Surveillance: Trade Friction Ahead, CIBC's Stretch Says

this Monday morning that the Chinese still want further talks? Certainly, the indications coming out of China over the weekend haven't added to optimism, Jonathan, As you mentioned, I think it's important that the Chinese official media is not using the term deal in any of their reporting on what happened.

That obviously indicates there's some distance still to travel. Um. At the same time, relative to where we were a month ago, UM, I think we're in a slightly better position, and I remain cautiously optimistic that this very very limited mini deal could still get done. Tom, do you think that China wants materially more concessions or do you think that this is just a matter of trying to let

people know they're trying the best that they can. So I think they would certainly want those December fifteen tariffs off the table. Um. As you remember, that's the tariffs which would hit the consumer electronics sector. That's your iPads, your iPhones, your laptops, um and UM. Frankly, I think

that's actually a really pretty realistic ask by China. Um. It would be it would be very painful for the US to put those tariffs on just before Christmas, to hit so many iconic products, so the iconic brands, just ahead of the Christmas shopping season. I think probably the US doesn't want to impose those tariffs either, So if that's what China wants, I don't see that as a

significant barrier to making progress on this mini deal. I have to agree with you, Tom, I think it's highly unrealistic to expect the Chinese president to go down to Chile and sign a deal with December terrifis hanging over him a month later. Beyond phase one, it's phase two where I start to worry, and that's where the hard work really starts for me. Over the harder issues. This is the easy stuff to come to an agreement on We've seen it multiple times over the last eighteen months.

Phase two. We're told Tom, those talks are going to begin almost immediately. How difficult is it going to be to come to any agreement? And with that in mind, to what degree is to a large risk that this just blows up all over again. So I completely agree with you, Jonathan, that Phase two where all the difficult

negotiations take place. That's where the U S and China have to talk about market access, intellectual property protection, China's program of industrial subsidies, what to do about U S sanctions on firms like Huawei and the Chinese surveillance firms which the US is accused of being involved in human rights violations. So all kinds of really thorny difficult issues there.

At the same time, I don't think that the US and China actually have to solve those issues to put a bit of a flaw under global confidence and global growth. I think the optimistic case right now is we get the mini deal done more agricultural imports, we hold off on the tariffs coming in October and December, and we agree to have constructive talks on those big difficult questions will we solve those big difficult questions or not? In

a sense, it doesn't really matter. All that matters is that the markets have a sense that tariffs aren't going to go up and the talks are going to continue. Tom Allo, great to catch up with you, as always, Tom Olick there joining uh leading guy can almost coverage here at Bloombeck. Let's bring it Andrew Holland hold, shall we city chief US economist, teacher and just now good morning to Andrew. Good morning, let's talk about the deal that wasn't a deal in the prospect for a deal

ahead of a November signing ceremony you'll view this morning. Yes, I think I have to agree with a lot of what Tom was saying. It's not really surprising to see that China and the US are going to be speaking more about these issues, and that December teriff hike in particular is really the important one. That's where all the direct consumer goods are going to come in. And you would expect that part of even this phase one of the deal would be some agreement or at least some

understanding about what's going to happen in December. So I can't be too surprised James Affy at Aberdeen Standard had this to say, we are in the last knockings of this cycle. Trade is an irritant, not the disease. Would you agree. I think that that's a very insightful comment in the sense that a lot of the slowing that we're seeing in the global economy, I don't think you can tie directly to trade. So it's true that trade is a negative and the uncertainty around trade is a negative,

and that's weighing on the outlook. But if you look at the slowdown in Chinese manufacturing, for instance, that began well before we had the escalation of trade tensions. On the flip side, if there is some sort of trade deal as per what has been discussed, how much will I give a boost to the U. S. Economy. I

think the direct boost is actually limited. We're more looking at this in the context of an outlook that's fairly solid for the U. S economy, even with this trade uncertainty, with then a big downside risk that we get a big pullback and investment from corporates. We haven't really seen that pullback yet, and we would hope that even in the kind of scenario where we kind of plot along and you don't get a final deal on these issues, maybe investment can at least be kind of flat, if

not increasing. If you do get a deal, that's upside risk for investment. But again, since we haven't seen a big pullback that's directly related to trade, you're not going to get a big boost just because you make a deal. And I'm really interesting and you just to get the view of an economist on this trade deal if you want to call it that, and what it would mean

for the economy. It is incredibly nuanced. But when you look at the market, market pricing was pretty decisive when it came to what the Fed shouldn't, shouldn't do or will it won't do at the end of this month. Why do you think this is shaping FED expectations to the degree that it is when you don't have any real convection on what it does mean for the broader economy. I think it's not surprising to see markets reacting with

a lot of sensitivity to these issues. UM. On the other hand, in terms of what the Fed is actually going to do, UM, I think that the FED is taking a longer view here, and even if we have some phase one. If we have some agricultural purchases, what the FED is going to be looking for is have

you resolved some of these fundamental uncertainties. Um. So, in terms of what the market is looking for, the market I think is looking for do we get at least some kind of true, some kind of the ton so that we can kind of take these off of center stage for the time being, and that would be positive for risk assets. Maybe you price a little bit less for the FED. But fundamentally I think the FED is going to be largely unchanged despite these development went through

a couple of weeks away from that FET decision. Then you think no change at the end of this month, we we think they cut. Now at the end of this month, we changed that view um after we saw those negative readings in the I s M surveys. Is really a pretty pretty negative UM reading that we had for I s M manufacturing down at forty seven point eight, and we thought that would be enough to just push the committee to cut in October UM and then probably not cutting further. And so then you have to ask

this this trade issue change that in any way? Does the positive developments around trade change that? And again I think the FED is going to be watching the data here. Data have been a little bit more negative. That's why they'll be cutting in October. And I don't think that the trade developments change that. Andrew holding hollis quite to catch up with you as AY Cities chief US colomist, jointing US here in New York City alongside in this

morning Bloomberg's Lisa Branmit's and Lisa. We've been talking about it through the morning. A lot of happy talk through much of last week. This morning, just a little bit more skepticism around two key stories, not just trade but Brexit too. Again, I am surprised at the incredible optimism and today the pessimism, even though it's clear it's not going to be so easy to get a China deal and it's not going to be so easy to get

a Brexit deal. I think you are seeing some muted responses on both sides at this point, people looking at the talk and saying, honestly, the longer this drags out, the more the effects are going to happen, regardless of what agreements people come to move to. Price Action two equity futures are lower this morning, but not by a whole lot were down by six points on the SMP five down some two sense of one percent in foreign exchangely, so it's really really interesting what's going to happen here.

Very little detail around what this effects packed actually is. Is it just words? Does it actually mean? And I think is there any kind of enforcement mechanism? Does it have any material meaning for foreign exchange markets? A lot of people think that a little bit on the edges, it puts the pressure and keeping a lid on where the U N goes, But there is no enforcement mechanism. From what people are saying, this is similar to what there was back in February. There was a similar type

of agreement. It's more something for the U S treasure to hang its hat on and for China to kind of point to as a win for the US, saying, look, we're throwing you a bone and not trying to compete with our currency. We've got a perfect guest to weigh in on all of that. Jeremy Stretch joins a c i PC Head of Detail Effect Strategy. Jeremy would love your take on that situation. Some kind of currency agreement between the Chinese and the United States. Very little clarity,

any detail around what that currency packed actually is. What does it mean to you Jeremy Good and Jonathan Well. I think in a sense, as ever, it is all about the details, or the lack of thereof. So in a sense, it's an opportunity for both sciences to suggest that they're not going to be sanctioning or tolerating a significant degree of deviation. But I don't think it signals in itself any obvious sort of step change in terms

of the underlying dynamics. And I think we'll we've seen over the course of the last few months is that as we've seen the gradually imposition of tariffs, than accordingly we've been seeing the CNH depreciate and weaken as the Chinese economy is also moderated. So if there is a degree of a degree of agreement going forward, and we don't see an escalation in tensions, then that might provide some stability and ultimately a degree of a reversal in

the CNH. But I think it is very much a case of watching and waiting to see how the political factors play out over the course of the next few days, weeks, and months. Although even without this sort of f x agreement. Isn't there a pressure on China and the PBOC to try to reign in how much and how frankly quick we the u N it is depreciating just in terms

of capital outflows and just investments in the in the country. Well, I think when we've seen previous episodes of weakness in the currency, we have seen a particular concern about the degree of capital flight. But the evidence this time doesn't look quite as pervasive in terms of the degree of capital capital outflows. So I think that does suggest that the authorities can be and will be a little more relaxed.

And in a sense that I say, I think there has been a degree of rationality in terms of the way that Dollar City in H has traded, because of course the dollar has been generally broadly strong across the across the board, and so accordingly, uh Dollar City in H moving up has been uh, you know, a sort of a realistic and rational market market reaction. If we can see some stability on the data front, then I think we will see a sort of topping out in dollar ce in H and we won't see any particular

concern about capital leakage and capital flight. Further, down the track generally, just in terms of the policy outlook from here on out October, it's horriffs are now off the table. December terifikes are still on the table, though, I think most people concluding it's unrealistic to expect these two leaders to meet in Chula next month and sign a deal with the December tariff hikes hanging over us. Do you just see it as inevitable that those December teriffis are

taken off the table as well? Well, you can never see anything as inevitable in this particular process, because of course we've been doing and throwing over the course of the last four or five months, in particular as the as the news flowers are oscillated. But I think it is realistic to assume that if there is going to be any progress, then it's more likely than not that the additional round of tariffs will also be postponed or

pushed into the middle distance. But I think in reality, probably what we are going to have to get used to is that whatever the final destination is of these trade discussions, we are likely to have a greater degree of trade frictional tariff barrier than we would have had prior to the start of the process, and so it

will inevitably end up with a restriction on trade. But I don't think we're going to see the sort of the extension of the tariffs thresholds because of course that would have some particular concerns for the consumer sector in the U s is it would be rather more difficult to argue that the Chinese producer is paying the tariffs once they are extended towards consumer orientated goods. Jeremy, you're in London, so we'd be amiss if we didn't hit

on Brexit. And I'm sure you are so excited to talk yet again about Brexit, but I really do want to get a sense of just how volatile the pound has been and how much it's trading like an emerging currency. I mean, at this point, how can how much conviction do you have in your recommendations when it comes to Sterling. Um, well, if if it had been television, they would have been in sing me sort of having a rice smile as

you talked about the policy list in Sterling. Because of course, when we when we look at the performance and reaction that we saw in the last two sessions of last week, which was the best two sessions that we've seen in ten years, and then you know we've almost we're getting towards reversing half of that move from Friday just underlines the degree of volatility and as you say, if you didn't know what currency pay you were looking at, you could have been persuaded to suggest it could have been

some want of a more emerging nature. But it does underline the the sort of the high frequency political risk that we're really dealing with now, and of course as the negotiations go down to the wire for the for the Brexit process, I think it is going to be a period where we are going to be very very susceptible still to these headline risks. Um I think the market, which had been largely assuming that the extension was almost inevitable, got excited about the prospect of an earlier deal late

last week. But I think now we're having a dose of reality kicking in and on one suspect that it will be very much a sort of an oscillating market until we get beyond the weekend, when of course we have further first parliamentary sitting here in the UK. In one thing, we struggle with a lot jare. I mean, I'm sure you've struggled with it too. Market participants have

to be political analysts constantly. We have to read the political tea leaves of the political tea leaves in the United Kingdom right now, Just what are you focused on this week ahead of that EU summit. We're absolutely right other needs to be a political analyst. It's it's far more so in Sterling terms than you would be necessarily a macro analyst, because of course the macro pitch has

been totally blindsided. Um. I think in a sense for the course of the next two days we'll be watching I'm waiting to see the news flow or the leaks coming out of Brussels visa VI, the negotiations with the EU.

But I think also one shouldn't lose scited the fact that if there were to be a deal agreed, it has to be ratified by the UK Parliament, and in that regard, I think the key constituents will be the Democratic Union, this party, the small Northern Irish party that had been and have been supporting the Conservatives in their minority government over the course of the last few months, and also the tone and appetite for supporting the government

from the European Research Group the Conservative Euroskeptics. Those are two groups are absolutely pivotal to any success in a Brexit vote, should a deal be brought back to Parliament before the end of the week. Jemmy Stretch always great a cat show. Whether you see I p C header detain ethicslogy, joining us out of London on the latest on the trade deal, the potential for an effexx pack, what it looks like and what on earth is going

on with Brexit. Earning season is almost upon us and that means we need to catch up with Betsy Grace Sick Morgan, Stanley's head of Banks and Diverse Fied Finance Research. Good morning to Betsy. Hey, thanks so much. Good morning. Let's talk about these bank numbers you're looking for. Top of mind, according to you guys, rate sensitivity. How important is that for some of these companies critical look, I

mean rates is about half of the revenue stream. So you have to think about not only where you are in three Q, but what the outlook is into How do you generate any kind of outlook at the moment, Betsy, given how rates of whip sword through the last couple of quarters. Yeah, it's fair question. Look, you know, we do keep our models live, so as the four words are moving up and down, we are flexing our amits

for that. And and sometimes I get some questions, especially from UH investors, some smaller investors, saying, hey, you know, you're moving your numbers around a lot, and I'm like, hey, it's a reflection of what's going on in the bond market, so I gotta keep them live, you know, John, I love how excited Betsy is. And she came in. She's fired up. She said, she loves best too. I feel like we have to just take a moment to appreciate that.

She was saying, this is what she lives for, is the earning season when you actually get a read on the banks. What are you expecting when it comes to loans and sort of how much that's expanding given the low rates. Look, it's so interesting because we have a very unusual economic situation right now today where loans are actually growing pretty strongly. I mean, you know, we all see the h A data five between somewhere between four and seven percent, depending on the week. If you're a

big bank, small bank. What kind of asked the class you are. And one of the surprises this quarter relative to our models. Two things. One commercial is actually a little bit better than we've been looking for. And consumer, especially in auto, is a lot better, you mean in terms of the loan performance, in terms of loan growth, in terms of loan growth. Um. One thing that I'm wondering is how much pressure there is from the Blackstones of the world and the Carlisles of the world that

are raising record amounts of money in cash. How much are they taking business away from the banks? You know, there's obviously some it's it's you know, we have this debate internally, as it's structural, as it's like local you know, it's a little bit of both, right, Um. And what we've seen is that there is about one percentage point or so of commercial loan growth. Uh. That looks like it's gone to the shadow in each of the past you know, over the past ten years, Right, in each

of the past ten years, ten percentage points over that time. Yeah. Yeah, But see, let's move on to mortgages. I hear everybody talking about mortgage business, hardly anybody talking about expenses. You want, how critical is that to look at both sides of this store. Absolutely. You know, when we look at what drives alpha and bank stocks, it's operating leverage. So you can't just look at revs. You can't just look at expenses.

You gotta look at both. And you know, we know that revenues on the mortgage side are going to be a little bit better than expected because of the refi activity that's been so strong. But you know, a big piece of that is paid out to brokers, so you have to add that into your EPs. Which bank do you which bank do you think is gonna outperform the most in terms of the estimates are in terms of the stock price estimates? Okay, um, where we are above

the street. The most is for names like Discover. Why is that? That's mainly because of consumer credit and frankly, Discover actually put on Friday their master trust out after the close and net charge offs came in, you know, a little bit better than seasonality. So that's the main reason. But I know you've got to run. It's been great to catch up with you. Good luck for the rest of the week. All right, thank you. They're gonna be exception me busy. Betsy Grisi, Morgan Stanley, head of Banks

and diversified finance research. My question is whether anyone trades on the trade headlines anymore, considering the fact that the action is fleeting and rather unreliable. David Sowerby would love to weigh in on that. I hope he is Anchor Advisors as managing director and portfolio manager joining us on the phone. So, David, what is your sense? I mean, how how much have you actually traded ever on some of the headlines we've gotten on trade? One word never?

All right, then good good luck predicting politics, particularly politics in the last year and a half of this again off again trade issue, not just with China, but global economies in particular. And I think one number really drives at home. I can I can trace the trade issue back to about mid March or two thousand eighteen, and if I take it all the way to the present and I look at the Median company, the Median company in the SMP which encompanies encompasses large cap, MidCap small

cap stocks, that Median company is flat. We've had Median zero returns and large mid and small stocks since March two thousand eighteen. The Camp weighted indexes are a little better. But when you look at the breath of the market since March and two thousand eighteen, it's been zero, when at the same time, the tenure U S. Treasury is

compounded at better than eight and a half percent. Yeah, so, David, that maybe reflects the fact that Corporate America, you know, is just not sure what the future holds in the near term, given the uncertainty surrounding trade. Um So, as we head into this earning season beginning in earnest tomorrow, you expect to hear more from Corporate America about, Hey, we're just kind of playing it close to the vest.

We're keeping our spending a little bit tempered. We're maybe not opening a new plant or ramping up r and d do you expect to hear some of that out of Corporate American on the margin compared to the second quarter, Paul, Yes,

I do. And in the second quarter of this year, after all the companies had reported their earnings, and you listen to the conference calling through artificial intelligence, you're able to see how many were discussing trade and tariffs compared to the first quarter two thousand nineteen or even two thousand eighteen, and had gone up measurably. Last year that the focal point was tax cuts deregulation being positive to earnings in the economy. This year, it's the uncertainty of trade.

And I think by a time we're done with third quarter reports that on the margin it's going to be higher CFO. CEOs don't like uncertainty. We know that for certain, and I think that's going to be telling point as we think about this earning season because it's so important because it sets the table for two thousand twenty. CEOs don't like uncertainty. That's one thing that's certain. Love it,

love it alright. So neither neither do portfolio managers for that matter, No, and and and frankly, neither do radio hosts who have to talk about the same story on a different side every single day, flipping and flopping. And so there's a question of when you start paying attention and earnings definitely is something that you need to pay attention to. What earnings are you paying especially close attention

to during this round? It's twofold, it's it's certainly it's going to be the cyclical companies and energy uh uh, the cyclical part of tex semiconductors. But but I would add in I'm going to spend a lot of time on all companies, but in particularly the consumer, because the consumer has been just the heavy lifter in in the

in the last couple of quarters. So if you get a sense that the consumer is starting to get a little weathered over the tariffs and trade even starting to impact them versus last year's glow of the tax cuts, which I would contend we're very positive for the U. S. Consumer, then I start to worry. And one of the best things that two thousand twenty expectations have going for it is that it'll it'll have easier comparisons to this calendar

year that we're in. And besides easier comparisons, it's harder to make a case for for what Wall Streets expecting today, and that's ten percent earnings growth in two thousand twenty,

I think it's five or less. Frankly, yeah, David, that's kind of where I wanted to go about, you know, right now, as you suggested, the market's pretty optimistic as it relates to earnings, but that's tough to really support if you're in that camp that says, you know, what the economic environment where now it's a one and a half to two GDP growth kind of scenario, and that's really tough on that scenario to make a case for

ten percent earnings growth. What is your view? I think this, as I said, closer to five percent or less next year. And when you talk about one and a half to two percent growth rates for the economy and then you connect the dot to corporate profits, we were getting there in two thousand eighteen. We were getting to three potential real growth for the economy, which nobody anticipated a couple of years ago. We were seeing double digit growth and

corporate profits. A lot of that was the byproduct of the tax cuts and more sensibility. I would contend on regulation, and we've probably deluded half to two thirds of that with the indirect text from the tariffs, and that slowed down to speed limit to two percent real growth in the economy maybe less, and now corporate profits in the five to seven percent range. I want to shoot gears

just a little bit. I know the ball markets are closed today for the Club's Day holiday, but I'm wondering what you make of the pretty large sell off that we saw last week. It's still it's still the teriff issue global growth. If I had to watch one business number every month. I'm I'm a devout student of the purchasing manager's index that has decelerated, particularly for exports new orders as well. I think the market has has becomes quite skin show over that last week we saw that

sentiment for bearers. Sentiment on the weekly numbers got to that's meaningfully above the long term average. From a contrarian perspective, I get more excited when that bearer sentiment starts to push on bears than I think market weakness has been washed out. It's a good time to be a buyer, but we're not quite there yet. David Sowerby, thank you so much for being with us anchoring Anchor Advisors, managing director and portfolio manager talking all things trade and thanks

possibly see value there. Thanks. We're 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