Our Sentiment is Still Good on EM, Santos Says

I'm really pleased to say that joining us from Canada is Andrew barda Bloomberg's European government reporter, and you just walked me through the issues on the table and why this could be so contentious out the next twenty four hours. Good morning. Look that there's really only one issue on the table that that matters is um obviously the trade war, though though their scheduled to talk about other things have invited a few emerging markets here, they'll talk about terror,

they'll talk about cybercrime. It's really all about about trade. And as you said, you know, the setting the table and it's and it's not looking good. You had McCaw come out and saying, um, you know, we have no problem signing in agreement with only six countries if we need to be, and we have, we have May saying

there would be a measured proportional response. Trump then comes out and in a very personal attack on Trudeau, accuses him of being so indignant um and and thirty seven minutes ago, uh tweeted that um he was looking forward to straightening out unfair trade deals with the seven countries and if that doesn't happen, well, from his perspective, the

US will come out even stronger. So you know, he would sort of expect before meeting like this to have conciliatory comments, to have leaders, you know, lay the groundwork for having a conversation, and we're seeing the opposite takes place.

And I think that that's what's being reflected in the markets now, very aggressive tone from Trump and and leaders who previously had tried, you know, appeasement and being kind of Trump whisperer and trying to see if they could get him on board, they're realizing that that hasn't hasn't worked. So the gloves are coming off and now the other g seven countries are retaliating and responding with their own language.

So as you say it will be the first meeting in many years where we're probably see some fireworks, and we'll be looking closely at the final communicate in the body language leading up to that, the final I imagine

we're going to see fireworks. But as you know better than anyone else, UM in our in our team at Bloomberg, that noise and news are two very different things, um, And over the last twenty four hours and imagine over the next twenty four hours, we have heard a lot of news, a lot of noise, a lot of bluster, and I just wonder, will it be all about mood, music and optics or we actually have some news to

deal with at the other side of the summit. I think that I think the worry is not that we're going to have news at the end of it, but

that we're not going to have news. And what I mean by that is, you know, usually the G seven all the countries by now will have will be like on the draft of the final commun k, They'll be talking about every period, every comma, every word, and and having having this kind of consensus where you come out of the summit and you have an agreement that you communicate to the world, and you say we the G seven united, you know, believe X y Z that that's

not happening. You know, we're we're seeing the opposite. We're seeing you know, and maybe a lot of noise, but we're not seeing them come come together. And and and that's sort of important because what you're gonna have at the end of this at the end of this agreement is either going to be you know, a G six plus one, which which may be about as good as a guest, but it could even be worse than that. It could be that there is zero statement and the Trudeau has to come out and kind of recap and

and say, you know what he thinks happens. And then you have all the different countries come out and put their spin on it. And and from a market's point of view, that that may be the worst the worst, you know, the worst case no agreement. Everybody's pushing their own thing, and we leave the G seven with with nothing to stop this this global trade war from from getting work. Okay, so it's tipped for tad. I get that. The president. I mean, I'm gonna essentially call it transactional bluster.

Does Europe have a bluster? As they come to CHAUVROI, well, you remember in the in the past, in the in the in the past sanctions, Europe was very quick to respond and they were very targeted spots, like they knew exactly you know, who to hit, how to hit, how to hurt the Republicans. And you've got the mid terms coming up, and and you have to assume that all the other get no. But are they gonna bluster? Andrew, I don't sense that there'll be any bluster. They're just

gonna show up. They're gonna act diplomatic and then tip for tad will click in. Right, Well, that's what we've seen so far, and and and you're right, I mean, the blusters there. But but Europe has that it's willing to retaliate. It is willing to meet Trump head on when it comes to the tariffs. And you know we've seen that. And there's nothing that suggested that. John, help me here. I think you're better at this, you and Andrew, Andrew decades of work on this, and you as well.

I mean, Miracle is a physicist from East Germany who grew up I believe under some serious duress, she's got to be looking at this side show this carnival act and going. You know, we're just gonna go up to Quebec. We're gonna make decisions, and then we're gonna go back and put an import tax on Budweiser. The Chuncellor Miracle understands the importance of international diplomacy and integration. I get that, Andrew,

And I'm not trying to demean that. We all understand how important the last several decades have been for global peace. But in terms of the G seven agreement, has it ever been worth the paper it's written on in recent years? And we can follow in the G twenty communicate into that question as well, Andrew, because after the last several years, I see a lot of people agreeing on stuff on

paper and then going back home and doing very different things. Well, look, I had this conversation yesterday with John Curtin from the G seven Research Group, and and I mean, this is all he does. He's been studying this for for decades now, and he says, in the history of the G seven, you've really only had one meeting where the world was worse off because of the G seven. And you know that that possibility is back on the table, which is

something that you have to worry about. I mean, you've always had these statements, but you know that you can argue what to what extent they've were the they've made the world a better place, but there has been some incremental progress and you have gotten people to kind of agree to certain commitments and move in a certain direction. But if you're not putting anybody on that track, then yeah, you have to agree. You know what, what are we going to get out of this? Andrew Barton, thank you

so much, brilliant and I just greatly appreciate it. From Quebec and these important G seven meetings. Should we talk Brazil? Okay, Gabriella Santos, do you want to guess from jam P Morgan Asset Management clubal market strategy is very confused, wondering what on earth is going on in this studio, Gabby, Let's just talk about Brazil. Brazil are intervening in the FX market without much success. At the moment, M e

M is under some significant stress. I would say, relative to how it has been in the last year, why aren't they hiking interest rates? So let's think about why Brazil is under pressure right now? I would say two things. The first is the broad uest dollar strength um really since mid April, and Brazil seen as a bit vulnerable to that given it's very large fiscal deficits. So that's

one thing. Central bank hiking actually exacerbates that problem. Uh. The second reason Brazil's under pressure right now is because the investment thesis is falling apart for this year, growth has been slashed, growth expectations and there's more of a probability of a shall we say, non business friendly candidate win in October. Central bank hiking actually doesn't fix either of those problems either, So they are pushing back against this narrative that raising rates is going to fix any

of the problems, perhaps even exacerbate them. Let's remember that inflation in Brazil is actually very very low at the moment. So just to discuss em more broadly, there are calls for help from emerging markets, from the Central Bank Governor of Indonesia, the Central Bank Governor of the r BI, and India Urgent Batel, essentially asking the FED to do something. But they do something. Is interesting to me because it's not slow down rate hikes, it's slowed down the pace

of balance sheet reduction. Why is balance sheet reduction so important to em right now in a way that maybe some people didn't anticipate. I'm not sure that that I would agree that it is necessarily because for emerging markets in the past, higher rates in the United States in and of themselves have not been a problem. Because rates are rising, balance sheet is coming down because the economy is doing well. That's a good thing for emerging markets.

So honestly, the trouble we're here, we're having right now is not interest rate in and of itself related. It's dollar strength related, and that's much more a function of some risk aversion that we've been seeing over the past few months. So I'm not sure what the FED can do here Necessarily, the data just has to come through in terms of economies outside. It makes you wonder if that's the case, then why are the central bank governors of India, Indonesia and others as well asking for this

help If you're saying it's not as critical. I mean the Urgi Baal, the governor of the RBI, essentially was warning of a dollar liquidity crisis because of banishing production. And I agree, John, you're correct to bring up India. I thought that was a very important comments, you know, given them mix, There's not been enough talk about India and using the word crisis. It just seems it just seems a lot to me. We've, like you said, had a big move over the last month. It's been kind

of calm over the last year. Actually, sentiment around emerging markets from investors on a by side, it's been incredibly good, to be honest with you, from what our sentiment is still good on emergency. So just walk me through why these central bank governors are so worried right now. I'm not particularly sure. I think perhaps it harkens memories right of that tough period for emerging markets from two thousand eleven up until But let's think about the fact that

we're not in that place anymore. Growth is improving, That's what drives capital flows to emerging markets in the medium term. Earnings are improving, vulnerabilities are better, commodity prices are higher, and the list goes on and on. It's simply within the JP Morgan world. Is it the same financial structures of e M as it was crisis to crisis, back to crisis, back to crisis back or truly is this time different where it's a new e M which is

more resilient in liquidity and resilient solvency. Is that the official line, that is our our view from our side, UM, I would say there's a lot of focus on the outliers here when it comes to countries which still have very large current account deficits and thus are very exposed to any sort of ebbs and flows in terms of liquidity. That would be a Turkey, and in Argentina there are some stream outliers in terms of US dollar Dad taking up a large share of debt. That's an Argentina example

as well. But those are outliers. In terms of emerging markets as a whole, it's a much much better, much more resilient picture. Very good, Thank you, a real especial tribute. More now is Stephen Major, Steve Major of HSBC. Steve are rates high or on a relative basis do you look at them? Is still low? Uh? US rates too high in the forwards. I doubt the FED will get

anywhere near where they think they're going to go. Well, if it doesn't happen in the next few months, I'll be very surprised they will choke on the additional great hikes, and I imagine and two more would be enough. UM to two more gets us to two twenty five. That the thing is that the idea that the FED could just close their eyes and keep hiking all the weight of three or three five without there being some massive event,

I think is naive. There's been many, many surprises in the last month, and I think that we are seeing a regime shift in the risky asset markets. Look at all the incidents that keep popping up in e M. It's not a coincidence that the common denominator is the vicious tightening of financial conditions. Now, I can't believe that people don't recognize this because they're looking at outdated financial conditions indices, and really you've got to look at this

in a more holistic way. The FED is increasing rates, they're shrinking the balance sheet, and the U. S. Treasury is rejuvenating cash as an asset class. That is a massive tightening um. The last time we had this kind of tightening of financial conditions associated with low unemplo moment and lucier fiscal policy. The last time this happened, England won the World Cup. That's football. For Tom's benefit and both football, Steve. Steve's in East London guy west Ham fan.

But West Town won the World Cup for England. Actually, so so in nineteen sixties six England won the football World Cup. And it's fifty years fifty two years ago. So in nine six you will remember there was a very strong tightening of credit conditions and what happened afterwards wasn't very nice. And and from the UK perspective, we had the nineteen sixty seventy evaluation of course. Um, but you can read the St Louis Fed nineteen sixty six papers, a paper about nine six written by the St Louis

Fair that talks in strong tightening of financial conditions. So I think it's naive to look at say the I O E R or the FED funds rate and say they haven't Steve. That's what I was going to ask you about actually, because you've mentioned a couple of things. You've talked about regime change one and also this tining of financial conditions. I think for some listeners they'll be looking at financial conditions and thinking things are still easy.

So what are you looking at, Steve? What are the indicated is that you think people should pay attention to well, what could possibly be wrong about the idea that financial conditions are lose. So if you look at this, if you look at the FEDS indicries, and there's a Bloomberg index as well asn't as a global index, bloom Bloomberg, Bloomberg has one. I think it's got ten or eleven components. Again, the Saint Louis fed, by the way, has a seventeen

component financial conditions index. These these are tighter than they were in any time in the last twelve months, I think, but in the context of the last ten years, they're still loose. I suggest that they're picking up the wrong thing. So so in these indicries you've got things like the SMP, the VIX and the f O A S and this kind of stuff. The thing to make to me is that financial conditions for for Turkish corporates who are issuing

in dollars, they are tight. For Chinese real estate companies who are coming to roll some bonds they issued a few years ago, they're also tight. For the Italian sovereign financial conditions are about to get very tight too. It seems to me if you look around the world, you go and ask a Japanese Bank, how it is the borrow dollars in the open market. You know, there's a lot of different institutions in different parts of the world will tell you that the financial conditions are getting very tight.

And of course the FED looks at things globally. Sometimes they have to be whacked on the head and it might be that a strong dollar would do it for them. That the facts are quite simple. In the last five or six years, I think the FED has been distracted from its expected tightening path by China twice, Greece at least once, and even the UK around Brexit. So stuff happens. They get distracted or or they get deflected off the

tightening path, and I think it's sort of happening. Do you know, in in May, I read my colleague David Bloom's piece about May. His team they put together a descriptive piece about what happened last month. And do you know in the month of May, you've got stories around Argentina, India, Brazil, obviously Malaysia, most recently Italy and Turkey that I've forgotten

more than I can remember here. And then there's all the big set piece global things like trade wars and nuclear deals and Iran and North Korea, and there's so much stuff going on. That was one of the most volatile months we've had in modern times. Just because the VIX doesn't show it doesn't mean to say it wasn't volatile. It's a really good point, Steve. So it gets it gets to an important question. You've talked about regime change, in the regime shift, what's the new regime and what

is the market. Look, my my regime change comment isn't just some assertion. It's based on how the term premium has decoupled from the level of yields. Now, I wrote a paper about this that was published at the beginning of the week with the colleagues, and that this is really important during the last fifteen years we've been in a queue regime. It's fifteen years, not ten. Because when Ben Bernanke wrote that paper, deeply should make sure it

doesn't happen here. In two thousand and two, the Green Span fed actually were expected to implement some of Blankie's policies. In two thousand and three. It didn't happen, but the market built into the idea they were going to do it, so by the rumor sell the fact. Ever since then we've had We've got six occurrences of bullish flattening followed by irish deepening. Suddenly it changed because the fad is hiking. It all changed, right, so so this is scary. They're

going to flip the curve over. Steve, always great to catch out with your very major, very thoughtful, always valuable. Thank you very much, Managing Director, Global head of Global Fixed Income Research over an HSBC and joining us out of out of London. Right now we get clarity and the economics of our time is this G seven melling occurs that do that with Stephen Roschudo, Yes, Stephen, wonderfully have you with us? We heard the president there and

any number of themes. How does trade fold into the economic growth of the world economy? Well, I mean, you know, you think it's a zero sum game, but in reality it's not. Um. The reality is there are places which are more efficient at producing products than there are places that aren't efficient in producing products. And the whole concept of free trade is to allow that to develop. And I think the point that is trying to be driven home in here is that it's not about free trade,

it's about fair trade. And there is this concept that tariffs are erected in different places to protect different industries, and this is a nationalist thing that every country does. And I think for many many years, the United States, because it was the largest, most powerful nation in the world UM, and used a lot of our willingness to trade with people as a tarret in order to get them to do political things that we were wishing them

to do UH in supporting us. And now there's a bit of a pushback given the change in the world order that is brought about by the fact that China is so powerful now. And I think it is a recognition of that fundamental change. The president. I think there's

some value there. Stephen s the President. It was some commisary you know, thinking about pardoning Muhammad Ali, but one of them was to bring Russia back in from the G seven to the G eight, which brings up that I m f like debate of what to do with China. Should we should we leg out here to a G E to G nine, a G ten. I would almost come up that you might as well just bring it

down to a much smaller group than that. UM. You know, you should focus in on a really new G three UH, and that could be something as narrow as the United States, Germany, UM, and China, and those three are really the dominant issues here, because the problem with Europe and Europe is not being

able to get itself moving. Is the fact that there is an uncertain degree of unfair trade practice that goes on within Europe UM and Germany does not contribute its fair share back out to the rest of Europe UM and that needs to be addressed. And the same thing is true with China and other areas. So yeah, the reality is those are the three things you've got to focus on. Those are the three countries that have to get together and decide how this is all going to

get done. The rest of it really just falls into place around those three. Off the Bloomberg. I can figure this out, folks. What's list of g seven countries? Because Stephen Shood gives us a clinic, Canada, the host, France, Germany, the United Kingdom, Japan, Mr Abbe with the President yesterday, Italy, and then there's the United States as well. I mean,

it really is a dated organization, Steve, isn't it. Yes, it is, and that's and that's part of the problem, and that's one of the reasons why you have this fractured behavior, and I think you also have to keep them mind. At the same time that this G seven discussion is going on, You've got the UK eat in the EU, You've got potential problems within Europe with regard to Italy and Spain um and this goes directly back

to the to the German situation. And you have a very very aggressive China on the other side of the equation, and that all the infighting going on really distracting from the more important issue, which is China. And that's what I think, you know, the value that comes out of this, I hope will be a refocusing of the decision of the discussions to where they need to take place. Good morning in syrus Sex FM. I'll get it out serious x m H one nineteen across the Great Midwest, Steve.

One of the constant themes of analysis this morning, whether Greg Valier at Horizon or Mike Gallen over in Axios, is Midwestern Republicans really upset with their president about these terroffts. What is the tip for tet agriculture angle with Germany, with France and England. I get it with China, but

is there an agriculture angle across the Atlantic. Well, I don't think there is an agricult agenda off the Atlanta across the Atlantic, but I think there is certainly with regard to cant and I think there certainly is with regard to Mexico that that that could be addressed and how things come up through South America through Mexico. So I mean, I think that's where you get back into the napt To keep in mind he's attacking I'm not trying to support Trump other than end I think the

America first concept is the right concept. Now, how you go about executing it we can all argue with and discussed, but the America first concept is a valid concept. He may not be approaching it properly, but all these specific trade deals that have been done have been done based on an idea that the United States is the largest, most powerful nation in the world, and we have to use our strength to help pull up other places in order to keep the world in a more stable, peaceful

environment that dynamic no longer expects. Well, it's one more question in the wax philosophical here, as he's talking about milk terroriffs on Canada, you know you're protecting your cows. You're protecting the farmers. I get all that. All I can remember Steve was reading about feta cheese in the trade battle between Greece and Bulgaria. Over can the Bulgarians say feta cheese? And this is like a serious EU debate. So bring that over here to the trade that we

have today. I mean, consumers worldwide really don't care anymore, do they. I mean, to the great extent, prices have been stabilized and prices have been held back. Consumers are much more interested in the job aspect, the wage aspect that comes out of this at this particular juncture. And the reality is given the imbalances and trade as simple mathematics, if you reverse that trade deficit, how many jobs are going to create? Now that's that simple, Steve, Thank you

so much. Stephen shot on missoo on duty there, Abby, Joseph Cohen, if Goldman sachs, we do not care what the stock market is going to do, Abby, very quickly here the Washington Capitals finally done your thoughts on Mr Kin lifting that Stanley cup. I was, of course delighted to see Mrkin lift that Stanley cup. As a long time Caps fan, But I have to say this was going to be a Cinderella Stanley Cup final regardless of which team won. I mean, the Vegas team was wonderful.

They had a fabulous season, really record breaking Mark Andre Fleury also was simply outstanding in all these games. But to seekin um lift that Stanley Cup was thrilling. But I'll tell you what was more thrilling, and that was the handshake line at Yes where the two teams greeted each other, not just in a polite manner, but there were warm hugs and sincere congratulations. Make America great again

as a zeitgeist right now, I'm as Cohen. The basic idea here is the Washington capitals are as international as you get. I'll Vetchan from Rushka, t j o'she from Everett, Washington State, Bruce or Pick from UH from San Francisco, and Ocurs Haltby from Saskatchewan. That's the spirit that's missing in our trade debate, isn't it. Absolutely? And to quote

the line from Hamilton's Immigrants, they get the job done. Um. And one of the things that's so great to see about hockey and some of our other professional sports as well, is the international flavor. But let's forget it's not just that industry. There are so many others in the United States where we have benefited immensely from our immigrant population. Joseph Cohen thirty seconds your view of the equity markets now twenty five thousand, Can you own equities at this point?

I think equities UM are at roughly fair value right now. UM. We may have already seen the highs of of the year off the SNP and and the Dow based upon our analysis of earnings and cash flow. What I do worry about is that when you're at fair value UM, there can be mistakes, and there can be mistakes for example in policy government policy. There can also be disappointing report. So I think we need to be very careful. We're now in a period where it's not just the rising tide.

You really have to select the ship properly. Joseph Cohen, thank you so much on the equity markets and Hurt Washington at Capitals. Thanks for listening to the Bloomberg Surveillance podcast. Subscribe and listen to interviews on Apple Podcasts, SoundCloud, or whichever podcast platform you prefer. I'm on Twitter at Tom Keane. Before the podcast. You can always catch us worldwide. I'm Bloomberg Radio s