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Bloomberg Audio Studios, podcasts,

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Welcome to the Daybreak Asia podcast.

I'm Doug Krer. [music]

It's proving to be a mixed day for

equities across the Asia-Pacific. In the

US session, stocks drifted lower in

front of a report on consumer prices and

American markets also had to contend

with a push higher in the price of oil

given the lack of a deal to restore

energy flows through the straight of

Hormuz. Needless to say, higher oil

prices have renewed concern about

escalating inflation. And that's where

[clears throat] we begin our

conversation with Chi Chow, managing

director at UBS. She spoke with

Bloomberg TV host Sherion and Heidi

Strad Watts on the Asia trade.

>> As usual, there's a lot of crossurrens

going on for investors. How big is this

inflation print in terms of broader

sentiment going forward for you?

>> Um, I think we're just not as concerned

with the inflation at this point. I

mean, we're still pretty focused on the

overall market and the strength of the

economy. Um, so I mean even even with in

inflation where it is, I mean the Fed is

uh is still on hold and the progress in

the uh hopefully the US Iran

negotiations and uh AI growth uh we feel

like the economy is still going to uh be

pretty much intact and uh and we're

positive and very optimistic uh towards

equities uh even though it might be

bumpy but uh still we have a pretty good

uh price uh target for the S&P reaching

about 8,200. 00. Um, so I think uh, you

know, investors should still continue to

stay invested uh, and and hopefully you

know the AI and and the strength of the

markets will continue uh, uh, to help

push equities higher.

>> Yeah. tell us about how you're viewing

the construct of the AI the hyperscalers

uh some of the developments that we've

seen in that space particularly in the

US because there's been ongoing concern

about obviously the amount of

infrastructure investment capex levels

but then we're also seeing you know the

rotation of huge amounts of funds in

these circular funding arrangements

>> right absolutely I mean I think uh you

know lots of concerns but we were being

constructive on the AI

story. Um, but we believe investors

will, you know, manage the concentration

and we we're hoping that investors can

start to manage some of the

concentration by just diversifying uh

out of, you know, complete AI stocks,

but maybe into other sectors like

healthcare, industrials, financials. Um,

even though we we feel like AI is still

going to push the growth for the next

probably 5 10 years, but um there's

still a lot of room for investing in

other defensive sectors as well.

Um, as I'm doing,

>> one of the non- US markets you like is

China. Tell us about what you're finding

compelling within Chinese equities at

the moment. Is it that AI play on the

basis of the gap that is being very

quickly closed?

>> Yeah, absolutely. I mean, Chinese

equities, I mean, we think uh China's,

you know, has a lot of room for growth

in terms of the tech equities. Um but

you know outside of China you know we

want to focus on you know India, Japan,

uh Europe those are also a lot of good

valuations in some of those markets. So

I think um of course China's going to

drive a lot of the growth just because

where it's located and because all the

investments they are also making in AI I

think um it's probably worthwhile to to

stay with with some of the Chinese

larger tech names but also diversify

among surrounding countries. I mean uh

South Korea was was also a big you know

a big winner uh in the in in the last

few months but I mean we're currently

neutral um and we are now uh more

attractive on India so I think uh China

India some of the surrounding country

are also good place uh in this in this

market especially with the AI growth

>> when it comes to developments on the

ceasefire or an ultimate peace deal or

at least you know a specific deal to

reopen the straight of Hormuz Is that

meaningful for markets at the moment? Do

you see any kind of big change that

could could could come through?

>> Um, I mean, I think negotiations are

improving and we do absolutely hope for

a a kind of resolution, but we feel like

eventual agreement with Iran, I mean,

will likely keep pressure on oil um by

allowing more supply to reach global

markets. I mean, it's going to take some

time. So, I mean, this can definitely

support gold uh by easing inflation

concerns and and reducing the risk for

further central bank uh tightening. So,

uh I mean there's going to be some

impact, but I think eventually there

will be a resolution, but it's it's

still going to be a kind of a bumpy road

ahead to get there.

>> What do you like within bonds at the

moment?

>> Well, we like um a lot about bonds. I

mean, we think this is a great time to

lock in yields. Um especially with US

corporate bonds 5 to seven years we

prefer high quality also emerging

markets. Um but I think you know where

rates are right now this is a really

good time to uh to to to diversify your

portfolio within bonds and focus on on

the high quality corporate corporate

bonds.

Um

we talked a little bit about the sort of

broader

opportunities within China. I know that

India is one of them. Are you

constructive on broader EM as a result?

>> Yes. Uh emerging markets absolutely. I

mean we think EM has had a good run this

year. Uh but a a lot of that is uh

volatile as well is uh dependent a lot

on on China especially on China. So

really have to see a stronger recovery

in China's economy. Um and I think uh

you know EN is usually EM emerging

markets usually is a smaller allocation

for us. Uh you know like I think it's

good to be be be participating but we're

still focusing more on just the core US

portfolio at this point. Um and some of

the larger developing markets uh such as

China and Europe and Germany and the the

Euro zone overall.

Uh career has of course been front and

center. You've downgraded from

attractive to neutral. Is that over the

froth over the AI trade for you?

>> Uh no. I mean that's that's actually a

really good point. I mean I mean Korea

has certainly done very well with the

memory companies and um just you know

but but that a lot of that has run up

pretty high uh in a short time and and

know and we have a lot of clients are

always favorable on the semi semimeis

and equipments and foundaries but we we

feel like you know focusing if you want

to diversify among the semiis uh

focusing on some of the compute names

within semi and there's a lot of

opportunities that we see in smartphone

makers payment networks data centers

reads and also some select uh consumer

electronics. So, a lot of that, you

know, is still it's it's still a good

play for some of the Korean companies.

Uh but, you know, just just to diversify

out um Pure Sims, I mean, these are some

of the opportunities that we see.

>> That was Seow, managing director at UBS,

speaking with Bloomberg TV host Heidi

Strad Watts and Sher on. Coming up,

we'll take a look at the yen story with

Bloomberg News macro strategist Michael

Ball. That's ahead [music] on the

Daybreak Asia podcast.

Welcome back to the Daybreak Asia

podcast. I'm Doug Krishnner. The focus

now is on the foreign exchange and the

Japanese yen in particular. We've seen

some renewed selling pressure as the

market looks for a return to that 160

level against the US dollar. Now, in New

York trading on Tuesday, the yen was

little changed, but it remains clear

that there is concern about possible

intervention. Again, we already know

that US Treasury Secretary Scott Bessant

has said the US is willing to support

the Japanese currency, and many on Wall

Street have speculated that part of his

motivation is to keep Japanese

authorities from selling US treasuries

as a way of raising dollars. For a

closer look, I spoke with Bloomberg News

macro strategist Michael Ball. It was

pretty a surprising move, but everyone

had been kind of anticipating this given

the fact that the yen had been so weak

for such a long time.

>> Yeah,

>> it almost felt like um the market was

waiting for the monetary authority in in

Japan to act unilaterally, but they

didn't. It was a coordinated effort,

first time since 98. The market

obviously was caught a little

flatfooted. Was it a watershed moment?

Do you think that it send a kind of a an

important signal that maybe has the

market a bit in check right now or do

you think

>> we're making too much of it?

>> No, I don't think we're making too much

of it. I think again we've crept up back

to this 160th area. We're a little bit

below it now today. And again, that

seems to be the line in the sand that

the market has in mind for that's where

coordinated intervention both Treasury

and the MAF and the BOJ together all

have to basically signal that this is

where we're going to defend until we get

to September or potentially October

where you could see rate hikes from the

BOJ to again give a more fundamental

story why the yen should appreciate and

to change this feedback loop. It's just

a negative feedback loop of weaker yen

be getting weaker yen because of

positioning. So from the US position is

is Treasury Secretary Bessant looking

more at what's happening in the US

Treasury market than he is the currency

market and he's concerned that we may

see a backup in US yields.

>> Yes, I think that's the primary goal

here and I think he's signaled that in

several ways. One obviously for his

worry that the intervention will not

only be the selling of bills which has

been up to date now how they've done it

but more on actually the long end. So

again, if they didn't have access, let's

say, to the FEMA kind of facility as a

backs stop or they didn't have access to

the international repo market or even

the repo facilities, the other ones that

are available at the Fed, then they

would have to sell longer end

treasuries, whether the 10ens or 30s and

the curve, which has already been under

pressure since the July FOMC would come

under further pressure and that would

actually force the hands. So you

mentioned FEMA. Just to unpack that a

little bit, this is a vehicle that would

essentially allow Japan to borrow

dollars to post US treasuries

essentially as a form of collateral so

they wouldn't be net sellers of US

treasuries to dump that inventory into

the market and run the risk of pushing

US yields even higher. Right.

>> Exactly. And there is a limit to that

amount. I think it's around 60 billion

which in a sense is a little bit small

for what is needed because let's keep in

mind the initial intervention that

happened last week saw about $80 billion

of bill selling by the moth to actually

support and buy yen. So this one itself

is you know more of a backs stop. It

hasn't been used yet because it's more

expensive. It's about 25 basis points

over what a normal repo rate would be to

do something like this. But in it in its

signaling effect, it's much larger

because again what we may see from

Bessin with you know the the new Fed

leader Kevin Walsh is to to lift the

limit there which then would be a much

bigger signaling effect and overall with

all the other tools that they have at

their expo at their uh can use the

Japanese then could just have this as

well as a backs stop.

>> So take me back to the currency market

what this means for not only the dollar

but the Japanese yen again.

>> Yeah, exactly. And again, there's other

things going on in Japan that is making

us worry that they'll be selling

Treasury holdings. And as they sell

Treasury holdings, obviously, then they

weaken sort of the dollars, they bring

money back into the yen. But specific to

what this intervention was about, again,

it was to initially stop official

account selling of the the Treasury

market. And what it really means for the

dollar is, you know, for that cross

itself, it would weaken the dollar

against the yen and effectively put more

pressure even on long- end real rates,

which is counterintuitive because the

rate differential story would be off

there. But then it's a capital flow

account thing where basically you're

just seeing selling of dollar assets by

Japanese holders.

>> So we know what the disinflation or

deflation story in Japan has been like

for three decades. And we know that the

BOJ these days has been very very

conservative moving very gradually. You

could make a case given the level of

inflation now in Japan that the BOG

needs to be a little bit more

aggressive. That's not happening. Yeah.

>> Is there the risk though that if they

begin to lean into more of a tightening

that we could see a repatriation of

Japanese assets leaving global markets

like the US and coming back to Japan?

>> Well, it might actually be the

interesting I think you actually nailed

on the head. I think they took so long

for them to get inflation to kind of get

going again. And it has gotten going

again. Obviously, they have more energy

sensitivity and we know what's going on

there. But it took them so long to get

rates off the zerp and get all get get

them off the floor and get inflation

back ingrained in sort of the day-to-day

consumer that they're very worried that

if they sort of even tighten a little

bit, they're going to lose that

progress. But to your point, if they do

tighten, if they come out in say

September and they issue maybe a

statement that's more hawkish than

expected and October is getting priced

up again because right now September is

about twothird price for a hike and if

they don't go then the expectations will

be 100% for October. But let's say they

just do backtoback, you would see that

curve flatten. So you see the long end

of the Treasury curve, their treasury

curve over there come off and get a

rally and that actually would give you

less incentive to repatriate back into

the Japanese assets effectively into

their bonds because one liquidity is not

great there. Two, then you're just your

rate differential story is not as

compelling anymore because by hiking in

the front end they're effectively

showing that they have more

responsibility towards the back end as

far as monetary policy.

>> So what's your sense in terms of yen

weakness? Is the worst over at least in

the near term? Yeah, I mean that's a

great question. I think a lot of that

has to do maybe with energy as well.

Obviously, they have some sort of uh

well, not some sort of they have a

higher correlation here with oil prices.

If oil where it is now and the rate of

change there stays stable, then it's

less of a pressure on them there. I

think you're right. I think in a lot of

ways, well, not that you're right, but

what you're hinting at is that the worst

could be over if we see this coordinated

intervention lead to basically hold a

period of time before you see actual

rate hikes.

>> To what extent could the market be

surprised right now? Is the trade so

crowded that we risk maybe kind of I

don't want to say a violent adjustment

but something that could be dramatic.

>> So the trades come off to your point I

think what a lot of that was last week

was that people were caught off sides by

the coordination and now obviously the

size it was a somewhat large imprint

they had in the market and people were

basically still leaning very short yen

and that's cleaned up nicely. We get the

CFTC data that's one way to look at it

but also we're hearing sort of from flow

traders that a lot of that has come off

and it's a much flatter position. people

are more nervous now that there's

two-sided risks to where the yen could

go. And again, this 160 level is sort of

the pivot where if we drift above 160, I

think people will be more empowered to

short it. Traders will think that the

intervention was a one-off and they're

not really disciplined or committed to

it. And if it goes lower, then the

feedback loop actually people will

probably try and rush into it to get

ahead of maybe a more structural change,

which would again be real rate hikes

coming down the road.

>> Do you think I'm going to bring up trade

policy because sometimes, you know,

currency levels are very influential in

that regard.

Is this meaningful in a way that could

influence the trade conversation, do you

think?

>> Well, we know Bessant was hounding

Taiwan and obviously pressuring some of

the other sort of Asian export powers uh

to basically strengthen their currency.

So, I think that's always lurking in the

back. We have a different relationship

with Japan. Um so, I can't really give

you a great answer there. That's always

a consideration. Um but I don't think

it's the driving force here. here. I

think the driving force as we kind of

basically hit on the head is Besson's

worried about a lot of pressure on the

long end of the Treasury curve and he

sees this as one of many tactics he's

using including the recent re

announcement of refunding and all that

to stick still with heavier bill

issuance to basically take pressure off

further sort of selling and supply in

the back end and not to have that

unhinged.

>> Michael, we'll leave it there. Thank you

so very much. Bloomberg News macro

strategist Michael Ball joining us here

on the Daybreak Asia podcast.

Thanks for listening to [music] today's

episode of the Bloomberg Daybreak Asia

Edition podcast. Each weekday, we

[music] look at the stories shaping

markets, finance, and geopolitics in the

Asia-Pacific. [music]

You can find us on Apple, Spotify, the

Bloomberg Podcast YouTube channel or

anywhere else you listen. Join us again

tomorrow for insight on the market moves

from Hong Kong to Singapore and

Australia. I'm Doug Krer [music]

and this is Bloomberg.