US Tech Drags Global Stocks Lower | Horizons Middle East & Africa 06/21/2024
Good morning. This is Horizon's Middle East and Africa. These are our top stories this morning. Asian stocks fell on Wall Street lower on buyer fatigue. That is after tech shares dragged the Nasdaq 100, breaking a seven day rally. Israel's military appears to suggest Prime Minister Benjamin Netanyahu's goal of destroying Hamas is unachievable. While tensions on the country's northern
border continue to simmer. Plus, a Bloomberg scoop. Canada is preparing a potential tariffs on Chinese made EVs aligning with moves by the US and the EU. Well, good morning, everybody. Happy Friday. It's just on idiom across the Emirates. I'm John Versace here in Dubai. Let's get you up to speed with how some
of these markets are faring and what we thought was going to be a strong comeback for US equities. It really ended with a bit of a fizzle. So the S&P briefly broke through 5500, but then started to decline, pulled lower by some of these key tech names the likes of in video. Apple actually leading declines yesterday. So a bit of buyer's fatigue coming in after the huge run up in equities that we've seen as of late today. The futures are pointing slightly more positive. The Nasdaq futures, as you can see,
above 20,000. But leaning towards the green, though, the question mark, of course, is whether or not we can recover some of the losses seen in yesterday's session. Dollar yen also very much in focus. That currency pair continues to move higher despite the fact that we've had some upward surprises in Japan CPI this morning.
Obviously, that raises or puts pressure on the Bank of Japan to turn more hawkish and do something about the currency, which continues its decline. Getting close to 159. Remember, around 160 is the last time the Bank of Japan were suspected of intervening. So watching this currency pair very closely and then Brent recovery. It has been a roller coaster ride for the oil complex, but we are still sitting above $85. And also notably, what we saw was a drop
in U.S. stockpiles yesterday. So that gave a bit of a bullish backdrop to where the price of energy is trading. Now, let's turn and take a look at how ten year gilts are trading, namely because of that MPC meeting yesterday. And here's the thing, the headline wasn't really a surprise. No surprise that the Bank of England
didn't do anything on the interest rates. But the language and the fact that several members seemed to think that it was a finely balanced decision to keep rates on hold led the market to believe that perhaps August could be a live meeting. And what we saw is a drop in yields. You can see that on the screen right
now. We values about five basis points throughout the course of the session overnight. We've come back. But as you can see, we are lower from
where we were and markets are getting a lot more excited about the potential to see Bank of England cutting rates as soon as August. We will talk more about that shortly. But for now, let's check in also on how other markets in Asia are faring. Yvonne Man is in Hong Kong. Yvonne, great to have you on our show today. Hi there, Jomana. Yeah, as you mentioned with the boat, it
was a bit of a dovish hold there. And then you have the ECB also unexpectedly cutting rates again. That certainly didn't light another fire under this dollar trade. So in that way, that's really what's weighing on Asia sentiment here this morning. You talk about the drop that we saw of some of the big names like video, some of the Max seven. That certainly is why we are seeing HS tech is also down about 2% here. And that's really dragging down Hong
Kong to be the biggest loser on the board on the equity side of things here in Asia and Hong Kong as well as China. Stocks, I should say, are set for a fifth week of losses. They're already up a CSI 300 you mentioned by the yen. That goes part and parcel to what you're seeing in the renminbi as well. We're sitting around 728 levels, though
about one point. We hit 729. Thanks That PBOC fix, though, which was actually strongest that we've seen since April, that helped at least push back on some of that weakness there for now. So it did send a bit of a whipsaw in China. Yesterday was a pretty weaker face. So it doesn't really show really what the message is in the PBOC at this point. Perhaps they're just using that U.S. holiday on Wednesday to maybe we can a
little bit the currency, but we're basically steady here as she goes. In terms of what you talk about when it comes to the yen. It's interesting, right? So we're it looks like we're getting closer to that, just seven $34. China also 160 for the yen. And we're continuing to test that level. Keep in mind, the year today high that we saw the dollar yen for 2024 was one 6017. And that yellow line here right now. So that prompted that intervention last
time around. We'll see if we actually start to see more of that risk come through. But the fact that the US is adding Japan into that watch list is certainly something that is alarming a lot of traders here today and we bring it back to one 6020 levels. That is what we're going to see, the lowest yen and we've seen in 1984. So we're going to be heading back to that 34 year low.
You mentioned about the inflation numbers that didn't really do much to change. And Bath is coming out with an interesting note, talking about that path to 160. And they're saying, look, does it really matter how those rate differentials are going to narrow just even by a little bit? If you see that threshold between the U.S. and Japan still remain, why that carry trade still remains the area they say headed back to 1/16. Yeah.
It seems like the Bank of Japan really have an impossible task there. Yvonne, thank you so much for the very comprehensive overview on what's happening with these Asian markets. That's Yvonne Man and Hong Kong. While speaking of central banks, not just the Bank of Japan, the Bank of England and the Norges Bank held rates steady yesterday as they battled the highest inflation in decades. Meanwhile, the Swiss National Bank, the
S&P has surprised markets by lowering borrowing costs for a second straight meeting. So for more we're really happy to see that. Fredrik do crazy joins us now. He is the head of macroeconomic research at Pictet Wealth Management. Good morning to you. Great to have you with me on the show. Thanks for getting up early. Since you're speaking to me from Zurich,
maybe we should start with with the Swiss news S&P overnight. Also, that was the most surprising announcement out of all of the central banks yesterday. What do you think prompted the SNB to go for another cut since they had already cuts earlier in the year in March? Well, I think Switzerland is kind of an outlier. Inflation is low. It's 1.4%.
It's heading lower even in the second half of this year. And yesterday's decision by S&P was motivated by the fact that inflation was actually revised lower over the longer term to 1%. Now, it's a different target than the European Central Bank, for instance.
It doesn't need to bring inflation close to 2%, but 1% is probably too low. And the second thing is that it's been the case already for a long time in Switzerland that the currency, the strong currency has been a key driver of disinflation so far since last year. But it then reached that threshold, the pain threshold, I think, for the economy, where the Swiss National Bank didn't want an even stronger fall. And yesterday's decision is also, I think, their own way to tell us that they are concerned about a strong currency, obviously, because of what's happening on the other side of the border in France. French election driving some further
Swiss strength. So this is a you know, in a way an easy task for the Swiss National Bank compared, for instance, to the Bank of England or the Fed in the US where inflation is higher. But it's also a tricky trade off with another one, an even stronger currency.
Yeah. Yeah. And we'll talk about France in a moment, But let me ask you about the Bank of England as well. I thought it was pretty surprising that on an on on a day where essentially the Bank of England didn't say much, the market read a lot into it, and especially that quote unquote finely balanced comment is what is getting people excited, because it seems to suggest that even though the majority of members didn't want to change interest rates at the meeting yesterday, they may change their minds come August. What is your view? Do you think the Bank of England are readying for rate cuts in August? Yes, absolutely.
I think August the the meeting is live. It's not only about this finely balanced comment. I think you can feel that they are desperate to cut rates really? And not only good governor, but we have already two members out of the nine members of the NPC who voted for cuts. You just need three more to vote for a cut in August for the decision to be agreed by the split one. But still, and more than that, I think the communication around inflation services inflation, which has been even more sticky and higher and more volatile in the UK than elsewhere, the comments were actually dovish and encouraging that, you know, the uptick was driven by a small number of volatile components. So going forward, I think, yes, the Bank
of England is in the position to, as they say, dial back a little bit of this restrictive monetary policy stance. Cedric, I don't know if you remember that speech the UK chief economist Hugh Peel gave when he was in South Africa. But he likens monetary policy decisions to Matterhorn versus sorry, to Matterhorn versus Table Mountain in the sense that central bankers have the option of keeping rates high very flat for very longer, very restrictive, or they can raise them very quickly and cut them very quickly.
My sense and I know that you've been watching multiple central banks for many years now is that central bankers seem to be falling into the table mountain category, that they're keen to keep rates restrictive. And perhaps the path ahead means a slower, gradual decrease in interest rates than what the market was assuming would happen about six months ago. Absolutely agree with the caveat that, you know, we struggle to forecast inflation over the next months. So, you know, forecasting inflation over the next year is a different task at the moment.
We have a lot of uncertainty and volatility is tourism related items. Then there is insurance, there is this and that. And I think, yes, of course, they want to guide us through these stable mountains, but they are data dependent. And in the UK, in particular in the US,
perhaps eventually the labour market is another driver of potential easing in monetary policy because at some point we know that the unemployment rate could start to rise a little bit faster. I think if that happens then the stable month and because it becomes a little bit steeper and you have to adjust. So they do their best, including in terms of guidance, but that's their reaction function at the moment. Yes, I would agree.
Yeah. Frederick Well, let me just turn to the major matter of European markets the last couple of weeks, and that is the widening and spreads. How much of a concern is that for for the rest of Europe? And people have started to talk about potential spillovers, fragmentation risks, all of these, you know, major concerns that flare up every time you see a widening and spreads. But this time it's France, one of the largest economies.
This time is different. Yes, indeed, in many respects. First, I would say on the positive side, the euro area is structurally stronger, more stable. Contagion risk can be mitigated. Yes, there might be some spillover to Italy, but as long as Italy is growing and compliant with European rules, I don't think that the ECB would need to intervene. Many other reasons why we could expect
some sort of, you know, stabilization. And but then on the negative side, this time is different. As you said, it's France. It's the largest, most liquid markets for foreign investors, in particular, the share of foreign investors in equity holdings is very high. So, you know, this repricing has been fairly orderly so far, I would say is also a reflection of a higher probability of tail risks. And I would just highlight that to think there might be some complacency and there are some scenarios we'll see in the election. But if you get something that is like a non workable majority in the government or something more to the extreme far right, far left, then the state risk probably could lead to two further widening into the early part of summer.
I would be a bit more cautious and we are not taking any position at this stage because things can still move very fast in one or the other direction in the next couple of weeks. Interesting. Okay. Well, we'll leave it on that somewhat cautious note. Frederick Duker, the head of macroeconomic research at Pictet Wealth Management. I said you were in Zurich earlier. I think you're in Geneva. So I just want to correct about I also coming up on our show, the Israeli military appears to have pushed back on Prime Minister Benjamin Netanyahu's goal of destroying Hamas. We're going to talk more about what's
happening in the Middle East next. This is Bloomberg. Welcome back to Horizons, Middle East and Africa, Asia, minor Versace in Dubai. Let's get you up to date on latest developments in the Middle East conflict.
The US built pier in Gaza has unloaded humanitarian aid again after rough seas cut off the flow of food, medicine and basic goods. Earlier, Israel's military suggested that Prime Minister Benjamin Netanyahu's long stated goal of destroying Hamas is unachievable. And Lebanese government officials are seeking to maintain friendly relations with Cyprus. That is after Hezbollah threatens an attack if it allows Israel to use its territories to attack Lebanon. So no shortage of news from the region. For more on this, let's bring in Ryan Bohl. He joins us now.
And he's senior Middle East and North Africa analysts at Iran. Great to have you with us, Ryan. Look, I think the big question on people's minds is, are we going to see another war, another fronts open up between Israel and Hezbollah? Well, we certainly already seeing that front open up in the border zones between the two since October 7th. But, yes, we are currently on a path towards escalation. That escalation is being driven by the Israelis who see in southern Lebanon an imperative to create a buffer zone that would prevent Hezbollah or Hamas, which also now has bases in southern Lebanon, from carrying out an October seven style assault on Israel's north. So as long as Israel believes that it
can only be secure with a physical buffer zone on that frontier, we will eventually see the Israelis escalate further than what they've already done. And this is the key here, because it seems as though Israel wants to create that buffer zone, i.e., to push back Hezbollah. I think the number that's being circulated is around ten kilometers further north from where they are as it stands. But as we know and anyone who has, you know, is a purveyor of the region's history will know that these attacks and these operations don't seem to go as planned. The question is whether or not Israel actually has the appetite within the public, within the government, to push ahead with another war if it would mean more boots on the ground in Lebanon. What is your take? So I think the Israelis certainly believe that they have to go into southern Lebanon in some capacity, but their preferred outcome is a diplomatic solution that goes through the United Nations or goes through some other international actor that sees Hezbollah more or less voluntarily withdraw from the border.
That's Israel's preferred outcome, because that's the least risky, the least painful for it politically and diplomatically. But Hezbollah isn't going to do that. Hezbollah is not going to hand a strategic and political victory to Israel without a fight. And that's where we have this kind of geopolitical, immovable force reaching a, you know, unstoppable wall or something along those lines where these two incompatible demands are about to collide. And it's the Israelis who can't put up with the status quo any further, which is why they're driving towards escalation. Now, in terms of do they have the action they do at the moment, the problem for the Israeli government is they are aware that they occupied southern Lebanon from 1982 to 2000. It didn't work out for them.
It's been described as Israel's Vietnam and they are aware that if they fail to achieve their objectives, it will be the end of their political careers as well as potentially a strategic disaster for the Israeli military. Yeah, And also, bear in mind that 1982 was the genesis of where Hezbollah came to be. And you look at Hezbollah today with their capabilities, their formidable foe, the largest militia in the Middle East. So the stakes are a little bit different
from 1982. Let me just ask you about the relationship between the U.S. and Israel, because a few days ago we were talking about Netanyahu's comments accusing the U.S.
of withholding key military shipments. The White House came back and said that they were unaware of what he was talking about. And so it seems as though the relationship right now between President Biden and Prime minister and Netanyahu is a bit fractious. And I do wonder what bearing that is going to have on Netanyahu's own decision making, despite the fact that Amos Hochstein has been in the region trying to de-escalate. Well, I think this is one of those situations where there's a bit of a the dynamic is kind of having it flipped on its head because Netanyahu is acting a little bit more as the dove in this situation because his political career would very rapidly end if there's anything other than an absolute victory in southern Lebanon, whereas the Israel Defense Forces, the IDF, they're the ones that are pushing the defense establishment, are pushing for this buffer zone because they just don't see another solution to the Hezbollah threat in the north.
And so that puts the IDF somewhat at odds with President Biden and with the Pentagon in that they're interested in regional stability. And Netanyahu, at least on this issue, is somewhat on their side. Now, overall, the relations are relatively poor, and politically it's rather frosty. But at the end of the day, at least on
this particular issue, Netanyahu is dragging his feet for the war in Lebanon because he knows that if he gets anything other than that total victory, that's probably the end of him as prime minister. Okay. And where do we stand on those cease fire talks? It feels like we haven't really made a lot of progress in the last week. Should a cease fire in Gaza come to pass? What does that mean for the border in Lebanon? Well, as you noted, it's very unlikely that we'll see a cease fire, a breakthrough at this point, given that Israel has now moved into Rafah. They're now operating more or less in the open there, and they're shifting over to a counterinsurgency campaign that looks like it's going to be open ended.
And in a counterinsurgency campaign, cease fires are rather rare. So that looks like it'll be an open fight in Gaza for months, if not years to come. But as a result, the northern frontier will be unstable. But in that unlikely, still unlikely
scenario in which there is some sort of diplomatic outcome in Gaza, that in some capacity or another ends that conflict, Hezbollah's political incentive to continue attacks on northern Israel will strongly diminish. And then we could see an opening of a door. What's a possible diplomatic settlement in Lebanon? But we need to see a lot of things happen in Gaza before we can see that knock on positive effect within southern Lebanon. It's very fair and it's even something Hezbollah chief Hassan Nasrallah said himself a couple of days ago in that speech. Ryan, thank you so much for joining me today. Brian Bull, senior Middle East and North Africa analyst at Rain. Also coming up on our show, Vladimir
Putin continues his charm offense as he looks to boost ties across Asia. We'll have the latest from his visit to Vietnam coming up next. This is Bloomberg. Welcome back to Horizon's Middle East and Africa. I'm Jeremiah Versace and Dubai. Russian President Vladimir Putin has
signed at least a dozen deals with his Vietnamese counterpart as he tries to boost ties in Asia. This includes offering to supply natural gas and cooperation in tech, clean energy and oil and gas exploration. Bloomberg News editor Jill Diess joins us now. Jill, this trip seems to have been somewhat of a success for Putin. You've had North Korea roll out the red carpet for him, essentially moving on to Vietnam. What has he achieved? What would he go home to Russia and sell as a success? Well, Jomana, I think he's actually touched quite a lot of ground on this trip. We'll start with Vietnam, which he's
obviously just concluded. You know, you mentioned, you know, some of those energy agreements there, this idea of Russia really helping Vietnam with its gas book, a fashion capacity. They've also talked about supplying liquefied natural gas to Vietnam. So you've got a lot of these energy ties there, as well as some additional infrastructure ties that they've been discussing. Vietnam and Russia have agreed to soon roll out major infrastructure, railway systems within Vietnam.
And then they've also talked quite a bit about defense and security cooperation within Vietnam. Vietnam's long been a buyer of Russian military weapons. So it does seem like, at least on that front, they've made a lot of progress there on what really is been developed is a is a pretty big, you know, US diplomatic ally recently. Yeah. I mean and this is the point right it is
somewhat concerning I guess, for the West for the US to see this alliance prop up between North Korea and Russia, North Korea being a world pariah, very sanctions country, but then also to see Putin visit Vietnam, a country that also has a lot of history with the US. What has the US response been to this trip? Well, look, I think ultimately when it comes to North Korea, you know, I mean, that's something that is that's a longstanding partnership between Russia and North Korea. North Korea's obviously been incredibly supportive of, you know, Russia's war in Ukraine that I think has been more of a concern among some of the US's allies in Japan and South Korea, which are obviously within range of, you know, North Korea missile weapons. So I think that there's been some discussion there on how they sort of respond to that partnership. I think on the Vietnam angle. Now, the one thing that you have to
remember, Jomana, is that last year the US and Vietnam actually upgraded their diplomatic partnership to the strategic partnership, really the highest level of sort of diplomatic partnership that Vietnam really offers a lot of its allies and its diplomatic partners. And so that I think has been a pretty big concern from the U.S. They had a statement out earlier this week just saying that, you know, I've read it for, you know, countries should give Putin a platform to promote his war of aggression and otherwise allow them to normalize atrocities. They are also sending in Assistant secretary of states to Vietnam ties. They're just going to wrap it up there. Thank you so much. All right. We're going to head to a break.
And when we come back, talking about oil. This is Horizon's Middle East and Africa. Our top stories this morning. Asian stocks followed Wall Street lower on buyer fatigue. That is after tech shares dragged the Nasdaq 100, breaking a seven day rally. Israel's military appears to suggest
Prime Minister Benjamin Netanyahu's goal of destroying Hamas is unachievable while tensions on the country's northern border continue to simmer. Plus, a Bloomberg scoop. Canada is preparing a potential tariff on Chinese made EVs aligning with moves by the US and EU. That's just on 8:30 a.m. across the Emirates. I'm zoom out of Versace in Dubai. What we got yesterday in markets was a
slight pullback for the S&P 500 alongside the NASDAQ. This after returning from a public holiday. And yes, we did break through 5500, another record high briefly intraday, but then we broke through it again on the downside, dragged lower by some of those key tech names the likes of in video surprise. Sometimes it does actually fall was down about 3%. Apple down about 2% as well. Today.
You can see that the futures are leaning slightly green sideways, but recuperating some of the losses that we're seeing in the actual trading session yesterday afternoon, dollar yen. Also in focus this morning, we're going to talk more about that shortly with Ivan. But essentially that currency pair keeps drifting higher and higher, getting close to around 159 160 are raising questions about possible intervention once more and what the Bank of Japan can do to bring about the appreciation of the JPY. And then, Brent, also in focus, the crude complex, recovering a lot, actually, since that Opec+ meeting.
What we're seeing is Brent is stabilizing around $85. This after the US stockpile count yesterday, surprised to the downside. So a bit of a bullish surprise to the energy complex that came through.
Also want to turn your attention to what happens in gilts. Yesterday we had the MPC meeting not making any changes to interest rate policy yesterday, but as suggesting that the decision to keep rates on hold was actually a finely balanced one, which means that some members of the MPC could be thinking about a rate cut as soon as August, and we saw bonds rally on the back of it. Gilts rallies about five six basis points post announcements over since then.
Overnight we've come up a couple of basis points, but still the market has been quick to price pricing, more rate cuts out of the bank of england for the remainder of this year. Now, let's also check in on how markets in Asia are faring. Yvonne Man is in Hong Kong. Yvonne, what is on your radar today? Yeah, we're watching some movers here in Asia, Jomana, and certainly the sector in China is very much in focus. We talked about that bloomberg scoop about Canada considering really joining the likes of the US as well as the EU in implementing tariffs on Chinese electric vehicles. So you see the likes of BYD slightly lower. But don't forget Motors, one of the biggest losers on the board here today in Hong Kong, we're down close to 6% May Taiwan as well. This was one of those worst to kind of
the top stocks that we've seen in this whole kind of tech resurgence of late. But we're seeing a bit of a pullback here, down some 4%. It's interesting, these tech shares really kind of rallied this week on the back of what we heard from the Lujiazui forum in Shanghai. You know, the potential for more market boosting policies.
But traders are left with scant details. They really want to hear a little bit more what these measures could mean. So maybe that's why we're seeing a bit of profit taking on tech here today. A lot of what we saw overnight in the US
with the Big Mac seven selling off as well. SoftBank is one to watch there. We just heard from Nostro Sung in Tokyo talking about their next big investment is going to be in AI to create the super AI here and aam chips will be the heart of that endeavor but right now the shares are down some 3%. Before I go we want to check one big
large cap stock in Hong Kong China and that's kweichow moutai. This is a liquor maker that used to be kind of the staple in many foreign investor portfolios. Well, that certainly has changed. Now there is this whole concern about wholesale prices of moutai that are continue to go down, which shows the demand picture seems to be weakening as China's economy weakens as well. We basically have seen eight days of losses when it comes to this stock already. And in terms of losing its market cap, we're very on the cusp of losing its status as China's biggest listed onshore company. And who's going to take over? It's a Chinese bank, ICBC set to take Moutai's crown. Hmm.
Interesting. Interesting tidbit there. Also, perhaps a bit of a bellwether for Chinese consumption patterns now. Yvonne, thank you so much for that overview.
That was Yvonne Man in Hong Kong. Well, let's talk more about energy. Oil is headed for its first back to back weekly gains since early April on the back of a decline in U.S. inventory levels. Brent has risen more than 3% this week, while WTI trades near $81 a barrel. Crude stockpiles fell 2.2 million barrels, defying the American Petroleum Institute forecast for an expansion. Now, crude prices have recovered since OPEC+ clarified that its decision to bring some barrels back to the market was conditional. Muasher, Capital's head of fixed income
and will shortly joins us right now in the studio. So. We are looking at gains for the week in oil. It's been a bit of a rollercoaster ride
ever since that Opec+ announcement came through and then I think they tried to dial back what that announcement actually was. But ultimately the path the last few weeks has been bullish. Do you expect that to continue that? Good morning. Yeah, oil took a significant upturn from the recent lows, which we saw, but again, most of it is driven by geopolitics and opec+ communication, right? Opec+ had to reassure market that the balance barrels they're going to bring back to markets are subject to market conditions. On top of that, if you look at the geopolitics recently, the fresh attacks on attacks by Ukrainian Russian infrastructure, actually that's actually helping oil prices in the near term. We are also seeing the Israel and
Hezbollah tension flaring up as well, and that's supporting oil prices as well. Having said that, if you look beyond summer demand, if you look at beyond geopolitics, I think the fundamental factors are still kind of a balance of bearish in our view. We maintain our view that oil prices could go back as low as 70 to $75 per barrel on average in the second half of this year. And the factors that you mentioned have remained the same.
We are talking about spare capacity, Opec+ are talking about non-OPEC suppliers are talking about demand softening in global economy and inventory picture is not that optimistic either. Right. So on one side, the geopolitics, another set of fundamentals. I think prices are going to stay volatile through the rest of the year. But we think if you go to other end of the distress that prices could go lower than where they are right now. And what does that mean for the economies of the region? Because, you know, it's one thing for Saudi Arabia to be withholding barrels when oil is trading at $85. It's quite another another thing if
they're withholding barrels when it's trading at 70. So what implications is that going to have on the real economy? Oh, well, I suppose Saudi Arabia economy is concerned. They really need higher oil prices and high production rate. That's not happening. And we saw that in the first quarter GDP number as well. It's contracting. Having said that, the many levels to the economy than just oil.
Right. Non-oil economies are resilient. We are seeing mid-single-digit growth there, if you look at. So the balance sheet as a whole is one of the strongest in the region. I mean, debt to GDP is still less than 3/%.
Interest cost as a percentage of revenue is just 2%. So we're really talking about a robust economy on the whole and that would mean they'd be able to cope with this kind of weakness this year, if not beyond. Yeah, I'm well, I'm not sure if you saw that Bloomberg story yesterday saying that Saudi Arabia has overtaken China as GM's largest issuer this year. I think that would have gone very undetected by many in the world. A bit of a surprise that the people who don't trade the ins and outs of Saudi as much as you do. What do you expect the funding situation
for Saudi Arabia to look like, not just for the end of this year, but in coming years as well, given how much they have been issuing in bonds face is a great question, and I think that's the risk which investors are talking about at this point in time. Supply risk out of Saudi Arabia. I think markets are overly concerned with the of this issue in our view. If you look at the deficit numbers by many economists this year, they're talking about 4 to 4 and a half percent of deficit versus the economy. And that just told us about 45 to $50 billion. If you combine the debt market and equity market issuance as a whole, that's about $45 billion already. So I think in our view, the economy is
well funded for this year. And I think the worry about supply risk, though, it's valid over the longer term. I think in the near-term, I think they should be. All right. And I just talked about the fundamental factors. Right. I think if you look at the net foreign asset of Saudi Arabia that were 50% of GDP, and that's one of the highest numbers you can see for any emerging market single-A or Double-A rated economy. And you've got to also look at the
relative valuations and spread of Saudi Arabian bonds was a was a similar rated e M bonds. And I think we see a great opportunity. And so the sovereign bond go at this point in time. It's one of the cheapest single issuer out there. You can compare it with names like Chile, Malaysia, Poland, it just giving you a 40 or 50 basis point more for a similar rated and similar maturity of bonds just to, you know, bringing attention. The relative valuation was Indonesia, which is a for nice, low rated economy.
So there have been bonds at the long end are giving 40 basis point more for foreign life, better rating. And I think the supply risk are clearly factored in in the coming up. Yeah. So I know you are a fixed income investor, but how closely were you watching the placement of the Aramco secondary secondary offering and to what extent were you interested to see that, you know, in the end 60% of the demand that came through was from foreigners? Oh well, it was not a surprise to us, as I talked about, about the deficit number. If you're talking about four or four and a half percent of the deficit, we're talking about 45 to $50 billion in absolute number. And the report which you guys published yesterday, we're talking. But $33 billion of bond market issuance. Aramco printed about $12 billion in
equity offerings, and that adds up about 45. We know that if the picture in Saudi Arabia is not that great at right over the last two years, average Analyst Day about 15 to $20 billion, they want to take it up to $100 billion a year at some point and next ten years. It's a very ambitious start. But then we can see that changing gradually. But until that happens, I think
government will have to, you know, issue through debt market. They have to go to aramco's secondary offerings to fund that gap. So I think if you look at the math, it's understandable. But then we are not concerned as such as far as bond market is concerned in Saudi Arabia. Yeah.
Okay. Very clear. I'm going to we're going to leave it there. Thank you so much for joining me today. That was almost totally head of fixed income at my short capital. Also coming up, Kenyan lawmakers defy widespread protests and pushed through a controversial tax bill. We'll bring you the latest. This is Horizon's Middle East and
Africa. Welcome back to Horizon's Middle East and Africa. I'm Jomana Versace in Dubai. Kenyan lawmakers are doubling down on
controversial tax proposals despite widespread street protests. The aggressive tax proposals aim to reduce the budget deficit by generating an additional $2.4 billion of revenue. Those fiscal changes are also key to unlocking more funding from the IMF. Axing the bill could create a $1.6 billion deficit. Now Bloomberg's on zero Ganga joins us right now from Kigali on zero. Maybe let's just start out by if you could walk us through what the protesters are actually protesting against. What are their grievances?
What are they raising? Jomana, the bone of contention is the proposed finance bill 2024, 2025. And as you mentioned, it includes aggressive tax measures that are aimed at raising $2.4 billion. Now, these taxes touch on basic goods and services, which is going to affect the income of those in low and middle income societies. And it is for this reason that young people came out to the streets and for the first time this a protest that are not affiliated to any political party. We saw young people take their time, go through this bill, educate each other, then mobilize themselves on social media through platforms like Twitter and Tik Tok. And they came out in their numbers, coordinated nationwide protests across eight cities in the country, largely peaceful. Any violence was propagated by the
police, but they had planned really well. They had lawyers on ground to bail them out. They had medical doctors to give medical care. But unfortunately, last night, one person succumbed to two gunshots from the police. However, national Treasury saying do not succumb to the pressure, because if we shell some of the tax proposals, we are likely to lose money and that will mean budget cuts in the near future.
Well, I mean, Kenya has been suffering from very high levels of inflation. And of course, these tax rises will only compound that. What are the likely follow on ramifications of the bill if it does get passed? What is important to note here is that Kenya is under an IMF program which is currently putting pressure on them to increase their tax collections and also implement painful fiscal reform programs to ensure that they can unlock more revenue from the IMF. The goal here, as you heard also mentioned, is to reduce budget deficit from 5.7% to 3.3%. And so this government has to weigh they
are at a crossroads. Do they continue of abandoning the taxpayer and risk social or political tension that is brewing and will continue to rise in the country? Or do they go back to the market to try and borrow so that they can fill those gaps? The catch here is that yields are really expensive and the market is still jittery about Kenya's fiscal sustainability. But at the end of the day, irrespective of whatever decision the government takes, the IMF will be the bottom line and they'll decide how the Kenyan government moves forward. On zero.
Thank you so much for the overview that was Bloomberg's on zero going and kick alley. Now for a look at some other stories we're following. A Wall Street is gearing up for a quarterly event known as triple witching that will see some $5.5 trillion worth of options tied to indexes. Stocks and ETFs fall off the board,
according to an estimate from Spot Gamma. This time around, the expiring value tied to calls is estimated, estimated at 11 times greater than the notional value of the puts. The US options expiration may provide volatility Star traders with some short term market swings as investors adjust their positions. A United Airlines plane returned to a Connecticut airport after losing part of a liner from inside the engine's cover. The Airbus A320 was bound for Denver
when the crew heard an abnormal noise, According to an FAA statement, several pieces of sheet metal from the plane were found on the wrong runway after the landing. No one was injured and the FAA is investigating. It is the latest in a series of mishaps for the carrier, including a piece of fuselage coming loose on flights and the wheel falling off a plane after takeoff. And software provider Cdpq is warning car dealers in the US that their systems will probably remain offline for several days. That is after a second major cyberattack this week on the company's systems. Auto retailers across the US rely on the
service to complete sales access customer records and schedule appointments and repairs. They're also coming up on our show, a Bloomberg Scoop More Headache for Chinese EVs. Canada is now preparing to impose its own set of tariffs to align with allies. More details next. This is Bloomberg. Given that the US is praised highly, a lot of the opportunities for bargains are outside the U.S. Obviously China is on a lot of people's UN investible list that tends to depress its value and we like to think to look at things that other people aren't interested in.
So China is is one good example. But, you know, we we are not macro investors. We're not top down. We don't affect a geographic diversification for its own sake. We go where the bargains are and we're finding lots of bargains in many places. And how are you mentioned about China giving you good opportunities outside the U.S. in particular?
I mean, I know you guys focus more on the loans side of things when it comes to your distressed strategy in China. I mean, how are you viewing distressed properties now in the mainland? Is there a sense that you're you're adding to your exposure in any way or backing away from the sector now? Well, you know, we've been investors in NPLs for close to ten years. Non-performing loans, that is, every every banking system generates some non-performing loans. China has set up mechanisms to to get them off the bank's books. And we've been participating for, as I say, close to ten years.
The legal system has operated as it should. We're happy to continue in that role and we're not backing away. In terms of I mean, obviously you were kind of caught up in what happened with Evergrande. As a creditor, I'm just wondering, you know, were there any lessons that were learned from from this fallout from Evergrande in this downfall? And how much of the assets was Oaktree able to salvage? You know, the lesson is to be careful when a supply is created by a strong availability of capital. Capital was made available to the property development sector to so that it could contribute to GDP growth. It expanded rapidly.
It made use of that capital. It built it build some buildings which from time to time turned out to have supply exceeding demand. You know, we participated. I think another important lesson is, is it's a good idea to get collateral. We got collateral on our loans to
Evergreen Evergrande when many others didn't. And we think we're coming out very well. As I mentioned, the legal system is performing for us. We have got in control of the collateral and there haven't been any disappointments on that front. So as I say, we're continuing with our involvement.
That was Oaktree Capital Management co-chair Howard Marx, speaking exclusively to Bloomberg and Bloomberg. Sources say Canada is now preparing potential new tariffs on Chinese electric vehicles. Prime Minister Justin Trudeau's government wants to align with the US and the European Union, who also recently announced their own sweeping tariffs hikes. Now China correspondent Matt Lowe joins us and tell us more about the story. What do we know?
Yeah, it's hard to say how much those tariffs will eventually be. Canada is said to be just starting public consultations on these tariffs now, and there's strong pressure on Prime Minister Trudeau to really match those tariffs that has been introduced by the Biden administration of upwards of 100%. The EU, of course, has also imposed tariffs of up to 48%. There is new research that has came out from the American think tank saying that China has provided over $200 billion in support to its domestic EV sector over the past 15 years. But to be fair, though, those support per vehicle has come down drastically over the years to just under $5,000 per vehicle last year.
That's still below what the US offers 7500 in rebates for US consumers on eligible vehicles under the Inflation Reduction Act. But in Canada, the domestic auto sector is calling for steep tariffs. They say that Canada cannot sit on the sidelines here because you have that review of the FTA coming up, the FTA between Canada, Mexico and the US. We know Canada's auto industry is very tightly integrated with a US sector as well. They sell finished products and parts to the US by far. Most of their exports are going to the US. So Prime Minister Trudeau will really
have to balance between the US and China now. And of course there will be fears of retaliation from China as well. And, you know, this isn't the first set of tariffs that will be imposed on the Chinese. Every sector. We've had it from the US, as you just spoke about, from EU as well. What sort of an impact could these proposed Canadian tariffs also have on Chinese EVs? So the short term impact is not likely to be great because Canada is still a very Nathan market for Chinese EVs.
Tesla, though, is going to be disproportionately affected because last year Canada saw this five fold surge in Chinese EVs. Most of that is really driven by Chinese made Teslas. The Chinese companies like BYD, NIO, they don't have a huge presence in Canada just yet. But of course the risk is that they'll be locked out of the market before they even make inroads into the country. And currently Chinese EVs are terrified at 6% and consumers get to participate in this federal rebate program when they buy foreign made EVs.
That's part of Prime Minister Trudeau's ambitions to really increase the number of new vehicles sold that have zero emissions by 2030. So there is a huge potential market there. Of course, Canada is also pouring billions to build up its own domestic supply chain with multi-billion dollar subsidies given to companies like Honda and Volkswagen to build factories there. So the market barrier of entry, as well
as the trade barriers, is just going to keep increase, keep increasing for Chinese EV makers. Certainly does appear to be the case. China correspondent Min Lal, thank you so much. Well, that is it for our show today, Horizon, Middle East and Africa. Stay with us because the DAYBREAK Europe is coming up next. This is Bloomberg.
2024-06-24 03:46
