Transcripts For BLOOMBERG Bloomberg Technology 20180205

From sydney, we are just a. M. , just outside 5 p. M. , and over the next half hour, where looking at how the stock market plunge affects asian trading and around the world. A special day in the markets and the special day as were going to be looking at, around 3 00, i was doing a report on bonds and as i talk about bonds bouncing 800, we saw the dow down, 900, 1000 points dow jones down, excuse me, the s p down, the dow jones down the nasdaq losing 3. 70 . This was at the close. At the worst level for the day, it looked much darker than that. Joining us now for the entire hour is julie hyman and gina martin. I want to hear the ticktock from you julie. Down, and then all of a sudden, it was plunging. There didnt appear to be fundamental change. Strategists call this a mini flash crash. What does that mean to call it a flash crash . What they mean is that you computer trading, algorithm trading being triggered by a that can speed up the velocity of the movement, whether it is to the upper downside. That is why they characterize it that way. Again, there wasnt a fundamental change that caused that snowball. It was the momentum that ran away with the action during the session. 3 00 why 3 00 . Were people talking about technical indicators . Earlier,k it started it propelled itself into greater velocity starting at around 3 00, and a 2 00 we had major support levels of the 50 Day Moving Average and sailed right through it. It accelerated at 3 00, and it ,howed signs of skittishness but we saw a movement in the treasury market. That could have something to do with the capitulation in the equity market. It is difficult to say exactly where these things come from, but i think a lot of it is at the 50 day support level, which helped consistently in 2017. We broke through that, and in all bets are off. We saw a big selling, but bit,dity so that quite a investors tend to move towards momentum shares, which is typical in a market that is in a corrective. Ode bonds reversed, and treasuries make a move around 3 00 p. M. , and it made a move in the other direction, and yet people selling stocks and buying shares. What happened last night in back around it came to 2. 84, and you can see that picture of the dow jones, but lets bring in pictures and perspective on some of the u. S. Biggest stock plunges. The s p 500 indexing sectors across the board, we have treasuries and gold rising as investors bought. Day. P on a historic it was a sentiment story. What it was like was musical chairs. The music changes, everyone seeking a way out. Therket snapshot with bloomberg dollar higher, lets look at the market close, because at the worst moment were 1600, the worst pace since 2008, which is not the sentiment were looking for. Worst a since august 2011, and we had the worst two days since 2008. Thats an at the big movers, because energy was down big. , the fargo hit hard government slapping them with penalties. Berkshire hathaway going down for the ride. To btv, treasuries and equities. This is interesting in the market because it underscores as we slice through the 50 Day Moving Average. Capitulation, but tomorrow is going to be key when we open because there is a lack of clarity here and what investors are doing to protect themselves at this point. As you say, this is a sentiment driven selloff. Banks, wellsout fargo, Morgan Stanley, and crypto plunging as well. Why did we see that the klein . Decline . This has a lot to do with their accounting scandal last year. It triggered this, a fear of god penalty. Downgrades from analysts, wall street, analyst after analyst trashing the bank and the stock taking a huge hit as you can see in the bigger picture. Meanwhile Morgan Stanley will be are the blue they chart, they have been outpacing goldmanggest rival got to, all the banks under pressure. Lets talk about bitcoin, it was a very bad day for bitcoin. A big drop as all rival corns what one as well, and big coin enthusiasts says it has , it is notolic rise a fundamental thing, and it is par for the course. Classic risk off as you say, people fleeing for the exits. And energy stocks, the S P Energy Index down, the most in todays going back to the summer of 2015, 4. 4 . It fell on friday as well, so that was one of the other groups that suffered. Talk us through that. As you mentioned, the underlying you have energy active allocation that happens when they start selling in one sector and the fact that investments. Chart of how we have seen oil prices perform we were down 2 closing below 64. As you can see it bounced up after hours trading. Gold on the other hand, a shelter play, investors piling in. No surprise there as both is getting a bump up in the release development latest development. There is so much going on, but we are going to the story itself. Story were going to scott, great to have you today. Been ont you may have the Trading Floor in 1987, at close. We had the biggest percentage drop ever, what is going to happen next . Technically driven day, and i have to agree with gina. You look at the 50 day average, it might be a magnet, but i dont think it always is major. You can see that 2015 level, but once we start to fall through, i think there were a lot of stops, stops triggered, and some algorithm trading. I think once we broke through that level, i watched the 120 Day Moving Average down 2600, i thought we might even touch it today. We didnt, but it was a Technical Trading day. We have margin debt at alltime highs and a market that has done virtually nothing but go up since january. Theres a lot playing into this, is the trigger in my mind what is the fed going to do with rates in 2018 . Are they going to make a mistake andtwo . I dont think theres going to be too much inflation, but this is a Central Bank Year in our minds. Julie that brings up the question then how does it end up like this if it continues to feed back to what the fed is going to do . Does this give them reason to be more cautious . Julie. Ight, you guys know this. If this happened over a twomonth. Month period of that but what happens is the panic sets in, and you start asking a lot of questions. The fed clearly over time things about panic in the market, and it frequently will make them either hold off on rate hikes, basically alter or delayed monetary policy. I think the selloff will have to have a more structural feel. The underlying fundamentals still look as good, and leading indicators dont look as good, and i dont think that is the case. I think the fed has been telling year, butikes for the i dont think were going to see the inflation or the Economic Growth that is going to push them hard to crack up rates the high. Thehis is great timing for rates talking about this expectation of the fed after wages growth. He said that in the past, when starts stock stocks start falling, how does that affect you . First lets take a step back and realize this is jay powells first day on the job. [applause] welcome to the chairman of the Federal Reserve. I think it is going to be a tough road for policymakers, and the biggest risk to stocks is due monetary policymakers do . Goingg as everything is swimmingly and growth marches forward and inflation is moving forward at a pace higher, then the market is generally expecting three to four hikes to come to fruition, but Everything Else cause that into question. It is too early to draw conclusions from the last few days of declines. It hasve been so rapid, been difficult to draw to many conclusions from them. If they result in some sort of deterioration in the outlook for growth, and the depletes confidence, then the fed will have to react and become easier. Scenariosay there is a that gina describes where growth remains on the track that it is in right now, that we get Interest Rate increases the market is expecting. That means gains resume and we end up having the moderate rally this year that most strategists are expecting . I think that is the most likely outcome, that gdp numbers at two point 9 , we feel good about that. Our cpi numbers at 2. 4 , both of those numbers are slightly higher. Valuations have been trimmed back here in terms of pes over the last week or so. Stocks are above their median, times. Term it is 16. 7 17. 4. You are sitting at i think you are sitting at 2850, 20 900, that is our target. A seven or 9 return. I think investors should be looking for opportunities to by industrials, financials, Consumer Discretionary health care. I do not think they should be trying to hide in defensive sectors like utilities. Go into the asia open, we are setting up to the trading session, but Something Interesting we saw yesterday where the southbound flow is coming into china. You are seeing some regional asia. Ors here in what would you be watching when it comes to volatility being key and volumes and how much this selloff is consumer and panic driven . I think it is momentum and panic driven, and if you think chinese growth is going to be 5. 5 , that is a problem. We dont think that, we are thinking 6. 5 . You think zero zone growth euro zone growth, i think the fundamentals are supportive here. Stocks are not cheap, but they are cheaper than they were a week ago, so i think there is upside here because the u. S. Growth is going to be better than a lot of people expect. We are seeing a lot of numbers north of three, so there is risk to the upside, but gina mentioned this as well. In our minds, this is it. The biggest risk to this market is at the Federal Reserve makes a mistake, and that is where you have to Pay Attention to. If they start dropping hints that three is not enough, you have to react fast because the market is not going to like that. Something else i want to remind viewers about is about earnings. This is something gina brought up in her morning note today, and one of her charts that i have i made it to be friendly. This looks at atbat, chevron, and exxon mobil earnings estimates versus their peer group bit you see on the right side, a trend downward. Taxes were supposed to be the holy grail and save earnings, and get weve seen these disappointments. What gives . Bring this up, because expectations are too high. Wasy company that came out and how wonderful tax reform was going to be for their ultimate earnings outlook. They are still marching to that tune, but the reality is you ofe this constant drumbeat optimistic sentiments coming from companies, expectations get higher and higher for every company in the next to produce those great results. Last week we certainly got hit with not so great results. We got it from the tech sector, health care, earnings from energy that caused us to question our assumptions regarding how strong canvas growth really be . With that question, then you start to see selling across sectors. Became aat selling bigger capitulation as a result of the technical levels. You saw a technical breakdown that followed what was an earnings related story last week. Is what is probably going on in the equity market and you have some peripheral concerns about inflation and what the fed is going to do. Is what is probably going on in the equity market and you havethis started with e. Lets get back to scott with some final thoughts. You mentioned that this is roughly, probably, a time to buy. People have said on the street you cap koch a falling knife, you dont have to get at the bottom. What should people be watching now . Me talk you about Retail Investors because that is who we are catering to hear. They have been sitting on to much cash and want to get back in, but they are somewhat fearful. This brings back my trading days. Think in terms of thirds. Youre not going to pick the bottom of this market, it is cheaper than it was a week ago, you to step in with a third now, hoping you can get a chance to put the other two thirds to work lower, at least you have put money in lower. What we tried to tell clients is that i can tell you where the bottom is going to be, i can guess where the bottom might be or close to the bottom, but the best thing to do is that if you have faith that the economy is going to chug along and inflation is not going to get too high, this expansion is going to roll on for a couple more years largely due to tax cuts. You need to be stepping in here because we are living longer and you need more exposure to stocks and participate in global growth, and local growth is going to be decent in 2018. Scott, thank you so much for that. We continue the conversation with the professor of finance a longtime bull here, the dow hitting 25,000, but he warned pullncent kobach, back. Theyou surprised by violence of the pullback that we have seen . I am not surprised, this is momentum investors jumping off the train. They were writing it up, and they said no, with respect to valuation, they said as soon as they hadhrough 2 , 3 , their stock orders and and they were going to sell. This is exactly what you got. Fast, and to far, too where are getting too realistic levels. Last december i said it is going to be a zero to 10 this year, and people called me to bearish. Today, i have seen this before. I dont think it is anything fundamental. We talk about if it is the fed, but it is not going to deter them at all for the march increase. They will only be deterred if this does affect the real economy. Some of your contributors have said that. They are not going to be 15,cted by an 8 or even the market is up 40 since trump was elected, so this is a minor pullback with respect to the longerterm look of the stock prices. It was the worst day for the the credit rating, and is the worst tech line postbrexit wrote. Vote. Does it for try something more negative of sentiment that has the dual the u. S. Economy or is it an effect of coming from o high . Re too people shouldnt think that the market is a oneway street. I thought they were thinking like that about the coin to bitcoin. 100 market was going up by and 200 points everyday, and there is an old saying that goes back decades. Up the staircase and down the elevator. [applause] we had the elevator move today, going down. It is technically driven, i think it is going up a lot, there were good earnings, but it triple counted the good earnings and went up in momentum and investors are jumping off after a few little kinks in the good story. HigherInterest Rates, wages, those are excuses, take your office and jump off. To ask you about the broader question of liquidity because a lot of people have been talking about Central Banks since potential banks started buying bonds. People said that is fueling the stock market, ride it while you can come up because when they pulled back, the story will change that the fed is going the bojpulling back, may not be ready. But is a something the Central Banks are doing . I have claimed that these rises that we have from 2009 until early this year when i thought it was momentum driven it was due to good earnings and low Interest Rates. We are coming to the and of the super low Interest Rates, and we are in a new world of lower Interest Rates than certainly in the us were used to late 60s, 80s, 90s, and even 2000. We are in a lower Interest Rate environment. Is in a quantitative tightening who want to use that 150r phrase it is adding sales. 0 billion aof a market where people view the treasuries as the easy i will buy them for insurance. In fact, today, during that drop, you somewhat happen to treasuries. People went back to treasuries. Payoff,re is financial it is still the goto asset. One final question, as stocks were rocketing higher throughout january, there were frequent reminders from conventional wisdom now we have seen pullback, our stocks a better reflection of the outlook for the economy . Fed came out with this five plus estimate for First Quarter i think that is crazy. I follow these forecast very well, and between the have percent is decent, the First Quarter gdp is biased downward over the last two years. Some people were talking about we are up to four or 5 , but we are not there. We are strong, and we could approach 3 this year with the tax cut. The fed is going to be looking this, in and of itself, is not going to influence the march hike. Is fake in to the data baked in to the data. What a first day for jay powell. A look at first world news. The unexpected release of the most highprofile corporate figure caught in a corruption investigation that brought down former some president the ruling follows tied toar pattern corruption, only to receive suspended sentences. Forvist investor is calling a dual structure of printing a unified company. Rise22 billion dollar recorded in australia. As to entities. Pension fundsows in australia has grown at the fastest pace in the world in 20 years. Outpacing the u. S. , the u. K. , and japan, according to research. Compulsive very Retirement Savings are among the key drivers of the growth. Global news, 24 hours a day, powered by more than 2,700 journalists and analysts in more than 120 countries. This is bloomberg. Will take a look at the set up here in asia, and what a handover we have from the u. S. , plummet, just a reminder that new zealand traders are happy to sit this one out. They are on a Public Holiday on tuesday for the founding of new zealands founding. Sydney futures, the aussie dollar falling below 79 u. S. Cents, and the kiwi trading at 108. 29. Crude also falling with the addition of more recent expected in the u. S. This is bloomberg. Quite downside. U. S. Talks were tracing were a racing their gains for the year. Lun here in sydney. You are watching daybreak australia. Hyman and gina martin adams. We want to get back to heidi. Imagine the damage you can see when it comes to japanese equities. We have seen a very broad selloff. There is no way that asia will escape that but for nikkei futures, even after the bell closure of the u. S. Markets, we have seen pressure on the futures trading in chicago. It could be something on the order of 5 declines on the open in japan for the nikkei 225. We will see the how much of a shakeout. There is disagreement we have heard around people in the markets, we are spoken to investors, traders, and people around the market. We are interested in what caused it and whether this does count as a flash crash or if there are elements in securities that were not moving on a fundamental basis. There is Nothing Specific we can point to at this point where we can say this is definitely a flash crash event. This wasnt a move about market fundamentals. That is a lot to some up in a short amount of time. Traders are signaling the abrupt pullback is likely to weigh in on Interest Rate policy. Lets get some insight. They said they would support the economy. We are nowhere near that. What does this mean for jay powell . Not much. In 1999, the fed was hiking rates aggressively to prop up the dollar. The real funds rate got to very high levels. The curve was nearly inverted. It was clear that something was going to happen. If you think about the current situation, the economic fundamentals are sound. Monetary policy is quite easy. Globally, you are flush with liquidity. There is nothing that the Central Banks need to do now. To an economyn with a lot of momentum. The first major meeting is the third weekend march. You can sit back and observe how markets behave. We talk about stocks and sectors now, but consumer sentiment, Business Investment. People say that the stock market declines dont affect anybody. What about somebody who is looking at the stock market . Up, they areis getting ready for a tax cut and what is the stock market doing . Will this have an impact on the economy . Not directly, but indirectly youre right. The consumer and Business Confidence numbers are very elevated. They are so elevated, my Research Shows they are having a decided impact on Business Investment decisions and. Onsumer spending if it continues, and the confidence number start to than it would dampen economic activity. One of the bloomberg headlines i saw today said you are just giving up very robust gains over the last month. The Consumer Spending numbers are so robust that they have led to higher spending. How does the timing work . You can see the effect on confidence and spending. How did that Ripple Effect happened on the way down versus the way up . Doesnt happen more quickly if confidence pulls back . It works for a couple of months. You have to consider the broader context. Healthy employment gains, rising wages. Increasing disposable income. That will get an extra boost from the tax cuts. Confidence would start to weigh on Consumer Spending, but not that much. So many times we have been told by economists be patient. Theselloff really has been market waking up to the idea that inflation could be around the corner and rates will rise. What about the structural impediment we have been pondering as to why inflation hasnt materialized . The primary reason that inflation has an accelerated to date is that current dollar spending has not accelerated. Nominal gdp growth. It is fairly modest. There hasnt been a lot of flexibility to increase prices. You have Technological Innovations that are reducing quality adjusted prices, and we have the amazon effect. Going forward, what we are seeing is that nominal spending growth has accelerated in the second half of last year. Paid. W at a 5 annual has as paid. I do expect modest increase in inflation. We are still in that sweet zone of inflation. Even if it increases, inflationary expectations are well anchored. The correctionte that began last thursday to some big concern about inflation. I think one of the things that has underpinned the stock market is that inflation has been contained and growth has been slow, but edged out the pace of inflation. Would you see an environment where inflation accelerates absent acceleration in growth . That is the risk to the stock market. What would create that environment and can you see them playing out . I think that you are making a good point. With the stronger aggregate demand, it would be easy to see. Usinesses test the market you can see inflation drift up. We are in that sweet spot that even if it rises, it will not harm things, but i would like to come back to the current context. We have had a Strong Economy profits, but the stock market just ran up a lot. Through the end of 2017, the stock market was going up, the economy was strong and bond yields were too low. You have seen a 50 basis point adjustment, not enough to hurt the economy, but does it lead Portfolio Managers to reassess valuations . Yes. Maybe because of human nature, things dont move gradually. They dont, but there was quite a rally in the treasury market because we have the 10 2. 70. Enchmark it down to economist in the bond market one of the great translators of the fed, is this about where the 10 year should be . Camp than in the says, we are marching steadily toward 3 . I would put myself in the camp. I would stay away from the word marching forward because i dont know how it will get there, but my forecast is above expectations and i expect forecasters will be moving their forecast up with 3 growth and even moderate inflation. Its not going to hurt the economy when it gets there, it. S just an adjustment key levy, we thank you for joining us here. To los angeles and bring in oh in tracy. What owen tracy. What do you make of this market . Capitulate is a strong word, but i dont think it is over. This is the definition of what i would consider a prevailing the previoust like speaker was talking about, there are not a lot of fundamentals. There is one big reason why the market is pulling back. Janets final day in office, we have a new fed governor today. Everyone thinks he was appointed because he is a dove, but we dont have actual proof that. Historically, immediately before janet yellen took office the market was tookng back, and greenspan office in august, and it crashed in october. It was coming down before that. Ben bernanke got a small pullback and then a bigger pullback a couple of months after taking office. The market likes to test new central bankers. What he is saying today is that he will be very transparent with the market in the market will want more than that. We have seen a big runup in. Tock prices those are the ones that have the most potential to pull back. Generally speaking after a big pullback like this, we get a range of this suggests we have a peek in the market that is anything from three months to six months at least. So what should investors do . Do they hide in defensive stocks . Do they buy protection . At the very least, it is going to continue . Is, all things being equal we dont have a great deal of fundamental evidence for why the market. Hould be pulling back they will be looking at things that have big rallies and better dividend. It will not be looking at things that have been rallying in an aggressive manner for the last six months. But people are going to start looking at the commodity complex and cyclical sectors that are leveraged to global growth. We saw today that the commodities complex was firm. By then people will start looking at that and that is a classic late cycle performer. Oh and owen, what about asia . Do you find safe haven in chinese stocks and hong kong stocks . Telling brokerages to add to their positions rather than closing them out. This is the chinese equivalent of the protection team. I am watching it very carefully. I dont think we have the conditions for a crash. Highlevel to start supporting prices considering the extension we have on the hang seng right now. Today afteruying it it only came off the market, that is very early in the cycle. I dont think that is a serious way of supporting the market. That is one thing really different now, there are many more stocks, and many more global interconnections. Selloffs,d some big but it is not like this major crash. Thedo you factor how overseas markets are reacting to this . Right now it is clear that everything is contagious. Is difficult to draw a ton of conclusions, but when i will say his last week, on top of the evidence of weaker earnings in the u. S. , we had week earnings in europe. There is evidence of currency in europe. Srupted we havent seen that kind of negative fundamental concern bubble to the surface for asia. I would watch that market carefully. These are some of the biggest momentum gainers of 2017. You would watch for some capitulation as a sign that investors have given up all hope to create an ultimate bottom. Momentum chairs, investors cluster on the best momentum in the hope that that will continue to hold out. At the end of the decline you see capitulation. Evolve over the next coming days. You believe this is the peak for the next few months, or longer. One of my watching to know that it is time to look at one of your recommendations which is, what has been overextended . What other signals we should be waiting for . Most of the things that have done well, look at amazon or boeing. Those are kind of shares that everyone has wanted to own and last six or seven months. It isnt that you wait and want to buy those, but you wait for the real selling pressure to run its course and then watch for relative strength. A lot of things are really overextended. That is what i am watching for. I am seeing it in the commodities complex. I think that japan will offer an attractive buying prophecy property. The banks are dirt cheap. You cannot by banks and that kind of valuation anywhere in the world. I think we are moving into an inflationary environment. If you look at the u. S. They are adopting a deficit Spending Program after one of the most lengthy periods of economic expansion they have ever had. That is outright inflationary. This is a period where the Federal Reserve is buying more bonds. If you get supply increasing where there is falling demand that means price is going down and yield is going up. I think the 10 year treasury future could rally another three points and at that point it will be an attractive start. Thats the reality we are getting into now that inflationary pressures are be anng and this will attractive buying opportunity. Treacy, thank you for your time. We appreciate it. Lets get the first word news with jessica summers. Jessica bitcoin tumbled for the dropping below 7,000 for the First Time Since november. They are feeling backlash against regulators bitcoin has erased most of its value from the record it reached in december. President the ecb mario draghi has told the European Parliament that they must brace for a hard brexit. Theyre always preparing for a range of outcomes, but the possibility is there. He is working closely with the bank of england to help smooth the impact of brexit. The computer say they want a simple yes or no decision. More than four months after an inconclusive election, they had more opportunities to win a fourth term. President does not support faster rate hikes. Based on the job report indicated that pay might be rising. Average Hourly Earnings rose 2. 9 in january from a year earlier. That the fastest growth since 2009. Also says that wages must be balanced with inflation. We have to see what will happen with inflation. We have our 2 inflation target and that employment mandate, sometimes those are seesaws trading off of each other. Jay is that wellequipped to take this on. Iron jessica summers and this is bloomberg. You can watch us live and catch up on past interviews on the interactive tv function on tv. You can dive into any of the securities that we talk about. Become part of the conversation by sending instant messages during our show. This is for bloomberg subscribers only. This will be a difficult one for from theaking cues selloff and wall street. It looks like no change is expected. We will hear more what of what we can expect. Nothing has really changed for the rba. They were weaker, still outside the rba target. Wage growth is low as well. That high household bid as well. Tighten, buty can it is not all bad. We have an employment at a record low. The reserve bank is said to be patient on inflation. The aussie dollar has pulled back. It will be on hold for the 18th straight month. Now november is the likely month for any possible rate hike. We will get the trade and retail numbers for december. Is there anything likely to change the picture or give people a reason to buy and sell aussie dollars . The retail one will be interesting. A 0. 2 xpecting to see contraction in february. We are seeing Consumer Confidence rising but consumers are missing in action at the mall. Trade or and returned to the surplus has forecasted we had a shock in november with a 28 million deficit and we are expecting that to flip to a 28 million surplus. There was a bit of a weakened december for the dollar, but there could be a reasonable boost. It isnt much to move the needle for the rba. Allen joining us from sydney before the rba numbers come out. Soment to get back to comments before we wrap up this terrific hour of daybreak australia. And tina martin is the takeaway . That thesay perspective on the s p 500 is we have repriced the valuation levels that are more attractive. It is the upside. On a technical basis a lot of this decline in the u. S. Stock market has been technically driven. We did find a low around the 100 Day Moving Average. Tomorrow will be important to watch. It might provide people with solace. I want to put a fine point on how unusual today was. The streak with not having a pullback in the s p 500. In a 6 to 7 pullback from the record close. Look at the bloomberg to illustrate this in another way. A one percentage choice up and down. 2016 it didnt happen. We dont have any 2 swings. You can count on one hand how many 1 swings there were up or down in the past year. It has become less frequent to see this kind of percentage move. If i can bring you back in and take a look at volatility we dont usually talk about the vix in percentage terms. But stay with me for a moment you have the biggest percentage gain in the vix ever today. We have not been accustomed to this for the past year or so. That was part of the reason why today felt so unusual. Thank you so much for that. Cray to have julie hyman with Kathleen Hays and gina martin adams. As julie said, it is an extraordinary day when it comes to u. S. Markets. Ivanka yvonne is on the lookout for us this morning. World this is the fifth Capital Market symposium. We are talking about the regulations of Political Risk as well as in malaysia as well as southeast asia. Plenty more to come. Yvonne welcome to daybreak asia. The u. S. Stock market falls the most in six years. More than 1 trillion is wiped away. The markets braced for a second day of heavy losses and rising concern that inflation will force Interest Rates higher. Quicktime cathleen in new york where it is just past 6 p. M. On this monday. The minneapolis fed president says not so fast. Wage gross to wage growth do