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[BFM Market Watch] Is The Market Behaving Rationally?

This podcast was first and originally published on the BFM: The Business Station podcast with link here: https://www.bfm.my/podcast/morning-run/market-watch/us-markets-meta-chevron-fed-rate-hikes-equities-market-rally

The CEO of Complete Intelligence, Tony Nash, spoke about the recent financial events in the market. In regards to Meta, Tony mentioned that the worst for Meta’s share price is over, but job cuts are still to come. Although Meta beat revenue estimates, ad impressions rose by 20%, but the price per impression fell by 22%. Tony also discussed the recent Fed interest rate hike by 25 bips, which was expected and the market welcomed it. Tony says there are likely to be at least two more rate hikes before the current tightening cycle is over. He also mentions that the market is excited but will take a closer look at the statement once they have a better understanding.

Tony also mentioned that there is some irrationality in the market because corporate earnings have been disappointing, but investors are bought off by the stock buybacks. The oil companies, Chevron and Exxon, made windfall profits due to cheap oil and fat refining margins. The refineries were operating at 94% capacity and have crack spreads and refining margins way above normal. The oil and gas companies have not invested in infrastructure since 2014, due to governments and media bullying over ESG and cost. The only option for them is to return the profits to shareholders through stock buybacks.

Transcript

BFM

This is a podcast from BFM 89.9, the business station. BFM 89.9. Good morning. You are listening to the morning run. I’m Shazana Mokhtar with Wong Shou Ning and Chong Tjen San. It is 7:05 A. M. On Thursday the 2 February. We were off yesterday because of Federal Territories Day, but we are back to bring you through the rest of the week. In half an hour, we’re going to discuss the probability of a Trump 2024 presidential run. But as always, let’s kick start the morning with a recap on how global markets closed overnight.

BFM

All US markets ended higher as the market shared the Fed’s 25 basis point rate increase. The dollar was up marginally by 0.2%, S&P 500 up by 1%, and the Nasdaq was up by 2%. Asian markets, they were all in the green. The Nikkie was up by 0.1%. Hang Seng was up by 1%, Shanghai Composite up by 0.9%. The Straits Times Index, it was up by 0.4%. But the FBMKLC, it was closed for Federal Territory Day

BFM

As mentioned and for some insights into what’s moving markets this morning, we’re going to be speaking to Tony Nash, CEO of Complete Intelligence. Good morning, Tony. Thanks as always for joining us. Now, markets rallied on the back of the Fed, raising interest rates by 25 bips. But before we get into that, I would want to talk about some of the corporate earnings that we saw overnight, namely coming from Meta. The markets were also quite happy with what came up there, up 18% in after hours trading on the back of better than expected sales, do you think this is the worst over for Meta?

Tony

I do think the worst in terms of share price is over. I don’t think their job cuts are over. I think they’re learning how to operate in this environment. So the last two to three years has been pretty easy for a tech company as people were kind of trapped inside and didn’t really have a lot to do. They looked for things online and ad revenue was great for Meta and ad driven companies, but what we saw in there, although they beat revenue estimates, they beat their guide by almost 3%. They announced a $40 billion share buyback, all that’s great news. And the stocks up almost 20% after hours. But keynote in their earnings release, Ad Impressions rose by 20%. Remember, they’re an ad driven business. Ad Impressions rose by 23%, but price per Impression fell by 22%. So they’re not able to push price. They’ve had to drop their price and raise their volume, which is the opposite of what we’re seeing with a lot of retailers and other firms in the US where they can actually push price in light of and accept lower volumes at higher prices.

BFM

And Tony, as expected, the Fed raise rates by 25 bips. Was this in line with what you were expecting, and are we close to the end of the current tightening cycle?

Tony

Yeah, you know, I think pretty much everyone expected 25. There was a slight chance of 50, but everyone pretty much expected 25. The market welcomed it very happily, and they’re still thinking there’s only one rate rise left. But Chair Powell made it very clear that there are a couple of more rate hikes to get to that level we think is “appropriately restrictive.” Those are his words. So we’re looking for at least two more rate hikes before this is over. And the Fed is also going likely to accelerate their quantitative tightening. Okay? So that’s taking assets off of their balance sheet, which is basically hoovering up the money supply in the US. So the market will get tighter. And do we think we’re at the end? We don’t think we’re at the end. The interest rates aren’t the only tool they can use. So the market’s very excited right now, almost a relief. But I think as they look through his statement in detail, I think they’ll take a second look at expectations.

BFM

So let’s build on that. Tony, so you’re basically saying that because when I look at how markets have performed on a year to date basis, S&P up 7.5%, NASDAQ up 12%, this very much on the back of the Fed, going from a hawk to a dove. Do you think that there is some irrationality there?

Tony

I do, actually, because, you know, if you look at corporate earnings announced so far, they’re very disappointing. And so investors are expecting easy conditions to return so that underwhelming earnings are acceptable. So what did Facebook have to do? Their EPS underwhelmed by like 55%. Okay. They had to issue $40 billion in stock buybacks. So investors are basically bought off, and that’s why the stock is rising. But many other people reporting are not seeing the sales that they expected or didn’t see the sales they expected in Q4. And their costs, meaning the cost of employees and raw materials, these sorts of things. Cost of employees are up. Raw materials are down slightly, definitely year on year, but certainly quarter on quarter, they’re down slightly. But earnings are not what people had hoped for. And that’s the real problem we’re seeing in market. So the earnings picture is not reflecting the valuation picture.

BFM

Okay, so that may be the general picture, but if we zoom into oil companies or the two largest US oil companies, Chevron and Exxon, they made more money in 2022 than ever before, posting record earnings in their latest results. How are these windfall profits achieved? And I guess how sustainable is this going into the new year?

Tony

They were largely achieved on the back of cheap oil through the SPR releases and very fat refining margins. So we’ve had refineries in the US operating at about 94% capacity, which is way over what they’re designed for. And we have crack spreads and refining margins way above what is normal. So those refineries are booking profits at a record pace. And so what do they do? If you’re an oil and gas company and the government keeps bullying you over ESG and Cost, and media keeps bullying you over ESG and Cost, oil and gas companies have not invested in infrastructure in upstream or midstream since at least 2014. So if they invest in that, they’re going to be punished. So what do they do? They return it to shareholders. So you have a $75 billion buyback, because that’s really the only option they have. Otherwise, they’re going to get punished by governments, they’re going to get punished by media, and they’re going to get punished by investors. So they have to do this.

BFM

Okay, but let’s talk about OPEC Plus because there was a meeting, and I want to talk about oil prices, because the OPEC Plus Committee has recommended keeping crude production steady as the oil market awaits clarity. What does this then mean for prices? If I look at WTI, currently $77 a barrel, down 4.5%. What’s your view, Tony?

Tony

Well, I think OPEC is taking a lot of the excitement in markets for the past couple of months has been China opening. Ever since December, right? China is going to open and save us all. And that also hit crude markets. People looking at crude prices and going, oh, gosh, China is going to open. We’re going to see jet fuel and gasoline, petrol and other fuels consumption rise dramatically. Well, the opening has been slower than people expected in December, and it’s still not happening at the pace that many Westerners expected. And so I think OPEC is looking at crude consumption and draws from storage and saying, we just need to hold off on raising our level of production. We’re in a good zone with the price right now. We don’t see a dramatic impact. We expect recessions in the west, and we expect China to come back online slowly. So we’re not going to increase production right now. And so I think that’s the prudent thing to do. If I’m an oil producer, that’s what I’m doing, because I want demand to lead production increases. I want to see that people are going to use what I’m going to pull out of the ground, and I want to see pricing pressure before I agree to drill more.

BFM

Yeah, but, Tony, at the same time, what’s interesting to me is the US. Now, during the summer season, President Biden released its reserves, right? Because pump prices were just really very high. Doesn’t this change the equation? If I’m American now, wouldn’t I want to rebuild my reserves at this current level?

Tony

Well, yes and no. The SPR release was really done to get prices down for the US Midterm Elections. That’s really all it was about. Now the SPR is depleted dramatically, so the buying that will have to happen to refill the SPR will put upward pressure on prices. So I think we have to be really careful. If China is, let’s say in March, they start to come aggressively back online and the US starts buying to refill the SPR in Q2, then that’s an accelerator for crude prices in Q2and Q3. Right. So will Biden then beg OPEC again to raise their output? Maybe. China has already forward bought a lot of its crude supply. So if the US is going to choose to refill the SPR at elevated prices, it’s really not the brightest move.

BFM

Tony, thanks very much for speaking to us. That was Tony Nash, CEO of Complete Intelligence, giving us his take on some of the trends that he sees moving markets, commenting there on the earnings report of Apple, if not Apple, I’m sorry, Meta. That just came overnight. Apple is to come. So we’re going to be watching out for that before the week ends.

BFM

Let’s turn our attention, though, to what’s happening over in India, where the Adani saga has really taken attention by storm. Gautam, Adani’s flagship firm, called off its 2.5 billion US dollar share sale in a dramatic reversal yesterday as a route sparked by US short seller Hindenburg. Research criticism wiped out more than $80 billion off the value of the Indian tycoon stocks.

BFM

And the plunge accelerated after Bloomberg News reported credit Suisse Group AG has stopped accepting bonds of Adani’s Group of companies as collateral for margin loans. Adani Enterprises was offering shares to investors at $38 to $40 a share, but the stock closed yesterday at $26.13, which is 31% below the bottom price of the pricing range.

BFM

I think let’s take a bit of a step back, right, in terms of how important Adani is to the Indian economy in its way. They are like one of the major producers of energy, and then we’re talking about cement. They are such a huge conglomerate and their fortunes have been really tied to the rise of Nadira Modi. Right. Because the two, the Adani and Modi, are supposedly very close. And so when Adani came back with this 413 page objection, the allegations are all untrue. He also Adani took the step of saying that you’re attacking India as a nation. And then Hindenburg said, look, this has nothing to do with nationalism. Right. You’re just a company where we are not comfortable with your numbers. And then it’s this back and forth. And what was amazing was the share sale was almost going to happen. And the economists reported this is allegedly that the five largest and richest families in India were going to bail this company out by participating in the share sale, but now it’s not happening.

BFM

That’s right. I mean, that came as a big surprise, the fact that they managed to get buyers who were willing to buy these shares at such a high price compared to what the market was having. So, as mentioned, you said, Jensen, they would be buying it at a loss. But yeah, Adani said that the company’s board felt that going ahead with this share issue would not be morally correct because of that big gap in what the prices are being sold for now.

BFM

Yeah, but it was really amazing. You will never get a scenario similar in, let’s say, in America, where the richest families bail out another rich family. Right. So that’s what the economists point out, that doing business in India is very, very different. But the share price, of course, down 45% on a year to date basis.

BFM

I really wonder what they can do to build up to the levels that they were before. I mean, maybe it’s not going to happen again. So something to watch, for sure. This has taken everyone, really by surprise. The twists and turns in the saga at 718 in the morning. We’re going to take a quick break and we’ll come back with more top stories in the newspapers and portals this morning. Stay tuned to BFM 89.9.

BFM

You have been listening to a podcast from BFM 89.9, the business station. For more stories of the same kind, download the BFM app.

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Softer Fed Tone But Don’t Get Too Excited

This podcast is originally published on https://www.bfm.my/podcast/morning-run/market-watch/fed-rate-hikes-earnings-downgrade-outlook-for-2023

The released Fed minutes show that most officials are backing a slower pace of interest rate hikes. Markets reacted positively but this is false optimism as the terminal Fed Funds Rate may eventually be higher. The 3Q reporting in the US is also coming to a close and 75% of corporates experienced downgrade in earnings. Have the cut in earnings by analysts been adequate or will there be further downside, with 2023 outlook still uncertain? For answers, we speak to Tony Nash, CEO, Complete Intelligence.

Transcript

BFM

BFM 89 Nine. Good morning. You’re listening to the Morning Run at Thursday. It’s Thursday, the 24 November November Friday, junior, as we like to call it. Here. I’m Shazana Mokhtar with Wong Shou Ning and Chong Tjen San. As always, let’s kickstart the morning with a look at how global markets closed overnight.

All key US markets showed gains as most members of the Fed said the pace of rate hikes will slow down. So the Dow was up 0.3%. The S&P500 was up 0.6%, and Nasdaq was up 1%. In Asian markets, the Nikkei and Hang Seng was up by 0.6%. The China Composite was up by 0.3%. The Straits Times Index was down by 0.1%, and our very own FBMKLCI was up by 0.2%.

Joining us on the line now for more on what’s moving markets, we speak to Tony Nash, CEO of Complete Intelligence. Hi, Tony. Good morning. Now, let’s start with just some reactions on the Fed minutes that were released. It showed that most officials are backing a slower pace of interest rate hikes, but that the terminal rate might need to be higher. What do you think? Are we seeing a relief rally? And is that sustainable in the short term?

Tony

Yeah, I think the ultimate destination is probably the same, but the pace of getting there is slower than many people thought a couple of weeks ago. So I think what it means is we’ll see more, say, 50 and 25 basis point hikes. That’s the expectation. It’s still possible we’ll see a 75 if Powell really pushes hard for December, but we’re still going to see a 5, 5.5 terminal rate, depending on really how things end up for CPI and PPI next month. But it’s just the pace and markets are more comfortable with a gradual adjustment to higher rates than the continued kind of shock treatment.

BFM

And Tony, the US reporting period is coming to a close. How would you assess the quality of corporate earnings release so far? How well have they tracked market expectations?

Tony

They’re OK, they’re pretty weak, actually. Compared to 2021, we had, I think, 25% earnings growth in ’21 about this time last year. They’re just over 3%. So it’s not even near where it was last year.

Something like 75% of companies are seeing estimates for their downgrade. So people expecting inflation to endure longer than they thought. If you remember a year ago, people were saying inflation was transitory, so they’re saying inflation will endure longer and rate hikes will continue.

So with credit tighter, businesses and consumers are not expected to spend as much.

So going forward, there is a fear that wallets will be more closed than they are now and earnings will continue to be tight.

BFM

Which just confuses me, Tony, because if the Fed stops their rate hikes at least decelerates the pace of it. And at the same time, corporate earnings aren’t going to be as robust as ever. Then why is the S&P500 above 4000 and the Dow Jones at 34,194 points? I mean, they’re just in fact, the Dow is only down 6% on a year to date basis and the S&P down 15%. Shouldn’t markets be actually more bearish than they are now?

Tony

Well, I think there are a couple of things happening there. I think first, there really is consumers have continued to spend and businesses have continued to spend in the US. Although we’ve seen economic growth slow dramatically, we’ve had spending continue to push forward. So if the Fed slows its tightening cycle, and keep in mind, they haven’t really started quantitative tightening, meaning getting things out of their balance sheet. They’re only, I think, $200 billion off of their high.

But if the Fed continues to tighten at an accelerated pace, then markets are worried. But again, if they slow it down, the feeling is that spending will move in stride. It won’t necessarily be too shaken up.

Also, on inflation, don’t forget inflation didn’t really start on an accelerated basis until November of ’21. So we had inflation, but fairly muted inflation then. And so what we get after November, well after this month, is what’s called a base effect.

So we’ll likely continue to see inflation rise, but not necessarily at the pace that it’s been over the past, say six to nine months. So does that mean inflation is peak? No, not at all. But it means the pace of the rise of inflation is likely going to slow on base effects.

So if that happens, we’ll have a lot of people declare victory over inflation, but I think that there is an expectation that that rate will slow as well.

BFM

Can you look at the prospects of retailers like Best Buy? We see Abercrombie and Fitch. These names are defying inflationary trends and higher rates to post better results than expected. So why has this sector been the exception to the norm?

Tony

Yes, the quick answer is most of those guys have been pushing price. So they’ve been passing along their higher labor and goods costs onto consumers.

Now they’ve been pushing price while sacrificing volume. So they’ve been pushing 8 to 10 to 15% price hikes in many cases. But they’ve had fewer transactions between one and say 6% fewer transactions.

Regardless, they’re earnings have risen. So they’re not as worried about fewer transactions. They’re focused on keeping their margins up.

And so when you look at retailers like Walmart, which has mixed, say, general goods and food, they’ve done very well. They had a very difficult Q2, but they did very well this past quarter.

Home Depot, which is a DIY store, has done very well because they pushed price Cracker Barrel has done very well.

Cracker Barrel. These are not these are not retailers that are at the high end of the market either. These are mid and even, say lower end companies, but they’re pushing price on the middle and lower end of the market.

Higher end of the market? They’re doing great. So it’s tough to be a consumer in this market because price definitely continues to be pushed and we expect price to continue to be pushed through probably Q2 of next year.

BFM

And Tony, with potentially slower pace of interest rate hikes, how do you expect the technology sector to do? Is there more pain to come for the likes of Amazon and Meta?

Tony

For sure. Amazon, Meta and technology companies generally do very well in very low interest rate environment, where the money is effectively free or negative real interest rates.

As you have to pay for that money, it becomes tougher for those companies to do well because their core investment is in technology. And we had things like Mark Zuckerberg at Meta really went off the rails with some of his spending and investment.

It’s not to say that the Metaverse investment is not ever going to happen, but much of that stuff really went way overboard. Same thing with, say, Amazon with some of their infrastructure investments and delivery investments.

So we do expect HP today, I think announce 6,000 jobs to be lost over the next, I don’t know, twelve months or something. So we do expect much more pain in tech. We expect that to continue until at least the end of Q1, if not a little bit further.

BFM

And Tony, let’s talk about oil because WTI for futures delivery in January, $77 a barrel. And we know that there’s an upcoming OPEC meeting in December. What are your expectations in terms of oil price then?

Tony

Yeah, it’s tricky, right? Because oil prices are kind of in that zone where a lot of people are comfortable. And so the question is, is this acceptable to OPEC members? So Saudi Arabia, UAE, Iraq and Kuwait have already come out and said they’re going to stick to the current plan, the current cuts that were already announced last month.

But we have things like the Russian price caps coming into play. And you know, our view is the price caps are pretty meaningless actually, because Europeans are pretty good at circumventing the kind of emotional embargoes they put in place.

I’m sorry to put it that way, but they put these laws in place and then they circumvent them pretty well. A lot of this is theater. So that’s not the price caps are not going to have as much of an impact as many people thought. So it’s possible if we get into next week and crude prices start coming back pretty strongly, or sorry, if we get into next week and crude prices are as weak as they are now, we may see a 500,000 barrel per day cut. I think that’s a possibility, but it’s likely they’ll stay on what’s already been announced.

BFM

Tony, thanks very much for speaking with us. And since it’s Thanksgiving eve. Happy Thanksgiving to you. That was Tony Nash, CEO of Complete Intelligence, giving us his take on the trends that he sees moving markets in the days and weeks ahead.

All eyes, of course, on that all-important inflation number and how that will affect how the Fed raises hikes moving forward.

I think the key takeaway for me was he mentioned that 75% of corporates in the US had downgrades, which I feel it’s a good thing as it brings expectations lower and more in line with future expectations and it also gives perhaps some room to surprise on the upside.

Yeah, well, markets seem to be at crossroads, but a little bit cheered by the fact that the Fed isn’t going to raise rates as aggressively as they have in the past. But I want to keep my eye on corporate earnings. I think that if you see continuous downgrades by the analyst community, you see the messaging coming out of US corporates that things aren’t looking as rosy as they are, then it’s just going to be hard for the Dow, S&P500 to actually break through their current resistance levels. So I think it’s something we have to keep an eye on.

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US Dollar Strength The New Excuse Of Weak Corporate Earnings

With stronger inflation data suggesting that the Federal Reserve will continue with their hawkish stance, what then does this mean for markets? And will inflation be exacerbated by the potential rail strike. Tony Nash, CEO of Complete Intelligence tells us whilst diving into the impact of a strong greenback.

Produced by: Michael Gong

Presented by: Wong Shou Ning, Shazana Mokhtar

Transcript

BFM

Good morning. You are listening to the Morning Run. 7:06 am. On Thursday, the 15 September. I’m Shazana Mokhtar with Wong Shou Ning. In half an hour we’re going to be speaking to criminal lawyer Srikant Pillay on the criminal defamation charges filed against the edge. But as we always do, let’s kick start the morning with the recap on how global markets closed yesterday.

BFM

It’s the tale of two halves because the US markets all closed up in the green. The Dow was up 0.1%, S&P500 up 0.3%, and Nasdaq was up 0.7%. Albeit actually it was a very choppy trading session with US stocks actually sometimes swinging violently between gains and losses throughout the day. Meanwhile, in Asia, it all closed in the red. Nikkei was down 2%, Hang Seng down two 5%, Shanghai was down 0.8%. Straight Times Index in Singapore down 1%, while our very own FBMKLCI was down 1.3%.

BFM

So first, some thoughts on where international markets are headed. We have on the line with us Tony Nash, CEO of Complete Intelligence. Tony, good morning. Thanks as always for joining us. Now, we saw equities plunged this week in response to worries over US CPI numbers. But if we take a closer look at the numbers itself, headline inflation only rose about a .1% month over month, which doesn’t seem like a lot. Do you think markets are over reacting and making much ado about nothing?

TN

Well, kind of. But what’s really happened is it’s about expectations for the terminal rate, which is basically the terminal rate is when does the Fed have to stop hiking at what rate? Right? So the terminal rate expectations change from 4% to about 4.3%. And with that expectation, that means that the Fed would have to hike more and maybe hike faster. So investors were reacting to that because consensus had become 75 basis point hike in September, then two more 50s before the end of the year, and then maybe a 25 and boom, we’re at the terminal rate. But with a rise in the terminal rate, we could have a 75 in Sep, 75 in October, and then who knows after that if inflation doesn’t slow down. Now, what I see and what you mentioned is a zero 1% rise month on month in August. That tells me that the rate of rise of inflation is slowing. So on a year on year basis it still looks bad, but the rate of rise of inflation is slowing. That’s good news. Okay, let’s see what happens. And we could have some positive unexpected things like, let’s say for example, the Russia Ukraine war ends or something like that, right?

TN

But what I’m expecting are things like a continued deceleration of inflation. It doesn’t mean we’re going back to pre 2020 pricing levels, it just means that the rate of inflation is slowing and spenders get used to paying higher prices over time.

BFM

So, Tony, what then is your feel in terms of what the Fed will do at their meeting next week? Are you expecting a 75 basis point hike? I even hear some houses saying a 100 basis point hike.

TN

Yeah. So I think there’s a 20% to 30% likelihood of 100 basis point hike. And everyone loves to kind of freak out about the Fed. So it’s possible that we have 100 basis point hike. I think what they’ll end up doing is hiking 75 and they’ll try to sound really bearish about things or sorry, not bearish, really hawkish about things. That’s what I meant to say. So they’ll hike 75. They’ll basically say, if you don’t slow down, we’re going to hike more, and then there’ll be another 75 where we hit expected or where the market generally hit expected at 50 for the next meeting.

BFM

Two year US treasury yields continue to spike, worsening the inversion that already existed prior to this. In what time frame can we expect to see some equilibrium return to fixed income markets?

TN

Yeah, I think that’s largely happening because of uncertainty about inflation expectations. I think there had been a hope that inflation would moderate more on a year on year basis in August, which it didn’t. And so that added some uncertainty into the mix. And so you’re seeing those short yield spike based on that uncertainty. And so when we see more certainty, a lot of this stuff really started to rise in October, November of ’21. Okay. And so as we get into those months, what we expect to see are some base effects. So we already started to see things rise in October, November of ’21. As we get to October, November of ’22, we will have already started getting at a higher pricing level in Q4 of ’21 anyway. So we expect to see the observed inflation slow as we get to those months and we’ll see a little bit more predictability, a little bit less uncertainty about inflation.

BFM

Tony, I want to pick your brain on this talk of a potential rail strike in the US. How detrimental will it be to the economy? Or is it just a blip?

TN

No, everyone goes back to the supply chain bottlenecks that we saw, and of course the union is playing on those fears and the consumers are worried about more supply chain bottleneck. Is it a problem? Yes, it’s a big problem. So I don’t think anything you’re seeing in media at this point is kind of too shrill. It could be really bad. And so this stuff will come down there’s brinksmanship it’ll come down to the last minute and will likely, I’m sure it will be solved somehow. Right. And again, that’s a secondary impact of inflation. Right. So we’ve seen things rise. Dock workers are saying we’re not being paid enough. And then it’s that wage price spiral that you hear about. So wages rise. I know in Asia people are a lot more aware of this than people in the US are. Where we typically have say, one or 2% inflation, you don’t really see a wage price spiral here. I think you see it in spurts in Asia a lot more frequently than we see it here in the US. So yes, it’s a real problem. Yes, they’ll get their raise or a significant portion of it.

TN

It could be ugly until it’s settled, but I don’t expect it to be a protracted issue. Sorry. The other thing I’m not to think about is we’re starting to enter kind of the pre holiday import period. So the guys who are negotiating against the dock workers know that if this goes out a month or two months it’s going to hurt all that stuff on the shelf at Walmart, all that stuff on the shelf and all the stores, Amazon, all those guys.

BFM

Yeah. So some people might not get their Christmas presents on time. Right. But do you think the other headwind is the US dollar strength, which it has come down slightly last night, but even if we look at the Bloomberg Dollar spot Index on a year to date basis, it’s 11% and Oracle used that as an excuse to explain why earnings were a bit soft. How much more of these announcements are we going to see from US corporate?

TN

US dollar is going to be the Pinata. It’s going to get the bashing this quarter and earnings reports, everybody is going to blame weak earnings on the US. Dollar. Everybody. So it’s 11% year to date. So people are going to say if they missed by 11%, they’re going to go it’s the dollar is fault, regardless of what operational issues they have, regardless of what inventory issues they have, they’re going to blame it on the dollar. Wall street analysts know better, but they’re going to accept that as an excuse and that’s just the game that everyone’s going to play this quarter.

BFM

Tony, thanks very much for speaking with us this morning. That was Tony Nash, CEO of Complete Intelligence, talking to us about some of the trends that he sees moving markets in the days and weeks ahead. I really like the comment he made about the US. Dollar becoming the Pinata in next season’s quarterly report.

BFM

I’m going to bang it, try to hit it to get all the sweets out.

BFM

Right. We could probably do a game like a bingo game how many corporates mentioned US dollar as the reason for faltering earnings perhaps something to look for.

BFM

I mean even in Malaysia we’ve got corporates doing that all the time.

BFM

Right.

BFM

And it’s a non cash item but clearly an excuse. So we’ll be watching this space, lots of headwinds. I think the other news coming out of Asia, which is interesting, is actually and this is of course according to people familiar with the matter as opposed to unfamiliar with the matter, SoftBank Group founder Masayososhi’s Son has revived discussions of setting up a third vision fund. And what’s ironic about it is because just a few weeks ago, he apologized for the disappointing performance of his first two funds.

BFM

You know how they say there’s that saying goes, insanity is doing the same thing over and over again, but expecting different results. I wonder if that’s what this third vision fund is in a way. If the first two haven’t really performed, is setting up a third fund really the answer?

BFM

But it’s amazing. People do give him cash, right? It’s not like he doesn’t get new injections of cash all the time.

BFM

It reminds me very much of Adam Newman, actually the founder of WeWork. And even though he had such an infamous fall from grace, he is back in the corporate scene now with a new venture and people still continue to give him money. So go figure. Some people are just really good at getting cash.

BFM

Selling themselves in the brand.

BFM

7:16 in the morning, we’re heading into some messages and when we come back, we are going to be taking a look at the proposal to expand the parliamentary seat allocation for Sabah and Sarawa. Stay tuned for that conversation. BFM 89 nine you have been listening to a podcast from BFM 89 nine, the business station. For more stories of the same kind, download the VFM up.

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Podcasts

Inflation Stares Down A Reflating US Economy

BFM 89.9 The Morning Run talks to Tony Nash for his insights on the US economy. Why the tech industry is performing better than other industries? Is it the new inflation theme? And how about the reflation narrative? How will that affect price pressures for corporates in Q4 of 2021? Why is China importing less from the US while exporting a whole lot more? What’s the status of the supply chain issues amidst the coming holiday season?

 

This podcast first appeared and originally published at https://www.bfm.my/podcast/morning-run/market-watch/inflation-stares-down-a-reflating-us-economy on October 14, 2021.

 

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Show Notes

 

KHC: Okay, well, the Dow was unchanged. Basically, it just went side raced last night. The S&P was up by 0.3%. The Nasdaw was up by 0.7%. Preceding that, the Nikkei was down by 0.3%. The Hang Seng was actually closed due to the typhoon and also today for a public holiday. The Shanghai was up by nearly half a percentage point. The Sci by one and a half percent. Of course, FBM KCI yesterday up by 1%.

 

SM: And for some thoughts on what’s moving markets, we speak to Tony Nash, CEO of Complete Intelligence. Good morning, Tony. Thanks for joining us today.

 

So last night Nasdaq did better than the other indices on the back of tech companies having better pricing power. Do you see this being the new theme as inflation rises?

 

TN: Sure. I mean, I think tech prices can be adjusted pretty quickly for the most part. And I think especially with tech hardware, people understand that supply chain issues are very real. So I think the ability to change prices in tech are pretty quick, especially around software and software services. I think whether it’s prices rising or even in the case of additional competition, prices falling, I think they can do it in tech much more quickly than they can in other industry sectors.

 

KHC: Yeah. And, Tony, most of the news has focused on the effects of the energy crisis on China and, of course, in Europe. But in what race does this crunch impact the US. Is American immune from it?

 

TN: Oh, no, not at all. I think there are some considerations in the US. First is how regulated are the markets. So when you look at markets like New York, Massachusetts, California, highly regulated markets. Also, they don’t really have energy. They don’t have natural gas and oil, or they don’t really actively drill for it there. So they’ll have a tougher time over the winter, I think. In places like Texas and the Gulf Coast in the south, where we drill oil and gas in Texas, we also drill offshore in the Gulf of Mexico. We have supply, we have the pipelines in place. They’re pretty unregulated markets. We’ll find it easier here because of the availability of the energy and the infrastructure that we have.

 

SM: And looking at the reflation narrative. It’s starting to get louder in markets. Do you think last quarters corporate earnings were affected by rising price pressures, or is that going to be felt more in the coming Q4?

 

TN: Yeah. I think they were a little bit, but not much. Don’t forget in really Q2 of 2020 and early Q3 is when companies really started shedding costs because of a COVID. So they reaped those year on year profit benefits. Those profit growth benefits through 2021, so far. But that base effect really comes to an end in Q3 of ’21. So we’ve expected. Well, since the end of Q2  earnings, we’ve been telling people Q3 earnings will be worth because those base effects are gone and also because inflation has intensified. So, yeah, it definitely gets worse than Q3.

 

KHC: Yeah. So we are on the cusp of earning seasons reporting. And of course, I think Delta reports later today. JP Morgan as well. What’s your sense of what corporate earnings will be in this coming quarter?

 

TN: Well, they’ll still be earnings, but the growth rate will definitely be slower this quarter. There are some areas where they’ll continue steady. But in things like travel, where we’ve seen with airlines where we’ve seen fuel prices rise, we could see some real issues there. Not major issues, but we would see that eating into profit margin.

 

KHC: Okay. Let’s talk about the China trade surplus then, of course, with the US rising record high in September. Tony, why is trying to import less from the US while exporting a whole lot more currently?

 

TN: Well, part of what we’ve seen, the US exports a lot of ag and energy to China. And so when commodities prices rise, China buys less. We saw things like corn and sorghum and soybeans rises in the middle and end of Q2, early Q3 rose pretty dramatically and trying to slow down its buys of those. Now we see natural gas rising pretty rapidly, actually. So a year and a half ago, it was, say, a 1.5 in the US. Natural gas is now $5 in the US. So it’s risen pretty dramatically. So trying to slowed the buys of, say, US natural gas. They’ve also slowed some buys of, say, natural gas and all from other parts of the world.

 

So they’re buying commodities. They can slow those buys. And we’ve seen that impact, for example, on their electricity markets. The US buys largely manufactured goods. And so because of supply chain issues, Americans have really been over buying what’s available so that they can ensure supplies for months ahead. So there’s still, say empty shelves in many cases in the US. There are still backlogs. But we’re over buying because people don’t want to see empty shelves here.

 

SM: And I guess one final question, Tony, before we let you go, taking a look at our region, the Asian region. The economic outlook seems more brilliant in Asia as countries reopen. Which economies do you see outperforming as border restrictions lesson in this part of the world?

 

TN: Yeah. We definitely hope to see Asia come back pretty strong. We expect India, China, Taiwan, Philippines, Australia to perform best in Q4. Australia, obviously on the back of commodity and energy price exports. China and Taiwan on the back of global manufacturing kind of supply chains. Of course, they won’t be totally cleared up in Q4, but we will see continued buying and over buying for those items. So we don’t necessarily see it as a border issue because travelers, for example, we’ll have to consider how long will they have to quarantine if they do travel, because we don’t necessarily expect that to go away soon. So we don’t expect the cross border restrictions lightning up to impact too much. It will impact a bit, but we don’t see too much upside in Q4 yet.

 

SM: Tony, thanks as always for speaking with us. That was Tony Nash, CEO of Complete Intelligence, giving us a view of the economies in Asia that could improve as economies open up. But he says travel is still not going to be that lightning rod for growth or activity at this moment. Things are still going to be cautious on that front.

 

KHC: Yeah. The aviation sector has really come into focus in the last few days. Air Asia has been top volume in the last few days, and I think it looks. Look at Southeast Asia’s region. I mean, travel is such a huge factor in the economies. We know that Indonesia is slowly opening up. Bali has talked about opening up. Thailand is opening up. No choice, right? Obviously, with tourism, such a systemic part of the economy. China is still locked up. China is actually arages biggest market, right? So many destinations.

 

India is still locked up. So it’s a mixed bag. Right? But the one thing that has really put a spanner in the works is this whole inflation thing. You know how the Fed talked about how it’s going to be transitory is gonna be here for the short term. It’s not the case. I mean, you’ve seen wages go through the roof, supply chain disruptions, which is send prices higher labor shortages, much more jobs than people get to apply for. In fact, people are leaving jobs like in F&B, restaurants, waiting jobs, low pay, long hours. They go into much better paying jobs. Energy price as I think Brent, this morning’s at $83. Global energy crunch so much this inflation is commit malicious. I don’t now what that’s going to do? The market. But it’s definitely something.

 

SM: Watch out for that’s. Right. And if we’re talking about supply chain bottlenecks that are contributing to inflation, we have a story here coming out of the US, where President Joe Biden wants to break a log jam at US ports and stave off a holiday season of shortages and delays. Tony was speaking earlier about empty shelves in the US and the fact that US customers are overbuying because there’s so much demand. But supply chain is blocking these products from getting to the shelves. And Joe Biden wants to solve this by making ports operate longer just to clear that backlog. But that isn’t really quite solving the problem because, as you pointed out, there are other trends, such as the labor issues that are finally coming to a head in this scenario. And it’s causing a lot of chaos in terms of supply chains.

 

KHC: Yeah. Because, you know, this part of California, in fact, part of Los Angeles, right. It’s one of the biggest basic choke points for supply into the US. And, I mean, that’s got, like something like 60 to 70 container ships waiting in the Bay just to get in and offload this stuff. It’s incredible. To supply chain shortages, I think that’s supposed to last until 2023. Right.

 

SM: Right.

 

KHC: And there’s this huge amount of capital going into the US in the semiconductor companies that are just building chips which are going to require less energy and smaller to just alleviate some of this choke point. This bottleneck is crazy. I mean, this is how capitalism world sometimes.

 

SM: The juxtaposition to what happened last year is so stark. Last year, there were enough containers. They couldn’t leave their forte because they just couldn’t get the containers to ship their products. And now they’re just too many of them, and they’re jamming up the Port. So it’s really curious how the pandemic has kind of shifted us from one extreme to the next term in the economy. Stay tuned to BFM 89 nine.

 

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Podcasts

Worse GDPs, Market Expectations, Chinese Manufacturing, and the Rising US Dollar

BFM speaks to Tony about corporate earnings as worse GDPs, market expectations, and the Dow and S&P 500 extended losses after their worst quarter since 2008 as Trump warned of a “painful two weeks ahead”. They also get into Tony’s expectations for markets in April, the shortage of US Dollars globally and Chinese Manufacturing data.

 

Produced by: Michael Gong

Presented by: Roshan Kanesan, Noelle Lim, Khoo Hsu Chuang

 

Listen to the podcast at BFM: The Business Station

 

 

Podcast Notes

 

BFM: But right now. Let’s take a look at global markets, a deeper look at global markets and to do that, we speak to Tony Nash, CEO of complete intelligence. Tony, thank you for joining us on the line this morning. Now the Dow and the S&P 500 extended loss after their worse quarter since 2008, as Trump warned of a painful two weeks. I think, for the Dow, this was the worst quarter since 1987, if I’m not incorrect there. Now, how badly is this going to hit US corporate earnings across the board?

 

TN: It does really depend on the energy sector, but generally it’s hitting things pretty bad. I guess the good news is it’s only part of Q1. So the last few weeks of Q1, but I guess the big question mark and the reason markets are really saying negative is nobody is sure how long we need to endure?

 

It is another couple of weeks, is it another few months? And that’s why we’re seeing markets in the red because nobody really knows. And so I live in Houston, in Texas. So it’s the energy capital of the world. Malaysia’s feeling a similar pressure with the oil and gas and a lot of my neighbors, thousands of my neighbors have been laid off from their jobs. So it’s not just the stores being shut and things that are not happening. It’s actual incomes not coming in as well.

 

So that consumption part of the GDP calculation will be decimated for at least a single week. And this is why you’ve seen the big government intervention come in with the 2-terms plan, which allows government spending. That ‘G’ part of the GDP calculation, it allows that to replace some of the consumer spendings and that’s one component that’s been displaced over the last few weeks and will be displaced for the part of Q2. So, our view is it the last fiscal plan in the U.S.?

 

We expect at least one more, if not two, five to six trillion dollars of fiscal spending from the U.S. government. The real question is whether other governments can afford to match a similar proportion of their GDP. I’m skeptical that none of them can. So what matters right now to consumers is fiscal health, fiscal spending. For central banks do not matter as much. What matters is getting hands into the consumers.

 

BFM: U.S. right now has over 200 thousand COVID-19 cases and the situation does not look like it’s improving, and we might see even more lockdowns in the U.S. So do you expect markets will perform even more badly in April? And how might markets land in April?

 

TN: No, I think what’s affecting markets really is the uncertainty not necessarily the case count because, you know, not all tests are created equally. And what really matters in the case count is the denominator.

 

What we found is, yes US test is actually pretty accurate, unlike a number of other tests out there. And so the number of false positives and false negatives are a lot lower that’s my understanding of the US test. And the portion of population that’s been tested in the US is growing pretty rapidly. So although we see those cases counts growing, we see it as a fairly good example of the real picture in the US. Now, what we have seen on the ground here in the U.S. So the governor of Texas came out a few days ago and said that 99 percent of the bed space allocated for covered patients is empty. So we’re not seeing people in hospitals here. We are seeing things in other parts of the country. And of course, there are cases here. But what we’re doing again and again and again is that people will come in with other ailments that will be diagnosed as COVID. So COVID is a secondary or tertiary infection to something that is really, really ailing them.

 

So and that’s the question that people need to start peeling back is, “Is COVID the primary cause of that fatality or is was there already a number of other ailments in place and COVID was somewhat incidental?” Until we start asking these questions, you really won’t understand how deeply dire the problem is.

 

BFM: Tony, there’s a shortage of US dollars in the world today obviously as a safe haven. The Fed has introduced a new repo facility for foreign central banks to draw down on what you know about this facility and how effective has it been?

 

TN: Well, it’s been pretty effective. I mean, we see the trade weighted dollar down 99 with a 99 handle on it now it was up 103 or something, which makes it very difficult for people outside of the U.S. needing dollars. There’s a lot of U.S. dollars denominated debt. There’s a lot of trade conducted in U.S. dollars. So if the US dollar is expensive and if governments are having to buy medical equipment and other things in U.S. dollars, it makes it even harder for them to address some of these quality concerns. So the US government has been working very hard to help other countries by pushing the value of the U.S. dollar down. So these facilities and it’s easy for countries to put up pretty low quality assets in exchange for U.S. dollars. So that the U.S. can churn more U.S. dollars out into the global economy to grain that supply up and, of course, bring the value down. So I’m not really optimistic that they’ll be able to keep it down for long. I think the flight to kind of safe haven currencies is going to persist. So I think the dollar value is going to rise, continue to rise. But I think it’s really important for the Fed to focus on this and to take these efforts in the short term to help countries get the equipment they need and transact in dollars at a lower rate.

 

BFM: There’s a report forecasting a severe contraction for China this year, however, the latest PMI data beat market expectations. What is your current outlook on China’s economy?

 

TN: You know what’s interesting forecast, because the world’s economies can’t have a very downbeat China forecast without China’s permission. So, somebody is trying to get bad news out there, okay? So I think what we may be seeing, because we saw the PMIs came out a couple days ago that weren’t that bad. But we’ve also seen a lot of government spending to try to offset the lack of business and consumer activity. So there’s no doubt there’s going to be a bad reading in China this year. And I think the World Bank report is a way for the Chinese government to allow us to get out into the market first so they’re not seen as disappointing on their deliverable of 6 percent. So we’ve, you know, Complete Intelligence had believed that China’s been growing at 4 to 5 percent for the past couple of years. So with this, I believe it’s a 2.7 percent rate been said for continuous something, I can’t remember. But it allows China to deliver under 6 percent to deliver over whatever the World Bank forecast was so that they can start to notch down those expectations. So I think the World Bank report is probably credible. I don’t know that it’s necessarily that dire, but it might be, that I think it gives NBS and China an excuse to clock significantly under 6 layer.

 

BFM: Tony, how about your comments changed as the context of a couple of reports overnight suggesting a) that China has been doctoring the data on coronavirus the last couple of months and b) that a county in China, other reports suggesting that parts of the country is not under a new lockdown because of a further outbreak.

 

TN: Well, first, I don’t think it’s crazy that anybody that China’s been doctoring the data, but I don’t think China is unique. I think there are many, many countries out there that are doctoring the data. I think political leaders are afraid that corona would be seen as a political failure. And so I think many, many numbers. And China, usually have been singled out in this kind of data doctoring, which they’re guilty, but they’re not the only ones. So, you know, is there a resurgence of this? I don’t know if there’s a resurgence as much as maybe it didn’t pale off in the way the Chinese authorities said it did. So whether it’s a statistical resurgence, you know, maybe that’s the case. But these were you know, these were always there and they didn’t see the decline that was expected several weeks ago. I think that’s likelier than the fact that there’s just some crazy resurgence in COVID in China. But, you know, I don’t think anybody should be shocked. I don’t think China is angry or guilty than anybody else. They’re known for this. A lot of statistics ministries are known for its reporting and health agencies on this reporting. So it’s just the nature of reporting national level data that can be seen as politically sensitive.

 

BFM: Thank you so much for joining us on the line this morning. That was Tony Nash, CEO of Complete Intelligence.