Emerging Market Outlook; Traders Gear Up for US CPI
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Welcome to the Bloomberg Daybreak Asia podcast. I'm Doug Krisner. In the U.S. session, the equity market fluctuated a bit. That was after Jay Powell said again, the Fed is not in a rush to cut interest rates. And in a moment, we'll be joined by Adam Turnquist for a closer look. Adam is the chief technical strategist at LPL Financial. Welcome.

But we begin this morning in the Asia Pacific and in Hong Kong with our friend Ben Look. He is Senior Multi-Asset Strategist at State Street Global Markets, joining from our studios in Hong Kong. It's always a pleasure. Happy New Year. I know it's been a while since we last spoke. The EM story, you and I were talking a moment ago about how it's become a lot more interesting these days. And I'm wondering if for no other reason than valuation, is that possible?

I mean, it's to your point, Doug. Valuation is attractive. And I think the second most important thing is really just positioning. Over the last couple of years, irrespective of COVID, we had the post-pandemic and then really massive rate hikes around EM to really stem inflation. Earnings weren't good.

So positioning has just been a steady unwind across institutional investors that we track. So no major EM countries had an overweight in terms of the data over the last couple of years, and which is why I think year to date, although we're starting to see a little bit of inflows, I wouldn't say a lot, but you are starting to see maybe there's this value pickup in terms of some institutional investors that are

Yes, we know about the tariffs, but maybe that's something I can live with as long as valuation and positioning is still quite low, which is why we've seen year-to-date performance isn't so bad for EM. Yeah, we know the Chinese assets, generally speaking, have been much undervalued.

under-owned. I was reading a piece on the Bloomberg just the other day. Billionaire investor David Tepper ramped up his stakes in a lot of China-related stocks and ETFs in the last quarter. Is there a thesis here that you think represents the most value? The issue right now, in terms of the flows that we see, it's not been big flows. There's still the uncertainty, Doug, in terms of, first of all, whether or not there's going to be targeted tariffs,

or very specific sanctions that are going to be in place from the U.S. against China. That's the first thing, right, that most people are worried about. The second thing is whether or not Chinese policymakers themselves can really use, let's say, the two sessions that's going to come out next month

in order to drive the domestic stimulus story and to offset basically the export drag if and when the U.S. does fire at China in terms of many of these tariffs or policies that are going to come play. So I think that's why...

Investors are okay with slow increments right now, but whether or not they can actually have a structural neutral or benchmark position really comes from more clarity from China as we go through the end of Q1. Maybe we can talk a little bit about artificial intelligence in China and the shockwaves that DeepSeek set in motion across the globe. And we've since that time seen a rally in China.

a lot of equities, AI related on the mainland. I was looking at a note, I think it was from UBS saying we're less than halfway there. Where are you when it comes to understanding the AI trade in China?

Well, we've actually broken down looking at flows really since the deep seek momentum and then comparing that flow momentum relative to last year where we had those policy stimulus announcements that came through. And right now, the flows that we see since the deep seek are positive, but they're nothing spectacular, to be honest. So I think...

Maybe a lot of that uptick in terms of the AI outperformance is more domestic driven, I think, at least for now, whereas foreign investors are getting more interested, but they're still basically on the sideline as they wait for more of a firmer pickup, I think, in terms of whether or not, let's just say, Chinese policies become strong.

structurally supportive, or maybe we see more of government sponsorship to come through in the future, or even deregulation, let's just say, not just from Chinese tech and Chinese AI, but broader sector deregulation that can really start to improve and grow the multiple valuation story.

as we actually come into the, let's just say the second half of this year. But for the moment, can we say that the safer bet and maybe the more prudent bet is to put money to work in a cloud company like, say, Alibaba? Is that a way to go?

I think, yes. I think most of the natural beneficiaries or where the flows tends to go at the very beginning would be market leaders and the large cap companies that tends to benefit from it. Especially to your earlier point, Doug, maybe a lot of investors at the beginning when they start to increase some of those exposures or position would invest via ETFs, right? An ETF naturally is going to benefit those people

bigger players within the market, which is why I think at the very initial get go, it's going to benefit some of the bigger players in the field first. And then maybe as we see a broader earnings recovery across the sector, then the smaller players can benefit from that. Ben, how do you understand the change that's been happening in the domestic demand story in China? Is the property market improving enough that it's kind of improving investor sentiment at all?

I think the short answer is no. The issue is that is I think a lot of the flows are still geared towards buying into CGBs in particular, which basically sends a signal that

there isn't that much of a confidence yet from domestic investors to actually go up the risk spectrum, let's just say, in terms of buying back into property or property sectors or property stocks per se. I think what we can say, at least from all the supports I've come through from Beijing, is that maybe the worst is over in terms of

They're trying to close more of the loopholes. But whether or not we can go from the loopholes closing towards really a stabilization, I still think it's still a drag right now. And it's still going to take potentially a full year in terms of what policymakers needs to do to revive or even improve that sector. So we know that the Trump administration has put on this 10 percent tariff.

on all Chinese goods. Beijing has responded to some extent. Are you braced for a lot more tension in this trade war and perhaps higher tariffs? Well, I think right now the retaliation from China has been very mild.

In particular, I think they have been very selective in not really trying to send the signal that they want a full-blown trade war either. If we basically look at all the products that China is going to tax in terms of U.S. exports into China, it's basically, I would say, one-fifth

or even less than that, comparing to what the US is going to impose on China. So I think it is a managed approach right now from Beijing. It's really not in the best interest for them to engage in this. And second of all, in the way that the PBOC is setting the fixing and controlling the renminbi,

both onshore and offshore, also sends a signal that they want stability right now in terms of the currency. And that obviously spills over to asset class flows as well in the future. So I think they actually want to

I would say, toned down in terms of the war or the trade narrative with the U.S., as opposed to trying to escalate, at least from the early signals that we're seeing from Beijing. So when you take out the U.S. from this story and you look at China's relationship with some of its other trading partners in the Asia-Pacific, are there flows there that you find particularly intriguing at the moment?

Right. So, outside of EM, I'm sorry, within EM, most of the beneficiary has, I mean, it's concentrated more, I would say, into North Asia, whereas the bulk of the selling remains to be in places like Indian equities is one area that we continue to see very, very aggressive outflow still. And this is to your earlier point, Doug, I think valuation does come into play when you

When everything is already underweight, one area that people want to avoid would be expensive countries or expensive sectors. And India falls into that trap, which is why we have actually seen pretty aggressive outflows in terms of Indian equities. But to our surprise, it's not really been the EM story, but it's really been a recent surge in terms of institutional investors buying into European equities. And this is something that we are still quite skeptical. We're still underweight Europe.

We don't think the Trump administration is going to exempt Europe from any of these trade tariffs. But outside of just the trade concerns, the fundamental story is still very, very weak. And they're really avoiding technical recession right now, which to us is a very surprise that

institution investors right now are really piling money into European equities at the expense of all others right now as they try to play this hedge with respect to the new Trump administration. Ben, we'll leave it there. Thank you so much for joining us. Ben Luck there. He is Senior Multi-Asset Strategist at State Street Global Markets. Joining us here on the Daybreak Asia podcast.

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Welcome back to the Daybreak Asia podcast. I'm Doug Krisner. The U.S. equity market closed little changed on Tuesday. We had Fed Chair Jay Powell injecting a bit of caution when he said the Fed is not in a rush to adjust interest rates. And the tariff policy from the Trump administration, I think it's fair to say, has reignited fear over higher inflation. And markets are now focused on tomorrow's reading on consumer prices. Joining me now for a closer look

at all of these elements. Adam Turnquist, he is the chief technical strategist at LPL Financial. Adam, thank you so much. Let's talk about what Powell had to say. Shouldn't be a real surprise here that the Fed is not in a rush to cut interest rates, is it? Hey, Doug, thanks for having me on. And it was one of those days where no news is good news when it comes to Fed policy. I think

Some people were expecting maybe he would get into some color on tariff forecasts and what they could mean for inflation and growth. But he dodged those questions pretty good today. We'll see if that plays out tomorrow, of course, with CPI on the calendar. But I think it's not such a problem for markets when he's reiterating the fact

that the labor market is not a source of significant inflationary pressures, of course. That has been welcome news over the last year and that we're getting back into balance. It doesn't take away the tariff risk, of course, and I think that's a very fluid situation. But for the one side of the mandate, it seems to be pretty certain that labor market back in balance, less inflationary. And I think that's at least helping the market hold up here near record highs. We also heard today from former Treasury Secretary Larry Summers, and he was warning the

of a potential breakout in price pressure. Now, he was looking kind of at the tightness of the labor market and some of the recent growth that we have seen in wages. And Summers went on to put his finger on some of the recent tariff action from the Trump administration, saying that combined with labor market pressures, these tariff restrictions could potentially lead to a pickup in consumer prices. Does he have a point?

I think he does. And I've spent a lot of time over the last week or so reading through several different sell-side strategist research reports. I didn't see anything that said inflation is coming down if these inflationary or these tariffs are implemented. I think when we look at things a little bit more technical and we get some of the noise and political posturing out of the way, we'll look at break-even rates. That's the market's implied expectation. We'll call it for inflation. We'll use the

for example, the one or two-year breakeven rates. And those are actually breaking out a little bit. We're seeing new highs at least on a 12-month basis for two-year breakevens. I think that's a little bit of a concern. Also on CPI swap rates. Now, these get a little bit noisy, of course, but they're also starting to break out to new highs. I think that's an early warning sign of potential inflation coming back. Haven't quite seen that in the fixed income market in a repricing of

of monetary policy in terms of the rate cuts for this year, although they have been dialed back a little bit, but still in the cut camp here. So you mentioned consumer prices, the CPI data. We will get that tomorrow morning. Do you have a sense of what we may get?

I'm going to take the over. I don't have an official forecast, but I lived through the last couple of months here in the Midwest. We had higher energy costs. Heating demand is up. Plus, we can't forget about egg prices. I don't know if you've been to the store at all, but that's certainly a

factor into this. I can't remember the exact number of how much they contributed to the headline print last month, but still going up, at least based on my anecdotal evidence of shopping. And at the core level, I think it's still going to be a little bit sticky. That owner's equivalent rent category, that's the one I'll be watching carefully. That contributed to about half

of the core CPI print last month, and it was up 4.8% in December. Now, some of the higher frequency rent data suggests that will come down, but it's been a pretty bumpy path for that component of CPI. So if I'm a betting man, I'd take the over tomorrow, I think. So money markets right now, Adam, are still fully pricing in just one quarter point rate cut this year, and that's not until September. I'm wondering if you think there's a risk that we don't get...

any rate cuts this year? That is certainly a risk, unlikely at this stage, but we know that expectations and reality are far, far apart sometimes when it comes to forecasting what the Fed may or may not do. And right now, I think the market is OK, given the policy path is still pricing in those cuts. That narrative can change, though. And I think the driver of that, of course, could be tariffs if they're implemented and they're

implemented for longer than expected, and they're no longer just a negotiating tool, they're a reality, that could really flip the script on the narrative and I think really flip the script on this bull market. But of course, we'll give that low probability for now. So if the script does indeed get flipped, does that mean the 10-year yield flirts with 5%?

I think that would certainly be a logical spot for a retest. And we're coming into some pretty important levels right now as we look at it technically. 450 on the 10-year, there's some support levels, a 50-day moving average. Not going to get too far into the technical weeds, but

Keep that level in mind because it has been a pressure point for risk appetite. When we get above 450, we tend to see a sell-off in equity markets a little bit too much for maybe valuations to absorb when we're talking about the 10-year moving higher. And then if we're above 450 and above a rising 200-day moving average, that does mean risk is to the upside. So if we start to see those rate cuts priced out of the market, I think look for a 10-year

possibly approaching that 5% level. For the sake of our discussion here, let's split the difference between $4.50 and $5.00. Let's call it a $4.75 yield on the 10-year. What would that mean for the equity market if the 10-year were to reach 4.75%?

I think you have to look at the details. Of course, that's the devil's always in the details in what's driving us to 475, we'll call it. If it's accompanied by stronger than expected growth, then I think equity markets may do okay. But when you start to see yields move higher,

and some of those economic surprise indexes move lower, that means we're really pricing in a higher term premium. We've seen that play out over the last several months, and we're also pricing in higher inflation. Now, that's going to be harder for the equity markets to absorb. I think that's going to be a potential catalyst, we'll call it, if we're splitting the difference at 475, for a potential correction in the S&P 500.

So upward bias on yields, stronger dollar. How does that influence your thinking when it comes to putting money to work in the equity space? Do you want to stay away from anything that is offshore and focus solely on domestic and maybe reduce your exposure to some of the big multinational names?

At a high level, that's basically been the playbook. We've been more overweight toward US over international, especially emerging markets, especially if we're talking about a stronger dollar, which is another big technical story over the last few months.

EM or emerging markets tends to underperform, especially in that stronger dollar backdrop. So we like US over international. And then at the multinational level, it depends on what data set you're looking at. Tech has a big weighting in terms of exposure to foreign revenues. So when those get repatriated, it tends to ding earnings. We haven't quite seen that yet. I think most of the commentary has been so fixated on tariffs when you start looking at the

the earnings reports, but I think that could be a big factor for the tech space. And let's be honest, tech hasn't really done anything for the last several months. It had a great first half,

Second half of last year, kind of underperforming on a relative basis. So we look at other areas like communication services, consumer discretionary and industrials as potential or as overweights right now in the market. And that's where we think you should be leaning into. We'll leave it there. Adam, thank you so much for joining us. Adam Turnquist there. He is the chief technical strategist at LPL Financial. Joining us 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 stories shaping markets, finance, and geopolitics in the Asia Pacific. 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 Krisner, and this is Bloomberg.

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