Surveillance: China's PMIs Showing Resilience, Haque Says

Bloomberg dot Com, and of course on the Bloomberg. We were just talking with the Edward Strangling about the optimism UH that's being unleashed as a result of the trade Pact that we still have yet to learn very much about, which brings us really to the commodities market, because arguably that's where you're seeing the biggest UH signs of optimism heading into next year, where you're seeing the highest level certainly in crude and copper, depending on what you look

at in more than a year. And luckily for us, we have someone who's going to join us who actually understands the commodities angle and compare it perfectly with the macro angle, and that's Kona Hack. She is D and F Man, head of research focused on macro as well as commodities. Thank you so much for joining us, really appreciate it. I'm wondering whether you think that the optimism is well placed that we're seeing, certainly in commodity markets

right now. UM, I think it's justified because what we've seen in the last eighteen months is every time there's been some kind of talk or resemblance of a talk about a trade deal you've had, you've seen markets pick up. But we need to apply caution because the minute it seemed to be fizzling out, or these negotiations disappear, or it actually ends up being um non emvoid, then the

markets will tumble. So I think, yes, if this were to go ahead, and this phase one trade deal seems to be the most concrete thing we've had in a while. At least we've have verted those December fifteen tariff hikes. Um, I think that's already something to which we can be optimistic about. But there's still so much to be signed upon implemented that could all take time. And I do worry that the markets thrown a little bit ahead of themselves in crude, metals and even aggs. It's Asian code.

I wanted to go to crude right away because it just seems to me that one of the you know, the the commodities that really whips all around in relation to trade talk is crude and I'm looking at w T I at sixty two, you know, and Brent, they've had a rally here kind of off of their bottoms. What is your thought is it? Is it really the demand side of the equation you think is really driving crude prices globally as more more so than supply, say,

I feel at the moment it's very much demand. I mean the global GDP growth we all know is directly impacted by trade um and trade wars and trade tensions if you like. So anything that can help alleviate that tension, at least on the surface, provides some optimism on global GDP growth, and then that directly impacts energy demand, which

in turn pushes up crude oil. So yes, this is a demand side lead rally, and it's also sentiment really, so if the world's economy recovers on the back of a trade deal, I think that would directly benefit UM crude. On the other hand, you've also got the potential of UM the US buying more Chinese good than vice versa. You know, that could mean Chinese buying more US crude

as well. You know, we're we're one of the big um bearish fundamental issues of the last few years in crude oil markets globally has been the huge increase in US shale oil. If they find a new market in China because of a trade deal, that's that's really important, and you know it cannot be discounted. But you know, to maintain a rally like this, you really need open to maintain its cutback and discipline. You need non opegs, you know, including the US, to be also be a

little bit more disciplined. Just to put some numbers to this, the Bloomer commodity spot in x is hit the highest level since November, is up about this year, which is the best annual return since six A lot of the outlook here does hinge on China's economy, and I have

to wonder whether people are conflicting a trade deal. However, peripheral with the Chinese economy that is showing signs of weakness in certain spots, and thinking of the housing market as well as housing related industrial companies, how concerned are you about a bigger than expected slow down in those areas kind of overshadowing some the optimistic relief that we're getting from trade agreements. Yeah, and I mean, I do, I mean so much. I think I am kind of

cautiously optimistic. I feel that the Chinese economy has suffered a great deal on the trade tensions U. On the other hand, they have done what they can in terms of kind of stimulating the economy wherever they could. I feel that more of that would have to be maintained into um. Yes, you mentioned how the economy that's showing

signs of bubble has been for a while. The Chinese debt burton is very huge, but lately, at least in November December, the p m I manufacturing in the because have actually on some signs of resilience, and that's crucial for industrial commodities, not just energy but also for metals. So I think that's a positive sign. It would get a big boost if the trade deal were actually implemented, but I think it's fair to say that the Chinese government would have to continue to apply some stimulus to

keep that growth momentum ticking. ConA, Heck, thanks so much for joining us. We really appreciate your thoughts as if we think about the commodity space. Uh. In addition to twenty what we've seen in the stock markets, in the bond markets, routing in nineteen Cone hack E d and f Man, head of Research, joining us on the phone

from London. Let's set the stage a little bit for financial markets for after the extraordinary rise we've had in the markets in nineteen We welcome our next guest, Mike Gallagher. He's Managing director of Macro and Strategy at Continuum Economics. He joins us from London. Uh, Mike, thanks so much

for joining us. Let's set the stage. Just give us your sense of how you think, let's say, the UK and European markets from an economic perspective are shaping up for and given that Brexit appears to be moving forward certainly Paul Um you know, I think, first of all, actually removing some of the uncertainty so surrounding Brexit um does actually help both Europe as well as the UK. It has been sort of a factor that influenced some of the the exports coming from Europe into the UK

and has had a bit of an impact. So that will certainly help, but I think equally important in helping to revive the Eurozone and the UK economy with two of the things. One the decline in bond yields which have occurred since the middle of the year, which will filter through UM. And then also the US China trade deal because Europe's a very important exports or into China and the prospect of a Phase one deal will actually I think calm some nerves UM. So it's certainly better prospects.

But you shouldn't get carried away. Shouldn't get carried away. Let's talk about the consensus, and then let's talk about your take. Consensus that the economy is going to gain steam globally next year. There could potentially be fiscal stimulus, but yields are still not going to climb that much. Risk assets will have another good year, I'll be not as good as twenty nineteen. Uh and everything just chugs along, with the first half being better and more stable than

the second half of the year. What's wrong with that consensus call right now? I think one of the things that's wrong with that consensus call is that people are relatively upbeat on the US, whereas we still haven't seen the full lagged effects of the flowing and manufacturing and business investment feed through into the US jobs growth and U S consumption. We're not talking a harder landing in the US, but you know, we're talking one and half

a cent growth consensus of two percent. So I think there's gonna be a bit of disappointment as we we carry on. In terms of the US. The second thing is China. Um. China is not going to get a major lift from the trade truths, Um, there's other things going on in China. China's sluggishness, by their own standards is partly due to their clean up for the shadow banking system, which will continue in twenty and consequently, we

think that growth can slip below six percent UM. So while the Eurozone is a little bit brighter, UM, it's not making up for what we think is slower growth in the US and the Eurozone. Admittedly, things look better elsewhere, but in terms of world growth it could be pretty much the same in nineteen. It's interesting. I like you. I'm looking at your research right here, Mike, and I like how the nice graphics make it nice and easy for me to understand. So I got a couple of questions.

You're like, I like the pretty picture, like the pretty and the colors and everything like that. The asset allocation really interesting for equities. Well, but did you expect to come on radio today and have uh and have I say to you, we like the pretty pictures. Thank you. You don't have to answer worth more than a thousand words. All right, So let's take a look at the equities. Your global asset allocations seem to be favoring emerging markets a little bit more than maybe, let's say the US

and Japan. So willing to go out on the risk curve a little bit, give us your thoughts on global equities. Yeah, I think there's three sort of reasons for for that. All view on terms of US equities is pretty flat for next year. UM. What happened in two thousand nineteen was there was very little learnings growth. There was a lot of multiple expansion in the US market. And now a number of evaluation metrics are pretty rich in the

US market. So we think we'll probably tread water, particularly given the degree of un certainty surrounding the outcome of the US presidential election. UM, and we'll see rotation elsewhere to to markets that have been left a little bit behind, but now don't have a U. S. China trade war in UM, and a lot of that's got to push

towards emerging markets, we think. I think, secondly, UM, you do have a little bit of rotation lower in the dollar into which is partly because the dollars overvalued and has been sort of supported by some of normal flows in namely the repatriation of funds by US corporates UM, and as we get into twenty that will tend to drift lower UM. An e M risk generally performs better when the dollars trading lower UM, and then there's still some valuation benefit in terms of the M assets UM.

There they look cheap relative to d M assets developed market assets UM, whether it's fixed income or alternatively equities. But haven't people been saying this for the past ten years. So the trigger this time around is that we actually get UM the U S. China trade war shifting to a trade truth in because the phase one trade deal is not going to be followed by new outbreak, Trump will consolidated gains into the election UM, and so we're likely to see a breakout of any problems on the

China trade front UM. And then also that the dollar gravitating blower UM. So I think that that that's enough to actually trigger and unlock this valuation story. So, Mike, I'm also looking at your fixed income allocation appear to be underweighting Eurozone in the UK, so suggesting that greater clarification on Brexit is not enough to maybe drive performance

in Western Europe and UK. Well, I think in terms of Eurozone bond yields generally, they've got had such a good run with the ECB easing and the ECB constitutas ng um, it's now brought yields down to a level that are extremely low on a five to ten year basis. Um. You know, you're looking at negative returns on a five year basis in a nominal and real terms for the Eurozone bonds. And if you've got that kind of backdrop, people are going to start to look at that expensiveness

because there's no storm clouds hanging over the horizon. We've we've fixed Brexit, We've fixed the face one thing. We're gonna come back to you next year and say we fixed we fixed Brexit. Carry on. Yeah, yeah, I know, but no, for at leastfully for the first half of the year, there's no immediate crisis point that that exists. So um, and that's going to lead people to rotate away and out of your zone fixed income and out

of UK fixed income. It's It's been really surprising me to see this bifurcation in fixed income markets, with some people saying that they expect a bond rally, certainly in the US next year as a consumer fails to deliver some of the on the expectations that people have for them. Uh. Then you have other people saying that coordinated fiscal stimulus will lead to significantly higher yields in the next five to ten years in developed markets. Which do you think

is the more accurate take on global rates markets? I think in terms of the twenty outlook, it's the form and namely that we'll see a gentle rotation lower and it's not only what I've sort of said in terms of the I'm more referring to the US government bond market lower yields, higher press lower yields. Yeah, so we're seeing the ten year yield in the US at one fifty five by the end of twenty and that's on

the soft consumer story. But also additionally, um, you know, I think if you if you look at the fiscal picture, you're not going to see any fiscal policy change in

the US or Europe. You will see some further fiscal easing in China, you are seeing a modest amount of fiscal easing in the UK after the action, but it doesn't really add up to the kind of fiscal policy expansion you saw in two thousand and nine, two tho and ten from the g twenty UM so stories about major fiscal expansion I think are a bit premature, really, and I think the more likely sort of situation is either little or very modest and fiscal expansion UM and

that's not going to really destabilize coming upon markets. The exception to all of this is on deals where we're looking for them to actually go to zero UM in the tenure areas by the end of a fair is a fair sell off. And what that reflects is that you know, we're at the moment, we're at minus not point one nine tenure yields in Germany today UM, and that really reflects that really we need to get back towards positive territory and to avoid this or of evaluation.

Mike Gallagher, thank you so much for being with us. Mike Gallagher, Managing director of MAC and Strategy at Continuum Economics. Well, I do think that when we talk about the FED, there is an interesting divergence going on right now I'm fixing com markets. Our Jersey, who is the head of

US industry strategy for Bloomberg Intelligence joining us. Now. It seems like there is a bifurcated market, with some people saying we're going to see a significant rally Priamisra among them a TV securities in rates at other people saying we're going to see a significant sell off as fiscal stimulus takes hold. Which camp are you in? So I do think that yields you're probably going to sell off a little bit, although you know, not a major cell off,

not a major trend here. So from this level, we have to twenty as our base case scenario for the end of next year, So we're talking about a twenty five basis point sell off, which probably means that at some level, um you can wind up with maybe a you know, a little bit of an overshoot, so you could see maybe two and a half percent, but ultimately just you know, more of a range bound market in a slightly better environment for the economy than you had

in uh in the slowdown during alright, so a range bound in the tenure One thing I want to get your thoughts on. I R I'm not sure if there's been any real developments here, it's at that short end of the market, the repo market. UM. One of the things we've had, that uncertainty that came into the market. I guess back in September, where are we or where is the FED in terms of thinking about a long term solution if one is even needed to kind of

stabilize that short end of the market. Well so, so, firstly, I think that the interventions that they've done, they've done over two hundred billion dollars of intervention so far, and they're likely to get up towards three hundred, maybe not up to the kind of fear levels that we thought where they'd have to interview even more than that, primarily because dealers haven't taken up all of the all of

the operations that that they've done so far. In fact, the Morning's operation was only there was only eight billion dollars of been submitted for their UM for their two week operation when there was thirty five billion dollars available. So you know, there's a lot of liquidity swishing around

in the market right now. UM. I do think that the FED wants to have some type of standing facility and operation as as opposed to doing the traditional open market operations they've been doing for the last few months and quite frankly that they used to do every day prior to the financial crisis. Um. You know, I don't know how they're going to do that though, because there's a stigma issue where if you have a standing facility and someone uses it, then people say, oh, well you

lack liquidity. Maybe I don't want to trade with you because you lack liquidity. Goes back to the financial crisis time period. So I think if they can figure out that, um,

that stigma issue, that they'll they'll do that. That could be the interesting thing in the minutes actually that Leasta mentioned, So when the Fed minutes come out, one of the things that we'll be looking for is not so much you know, what they're thinking about monetary policy, because I think it's pretty clear they're going to be on hold for a bulk of the year unless unless there's a very significant change one way or the other the economy.

But it's how are they going to deal with the funding stresses and the issues in the treasury and UH and mortgage market funding. UM, that's going to be kind of the focus. I think of most rates people. When we get these minutes and we talk about mortgage bonds, it's actually been one of the most understood under told stories of the sort of rotation allowing mbs to roll

off and then reinvesting the proceeds into treasuries. How much do you think that's going to be a support for treasury valuations and a support for yields going too high? The fact that the Treasury that that the devasures serve is such a significant net buyer of treasuries with that runoff from mortgage debt, Yeah, there's still going to be a significant amount of net supply because deficits are still large, so so visa v you know issue, I don't think

it's going to affect treasury valuations that much. I think, uh, it affects mortgage valuations much more because the because the Fed was buying a significant portion of net supply of mortgage backed securities um through through the TB a market kind of what mortgage forwards basically uh, that that they purchased. So so the fact that they're not buying nearly as much of that now than they were before, I think

it's really affected those valuations a lot. And in fact, you've seen a significant widening of the spread we call it the mortgage basis between mortgage backed securities and treasury yields. So um, so, I think it's having much more of an impact there on on mortgage rates and and UH than it is on treasuries. And I think that that

will be the case going forward. Um, you know, particularly since UH since net net we're we're gonna have you know, slightly larger deficits this coming year than we did last year, but it's not as significant as it was, say, you know, back in seventeen when we had a massive UH increase in eighteen in UH in the deficit. Jersey, thank you so much for being with us our Jersey U s

Interes trade head strategist for Bloomberg Intelligence. As we head into one big question is Paul Sweeney is very familiar with, is what is going to be the fate of the streaming services that continue to rival one another. Disney Plus coming out, Hulu, we have of course Amazon Prime and Netflix, which has rallied four thousand percent over the past ten years. As people absolutely pile in and just compare that, Lisa, that that four thousand percent over the last ten years

the SMP i'd respectable two fifty Disney four. Just to put in context the four thousand percent total return over the last ten years for Netflix, there was a time when Netflix the market cap exceeded that of Disney, even though it had been around that much less guitar around nath and joining us now of Bloomberg Intelligence, who covers all things in this space. What's your sense heading into of the weeding out process that we expect to see

in the streaming service? Do you expect some real pressure to come on Netflix? Is the other media giants try to get in the game. Yeah, good morning, Falling Lisa. Yeah, definitely. This has been the Netflix decade. As you pointed out, you know one company that has been kind of singlehandedly responsible for changing the way that we watch TV. And obviously it has also been the catalyst for these streaming wars that have overloaded dozens of platforms now with live

and on demand video. But I think, um, Netflix, as you point out, Lisa, is going to be a little bit of a victim of its own success because we are seeing so this explosion of so many new streaming services. And while I don't think that they are necessarily going to cause the collapse of Netflix. I definitely think that competition is heating up tremendous sleep. Uh, there is only a certain number, there's only a limited number of UM services that I think the market can sustain over the

long term. So we are going to see a shakeout. But if there are a couple of services that emerge as true winners, Netflix will definitely be one of them, and along with that Disney plus two. So KEITHA. One thing we've kind of learned from looking at the financial statements of Netflix is this streaming business ain't cheap. It's really expensive from a programmed perspective. And you know, Netflix isn't even you know, nowhere close to free cashual positive.

What's your sense of, you know, kind of the overall costs for a lot of these new players coming into the market. Yes, absolutely, it's a very very costly endeavor. As you point out, Paul, they are burning free cash. They're spending about fifteen billion dollars in terms of content costs, cash content costs this year, losing over three and a half billion in free cash, and and all of these new services that are coming to market are uh, you know,

spending on good least sums of money. Um, you know, Disney plus itself pointing out that they're not going to be that they're not going to be able to break even for at least another three to four years, even though they have a lot of the I P they own a lot of the content, So this is really an expensive proposition. And I think the key for Netflix and Netflix management is they have promised that their free cash flow burn is going to significantly reduce, but they

haven't really given any guidance. And I think that is one area that investors are going to be truly a little bit concerned about. Yether. Should I quit my job and become a screenwriter? I mean, seriously, therese are such a bubble in content right now. Is it a bubble or or is this something that's really sustainable. I don't think it is sustainable, And I think this is this is kind of the monster. It's basically, don't quit my day job. Yeah. I think you know, the Netflix has

kind of being partially responsible for this tremendous inflation. Um, we've seen kind of prices per episode costs of certain TV shows rise almost hundred two hundred and fift and just a span of two years, and if you just look at some of the new Disney Plus shows that are coming out, I mean twenty five million dollars per episode. I mean those are unheard of amounts of money. Even even Game of Thrones costed only about you know, fifteen

million per episodes. So really, more and more of these streaming services are are literally throwing money at UM at these new shows, and it's as as you as you said, it's it's really not sustainable. So that suggests kind of the next I guess real call that investors need to get right is how will this thing shake out? Who will be the winners and the losers? Is there a sense of maybe how many streaming services this industry can really support. So there have been a lot of studies

that have been conducted. Right now, it standard about three to four. That's where UM. You know, if you just look at households, even with a traditional cable TV subscription, they do have in addition to that, most of them have about three additional streaming services in the long run. UM. Some of the studies are pointing to UM an average

US family having maybe about four to five subscriptions. That's where you see costs coming in and around sixty seventy dollars per month, and we think that's the maximum that, um, you know, a consumer would be able to afford. Either, Nan, thank you so much for being with us. Either. Wronk and Aten covers all things in this space for Bloomberg Intelligence.

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