Tariff War Woes Fuel Exodus From US Assets
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Welcome to the Bloomberg Daybreak Asia podcast. I'm Doug Krisner. Economic angst reasserted itself in U.S. markets. We had the uncertainty around tariffs combined with the escalating trade war between the U.S. and China dominating psychology. Now, the White House confirmed that China now faces a 145 percent levy on all goods it sends to the U.S. And remember, all other trading partners are dealing with a baseline tariff

Mark Cranfield, Bloomberg Market Live Strategist. He joins us now from Singapore. Mark.

Mark, it's always a pleasure. Thank you. I'm sure it's been a busy day where you are. And I guess we could start with the idea that we're beginning to see signs of a slowdown in global trade already emerging. You can look at the degree to which equity prices are already reflecting that fact. But maybe we can begin with the volatility that we're seeing in currencies right now, because this is pretty tremendous, is it not?

it is indeed bloomberg already running stories that some american companies are suspending their flows of goods which are coming from china because they're so uncertain about how to price them for the time being and traders are reading that so they're seeing that as a negative signal for the us dollar among other things um allied with the fact that they do expect the federal reserve to lower interest rates several times this year so what we're we're seeing is particularly demand for the strongest

what is perceived to be the strongest currency. So the Euro, the Yen, the Swiss franc, they're leading the way as people are shifting some money away from the US dollar. We've just seen the Euro touch a multi-year high. Today, dollar Yen is already been down onto a 142 handle. We haven't seen that for a very long time as well. So you can see these are very significant shifts

in the currency market. And that will give a little bit of respite to the Chinese currency in the short term. But the Chinese authorities have made it pretty clear that they are willing to shift the yuan to a weaker stance should they need to. But that's unlikely to be seen today. They're getting help from their basket arrangement, which is when the euro is strong, it helps to strengthen

the year one. But these are very fluid situations in the currency world. People going into this were probably thinking that this was going to be a good year for the US dollar, expecting stronger economic growth in the United States before

the feed through from that into into securities in America. But we are obviously getting the reverse situation. A lot of people recalibrating their outlook on the US dollar. We had a lot of dollar weakness in New York trading. If you look at the Bloomberg dollar spot, I think we were down one and a half percent. We are building on those declines now in Asia. And to your point about the rally that we're seeing in the yen at 143.35, I think in New York trading, the yen was up 2% against the greenback.

But to go back to the point that you were making about the yuan and the PBOC combined with the influence of Beijing allowing it to weaken, do you think that there is a line in the sand that represents the real risk of more capital flight out of China as a result of a weaker currency? Or is that not even entering the thinking at this point?

well i think it i think it certainly enters their thinking but it's more to do with the speed of the moves in the in the currency so i think from what we can see at the moment if there's a gradual weakening of the yuan they seem to be reading that as something that the chinese economy chinese investors they can they can deal with that they can if there's a small amount each day that's something they can have what they

were really scared of is a sudden jump. We saw them experiment with that in 2015 when they moved the currency by 2% in one day, and that just caused havoc across Chinese equity markets, bond markets, everything. And people were panicky, and they started to move money out of the country. So they're really wary of that. They don't want to get people panicking

to be really nervous about the situation. So it's most likely they're going to continue with a very gradual move, something like we saw in 2018, 2019, as the first round of tariffs came on against China. It was a move which lasted over many months before it reached a level where the Chinese authorities thought, "Okay, now we offset the extra costs we're receiving from the United States." So difficult in this current environment to get any visibility in order to kind of react

Treasury Secretary Besant during the New York session was telling Fox Business everything was on the table. He was asked the question as to whether kicking Chinese stocks off US exchanges was an option and he seemed to keep the door open for that. How bad could this get? I mean, when you look at the potential for a real destruction in relations between Washington and Beijing. I think we've already seen investors start to move ahead of that for some time anyway.

You could argue that the establishment of the Hang Seng Tech Index, which happened about four years ago in Hong Kong, was really there as a preparation for people expecting that over time Chinese companies would do fewer listings in the United States. They may even pull their listings altogether. And you've seen volumes shifting away from the activity in the ETFs, which are listed in the United States, shifting more towards those.

those which are listed in Hong Kong. That's a transition that's been going on for some time. It may accelerate. This has been hanging over the threat of Chinese companies being removed from

US exchanges is a threat, which has been there for some time. And some Chinese companies are voluntarily putting dual listings into Hong Kong to protect them should the day come when they need to remove themselves from the US. So it's not something that is a complete shock to investors. It will still have an impact, of course, should it happen. So we're seeing much more attention to people like Alibaba, JD.com. They've all got listings in Hong Kong, and those flows are starting to increase to compensate

for money coming out of the United States. I'm curious about the pressure that you're seeing right now that is being put on institutions, government-sponsored institutions, pension plans in China to absorb a little bit of equity flow right now, given the ructions that we have been seeing in markets, the so-called national team stepping up to do some buying. Is that something that you're expecting to see a lot more of? Well, just a couple of days ago, China Central Bank, PBOC, they said that they had more funds available

for these government-linked entities which go into the domestic market to buy ETFs. So they're providing them with more liquidity. We've also seen a lot of activity in the last couple of days. Clearly, the volumes are very strong. They are buying the ETFs.

And Chinese equities have been holding up much better than other regional exchanges. So clearly it has started. There's nothing to suggest that it will stop anytime soon. It seems to be part of their plan is to, as much as they can, is to ring fence the domestic economy, ring fence domestic securities, try and show that they have some strength there, that they can withstand this no matter what happens in the outside world, that China still has a vibrant stock market. Its companies are in good shape. So they're putting their money where their mouth is.

and they probably will continue to do so because they need to show everybody that they're being

as little as possible by what's happening in the outside world. So put yourself in the mind of a trader right now in the Asia Pacific. Last trading day of the week. How do you want to close out your book this week? Well, if you haven't exited things already, you will probably be looking to even pare down risk even further. It's like a steamroller. You can see a situation where they got this

this big truck coming towards you, you just don't want to get in the way of it. So there are some very clear flows. The dollar is falling. You don't want to get in the way of that. Treasury bonds are selling off. Equities are

are very soft as well. So if you still have short-term exposure to those things, you're probably just going to want to reduce it as much as you can. But the sense is that people did a lot of that over the past week already. We can expect to see a lot more erratic day-to-day movements. Uncertainty is extremely high. You imagine it's uncertain in the United States. Imagine what it's like for people out here in Asia who don't have much clarity at all.

on how these things are going to be imposed. So keep risk as small as you can. That's the message. Okay. Mark, thank you so much. It's always a pleasure. Mark Cranfield, Bloomberg Market Live strategist, joining us from Singapore here on the Daybreak Asia podcast. Want to understand trends shaping the global investment landscape?

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where money means more. Welcome back to the Daybreak Asia podcast. I'm Doug Krisner. There was heavy selling today in U.S. risk assets less than 24 hours after President Trump backtracked on his tariff policy, ostensibly to prevent a meltdown in financial markets. Today, we had a sell-off in U.S. equities, in the dollar, and in crude oil as well. All of this seemed to underscore the concern about the possibility of global recession.

For a closer look, I'm joined now by Patrick Kennedy. He is founding partner at AllSource Investment Management. Let me begin with the question around recession. Do you think this is a real risk at this point, Pat?

Thanks so much for having me back on. I do. I think that anyone that plays down the risk of recession at this point, you know, you just haven't seen what's going on the past two weeks. So I think, you know, if you go back in time a month ago and fast forward today, you have to acknowledge that recession risks are much higher.

You know I think that we avoided worst case scenario yesterday where we would have a you know a certain recession and a very deep one at that if the tariffs were put on how they were first laid out. Now I think the risk for a softer recession is still definitely there.

And if a deal with China isn't made in short order, I think that, you know, that's a real possibility. And the risk and odds continue to go up the longer that we put off a deal with China. You cannot, as you know, uproot manufacturing routes overnight.

and bring them back home or anywhere for that matter. And during that time, you know, take Apple, for example, they can't jack up their iPhone prices to two or $3,000 or whatever it would be if they were to move their manufacturing plants. So right around the time that the retaliatory tariffs were announced by the president, we saw a heavy selling in US treasuries during the Tokyo session and the 10-year spiked and yield something greater than 20 basis points.

And a few hours later, the president hit the pause button on those retaliatory tariffs. And I'm wondering whether or not the message from the market, particularly the bond market, may have been that bear in mind here that China does hold a trillion dollars worth of U.S. treasuries. And that seems to be almost like a sword of Damocles hanging over these trade negotiations. Is it not? Am I making too much of that point?

No, Doug, I think you bring up a very valid point. And that was the first thing that we thought about yesterday morning. Right. So, you know, some people were saying, oh, it's a negotiating tactic to go up to the 11th hour and inflict maximum leverage, that sort of thing. We think when you look at the markets, it had a lot to do with what the bond market was yelling. Right. So the old saying is the smart money focuses on the debt side. Right. And there's a reason for that.

And it's simply because the debt side is what can really break the economy. So once you start to see problems on the bond market side, that means liquidity can dry up, banks can have issues, so on and so forth.

When you go back to the COVID low or 08 or any of the major lows, you usually saw big issues within the bond market right before the Fed stepped in. Now, whether or not the Fed can step in this time, that's a whole different question. But typically when you see a market low, you start to see the bond market get a little messy. The Fed doesn't care, in my opinion, doesn't care as much about the equity action as they do the bond market. If the bond market starts to get out of hand and you start to see some wild swings,

that can make meaningful impacts here and abroad. And usually that's when you start to form a short-term bottom. I say short-term because, again, we expect volatility over the next 90 days. So, Pat, I'm glad you brought up the Fed because today we heard from the head of the Chicago Fed, Austin Goolsbee, and he was saying that these tariffs put the Fed's goals of price stability and full employment essentially opposed to one another. Now, does that essentially mean that the Fed is kind of stuck here and that we may not...

get a rate cut or several rate cuts, even though the economy may weaken just because there is the risk of some sort of stagflation?

So, Doug, last time we were on, we mentioned that, you know, we really thought that stagflation was becoming a fear, right? It was becoming a fear within markets. And that's the last thing that Powell wants to be known for is letting stagflation back out of the bottle, right? The last time we saw that was the 70s. And, you know, obviously, it wasn't a good outcome then. Now, the tough thing is when you provide, as you know, when you provide liquidity into markets and you lower interest rates, you're

You know, it can create inflation if it's done too early. Tariffs are inflationary by nature. So if you raise the cost of goods by 10% coming into the U.S., one can think that, okay, the cost of goods are going to go up, right? So inflation is going to come along with those tariffs.

And if it creates economic pain, the Fed is very limited at what they can do simply because, as you said, their two goals are maximum employment and to keep inflation in check. Well, if inflation is running rampant, they're going to have to weigh out, OK, how high has inflation gone and how low has growth gone?

You know, there's an interesting comment made over the last few days, and that was essentially that, OK, we'll see inflation until we don't, which means, OK, tariffs will come on. You'll see inflation really tick up. But at what point does the consumer stop buying? Right. At what point does the consumer throw their hands up and say, you know what, I've had enough?

I can't afford, you know, a $1,500 iPhone or $2,000 iPhone or whatever it may be, right? At that point, you could actually start to see deflation. And I think at that point, the Fed has to step in and will step in. However, there could be a lot of pain in markets between now and when we get to that point. This is going to be a very interesting earnings season, particularly when we're listening for guidance. Tomorrow, we're going to hear from the big banks, JPMorgan Chase, Bank of America, Wells Fargo, Wells Fargo.

What do you think we're going to hear from the banks in terms of forward guidance?

I think that they're going to be extremely cautious, right? I think they're going to be extremely cautious. When you listen to some of the market strategists out there, from Morgan Stanley, from Goldman, most of them have even pulled their 12-month guidance for the S&P, right? They're more focusing on trading ranges over the next two to three months. And I think that's prudent. I really think it is. I mean, if you say with a degree of certainty, hey, I think X is going to happen a year out, it's very tough to do that right now.

because of all the variables that are still up in the air. You know, you can't tell me that, okay, you know, the same is going to be true for the market and the economy if we have a 15% tariff with China or if we have a 70% tariff with China, right? So that is just such a huge variable right now. It's very hard to give guidance, and therefore, we think that the banks will be light on guidance, cautious, right?

And they'll probably give their assessment of what the near-term volatility means for the book of business. Would you expect to hear about a much greater level of loan loss reserves? So it's funny you mentioned that. You know, we do think that there are risks in credit markets right now, particularly when you look at some of the real estate debt market, right? So I saw an interesting chart a few days ago where the missed payments on mortgages are the highest they've been since 08.

So that kind of caught my eyes. And that was before all of the news on tariffs and such. So I do think that credit could start to weaken once tariffs are put on. I don't think we've gotten there yet, right, because these tariffs have not been implemented for a good amount of time. I think very quickly we're going to see if credit deteriorates and at what pace.

So how are you guiding clients through all of this turbulence right now? I know that there are different risk profiles based on each individual client, but is there kind of an umbrella that we can put over the strategy that you've adopted right now?

Yeah, great question, Doug. So as you know, we work with a lot of high net worth people who have access to alternative investments. So we use stocks, we use hedge funds, private equity, private credit and the like, right? I think right now hedge funds make a lot of sense. They've been doing great year to date for a hedge fund. Volatility is your friend. For the retail investors who listen to this show, I think that a long short mutual fund serves the same purpose. So

Longshore mutual fund, they can bet on stocks going up, they can bet on stocks going down, and therefore they can do a lot better in a volatile environment like this because they can short the market on the way down and that serves as a bit of a cushion.

We still like commodities a lot, right? So we talked about commodity exposure over the past six months. We haven't changed our stance on that. If anything, we're leaning in a bit more. You know, commodity prices, we think overall will go up because of this. You know, some won't when you look at what happens with oil right now. But for the most part, when you see costs increase across the board, at the very least, you're going to get some volatility in commodity markets, and that's good for commodity traders.

So we like commodities right now. And then private credit. Private credit has been a big part of the portfolio. I know there's a lot of buzz around, well, it's a huge market now and there could be a lot of risk there. There could be, but again, there's so many different types of private credit. We like asset-backed private credit right now simply because any loan that you give is backed by a particular asset and you can go sell that asset if the loan is not repaid immediately.

Again, for a public market investor, it would be the same as like a senior secured, right? So we'd focus on having loans that are senior secured, that have teeth, meaning, hey, if they're not repaid, the lender can do something. So just to summarize, you know, we like commodities, we like hedge funds, private credit. If you're just a public facing investor, it would be a long short mutual fund, a basket of commodities or a senior secured loan mutual fund.

Good stuff. We'll leave it there. Thank you so much. Patrick Kennedy is founding partner at AllSource Investment Management on the line from Connecticut 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 story 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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