Transcripts For BLOOMBERG The Pulse 20160318

Because what it has done is announce an increase in its in 2015. L by 14 that does go against the grain of its competitors as they have been slashing compensation. While some of europes biggest lenders posted losses in 2015, 4 ubs it posted the strongest profit since 2010. The ceo receiving a 37 increase. Ive highlighted barclays. News out of them this morning. Down 1. 9 . It said it does see the current year at the top end of expectations. On target to pay a dividend of one pound per share in september. Seeing good underlying demand for its property ies. Ive also highlighted home retail, because today is the shut up and put up deadline for an offer. Guy . Guy let me take you to the imap, because i think it is a useful story this morning. It shows the rotation this week. What youre seeing is the financials, the big block of red, and health care down once again. Rotating money out of both of those sectors all week. Financials have been significant underperformers but health care has been in the mix as well. What the rotation has been towards has been materials and the energy sector. Yes, we are seeing maybe a weakening in the oil price, but that has been the story of the week. The market has brought money out of health care and financials and into the material story. Youve seen a big spread opening up. Part of the fact is the dollar story the dollar rally may be coming to an end. The bloomberg dollar index is at an 8month low. Meanwhile, the dow jones has erased losses for the year. The head of unconstrained fixed income strategy at blackrock. Good morning. The dollar rally, is it o ver . Th markets are starting toe assess the impact of the fed, the fact we are seeing a slowdown in Global Growth overall. Were seeing more balance in the economy with the growth in credit in china. The risks, you could see some dramatic decline in the chinese were starting to see a bit more stabilization. People are taking on board what the fed is saying, that it will be a slow process. Guy what does that mean for Treasury Holdings . Marilyn if you look at the curve at the moment there is going to be Strong Demand in the back end of the curve for treasuries. You can see that clearly post fed. The front end of the curve is probably underpriced. In termsh is priced in of rate hikes. The fed has changed down his forecast from four to two. A huge spread difference still. It is interesting you saw the beginning of this year, a huge in market expecting a lot to expecting a lot less. The markets are still underpricing the fact that we could see a couple of rate hikes this year. Guy talk me through the trade you have been putting on. End,yn we saw the back the belly of the curve is very attractive. When you look at this environment where you have negative yeields in other sovereign space. When you look at the demand from investors searching for yields. If you you look at demographics and Pension Funds and people looking for this yield, i think it is still relatively attractive. Still, there is going to be a lot of demand there. Guy hsbc has got 10 year treasuries at 1. 5 . Where are you guys . I actually think we could see one or two more rate hikes this year. It is about 1. 9 k. W 1. 9 today. We can see it popping over two. Guy compare and contrast the u. S. And japan. Were seeing two very different worlds at the moment beginning to emerge. Marilyn a look at the state of the u. S. Economy it is relatively robust. Its interesting when we saw the fed, we heard janet yellen speak, there were two very different opposing forces. They were cautious towards the global slowdown. And factoring in the strength of the dollar. On the other hand, when you look at the changes in the unemployed and great the unemployment rate, overall, the picture for the u. S. Economy is robust when you look at Household Consumption and the labor market. On the other hand when youre looking at japan, the market expecting further easing. Again, when you look at structural changes such as Global Growth, when you look at demographics, the two economies are really starting to divert. Guy how do you trade that . Youmuch more stimulantus are expecting from the yen . The bjoj is very nervous. Marilyn we do think we will see more stimulus. Particularly it is interesting when you compare with the ecb. Compare that draghi mention they do not want to talk about iering, because there might be the expectation they reduce rates even further. A very different scenario and japan where they introduce the tiering system. Guy how far way from the end of the road is japan . How much more can they do . Marilyn that is the 1 billion question. Japan has done so much in terms of cutting rates. Rates could go a lot more negative. They could buy many more assets. I think the interesting question is what is happening to the money from japanese investors . How is it influencing markets . Were seeing that money is going abroad. Pension funds and other Institutional Investors are buying assets abroad. That is having an impact on global markets. Guy one week on from draghi, is he pushing me into credit . Marilyn i think it was positive for credit markets. Is shehink the heck introduced was aimed at not only supporting the eurozone the package he introduced. In terms of corporates, increasing asset purchase programs there, its certainly a support. In terms of introducing the target of longterm retail operations, its also a positive specifically for banks who might be able to borrow a negative Interest Rates. I think he was really also showing their cognizant of the side effects of very loose monetary policy. Guy has he made it harder for fixed income . A lot of people have a lot of money invested and infrastructure around it in fixed income. There is a line that says draghi is making it harder. Marilyn if you look in the sovereign space, i think we are going to see a net negative. I thin when you look in the corporate spacek, we think if you take into account all the different you may have a pool billion550 and 650 euros, the ecb can buy. Is it making it harder or more people chasing more bonds . It is providing support for the european bond sector which, over the longterm, does enable banks in the Financial Sector to have more time to possibly restructure an opponent reforms and improve their balance sheets. Guy talking about that overnight in brussel. Up next, crude has risen 30 since the saudirussia pact. Can it hold above 40 bucks a barrel . Guy european equities fairly flat. Eets withresident mae the turkish Prime Minister this morning as leaders attempt to complete a deal to help the flow of refugees into your. The block will offer turkey and s. Xt to 3 billion euro draghi has told the European Union that the ecb has no alternative to his recent raise cuts and policy actions. Draghi told e. U. Leaders they should prioritize setting out a clear path forward for the euro area and providing research about the potential market the yuan headed for the biggest mot after then a central bank raised its reference rat by the most in a month. Spotloomberg dollar index fell to a fivemonth low on thursday. A judge issued an unction suspending leave and lula as congress restarted the impeachment process against roussef. As antigovernment protests continued over night. Now lula and roussef have denied any wrongdoing. More stories on the bloomberg at top go. Has reacheddie oil its fifth week of gains, holding is price around the 40 bucks a barrel mark. Guestg us now our still with us. Stewart, i take you to this chart, the dollar index and wti. I guess we can see uiit may explain things. Whatsuld say underpinning the dollar. The demand side is looking more interesting than it was a couple weeks ago. At the same time you have these talks going on between opec producers. It is not going to make a lot of difference but sentiment has changed. A lot of people very short in this market. This is maybe the right moment to start taking a profit. Guy where does it go next . Its dependent on a whole bunch of factors but is it dollar dependent . Stuart no. I would say what you want to look at is the breakeven cost on the shale. That has come down. A year ago, we were looking at the ceiling of 65. You are now looking at 55. Guy does that line keep going down . Stuart no. We havent found it yet. They have been incredibly resource resourceful. They are managing to cut costs like crazy. Guy im not getting a huge global stimulus. Maybe i am. Marilyn when you look at the emergingmarket currencies, for example, youre seeing a bit more stability. Hasously, the price of oil been incredibly volatile and it has an impact, reference but any leading central banker out there. Janet yellen mentioning mexico and canada. I do think we will start to see this coming through. I will continue to help the overall global environment. Guy at the beginning of the year, people are saying we were going to have a recession because the oil price is down. Aboutn youre talking the u. S. Economy. Still relatively robust. While growth may not be tearing away, it is relatively strong. Even if you start to see it gradually start to decelerate and other sectors coming through with corporate profitability starting to decline. We may start to see that coming through into labor market as well. But i certainly think its over active at the moment. Guy when you look ahead to the next six months, weve got this declining cost curve coming out of the shale guys. A situation where the dollar might be finding a little bit of ground. Talk to me about the dynamic of how the market is going to trade in this wedge. Stuart that is exactly the right word. It is a trading band. At the top end is shale, which you might argue is the swing producer. Thats the assumption. At the other end, youre looking at a huge build that has to be worked out. There are two quite negative factors. You look at prices relatively to where they were two years ago, and it does still seem very cheap. Guy is inflation underpriced right now . Marilyn it is possible. If you look longerterm, if you look at what the feds target is, and breakevens, you can see at the moment the market is still underestimating some inflation. I think going foward, youre going to see more impact the dollar perhaps is sort of stabilize. I think its possible to think in the long end its good value. Guy thank you very much, indeed. Joining us. Up next, well take a look at a chart that shows how the prospect of a stronger yen, Japanese Fund managers decisionmaking process. Fascinating what is happening. Andrnational investors domestic are viewing the japanese story very differently right now. This is the session we have. The rally has run out of steam. What is interesting is that there is a survey showing you a lot of investors do not see europe during a great deal on the equity front. Equities a little bit higher. Again, story this morning is when we have seen all week. Though im beginning to see a little bit of selling in energy. Financials, health care down. Where we have seen money flowing in is energy. That has been sold. What is the big stories we are watching is what is happening in japan. Japanese investors turning net sellers of u. S. Treasuries. Nejra we have talked a lot about japanese investors, Global Hunting yields. What this chart shows is that in january for the first time in seven months japanese investors u. S. To net sellers of treasuries. It also offloaded u. K. And german bonds. Treasuries, of the a lot of this is because of the prospect of a stronger eynyen bt also u. S. Yields staying lower. Haver hedging costs surged four fold. This makes investors a little bit more cautious on overseas investment. Now, what i also found interesting is this chart shows data. Before we even got the latest fed decision. The question is how this is going to look Going Forward if we see treasury yields move lower or more demand for the yen as theres more caution over Global Growth. It happened before today we saw japanese 10 year yields fall. If you look at the long end of the curve, it is still positive. I wonder if we are going to see this happen again in february or march. The bank ofhink japan is really continue to expand its program massively based on negative out 10 years and probably will go beyond that. Investors are looking for yields. Also, japanese investors are searching elsewhere for yields. Its interesting they are turn away from the treasury markets in january. But i think the overall trend is still for investors to be searching elsewhere. The dollar impact and the japanese yen is going to have a large impact on the rest of decisions. The longterm trend will be that they will continue to buy assets elsewhere. Guy do think they are making a mistake . If you were making that trade, which one would you be doing . Yn there are a lot of assets japanese investors can look to invest in. In european markets or in emerging markets, in australia. I think there are a lot of assets they can also buy other than treasuries. Guy when you think about how this is going to work its way out to the rest of the year, and you think about how the changing nature of investment and these flows are going to work, when we get to the end of the year and we have got too many, three or two fed hikes under our belts and we look back, how different is the world going to look at the end of this year . The beginning of this year was horrendous. Was incredibly volatile. We saw so many markets depricing. I think a lot of news has been adjusted. There are a lot of risks that have started to dwindle, such as risks around china in the short to medium term. The price of oil has had a huge impact as well. That is starting to potentially stabilize. If you look at the end of this year to the beginning of this year, i would hope we see more stability. I dont think we are going to see any huge, sharp shocks. If you look at the fed, if they do raise rates it is going to be very gradual. Guy is the market going to be more or less distorted by Central Banks . Marilyn the market is already very distorted. Guy more or less where we are now. In terms of the u. S. , if you have more normalization, i think elsewhere we are seeing the bank of japan, we have got the ecb, were still seeing increases in the unusual policy tools they are using. On balance guy thank you very much, indeed. See you in a moment. Hey hows it going, hotcakes . Hotcakes. This place has hotcakes. 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This bank raised its bonus pool the chief executive officer receiving a 37 increase. This goes against the grain. Of course, the difference is that while some of europes biggest lenders posted losses in 2015, they were hurt by a slump in trading revenue and cost tied to restructuring, ubs posted the strongest profit since 2010. This stock was up more than 1 . Gains coming off a bit. Populari banks, banco in mergeren locked talks for weeks. The ecb is urging them to form a letter with a Strong Capital position. This is in a letter that the ecb requested. It wanted them to submit a Business Plan within a month. What we saw yesterday with these stocks declining basically reflecting investor concern, that the ecb request may force banks to raise fresh capital to comply with these requests. These have extended the declines. They are two of the biggest losers on the stock 600. Guy lets turn our attention to brazil. It has been a stunning week. Sunday, we saw millions take to the streets in protest of roussefs decisions. She doubled on appointing her former president lula as to success as chief of staff. Within an hour, a federal judge issued an injunction suspending his employment. Whats been fascinating is the markets. Stocks had their best a sense 2009. Since 2009. The ibor is up. Lets get more from the head of emerging markets at invesco. Good morning. Do investors understand what is going on a brazil . You can follow the politics. I guess the big picture is the rally is thatig if there is rapid process of impeachment and early political change then pressure will come off. Maybe there will be structural reform. We certainly hope that is the case. The trouble is we still going to have quite a complicated process to get to impeachment. Guy impeachments tend to be messy and they tend to involve a lot of political shenanigans. As a result, clarity is not necessarily the outcome. I would tend to agree. Once you are done with the process, you have something clearer than what you had at the beginning. But i think that is exactly right. We do not have a very large sample of impeachments around the world. A couple in venezuela, couple in the United States and one in brazil a couple decades ago. So, there is some history. It tells us it is going to be very torturous. Part of it is political and part of it is legal. I totally agree guy the markets once you get the decision to impeach. Were off to the races. There is part of it that is binary that if you dont stop this political rot, the fiscal situation is going to deteriorate. The nominal gdp is collapsing. The recession is worse than the Great Depression was in brazil. If you dont stop this, they will head to some sort of the fiscal crisis. The balance of payments is in pretty good shape. The fdi is more than covering the current account deficit. So, they are not very reliant like people like ourselves, portfolio investors are very involved, but they are not the marginal financer of the external accounts. You have this discussion where the external side looks good and is suggesting. But the domestic dynamics, the public and private debt, are very negative. That has to be stopped if brazil is not going to continue to hit the buffers. Guy blackrock has some skin in the game. Talk to me about what you see because to his point, its quite difficult to judge the real political situation from here in london. But nevertheless, it does seem politicalf the situation continues to deteriorate, the macro story is going to go with it. Marilyn i think that is right. If you look at the brazilian economy, in recession for a very but protected per protracted period. It is a broadbased recession. You look at gdp and debt to gdp, its shot up. You are seeing other very positive thing such as current accounts and the real has helped the adjustment. You are seeing some sober linings as well. Guy there is opportunity that . Marilyn in this environment where it is hard to find, you are looking for attractive sources of carry. If you believe there could be a solution coming to the political problems, then actually, i think youre seeing relatively short dated bonds offering more than 15 . Quite attractive if you can trade around those. Guy what would it take for your to change that view . The politicaldoes situation how much tolerance do you have . Marilyn its a very long time. Seriousness,ll politicalking at the situation and making it day by day because the nature of the investment in shortterm. Marilyn it is something we have to focus on and we have to be cognizant theres going to be a lot of uncertainty. That this is probably going to be relatively protracted. Do start to see there are signs that there will be solutions, i do think it could be in a relatively short time frame, we could start to see improvements. Carry versus Everything Else because those attractive. Sound attractive. That is what people are reacting to and we are processing ourselves, the Interest Rate, the carry, all of that is externally attractive. You cannot afford to be underweight or short depending on what kind of player you are. You can either be flat or long. F volatility in the process is precisely why we see these enormous urges enormous surges. Guy how do you cope with a whipsaw . Domestic investors are basically sitting on their hands. This whipsaw is being driven by international money. Today were doing this. You wonder, kind of, how that is being managed, whether people have got a real grip on the run we are seeing at the moment. How much more volatility as more and more people look to get , how much more volatility we are going to see. Arnab i think we are going to see a lot. One thing i would say, i think brazil is a very important country in the emerging markets index. I would be surprised if people are actually not involved. Has been is a lot of flows of hedging rather than getting out of the Interest Rate market. I think there theres been more change in positions. It sort of feels like in the market as a whole and in brazil in particular, the fx has moved a lot more than the underlying positions in the local margaret. The local market. Its much easier to trade that fx or has your position than it is in the interest or credit market given everything that is happened with regulation and liquidity in markets. Im not sure the result of this will be a massive influx of net new money. There will be an unwinding of those hedges. The central bank has indicated that is the way it sees this. A good moment to start unwinding its own fx swap. Guy hold that thought. Were going to talk about south africa in a moment. Andext, raising rates political wrangling. Live in johannesburg as we look ahead to the challenges facing the South African economy. Guy lets get you up to speed. Lets get your Bloomberg Business flash. Ubs has raised its bonus pool by 14 . The ceo received a 37 raise as the bank saw its most profitable year since 2010. That comes as rival banks have got their payouts. Its finalo continue decision to go ahead with a power plant in the u. K. Now, they said approval for the project could come this month. There has been speculation about the future of the plant since edfs cfo rezone resigned. Howard Asset Management is said to beginning full control of a 450 millions system trading hedge fund to david gordon, as allen howard focuses on macro strategy. Howard Asset Management has spun off non core money pools as part of a plan to focus on its Macro Hedge Fund strategy. That is your Bloomberg Business flash. Reserve banks decision to hike rates yesterday is being warns thep official fiantry could become a ma state. What is the latest on the political twist and turns . Yesterday for the First Time Since a new round of allegations of versus president zuma was in parliament and commented on the allegations that a business family in business with his son offer the finance Ministry Position to a deputy minister. Almost to show how unfazed he is by all of this he said the following, dont aske me. Later on he said, im in charge of the government. There are no ministers appointed by the guptas. the opposition left parliament. It was a stormy session. Today it becomes a lot more serious. We had the seniormost officials meeting for three days. For the first time ever, there is a real potential that senior members of the anc could call for his resignation. He hide close doors. The outlook so far is that he should weather the storm, but well have to see. Guy talk to me about the Market Reaction to all of this. The market seems undecided about what it makes of all of this. Herethere have been quite a lotf twist and turns the last few weeks and months, politically, and especially the rand has yoyo to along. The last week, we have not seen much. The market was moved more by the latest round of Interest Rate tightening. Whatse we really know is going to happen to zuma and whos winning the battle for the anc, we will see a clear reaction in the market. Guy thank you very much. Joburg. S out of brazil a fewut minutes ago. The South African economy has so many problems. You wonder whether the politics is a sideshow. Arnab i would not characterize it quite is a sideshow. I agree that the problems are structural. South africa has been buffeted by global shocks. Politics makes all of this that much worse. It makes it much harder for South Africans to consume, to invest, to have confidence in what is going on when the institutions which were reasonably strong in south africa when the anc took power have been gradually degraded. And that has accelerated. Guy one party state is going to far. The anc is in control. I wonder whether replacing zuma is going to have the same effect that replacing roussef could have. In brazil,ould like it would help stop the rot. We did have to see how much change the anc is willing to bring about to the structural problems that south africa has. What it would say is that, it is not a one party state that there is one part of it dominates. Whenever you have that situation, all the competition is internalized, political competition is internalized within that party. What is happening here is that the more, the more reasonable wing of the faction within the anc is in conflict with the zuma wing and zuma himself. And that is the tension we are seeing with the national treasury. And arbitrating in the middle and imposing these very pro cyclical but essential tightening rounds as inflation up while thego economy goes down. Guy the brazil story is interesting. It is a very elevated yield. You, are they different . Marilyn theres not a lot of differences between the two. I think certainly in south africa, if we seeing, they rai sed rates yesterday. They are doing as much as they possibly can to bring, reign in inflation. In inflation. Domestic demand is very weak. I think what we have seen is really the rand has been left to absorb most of those problems. And so, when you look at south africa is not in the same position as brazil. It has not been in a very long recession in the same way, but it is suffering from a huge number of issues. Guy the structural issues are enormous. Unemployed it is massive. Infrastructure. So many problems the government has got to deal with and deal with as soon as possible. It does feel like a very different sort of story. Brazil was rocketing a little while ago. South africa did not have that pleasure. Boombust cycle has been much more mitigated. Guy should we buy . People talk about buying when things are on the floor. Is south africa on the floor . It is. Do we know where it could sink to . Marilyn at the moment, there is volatility around both the rand and in the bond market, still very volatile. Its something that in the current environment we find more attractive opportunities in other emerging markets. Where we can find relatively attractive carry but without the political volatility. Guy you can understand brazil more than south africa. Marilyn if you look at economy such as india, indonesia, mexico, there are a lot of different very good stories where we find better opportunities at the moment. An International Investor what i put money into south africa right now . Arnab i think this is the wrong moment to be stepping in in south africa. I think a lot of things have cheap and up a lot. This process needs to play out and there needs to be stabilization before people are going to become to go with south africa. In this comparison, south africa v. Brazil, the dynamics can be turned around in brazil more aggressively, more quickly. The negativeime, dynamics in south africa is a slower burning fuse. The public debt is much lower. So, the shock they have suffered in Exchange Rate its hit inflation even though they are not quite in recession, they are slowing down. But it is not like the debt dynamics are explosive. You do not have quite the same downside risk. Yes, is active. I think that is reflected in the rating story. There is this danger that south africa will be downgraded to below Investment Grade. That has already happened. Guy my next question. Arnab sometimes that is a bit of a lagging indicator. Guy some in the Business Community are very worried about it. You think about how that could work its way through. And its not a good story. You push south africa down that road and it not only changes south africa, it changes the regional dynamics as well. What would be effective a downgrade . Arnab on Financial Markets it would be more symbolic than actual, because i think people are not treating it as an Investment Grade kind of but i think you are right that the concern is that that symbolism would affect things that are more fundamental and more real and affect the reputation of the country which is already suffering from this guptagate. I think it would crystallize it in the business sector in a much more serious weight. More serious way. The tendency when you get this downgrade, it takes a lot of time to plow your way back up. Some countries have done a more quickly than others. Discussing,een these issues in south africa are much more structural, much more serious, much more profound longerterm issues that need to be dealt with with enormous reforms. What has to be done is really to free up the labor market. A big plank of support for the anc is the trade unions. You have a real political nexis that is going to make it difficult. Guy think you very much to both of you. Thank you very much to both of you. Was cuts. He only we take a closer look at the euro after draghi e. U. Leaders the ecb had no alternative. Guy lets talk about the day ahead. Draghi says we have a lot of draghi stuff this money. Talking about what is going on talking aboutghi the fact that this policy is the only one we have got. How was the market reading all this . Richard we are seeing a big move in the dollar with u. S. Trade markets repricing, the fed being more dovish. I think this is just draghi is referencing, we need help from the fiscal side. Peter is working looking note eurodolar is and hes very happy. There has been a big move since ecb cut rates. I dont think they are very happy with where the euro is. We start tothink get moves, yes or no, out of koruda . Richard very possible. Guy stay with bloomberg. Surveillance. Is up next. Has been quite a week. The dollar has rallied. Friday. For bretath this francine the dollar headed for its steepest threeweek slide in four years, but the dovish fed means rest in peace, dollar rally. The central bank is doing more. They have room to cut rates of the outlook worsens. A win for ubs, the only major european lender to pay higher compensation. The bonus pool surges. Im Francine Lacqua in london, tom keene in new york. Negative rights, Central Banks, currencies, and some of the other asset as