is it a hawkish cut or is it a dubbish cut? And that, but that's one or two percent, that's not a ten percent move on the Fed. The Fed is kind of over here now they're doing their thing. They made their decision. That

Looking forward to having that conversation with you, Mike. It's going to say thank you, Mike Wilson of Molting Standard Cetermatic. If newthe joins us now so more to talk about the election and what it means a financial market cera. What are you doing going against tomorrow? And I know it's super short term, it's super tactical, but given why this market has been how are you thinking about the price sanction bey on Tuesday into Wednesday and through next week.

It's good to.

See you, Jonathan, Well, the stakes are high this week for three reasons, and that's the FED earnings and the elections. So let's start with the two perhaps more certain ones for the market. For the Fed, we expect twenty five basis points, even with that twelve thousand payrolls that we saw on Friday. Earnings have been strong. There's optimism there. Estimates did come down going into earning seasons, but we are growing at about four to five percent year over

What kind of market volatility could we see if that happens this time around.

But I think first of all, the markets have been starting to pre price in Trump winning, so we're seeing today a bit of that unwinding because of that poll that came out of Iowa.

So markets have started to prices in.

This is unlike twenty sixteen where markets were surprised by his win. So we're seeing that start to unwind a little bit. And then I think the issue of who will win is going to cause the markets to just go into more of a defensive mode.

We're also in a different period. Today.

SMP five hundred valuations are at the third highest level since the year nineteen ninety nine. So nineteen ninety nine we had a SMP five hundred valuation higher than today, and in twenty twenty one we did, and we know how both of those periods ended. So this is not a cheap market that's going into quite a bit of uncertainty over the next few.

Days and weeks.

You mentioned the DESMOI Iowa poll. What do you make of that and it's impact on financial markets. There's been no data, just this one poll coming out of a state that many view as solid red.

Well, markets keep trying to trade off of the polls, and as you've seen, they've been very tight, and there's a lot of uncertainty around poles, which markets have learned the hard way in recent presidential cycles. So I think it's just very challenging at this point. I think what we can assume is the race will be tight. There may be disagreement over who wins the race. There could be a delay in figuring that out. That's going to

We heard a bit about that from the prior guests he was on. So markets will eventually move back to fundamentals.

So that's why you know, I would say, even though we're cautious going into the next few days and weeks, over the long term, we will be focusing more on earning's growth and really what's going to drive this economy going forward, which will be employment, the consumer and inflation issues.

That's the earning side, that's the equity side. You say, back to fundamentals, and it raises this question the new normal. Is it with bonds as a ballast or is it with bonds as a risk asset. And that's a real question because so far in this period of uncertainty, bonds have actually been the center of the volatility and expected volatility going forward. Is that the new normal we can expect after the election, all.

We've seen rates back up in credit, and that's because people are looking at FED rate cuts and assuming they're going to be less than what we'd hope for.

The economy remains strong, and that's caused fixed income.

To struggle a little bit.

But we think this is a period where areas of fixed income where fundamentals are strong, like municipal bonds, where state rainy day funds are very strong and their saving rates are high, this is where you can start to lock in yields. There is a lot of cash sitting on the sidelines, and we expect rates to go down for cash flowing for so your return.

Is going to deteriorate.

You can take incrementally a little bit more risk and start legging into bonds and locking in some yields at this point.

In the areas that are strong, such as.

Municipal bonds, you said that stock seem expensive at a point of such uncertainty. Don't bond seem pretty expensive too. I'm talking on the credit side, some other risk. Your side, well, I think it's challenging.

We're not looking to take more duration at this point because of what's going on with the economy and also our forecast for we think that the tenure got a little bit too optimistic on the downside, and now I think it's a little bit over four percent is a little bit too negative in that sense in terms of where and go. We see that trading in a range, so we're not taking on more duration. We're looking for

Point, Sarah, I always appreciate you catching up with you. Just one final word on single names. You usually offer some stocks. What are the ones you like right now? Given everything you've just.

Said, I'll be watching closely today.

You know, we're not huge, I'm not usually bullish on it, but looking at Mary Up.

Today's just to get a glimpse into the consumer.

And spending on travel, watching for corporate travel and how much room growth they can grow next year.

I think that they're going.

To report before the open and they're going to give us a good view into what's going on with the consumer and travel.

Sarah, I appreciate it. It's good to see you as always, Sarah moutcare of New Vein. Thank you. This is the Bloomberg Surveillance podcast, bringing you the best in markets, economics, angiopolitics. You can watch the show live on Bloomberg TV weekday mornings from six am to nine am Eastern. Subscribe to the podcast on Apple, Spotify, or anywhere else you listen, and as always, on the Bloomberg Terminal and the Bloomberg Business Out