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This is Bloomberg Daybreak Weekend, our

global look at the top stories in the

coming week from our Daybreak anchors

all around the world. Straight ahead on

the program, we look to some key housing

data in the US. I'm Nathan Hager in

Washington.

>> I'm Steven Carroll in London. We're

looking ahead to the next economic

indicators for Europe and what it

signals about the [music] trajectory for

stocks and the economy for the rest of

the year. I'm Doug Krer looking at the

fate of the Japanese yen and a reality

check for Hong Kong. That's all straight

ahead on Bloomberg Daybreak Weekend on

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Washington DC, Bloomberg 929 Boston, DAB

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and around the world on

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Good day to you. I'm Nathan Hager. We

begin today's program with a look at the

US housing market. This week we get

figures on housing starts and pending

home sales for the month of July. For

more on this and the latest in the home

building sector, we are joined by Drew

Reading, US home building analyst for

Bloomberg Intelligence. Uh great as

always to speak with you, Drew. And of

course, it's been a pretty hot summer.

So, are we expecting many projects to

have gotten off the ground in the last

month? So when we think about housing

starts um you know we're down about 5%

year to date on the single family side

and we expect to see further pressure um

from that side of the market. You know

we see builders that are continuing to

scale back production giving in an

already elevated supply of speck home

inventory that they still need to work

through. And you know we've got sales in

the new home market that are up just

about 2% year to date. So it's a little

taken a little bit longer to clear that

inventory. Um, you know, now the large

public home builders have done a pretty

good job in drawing down their completed

home inventories. Of course, they've had

to remain pretty aggressive in their use

of incentives to do so. Um, but we are

starting to see more of a shift away

from that spec production model, which

is building the home before you have a

buyer. Um, you know, many of the

builders are looking for a better

balance. So they're trying what they're

trying to do is basically match

production with the sales pace rather

than, you know, putting more specs into

a slow market.

>> Sounds like that speaks to an overall

trend of the the home market in general

moving away from uh buying toward

renting. Is that kind of what you're

pointing to as a as an overall trend

here?

>> Yeah. Yeah. So, I think when you look at

the the forale market relative to

rentals, when you think about

affordability, the the high price of the

homes, uh mortgage rates back towards

7%. You know, the math certainly does

favor renting over over owning. We've

done some survey work um that shows the

same. And it's not that it's not that

current renters

um don't want to own. We find a majority

of them do. It's simply the the

economics of it don't make sense right

now. So, what does that do for the

overall sentiment in the home building

market when uh we're we're seeing a

trend toward uh more of those multif

family projects as opposed to the single

families that you would think have uh

better profit margins?

>> Well, it's a good question and you know,

I mentioned that in the new home market,

we have sales paces um you know, that

down significantly from last year. The

market as a whole is up only about 2%

year to date. And really the the way

builders are having to grow is to expand

their community count. So they're not

seeing it on the the pace side, but

really by increasing the number of

subdivisions that they're operating

from. Um you know, so it's it's really a

tough growth environment on on the

single family side. And you know, if you

think about the market, certainly there

are are pockets of relative strength and

relative weakness. When you think about,

you know, the the entry level buyer who

is typically someone that may be coming

out of a rental situation, we see more

stress as you would expect across that

part of the market because those tend to

be the most price sensitive home buyers.

Um, on a relative basis, we have seen

more strength at the move up in luxury

segments. These are typically the buyers

that are coming out of uh an existing

home. So, they've built up equity over

the last couple of years. um in the

luxury side, they're benefiting from the

runup in in equity markets. They tend to

be less sensitive to mortgage rates. So,

we're seeing relative strength on that

side, but you know, there's really not a

park part of the market that is

completely immune, you know, to what's

happening in in the broader economy. Um

you know, affordability, economic and

political uncertainty. So, you know,

there there's broad challenges, but

there are pockets of relative strength.

Well, we are going to hear from one of

those luxury home builders when Toll

Brothers reports earnings this week. Are

we expecting some uh positive signs

there in in terms of a a lot of the

factors you've just been talking about?

>> Yes. So, we we like the relative

position of Toll Brothers. You know, as

as you know, they cater to the luxury

market. So, their buyer is more

affluent. Um you know, they're they're

as I said, the customers are less

sensitive to interest rates compared to

the entry level. about a quarter of

their buyers paying cash. For those that

do take out a mortgage, they put about

30% down. So, the buyer is very strong.

Um, so they're certainly more insulated

to the macro. In terms of the upcoming

print, I think, you know, the the KPIs

we'll be looking at are order growth and

gross margin. And we particularly are

interested in hearing how demand has

trended intraquarter, you know, with

mortgage rates climbing back up towards

7%. With that being said, you know, we

still expect Toll to report high

singledigit growth in orders. And

importantly, you know, that's being

driven, as we mentioned before, by

community count growth, which is helping

to offset muted sales absorptions. And

that's really what sets Toll Brothers

apart from a growth perspective both for

2026 and looking out into 2027. Now, on

the margin side, gross margins have been

very strong. The outlook's really going

to come down to how aggressive they've

had to be on their use of sales

incentives. Whole primarily prescribes

to a price over overpace strategy. So we

we do think that near-term margin should

hold pretty well.

>> Thank you for this Drew. Great having

you on with us. That's Drew Reading, US

home building analyst for Bloomberg

Intelligence. Let's take a look now at

some stocks making news in the week

ahead. I'm Nathan Hager joined by

Bloomberg equities reporter Avalon

Pernell. We're sort of winding down

earnings season here, Avalon, but we're

going to hear from some of the biggest

names in big box retail this week.

Starting with Target on Wednesday. There

has been a lot of drama around this

stock. What are we expecting this week?

>> Absolutely. We're definitely going to

get a lot of visibility on the state of

the American shopper. Sales trends and

progress on Target's broader recovery

will definitely be top of mind for

investors, especially as they head into

their second quarter earnings next

Wednesday. The company is still really

trying to regain its sparkle and

pinpoint what exactly made the company

tar as opposed to just target.

[laughter]

One thing of note though is that

definitely analysts remain mixed on the

company's performance moving forward,

especially given guidance they had in

their earnings call last quarter, noting

that they did have a little bit of

concerns about tougher comparisons

moving forward. You have UBS's Michael

Lasser remaining quite bullish,

expecting the results to provide the

next proof point that broader recovery

may actually be sticking around for the

company. Whereas Barlay's Seph Sigman

saying that, you know, meaningful upside

to results will really be needed to push

the stock from here. He notes also that

he believes the big box store likely had

a solid quarter. However, he still views

improvement as just recovering from last

year's issues as opposed to moving

forward into the next chapter. So, worth

noting that the options data that we're

currently seeing at the moment is

implying about a 6.2% move after those

results.

>> Well, you wonder if we're going to see

something of a similar move from Walmart

when they report on Thursday. If you

think about some kind of indicator of

the American consumer, it's hard to

think of a company that's more of one

than Walmart.

>> Absolutely. And a similar story that we

were seeing in Target definitely still

playing a role here for Walmart as well.

Analysts still quite mixed on how

exactly this big box stores e-commerce

and also delivery businesses will

perform as they report second quarter

earnings. Key Bank is expecting pretty

healthy results from the store, noting

that the company remains one of their

top picks as growth initiatives and also

further share gains continue to build

momentum despite a fairly volatile macro

and geopolitical environment. They also

expect Walmart to be fairly vocal about

how exactly they're using those tariff

refunds to fund roll backs and

ultimately drive future business gains

by bringing people back into the store

with slightly lower prices. Others are

not necessarily as rosy about the

company's outlook. Barclays noting that

the optics don't look too great given

expectations for sales moderation from

the last quarter. Barclays though still

saying that they believe this could be

the trough as price investments and

other initiatives support accelerating

share gains in the second half of the

year. Worth noting like retailers are

still expecting, you know, back to

school sales and Black Friday which

obviously won't be pencled in for the

start of the year,

>> right? But uh definitely something to

keep an eye on uh as we wait to see what

the outlook is going to be from both

Target and Walmart. Also on Thursday uh

we're going to hear from one of the

biggest names in the A sector. What are

we expecting from Dear and Company?

>> Yes, investors will be looking for more

data that reinforces Deer's view that

2026 will be the trough, the bottom of

this quite complicated situation for the

company. The world's biggest farm

machinery makers second quarter results

are expected to be slightly mixed again

this quarter. Bloomberg Intelligence

expecting the results to still reinforce

that expectation that 2026 will mark a

trough in large a demand as attention

shifts towards how fast will that

recovery be next year. However, that

analyst is also noting that they're

still expecting large agriculture retail

sales to remain quite soft. though they

do appear to be tracking better than

industry forecasts as inventories

continue to normalize. RBC also

highlighting that their big question is

continuing to be what exactly does the

pace of deer's recovery look like

especially as there continues to be a

lot of volatility in the macro

environment and also the tariff

situation that is somewhat improved but

still kind of in the balance obviously

kind of interesting especially with the

Iran war in the background as to how

exactly that's going to be impacting

farmers who are continuing to struggle

to manage prices not necessarily keeping

pace case with very elevated cost in the

options market also continuing to price

a potential move of nearly 5% after the

company reports earnings.

>> Yeah, still a lot of back and forth when

it comes to that situation in the Middle

East and uh the uh posttariff situation

as well. Uh just time to talk about

another stock that's reporting this

week, Estee Lauder. There is a lot more

competition in the beauty space. How are

we thinking Estee Lauder is going to be

handling it?

>> There sure is. And I mean to say the

least this company has had a roller

coaster ride of a quarter. I mean just a

couple of months ago they were talking

about merger talks with the Spanish

brand Pooch which was on the table and

then later scrapped after investors were

quite negative on that idea. And like a

lot of other companies that we've

already mentioned, they are in the midst

of a broader recovery as consumers are

continuing to kind of pull back from

spending on these various like luxury

brands that are under the Esteee Lauder

umbrella. That being said, RBC does

continue to favor their turnaround, say

noticing that potentially important

brands continue to outperform and they

also noted that the broader turnaround

at MAC continues to kind of bode well

for the company. Though they do still

question how Esteee Lauder will continue

to fare with holding on to Smashbox and

Too Faced, which are fairly popular

brands amongst uh maybe millennial

crowds, and whether it still makes sense

for Estee Lauder to hold on to them or

maybe look for a play to sell them at

some point. We'll see.

>> Yeah, we'll see if a lot of those sales

are happening in Tar as well. Thanks,

Avalon, as always. Good to have you with

us. That's Avalon Pernell, equities

reporter for Bloomberg News. And coming

up on Bloomberg Daybreak Weekend, we'll

look at whether Europe's future economic

[music] data can live up to the promise

of a bumper second quarter when it comes

to Europe's earnings. I'm Nathan Hager

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>> This is Bloomberg [music] Daybreak

Weekend, our global look ahead at the

top stories for investors in the coming

week. I'm Nathan Hager in Washington.

Later in the program, we'll take a

closer look at the fate of the Japanese

yen. Plus, how Hong Kong's

competitiveness as a financial center is

about to be tested. But first, Europe's

biggest economies report inflation and

purchasing managers index data next week

against a backdrop of geopolitical

uncertainty and higher energy costs

driven by the war in Iran. Let's get

more now from Bloomberg Daybreak Europe

anchor Steven Carroll. Nathan, European

economies and companies have defied the

doomladen forecast that the Iran war

would tip the continent into

stagflation. We've seen the best

earnings season in nearly four years,

pushing key stock indexes to new

records. And the signals for the months

ahead look strong, too. In the coming

days, PMIs and the ZDW survey in Germany

will give fresh insight into how the

biggest economies are performing, along

with updated readings on inflation, and

investors seem bullish on European

stocks, too. Benedict Low is equity

derivative strategist at BMP Pariba.

Here's what she told Bloomberg's Tom

McKenzie earlier this week. So, it's

undeniable that the macro story is

picking up in Europe. We've got growth

that is surprising to the upside,

activity on the rise, and earnings that

have been good. Actually, earnings have

been exceptionally strong in the US, but

also very good in Europe. It's been one

of the best earning seasons over the

past few years. And all of this is

happening in a context where positioning

is low to neutral. So, that points a

positive picture for stocks. Now the

counterpoint to that is that a lot of

positive news is already in the price

and with seasonality that is not

supportive for higher stock price up

until the end of September October. We

like to position for what we call a

grind higher in stocks and we like to

minimize the premiums that investor are

spending on upside positioning.

>> How do you mitigate the risks around

inflation? Whether it's soft

commodities, whether it's diesel,

whether it's gas, oil prices. If this is

the status quo right now around Iran and

that is prolonged, how do you hedge

around that?

>> So, one of our top uh peak at the moment

is the banking sectors. We think the

banking sectors is one of the best

sector position for end of year. First

of all, PMIs are on the rise. As I

mentioned, activity is picking up

earnings that have been good, but also

higher inflation mean higher rates.

We're expecting the ECB to rise rates

come September meeting and that is

positive for the banking sector a

cyclical sector that has yes really

performed well over the past few years

but we think there some upside for that

sector.

>> So Benedict Lo from BMP Pariba

optimistic there but there are risks to

the outlook not least from oil and gas

prices grinding higher. Let's discuss

now with David Powell Bloomberg's senior

euro area economist and Sagurica Jason

Gani who covers EMA equities macro and

investment strategy. David, let's start

with you. We're looking ahead to these

economic surveys coming in the next few

days. What are we expecting to learn

about the state of Europe's biggest

economies?

>> Well, essentially, uh, we're going to be

we're going to be focusing on the PMI

survey, and that's going to give us an

indication as to whether the strong

growth that we saw the second quarter

continued in the third quarter. Euro

area GDP extended by 0.4%

in the second quarter this year. That

was basically double consensus. Part of

that is because of a rebound in Ireland.

Uh but even without that distortion

caused by Iris GDP, the economy probably

would have expanded by by by about 0.3,

which is above expectations and is

certainly defying the the negative

forecasts or the gloomy forecasts that

were put out after the sharp rise in

commodity prices earlier this year.

Saga, we've just wrapped up uh or we're

just wrapping up rather a very strong

earnings season in Europe, but can you

give us a sense of perspective on this?

How good has it been when we look back

at how European companies have reported?

>> It's taken a lot of market participants,

both investors and sellside strategists

by surprise. And I want to put that in

context a little bit because European

companies in the last two years have had

essentially zero profit growth and that

was underpinned by poor economic growth,

both a lot of it domestically. But this

year what happened was European stock

started off the year on a really solid

footing. Right? You had the AI trade

cracking in the US. But at that time

Europe was turning attractive because it

had these uh there was a new buzzword on

Wall Street at the time. It was called

halo heavy assets low obsence. So

suddenly the asset heavy old economy

stuff was becoming attractive. But

before that could really take off, you

had the US Iran war and that exposed a

lot of European companies to the

potential for higher oil prices. Would

it there were there were worries that

European economies would tip into

stagflation. So expectations had on the

macro front been tempered a bit. But

coming into the second quarter earnings

season, analyst expectations were

incredibly strong. Um, analysts were

expecting MSCI Europe companies to post

a 12% increase in profits versus a year

earlier. As I as I said previously,

after two years of no growth, that was

already a high bar. What's been

astounding is that not only have the

companies met that bar, they've actually

beaten it by a quite quite a wide

margin. So, they've posted 17% increase

in profits, and that's the best since

late 2022. Of course, the economy has

been surprisingly resilient to the oil

price shock. We haven't quite seen that

feed through to inflation to a degree

that had been feared. So, that's been

underpinning that. Um, but the really

big takeaway for us this season has been

that, you know, you the typical pattern

in a year is generally that analysts

start the year really bullish and then

through the year they downgrade earnings

expectations. This year it's been the

opposite. Not only have they come in

bullish, but they've actually raised

earnings expectations for 2026 by 5%,

which is really atypical. So that bodess

well for further bullishness.

>> Okay. I mean, the inflation concerns,

David, really are central to to what

things look like for the rest of the

year as well. We've talked about the

resilience in the European economies

that we've seen so far, but given that

energy prices still remain elevated, how

big is the inflation risk when we're

thinking about the picture for the

coming months? there were these fears of

stagflation. We haven't had the stag,

but we've had the inflation. Uh, so if

we look back at headline CPI in January,

it was 1.7%.

Uh, commodity prices started to rise in

February in anticipation of a of a of a

conflict in the Middle East. And then

when it actually began uh at the very

end of February, commodity prices shot

up. And the latest uh inflation reading

is 2.9%. So well above the ECB's uh 2%

uh 2% target and that is really what's

driving the ECB's decisions right now.

We uh expect another hike from the ECB

in September and that's universally

expected uh by uh by most economists and

priced into the market. Um and really

what's going to drive their decisions

after that is how commodity prices are

um are affecting inflation. And that of

course is uh tied up with the outcome of

the conflict in the Middle East. And no

one can say with exact certainty where

we're going to be at the end of the year

um in terms of that. But we're on track

for another hike. Um and uh if if this

persists, we could have more tightening

as the ECB worries about worries about

inflation. However, the good news is is

that that core inflation is unlikely to

rise as much. We have had some increase.

Um, things that are uh particularly

vulnerable to commodity prices like

airfares have gone up. But the weakness

in the labor market is unlikely to allow

uh workers to ask for huge increases in

pay that we saw after the pandemic that

really boosted inflation. keeping

underlying inflation pressures limited

this year.

>> Indeed. So the risk of a wage price

spiral not looking uh looming large at

the moment. Sag in the earnings pictures

did we hear much from companies about

their inflation fears?

>> I think in terms of inflation the uh

sentiment from management has been

really uh positive. Uh they have sounded

really confident on profit margins and

actually a really key part of that and

this goes back to the AI story in the

US. uh one of the other fundamental

reasons why this bullishness toward

European companies and the European

stock market is that changing attitude

from investors on who are the next AI

winners. So that was a key focus for how

are companies in Europe being able to

monetize productivity efficiency from AI

and we're seeing nent signs of that now.

Initially in the first leg of the AI

rally it was all focused on the big

spenders on AI on developing AI and

those companies are based in the US. So

Europe had been at a disadvantage then.

It had underperformed US indexes because

you don't have those big AI developers

here. But what you do have are both

sides of the other sides of that supply

chain where you've got the semiconductor

parts makers that allow for AI to be

deployed. But you then also have

companies and Benedict was mentioning

this earlier in her snippet. You have

companies like banks who have already

started to show that they can monetize

[clears throat] AI in a way that is

translating into uh earnings growth and

margin growth and they're confident that

they can defend that going forward. So

that's keeping optimism alive as well.

>> What about the other asset classes?

We're talking specifically about

equities uh so far, but I mean in terms

of of other European assets, are there

interesting trends to be watched

watching out for?

>> Definitely. Uh we were looking into this

theme earlier with my cross asset

colleagues and it's quite notable

economically speaking or economicsly

speaking uh stocks and bonds generally

behave opposite in in [clears throat]

opposite directions. That's the

fundamental rule of economics. This time

around uh we notice that European stocks

are rallying at the same time as there's

uh growing bullishness on bonds. And the

reason for that is that and David

mentioned this earlier as well. The

economy is in a sweet spot at the moment

where economic momentum is picking up

from lows. So there's a cityroup index

which measures the degree to which data

are coming in better than expected and

that economic momentum is the highest

since March 2023. But at the same time

absolute growth figures are still

trailing the US and there is more policy

certainty at the moment in Europe or at

least it's being viewed that way versus

the US. So investors are certainly

bullish on stocks and bonds at the same

time which is really rare.

>> David, we're sort of belying the dismal

science of economics by being so

positive uh about uh the picture going

ahead for the rest of the year. I just

wonder what risks we should have our

eyes on when we're thinking about what

could derail this momentum and this

resilience for the European economy.

Probably the biggest risk is the obvious

one of commodity prices shooting higher

or much higher um again if the conflict

in the Middle East were to escalate and

beyond that it's probably that the the

increase in commodity prices that's

driving up headline inflation if that

starts to appear more strongly in

underlying inflation even though the

labor market is weaker than it was

several years ago because that would

probably cause the ECB to tighten much

more aggressively uh than we currently

think it will.

>> Okay, Zachary, the the question of of

investors diversifying away from the US,

looking for other options away from the

US has been something that's benefited

Europe in the past. Is there any sign

that that momentum could continue or be

a theme as we're looking towards the

rest of the year?

>> Absolutely. And that underpins the

broadening trade that has been going on

this year. So investors are looking out

of they're looking within the US but

outside of tech but that is also leading

them to other more attractively valued

stocks which are in Asia or Europe and

again it goes back to the economic

momentum because Europe is chalk full of

uh sectors that are very closely linked

with the economic cycle again banks

industrials miners these companies tend

to do well when the economic growth is

sustainable and it's it's resilient

that's what's drawing investors this

time around and we've seen that in the

earnings picture as well. It is the

miners, energy, industrials, financials

which have really contributed the most

to profit growth.

>> Okay, Zachary Jason Ghani who is

covering EMA equities, macro and

investment strategy at Bloomberg. Thank

you. And from Bloomberg economics, David

Powell, our senior Euro area economist.

We'll have more on those data points and

the PMI surveys for France, Germany, and

the Euro area on Bloomberg radio this

week. I'm Steven Carroll in London. You

can catch us every weekday morning for

Bloomberg Daybreak Europe beginning at

6:00 a.m. in London and 1:00 a.m. on

Wall Street. Nathan, thanks, Stephen.

And coming up on Bloomberg Daybreak

Weekend, we'll take a closer look at the

fate of the yen. I'm Nathan Hager, and

this is Bloomberg.

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This is Bloomberg Daybreak Weekend. Our

global look ahead at the top stories

[music] for investors in the coming

week. I'm Nathan Hager in Washington.

The persistent weakness of the yen

continues to be a troubling issue for

Japanese policy makers. For a closer

look, let's get to the host of the

Bloomberg Daybreak Asia podcast, Doug

Krishnner. Thanks, Nathan. The yen's

weakness is a problem for the US as

well. So much so that two weeks ago, the

US and Japan surprised markets with a

coordinated effort to strengthen the yen

for the first time since 1998. The

problem is since that intervention, half

of the yen's gains have been wiped out.

Now, several factors are weighing on

Japan's currency, including the gap

between Japan's ultra- low interest

rates and those in the US and other

major economies. Now, the situation

could be remedied to some extent if the

Bank of Japan were to raise rates. We

know that inflation in Japan has been

above target for years. Now, in the week

ahead, we'll get fresh price data for

Japan with the GDP deflator. For a look

at the dynamics, I spoke with Bloomberg

News macro strategist Michael Ball. I

started the conversation by asking

whether the intervention was a watershed

moment or whether we're making too much

of this move.

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

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

to this 160th area 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 tens 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 its

signaling effect, it's much larger

because again, what we may see from

Besson with, you know, the the new Fed

leader Kevin Wors is to to lift the

limit there, which then would be a much

bigger signaling effect. And overall,

with all the other tools, 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 yan.

>> 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 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's 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 back to back. You would see that

curve flatten. So you'd 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 as 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 warned and powered 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. Michael, we'll leave it there.

Thanks for your perspective on the yen

story. That is Bloomberg macro

strategist Michael Ball. We turn next to

Hong Kong and how its competitiveness as

a financial center is about to be tested

by two opposing forces. Bloomberg

opinion columnist Julie Ren is based in

Hong Kong and she has been writing about

what she calls a reality check. Julie

joins us now from Hong Kong. Thank you

for being here. You've been writing in

your latest piece that last year Hong

Kong overtook Switzerland as the world's

largest crossber wealth hub. I didn't

realize that. Talk to me about the

positive forces that could further

cement that position.

What we are seeing is a a rebound in

Hong Kong's asset management industry

last year. A lot of global hedge funds.

They were opening uh shop in Hong Kong

and they were actually expanding their

office space. We're talking about

Citadel uh Jane Street uh Point 72. Uh

one reason is that uh uh they want to be

close to the deep talent pool in

mainland China. For for educated smart

mainland Chinese to move to Hong Kong,

it's very easy. Whereas it will be very

difficult for them to move to say London

or New York. And with global hedge funds

stuck in a very heated uh uh talent

fight and paying more and more money to

young analysts, they find Hong Kong

quite uh attractive. So when you look at

the possibility that things could

change, let's go to the negative side of

the equation now which would maybe erode

Hong Kong's standing in terms of the

asset management industry. What could be

a negative in this story?

>> At the end of the day, Hong Kong is

still very integrated into China. Uh

sure Hong Kong is uh uh the world's

largest crossber wealth management hub

but according to Boston Consulting Group

estimates 60% of the money still came

from mainland China and right now the

problem is that the uh the Chinese

government is a bit short on cash so

they want the mainland Chinese to cough

of uh unpaid capital gains taxes. The

Chinese government is a little bit short

on catch. So they want to So they're in

a global tax hunt for capital gains that

mainland Chinese made overseas. And a

lot of that money is in Hong Kong. So

we're talking about billions of uh

dollars of unpaid tax bills that

mainland Chinese will somehow have to uh

uh cough up to to liquidate their

existing assets in Hong Kong. And that

hurts Hong Kong's asset management

industry.

>> So we've talked about the polarity here.

these two opposing polls. One that would

prove to be very positive for the asset

management industry in Hong Kong that

tax reform. The other is obviously the

influence on the negative side that

Beijing would have in terms of the

crackdown on a lot of crossber activity

including a levy on overseas capital

gains which I think is 20%. Do you have

a sense of how this may shake out and

and what may happen at the end of the

day? I think what will happen is that

the uh traditional investment banking

services for instance prime brokerages

sales and trading they will do very well

on the other hand private wealth

management which has been the the

fastest growing sector they they're

likely to have peaked

>> so if it's an issue of whether or not

Hong Kong is going to preserve its

competitive edge in as a financial

center do we need to talk about what's

happening with the IPO O market

particularly as mainland Chinese

companies are concerned

>> well that the IPO market is doing very

well and the that that's a thing the

Chinese government is happy with that

they think oh it's great you know uh uh

Hong Kong could be a good uh uh capital

allocation hub for mainland Chinese

companies to get financing to to develop

their AI capabilities etc. And that is

where Hong Kong politically stands on

the good side of Beijing. On the other

side, uh Hong Kong shouldn't be

shouldn't continue to be seen as a place

where wealthy Chinese hide their assets

from the the government from their

government's watchful eye.

>> So you know very well when we talk about

talent in the financial services

industry, we have to talk about the

technology that some of these firms are

using. talk to me about the extent to

which asset managers in Hong Kong are

using artificial intelligence these

days.

>> Well, th this is an interesting

development because you know like the

the western uh uh artificial

intelligence labs, they don't allow the

uh uh people in Hong Kong to use their

products. For instance, we cannot use

open AI or or anthropics products. So

what will happen is that these global

asset managers will end up using cheap

Chinese models because they have no

choice, right? Like and I think that

actually might help the proliferation of

Chinese models in the asset management

industry.

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

so very much. That is Bloomberg opinion

columnist Shulie Ren. Her latest piece,

Hong Kong's low tax lure is getting a

reality check. I'm Doug Krer. You can

catch us weekdays for the Daybreak Asia

podcast. It's available wherever you get

your podcast. Nathan, thanks Doug. And

that does it for this edition of

Bloomberg Daybreak Weekend. Join us

again Monday morning at 5:00 a.m. Wall

Street time for the latest on markets

overseas and the news you [music] need

to start your day. I'm Nathan Hager.

Stay with us. Top stories and global

business headlines are coming up right

now.

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