Tech Stocks Rebound Ahead of The Fed's Rate Decision
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Welcome to the Bloomberg Daybreak Asia podcast. I'm Doug Krisner. A myriad of markets in the Asia Pacific are offline this morning for the Lunar New Year holiday. China, Hong Kong, Korea, Singapore, and Taiwan are all closed. And in the States, we had a recovery in stocks after that sell-off Monday, a bit of a rebound in mega-cap tech in front of some key earnings. And in a moment, we'll be speaking with Tom Bruce from Tanglewood Total Wealth Management. Tom,

But we begin in Sydney. Joining us now is Garfield Reynolds. He is Bloomberg MLive team leader for Asia, joining us from our studios in Sydney. Can we talk first about the dollar? So much of what we have heard lately from the Fed has kept the dollar strong. And I'm wondering whether you expect that to continue, even though, as the market expects, we're likely to get a dovish hold tomorrow.

Yeah, well, just how dovish the hold ends up being, if it does, is one of the key factors that traders are looking at. We have had...

some signs that should be positive for the Fed when it comes to the progress on inflation. Governor Waller, before the quiet period came along, he was the sort of cheerleader for that view, the view being that the Fed still has what it needs out of the economic readings to stick with plans to cut rates twice this year. Now, if they're going to cut rates twice this year, then you would think that...

that just about any meeting going forward from this one, this one it's obvious they're not going to move, but any meeting going forward from here could be a live one. And we already have a number of bond traders who overnight were increasing their expectations that March could be live. A week or so ago, we were looking at almost no chance for a March rate cut. Now it's sitting at sort of 25% to 30%. And, yeah,

Yeah. Traders are looking at what does Powell say? How does the statement sound? How much emphasis is there on the potential that some of those stronger jobs data reads have been outliers? And how much stress is there on the recent better inflationary data? If they get enough, then those March bets will go to 50% in the blink of an eye. Yeah.

You know, it was interesting because after the December meeting, Powell came out and basically indicated there was a little bit of concern among a few Fed members about the potential inflationary impact of economic policies from what was then the incoming Trump administration. Now, we've heard a lot of rhetoric lately about tariffs. Do you think this is concerning for the Fed? Will tariffs necessarily produce higher inflation or is that a big question mark?

They did say they were concerned about it, but they also said that they weren't about to rush to conclusions. We've had a confusing myriad of announcements recently.

which have still, you could say, been less aggressive than what President Trump had promised when he was on the campaign trail, or at least had flagged the idea that he would impose tariffs from day one, at the very least, on Mexico, Canada, and China. He hasn't. He does have this possible deadline for Feb 1, when he thought that that might be when he would impose tariffs.

tariffs on Mexico and Canada. The Fed most likely is going to look at that as, well, yeah, this is a risk we have to take into account once there are concrete actions that have been taken and we can assess what those are doing. The threat of tariffs has also kept the dollar well bid. Talk to me, Garfield, about the second order impact on currencies across the Asia-Pacific, including the Aussie dollar.

Yeah, one of the things that that does is actually make it harder for central banks here if they are considering cutting rates to go ahead with rate cuts. It creates an air of caution when the dollar is strong because that means their currencies are weak and that increases the potential for imported inflation.

in particular, more developed markets like Australia and New Zealand. And one of the things that very much drives, in particular, Australian inflation expectations is what's going on with gasoline prices at the pump. And a lower Aussie dollar means a higher gasoline price. So that's one of the things that can have consumers expecting stickier inflation and

And that can be a concern for the RBA. It also creates a bit of a devil's dilemma because a stronger dollar also tends to hurt risk sentiment here in Asia, make people, households gloomier. So that's a potential demand downer, which then would push you towards rate cuts. So it really clouds the policy spectrum.

Now, during the equity market sell-off that we had in the States on Monday, one of the things I noticed was a tremendous rally in the yen. I'm wondering how much of that move may have been tied to a bit of an unwind of the carry trade. Is the yen still being used as a big funding currency for carry?

Yeah, very much so. The positioning is not as extreme as it was back in the middle of last year, just before that meltdown that we saw, which hit global risk assets.

But it's sitting at about a third to a half as large from the data that we can see, which is mostly CFTC data on speculators. And that's kind of tip of the iceberg stuff, but it's an indication. So those carry trades are still there. I mean, after all, even after the BOJ raised rates to 0.5%, and that sent Japanese bond yields for the

10-year up to sort of 1.2% or so, that's still a long way below the interest rates that are available in a whole range of other currencies, including the US dollar. So those carry trades are there. Then again, conversely, part of that yen rally was driven by the big tech

equity sell-off in the U.S. was accompanied by a massive rally in U.S. Treasuries. You had bond yields dropping by 10 basis points there. So following on from last week's BOJ rate hike, that helped to narrow the still wide differential in rates between the U.S. and Japan. So that was part of what helped to make those yen gains so strong. And it helps to explain why the yen has fallen back

as the tech rally unwound and U.S. Treasury yields ticked back up. So there are a lot of moving parts there. Yes, the carry trade is still there. Yes, it is still a threat, although it's a smaller one than it used to be. Garfield, we'll leave it there. Thank you so much for joining us. Garfield Reynolds there, Bloomberg's MLive team leader for Asia, joining from Sydney here on the Daybreak Asia podcast.

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Welcome back to the Daybreak Asia podcast. I'm Doug Krisner. U.S. stocks recovered from that sell-off on Monday, given a rebound in mega-cap tech. Even so, a number of participants are still grappling with the impact of DeepSeek, that AI model from a Chinese startup. They're asking about what it means for the valuations of certain AI tech companies. Joining us now for a closer look is Tom Bruce. He is macro investment strategist at

at Tanglewood Total Wealth Management. Tom, thanks for making time to chat with us. Give me your sense of yesterday's price action, and then I'll call it the mild recovery that we got today. Well, my overall take on it is when you have this kind of new disruptive technology come out, it is a total game changer. Yesterday's reaction makes a lot of sense. Semiconductors could be under a lot of pressure if

if less resources are required of them going forward for AI.

So I think the scope of this, the scope of the negativity can be somewhat narrow towards semis and towards maybe energy as well, because if you don't need as much computing power, then you don't need as much energy. Outside of that though, I think it's great news overall for AI and for the rest of the market.

If you look at being able to produce this cheaper, then you can roll out AI quicker and it has that ability to

to enhance productivity that much quicker. So as a whole, I view this as a very positive development. One of the things that we heard today, the commentary of David Sachs, White House AI czar, and he was talking about the fact that this event really is going to refocus America's AI industry. Clearly, there's a lot of competition that's happening between the US and China.

And it's a very strained relationship right now with the threat of tariffs looming. We know that during the Biden administration, there were export controls placed on certain high technology components.

and whether or not the Chinese would be restricted from using that. It may be a big question as to whether or not this particular AI model was developed without advanced US technology. But do you think that this situation with DeepSeek has the potential to worsen US-China relations? Well, I think that's unlikely. If you look at the bigger picture of it, to me, it's just a beautiful thing overall because

I think as a lot of tech entrepreneurs have come out over the last 24 hours and talked about this, they've offered congratulations for it. It's great news for the industry as a whole, and we're able to do this much more efficiently now.

Now, it's bad news for certain companies, for the semiconductors, and I think even for the mega tech that have led the way for such a long time. The moat that they had over the cost that it took to produce one of these AI models, that moat appears to have shrunk considerably now that we know that they've successfully engineered something that can produce similar results for a far lower cost.

So there could be some issues there with the markets. You know, it could be some difficulty with an adjustment, I think, with cap weighted indexes being so popular, you know, in the Magnuson 7 taking such a large weight in them. Something disruptive like this can certainly happen.

have at least a temporary impact, even if the news is positive overall, it could ding a few of these companies. I don't want to get bearish on them quite yet, because I think they have some phenomenal leaders, but NVIDIA in particular.

But, you know, there could be some pain over the near term. Earnings season begins tomorrow, as we know. We're going to be hearing after the bell from Tesla, Meta and Microsoft. Then on Thursday, it's Apple's turn. I think it's fair to say that when you look at earnings, they are still rising for mega cap tech and far outpacing the rest of the market. Even so, profit growth is projected to come in maybe at the slowest pace in nearly two years. And I'm curious, is that a concern for you?

Within the context of this latest development, I feel like it's such a game changer going forward. It's really hard to say what to expect within the greater context of it all. Megatech has been under such scrutiny recently, it can blow out earnings. In some cases, it just hasn't been enough. Even with phenomenal earnings growth, the markets still punish them after earnings are released.

And now that we know the same resources aren't needed, it may, you know, it could be difficult for them. We have the Fed meeting that will wrap tomorrow as well. And most market participants are expecting a dovish hold. Does that sit with your view? Exactly. I think this will be the least eventful meeting of the year. I'd be very surprised if they did anything. There's no, some of the projections coming out. So I think they just, you know, kick a can until March.

As we know, one of the things expressed at the end of the Fed's December meeting was this idea that there was a big unknown about the potential inflationary implications of economic policy from what was at the time the incoming Trump administration. Now we've been hearing the word tariff mentioned quite a bit. And I'm wondering how you feel about the use of tariff policy, first of all, and whether that's creating inflationary risk for the markets.

I'm not overly concerned about it. Yes, it's something we're watching closely. I think the first week we've seen here has been encouraging that there haven't been substantial tariffs right off the bat. In that sense, it's probably a little bit better than a lot of feared. As a whole, it's really just too early to know on this.

Even after tariffs are announced, when they're announced, it'll take some time to actually filter into our CPI and PCE data. So it's going to be hard to gauge this for a while from the Fed. What is your biggest concern when you look at the American economy?

Well, as a whole, I'm very positive on the American economy. I think there's a lot of tailwinds we had going into this year. And with the new administration, it's even more positive in a lot of ways through deregulation and the prospect of tax cuts. But if I had to point to one issue, it's that inflation.

If rates stay approximately where they're at, or let's say if the long in the curve rises, the 10-year stays at 4.5 or goes up to say 5%, well, that's probably going to translate into mortgages staying around the 7% level or maybe going a little higher.

what does that do to the housing market? It's not been as strong lately. Actually coming off, I wanna say the last 18 months or so in markets like Florida, it's not really been seeing any appreciation. They've been going the other direction for a while. So how long will interest rate sensitive areas of the economy be able to weather these higher rates

I don't think that's a problem in the first quarter and probably not the first half, but it could weigh on things going in towards the second half of the year. Tom, we'll leave it there. Thank you so much for making time to chat with us. Tom Bruce there. He is macro investment strategist at Tanglewood Total Wealth Management. Joining us 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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