US, Russia to Meet on Ukraine; Markets Cautious Amid Global Trade Tensions
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Welcome to the Bloomberg Daybreak Asia podcast. I'm Dan Schwartzman in for Doug Krizner. On today's episode, a look at the trading week ahead with a looming threat of tariffs top of mind. We'll hear from Fred Newman, chief Asia economist at HSBC, plus an exclusive conversation with German Chancellor Olaf Scholz. He sat down with Bloomberg's Stephanie Flanders in Munich.

But first, delegates from Russia and the United States are expected to meet in Saudi Arabia this week. This is a two sides look to be in talks to end the war in Ukraine. For more, we hear from Michael Heath, South Asia EcoGov editor for Bloomberg News. He spoke with Bloomberg's Sherry Ahn and Heidi Stroud-Watts. It's been so much criticism, even sort of back in the presidential campaign, that Trump is going to perhaps go easy on Putin and kind of, you know, hand them the better side of a negotiated deal.

Yeah, I'm not sure that it looks too different to that at the moment, Heidi. I mean, there are these talks, as you mentioned, in Saudi Arabia. There's sort of preparatory talks between Russia and the US side. And as you mentioned, President Trump did say that Ukraine and Volodymyr Zelensky will be involved. The question is in what form, because...

So far it sort of looks like Europe has been kept out in the in the kept in the cold. Ukraine is finding out things sort of after they happen. So it's going to take a little bit of a turnaround here to sort of reassure Ukraine that a deal is not going to be done over its head.

But one interesting thing is that Volodymyr Zelensky was talking fairly tough. He said, look, there'll be no peace without Ukraine being involved in it. The Ukrainian people themselves won't accept that. And I think that that's completely correct. And Europe, of course, is trying to sort of scramble to get itself into the discussion here so it's not left out as well. So it's a really interesting time. It's been incredibly fluid. Quite a few contradictory statements coming out. But from the Ukrainian side, they weren't terribly...

promising. You know, it just looks very much like this whole relationship between President Putin and President Trump is sort of rekindling. It's very opaque. No one quite understands what it is. Trump seems to have a very, very high regard for Putin. I mean, even to the point where when he was mentioning that Zelensky would be involved in it, he said that Putin had told him he didn't want to go any further in the war and that he's sort of ready to end it. I mean, these are not the sort of comments that you rebroadcast because, you know,

You wait until you've actually got things set in place. So, yes, it's going to be really interesting to see how he handles it. Are we seeing European leaders respond to this, you know, changing geostrategic and security environment and demands by the US?

Yeah, I mean definitely it was it looks like it was quite a historic weekend really in terms of the whole transatlantic alliance here because we've got this meeting today that convened by President Macron and the European states that are involved are the ones who actually do take their defense spending seriously plus Germany which doesn't quite so much but nonetheless it's all states involved who can do something and it looks like

They're trying to bring in a core group who can actually come up with some sort of plan quickly to allow Europe to respond to this. Countries like Denmark, like Spain, France and Britain obviously as well, Poland, all countries that can get moving. Now we saw some smaller states criticise this but the problem with the EU is it's so unwieldy and the Trump administration is moving so quickly that Europe must respond quickly. And I think the Trump administration does have a very strong point on Europe. It's been free-riding for 80 years. It really does need to step up.

It's just that it comes in the context of a war, which makes it very, very difficult and stressful to do, obviously. But the underlying premise is right. It's just whether the timing is. But yes, it looks like Europe is really going to make a change here. Yeah. And the Trump administration really wants to get paid back is what they are saying right now when it comes to supporting Ukraine on the Russian invasion. But at the same time, not having necessarily invited President Zelensky to these negotiations. How is this going to play out?

Yeah, Sherry, I mean, there was a... When the Treasury Secretary was in Kiev last week, he presented an economic proposal to the Ukrainians about these critical minerals that Ukraine has. And it looks like... It doesn't look like it's particularly good for the Ukrainians, this agreement. From the bits that we've seen or have been reported about it, it's that the US will get 50% of whatever Ukraine has. And, number one, that sort of contravenes Ukrainian law, but...

it's almost, it's sort of almost like an, dare I say, imperialist sort of thing that a larger state takes some of the economic power of another state. Ukraine is looking, Ukraine's happy to deal with the US in and to be very, very generous on it, but Ukraine needs security guarantees tied to that. And there were none here. It was just Ukraine, US will have this ownership with no, it won't have any requirements with them in terms of defending Ukraine. Now, the Trump administration says, look, the fact that

the the the us is in there means that it will defend ukraine because it's got an economic stake in it and they're very very um strong on ukraine needing to pay for for what the us has done to support them it's a difficult issue because if you look at it from a macro level the reason that the u.s was doing that was so they don't have to deal with russia in in europe at some point down the track so it was sort of an investment uh you know in stopping this before it gets makes it worse but

You know, we'll just have to see how that unfolds. Ukraine is not agreeing to it yet, but it may have little choice here. Bloomberg News Editor Michael Heath there as we continue to watch those geopolitical developments.

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Welcome back to the Daybreak Asia podcast. I'm Dan Schwartzman in for Doug Krisner. Markets will be offline in the U.S. on Monday for President's Day, but the threat of tariffs from Washington will continue to loom over markets. For more, we hear from Fred Newman, chief Asia economist at HSBC. He spoke with Bloomberg's Sherry Ahn and Heidi Stroud-Watts. I mean, what a time right now, right? I think the last few times I spoke to you, we also had this Trump tariff uncertainty. We're back to that.

Did we get any lessons from the last round of tariffs we had in 2018, 2019? You're right. It's a bit of a deja vu, but I think you have to be careful to say that it's exactly a rerun, right? The global economy has moved on. There's much more inflation in the world now than it was back in Trump 1, right? In fact, we talked about deflation risk back then. Now it's inflation. So it might be much more disruptive in many ways. It might also be we're going to see more countries actually receive tariffs this time around. Back

Back then it was mostly China. And now it's sort of, are we going to get reciprocal tariffs on everybody? Reciprocal tariffs. They're now talking about auto tariffs as soon as April the 2nd, I think. What does that mean in terms of central banks as you say there's the inflation concern as well?

So up until now, central banks in Asia have been really worried about the stronger dollar, right? They kind of knew they had to cut because inflation is back down, but they're kind of reluctant to cut because they don't want the currency to weaken further. Now you sense they're really getting concerned more about growth. What does all of this mean for economic growth and should we therefore cut? The reaction function is sort of switching from the currency towards growth and that

That's why we might see more cuts coming. If you have the tariffs in place, what does that mean for economies across Asia? Because at the same time, we could see those inflationary pressures. But what happens if the U.S. economy starts to slow down? We saw the U.S. retail sales also being much softer than expected.

Well, it was primarily the U.S. that imposed tariffs. Actually, you could argue it's deflationary for the rest of the world. So what you get then is a divergence of inflation. You have more inflation in the U.S. because of the tariffs. But everywhere else, because there's weaker growth, you might actually get less inflation. And therefore, central banks have to have the door open to cut. The only thing is that the currency might weaken. And so do you accept that or not? At some point, you probably prioritize growth over weaker exchange rates.

This time around the Chinese economy is in a far worse state than the last Trump administration. So what tools that are meaningfully effective are still available to Beijing?

Well, if you talk about protecting economic growth, then it's really about firing up domestic demand. That's got to be one of the priorities because the export channel really is not going to be viable for the next two, three, however many years. It's all about the domestic economy. So one of the first reactions is to say, OK, well, tariffs are coming. What are we going to do with growth? And it's about fiscal policy. It's about taxes.

putting in more stimulus domestically. But as we know, it's been slow in coming. We're now looking to the two sessions in early March. Is there more going to come? It might be more of a very gradual, incremental kind of move forward. It won't be the big bazooka that many people are still hoping for.

The domestic demand side, the animal spirit side has been missing this whole time, right? Do you think it's because they haven't been willing to kind of go for the big guns like direct household payments and do they need to do that? What breaks this deflationary mindset and confidence spiral?

It's probably you could always say you need more, more, more, right? You could say, well, interest rates should be cut more. You could say that we need more fiscal stimulus. To some extent, that's true. We probably need more of a policy accommodation. At the same time, remember that one of the key, key drags on the economy is the property market. It is that worries around property values. It's really starting to weigh in the confidence of consumers. And so you probably want to

kind of hone in on the property sector in particular. So the key key to unlocking things is probably to accelerate stabilization measures on property and therefore then hopefully at that point when you do stimulus and you have much more traction with it. So we would expect actually priority coming months needs to be the property sector and here probably we need more Beijing funds to help stabilize things because there's still excess inventory in the system. There's still companies

they've been struggling a little bit with funding. And so that's gonna be sort of one of the keys to unlock things. - Talking about animal spirits, are they sustainably back

over in Japan. I mean, we've known that there's been a lot of interest on Japan, especially with the BOJ finally normalizing rates. But at the same time, how sustainable is this if we continue to see inflation picking up and consumers suffering because of a weaker yen? It's a really fine line the BOJ has to walk, right? You want inflation, just don't want too much. You want optimism, but you don't want to raise interest rates too much. So it's really a fine line. So far, I have to hand it to them. They've really struck the line very well.

If you look at... You think? Yeah, I think so far it's worked actually quite well. It looks as if inflation expectations are back up. We see corporate earnings actually doing reasonably well. These are large companies. Investments coming back. We're seeing moves towards accelerating productivity.

likely we're going to get another round of strong wage growth. So it really looks like Japan has turned a corner. Now, that might work for one or two years. The problem is what comes after, right? And there we need to see how do we kind of ease the decline in population? How do we really start to get those productivity growth going in terms of innovative technologies, in terms of new industries? That's still going to be a big hurdle. But for now, I think they've really laid the path for a sustained recovery.

That was Fred Newman, chief Asia economist at HSBC. Over the weekend, we heard from German Chancellor Olaf Scholz. In an exclusive interview with Bloomberg, he said the European Union is prepared to counter U.S. tariff threats if it has to. Scholz spoke with Bloomberg's Stephanie Flanders in Munich. First, I have to admit that I'm in favor of free trade.

I think this is a big advantage we have in the world and that many of the wealth and the growth we have in the world is because of free trade. So it must be fair free trade, yes, but free trade is better than tariffs and protectionism. I don't think that this will work. So it should lower tariffs? When it comes to the European Union, I think everyone knows that we are a big economic area with a lot of strength.

policy about tariffs is something that is our common policy so we are strong enough to react to everything that is harming European economy but we should and we should react always but in a way that is always offering the chance for an agreement because it's better for all all

parties involved especially on the both sides of the Atlantic. But is it is the opinion in considering cutting tariffs before any announcement on cars? We invite the United States to discuss with the responsible authorities about what we can do for a better progress that serves all of us. There is a willingness and so I'm sure

It's better if we agree to something that helps all of us. And it is good to know that Europe is strong enough to act and to react. You talk about it being a common project, but Donald Trump has made clear that he wants to do reciprocal tariffs. He doesn't want a WTO approach where all the rules are on the same countries. And even with the European Union, he might want to have a different tariff system.

regime for France and Italy and Germany, what would you do then? The European Union is a unified economy and has... But there's nothing to stop the US doing that. But it has common tariffs and we act together and we will stick together, which I think is also important. And so I'm quite confident that a good solution is feasible and everyone should work to make it happen.

You spoke this morning very clearly about what you need to do to increase defence spending above 2% of GDP and suspending the debt break just for that additional defence spending. But for many countries, it will want to also have joint debt issuance for Europe as a whole to be able to invest enough in defence. Would you consider that given everything that's happened in the last few weeks?

I think there are three things we can do in this very moment. The first is that we agree in Germany that supporting Ukraine is something of an extra effort. So we should have extra room for maneuver also financing this support to Ukraine, which when it comes to the figures Germany is doing the most. We are the biggest supporter of Ukraine in Europe, the second biggest in the world, and this has to continue. But we cannot

pay for it with cuttings in pension schemes or in the health sector or in cuttings in the investment into streets and railways and so on. So I think it's clear that we have to do this. And the second is that we have to agree how we will continue with the spending of more than 2% of our GDP for defence, which we achieved.

because of an extra fund which I managed to get through the parliament. But for the future we need a new decision about this and this is for continuing with this 2% plus already 30 billion a year. So also this will not work with tax increases or cuttings and spending in the different areas of the German budget.

And when it comes to do more, which will be obviously necessary when we look at what NATO is discussing, then it especially means that we do something for these activities, which gives us in Germany the opportunity to spend even more. And this has also to do with the reform of the debt regulation in Germany.

When it comes to Europe, I think we should help every country if it spends more than 2% to be not hindered by the European regulation on treating that. So changing the stability? We have to change these agreements so that this is feasible for a country to do. That was German Chancellor Olaf Scholz speaking to Bloomberg's Stephanie Flanders in Munich.

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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