Welcome to DAYBREAK.
Asia. We're counting down to Asia's major
market opens. Australia has just come online.
The top stories this hour. Asia is set for a week of open after a
volatile session on Wall Street as US inflation pick up tempers bets on a Fed
rate cut in March. The U.K.
cabinet set to authorize joint military strikes with the U.S.
against Houthi rebels in Yemen to deter further attacks on Red Sea shipping.
And I'm Yvonne Man reporting live from Taipei.
A day before an election that's said to give investors their first major
geopolitical test of the year. And some breaking central bank news.
Peru's central bank has now cut its reference rate by 25 basis points to six
and a half percent. Of course, it was at six and three
quarters percent before this was in line with what most economists were
expecting, including Bloomberg Economics.
So Peru's central bank cutting its benchmark rate to six and a half percent
from 6.75%. That will follow 25 basis point
reductions at each of the gatherings in the previous four months.
Policymakers are going to maintain, though, that cautious tone reiterate
that the move doesn't imply cuts at every meeting.
Slow rate cuts is what they are terming as future decisions will depend on new
information. So, Heidi, I wonder if there is any kind
of reaction in markets, but certainly we'll see that in the next Latin America
session if that happens. Yeah.
And we do kind of continue to watch that divergence right between emerging
markets, what we're seeing in terms of Fed expectations.
And that's going to play out in potentially a really interesting way
this year, given that a lot of these emerging markets, particularly in LatAm,
might be in quite a different space than what we see across developed markets.
But we are, of course, watching the market open here when it comes to
Australia just coming on line. But that stuck in session.
We're talking like just a little bit of softness at the margins, really pretty
flat start to trading. I think expectations are that we are
looking to set up a pretty mixed session here in Asia as investors will continue
to pass through the US CPI data. The implications for Fed expectations
and certainly taking mark off the table if they expected that.
Really though, ultimately failing to knock down market expectations for lower
interest rates throughout the course of this year, we are seeing equity markets
in Asia being set up for that kind of muted Friday open.
Their contracts for benchmark futures in Hong Kong looking a
little bit softer. We're seeing a little bit of upside when
it comes to currencies in Asia. The Aussie dollar is trading just under
that 7067 US it level, I should say, as we saw that pullback muted as it was
when it comes to the US dollar and going into the start of trading in Japan.
I should point out that the Nikkei 2 to 5 is poised for the best week in 22
months, where up about 5% this week, despite some signs that some parts of
the Japanese markets are looking overbought.
Exactly. We saw that yesterday.
We'll see what happens in today's session.
As for a US future as they look to be lower right now, we have them pointed
lower after a very choppy session in the session after we got the CPI print,
which showed a little firmness in CPI, now jobless claims, continuing claims
they were low, but the CPI print was a bit higher than expected and there were
a few elements in there that wouldn't have pleased the Federal Reserve.
And of course, we're getting this news that a person familiar with the matter
says that Rishi Sunak has had his cabinet approve Houthies strikes.
So that is also having an impact on this market.
You can see that haven trade that we saw on the Thursday session in the United
States continuing in the future session for bonds as well.
The ten year yield finished the session at three 9658.
And looking at crude oil in the United States, 7298, that's up another dollar
from where it closed. And that's very likely on rising
tensions in the Middle East. We're seeing Brent crude rise as well.
So let's get to that story now and bring in Bloomberg's Nick Wadhams from
Washington, DC. Nick, a person familiar with the matter
telling us that at least in Britain, the decision has been made.
Can you tell us more? Well, what we know is that Prime
Minister Sunak has authorized strikes and they could come at any time.
So we had been told over the last several days by US and UK officials that
essentially the houses would be forced to face consequences for a repeated
string of attacks against commercial vessels in the Red Sea.
And then yesterday you had a sort of unprecedented barrage, the biggest to
date where the Houthis fired 21 drones and missiles that ships.
Those were swatted down by US and UK warships.
So that sort of forced the hand of the US and UK.
But obviously it's a situation where they want to restore some sort of
deterrence to get commercial shipping flowing back through the Red Sea to the
Suez rather than having to go around the southern tip of Africa.
And there was some speculation that we could hear from President Biden this
evening, but we're now hearing from the White House that there are no more
public appearances from the president to be expected today.
Having said that, this is obviously a joint operation.
What are we expecting in terms of potential retaliation because the leader
of the Houthis has already spoken out? Yeah, Well, I mean, obviously, this
would be a very much alive debate within the US and the UK.
I mean, the tension point here is between wanting to deter the who's these
from taking greater action, doing something that makes them take notice
and allow those ships to go undisturbed. But then at the same time, the US has
been saying all along, you know, they do not want to provoke a wider conflict, a
wider war in the region. Those two goals have proven increasingly
difficult to square. I mean, you have attacks on U.S.
forces in Iraq and Syria. The US has responded there, but Iran
backed proxies in those two countries so far seem undeterred.
So you're sort of getting into this dance where the US and UK want to say,
okay, we're going to tamp down those attacks by launching more attacks
against an opponent that so far has said it will not be cowed and is in fact
threatening only more so. That's basically the definition of an
escalatory spiral. And you can bet that's very much on
their minds at the White House tonight. In fact, if anything, it's playing into
the Houthis hands in some ways because they've already said that they are ready
for something like this. Nick, what kind of action could the US
and UK take, assuming that action is taken, that wouldn't make enemies out of
everybody from Katara to you? Allies in Operation Guardian?
Well, I think what you'd see is something that would probably be very
careful, obviously very carefully targeted, and it would be limited in a
lot of ways at targeting those assets from the houses that are aimed at ships.
So taking they're taking away their ability to launch those attacks on
ships. I don't think you would see a broader or
sort of deeper set of strikes aimed at taking out the Houthies.
That would be virtually impossible anyways, given how entrenched they are
now in Yemen and how they've been able to resist Saudi attacks for several
years. So it would be much more at eliminating
or at least degrading their capability to go after these ships and restore some
sort of confidence from shippers that it's safe again to go through the Red
Sea. Begs US national security editor Nick
Wadhams there. And certainly so early in the first few
days of 2024, the global geopolitics looks pretty full already.
And this weekend, Taiwanese voters heading to the ballot box to vote for an
election that carries serious implications for geopolitics, for trade,
for investment. Joining us now from Taipei, Bloomberg
Markets co-anchor Yvonne Man, who's there to cover this election.
And Ivan, there are plenty of reasons for global interest in this.
Yeah, I think there might be a bit difference between what global investors
are looking at with this election and what the local community here is going
to be voting for as well. But as you say, right, this is one of
the most hotly contested national elections that we've seen in decades.
And we're just about a little over 24 hours away from when pollings polls will
open tomorrow to kick off this election. And certainly a lot is at stake, as
we've been talking about all week now. And really the high level, you know,
interest in what we're seeing when it comes to what this means for
cross-strait relations, US-China relations as well.
Taiwan's position, of course, in key supply chains like advanced
semiconductors. That certainly is a reason why there's a
lot of implications and not just what it means for cross-strait relations, but
also the global economy. So, you know, this is a chance for
Taiwanese voters to decide what Taiwan's future is going to be.
Is it going to be one that is going to lead to, you know, heralding more ties
with China, which is exactly what the KMT and TPP is vowing for?
And or is this about democracy, what the U.S.
is backing, which would for the DPP if they win a third straight term and which
is something we haven't seen before? Well, so given the importance of this to
China, any signs of Beijing perhaps trying to meddle in the election in some
way on or doing anything that might impact the results Saturday?
Yeah. You know, there certainly has been
several things that we've reported about.
You talked about the Chinese balloons. There's been some, you know, signs of of
China trying to really try to interfere as well with economic coercion.
And they've suspended some of these tariff concessions on some Taiwanese
products and warning that there might be more.
And then, of course, there's some more dirtier tactics.
Right. We've seen, you know, videos surfacing
online, fake videos of President Tsai Ing Wen.
Of course, we can't verify where those videos came from, but certainly that
does show you just the anxiety that that we see leading up to this election.
And that, of course just a few days ago that ALM that that a sort of missile air
raid alarm that that certainly sent some panic across the ground here when that
alert came on people's phones. You know, it turned out just to be a
satellite launch from China but it was a just a bad case of translation as well
because the English side said that it was a missile sort of launch.
So certainly that led to some more of why we're seeing this sort of fever
pitch leading up to this election now and how far Beijing is going to go in
response to this election in meddling is still a key topic here.
But certainly there's a lot a lot at stake here so far.
That's such a great shot that we just showed as well that Bloomberg New Taiwan
Straits Stress Index. And I want to throw up another chart
taking a look at expected hot and volatility of on you.
You've seen this right when it comes to Taiwan dollar versus the US dollar.
And over the next week it is expecting to be a pretty rocky ride.
Having said that, at the moment we're seeing traders trading currency options,
the most bullish on the Taiwan dollar in about 16 years.
So how are we expecting the market impact to be expressed?
Yeah, I think it's it's interesting. We've been talking to our guests about
this as well. And people are are easy to say.
This this election might just be noise at the moment.
Right. This is just the first sort of major
geopolitical test for for global investors this year.
We saw a lot of elections to come, of course, with the US election in November
as well. That might be more the important matter
in all this. But when you look at, you know, as you
say, local markets, you are seeing that volatility in the currency.
But what the analysts that, you know, our colleagues have been talking to
this, this might look more like a slow burn than than really some sort of
drastic volatility that could ensue. Obviously, if it's something that's a
shock sort of win from the opposition parties or, you know, either one, that
might be a surprise to the market and might actually help sentiment.
Right. If we see closer ties with Beijing.
But keep in mind, we have the Taiwan stock benchmark, very tech heavy.
It's trading near all time highs right now.
This is one of the leading markets last year.
And that wasn't really because of any geopolitics, but this trade that really
has held markets like Taiwan and South Korea.
So potentially, we talked to our guests just this week saying, look, the AI
craze that that could still continue this year and potentially if that
overshadowed some of the geopolitical concerns.
Bloomberg Markets going home on monday in taipei with the latest.
And still ahead, top US banks kicking off their latest earnings season coming
off their best quarter since 2021. We got a preview of those numbers with
CFR. We're coming up next.
We'll be live at Morgan Stanley's Global Alpha Investment Conference in Hong
Kong. The bank's head of Apex Wealth
management will be along with us. This is Bloomberg. I think March is probably a too early in
my estimation, for a rate decline because I think we need to see some more
evidence. I think the December CPI report just
shows there's more work to do and that work is going to take restrictive
monetary policy. Clayton Fed President Loretta Mester
After commenting following the latest data showing us inflation picking up
just a little in December. For more, Bloomberg's undercurrent joins
us now from Washington, D.C.. So and I love how you put this in the my
blog. You said today's data don't quite throw
a bucket of cold water over the rate debate, but they do add a sprinkler
effect. Does that mean rate cuts later or what,
exactly? Well, I think the data today undoubtedly
shows you that the US inflation story hasn't totally gone away.
Vonnie when you look through the numbers, airline fares are up, the cost
of used cars are up. The cost of auto insurance.
Auto insurance rose by the most last year since 1976.
Then you get the big ticket items like energy costs and of course shelter costs
all up. A reminder that for all the disinflation
going on in the U.S. and the pressure coming off goods prices
in particular, there are pockets of the economy where prices are proving to be
quite sticky. And that's obviously a complication for
policymakers. Now, one of the core core readings that
the Fed looks at that kind of came in more or less where they wanted to be
suggesting inflation is heading back towards the 2% target.
But I think today's numbers do give pause for thought that maybe the
disinflation is not going to be necessarily a linear line.
It's going to be more of a bumpier path back down to that target,
talking about a bumpy path, that's a challenging recovery for you.
We have a decent data dump today when it comes to trade and the deflation picture
as well. What are you watching most closely?
Well, the inflation story in China is going to be very difficult.
One here, both consumer and producer prices that are expected have contracted
together. That's obviously quite a standout.
And on the trade side of things and both numbers will be interesting, imports are
expected to be weak and that will, of course, be too weak domestic demand.
And I'm sort of underscoring this idea that the Chinese economy hasn't roared
back the way some thought, even though we're heading into the holiday period
where apparently consumers are gearing up for good spending there.
And on the other side, the exports dollars out of China is supposed to be
weak and that will speak speak to the whole idea of weak global demand, a weak
global trade. And of course, that's certainly not
going to be helped by the ongoing developments in the Red Sea.
So I think the net takeaway from today's numbers are going to speak to the idea
that weak inflation reflects weak demand in China as as weak imports.
And of course, the Chinese export story will just speak to the idea that global
trade remains in a slump and not much sign of a turnaround there any soon.
The next global economics correspondent and a current there in Washington.
Well, the annual Morgan Stanley Global Alpha Investment Conference is taking
place in Hong Kong and world rulers is there with our next guest, Bo.
Thanks, Heidi. Kicking off with that same you were just
talking about, the Chinese economy. Really perhaps still haven't seen the
lowest point for it just yet. And that's really one of the key themes
that's going to be discussed today at the conference.
Let's bring in our first guest. This is Morgan Stanley's head of APAC
wealth management, Vincent Choi, joining us.
Vincent, I was listening to your interview that you actually did at this
event last year, and you were very bullish on that point about about China
or about Hong Kong, the reopening theme. How you feeling going into this year?
Good morning, Annabel. Thank you for being with us today.
I last year I was very constructive in terms of opportunities which would be
brought to us reopening. I think a lot of that as far as
industries is concerned, it has played out pretty well.
I think most of the banks in this part of the world has done pretty well in
terms of catering to the wealth and investment need of the wealth clients,
not just in China but across Asia. Now, obviously, in terms of the
investment opportunities, depending on where you put your money to put your
money in, for example, mainland Chinese stock.
I think that will be challenging. But a lot of other wealth lines that
actually the investment is global. If you put your money in the Division
seven in the U.S., I think you'll be pretty happy.
So you catering to ultra high net worth individuals.
So so where were they really putting their money then?
Is it not into Chinese equities? Well, I think the US is perhaps
predominantly the very significant destination of wealth right now.
I would argue I feel years ago I think with the robustness of the tech sector
in China that a lot of money is put into that actually particular way.
But right now I think that the US is really is such a massive destination for
everybody. So therefore the question is really
about diversification going forward and there's not exactly a lot of markets of
that size where people put money into it.
So when it does come to diversification though, you sort of changing that
investment thesis, are you still seeing U.S.
exceptionalism over the course of this year or are you recommending that people
go into alternative areas or regions to invest instead?
Well, we are very for example, in this part of the world, we are very
constructive and bullish on Japan. But once again, coming back in terms of
the size of the wealthier right and most of the clients are putting ultra high
Nobel Prize in Asia that honestly that us remain the theme.
So therefore you think about all these of other big tech sector, the
Magnificent Seven in the US. The question is really about what is it?
Why would you want putting money into because of the size factor.
Japan. One of the key reasons that investors
are still continuing to prefer it is the geopolitical element because investors
are pulling out of China. They're pulling out of Taiwan.
How are your clients really navigating those tensions in this region?
Well, I think once again, the most important thing is to everybody has a
different need depending on where your wealth is concentrated in.
If you are not in China, if you're in Taiwan, for example, then you pass your
needs for a different. As far as Japan is concerned, I think,
yes, it is the beneficiary of geopolitical tension in this part of the
world. At the same time, I think ever since of
anomalies took place, I think there's a lot of restructuring transformation
going on in India and in Japan already. So there's a lot more than geopolitics
as far as clients in this part of the world is concerned.
I think they have to think about, okay, well, if my business already in China or
my business in Indonesia, how do I actually try to diversify a little bit
as a business as well, which has concerns?
Where are your clients choosing to base themselves?
Because we've seen the fallout from the money laundering scandal, for instance,
for Chinese clients or family offices in Singapore, in Hong Kong, for instance,
as a new ordinance law that's taking effect later this month.
And it would make it easier to enforce civil court proceedings in mainland
China, in Hong Kong. So a bit of concern there, how clients
really reacting to that. Are they looking for other markets to
base themselves? Well, I think what they think is most of
our clients ones are getting the ultra high net worth.
Some they actually prefer to be a senior Asia.
Most of them are at the age group where they still want to be active in doing
their business. So, yeah, I mean, in theory they could
many of them could move to countries outside Asia.
I think most of them prefers to have a significant base of domicile in
Singapore, Hong Kong, this it doesn't really change.
And different countries, all the different schemes for them to actually
get in children in terms of family, etc..
Australia, for example, is one. So I think everyone is very different.
You're also working with the Hong Kong government too, to try and look at ways
that we can boost stock turnover in the city here.
It has been really low over the course of last year before that as well.
We don't have a very strong IPO pipeline either.
What are the sorts of measures that you're looking at introducing?
Well, I think the financial secretary will speak about that in about a half an
hour or so. So I'll leave it to them to talk about
the details. So I think generally speaking, in terms
of the market turnover, you know, the two things is the competitiveness of the
market itself in terms of the cost to install.
So that's something which I don't think we can change.
It is up to the market to choose where you list to start and whether actually
in your marketplace where you have sectors and stocks where clients are
very. Focus on Kong is not exactly a big tech
mantra. So I think we are behind, honestly, in
terms of the technical area. Hong Kong remains the most transparent,
most open, most liquid stock market. If you look at the fact that most of the
large quant hedge funds, passive funds are based in this part of the world, I
think they are very crucial and I think some of the measures contained in the
taskforce, recommendations addressed to and I think the chief executive of Hong
Kong has fully embraced that. So I think this one you'll hear the
Finance Secretary talk about that would be great if you could share some targets
with us. So in terms of headcount plans, how many
are you planning to hire in this region this year?
And then also, how much are you planning to grow your assets under management?
Well, I think we are I think every firm is slightly different.
I think some of the things here are rare, large size, small incentives,
never about large size in terms of talent.
We right now have about 140 items and just in Hong Kong and Singapore.
Personally speaking, if you can get to like up ten, 15%, I'll be very, very
pleased. But once again, in the outward segment,
I think the talent pool is very, very small.
And also we care a lot about cultural stability.
So I'd rather not have a target, but I would say that I was very happy if I can
get to that level. All right.
A little bit of quality over quantity, perhaps.
That was a Vinson. Thanks so much for your time this
morning. That was Vinson Choy, Morgan Stanley's
head of Ipac wealth management, Vonnie, and that's Annabel Andrews in Hong Kong.
Annabel, thank you so much. And just a little bit because there is
much, much more coming up from the Morgan Stanley Global Alpha Investment
Conference. The bank's head of applied equity is
Andrew Salmon, joins us the next hour. This is Bloomberg. Yeah,
because our playing is still close attention when it comes to
cryptocurrencies. After the SEC's really milestone
decision to grant approval to a spot Bitcoin ETF, seeing trades top $4.6
billion in what has been a groundbreaking day for those first US
ETFs to directly hold a Bitcoin broadly higher across the board. CPI coming in hotter than expected.
CEOs are already complaining about inflation.
They're saying the cost of doing business is higher.
That has proven to be very sticky because of wage inflation from wage
increases to higher interest rates. This economy is rebalancing.
The labour market is rebalancing. It's not a sprint.
This is a marathon that still puts us on a downward trajectory for inflation.
We think that the Fed probably won't start cutting rates until around June.
They're going to have to be patient. They're going to have to wait, push
back. The timing of the Fed's first interest
rate cut likely not six rate cuts, with the first one starting in March of 2024.
And the key thing will be the course of inflation.
We see less rate cuts and we see them starting later because the Fed needs
more data around inflation easing. For my TV guests weighing on the latest
U.S. inflation data, its implications for Fed
policy. Ultimately, that just doesn't seem to
sort of markedly change expectations of the trend of lower rates, at least as we
get past March. This is a picture as we get trading
underway for about half an hour or so here in the Sydney session for Friday.
We are seeing a bit of downside there, about 3/10 of 1% there as we also see a
little bit sort of more resilience when it comes to the currency, the dollar in
particular, briefly erasing that drop. But really we are seeing pretty muted
trading there with the Aussie dollar and the Kiwi kind of holding most of that
resilience when it comes to Kiwi stocks. We're down by about a quarter of 1%.
Singapore Nikkei futures are looking flat at the moment.
We're coming on to a session for Japan with the Nikkei 2 to 5 is really
positioned for the best week in 22 months.
We've already seen a hefty 5% gain this week with the trading day still ahead.
This, as we say, signalling at least when it comes to the topics that
according to the RSI, if you're watching that, that we are pretty close to
overbought conditions and potentially if we see a repeat of what we saw back in
September, that could see a bit of a correction or a pullback for Japanese
equities. US futures at this point looking just a
little bit to the downside. Vonnie.
Well, Heidi, if you can believe it, we're back into earnings season.
U.S. banks are set for an earnings showdown
after their best quarter since 2021. Jp morgan, bank of America, Citigroup
and Wells Fargo will kick off the reporting cycle from corporate America
on Friday. A gauge of US bank stocks gained 23%
last quarter. Looking ahead to US bank earnings, then
Jp morgan, Bank of America, Citigroup, Wells Fargo, all due to report in the US
Friday. Let's discuss this with Ken Leone,
director of equity research at CFR a second.
We already got warnings from the likes of Jefferies Group and also Citigroup on
trading revenue. Broad strokes.
Is tomorrow going to be a positive day or a negative day for the banks?
Well, it's great to be here. And there's a lot of cleanup.
A lot of one time charges, as we saw with city kind of pre releasing that for
the fourth quarter and 23. But the market and investors are forward
looking and we think we're going to see validation that the U.S.
economy will have a soft landing. There will be loan growth, but it will
moderate. And importantly, on the dark side for
banks, there's going to be less of a conversation as it relates to credit
risk or the risk that there will be significant loan write offs.
So putting that in the backdrop, the opportunity in 24, that's to see some
upturn, although perhaps not early in 24 for investment banking and also the
durable businesses of asset management and wealth doing fine.
So banks are complicated and it's up to analysts to really sort through what's
important. And I would say overall, the economy
looks fine. The expectations on earnings are low, so
there's room to do better. But the real conversation, which is
going to be more subtle, is talk about capital build.
Generally. You would build capital go their
shareholders equity to save for a rainy day or something wrong.
Unfortunately, that's going to be tighter regulation coming later at the
end of the year, which we could discuss further.
Yeah, absolutely. I'd like to do that.
Let's go there right now. In fact, Ken, so we've been hearing a
lot about this. It's been out for public review, public
comment and so on the hearings and where they are now.
Are the banks ready for is or are they going to be crimped, as they say they
are? They're certainly going well, all of us.
Many of the CEOs are in front of Congress in late December saying any
solution, which is the Basel three and gang of having higher capital
requirements of 15 to 20%, will hurt the U.S.
economy. When you think about it, though,
one of the worries of regulators, whether it's in Europe or in the U.S.,
is the black swan or the unexpected event.
So a lot of the increased capital requirements really relates to the worry
for areas and trading of the more complex, longer duration instruments.
You know, Credit Suisse comes to mind, but there are so many in the past and
that's going to be really the difficult area for banks because investors look to
banks to invest because of dividend increases and share buybacks.
So I think you're going to hear kind of the diplomatic term capital build both
by the managements and the analysts. Yes, I think we're going to have some
frank discussions on those calls about what it all means for the banks.
Ken? I mean, we know the Fed is worried about
commercial real estate and the things percolating under the surface of some of
the banks. Any ones we should be watching in
particular for, you know, in that regard?
We watch it very closely, along with, quite honestly, credit risk in all the
areas. But for commercial real estate, that's
specific to office real estate. It gets to be a little bit more
magnified for some of the regionals or smaller banks.
The global U.S. banks really don't have any material
risk to commercial real estate. It's what I call something idiosyncratic
and not systemic to any banking crisis. So I know you think that J.P.
Morgan and Morgan Stanley have the best chance to deliver a better than expected
performance in 2024. What about just generally valuations?
Are APIs, for example, reflective of fundamentals right now for most of the
banks? So share prices can move up either
because of improved earnings or expanded multiples for valuation.
And right now, we think in 2024, if the economy remains strong, the banks may
have over reserves. So they might have releases of reserves
in the second half of the year, which would boost our and it's not the best
way to show quality growth. But that's true.
Additionally, banks are all trading at a significant discount to the S&P 500.
Most, except Citi, are trading slightly above par in terms of net tangible book
value. We're staying with the quality names
which right now have underperformed in the last 13 weeks.
That being Jp morgan Chase and Morgan Stanley.
What buys Citigroup has captured really the bullish view of analysts, mostly on
the transformation led by Jamie Fraser. But when you hear the word
transformation, that's a multi-year process, one where there's going to be a
number of bumps along the way to then really figure out what is the earnings
power of a of a bank like sitting there in the right direction.
But we went through this kind of journey with Wells Fargo over the last 3 to 5
years. Yes, we did.
Yes, we did. And we did it together.
And we'll do all of this together as well.
Kenneth, Leon, thank you so much for joining us.
Ken Leon is director of equity research at CFR.
And you can also turn to your Bloomberg for more on all the big bank earnings.
Go to t live, go to get commentary and analysis from bloomberg's expert
editors. This is bloomberg. You're watching DAYBREAK.
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Indigo Air India and Turkish Airlines. Airbus also beat its annual delivery
target by achieving 735 handovers. Reuters is reporting Tesla will suspend
most car production at its factory near Berlin from January 29th to February
11th. The move stems from a lack of components
due to shifts and transport routes because of the armed conflict in the Red
Sea. And we're actually getting headline on
that right now. The US and the UK have launched
airstrikes on Houthi targets in Yemen. Once again, the US and UK have launched
airstrikes on Houthi targets in Yemen. Bloomberg has been told the US National
Security Review of Nippon Steel's takeover of the US steel is likely to
last until late this year and possibly into 2025.
Su Keenan has been looking into this and so that's a lot longer than the
companies have publicly stated. Yeah, it really defies their forecast.
We heard from both companies at the time of the deal and then reinforced in late
December when US Steel had its earnings conference that they expected the deal
to close in the spring or end of summer at the latest.
But sources close to the matter told Bloomberg that a national security
review unlikely to conclude until late this year at the earliest.
That is, you can see, knocked the stock down briefly.
It was down almost 4% before paring those losses.
Now, sources tell Bloomberg they case the deal now under the scrutiny of the
secretive Committee on Foreign investment in the US and that the review
is in its early stages. This is a special interagency panel
which is led by the Treasury Department, and it has the power to approve, block
or amend the deal on national security grounds, or they can send it back to
President Joe Biden for a decision. So, again, while the precise timing of
the review remains unclear, people familiar with the process said they
expected it to take about a year or longer and that the process can lurch
ahead and sometimes pause amid legal wrangling, which is typical given the
scale of this review. A sale of an iconic U.S.
company to a major Japanese corporation. Tell us about the impact that this deal
could have on the presidential election. Well, there was a lot of opposition
initially from Democratic lawmakers and from the steelworkers union.
What we know is that US Steel is located in Pennsylvania.
That is a battleground state for the 2024 election and is also the seat that
President Biden was born in. And so we know that Nippon plans are
actually touch shop. A call from the White House last month
saying that the deal deserved, quote, serious scrutiny.
Bloomberg's Su Keenan there with the very latest.
And speaking of developments that we're watching at the moment, particularly
when it comes to the geopolitics of it all, we have heard now really
confirmation that the US and UK have launched airstrikes on Houthi targets in
Yemen. Local residents reporting that blasts
have rocked Yemen's cities of Sanaa and heard data.
And we're also hearing a Reuters reporting there of those airstrikes
taking place. And this as, of course, we heard from
that authorization of joint military operations, the airstrikes against the
Houthis from the UK. Rishi Sunak, we haven't heard from
President Biden. We're expecting him to speak throughout
the course of the rest of the day. But now confirming that the US and the
UK launching airstrikes on Houthi rebels targets in Yemen.
This really potentially risking a further escalation, as we see it, of
that conflict with an Iranian proxy group in response to what has been
really an elevated string of attacks that have disrupted commercial shipping
in the Red Sea, that have really been ongoing.
A US official who's asked not to be identified before a formal announcement
has confirmed those strikes have taken place, intending to hit a source of the
militant group's attacks and coming after the Biden administration warned
that there would be consequences for a barrage of drones and anti-ship missiles
that has targeted ships in that vital trade waterway.
And we have spoken, Bonnie, about the escalatory spiral because we know that
the leaders of the Houthi group have already said that there would be
retaliation if the U.S. was to take action.
Yes, exactly. And adding to the turmoil, Iran had
seized the tanker off the coast of Oman Thursday, and that had been sending oil
prices higher. This is just adding to the turmoil in
oil markets as well. As we know, Heidi, the Houthis launched
their largest assault yet on shipping in the key waterway, having had that
warning and several warnings, In fact, Secretary of State Antony Blinken in the
region even repeated that there would be something to
deter the Houthis from continuing these attacks if they didn't stall and they
were taking that rhetoric and basically saying bring it on.
And they reiterated that they weren't going to attack anybody, that it was
involved with shipping that didn't stop off at Israel.
They would only target ships that were going to have truck with the likes of
Israel because, of course, their goal is to identify with the Gazans on the Gaza
cause. And so there is there is a path out of
this, but not the current one. That's ongoing uncertainty.
Qatar is saying no strikes, strikes will not lead to anything good.
There's going to be a vicious cycle. They're not going to be pleased tonight.
We are watching that reaction when it comes to energy markets in particular.
Right. We do see oil climbing on these rising
tensions in the Middle East. The confirmation now of the US and UK
launching these joint airstrikes in Yemen.
We do have much more to come. We'll get you the details of this
breaking story as they get to us. This is Bloomberg. The US and UK have launched airstrikes
on Houthi rebels targets in Yemen. This is according to a US official who
asked not to be identified before a formal announcement confirms the
strikes. However, the US official has told
Bloomberg the US and UK have launched airstrikes on Houthi rebel targets in
Yemen. This escalates a conflict with an
Iranian proxy and is of course in response to a string of attacks that
have disrupted commercial shipping in the Red Sea.
And you can see the reaction in crude oil markets up another one and three
quarters percent, Heidi. It's 7327 right now for a barrel of WTI.
This after Iran had seized a tanker off the Gulf of Oman, which had sent prices
higher even earlier. And we'll continue to watch really for
the market implications of. Right.
A lot of geopolitical risks abroad. Of course, we've been monitoring this
widening conflict situation in the Middle East.
We do have the Taiwan election this weekend as well.
And in the meantime, we've been watching for these levels for Japanese shares
really continuing to surge in the new year on bets that they'll benefit from
that Goldilocks situation of the global economy.
Now, the too hot to call. They're also attracting funds fleeing
China's stock slump. Olympic senior Asia stock reporter Hideo
Casado has the details. Going into the new year, we sort of
listed some of the challenges for the next leg higher for this Japan equity
rally. So far, we've seen, what, 5% for the
Nikkei, 2 to 5 looking like the best week in about 22 months.
And technical indicators looking like we're we're pretty much in over
overbought territory. Exactly, Heidi.
So at the beginning of this year, investors station was basically after
such a big rally last year. The Nikkei still upside might be limited
for the time being, especially given that the Bank of Japan is likely to
tighten its policies sometime in the future.
Now, of course, the expectations about the BOJ tightening have receded
sharply after with its recent remarks, as well as the deadly earthquake that
happened on the New Year's Day. So that is helping Japanese stocks.
But that's there's more to the. And one reason is the expectations of
Goldilocks economy globally is helping Japanese stocks, because Japanese stocks
are considered to be one of the cyclical shares in the global market.
Oh, yes, you. Yes, I totally understand.
A phone call 10 minutes ago and to a phone call by senior Asia stock reporter
Harriet Casanova. So we'll continue to watch to see if,
you know, we do, in fact, have those further gains when it comes to the
Nikkei, 2 to 5 after that 5% rally so far this year.
We do have some data when it comes to Japan, balance of payments at current
account balance there just crossing the Bloomberg as well when it comes to the
adjusted current account surplus coming in at 1.85885, I should say trillion
again there we're seeing the current account surplus.
They're unadjusted at ¥1.9 trillion. That is a little bit lower than the 2.38
trillion that was expected. The trade deficit coming in at ¥724
billion. And of course, a lot of this really
feeding through with each incremental trade, particularly on the side of
inflation and some of those wage gains, vonnie informing what the bank of japan
will do. But at the minute we really are focusing
on what we're seeing in terms of the developments on the geopolitical front.
Yeah, exactly, heidi. Just to recap a bilateral action on the
part of the United States and the united Kingdom.
So the US and UK launching airstrikes on who the rebel targets in Yemen that has
happened. We know this from a US official who
asked not to be identified because there presumably will be a formal announcement
at some point to confirm the strikes. But he, the official has told Bloomberg
that the US and UK have launched airstrikes on Houthi rebel targets.
We're seeing a reaction in oil markets because this could potentially be a
quite serious escalation in the Middle East conflict depending on what happens
next. We know that several nations were
against this kind of action and had been looking for some other way to try and
calm the water is, as it were, quite literally in the Red Sea.
But Anthony Blinken, secretary of state, had warned repeatedly that there would
be consequences and this looks to be what the consequences are, this
bilateral action that has taken place Heidi.
Yes, the US and UK launching airstrikes on rebel targets in Yemen.
And Derek Wallbank joins us now, managing editor with the latest.
And Derek, you know, this kind of puts in place the likelihood of of an
escalatory spiral. Now,
look, this is no question this is an actual escalatory step.
The US and the UK had warned that there would have to be some reaction if there
were strikes that were continuing. We've seen shipping disruptions, ships
try and go around Africa rather than utilizing normal sea routes.
The those attacks had had not stopped in in the main shipping lanes there in the
in the Middle East. And so this is a definitely a reaction,
a an escalation. There have been concerns that that, you
know, you sort of you start escalating. Where does that escalation end?
I do think that has been a concern that has been playing here.
I also I it's very clear from some of the reports that we're seeing in that
these strikes have begun, that the case was made in both London and Washington,
that the risk of an escalation beyond where they're where they're escalating
to right now was worth taking. So this action being taken place right
now, again, the headlines that are just sort of crossing over right now is that
the US and the UK have launched airstrikes on Houthi rebel targets in
Yemen. We've got reports of explosions in
places around the country, very, very preliminary right now.
So this is just the beginning. And stay with us.
Will have a lot more information as this story develops.
Breaking news managing editor Derek well being there and we'll bring you the
latest on those developments plus the market reaction as it gets to us.
We do have the market opens in Seoul and Tokyo next.
We'll be watching for any kind of reaction, particularly when it comes to
energy markets. We are seeing crude trading higher on
this development with the U.S. and U.K.
launching airstrikes on Houthi rebel targets in Yemen, really escalating on
conflict with Iranian proxy in response to the string of attacks in the Red Sea. This is DAYBREAK, Asia.
We're counting down to Asia as a major market opens.
And it is a lot for investors to contend with The driver heading into a weekend
that holds for us the key vote in terms of the Taiwan elections.
That was supposed to be the first kind of test of geopolitical appetite for
these, the mark that are so firmly trained on Fed easing.
And of course, the inflation data set that expectation back just a little bit.
But Vonnie, at the moment, front and center, we're really looking at the
escalation when it comes to these iranian proxy conflict in the middle
east with the confirmation of U.S. and U.K.
coordinated airstrikes, a retaliation given the number of attacks that we've
seen in the Red Sea. But certainly these concerns of an
escalatory spiral are very, very real. Exactly, Heidi.
And we're seeing reaction in oil markets, at the very least with crude
oil up 1.7% right now. But have a look at how Asia is opening.
The Nikkei 2 to 5 on track for a third straight day of gains.
Look at that. A 1.6% was roaring out of the open.
We had foreign travel exceeding expectations in November as
well as other data out of Japan that will have helped things the topics of
8/10 of 1% and the yen continuing to strengthen there.
One 4509 The US dollar more than a 10th of a percent weaker versus the Japanese
yen. As you can see, the ten year yield at 59
basis points. But we're going to want to be keeping an
eye on crude oil. WTI crude up almost 2% now at $73.42.
Yeah, and vonnie, really energy stocks are one of the few kind of modest
outperformers, if you can call it that when it comes to trading here in
Australia where we are seeing materials and energy just tracking a little bit
higher. The rest of that market though, one of
the underperformers in the session and taking a look, as you say, when it comes
to oil markets that we're firmly focused on at the moment, given that we are
seeing these are fresh developments when it comes to the situation in the Middle
East, oil rising as we see the US and UK launching airstrikes on Houthi rebels in
Yemen. We've seen the benchmark WTI advancing
as much as almost 2% there. We're seeing just when it comes to New
York crude, they're holding most of those gains.
The militant groups attacks on ships in the Red Sea have really become an
increasing issue when it comes to that. US reaction being more likely above $73
a barrel is what we're trading at the moment.
Earlier this week we did see, of course, the biggest assault to date on shipping
as that key waterway, despite the presence of that US led naval force
that's supposed to deter such actions. We've seen a series of warnings of
retaliation from Washington and now confirmation of US and UK airstrikes in
Yemen that we have really seen these rising tensions kind of despite the fact
that oil has been buffeted since the start of the year, moving sort of $2
each way without a clear direction. And now we are seeing a little bit more
support there given the ongoing tensions in the Middle East.
Still, there are those concerns about rising non-OPEC plus supplies, some of
those deep pricing caused by Saudi Arabia as well at play here.
Let's bring in Alessio Solano, who is a professor at the Department of War
Studies at King's College, London. Alessio, really great to have you with
us. And of course, joining us on
at a point where we're still monitoring kind of the breaking news situation
here. Right.
How deeply does this risk the spiral of retaliation now?
First of all, thank you for having me. Listen, I think the first thing to say
as a starting point is that these actions and needs to be put into the
context that was said to by the warning, by the statement led by the United
States and joined together by by 11 states about the concerns of freedom of
navigation. Now, why that is important, because it
contextualizes why these actions are taken.
And in policy terms, it probably also very much framed the type of targets
that were selected for the actions to be taken here.
The focus is not to expand the conflict, but to degrade the capabilities that the
Houthies may or may not have in order to continue to represent a threat to
shipping lanes of freedom of navigation to the Red Sea.
So I would be very surprised if these actions were not to be highly tailored
to address the specific issues provided of the sensitivity and of why that risks
in the place the area. You talk about the need to kind of
contextualize that when it comes to the statement that we heard a couple of days
ago? Is it possible for this action to
specifically just address this risk? We've already heard from the hoodie
leader that there would be retaliation, a more outsized reaction than even the
attacks that we've already seen. How much does this really widen the
conflict insofar as it relates to some of these Iran backed proxies in the
region? So I think, first of all, the should be
considered as allies of the Iranians more than than a proxy.
They have there in mind that they have their own agency.
And, of course, the narrative that will be an inflammatory one.
But at the same time, if we assess the context based on the type of actions
they have undertaken until now, we have fundamentally three types of challenges
that have been presented and potentially a fourth one.
If you if you if you take the attacks the Houthis have carried out against
shipping over the last few years since around about 2015 70.
And so we've we've got missiles, we've got drones, we've got small balls, raids
and, of course, mines. Now, the actions taken tonight, I think
they can easily address the question of where these boats might be located and
certainly the launch size of missiles, because ever since the beginning of this
missile has been launched against the shipping targets and more recently,
naval vessels, you can always reverse engineer with a certain high degree of
precision, whether we're launched from. So I think if this is fact, we can be
confident that provided the buildup of tension and provided intelligence
gathered and the fact that this is not an unknown challenge, the Houthis have
been attacking on and off shipping for quite some time.
Is this age going back to 2015 and 2017? And I think also limited capabilities in
terms of what they can do and see. And I think we'll see actions that will
be primarily aimed at degrading the capacity to continue to escalate in that
maritime context. Yeah, but it will depend on, you know,
what you term capacity, right. Because they can always get more of if
it's just stuff you're talking about. So, Alessio, does this risk alienating
allies, not just European allies, but Gulf allies, Middle East allies?
I think it is in the interests of other Gulf states.
I mean, the statement is interesting that it had some solid partners,
partners that didn't want to be on the letterhead, but it certainly joined the
statement in principle and in terms of the content that it addressed, because
it does present the problems of shipping, which in turn is a wider
challenge to Gulf states, Egypt. And as a result of that, and it also
sort of is also part of the calculation, I
think, in how these actions of the coming together of a constant working
and exchanging, if you want diplomatically engaging, decide
involvement of the statement in order to ensure that the result of the action, it
would be something that would keep the if you want, the spirit of the statement
going and to target participation going, but also because of what the Houthis are
doing is not a harm just to the United States and the UK.
It's a harm to prosperity, to shipping. And that is a problem that goes way
beyond these two actors. It's an international community problem.
The real question that one should be asking is where is everybody else?
This is not just a UK matter. It's not just the United States factor.
And the fact that we shall see over the next few days, coming days, based on the
reaction where also the very common use, the reference to having stakes in
international stability when it comes down to proving that is where everybody
will fall in that part of the fence. Yeah, this is about the global world
order in so many ways, right? This is happening in parallel to in
conjunction with, of course, the continued assault in Gaza.
And we've seen Secretary Blinken in the Middle East, in the region this week,
again trying to push for a more targeted strategy from Israeli forces.
We've also seen the opening arguments for South Africa's case before the
International Court of Justice. From your perspective of war strategy
and military strategy. Is it likely that will seen a change of
tactics that might result in less humanitarian turmoil?
I think the the humanitarian drama that is unfolding in Gaza is certainly
something that is in the minds of policymakers.
I think if we go back to the specific case of the Red Sea, so far, the actions
have been that have been taken, were very defensive, were very reactive, were
focused just on ensuring that things could carry on.
And the escalation has been part has been communicated as been sort of like
laid out pretty clearly. So I think in this respect that this is
all symptomatic of the fact there is a clear sense that you cannot turn guns
towards the Houthis because that will harm the ability to move on towards a
process that would reduce the humanitarian and the humanitarian impact
of of of the sort of the actions that military actions that are taking place
at the moment. But I think at the same time, it's going
to take a little longer, certainly more time to find and a different approach in
terms of military strategy. And the Israeli goal is very clear at
the moment that this is a course of action that they are committed to.
So I think from the humanitarian perspective, there will continue to be
an incredible amount of challenges for the international community.
And I wouldn't be surprised if the United States had to continue to remain
heavily engaged in order to improve the situation.
And it doesn't feel like it's anything that will help the plight of the Israeli
hostages in Gaza either. Alessio, given that Qatar was the sort
of intermediary the first time round and now Qatar is hands maybe tied here.
What kinds of responses do you anticipate from global leaders?
I think, again, the role of the guitar as a mediator has been very important.
The hostage situation has been very clear insofar as the Israeli government
is concerned that that is a matter of absolute critical concern.
So in that respect, I think the if you want the broader interests of the
international community is truly to continue the diplomatic front if you
want to remain quite wise, including on the one hand, a broadening of the
negotiations to ensure the release of the hostages, which in turn favors the
possibility of of of of of of a conversation with the Israeli
authorities in terms of adjusting and modifying the military behavior in Gaza
in order to facilitate addressing the humanitarian element of of of of the
implications of the military operations, the way they are conducted at the
moment. All right.
Thank you so much for joining us. That's Alessio Portolano, professor of
war and strategy and East Asia at King's College, London.
This, of course, on the news that the U.S.
and the U.K. have launched airstrikes on rebel
targets in the Red Sea and, of course, the oil reaction as well.
Still ahead, voters in Taiwan preparing to pick their next leader on Saturday in
an election that could change the course of US-China relations.
Analysis with the International Crisis Group coming up.
This is Bloomberg. Let's just take a look at where some
risk assets are trading on the news that U.S.
and U.K. forces have attacked.
Who the targets in the Red Sea. Now we're seeing a little bit of
reaction from crude is probably the most of the asset classes that we're seeing,
the most money flow into. It's 73, 35, and we're seeing the ten
year yield just down a little bit at three 9621.
But really, it's fairly muted so far until we get a few more details and some
international reaction. Gold, for example, up about three bucks,
2/10 of a percent. And the yen is also just strengthening,
although it's off its highs of the day. It is at 145 and 22.
Let's get more on the building risks for global markets now, though.
Annabel Drury is at the Morgan Stanley Global Alpha Investment Conference with
our next guest, Bill. Thanks, Tony.
Let's bring in Morgan Stanley investment managers, head of Applied Equity
Research, Andrew Solomon joining us this morning.
So, Andrew, just hearing then about these strikes on on who see rebels in
Yemen, how much is that risk of any sort of escalation in the Middle East priced
into US equities at this point in time? So I do think that, you know,
geopolitics already always affects equities.
But to the extent that there's other things going on that I think will drive
the market more significantly, and I do notice that oil and oil stocks have
really not responded in a rally sort of way.
If you really thought oil was going. And that would be the biggest risk to my
kind of look outlook for the year would be if oil were to substantially increase
in that would jeopardize kind of this soft landing scenario that I think is
quite likely for the U.S. in terms of substantial increases as
sort of any percentage the reporting on that.
If you look at oil closer to 00 a barrel, now, you're starting to see
you'll see consumer spending start to slow and as people have to divert their
spending and that would that would of materially affect the economy.
So as long as oil stays maintain, I don't think it will affect the, you
know, the equity market or the economy. The other big theme overnight, of
course, is the US inflation print that came out.
How does that sort of factor into your thinking around the outlook for the Fed
and equities over the course of this year?
One of the things I find interesting is people perceive that when the Fed cuts,
that's going to be good for equities. I'm not so sure.
If you look at the history of when the Fed cuts, equities actually tend to
weaken, and the reason for that is that there is a fear that why are they
cutting? Is it just because inflation is coming
down or is there a problem in the economy?
And that usually creates some short term anxiety where you get a 10 to 15%
pullback. So in many ways, I want the Fed to be on
hold because it says to me, inflation is coming down, the economy's strong enough
to withstand where we are in terms of Fed funds.
I think the market will rally during this period that they're on hold.
I'm concerned when they first cut. You're going to hear a lot of people
that come out and say they must know something we don't.
And it's bad for the economy because a lot of traders, of course, I mean,
agitating for for a cut as soon as March, for instance.
So what's your expectation then, when we would actually see some sort of
reduction? Yeah, I mean, you heard a couple of Fed
members say today, I'm not so sure. I think it's going to be let out later.
I'm not an economist, I'm a portfolio manager.
So I still think it would be better if it's later rather than sooner.
So something else is going to really play, of course, into the the
performance is going to be the earnings season.
So a lot of the the optimism and sort of was baked in last year.
We saw that rally into the year end. Now it's going to be really tested.
Yes. So what are you expecting?
Yes. So so again, though, I haven't usually
if it's going to be an over week earnings season, we start to get
indications from companies during the quarter that maybe the numbers are too
high or they'll pre release and so forth.
And we haven't heard that yet, very little.
So I expect that earnings season will be okay.
But the question is how our stocks doing going into that earnings season.
And many like the financials are about to report they've been very strong the
last few days. And so the setup isn't great going into
earnings season. The stocks are very strong, high
expectations that what that worries me. But I don't expect a material cuts to
earnings for this year coming out of fourth quarter earnings reports.
And if you think about the market last year, we had flat earnings for the S&P
last year, but that's why the market was off the year before so anticipated that
this year the earnings were going to recover.
When you think about the market last year, it was, of course really driven by
the Magnificent Seven or so. Do you expect that sort of trend to
continue this year? I wouldn't necessarily say those stocks
are going to go down because their earnings have been very strong in the
revisions for those seven have been excellent and they're going to buy back
a lot of stock. But what's interesting is if you look at
fund flows and net human flows, they turn positive in November of this year,
which was a year after the low. And when those flows turn positive,
that's when other stocks start to participate.
The equities S&P outperform the S&P 500. And I think that's because when people
say, well, I want to get back more involved in equities, they start to
search around for other things that haven't participated.
And that's when the Magnificent Seven started to underperform.
And you're seeing it still year to date as other things around.
So I expect that the market will broaden out this year and there will be other
areas that will participate, not that those stocks will go down.
I just don't think they'll have the outperform.
But if someone comes to you, if I came to you and I said, I've got 100,000,
I've got ,000,000 to invest, what's the percentage to take care of?
Thank you. What's the percentage you're putting
into the Magnificent Seven? What's the percentage of putting into
other sectors for? There's other sectors.
So I think in terms of the S&P 500 or the S&P equal weighted, and I would
rather have more weightings in other areas than the magnificence of the
magnet. Four seven is about 30% of the S&P cap
weighted right now. I think the number should be lower.
You can't be a zero. Some of them are doing.
I think we'll do well. There will be a diversified divergence
of how they do this year. But I think there's other areas like
financials, industrials, semiconductors that are a little bit outside of the
magic seven. I think there's other more cyclical
areas that will do better. And don't forget, it is an election
year. And in an election year, fiscal spending
tends to ramp up. And in when fiscal spending ramps up,
you're seeing the Infrastructure Act. We have a chip tax, we have an inflation
reduction act. Those are all help the more cyclical
areas of the market. So I expect those areas will do better
than maybe the mag seven. Again, not that they'll go down, just
that they won't do the differential won't be as much.
And that's really what happened. Starting in November, you've seen this
divergence close. All right.
Thanks for your time. Enjoy the conference today.
That was Andrew Solomon joining us here from Morgan Stanley Investment Managers
Conference Heidi. And of course that about you side of the
conversation off with the latest geopolitical developments there.
We do have more interviews lined up from the sidelines of the Morgan Stanley
Global Alpha Investment Conference in Hong Kong leader Andrew Ross Investments
founder and CEO David Sarah, who'll be joining us in the next hour.
As we've been speaking of, in terms of the latest that we know of these
authorized airstrikes that have now been launched on who the rebel targets
in Yemen by the US and UK. We're now hearing from a Pentagon
official saying the US and its partners have conducted these strikes on who they
controlled in Yemen, that the US struck more than a dozen targets in Yemen.
These targets included radar sites as well as missile launches.
We continue to watch this for more details on these operations and where we
go from here, as we had the US. And of course, Rashid are not confirming
his authorization on these joint strikes.
Let's bring in our chief geoeconomics analyst, Jennifer Welch.
And Jennifer, we've kicked off 2024 with quite a high degree of geopolitical risk
here. What is the escalated risk that we see
retaliation now? Well, thanks so much again for having me
on this morning. Look, I think we're still in the process
of determining what happens after this. I should note that this isn't the first
time U.S. forces have interacted with Houthi
forces. There were also an exchange of strikes
back in 2016 when the Saudi who the conflict was even hotter.
So I think this is an important marker of where things are headed in the
region, certainly one that has been signaled for some time, both the
exchange of fire between the multinational forces and the really
stark warning that they put out to Houthis just a few weeks ago.
But I think it's too soon to say whether this is going to lead to a major
regional conflict or if it can still remain relatively contained.
But certainly something we're going to be watching closely.
The Pentagon confirming now that the US struck more than a dozen targets in
Yemen and those targets included radar sites and missile launchers.
So the other huge geopolitical news that's going on this weekend is the
election in Taiwan. What's the outlook at the moment,
Jennifer? Well, we're headed into the polls
tomorrow with a very, very tight race. In fact, I think this is one of the
closest races that we've seen in Taiwan in several election cycles.
We have the ruling candidate, party candidate like seemed to facing a split
opposition led by Hou Yu-ih of Kuomintang party and into the new third party, the
Taiwan People's Party. Generally speaking, in past election
cycles, when ruling party has faced split opposition, that tends to lend
them some favors. But this election cycle is really unique
in a lot of ways. The ruling party faces the disadvantage
of having to represent incumbency, which is always a challenge of any election.
And voters, you know, are interested not just in issues like cross-strait
relations, but really in domestic issues, the economy, cost of living,
etc.. And that again, kind of doubles down on
the disadvantages of being the ruling party at this time.
So we'll be looking for the results. Hopefully, we'll get them very soon
tomorrow night. And I expect up until then, there's
going to be a lot of watching because there's a huge potential for surprises
here for sure. Absolutely.
All right, Jennifer, thank you for your analysis.
That's Bloomberg chief geoeconomics analyst at Jennifer Welsh.
And our special live coverage from Taiwan continues in the lead up to
Saturday's vote. We have full results, by the way, and
analysis on Monday. This is Bloomberg. Take a picture when it comes to take a
look at the picture when it comes to trading across the region.
We are, of course, monitoring the breaking news in the market, reaction to
the airstrikes on Yemen's houses by the U.S.
and U.K.. The Pentagon now confirming through an
official that the U.S. has struck more than a dozen targets in
Yemen. We are seeing when it comes to that
reaction that WTI crude futures trading generally just modestly higher.
We're seeing again, a little bit of lower as well.
Treasury futures looking firmer. So not a huge reaction, but certainly
more support when it comes to crude prices.
But oil prices are still lower than they were a week earlier.
Elsewhere around the region, we're seeing some split trading action with
Japan continuing to outperform. We're just checking some risk assets
here. We're seeing crude oil futures higher by
about one and three quarters percent. They're holding steady, though, at that
range, 7328. The ten year yield is now flipped around
a little bit, but it is at the level that we saw earlier on.
Gold got about a 10th of a percent, just a couple of dollars of the yen really
unchanged at this point. This is after we learned that the U.S.
and U.K. launched airstrikes against Houthi rebel
targets in Yemen. This after a string of warnings from
various diplomats, including the secretary of state, Antony Blinken,
telling the Houthis to stop irking them and to stop attacking with drones and
other ways of attacking ships and people and vessels in the Red Sea.
So let's bring in now Bill Farris, who joins us in our studio.
We'll get to both areas in just a few moments.
But just recapping once more, we have had attacks in the Red Sea from the US
and the UK. So let's get back to Taipei for the
moment as we look ahead to Saturday's elections.
Our markets co-anchor Yvonne Man is standing by with our next guest.
Yvonne. Coffey
Yep. I'm joined by Amanda Shaw from the
International Crisis Group, a senior China analyst joining me here in our
live location. Amanda, it's great to talk to you in
person. And obviously it seems like there's so
much global interest in this Taiwan election.
Do you tell us why? Yeah, I mean, you know, the next leader
of Taiwan is really faced with quite a big challenge.
He will be facing an extremely complicated external environment in
which he will have to deal with a China that has shown itself to be much more
assertive on the question of Taiwan. And in a situation where it's been
evident that Beijing is willing to throw a lot of resources in creating really
everyday headaches for Taiwan, and at the same time, this next leader will
have to deal with deepening US-China competition and it'll be a difficult
road to navigate for this next leader. The frontrunner, obviously, is the DPP.
I'm just wondering if we see a third term, which we've never seen before from
this ruling party, what does that mean for US-China relations?
Do you think it can just deteriorate further?
Yeah, So, you know, it is possible. The race is pretty tight right now, so
we can't say for sure that Lee will win. As you say, if he does win, it would be
an unprecedented third term and it would be a real sign of the deep staying power
as a party. In terms of the US-China relations.
We saw that around the Xi Biden meeting. There was a real concerted attempt to,
if not entirely de-escalate, to at least hit the pause button on escalation,
including on the issue of Taiwan. I think the two leaders really use that
opportunity to send signals to each other that neither want to change the
status quo around these elections. So I think both sides understand and are
gearing up for this transitional period. But nevertheless, it's probable that
we'll see an uptick in tensions should lie win.
Obviously, we've seen indications of Beijing interfering into this election
before Saturday, whether it's Chinese balloons or economic coercion, you know,
the like. What is your take on the sort of Beijing
response that we could get after this election if, in fact, that if the DPP
win in that case, what are the scenarios you're mapping out now?
Yeah, I mean, I think that in the case of a win that it is likely that we will
see China increase pressures perhaps initially in slightly more discreet or
less threatening ways. So they could very easily enact more
economic punishments on Taiwan. They could increase military activities
in ways that are a little bit more low profile.
You mentioned the balloons. That would be one way.
And they've really been suggesting that they are very capable and willing to do
so. I think maybe the milestone to watch out
for, though, and in a lie win is around May 20th, which is the inauguration.
And at that point, you know, Lai will define his understanding of the
cross-strait situation. And he's not going to say what Beijing
demands because that's not what his party believes.
And so at that point, we might see a more overt and forceful response,
potentially including a military exercise.
It's interesting that we've seen lighting the you know, he first
described himself as a pragmatic worker for Taiwanese independence.
He's walked back some of those comments and maybe lying more aligning more with
what Taiwan would and then saying that, you know, there's no need to just, you
know, declare independence because it's de facto sovereignty already.
I mean, is there a chance that he might strike a harder line once he wins?
So I think, as you say, he's been campaigning on following Taiwan's fruit
that she's carved out for Taiwan. But, of course, it remains to be seen
how he will actually govern. Now, I think he has every political
interest at the start. It is at the start of his term to
continue to maintain size line. You know, we see probably that he will
win with less than 50% of Taiwanese voters support.
And also he'll have to convince Washington that he will be
a stable leader in a fairly precarious moment for US-China relations, the
cross-strait relations with relative other KMT, too, because the former
president Main just kind of led to a lot of headlines here in Taiwan and all
these comments that he made with Deutsche Orwell talking about, you know,
Taiwan would lose if it had to fight with China, that you should just reduce
your defense spending and that, you know, you should trust Xi Jinping when
it comes to cross-strait relations. And, you know, and the games are really
doing a lot to distance themselves from these comments right now.
What do you make of all that? You know, so so for me, I think what
that raises is on the other side, if Po were to win.
Now the KMT has been campaigning on a platform of increasing defense reform or
pushing forward defense reform just all the time, at a time when administration
has done now so far. For me, what my NGO says suggests to me
that within the party there's still a fair amount of debate and division as to
whether Taiwan or how quickly Taiwan should be pushing forward their defense
reform. And so it raises questions about how
exactly a whole ministration would govern despite his campaign promises.
I mean, you mentioned I mean, even if there is a KMT win, cross-strait
tensions might still be there. It might not be in 2024, but it's
something more mid to longer term. Right.
So, you know, the assumption here is that if he were to win the KMT, come
back to power, that cross-strait dialogue would resume at some point.
And once those channels reopen at some point, Beijing may feel some domestic
pressures and pressures on itself that it puts on itself to deliver some
outcomes as a result of dialogue. And when that happens, when they seek,
whether it's more economic integration or more a more conciliatory political
stance from the KMT, at that point, we will see pushback from the Taiwanese
people. And at that point, it's possible that
tensions will re-emerge. You know, obviously, there's there's
more of this problem as well, not just that the choice for president, but also
these parliamentary elections. How important is it for any elected
president to have a majority in the legislature?
Yeah, of course. It'll be very helpful for the ruling
party to also have a majority and the legislative yuan.
It's not looking likely that any of the parties will gain that majority.
So it means that they will be dealing with a divided government.
And so we can expect that the legislative yuan will serve as a form of
check on executive power. It depends on how things shake out.
But perhaps the most significant implication is that it means that the
third party, Taiwan People's Party, will have quite a bit of say potentially in
how Taiwan perceives things like defense spending going forward.
That's great to have you get a show there.
Senior China analyst at the International Crisis Group joining us
here in Taipei. How do you set about.
Oh, there is so much going on all along the lines of these geopolitical risks
being heightened so far early in the new year.
We are hearing now a statement from President Joe Biden on these coalition
airstrikes in whose controlled areas in Yemen's.
President Biden saying that in his direction, U.S.
military forces together with the UK, which we know as well as support from
Australia, Bahrain, Canada and the Netherlands, have successfully conducted
strikes against a number of targets in Yemen used by Houthi rebels to endanger
freedom of navigation in these vital waterways.
So we are also hearing President Biden in that statement saying that they won't
hesitate to direct further measures as necessary, going through some of those
coalition supporting partners there and calling these strikes successful.
They are in response to Kuwait, unprecedented Houthi attacks.
President Biden making this statement after we'd already heard that
authorization being confirmed by the UK's Rishi Sunak, saying that this
defensive action follows extensive diplomatic campaigns and the rebels
escalating attacks against commercial vessels.
Let's bring in Bill Ferris now from Bloomberg with the latest and more
analysis in terms of what happens from here, the nature of these airstrikes,
and does this really kind of set us on a path of retaliation and escalation,
given that we have heard from the Houthis leader saying that any what they
call U.S. aggression would be responded with
operations bigger than the assaults that we've seen so far?
Right. That's the big question now.
One, we're still in the very early, really hour or two of this conflict
between this this allied said in in the Red Sea and Yemen.
We'll have to see how much damage was done, what ability the Houthi rebels
have to retaliate. This is not a huge surprise of an
attack. The US and its allies have been
signaling that something was likely to come.
The US says that there have been so far 27 attacks on commercial ships in the
Red Sea since the Israel-Hamas war started in early October and that those
attacks have been escalating. So we know in the last few days that
people on both sides have been expecting some sort of action.
Really the big question is to what degree can the Houthi rebels respond to
this in the coming hours and coming days?
And to what degree can they replace the radars and the various bits of
infrastructure that the U.S. and its partners, which seems to be the
U.K. with support from places like the
Netherlands, Australia and Canada, have done.
So, Bill, can they replace these pretty easily?
I mean, they seem to be undeterred. Yeah it's that's the big question is
whether, you know, they have been moving some of their critical equipment to more
secure locations. The early reports are that perhaps more
than a dozen sites have been targeted by this US UK led action, but we just won't
have a real damage assessment for quite a while.
And the WHO teams, as you said, have promised to retaliate in a in a big way.
So we'll have to see whether they are able to carry that out at all.
We know that they have gotten a lot of supplies over really the past decade
from Iran. We don't know what kind of stockpiles
they have that might have survived this initial attack.
So those are all the big questions. It will be much more difficult for Iran
to get fresh supplies into the Houthi rebels with such an armed presence in
the Red Sea right now. But it won't be impossible.
I think we just will have to be waiting to seen to to the extent to which this
is a setback for them in their efforts to disrupt the shipping in the Red Sea.
But it's it's it's almost a foregone conclusion that that shipping is going
to be increasingly routed in other ways for at least the time being.
How much of a setback is this when it comes to the foreign policy efforts that
we've seen from the likes of the US and the UK, but the US in particular?
Secretary Blinken was just in the region over the past few days.
Does this really complement or complicate an already complex
and in a lot of ways intractable situation in terms of how to manage
what's going on in Gaza and how this regionalization of the conflict might be
prevented? Yeah, A big focus for the US and its
allies has been preventing Israel, the Israel Hamas war from spreading too much
in the region. That already had happened a little bit
on Israel's northern border with via the back and forth between Hezbollah and
Israel. But this is certainly another step in
the direction the US didn't want to see. It raises the risk somewhat of bringing
Iran further into this conflict. It doesn't necessarily mean that that
the conflict is now a regional one, but it seems to be heading in that direction
at this point with no end in sight to what's happening in between Israel and
Hamas. Exactly.
And Asian shipping stocks, as you were saying, Bill, are advancing after those
airstrikes on Houthi rebel targets in Yemen.
That's Bloomberg's senior editor, Bill Faries.
And you can also turn to your Bloomberg for more on this.
He live has excellent commentary and analysis live and fact from Bloomberg's
expert editors. We'll continue to keep you updated on
this story and more. This is Bloomberg. Take a look at the market reaction given
what heavy news for when it comes to the geopolitical developments the US and UK
and coalition airstrikes that have been successfully, according to the White
House, conducted when it comes to who controlled parts of Yemen.
This is a picture across Africa in particular is quite interesting.
The reaction has been very, very muted. So it seems like as far as investors are
concerned, this is not a big enough escalation at this point to warrant a
large pickup in any kind of risk of sentiment, though.
But of course, if it does continue to escalate, we're looking to the dollar in
terms of more flows and potentially a move in again there as well, Dolly.
And holding pretty steady at 145. The Aussie dollar still just sitting
kind of stubbornly under that 67 US cents level.
We did see a little bit of a pullback when it comes to the dollar rally
overnight as we had that inflation picture change a little bit.
But of course ultimately expectations for easing from the Fed not to
dramatically move the Kiwi dollar is trading at 6239 at the moment.
We did get, of course, that statement explaining the air strikes and President
Biden ultimate saying that there's no hesitation for further measures as
necessary. Well, from the Middle East to, of
course, the other major economy that we're watching, China.
Economists are expecting China's December trade data to show demand
remaining weak both at home and abroad. We also get inflation numbers over the
next hour, consumer and producer prices in falling for a third straight month.
So let's bring in our China economy editor Joe says for more.
And Joe, let's start off with the price picture, because there is this broader
concern that we're starting to see a pretty significant demand downward
spiral from these deflationary pulses. Yes, Heidi.
So we'll be getting those numbers out in just about 45 minutes or so.
At this point, there's pretty broad expectations that both consumer and
producer prices will have fallen into deflation in tandem with each other for
the third consecutive month, of course, factory.
Those factory gate prices, those of intense inflation for quite a bit
longer. But, look, I think that really the story
here, Heidi, is when you look at these these consumer prices, this deflate
these inflationary pressures that exist. I mean, this is really that symbol of
how weak demand is in China right now. Confidence has been under major pressure
for the past year after the reopening from the pandemic.
These are really kind of these, you know, indicating these really widespread
concerns about China's ability to sort of revive demand and revive confidence.
The numbers, I think, are expected to show for those CPI figures that headline
figure that maybe food prices in December weren't as much of a drag on on
prices, but transportation as people were.
You know, it's it's winter months, so people are not traveling as much there.
But ultimately, yes, it's it really is spelling the broader concern for the
economy. I think that when you look at what the
what the government can actually do to sort of help things, we're pretty widely
expecting there to be a pretty key policy rate cut, kind of stimulate
demand and combat some of these inflation pressures on Monday.
We'll see if that ultimately happens. But it does signify that there are some
pretty big concerns around deflation as we gear up and get into 2024.
And Jill, what are we anticipating in terms of the melee?
Well, we definitely see action. Well, I think that at this point, it's
pretty. Most economists are expecting there to
be some kind of policy rate cut there, ten basis points.
We haven't seen that since August than when there was actually a surprise cut
to that policy rate. I think at this point it would be a
pretty big shock if there wasn't any kind of rate cut.
Once we gear up into Monday, maybe we'll also see a bigger net injection of
liquidity to kind of help with some demand for financing there.
It's there's just at this point, very broad expectations that the government
has to do something more than it's been doing to kind of help the economy, help,
you know, revive activity here, maybe support credit growth.
But I think at this point, there's also this this understanding that there's
only so much that policy rate cuts can do.
So what if once we get past one day, we'll see what ultimately happens there?
But then I think the attention's really going to turn to what are the types of
targeted measures the policy other government agencies can actually do to
stimulate growth here? Does that come in the form of targeted
lending programs that they've been starting to make use of?
Is that something else? You know, we saw the easing of some
mortgage rates last last fall to kind of stimulate property sales.
But ultimately, yeah, I think it's going to be something that has to be a little
bit more comprehensive, holistic to actually get this economy going.
All right, Jill, thank you so much. And much of that data coming in the next
couple of hours. So do stay tuned.
That's Bloomberg's China economy editor, Jill Dessus.
And we just got some word from Tesla about China as well.
Tesla is cutting the price of its revamped model three in China by 5.9%.
Once again, Tesla cutting the price of its revamped model three in China by
5.9%. Now it's down about 1% in the after
hours trade. There's also the one, a Reuters report
earlier that it has to hold most of its Berlin site output on the Red Sea
conflict, which continues. Plenty more to come on DAYBREAK.
Asia. This is Bloomberg. We're checking the market reaction
following airstrikes on who the rebel targets by the U.S.
and U.K. with support from some other countries
such as Bahrain and Australia. As you can see, Asian shipping stocks
are moving higher with Korea line up more than 7% at this point and
continuing to climb in the merchant of more than 2%.
Kawasaki Kisen up 1.8% and Mitsuo KSK lines up about 1%.
So it seems like Korean shipping stocks are moving higher faster than Japanese
shipping stocks. Let's take a look at some defense stocks
now while we're out of this and see how they're trading.
So as you can see, several defense stocks in Korea and also Japan on the
move higher. For the most part, though, there is one
there that is down about a quarter of a percent, Heidi.
Yeah. Take a look at the futures picture as
we're getting into what was already setting up to be a pretty mixed picture
across Asia. Of course, now with this added
geopolitical overlay and we are seeing a little bit more caution there.
Some B futures down by just about 2/10 of 1%.
We are also seeing tie speeches, Taiwan. Unsurprisingly, the risk aversion going
into the weekend's election is going to be key in terms of this geopolitical
test for cross-strait relations. But having said that, even though
volatility expectations for the Taiwanese dollar are high over the next
week, we are also seeing traders the most bullish on the currency in about 16
years. So watching the A50 China futures there
a little bit to the downside we are getting as we spoke about just a few
minutes ago, the key inflation data as well as trade numbers, export import
numbers out of China as well as China holding pretty steady at just over seven
spot one six there. Take a look at what else we're watching
when it comes to perhaps some of the elements of the markets.
It could be a little bit more sensitive to these rising Middle East tensions.
Oil has been pretty much sort of the only beneficiary there as we've seen
quite a bit of support when it comes to New York.
Crude still trading pretty close to 2% higher there.
We've seen that kind of lack of direction characterized cruise trading
since the start of the year. And of course, so much of that has been
on the supply, the pricing situation when it comes to Saudi Arabia and some
of the supply concerns over non-OPEC members in particular.
But New York crude outperforming as an asset class, if you will, in reaction to
the strikes really crossing news wires, We have really seen more of a muted
reaction when it comes to some of the other kind of haven demand elements that
we might see go a little bit higher. Again, largely a move, but certainly if
the sort of escalatory nature of this news flows develops, we will see more
moves when it comes to the yen and when it comes to flows to the dollar as well.
That is just about it for DAYBREAK. Asia, our markets coverage does
continue. We looking ahead to the start of trading
in Hong Kong, Shanghai and Shenzhen. Stay with us, Bloomberg Markets.
The China Open is next. This is Bloomberg.
