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Welcome to [music] the Daybreak Asia

podcast. I'm Doug Krner. The market's

attention remains on developments in the

Middle East. Over the weekend, the US

struck military sites on Carg Island.

This is Iran's main export hub for crude

oil. Then on Sunday, late in the day,

President Trump told the Financial Times

the US was prepared to launch new

strikes on Carg Island. He also said the

US could target Iranian oil

infrastructure. And at the same time,

Trump told the FT, "NATO faces a very

bad future if US allies fail to assist

in opening up the straight of Hormuz."

Now, those comments come a day after

Trump appealed to China, France, Japan,

South Korea, and the UK to join a team

effort to open up this choke point.

Trump also said he could delay his

summit with Chinese President Xi Jinping

later this month as he presses Beijing

to help unblock the strait. To help us

understand some of the market action,

I'm joined by Steven Chenfeld. He is the

CEO at Market Vector Indexes. Stephen,

thank you so much for being here. So

when you digest the latest news

regarding the Middle East, what do you

come away with?

>> So the US sent a very strong message by

hitting military targets on Car Island,

specifically avoiding uh energy targets

for now. It's basically put a a line in

the sand on that. Uh there's been lots

of back channel discussions about

different ways to get uh ships through

the Straits of Hormuz. Um, India is

talking on its own deal, some countries

in Europe, but I think the Straits of

Hormuz are more blocked than open

certainly for the next few weeks. Um, a

lot is going to depend on how much Saudi

Arabia can get out through the Red Sea.

They're pumping more than ever that way.

And it was very encouraging that already

today the UAE opened back reopened uh

Fujayra which is on the other side of

the straits of Hormuz. So that's back

on. I think the pop in uh both Brent and

WTI is natural. I'm glad to see it's

easing off. US futures are uh flat to

higher. Um Asian markets don't seem to

be like they're going to drop as much.

So my guess is that this week is going

to be a little bit of a consolidation. I

don't see oil surging back up to 115 or

120 as we saw uh early last week.

>> So the S&P 500 right now is holding just

above the 200 day moving average and you

know the old adage on Wall Street,

nothing good happens below the 200 day.

Is there a risk that we puncture that?

>> Yes, there is. There is a risk. The

NASDAQ is actually uh sorry the NASDAQ

100 is is solidly below the 200 day and

we've seen uh topping patterns even in

uh such high-flying uh sector indexes

such as our market vector semiconductor

index. The markets are vulnerable. Uh

the area for hope, Doug, is that three

straight weeks the markets have been

pushed down and yet buyers keep coming

back in. It's not like there's the bad

news isn't in the market. So, I think

not just the 200 day, but also the lows

of December in the S&P 500 are going to

be very critical to watch this week. Um,

I would have a bias to the downside.

What I'm hoping to see is that uh Asian

emerging markets, Japan

um find some support. Japan is very

dependent on oil exports from the Gulf.

And if it could find some support, I

think it's kind of flat to positive uh

so far in the futures. That would be a

very good sign. So, I'd say I'm I'm

nervously bearish and cautiously

optimistic at the same time.

>> What about the financials? Private

credit worries really continue to cause

headache for the entire uh banking

system. Nothing yet has manifest in a

way to suggest that there is systemic

risk, but nonetheless, a lot of the

banking stocks have been hard hit. How

do you feel about the financials here?

>> So, it it's beyond the banking stocks.

What we've really we've seen almost all

the asset managers, not just private

credit asset managers, but even uh very

large asset managers like like Black

Rockck and uh Franklin Resources. Um so

I am concerned about it but as you said

systemically this does not feel uh like

2008 2009. Um, I think systemically

we're in good shape. I wouldn't be

surprised if the Fed uh statement or

Pal's press conference on Wednesday

afternoon will touch on this. I would I'

I'd actually be very surprised if he

wasn't asked a question about this. So,

we'll get a view from the Fed this week

as well.

>> So, Stephen, what's your strategy in an

environment that we are that we find

ourselves in right now? How do you make

the best of it?

Um well the starting point uh as if

you're going to talk about addages or

old addages is diversification.

Um we advocated at the beginning of the

year more international diversification.

That worked great for the first two

months. But of course as as the war

broke out in the Gulf, all markets uh

European, Asian, emerging uh all fell uh

Korea was really hammered because of its

energy sensitivity but also the speed at

which it went up. It was up over 50% for

the first two months. I would still

advise investors to broadly diversify.

If one is heavily heavily overweight in

US equities, we have a great opportunity

now to diversify f further into both

developed and emerging markets and also

take a look at markets that are not as

negatively affected by the energy. Uh in

particular, we like Brazil for a number

of reasons which I'm happy to go into.

The bond market has been troubled by the

inflationary implications obviously of

higher oil. If you look at a 10-year

that is just above 425 right now. Give

me your view on the Treasury market.

So earlier this year it looked like we

would have a move toward lower rates as

as uh inflation numbers weren't as

painful. I think that's off the table. I

think at best we're going to be uh

vacasillating between uh 3.95 and 4.4 in

the long bond. Um I don't see room for

much higher rates at this point because

I think the the economic slowdown effect

of higher energy and how it pushes

through the economy uh will temper that.

But I do think the Fed has a real

dilemma. Um whereas um before the war

you might have hoped for interest rate

cuts by June, it may get pushed back.

We'll get more signals about that again

on Wednesday.

>> Where does that leave the dollar?

>> The dollar had been steadily weakening

uh going into the M East crisis and it

it found a lot of support. Um the euro

and the Swiss Frank have both weakened a

lot but they've not broken their trend.

I do think the longer term trend is for

a weaker dollar. Again, that is why I

believe that uh non US diversification

in equities will have the tailwind of a

weaker dollar adding to the performance

as well.

>> So, at what point do you believe the

Trump administration really takes what

markets are telegraphing to heart and

looks at the impact that this will have

this policy on economic activity and

change course? Do you have a sense that

that's even a possibility or is the

Trump administration so beholden to this

strategy that it's going to take it to

the wall so to speak?

>> So there's a lot of hope in the markets

that uh the taco phenomena uh could come

into play. Clearly the president and his

adviserss are sensitive to the equity

market and the economy. But when it

comes to national security and the

commitment that the US has made publicly

to ensure that Iran does not have

nuclear capabilities and now that energy

is at play, I do think it's a little

different. It's not the same as tariffs

and I think the administration will be

firm and as we learned from their attack

on the military side of Car Island, the

US still has plenty of cards to play.

There's an amphibious ready group that's

coming in from Japan coming will be

coming into the Persian Gulf. That will

add pressure. So I I remain of the

belief that the administration is going

to continue to press it, but I don't

think it'll be to the wall because I do

think the United States will prevail in

this conflict. When you look at markets

offshore, whether it's China or India, I

know it's probably a very difficult call

to make right now given the fact that

both economies are very much exposed to

imported oil. Is there a case to be made

that you need to take a look at China or

India in this environment?

>> So, I believe there's a a broader case

for both China and India. India really

was poised for a good recovery this

year. um the fact that India's

negotiating on its own about oil

shipments and in fact some shipments

from Saudi Arabia to India have already

made it through. I think both China and

India will somewhat insulate themselves

and I think investors can gradually

trend in to increase India and China

exposure and then as I said I think

Brazil is a very attractive market

because they're energy independent and

they're really on a different cycle.

They're only going to begin to lower

interest rates uh in the next month or

two. So I think it adds further. Uh that

is three of the five bricks. Um and and

those are the ones that I would uh

certainly uh put a little more money to

work in.

>> So I know your firm Market Vector

Indexes typically doesn't address cash

positions right now. That's not really

the the focus of your firm's practice.

But if you had to advise right now based

on the likelihood of a pullback, let's

say in the equity market, do you want to

gather a little bit of dry powder at

this point and and resist the temptation

to try to find a bottom or or to buy the

dip? So I think if if an investor's

heavily heavily overweighted us, it's

not too late to reduce exposure. I

wouldn't necessarily allocate it all to

cash. I think commodity equities, so

companies that make money from

commodities across all the spectrum

could be a very good place to diversify.

They're going to benefit from uh some of

the trends we're seeing. Also, um not to

plug your indexes, but the Bloomberg

Commodity Index and the ETFs that track

it have also performed very well in the

last few weeks. It's another area for

diversification. Isn't there the risk

though that those are crowded trades at

this point?

>> Um not not the broad commodity index. I

think um it's it has exposure to energy

of course and precious metals, but it

also has grains and industrial metals. I

think it's pretty diversified. I think

the gold mining trade and silver mining

got a little crowded. We've seen a

correction. I do think that's also an

area that people can allocate to.

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

so very much. Steven Shenfeld is the CEO

of Market Vector Indexes, joining us

here on the Daybreak Asia [music]

podcast.

Welcome back to the Daybreak Asia

podcast. I'm Doug Krer. It's a major

week for central bank decisions. We'll

hear from the Fed along with the Bank of

Canada, the European Central Bank, Bank

of England, and the Bank of Japan. They

are all seen as being on hold. We'll

also hear from the Reserve Bank of

Australia and the RBA is seen as raising

its benchmark interest rate. Obviously,

the big unknown is the economic impact

of war with Iran. And that's where we

begin our conversation with Danna

Mousina. Diana is deputy chief economist

at AM. She spoke with Bloomberg TV host

Heidi Strad Watts and Sher on.

>> It feels like a historically difficult

time to be a central banker at the

moment. I mean, I wouldn't want to be in

their shoes right now because the goals

of inflation and keeping growth buoyant

are sort of at odds with one another.

I think the RBA is really the only

central bank in our region or really the

only major central bank around the world

that's even considering the prospect of

hiking rates besides the Bank of Japan

um of course and

that's really because we are an outlier

in the inflation story besides what's

going on with oil markets we have a lot

of domestic services inflation and I

think the RBA is also less tolerant to

higher core inflation compared to some

of the the central banks around us.

>> Do you think in these uncertain times

that they should hold?

>> I mean, my personal view is that they

should hold and this was a difficult

decision when we were thinking about

what was going to happen tomorrow. Would

the RBA hold or would they hike? And our

view at AM is that we think that they

should be holding because it's it's it's

just too uncertain when things are going

to slow down. The war could end this

week and oil prices could moderate

again. I mean they they probably will

take a while to moderate back to their

pre Iran levels. Um but there's the the

hit to consumer spending and to business

spending from high oil prices is sort of

the negative growth implication that we

could have from high oil prices. It's

not just that inflation impact. I think

we're more cognizant of the secondary

hit to growth that could occur. So in

those times our view is that's probably

better to wait. But given the RBA is

quite concerned with already elevated

inflation in Australia, they probably

will will look to hike.

>> I think that point is an interesting one

that you know say if the energy

secretary is right, this war finishes in

a matter of weeks and we know kind of

the pass through to oil prices will take

x amount of time to dissipate. Do you

think there could be more of a permanent

or a longerterm shock to confidence?

Because I'm sure there are households

and businesses out there that are

thinking we didn't, you know, this wool

wasn't on the bingo card. What else

could happen? We're not going to be as

risktaking as we were previously. Well,

it sort of felt like that for a while

really, hasn't it? I mean, we've had so

much policy uncertainty in the past 12

months.

>> Forget what came before.

>> That's right. And I mean, consumers are

quite short-term focus. Like when we

look at inflation expectations,

consumers basically expect inflation to

be whatever it was. and petrol is

actually a key driver of inflation

expectations. So consumers generally are

a bit shorterdived I guess in that

process of thinking about what's ahead.

Businesses yes it might it might take a

bit longer for them to become a bit more

confident again but again the macro

environment is just changing so quickly.

I mean a few months ago we were talking

about the impact of tariffs and then the

Supreme Court decision around tariffs in

the US and now we're talking about a

war. So what could happen next is just

when we look at things like trade policy

uncertainty around the world is actually

around a record high and that is

fundamentally due to the politics and

the policies that are coming out of the

different of the different governments

around the world and in particular the

US

>> in the US you guys were talking about

the gas prices retail gas prices

averaging at the highest level in more

than two years when you have a midterm

election coming up in November. How does

this change sort of the rate trajectory

and the views on inflation expectations

for the Federal Reserve and what are the

implications then of those change

expectations for central banks across

Asia?

Well, we know that Trump and the

administration is very cognizant of the

housing affordability story in the US

and just the general cost of living

affordability story. So I think from

that point of view that's a major

constraint on the war in the Middle East

that they have to reduce the cost of

living pressures for consumers and

that's likely that's that is one of the

main reasons why the war probably will

not be prolonged for the rest of this

year because they do have the midterms

coming up soon. I think for the Fed,

they can they're probably more

comfortable with holding rates steady

for a bit longer compared to a bank like

the Reserve Bank because growth is

holding up okay in the US. It's sort of

been mixed lately. Inflation is at an

okay level, too. You know, they're sort

of obviously higher than the target, but

it's not at a runaway level or a

problematic level like the RBA would see

it here. So, I mean, the Fed is is being

put in in a difficult place right now

because inflation is going to increase

in the short term, but there's probably

no real need right now to cut interest

rates at a very quick level in the US.

We're seeing sort of a similar feeling

across the world with major central

banks uh traders thinking that major

central banks will actually uh delay any

rate cuts and perhaps swing a little bit

more hawkishly given those inflation

expectations. What are the implications

for banks like the Bank of Japan?

Because that also puts more pressure on

the Japanese yen.

Yeah, I mean all the central banks are

sort of going through the same [sighs]

thought process. I I suppose I mean

again for for Japan the [clears throat]

focus will probably be more on the

fiscal side in the short term rather

than on the monetary side. I mean my

personal bias is that at a time when

inflation's rising due mostly well all

mostly due to supply issues um because

of higher oil prices and the impact that

that has going through the supply chain.

It doesn't really make sense to be

raising interest rates when the impact

of that is really on the demand side. So

I think that it's it's probably just

means that most central banks will

probably want to wait and see what

happens in the next month or two because

we keep on getting headlines from the US

that this is not going to be a prolonged

war that they want this to end soon and

clearly they're trying to find ways to

reduce oil prices right now through um

you know through trying to open up the

straight of hall moves for example. So I

think most central banks will probably

try and look through some of the supply

issues right now and hold policy

unchanged. That was Da Mousina, deputy

chief economist at AM, speaking with

Bloomberg TV host Heidi Strad Watts and

Sher Anne, bringing you their

conversation here on the Daybreak Asia

podcast.

Thanks for listening to today's episode

of the Bloomberg Daybreak Asia Edition

podcast. Each weekday, we look at the

[music] 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. [music] Join

us again tomorrow for insight on the

market moves from Hong Kong to Singapore

and Australia. I'm Doug [music] Krer,

and this is Bloomberg.