Markets on Edge Ahead of Rate Decisions, Tech Earnings | Bloomberg: The China Show 7/30/2024
Half an hour away from the opens in Hong Kong, Shenzhen and Shanghai are watching the China show. I'm Yvonne Man with David glass. Good morning from the asia pacific are top stories today. Stocks across the region under pressure as investors await major central bank decisions, key economic data and also big U.S. tech earnings. Now China shares in focus today with authorities taking a further step to obscure data on global flows into the onshore market. And Italy's George Maloney calls on President Xi Jinping to balance out China's commercial ties with the EU while offering to broker better relations.
Good Tuesday morning to you. I got to say, it's pretty quiet out there, but nevertheless, we are seeing most Asian stocks declining, of course, ahead of his key decisions that we're seeing out of the Fed. The BOJ and Bowie are coming up later on. So in the meantime, we're just kind of taking a bit of a pause on certain things here. But keep in mind, we're watching that
Bloomberg dollar index there right now. We are at that three week high for the greenback. The BOJ begins a two day meeting as well. We're watching Taiwan very closely here.
We are off the gates here with a downside, about 8/10 of 1%. So basically facing some of the worst months since 2022. For that gauge, you're just given this sort of tech sell off, this rotation trade we've been talking about. And Brent, also something that to keep in mind, we actually saw oil dipping to those seven week lows were briefly breaking below where we are breaking below that $80 level now for Brent here as well. The China story also with the growth prospects and the faltering there, that certainly has been way down outweigh that asset class. But certainly we watch when it comes to the commodities continue to see to continue declines across the board when it comes to that asset class as well. Iron ore is also down in Singapore
today. And we mentioned about those treasuries set for a third month of gains as well As we wrap up the trading month. We talked about that Bloomberg Commodity Spot index, because China certainly is a big factor in all this as well, given just what we've seen in the data.
We have Citi, also the latest, a downgrade growth there for the 2024. They also think it's going to be sub 5% now and more of a 4.8% print. So you take a look at how global commodities have been doing.
Basically, they have seen a second straight month where basically we were poised for losses there. That is the worst streak I believe that we've seen since 2023 and the worst month overall for July in over a year as well. The approach the open is looking like this year right now, we talked about the story about the flows and how we might not get that much information on really what these daily northbound and southbound flows are going to look like pretty soon. But it's really about that CGP rally and extends into this Tuesday morning. Here we take a look at how that Chinese ten year yield up to 14. That's a fresh record low that was reached yesterday, the 30 year low while 30 year yield I should say that to 37, that's a 19 year low.
So we're also hitting some key milestones there as well. Dave Yeah, in fact, it is extending today. So the 30 year yields against these are 237 to 30 6 to 15 on the ten year yield.
This is really top of the agenda markets agenda for Greater China today, this unrelenting SGB rally and really testing the patience. At what level do you think the PBOC is going to step in and basically said, okay, that's it for now. All that being said, we were inflation is and certainly it does give further fuel to this rally along this levels right 3400 on the CSI 300 we're slightly below that level In fact on Monday we closed at the lowest in about five months or so, although, you know, a brief rally could take us right about right back above that level.
The main culprit recently have been consumer staples stocks, whether that's a CSI 300 gauge DMZ, a China gauge, which is bottom of your screen, seven year lows as far as that's concerned. We'll continue to update you guys, of course. And this trip, of course, from Ms.. Maloney in China. And we're looking at some earnings coming through today, say, of Stanchart in Prada, China Place, still L'Oreal. Of course, reports in Europe. We're looking at the China angle to that story, Starbucks to Starbucks.
And she reported earnings yesterday. We'll see what reaction looks like today, bottom of your screen. So, of course, that drop year in year to about 4.2 billion renminbi. But as you point out, of course, it's a big central bank week. Yeah. In case you didn't watch yesterday's show, we showed this graphic already about just this 32 hour spree that we're really looking ahead to here right now.
And, you know, it's going to be a really interesting sort of dynamic between these three. Right. You know, are we actually going to see the Fed signal cuts are coming? Are we going to see the BOJ signal or at least even hike rates? And what does it mean for bond purchases? The bogey we talked about, that could be a bit of a toss up here as well. Let's bring in our guest now, James Ashley, head of international market strategy at Goldman Sachs Asset Management.
You get a little bit of everything this week. You got a bit of central banks, you get U.S. earnings, you get a bit of data as well to wrap up the week. What's going to be the most influential, do you think? It'll be a fun week, But I think most obviously it's going to be about the Fed. What was the Fed going to say?
And I think it's the saying what's in the doing this week. So if we look at the expectations for the market, there is some chatter out there that maybe the Fed could potentially move as soon as this week. I think that's premature. And for the most part, people are seeing that as a tail risk rather than as the central scenario is really how transparent are they going to be? How pre committing are they going to be about a possible move in September? Is September a done deal? No, no, absolutely not. I think we're in the situation now where it's more likely than not our base case would be September.
But if we ended up with a couple of strong payrolls, prints, a strong CPI and PC print over the next few weeks, the Fed is absolutely in the situation where they could roll back and say, actually, we're still on hold, We're watching and waiting. We think that things are moving in the right direction, but we don't have enough confidence yet to make that move. So that's why I think this week is crucial. Are they actually going to preach committee central and say, we're going in September, whatever happens? Or are they going to say we expect to move in September, but we're still in data dependent mode? Yeah. What do you in of the tone because. Is this going to be a fed that's that's forced to cut rates because it wants to because the data is gradually suggesting that it can.
Or that it has to because we're going to see a sudden, you know, softness in the economic momentum that they're going to have to cut later on this. I think they're doing this. They're making the move, the adjustment out of choice rather than out of necessity. I think very much reflects, I think, two combinations. Number one is that inflation has moderated quite substantially over the past 12 months. So it's still not back at target, but
it's much closer to target than it was at any point in the recent past. And in a world of dual mandates, the proximity to target matters. The second piece of that dual mandate, of course, is full employment.
And you've begun to see this creeping higher of the unemployment rates and loosening in the labor market. And that combination of circumstances, a weakening of the labor market, a moderation of inflation, puts the Fed in a situation now where given how tight monetary policy is, they can begin to think about taking rates back down again, using a French a chess analogy to essentially tell us where the Fed is in this whole managing expectations and dual mandate. You say, Have they signaled enough that both are equally important at this point in time? I think they have signaled and if anything, they've kind of pivoted the opposite direction. So the French analogy that you're
talking about in French, if you're playing chess and you want to realign the pieces, but you're not actually quite ready to move, you say Hadoop, we're talking about this in the GDP. So the Fed isn't quite ready to make the move yet, but they're beginning to realign the beginning to say, actually, our priorities are beginning to tilt towards the labor market. We haven't forgotten inflation. We can't say the job is done. It's not done. But we're beginning to send a signal right now that the labor market is at least as important as inflation.
And given the weakening that we're beginning to see and it's very much in its infancy, we're not talking about any major labor market correction, but a beginning to see some degree of loosening in the labor market that gives the Fed the capacity to say, well, actually now on the basis of a dual mandate, we can think about taking rates down in terms of the approach to equities or even just markets. I mean, is it still this rotation trade that you think might still have some traction? Is it the carry trades that you think also can unwind further? And what about commodities? Yes. If we do that in the equity space to begin with, I think down and out is the way to go. So if we're thinking about US equity markets, obviously we've seen some rotation over the past few weeks away from US large cap more into the small and mid-cap.
I think that's got further to go, particularly in this world where we just talked about the Fed is beginning to think about taking rates down. You think about which types of companies are more rate sensitive is the small and mid-cap. So they should be beneficiaries of that. And the valuations are a lot more compelling and interesting than, say, the large cap in the U.S. You then say outside of the US where you
go, well, look at economies like India, where you see this strong secular growth story and you've already mentioned Japan. You think about Japan is the one developed market where inflation is not a problem, it's a solution. And therefore, whatever you think about the BOJ doing over the course of the next week or the next couple of months, you're still in a world in which monetary policy in Japan is going to be very loose by international standards for an extended period of time.
So we think about what does that mean for equity markets. I think Indian equity look attractive, Japanese equities look attractive and small and mid-caps in the US look attractive. What keeps equities doing well? Because in previous cases, not all easing cycles, the stocks did well up until the point we entered an easing cycle and then sold off. What makes this year different?
Well, I think the difference this time is that we're not likely to be seeing a recession in the US. You think about previous episodes where when you've seen the yield curve inversion, you tended to see a recession in a short period of time Thereafter, when you start to see central banks cutting, it's normally in response to a recessionary scenario that shaping up. We're not in that situation right now and we can talk about the reasons for that, but this cycle has been exceptional. So what is different this time is that we're simply not expecting a recession.
So I think it puts us in a very different situation in terms of what you'd expect from risk assets. You mentioned Japan, you mentioned India as other markets outside the US. It seems like you're sticking to those winters. What about China? Where does that fit? I think China has got some really exciting opportunities, but it's very much about being grander and active in that space. And whereas I'll make the the blanket
statements, of course you still need to be active, but the blanket statement about Japan or India that we really think that's an exciting exposure to have right now in China's case is much more about, well, which sectors or which individual names. So we do see some great opportunity in the valuations, clearly a lot more attractive than you see in, for example, the US. But where's the underlying motivation to say you're going to see this continued upside? David, You were just talking about how you begin to see one or two houses revise down their China growth forecast. So what does that mean in terms of near-term macro momentum? We actually see this ongoing sustained growth in China. We've been of the view that Chinese growth is going to be just below 5% for some considerable time. So we're not seeing any major shocks. We need to revise that.
But I think you could be quite active in that space. Right. You know that. We know that. How receptive are investors outside where your base, for example, to that idea that this market does present a market to. It is, of course, risk adjusted.
I think very much so. So we've been in a world with quite a significant number of years. It's been either risk on or risk off, and it's been very binary. I think that's a simplistic way of putting it, but it's being the overall characterisation as being risk on a risk off. Now we get to a world in which it's, well, what type of risk do we want to take? Is it in the equity space, in the credit space for that duration? So it's no longer just about one market is about across all asset classes.
Think about how we position. So I think clients and investors are very receptive to that view right now. And how do you look at the fixed income space now compared to equities? I think fixed income is actually a really great place to be the start of this year.
The fixed income trade was the one that everyone's jumping on. We thought that was premature. You're saying quite candidly, look, the markets got seven rate cuts priced in from the Fed. They're not going to be delivering that number of rate cuts. So let's be realistic about how we've probably reached peak yields.
But actually the potential for that to be a significant rally over the course of this year is somewhat limited because the Fed and other central banks are going to be somewhat more conservative than the market anticipating. We just started this conversation saying, well, look, the Fed and other central banks are now beginning to prepare markets for imminent rate cuts. We're now at the point where we think actually the yields that you're getting in fixed income markets does look really attractive, should be leaning quite heavily into fixed income exposure at this point in time. So the rate cuts coming, we know that how deep we get in the next cycle is the other thing altogether, right? Because that determines value right now in these markets. And where do you think how deep do you
think we get next year or who knows when the cycle actually end? Yeah, I think that's a really good question. I think actually goes beyond the next 12 months. If we think about when does the cycle end is probably beyond 2025 some time into 2026. The more important part of your question
was the level at which we end. I think we're probably looking at a neutral Fed funds rate of somewhere three. Something is we've got a three handle on it. If you look at what the Fed themselves are saying right now, they're saying to 5 to 6. So we would expect the Fed themselves to be revising it. What our style is. And if you look back to where we've been for the past 15 years, it's clearly a very significant shift. We're not going back to this world of
ultra accommodative monetary policy, and that reflects a number of secular macro changes that create inflationary impulses. So rates coming down substantially from where they are today, but settling at a level that is quite considerably higher than what we've been used to for a generation. So so if the Fed does start to come in, what asset class do you think actually benefits the most then? Out of all, what we've discussed so far is they still the equity space is still the bond space. We you're at we still think it's
equities right now. Equities. Yeah. Yeah. I think you still need to maintain a very sizable allocation to fixed income and that probably the fund primarily through this rather than credits. I think the one asset class where you could say that could be a bit of a squeeze, not in the short term, but in the medium term. If you look at the spreads in credit markets both in Europe and the US, you'd say they're relatively tight. So if you're going to be a bit more
cautious, I think it express out through credit markets in the short term, I think goes in equities, they both look pretty attractive right now. James, it's nice to see you. Have a great rest of your trip in the region there. James, Ashley, Ashley there, of course, head of international market strategy at Goldman Sachs Asset Management.
Right. Just ahead here on the show, we'll talk about the Chinese economy with HSBC. They join us in a couple of minutes to hear why they expect a further cut interest rates as we go into the next couple of months. So with Beijing looking to shore up near-term growth and confidence cutting down to the open of trade, the Tuesday session just over 15 minutes away in Shanghai, in Shenzhen, and here in Hong Kong, futures are pointing down. This is the China show. All right. Your renminbi fixtures crossing a
Bloomberg here this morning. And we're seeing about seven 1364 here. So it is triggering a little bit of weakness in the currency here this morning. We're at 727 levels right now, Dave. Yeah, we're going through asset classes here.
So that's the currency. The bond markets is where, of course we're still focused on given the massive rally yesterday. And by the way, it is it's early days, but it's still green across three bond screens right now, too, all the way down to your 30 year yield. We now have a 214 handle on the ten year yield. That's a that's a new record low. The 30 year yield is now the lowest since 2000 2005. Right from this we go to equity markets.
And certainly when you look at price, you know, we're poised for some weakness, particularly on shore. You look at some of the price action and the flows into its base in the US and investors have been selling many of these names or products with heavy exposure to Chinese stocks. That's really ahead of what we've been talking about as a fairly busy central bank schedule of economic data of earnings coming through. And of course in China's case, that's in the form of PMI numbers around midweek, Charlotte Yangtze here with US or Asia equities reported to tell us more about what's going on and why people are leaving this trade for now. Yeah. So judging from last week's flow, we're
seeing ETF investors turning more cautious towards stocks, especially China ones. So you have the Vanguard FTSE Emerging Market ETF, which is the world's second largest track in emerging markets. And so we have is country exposure on China.
So this ETF has seen its largest weekly outflow in over four years. And also you have MSCI, which is the largest ETF tracking China, and they saw their largest weekly outflow on the record. So I think it makes sense because, you know, the CIO this week and we have the factory activity data from China coming out tomorrow. You know traders are getting more cautious, but also market watchers are saying that this confirms the trend they are seeing, which is investors now growing more sophisticated with AMS. They don't like to buy it basket.
They probably prefer themes such as CRM X China or specific ones on dividends or on consumption. And it seems like market watchers are not going to be able to see one key sort of data, which is some of these northbound flows. We kind of heard a little bit of of why they were doing this earlier this year. But tell us a bit more about the rationale behind it. Yeah. So starting from August 18th, China will start publishing the daily flows of overseas funds going in and out of Chinese market.
So essentially what this does is that it's shut down a window for investors to calculate the net flows at the end of each trading day. What they will publish on a daily basis is the total turnover for the market. Also turnover for the ten top most active securities and number of trades for stocks and ETFs. But this after is you know, came after authorities have been willing to try to prop up confidence for the offshore investor sometimes you know maybe smoothing out the impact they see when there's a big sell sell off, you know, from overseas farms to China. But to be sure, you will still get to get directions of how foreign funds are going and our quarterly basis. So there will be this report published by the central bank, but on a quarterly basis and also the real time trading flows of how anxious fans go into Hong Kong stocks are not affected.
All right, Charlotte, thank you. Charlotte Yang there, our Asia equities reporter watching these Chinese markets for us here. Let's talk about what Singapore's state owned Temasek is saying now. It plans to invest $30 billion in the US market over the next five years as it remains cautious on putting money into China. Let's bring in April Hong. She joins us from Singapore with more on
this bloomberg interview in april. Maybe tell us a bit more of the why. What's behind this focus on the US? Yeah. I mean, it's coming at the time of US-China strategic competition and it's making it increasingly difficult for investors to navigate. So this latest shift is just part of that. I mean, we've seen how the two have gone head to head in the arenas of chipmaking firms, for example, seen as crucial for air development, for what we're seeing in the digital economy. The US has been trying to curb China's rise via export controls, via tariffs. So Thomas, head of North America,
basically saying that the Americans will remain or will continue to be the largest recipient of capital going forward here. $30 billion of plans to the US over the next five years. This will come into the investments related to AI, whether it's some of these semiconductor linked names or even infrastructure plays such as centers.
And it's worth highlighting that this is coming at a time when the Americas actually accounted for even more of the portfolio than China. For Temasek, about $63 billion or roughly 22% versus China's 19%. This the first time we're seeing this in at least a decade. Guys. Yeah, this the US China tensions comes to mind here I was having look at that graphic we just showed It looks like to your point, April, they're simply rebalancing it and focusing more on the US. We're just getting a line coming through
as well here out of this defense meeting in Manila to the point on tensions that Lloyd Austin has told us that the Philippine President Marcos, that they are looking forward to four more, four more years of strong ties along that note. How else is Temasek looking to navigate things like that, looking to navigate the US-China tensions? Well. So now it says that is going to be kind of keeping out of businesses that could be in the crosshairs of geopolitical tensions. You know, in the arena of China, for example, it's kind of avoiding those geopolitically sensitive areas and it's focusing on some of the large domestic firms. It's looking to kind of put in new investments in EVs, in biotech. And it says that there are ways that it can structure investments to avoid some of these constraints. And this could include taking, you know,
passive public equity stakes in some of the listed chip firms. So these are among the ways that China investments are, you know, being navigated by Temasek. Everlong in Singapore for us going into the open today, have a look at where we are on the Hang Seng index. Of course, we're still looking at the GB markets and you have a 1014 to 14 handle on this. The opening about 6 minutes away.
You're watching the China show. Subdued open, I think is the way to put this quarter 1%. We're coming off, by the way, a very good day in Hong Kong yesterday.
When you look at it on share markets still have been rangebound to the downside, mostly depending on which benchmark you look at. Earnings, of course, in focus which you have to automatically. Yeah. So we're up about 3% here.
So they did talk about shrinking sales here. Revenue from U.S. clients also fell but revenue was still in line with estimates also tell me that strong pickup in the order backlog which was a key concern given this looming U.S. bill as well. So certainly we're seeing a bit of upside there today. Analyst actions to tell you about.
Jp morgan downgrading chatter among neo dairy to neutral. They're talking about a further decline in raw milk costs may lead to more discounts and will drive down their sales as well as their margins. Jamal Joe also cut to a hold. I had a renaissance for your glass that would call from Daiwa as well. Futures are pointing lower. We have an open coming up next. This is Bloomberg.
Welcome back. You're watching the China show rocking out to the open of markets, of course, in Hong Kong, Shenzhen and Shanghai. We talked about Hong Kong. Have a good day. Yesterday may not be that much of a case here today, but it's quiet. We're still waiting for all these key central bank meetings as well.
And you keep in mind, what's been going on in the job market is really a lot more active. And bonds that equities of late. There are 727 for your dollar China trade here this morning we didn't get too much in that in that fix here but really this this could be rally you got to wonder when it's really going to start hitting the PBOC is saying look we've got to do something. Yeah often enough when that happens, it's after the fact. Yeah, right. They're going to come out and do something and see something in markets. We have about 7 seconds to the open, so I think I still have some time to go. Yeah, Hong Kong, they just win their second gold medal.
Yeah, they did go. Okay, it's quiet. Anyway, back to markets just in time. There we go. Declines. CSI 333 80 right now. So we did close by the we already had a five month low yesterday. So we're continuing to see a downdraft there. We're getting some downgrades in fact, here on some of the liquor makers warned that I guess letter on multi is not about 1% curtail of course out with earnings this week and you know this this graphic tells you everything you need to know about the market story today and it's quite blatant visit at the ten and 30 year yield in green on your screens.
The rally continues as Yvonne was pointing out. Let's flip the boards, please, if we can, and have a look at the open in Hong Kong where we are likely to see just there we go, 8/10 of 1%. So we're giving up some of the gains yesterday. Not everything. We have earnings coming through today, I think. Stanchart, Starbucks.
Yeah, Prada, L'Oreal, and some of the China components, I guess, of what those businesses look like. I mean, if you had a look at Europe yesterday, Heineken, of course, had to take that impairment because of their exposure and their stake in China. Resources, beer. In fact, let's have a look at some of those names that have reported earnings so far. Uchi App Tech is getting some upside today, four and a half percent after earnings coming through. Full glass also report that's also an earnings story.
And we talked about Prada and also, Stan, second day, I'm talking about Prada. That's probably a record itself. I think you're happy that you're talking about it, right? Yes. Okay, let's change topic place. Yeah. Yeah. They are talking about, you know, given what we've been hearing from some of these European companies and the luxury sector, China certainly is going to be that key focus of how big of a headwind it's really going to be. And it has really impacted a lot of these stocks as well, given the earnings outlook. But there you go.
You talk about consumer stocks, though. I mean, it's also seeing a drought. This this is the I think this is the MSCI China Consumer Staples Index. So I think the declines already from the top to where we are right now and we've seen a massive drop in the last two or three weeks here. We're not the we're we're not worse off compared to the worst point of the GFC as far as the drawdown is concerned. And, you know, a lot of this comes down to the fact that when you look at investors, they try and gauge what part of this economy is doing well, not doing well. They stay, you know, stay long, quality names, large caps, consumer staples, not part of that. So these are Nongfu springs of the
world. These are your gauge about tides of the world. And you are seeing markets expressing that concern through this. Yeah. Let's bring in the next guest, Jack Lew, Greater China chief economist at HSBC Global Research. Yeah, we talk about the consumption,
obviously still be weak. This recovery appears to be losing momentum as well, but it's been a busy July. Whether it's planned a surprise rate cuts, the weak, weaker data. Is there anything that we've seen this month that could change the trajectory in any way? I think actually there's quite some information in the third plenum, especially when I read the full context of the resolution. Of course, there's no direct cash had out to the consumers. But we do see there's a lot of reform being planned, which in the longer run can support the consumption.
Yeah. Tell us what stands out to you the most among everything. Economists at Bloomberg Economics say that there seems to be a coordinated effort in the last two weeks to gear up for something that probably is ahead. Yeah, definitely.
We have seen, for example, the fiscal stimulus, the 300 billion for the trading of consumer durables and also the recall. But I think most interesting is that in the third millennium resolution, he says that going forward, we're going to see the provision of public goods and services according to the permanent residents. That's a big deal because in the past it's more or less related to the whole call registration, which means in cities with large population inflow, probably we don't have enough soft infrastructure and also hard infrastructure. So if people are given more social benefit, they probably have more spending power, the living salaries, so to speak. That is something which sent out. And the second thing also talking about
the new productive forces, he says that is going to be suitable to local conditions, which means in the current situation we see a. All of the resources being devoted to Eve and other things probably also cause the, you know, the criticism about overcapacity. So this time around, there is a plan to basically enhance fair competition, including to provide the equal market access as well as the protection for different kind of enterprises. And very and it talks about it's going to tackle the local protectionism through basically trying to prevent the illegal subsidies, etc.. You mentioned for the first thing about these consumption programs that there are 300 billion renminbi that's been allotted. Do you think subsidies alone can
actually boost demand? Because, you know, these funding programs are not really anything new. And we've already said the funding is going to come from these already announced. You know, these these are issuances from bonds as well. Yeah, I think to some extent it can help.
For example, this trading program for the vehicles, I think a lot of people are happy to tap into that. But the subsidies long only have a limit. So we will have to see the basically the improvement of the consumer sentiment that will depend on all those ambitious reform measures announced. And we need to see how they are going to be implemented. Yeah, and I think that brings to mind the retail sales number from the last month, which I remember correctly was 2%. Is that number that low because there's no inflation or is there? Is that fairly reflective of also dampened spending on volumes, for example? I'm just wondering, that's a price function.
I think there are many different reasons behind that. And obviously we see the consumer sentiment is still hovering around the low point and that plays a big role into that. And that is due to many factors such as the balance sheet impairment by the household. We see the housing market still
struggling. Equity market is not performing that well yet. So from the asset side, there's some impairment and then the recovery is on the way.
And also in terms of the income expectation, I think it's fair to say for middle income group, probably the labour market still needs way to recover just given these surprise cuts we really got after the plenum. Yeah. What did you make of this? And is there more cuts to come, do you think, after this? I think several things I want to highlight. First of all, actually, given the pangolin show from PBOC highlighted the change of monetary policy framework, Wang months earlier and he said that policy will move towards a single anchor, which is a seven day reverse repo. And we did see basically the cut by that
rate is followed by market rate change. MF card. I think a come after the market rate already responded. So that's a way to show, you know, in the future the MOF will be downplayed. And this is also a stance basically trying to underscore the pledge in the plenum that China will basically decisively make measures to meet this year's growth target. So in a way, the government is aware of the challenges and is willing to pledge more support. Is do you think banks will extend more credit in the future? Because part of the reason I asked that is, you know, you lower rates in the low end. You're getting also some of the banks
adjusting their funding and the deposit rates. So you're sort of you have a protection in margins there. And then we've also seen the PBOC trying to manage the yield curve to be slightly steeper than the current level. It all sounds like they're trying to encourage banks to lend more, that it's not going to hit their profitability if they do. So I think, you know, we all watch the on net interest margin.
That definitely will play a big role in the bank's profitability. But in terms of whether the banks can successfully lend more, it also depend on the demand side of the function. That is why changing or improving the sentiment both for the household as well as for the business will be very important given just what we've been seeing with the SGB rally. I mean, this is of course, after these cuts that we've seen. I mean, is the policy I going to have to do, you know, intervene in some way? I mean, this is already we're at levels that have surpassed what most of us thought was going to prompt some sort of intervention.
Yeah, I think that's a tricky call. We all know the policy always needs to basically balance different kind of targets. It certainly says at one point of time it wants to see the yield at a reasonable level, but it also needs to consider, you know, what to prioritize. Like right now probably trying to guide the overall, you know, sentiment towards more willing to borrow will. Be the priority. So I think, you know, so far we cannot rule out more courts on the in the cards. What else do you think is important for
us to keep in mind that we haven't touched on? What doesn't worry you at this point? Well, actually, I think the housing market still quite vital. And interestingly, when I read the resolution, probably fair to say not so many surprises in the wording. However, during the press conference, the day after the plenum ramped up, the senior official housing show actually said the housing sector is of systemic importance. That is something new. And if something is of systemic importance, usually we only refer to the financial sector. That means, in my justify bolder steps ahead by the Chinese government. And such as what?
What? What haven't we heard? I think it has to be from the central government. So far we have seen a lot of measures, but we haven't seen the central government put its skin in the game. So I think it's possible the central government will use its own balance sheet trying to, for example, acquire some of the oversupply, commodity housing and convert that into subsidized housing. You know, these are these are great
insights. Thank you so much. And all those comments, of course, coming through the detail there out of Giglio, good of China, chief economist of HSBC Global Research. Right. Just ahead here in shows. We'll get you the latest. What's taking place in Venezuela with President Nicolas Maduro. Election win has protesters on the
streets while world leaders call for a full accounting of the vote. The latest just ahead. This is Bloomberg. Too long to help the liberal arts. China congratulates Venezuela on its
successful presidential election and congratulates President Maduro on his sisters for re-election. China, Venezuela. Our good friends and partners who support each other. And that was the Chinese foreign Ministry congratulating Venezuela's Nicolas Maduro on his disputed re-election victory. Now, of course, Venezuelans are taking to the streets near the capital in protest after President Maduro claimed victory in Sunday's election. Maduro is also facing calls from the US and several Latin American countries for a full accounting of the vote that's taken.
Straight now to Bill Faries is with us right now, senior editor. He also previously covered LatAm, of course, for Bloomberg. So, Bill, you're fairly familiar with what's going on and the dynamics between not just in Venezuela, but between Latin American countries as well, that just take us to the latest and what whether we should expect more pushback from some of its neighbors at this point in time.
Yeah, I think so. Yeah. I was there in 2012 for Hugo Chavez's last election, and I think all of Venezuela's elections under Chavez and Maduro have been tainted by accusations of fraud. But I think having said that, what we're seeing in this case seems to be on another level. The the opposition now said this says that they've seen the individual results from about 70% of the polling stations around the country and their numbers show an overwhelming victory for their candidate over over Maduro. So. And what we're starting to see now,
besides the protests in the streets and the opposition from countries like the United States that you would expect, there's actually some of Venezuela's more traditional leftist allies in the region, including Brazil, Mexico, Colombia. They are talking about not going forward and endorsing this victory until they've seen all the individual voting data, until there's more transparency about what happened at all of these polling stations around the country. So while you while we had China at the top congratulated Maduro, we are seeing some Venezuela's more traditional allies not quite going that far given the events that were that are taking place on the ground. And we've seen certainly the market impact. I mean, some of the bonds that we're seeing in Venezuela basically are trading around $0.13 on the dollar after this sort of political turmoil. How should investors and international
investors be looking at this this country now? I mean, certainly what we're looking at, what's next? What are some of the key things that we have to look out for? Well, there had been hopes that if this was a relatively free and fair election, even if Maduro won, that there would be some kind of easing of sanctions. There would be talk of a debt restructuring. As you mentioned, though, the bonds fell $0.12 on the dollar for some of those 12 $0.13 on the dollar. I would be expecting possibly more sanctions coming from the US and some other countries. I think it means it's going to be more difficult to upgrade Venezuela's oil industry. I think they're going to remain isolated
for quite a while longer until there's a chance to sort out exactly what may have happened here. Bill Faries in Singapore for us, our senior editor getting us up to speed here on what's taking place there and also some important, of course, context, right? Italian Prime Minister George Maloney is, of course in China and has offered to broker better trade relations between China and the EU. It's her first visit, of course, to Beijing since she took office. Amendment. Laura, China correspondent, is here with
us on set to take us through, of course. I think it's day to day three of this this visit. And she had her meeting, of course, with Chinese President Xi Jinping. Yes.
So she's really trying to achieve a number of objectives for Italy here. She wants to reset relations after she had pulled out of the Belt and Road Initiative, which is quite tricky, after she had called that a big mistake for Italy. And now she wants to offer to broker better relations for the EU after Italy had supported those tariffs on China. And at this point, it's also not clear how much sway Maloney actually has over the trade policy of the European Commission, given that she was sidelined after the European parliamentary elections in June.
She was kept out of closed door negotiations for the Union's top jobs. But certainly both countries are trying to manage any potential fallout from those tariffs presidency, saying that he is hopeful Italy will provide a non-discriminatory environment for Chinese firms, while Maloney is calling for a more balanced trade relations. Because this these two countries still have $80 billion in annual trade that is heavily tilted towards Beijing's favor. And then, of course, you have those geopolitics in focus as well.
MALONEY Raising the issues of the Gaza conflict, the Ukraine war. She sees presidency as this important interlocutor when it comes to managing global tensions, especially ahead of the US elections, where there is some uncertainty over whether the US would upend its relations with the EU. And Maloney is trying to position herself as this key counterpart to presidency. And we've seen also with President Xi is
stepping up efforts to position himself almost as a peacemaker for ending Russia's war in Ukraine. Tell us more. Yeah, again, Beijing is making use of this window of opportunity where there is a lot of uncertainty over Washington's commitment to Ukraine. And last week, Beijing had hosted the Ukrainian foreign minister and said the conditions were not right for peace talks. And now they have followed that by sending its peace envoy leeway to South Africa, to Indonesia, to Brazil, these countries that have not imposed those U.S. led sanctions on Russia to create the right conditions for the resumption of talks.
And remember, Beijing had skipped the peace conference in Switzerland because Russia was not invited to those talks. They have been calling for an alternative peace conference. And it looks like now they are laying the groundwork for that conference maybe in the second half of this year, perhaps before the US elections. Certainly part of Presidency's ambition
to position China as this alternative to the US, a force for global peace. But of course, Beijing's support of Russia has cast some doubt over its neutrality and whether it can successfully extract the sort of security guarantees that would be amenable to the parties of that war thinking, even though there are China correspondent joining us there with the latest. We've got plenty more ahead. This is Bloomberg. Welcome back to the China show. Here are some big corporate stories we're tracking at this point. Energy trader. The middle group has paid a record dividend of, what, six and a half billion US dollars last year after Russia's invasion of Ukraine delivered this massive profit boom. Now, to represent an average of 4
million for each of the 450 employees who own the company. Bloomberg calculates, of course, that a company has distributed more than $25 billion to its partners over the past 15 years. Now, McDonald's has shrugged off the burger chain's first sales drop in since the pandemic. So pledging to launch new promotions, second quarter comparable sales actually fell 1%.
That's year on year with the CEO Ian Borden warning of 40 weakness as cash strapped consumers curb their spending. But investors retained their appetite with shares posting their best daily gain since 2022. Now Disney's Deadpool and Wolverine have has clocked in, has blocked the biggest box office opening of the year. Speaking of movies here, it took a 200
to $211 million in North American during the opening weekend in cinemas, but it couldn't clinch top spot in China, beaten by a local comedy successor. That underscores all the challenges Hollywood studios still face in China, which was once a gold mine for U.S. releases. Now shares of Heineken that absolutely watered down in Europe.
There we go, a 10% drop. That's after the beer maker took a 900, close to $950 million impairment on its stake in China's largest brewer. It says the value of its stake in China resources, beer humbled and concerns about consumer demand in Asia's biggest economy.
Now similar weakness in the US and Europe saw the brewer narrow its forecast for full year profit growth. All right. The impairments that we had to take a non-cash impairment is a technical adjustment that we have to do because as a minority participation, we need to value this on the share price. And the share price of CRB listed in Hong Kong dropped below the level that we acquired to company. But in these markets here right now, it's the earnings picture as we talked about with Heineken, the like Gucci, AB take that one is getting a bit of upside in that stock here, a bit of relief from investors here. So they did also the revenue was in line
with estimates. I talked about that strong backlog as well. So that certainly did help the stock here this morning. We have glass appearing. I think there was an upgrade there from Daiwa this morning and we're watching Prada, Stanchart reporting earnings a little bit later on.
Obviously, we were focus on the weakness in China. How is it impacting the luxury space? And that certainly is a key concern for Prada as well. Shares down about 3% right now. Yeah. So the next few hours will be
pregnant with possibility, let's put it that way. Right. In terms of some of the conversations we should be getting into as well. Not to also mention so you don't see it on your screen as we move into the European session, you have inflation numbers coming through. And of course, just in case you missed it, we are in day one of two of the BOJ meeting and we are already starting to see some measures of hedging and cost of hedging and implied vol on the yen, for example, starting to move against the grain. Okay. We're looking at equity markets mostly
to the downside that what is that I can't see that I can't read that market the hue of it's a bit too do it my producers will tell me what that market is. Can you make it all Asia. Yeah Malaysia. Okay not truly Asia today because we're looking at the clients across the region banter of course commodities also which is your middle column right now seeing declines in copper, aluminum and rubber and also iron ore over in Singapore.
Right. Coming up next, we'll be talking with Isaac pulled out of the financial services on his market calls ahead. Welcome back to the China show. Here's a look at the agency a half hour into the session. Well, we're setting those declines here
right now. And now it's session lows, about one and a half percent or so similar to what we're seeing with shares was certainly it's a down day across most equity markets here, as we count down to, of course, the Fed, the BOJ, as well as the bureau this week as well. But yeah, what's it like actually heading lower? Is this job market now continuing to see new highs and a 30 year yield? Well, 30 year futures, we hit that record very recently on the 30 year yield itself. So I think we're now trading a 2.37, 2.3, up 8%. I think we will be gboard to show you in a moment here. Do we have it?
I think we do, right, guys. Anyway, we're going to show it to you once we have. Well, since I'm calling for it, we're going to show it very, very soon to you guys.
We're looking at equity markets down about 9/10 of 1%, of course. So so here's what's happening right today. The market leaders from the first half of this year, you know, Japan and India, those two markets well, Japan, India and Taiwan. Let me just dissect that. So Japan is actually down eight in the last nine days or so on the Nikkei 2 to 5.
Taiwan is actually headed for its worst month this year and only India is actually held up quite nicely among the drivers of this Asian equity market. So we're seeing consolidation from the past winners not really into the underperformers like the Chinese market, which is still rangebound. So where is that money actually going at this point in time? As promised, very, very quickly, have a look at where you are and see.
So there we go. And we're hitting fresh lows on the ten year yield, 2.414% and a 2.37% on the 30 year yield takes you to lowest to the lowest since 2000 2005. Yep. Let's bring in Isaac Pool, global CIO and portfolio manager at Oriana Financial Services. Isaac, it's always great to have you just given just, you know, we can't stress enough how important this week is, but you're saying it's time to fade this rally in equities, Why? Yeah, I mean, I think when you look at where valuations have got to that they're very stretched. And when you when you consider what
that's pricing in, it's not pricing in a soft landing any more. It's pricing in a reacceleration of growth from here. And that is not the trend of the economic data. There's no amount of rate cuts that can be implemented now to to really drive that reacceleration of growth. So we think that there is scope for equities just to continue to trend lower from where they where they are now.
Isaac, to clarify, are you are you alluding to the Fed being severely behind the curve here? I think they're behind the curve. They they've been hoping that they can implement these surgical precise rate cuts and in a soft landing, but the economic conditions are not the same as they were back in 1995. Take the unemployment rate as an example. It's very low and it's moving higher. In 1995, it was high and it was moving lower. We will most likely get a rate cut in September.
But the real risk here is that the Fed then has to move to emergency mode and cut rates maybe half a per cent in the back half of this year and another half a percent next year. And those type of rate cuts are not positive for equities. They will be negative. And what does it mean for Treasury yields? Right. I mean, the two year yield you say,
could could actually rally lower to 3% or even below that. But that's quite a drop. What's going to take it there? It's that that bull steepening that you see when the Fed moves to emergency cut mode, the market price moves the price in not just one, not just to cut speed, but 2% or 3% of cuts. That is historically the minimum
required to move an economy out of something closer to a slowdown, to a recovery. And I think we could really start to see that gather pace in through 2025 and by the first quarter or the second quarter, we certainly could see two year yields set that much lower. And I think that will be across the curve at the moment.
There's this bulls steepening view that it will be driven only by the front end of the curve and the long end will be held up by concerns around the deficit. I don't think that will happen. I think you'll see the entire curve move lower led by the front end with a real bull steepening. As markets become more concerned about the pathway for the US economy.
So give us a rough number. Isaac. How how overweight should I be in fixed income, particularly in treasuries as you lay out those two philosophies? Yeah, I mean, that's that's going to depend on your portfolio settings. But we we would be looking to be moderate, moderately overweight, and that means really loading up at the front end of the curve, maybe out through the middle of the curve when you get out towards the ten year part of that US Treasury curve, it's not as attractive as it was a couple of months back when it was at four and a half per cent and above, and we were really banging the table there saying, Here's a great opportunity. Look, it's not. As strong an opportunity, but you're going to get some good risk adjusted reward there if the Fed does start to use emergency rate cuts. We do believe that the ten year will be forced lower if the economy continues to slow as it is. Well, yeah, it's interesting. Does does the U.S. election any way change your view,
Isaac, about that goal? Well, I think that a lot of the concerns around the U.S. election have been around the are the prospects for deficit, deficit spending and ongoing widening of the deficit and the potential for that to be inflationary, to push yields higher. And yes, that is a concern. But the fundamentals of the economy will dominate in the near term, and those fundamentals are weakening. I think we'll see it in the manufacturing PMI this week. I think we'll see it in the unemployment rate this week.
And those type of slowing growth fundamentals would will exert more downward pressure on the long into the curve than the election will come come November. Isaac we haven't talked about you have some big tech earnings this weekend. Granted, to your point that we have seen the market, the reactionary function, that markets have been really to sell bad earnings and not really act on good earnings as well. But what if we get really good tech earnings this week? Can this change the trajectory in global equity markets? Those are very, very big stocks that are reporting this week. Yeah, I mean, in the near term, I think the answer is yes. If we see a really positive surprise, I think not just in earnings, but it's it's now moving to that focus on the outlook.
And it's it's just showing me the money moment. People are asking, you've invested all this money, Where are the revenues, Where are the productivity gains? How is this going to translate over the next three months, six months, 12 months? And those sort of questions need to be answered, notwithstanding the positive earnings that we are likely to get in Q2. So there's that there's a question mark. And I guess the difference that you're
seeing now is that markets and investors are punishing any misses, but they're also certainly looking to punish any guidance that falls short of what has become very extended expectations. Yeah. And if you're if you're saying, you know, be prepared for maybe some sort of recession risk in the U.S., I mean, what does it mean for overall China? China, if you look at it as a global growth perspective, we're seeing this recovery really start to lose some momentum here right now. How do you look at this China market and what exposure is appropriate? It's a challenging market, and I'm just going to continue to be a challenging market because we've just not seen China's authorities willing to implement really solid monetary or fiscal policy support for what has been a disinflationary and outright deflationary economy over the last six or 12 months. And I think that will continue. The difference could be that if we see the global economy slow, that may be exactly what China is waiting for. They are holding some monetary and fiscal policy support back. I think they've been drip feeding it
with the expectation that the global economy will slow and they want to have some something held in reserves to support so that that will continue to be a challenging market. I think there will be a global slowdown that will impact China. But you can you can be sure. I think that if that happens, you will see more support come out of China, you know, in a more significant way than what we've seen so far. And does that not present at least a tactical opportunity, Isaac, in your view, when you look at Chinese market, I mean, you have everything you need for a market to to to rebound, right? You have cheap valuations. If your concern was valuations were too high elsewhere in the world.
It's the opposite here. And then you have just unprecedented stimulus either in the market or waiting to be deployed. Yeah, that's right. And I think there will be that that opportunity. But it's going to be difficult to lean against what I think is slowing momentum over the next six months at the very least. But when, when and if we do start to see that momentum kick lower, there's going to be the mother of all buying opportunities, I would expect, because those relative valuations are so attractive. And for people who are looking to
perhaps get a little bit of downside protection, China could be a way to play that. How do you express that sort of global growth slowdown as well? I'm looking at the yen and the surge that we've seen this week. Obviously, it's it's the unwind the carry trade, but maybe you get some of those traditional haven flows back into this in this currency as well. But do you think the yen is going to sustain that sort of strength even after this BOJ meeting, really, really hard with with the yen at the moment? Because you just cannot underestimate the willingness of the Bank of Japan to to do the opposite to what the market expects and to wait too long to do the right thing. And we've seen that so far already over the course of this year. That that said, there is there is we
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