Uncertainty Brews Ahead of Trump Tariff Rollout
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Bloomberg Audio Studios. Podcasts. Radio. News. Welcome to the Bloomberg Daybreak Asia podcast. I'm Doug Krisner. We are less than 24 hours away from the announcement on U.S. reciprocal tariffs. They will go into effect immediately. And still, there are a lot of questions over how this is going to roll out exactly, what it will look like.

Right now, we're seeing markets in Asia behave a little skittishly ahead of this announcement. Small declines in Japan and South Korea. And in a moment, we'll hear from Jeff Grylls. He is the head of EM debt at Agon Asset Management. But we begin in the Lion City. Joining me now is Bloomberg FX and rate strategist David Finnerty. He joins from our radio studio in Singapore. David, it's always a pleasure. Thank you so much for joining us. Give me your sense of

of what you're looking at, what you're monitoring most closely as you try to gauge the impact that these tariffs will have on markets? I think if I had to pick one thing specifically, it would be the equity market. So let's look at the benchmarks, S&P 500 or the NASDAQ, whichever one you want. I personally prefer the S&P 500. But I think that's the barometer of how much risk on or risk off sentiment there

Will there be? And I think that will permeate its way through, whichever way it goes, into the country markets and into the rates markets. And the markets, the equity markets digest information very quickly indeed. So, you know, where they end up. I have to say that we're going to get the tariffs in Asia time. It will be Thursday morning our time. So I'll come in. We'll see the reaction. But I think the key thing to remember initially is this is sort of in a game of...

I don't want to say a game because obviously it's not really a game, but in the tariff theatre, shall we say, this is stage one. And when I mention that, it's because there's a very good chance you'd have to think that other countries, maybe all, but at least some of them, say Europe and China, will retaliate to some degree. They've done that historically, so you'd think they would do it again. And then the question becomes, OK, so they've retaliated. What does President Trump do next? And his history has been like, well, I'm going to go and I may even go even harder.

So you've got this spiral. So the question I think would be uncertainly for the markets is how high, how long? How high do tariffs end up going? How long are they in place? Because we also know historically that

Oh, they could be in and then kick that can down the road, President Trump may say, or there's exceptions, blah, blah, blah. So that's the idea, really. At the end of the day, we're trying to grapple with is how high do these tariffs go and how long? And obviously, the higher is worse for the economy. And obviously, the longer in place is worse for all economies. So tomorrow is the start, I would say, of a process. So whatever market reaction you get tomorrow, that may certainly just be the beginning of

of it depending how this plays out that's a very good point up until this point there have been very few details and what we are being told at this point is that there are a number of proposals under consideration talking about maybe a tiered tariff system of some type another option would be some sort of plan for customized reciprocal tariffs

But it was very interesting to me, not really a big surprise, but one of the Fed speakers that we heard from today, Tom Barkin of the Richmond Fed, was saying these tariffs could raise both inflation and unemployment. So this creates an enormous challenge for the Fed. It seems like it's a stagflation-type scenario. We've talked a little bit about this in the past. Is that idea penetrating fixed income markets right now? Are you seeing it play out in the bond space?

I think that you're seeing definitely some fears of the stagflation. I think it could become more and more prevalent. I mean, even if you look at the data, ISM data that came out yesterday on manufacturing, it's slightly down ticked. So, you know...

And it's more of a services economy really of the US. But still, manufacturing is a key component. So the overall headline did down tick. But within that, that prices paid index jumped higher. So there are signs of stagflation. I don't think we're there yet.

But are we on the path to that? Definitely. And I think you're seeing that to some degree because the market's going – because the Fed has a dual mandate. It's basically control prices and support growth. And the market's going, well, for two of those, you're going for growth. And the reason we say that is if you look at the market expectations for Fed rate cuts now, they're pricing in three this year.

Even though the prices, you could say inflation's been a bit sticky. You look at the core PCE data from last week, that was a bit sticky. The price is paid as worry. The market's going to rethink the Fed's classic and go, it's going to support growth, which it may well do. What's interesting is the Fed, though, if you look at its rhetoric, they're not jumping out fully in line with that. They are keep indicating how we are worried about inflation.

So they are a bit more hawkish in the market. It doesn't mean they won't converge towards the market. But at the moment, essentially, they are more hawkish. But sorry to fully answer your question is because those Fed rate cut expectations, you're seeing those feed in. So you're seeing pressure on yields. Now, of course, if equities were to come under pressure as a result of these tariffs, again, that's an if. But

But if they were, or further pressure, I should say, then obviously you would expect the flows into bonds, which again will push yields even lower and lower. So those two things combined, you are starting to see play out. Which one is the bigger, like, oh, the Fed's going to slash, or it's just we're worried about growth? It's a bit tough to say. But overall, yes, you are seeing some worries in the bond market of the Fed.

of basically slowing growth moving ahead. So I want to get your take on what you're seeing in terms of currency market action, whether the dollar is a beneficiary of everything that we've talked about. Maybe there's a little bit of haven buying in the Japanese yen. What are you seeing? Yeah, I think it's a good point, actually, because historically you would see the dollar and the yen in the Swiss franc, the classic safe havens,

in these risk-off scenarios. What you have seen is over the last week, the S&P obviously has weakened, as we all know, but you haven't seen really a bounce out of a dollar. It's been heavily sort of range-bound. So you're not seeing those natural flows. Now, again, some of that could be distorted by month-end and quarter-end positioning. So you've got to factor that in. But certainly you're not seeing it as much as you think. And I think some of the catch could be

One of the things is if I'm President Trump and I do tariffs on one country, because the US is a big economy, you go, OK.

And even if the other country reciprocates, you go, well, the U.S. still will growth be less impacted because it's a bigger economy. The catch here is we'll find out tomorrow. But it looks like that the U.S. will be doing tariffs on numerous countries, if not sort of all the countries. Now, the question is, if all the countries retaliate, then suddenly that's like, OK, that's a big impact on U.S. growth. And arguably it could end up being a bigger impact, depending on how this all plays out.

So the growth theory of – we entered this year with the idea of U.S. was in a better growth performance than, say, Europe. That's all – those dynamics now are changing. And one thing I would definitely keep an eye on is the euro. And definitely the yen because I think the yen will benefit. If you had to pick one currency for me, it would be the yen because if you've got, say, favor flows, it benefits from that. If you've got equities down – you know, going down, then that will –

go money into bonds, which reduces your interest rates. So, if interest rate differential, you know, again, narrows and favours the yen. So, risks are skewed towards yen strength, I would say, in a risk-off scenario. But I'd also keep an eye on the euro because, obviously, it looks like one would guess that President Trump will announce tariffs on Europe. Europe have a history of saying, well, let's go for it. We'll play. We'll reciprocate. And,

historically, you are weakened. But in the moment, the sentiment is a bit more biased towards actually Europe may win on this. Some of this is obviously to do with the German infrastructure spending bill that they've announced. But again, that takes time to feed through. But then again, market sentiment will go, look, we're going to run with it. So I would be keeping an eye on how the euro performs. And I think that's another barometer of

of the dollar. And also, the euro is the biggest component in the dollar index or the Bloomberg dollar index. So really, where the euro goes, that's sort of where the dollar goes in the opposite direction, obviously. I've got to get your take on what's been happening with the Chinese currency offshore, the yuan right now at around $7.27, $7.28.

Do you have a sense of where this may go from here, particularly if there is greater tension between Washington and Beijing on the tariff story? Yeah, look, I think the risks have to be towards a weaker yuan. I think a slow grinding yuan. I don't think the PBOC is in any hurry to let that fix loosen. Everyone's looking for 720 in the fix.

as a line in the sand. I think at some point it will gradually ease past that because it is a method, a valve you can really steam off and support the economy on. But I don't think this will be a rapid depreciation at all. And I think certainly initially China may stand its ground and go, look, we're keeping the fix in a narrow, tight range just to show, hey, we're not going to use that currency. In the end, I think it will. But certainly in the near term, I wouldn't be surprised if they said, look, we're keeping that fix.

stronger than 720 in this 717, 718 range. Okay, David, good stuff. We'll leave it there. Thank you so much. David Finnerty there. He is Bloomberg FX and rate strategist joining from Singapore here on the Daybreak Asia podcast. Want to understand trends shaping the global investment landscape?

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Welcome back to the Daybreak Asia podcast. I'm Doug Krisner.

There are a lot of issues for markets to consider right now, not the least of which is the uncertainty tied to those tariffs. So how do you understand the risk landscape as it stands right now? Well, with regard to emerging market debt,

We've seen very balanced flows and very balanced performance. I mean, when you look at what spreads have done so far year to date, they're wider by 15 to 20 basis points, which in the grand scheme of historical emerging market debt, volatility or uncertainty is pretty benign. And I think a lot of that's driven by the fact that

There is this uncertainty, as you mentioned, to what are the tariffs going to be? How bad will they be? There's indications that they're on, they're off. And so the market. But the good part is that nobody has really reacted irrationally in our market or at least had this massive risk off sentiment to EM markets.

I was speaking earlier about what we heard today from Richmond Fed Bank President Tom Barkin. He was saying that tariffs could raise both inflation and unemployment. We're talking about a scenario here that feels a lot like stagflation. What is the probability, in your view, of that type of outcome? So it's definitely a possibility. And I think that those comments were reflective of the recent announcement by Trump to say that

he would instead of doing country by country and case by case, just a universal across the board 20% tariff. And so that would have, I mean, that would have from things we've read and the work we've done have a pretty reasonable chance of causing unemployment to go up, causing inflationary impact, although there is still this concept of it being somewhat transitory.

But the big question in terms of your probability is, what's the likelihood they're going to do that? And I think you're already starting to see some, you continue to see toned down rhetoric from the administration, from some of the other people that work in the White House. The real big question is going to be, how far do these tariffs go? It's not if tariffs are going to come on, it's going to be how far they go. And when you really look back at the Project 2025 plan, which has been a lot of the underlying basis for the

the actions that we've seen so far this year, there is a clear desire to see the trade balance or the trade deficit improve. So will that all be done by tariffs? Could it be done by other types of activity? That's to be seen. So I don't think it's a high probability at this stage, but it's definitely possible. So I'm curious, what is the impact that you see now for emerging markets?

Well, again, we've, emerging markets has been going through an interesting transition for the last five years, right? Really post COVID. One where, you know, pre COVID, the markets were very reliant on China. China was the big driver. It was, that was true for really the global economy as much as it was emerging markets. And since post COVID, you've had a China market

property sector, which has been weak, growth, which is being stimulus driven, but still not the high single digits, double digits that we had in the past. And those days are behind us. So I think the emerging markets are going to be better insulated, better situated, given what's going on. And it's going to be on a case by case basis. So even with Mexico, we've seen tariffs be announced and then be

modified so that the USMCA rules still are in effect. So I don't anticipate it being too big of an impact from a tariff standpoint. If we do get to that recession or a very severe slowdown, then naturally they're all going to get the impact as they do export a lot of their goods and services to the rest of the world. I'm curious as to whether or not you're seeing any safe harbors. It was interesting that yesterday

A senior lawmaker of the ruling party in Japan was warning that these tariffs may cause a big economic crisis for Japan, particularly when you consider the auto tariffs. That would have huge implications across many regions in Japan. Are you finding any area in global markets right now where you're seeing some type of haven?

Yeah, havens maybe a little bit of a way that I wouldn't quite describe it, but I do think that, interestingly enough, there could be safer bond investments in some of the emerging markets than you get in even the developed markets. And with one caveat, we still are tied to US Treasuries, right? So if you get that inflationary stagflation type of scenario, rates go higher, which leads to negative returns, there's really not going to be anybody who's immune. But from a spread perspective,

There are very high quality names in this universe that you can take advantage of. Middle Eastern credits like Qatar, Kuwait, they're actually being taken out of the index because they're just so high quality. But those are very safe investments, even some of the other Middle Eastern higher qualities. But in Latin America, you have

Chile, which trades at reasonably tight spreads and probably will continue to be pretty low insulated. And then you go all the way to even the Asia credits, right? Philippines has done very well. Indonesia is starting to show some cracks, but likely much safer than other countries.

high yields, double B, single B type of investments that will take the brunt of a negative shock to the global market. So Jeff, geography aside for a moment, what industries would you be avoiding under the current regime? I mean, obviously something like an industrial or an auto you want to probably try to avoid, but I'm wondering whether or not we need to be talking about a broader group of industries that are vulnerable right now. And for that reason, you want to take a look at

perhaps the risk of maybe greater defaults? So the way I would answer that is twofold. One is you definitely need to be somewhat cognizant of the exporters versus the importers, right? So the exporters are where you're going to see both any slowdown in growth or any

other types of terrorists potentially hit them. So Brazil, Mexico, China probably come to top of mind there as ones that are going to be impacted. The other one that's been a sort of cautious theme for us is, which has worked reasonably well, but a lot of the energy related countries and companies have done very well for the last four to five years. Oil prices are starting to come off. You have a slowdown in growth coupled with

likely at some point in the US, more actions to increase the oil production and other things that you didn't see under the Biden administration. So I would say things tied to the oil industry are probably more at risk. On the counter to that, I do think metals, mining, those sectors are going to be reasonably well supported. Copper may be a little bit more daunting, but you are seeing sort of the general support to that type of market.

Otherwise it's going to be very strong balance sheets. It's really going to be those that are higher credit quality. So instead of an industry, I would think focus on triple B sweet spot, some double Bs and try to keep your credit quality as clean as possible, uh,

As we go through this, when the administration took office in January, there was a lot of anticipation about a flurry of M&A activity that really hasn't played out. Do you expect that to be delayed as a result of these tariffs or will that be an eventuality? It's just been pushed out a little bit.

I think it's been pushed out. You're seeing that, again, across the board for emerging markets, both from the issuance side. We saw a flurry of, on the fixed income side, a flurry of activity in January into February, and now you've seen that start to slow down. Interestingly enough, the sort of green sustainable deals has definitely declined, and I think there is a little bit of a link both from an investor appetite, but

just some caution for people to issue those around the changes that we're seeing with the objectives and what's going to be rewarded. But I don't again, we are not currently forecasting a recession.

We're not anticipating that. So I don't think that that I think that anything that's happening is a delay. And once we get the key is getting back to clarity. And I don't know when that's going to happen. That may take some time. But once we get back to some clarity, I think you'll start to see a renormalization of markets probably in the second half of this year. So what I'm hearing underneath the surface there is that you don't think there's going to be an appreciable increase in default risk right now. Is that right?

No, and for emerging markets, we've actually gone through a period where a number of credits restructured over the last two to three years, right? So Sri Lanka was one of the restructures we set. We've had Ghana, Ethiopia, and just to name a few. So we've actually got them into better places. There's still concerns,

The big concern for emerging markets today is the large size of fiscal deficits. I mean, frankly, that's the concern for developed economies, quite frankly. But as long as rates remain relatively low or stable, and through all of this, the 10-year treasury has come down from 480% to 4.15% today.

Fiscal deficits are not a concern when you have rates that are low. Where it will become a major concern is if we get that inflationary shock, rates go up and you get starting those financing costs ballooning, then you could have some countries that can't stimulate, can't

and have too high of a deficit. But right now, most of the markets are generally in cleaner spots than they have been over the last couple of years. All right, great stuff. Jeff, thank you so much for joining us. Jeff Grylls there. He is head of EM Debt at Agon Asset Management, joining from Greenwich, 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 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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