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Trapped With Upside Capped For US Markets

This podcast is originally published by BFM: The Business Station for their Market Watch show. Here’s the link to the original content: https://www.bfm.my/podcast/morning-run/market-watch/snp500-us-job-market-economy-consumer-target-costco-oil-price

Can the Federal Reserve engineer a soft landing for the US economy? Are the odds stacked against them especially if consumer spending stops suddenly. Tony Nash, CEO, Complete Intelligence gives us his views.

Transcript

BFM: The business station BFM 89 Nine is seven. 6th Thursday, the 1 September, and we are in the final quarter of the year. But nonetheless, we don’t need to look so far ahead because in the next half an hour, I’ll be speaking to Hannah Pearson of the travel consultancy Pet Anderson on Asian tourism recovery.

But in the meantime, let’s recap how global markets closed yesterday. So the Dow was down 0.9%, S&P 500 down 0.8%, while the Nasdaq was down 0.6%. Meanwhile, in Asia, Nikkei was down 0.4%, Hang Seng was up very marginally by 0.3%, Shanghai was down 0.8%, Singapore Street Times was up 0.6%, and our very own FBM KLCI was of course close due to the medical holiday.

But for more in terms of where global markets are heading, we have on the line with us Tony Nash, CEO of Complete Intelligence. Good morning, Tony. Now, the S&P 500, in fact, the US markets continue to slide, but the S&P 500 we know, is down by 4.2% on a monthly basis, even though US jobs and consumer numbers released this week were largely positive. So why is this bearish sentiment in the equity markets persisting?

TN: It’s pretty easy. Equity investors weren’t prepared for Powell to have the conviction to fighting inflation that he showed in last week’s speech. So everyone else, bond vestors, commodity investors and so on, understood Powell’s conviction.

But equity investors had expected the Fed to pivot. And by pivot, maybe coming close to loosening and maybe coming close to ending rate rises. But the Fed was never going to pivot. If anything, the pace of rate rises may slow, but the Fed’s ultimate destination is 4%. And they’ve said that for months.

So there really shouldn’t have been any surprise with that. But equity investors just didn’t want to believe it. And so they’re in price discovery, continuing lower now. So once they hit the valuation that will reflect getting to 4%, I think we’ll be back in decent territory. But until then, we’re in a downward price discovery mode.

BFM: Okay, Tony, the other thing that’s going to happen in next few weeks is of course, the Fed going to reduce their $9 trillion balance sheet. What kind of impact do you think this will have on markets?

TN: Well, it’s tighter. So it’s going to be more difficult. So in September, the Fed will double quantitative tightening. So they’ve been tightening at about 47.5 billion dollars per month. They’re going to more than double that to 95 billion in September. So it will definitely add upward pressure on interest rates.

And when there is upward pressure on interest rates, that means the cost of money is higher and the cost of buying a house is higher, and so on and so forth. And with respect to buying a house, the Fed is about $50 billion behind on shrinking their mortgage-backed securities portfolio. So they do have some catching up to do, but they’ve got time on their side. They can do it at whatever pace they want.

BFM: Okay. In the meantime, right, let’s look at the US consumer. Super important in the US. Economy, but at least 60% of GDP. Do you have a sense of what’s happening there? Are they still very confident? Are they still buying, especially discretionary spending? Has it been robust?

TN: I don’t necessarily think. You have a separation. You have luxury buyers who are very confident. But I think your average buyer, I don’t necessarily think there’s a lot of confidence behind their buying. I think they’re just trying to maintain their pace of spending.

So spending continues to grow, but consumer credit has also expanded. Visa, I think, two days ago said that their payments volume grew by 11%. So that’s not the value. I mean, you could say with inflation, of course, the value is going to go up, but they saw their payments volume go up by 11%. Part of that is due to things like back to school here in the US. The school year starts in late August, early September.

But until consumers stop growing their spending, the Fed will keep raising because the Fed, part of what they’ve been trying to do is what’s called demand destruction. And until consumers and businesses stop raising the pace of their spending, the Fed will continue raising interest rates in tightening conditions.

BFM: But doesn’t this then just mean that the US is officially in a recession? Because you’re basically sending out signals to the market that the economy needs to slow down. And if we continue to do so, we’ve already seen two-quarters of it, right, which means it’s a technical recession. How bad will this recession really be? I mean, it will be official at some point.

TN: Yeah, I really honestly don’t care if we’re in a recession or not. If two quarters is the rule of thumb, then we’re in a recession. And we’ve been in a recession since Q1. So it’s really just a matter of labeling.

I think the difficulty is, as you say, what’s the impact on, say, business growth, job growth, spending growth? And we’re seeing that the job market has remained pretty strong, spending growth has remained pretty strong. And the concern is, will that stop? When will that stop? And I think we have seen things slow down, at least in terms of economic growth, but a lot of that has been around government spending as well.

So things will likely become dramatically slower in 2023 if the Republicans take over the US. House of Representatives, which controls the budget. So if Republicans take over the House, they will put a stop on a lot of the spending bills that the Biden administration continues to want to pass, and they’ll be more budget conscious. So government spending may not necessarily decline, but the pace of the rise will stop. And so government spending has been what’s been keeping, say, GDP and other things moving, but that will likely stop if Republicans take over Congress.

BFM: Okay, but what about the Fed, the actions of the Fed? Because so far it seems like markets are looking to them for engineering a soft landing in the US. Do you think they’ll succeed, though, or are we going to look at the politicians for doing so?

TN: It all depends. Well, not all. A lot of it depends on the Fed’s actions this month, in September. So if the Fed slows the pace of rate rises, let’s say to 50 basis points instead of 75, they’re signaling that they’re willing to slow down a bit with the destination remaining 4%.

So if the Fed were to come and say, a 25 basis point rise, then that would be a real signal that, yes, they’re definitely committed to getting to four, but they’re willing to slow down to get us to four by, say, Q1, maybe late Q1 of ’23. And I think that would be a signal to equity investors that the Fed understands and they’re okay if some of these valuations continue to be stretched.

If we see a 25 basis point rise, which I don’t think anybody is really calling for in September, then that would be a real kind of green light from the Fed. I think we’re likely to see 50. 75 is also likely, but I think 50 is slightly more likely. So we’ll likely see 50 and then a few 25s. And that’ll get us to four in, I think, December or January. And at that point, the Fed is just going to reassess and figure out kind of which strategy to pick after that.

BFM: So is it too optimistic to say that maybe we might have a year-end rally for US. Markets? What do you think?

TN: It’s possible. I wouldn’t necessarily count on it. Again, I think the upside is capped for a period because of the uncertainty of the Fed, at least until we have clarity on the September signaling. So if they do raise 75 in September, then that likely means we have a couple of 25 rises in October, November, something like that. But it doesn’t necessarily mean they’re going to stop. All it means is that they’re going to reassess and the beatings will continue effectively.

BFM: What about oil, though? It’s now $89 a barrel for WTI. Why have prices come under pressure so much?

TN: Well, the Saudis came out with a statement last week around the gap between the paper value of oil and the physical market. And they have been talking about cutting their output because of the difference, the broad difference between the physical market and the paper market. And so I think when we see falls like this, it just convicts the Saudis more. Unless there’s political pressure put on them, it just convicts them more to cut their output.

The Saudis, the Emiratis and others have come together and said we’re likely going to slower output. Part of this is also putting pressure on the Iran deal, assuming that there’s more capacity from Iran. So if exports from Iran are normalized, then that could put downside pressure on the price. So the Saudis are just trying to keep the price up.

Within that context, we also have to look at the Strategic Petroleum Reserve releases in the US. So that will end in October unless they slow down the pace of the SPR release, but that effectively cuts off supply to the market. And so when the SPR release ends and if the Saudis cut their output, we could have a spike in crude prices, say in Q4.

That’s kind of what we’re expecting is for crude prices to rise into the end of the year. The US midterm elections will be passed as Saudis will likely cut their output. Other OPEC countries will likely cut their output. And the US SPR release will be done. Unless the Russia-Ukraine war ends, which would put crude in the open market, we do expect to see crude price rises towards the end of the year.

BFM: All right, thank you for your time. That was Tony Nash, CEO of Complete Intelligence, telling us that we can expect Brent crude prices to actually perhaps go up for the last quarter of the year as there are more output cuts despite some of the demand destruction we are seeing because of the global economic slowdown.

Categories
Week Ahead

The Week Ahead – 11 Apr 2022

As a start, we looked at the Friday’s trading session and what it means. Is this a bullish market?

We’ve made a few recommendations over the past couple of months. We hope you’ve been paying attention specially on $IPI (Intrepit Potash) and $NTR (Nutrien).

We’ve talked about the tumbling lumber markets in recent weeks. What are Sam and Albert’s current thinking on lumber as we’re looking at $LB lumber futures. Sam talked about housing last month. We looked at $XHB, the home builders ETF. How about the rates and housing? We’ve seen that homebuilders are getting hit with expected rate rises. What is the impact of this on the mortgage market, housing inventory, etc?

Shanghai has been closed for a few weeks now and the largest port in the world won’t open for about another week. How can the second largest economy continue to close when the West has already accepted Covid as endemic? How can manufacturers rely on China as a manufacturing center if they’re unreliable?

For the week ahead, we talked about the earnings season, their portfolios, and Albert talked about Chinese equities for months, etc. Is now the time to look at KWEB, which he discussed for some time?

We’ve got CPI out on Tuesday and is expected at around 7.9% and Retail sales on Friday, which is expected at around 0.3%. Inflation seems unstoppable and consumers seem to be getting tired of spending. Sam explains on this.

Key themes from last week

  1. Friday trading session
  2. Don’t say we didn’t warn you
  3. Rates and housing (Tuna & Caviar)
  4. China’s shutdown

Key themes for the Week Ahead

  1. Earnings season expectations
  2. Near-term equity portfolios
  3. CPI (Tuesday), expected 7.9%

This is the 14th episode of The Week Ahead in collaboration of Complete Intelligence with Intelligence Quarterly, where experts talk about the week that just happened and what will most likely happen in the coming week.

Follow The Week Ahead experts on Twitter:

Tony: https://twitter.com/TonyNashNerd
Sam: https://twitter.com/SamuelRines
Tracy: https://twitter.com/chigrl
Albert: https://twitter.com/amlivemon

Listen to the podcast on Spotify:

https://open.spotify.com/episode/4uQUT91ocSlxs0sdNR7Vt6?si=3ba0d0bb07724b9f

Transcript

TN: Hi, guys, and welcome to The Week Ahead. My name is Tony Nash. I’ve got Albert Marco and Sam Rines with us. Tracy is not able to join us today. Before we get started, if you don’t mind, could you please like and subscribe. That would help us out. And we’ll let you know every time a new episode is up and running.

This past week we saw a lot, but I think the most interesting thing or one of the most recent interesting things is Friday’s trading. We’re going to start talking about the market action on Friday, and then we’re going to get into a couple of things that we told you about trades that if you were paying attention, you would have seen. We’re actually going to go into rates and housing, and Sam’s going to talk a little bit about tuna and Caviar, that discussion from the Fed speech earlier this week. And then we’re going to talk about China’s shutdown, which seems to be getting worse by the hour. So first let’s get into the Friday trading session, guys. What are some of the things you saw on Friday?

AM: Well, from my perspective, the market is acting like crypto. I mean, we’re seeing interday moves on some of these equities, like 5% up and down. It’s a little bit silly. And you wonder if it’s like light volume, if it’s market manipulation by the Fed. It’s just uncanny. I’ve never seen anything like this before. And obviously the market is weak and we’ve talked about black clouds coming over the market and what’s going on. But I don’t see anything any catalyst that would say that this is the bullish market at all. So we’re waiting for multiple numbers of CPI, retail and whatnot. But for me, it’s just like everybody is on pause waiting to see which way this market goes before they take action.

TN: So a couple of weeks ago, we saw a lot of money move into equities. Right? So that money moved in. It’s just parking and waiting. Is that what’s happening?

AM: Yeah, I assume so. The Fed, as it just ups the rates, forces more money to move into the US market, which is actually a brilliant move. You know, this is what we’re seeing. A lot of money here, not knowing what to do at the moment.

SR: To Albert’s point, there’s a lot of money that’s moved in here, but it’s moved into some pretty passive areas that it’s just not moving much in terms of the overall market. You look at fixed income, right? Lots of money moving in there, short into the curb, et cetera, et cetera. I think that’s some of the more interesting stuff as well. But there’s also this weird thing going on where equal weight is outperforming the market cap weight. And has been for some time now, particularly over the last week. If you look yesterday, S&P closed in the red, but if you were equal weighted, close green and it closed green on a non trivial basis, and it was 35 basis points, something like that.

That deviation between market that was led by predominantly tech and only tech, to a market that’s led by other sectors in general is something I think under the surface that paying attention to it can be something that at least can make some money in the near term.

TN: Including Crypto Walmart, which we’ve seen over the past week as well. So we’ll talk about retail later in the show.

Okay. So we had as a group talked about some calls over the past couple of months. Some of those were calls earlier, but let’s get into those just to walk through. Albert, you and Tracy had talked about Intrepid Potash. She talked about Nutrien. We’ve got those on the screen right now. Can you walk us through those and kind of what you’re thinking was on those and what’s happened? What do you expect for those to happen in the near term?

AM: Well, speaking about IPI, Intrepit. It’s like a leveraged ETF in the fertilizer market. That thing swings 5-10, 11% in a week, no problem. That call was basically on the premise that the Ukraine war is going to go on. Russia is cutting off the fertilizer supply. Belarus has a big fertilizer supply. OCP in Morocco has shifted from actual fertilizers to more like phosphate batteries for EVs.

So it only made sense that besides Mosaic, which is the 800 pound gorilla, IPI and Nutrien were just the logical choices for investments.

TN: And is there room to run on fertilizers like there was a target put on Nutrient by one of the banks of like 126 or something? Do you think we could keep running on those trades?

AM: We can, right? Certainly we can. It just really depends on what goes on with the Russians and whatnot. My only risk for running too far is that the Dixie could go to 105, 110 and then we have significant problems across the market, not just fertilizer prices.

TN: Okay. So even if dollar does go to 110, we’re planting now in the US, right. And now and for the next couple of months. And the fertilizer demand is right now and it has been for the past couple of months. But it’s especially right now, is all of that, say planting demand, is that all priced in already, or do you feel like some of that is to come?

AM: I think it’s pretty much priced in. And let’s just be careful because some of the farms that are planting crops are using nitrogen and also fertilizer derived from nat gas. So it really depends on which way the farming community wants to go, what they see the most profitable crops.

TN: Okay, great. That’s good to know. We also talked about lumber, as I remember a conversation probably three or four weeks ago where I think, Sam, you brought up lumber and how lumber was coming off. Can you walk us through that trade, as we have it on the screen?

SR: Yeah, sure. I mean, it’s a Fed trade, right. It’s a Fed tightening quickly, mortgage rates going up and housing demand coming down. The idea that a Fed going this quickly and having the market priced in, there’s a difference. Right. The Fed has only moved 25 basis points.

TN: Right.

SR: The market has done the rest of the tightening for it across the curve. It’s been pretty spectacular. Housing, housing related stocks, those in general, are going to be the first thing that the Fed affects and they’re going to be the first thing that the Fed affects on the margin very quickly. And you’ve seen mortgage rates go to five plus percent.

TN: Sure. Before we get on to housing, I just have a couple of questions about lumber and other commodities. So the downside we’ve seen come in lumber over the past week or so. Do we expect that to come to other commodities as well? I mean, things like weed and corn, there’s still pressure upward pressure on those. But do we expect other commodities to react the way lumber has?

SR: Oh, no, I would not expect the foodstuffs to react in anywhere near the same manner as lumber. Right. Lumber is a fairly… Lumber, you cut it up, you put it in inventory, you sell it, and then you use it for something.

TN: Right.

SR: It doesn’t last forever in good condition either.

TN: Great. Okay, good. Thank you. Now moving on to home builders, which is where you are going. You also talked about XHB, I think two or three weeks ago, and we’re flashing some warning signs about that. We’ve seen obviously rates rise. I was speaking to a mortgage broker earlier this week. He’s doing mortgage at almost 6% right now and expects them to go up kind of close to 8%.

We’re starting to see the resurgence of ARMs. People are already getting back into adjustable rate mortgages because 5.99% is high. Just as a bit of background, less than 10% of US mortgages over the past few years have been adjustable rates. So can you talk us through XHB? And maybe you had mentioned earlier kind of Home Depot and some of the other home makers. Can you talk us through what kind of… Home Depot was a leading indicator on that? Is that fair to say?

SR: It’s fair to say Home Depot and Lowe’s this kind of ties into the lumber conversation. Home Depot and Lowe’s were two of the best at ordering and trying to actually keep inventory on the shelves, even when during the first tremendous spike in lumber. Right. So they kept a lot of lumber on the shelves. They currently have a lot of lumber inventory on the shelves. And it’s part of the reason that you’re seeing what could be described as almost an over inventory of lumber, not just at those two entities, but across the board, because everybody had to buy lumber in order to keep it in stock.

So, yeah, Home Depot and Lowe’s are the tip of the spear in terms of both home building and in terms of home remodeling. Those are both fairly significant drivers of the business there. There’s a little bit of weekend contractor type deals, but very little.

So overall, I would say they are a leading indicator and they have not been acting very well. But when you have mortgage rates to your point at 6%, that creates a problem for the marginal buyer. It’s not a problem for somebody who owns a home. Right. You have your mortgage rate locked in, et cetera, et cetera. It’s not going to destroy you. It might set off being able to put a new deck and redo a pool or something like that. But it’s not going to hurt you in any meaningful way.

TN: Right.

SR: It does hurt the marginal buyer. It hurts the first time buyer, et cetera. So you begin to have slower turns in housing and you begin to have problems with where does that incremental inventory of homes go? And that’s the real problem with higher invetories.

TN: Right. Before we move on to officially talking about rates and housing, I’ll share a story about a friend who is building a house and their lumber broker who should be able to get the best pricing actually has worse pricing right now than Home Depot. Okay. So they can actually go to Home Depot and get better pricing than their lumber broker. And that’s how messed up the lumber market is right now. They’re arbitraging their lumber broker versus retail any given week in their bulk buying to make sure that they can get their house built. So that market both on the lumber side and on the housing side is just a mess.

So let’s officially go to housing and rates. We’ve done a lot of the discussion, but there was a CNBC story about rising mortgage rates are causing more home sellers to lower their asking prices.

And Sam, you talked about that marginal buyer, which is great, and that new buyer. When I talk to people who are doing mortgages, they tell me that even with the rate rises we’ve seen over the past couple of weeks, there is still not a lot of inventory on the market. That’s a big issue. And they’re not seeing a fall in demand for new houses. So is this kind of a last minute rush for people to get a house before rates rise even more? Is that plausible?

SR: There’s some plausibility to that. Yeah, 100%. The other thing is that we’re in Texas. Right. The demand for housing in Texas, the demand for housing in Florida does not tend to be, I would say, as tied to mortgage rates as everywhere else. The rest of the country is much more sensitive to what’s going on. Texas and Florida and a couple of other spots simply have too much inbound demand from higher priced areas. So California, New York, et cetera. There’s still an arbitrage when you sell a place in California or sell a place in New York and move to Texas, Florida, some of the Sunbelt States.

So it’s tough to take Texas as an example, particularly Houston. We’re actually the fourth largest city in the country, and yet we do not get counted in the S&P Schiller because of how different the housing market is here. Dallas gets kind of for whatever reason, but Houston does not.

TN: We’re not jealous at all about that.

SR: No, we’re not.

AM: Go ahead, Sam. Sorry.

SR: But just to wrap that up, I do think that there’s a nuance to Florida and Texas that should almost be ignored. When I look at the data, I’ll be taking out the Southeast region just because it’s one of those that is a little special at the moment.

AM: Yeah, that’s a key point that I always made is like, because of the migration patterns in blue to red States, things are just really wacky. Florida and Texas, Arizona will be red hot. Meanwhile, Seattle, Chicago, parts of New York are just dead spots at the moment. So until that all gets weeded out, people stop moving. Then we’ll actually see the housing market starting to cool off.

TN: Right? Yeah. I was just up in Dallas yesterday, and things are just as hot up there. And the immigration from the coast to Dallas, especially around financial services and tech, it’s just mind blowing. It is not stopping. It has been going on for probably five years, and it’s just not stopping. Those counties just north of Dallas are exploding and they continue to explode.

Okay, so our next topic is China and China’s slowdown. Shanghai has been closed for a couple of weeks with kind of a renewed round of Covid. And obviously the largest Port in the world, which is in Shanghai, is closed. And that kind of exacerbates our supply chain issues, especially around manufactured goods that we’ve been seeing globally. We’ve seen overnight that. Well, not just overnight, but over the last, say, five days. Food has become really scarce in Shanghai. We’ve seen people on social media talking about how it’s difficult to get food. We’ve started to see little mini protests around Shanghai, around food. And things are seem to be becoming pretty dire.

Overnight, we saw that parts of Guangzhou that the government is considering closing, parts of Guangzhou, which Guangzhou is the world’s second largest port. So the two largest ports in the world, there is a potential that those are closed. There is also gossip about parts of Beijing being closed as well. So I’m curious, what do you guys think about that? I can talk about China for days, but I’m curious, kind of, what alarm bells does that raise for you? Not just for China, but globally.

AM: Well, Tony, you recall, you Balding, and I discussing China’s attempt to attack Taiwan and what had happened. And I had pointed out that closing those ports would cause food insecurity and here we are. Although it’s not a Taiwan invasion, it’s a zero Covid policy that shut down the ports and now we have food stress in China causing all sorts of problems.

Most China observers, especially yourself, know that Shanghai has always been the epicenter of uprising for the CCP. It’s a problem for them. They’ve always tried to wash it. Maybe that’s why they’ve come down hard on Zero Covid Policy. That’s something that I’d have to ask you. But from there, this was very predictable. I mean, you shut down ports, China has a food security problem.

TN: On a good day, China has a food security problem. It is an issue that the Chinese authorities worry about day in, day out, not just when there’s a pandemic. Okay. So one of the things that I was talking to some people about yesterday is why is China closing down? Why are they closing down these big cities? There’s a lot of gossip. You can find a lot of theories around social media saying there’s some sinister plan, honestly and for people that don’t know. I’ve done work with Chinese officials over years. And the economic planners I was seconded to economic planner for almost two years. I believe that they’re closing because they’re worried about how the China virus looks, meaning they don’t want Covid to be seen as the China virus. And they worry about the world’s perception if there’s another outbreak that comes from China.

And so I think the leadership believes that they have to be seen to be disproportionately countering COVID so that there isn’t more wording and dialogue about the kind of, “China virus.” And so, again, I don’t think there’s something sinister going on. There’s a lot of gossip about China intentionally trying to stop supply chains to bring the west to its knees and all the stuff. I don’t believe that at all. I think it’s real sensitivity to how they look globally.

Of course, there’s the public health issues domestically. That goes without saying. But I think a big part of it is how do they look globally.

AM: Yeah, but doesn’t shutting down these ports is going to cause even a bigger spike in inflation within China and actually globally?

TN: Oh, absolutely. This is the one thing that I think they didn’t plan on is they’re about to embark on a whole lot of fiscal, a whole lot of monetary stimulants because they have major government meetings in November of this year. So they absolutely cannot go into recession.

But here’s what I have been thinking about. Okay. We’re looking at a Russia-Ukraine war that could potentially bring down Russia and destabilize Russia domestically. We’re now over the past couple of weeks, looking at a China that is starting to self destruct domestically. And I don’t know of anybody who had the domestic issues of both China and Russia as systemic risks in 2022. These things are just coming out of nowhere. And those two risks can be destabilizing for the whole world. And I’ve said for some time, Western governments have to sit the Chinese leadership down and say, look, you guys are systemically important globally. You need to get your act together around COVID, and you have to normalize your economy because it’s hurting everybody.

AM: Great points. Now, going back to Guangdong, there are some really elite families in China out of that area, really wealthy ones, that actually basically gives Xi the support he needs in the CCP. If he loses those families, there’s real trouble for Xi going forward.

TN: I think there’s trouble for him anyway. I think he is not a one man show. Contrary to the popular Western opinion, Xi Jinping is not a one man show. He is not a single Emperor, kind of claiming things from on high. There is a group of people who run China. It’s just too big for a single individual to run.

So I think Xi has been, I wouldn’t necessarily say on thin ice, but I think things have been risky for him for some time. And as you say, it’s pretty delicate for him right now. And if he doesn’t handle this deftly, I think, again, there could be some real destabilizing factors in China. So this is something again, they didn’t plan for. They were talking about major infrastructure stimulus. They were talking about monetary stimulus, getting ready for this big party in November to nominate Xi for more power and all this other stuff. But it’s possible that these events could really hurt him and really hurt his relationships, meaning the key people around him and then the other factions.

Because as much as people say that China is a one party state, sure, it’s a one party state. But there are factions within that one party. And it should be alarming for China and destabilizing China should be alarming for other people around the world.

AM: Yeah. Same thing as Putin. Like their factions behind them that keep them in power. Same thing as Xi. Most autocratic rulers have a circle of trust behind them that keep them in there. If Xi falls and China starts to, I don’t want to say crumble, but at least wobble, if we think we have serious supply chain issues now, wait till that happens.

TN: Oh, yeah. So Russia is important on energy and a couple of other things, but it’s not globally systemically important on a lot. Okay. I would say maybe it’s regionally important, especially to Europe, but China is globally important. And if they can’t figure this out, it will destabilize everybody.

And so I think Western governments need to not lecture to China, but they need to go forward with real concern about China. How can we help you guys out? Right? How can we help you out? Can we get you vaccine? Can we get you support? Is there anything logistically we can do? That is a way that Western governments can come to the legitimate aid of China. They’ll act like they have it all together, but they don’t. It’s obvious. We see it every day on social media. They don’t.

So Western governments really need to offer genuine aid to China in terms of intelligence, in terms of vaccines, in terms of capabilities, and so on and so forth.

Good. Anything else on that?

AM: No, we covered that.

TN: Okay. Looking at the week ahead. Guys, we’ve got earnings season coming up. Can you talk us through your expectations for earnings season?

SR: Sure. I’ll jump in here quickly. I think there’s a few things to watch. One, the consumer sentiment has been dismal. Right. For the last six months. It’s falling off a cliff. Where the US University of Michigan survey, well below where it was at peak of Covid. But we haven’t necessarily seen retail sales. We haven’t seen corporate earnings and corporate announcements follow that sentiment lower whatsoever.

For anybody paying attention this past week, you had Costco with absolute blow out numbers in terms of its same store sales. Take out gasoline, take out anything, and you still have 7% foot traffic. That was stunning. And that’s not a cheap place to shop.

TN: Right.

SR: So that’s indicative of the higher end consumer that’s still holding in there, at least fairly well through March. That’s pretty important. So then there was Carnival with its best week ever in terms of bookings. Those two things are pretty important when it comes to what is the consumer actually doing versus what is the consumer actually saying, which I think is very interesting.

This week we’ll have Delta Airlines. It’ll be interesting to kind of listen to them and see what their bookings have looked like, see what their outlook is for the summer. And then I’ll be paying really close attention to the consumer side of the earnings reports, not necessarily as much the banks. I don’t really care what Jamie Dimon has to say about Fed policy, but I will say…

TN: I think she do.

SR: Nobody does. But I’ll say the quiet thing out loud. But I will be paying very close attention to what the earnings reports are saying about the consumer, because the consumer drives not just the US economy, but the global economy generally, both on the goods side, services side and really trying to parse through what’s happening, not what the US consumer keeps telling us is happening.

TN: Go ahead.

AM: Sam, really quick. How much of these earnings because I’m a little bit suspicious of how much is it inflationary, prices of everything are higher and remnants of stimulus PvP, whatever the people have been getting for the past year. How much is that calculated?

SR: Yes, which is one of the reasons why it’s a great point, one of the reasons why I pointed out Costco. Costco much less on the stimulus side, much less on the saving side, much more on the high-end kind of consistent consumer. And with foot traffic up 7%, inflation was I think it was about 8%, give or take. So they’re passing on the inflation and they’re still getting the foot traffic. So I think that’s an important one.

On the CCL side, it was after the bookings were after the significant stimulus had already run out or run off. You just weren’t getting checks. I think that was also an indication that maybe there’s a shift from the goods to the services side. The one thing that was somewhat disconcerting, if you’re paying attention to the higher end consumer, was Restoration Hardware. They ran down their book to about 200 million in backlog and don’t really appear to be bullish about this year. They guided well below what some were expecting. I think we’re going to hear a lot more about that, partially because they just can’t get enough inventory in time and they’re kind of in trouble on that front.

AM: Yeah.

SR: To your point, it’s a lot of inflation, but some of these guys are seeing some pretty good traffic, too.

AM: Yeah, actually, funny, you mentioned Restoration Hardware because that was one of the things I was looking at specifically for the housing market, like who’s buying a $30,000 at the moment right now. You know what I mean? It’s just silly.

TN: Yeah, that is silly. Okay, great. Thanks for that. And I’m interested to see how the earnings from Q1 also translate to Q2. I’m expecting a real turn in Q2, and I’m wondering how much that is on investors minds as they look at Q1 earnings.

Albert, as we move into the next point around kind of short term or near term equity portfolios. You’ve talked about KWEB for some time, and I’d like you to, if you don’t mind talking about KWEB a little bit, but also if you and Sam can help us understand what is your thinking right now on your term portfolio.

AM: I mean, KWEB is one of my favorite little stocks because it’s a China technology index and it’s been beaten down to a pulp by the Fed. They have absolutely annihilated not just China, but pretty much all foreign equities. And from my perspective, you’re looking at China stimulating in the fall of the shore of Xi. So it’s like it’s a no brainer to me. I think KWEB at 28 is a fantastic deal. Start piling into that.

One of my other ones I was looking at was FXI, which is basically all the China’s big wig companies. So that’s another one I was looking at right now. In terms of the US equities and portfolios, I mean, we’re so overvalued right now. Where do you put your money into? One of my favorite stocks was TWY a tightened tire. It makes 85% of the world’s agriculture tires. Right. I mean, this thing ran up from $1.45 to $14 at the moment. You know what I mean?

How do you put more money into equities at this stage without some sort of correction or something happening with the Fed to show us which way they’re going to go? Are they going to go 50 basis points in the next meeting and then another 50 and another 50, or they’re just going to use a long bond to actually what Sam said earlier and I forgot to bring it out is they’re using the long bonds also to kill the market. So it’s just like,what do you do?

TN: Yeah. The change to valuations we’ll see over the next three months seem to be really astounding.

AM: They’re just silly. Everything is so inflated at the moment. I can’t in good conscience, say get into this stock or get into that stock, because I know how is it going to run right?

TN: Exactly. Sam, anything to add on that?

SR: I love Albert’s point on KWEB. Think about what’s built into the risk there. You have the risk of the SEC delistings. You have the risk that appears to, at least on the margin, be waning. You have the threat of sanctions on China from them helping Russia. You have a lack of stimulus. You have shutdowns. There’s a lot weighing on that index on top of Fed, et cetera. There’s a lot weighing there on that. And you begin to have some of these calls, the geopolitical onion risks begin to be pulled back a little bit. And that to me is a spectacular risk reward in a market that is generally pretty low on the reward.

TN: Okay.

AM: I had one of my biggest clients from the golden guy. I mean, it’s gold and KWEB is what he’s seeing right now. That’s the only thing he wants to even touch, which is fascinating.

TN: Yes, I can see that. Okay. Next, this week ahead, we’ve got CPI out on Tuesday, which is expected to be about 7.9%. Sorry. And then retail sales on Friday, which is 0.3%. So it doesn’t feel like inflation is abating. But, Sam, you talked about, say, Restoration Hardware and other folks earlier. What concerns you guys have about inflation eating into retail sales, do we expect serious difficulty with retail going forward?

SR: Probably not this month. We’ve going to get the release and it’s going to be for March. And I haven’t seen what I would describe as a poor number coming from any of the major retail facing guys for March. I don’t think that number is going to be distressing at all. I think it’s much more of a . May-June story in terms of the economic numbers lag with a hard L. That’s somewhat problematic.

So I would say you’re not going to see the bad official numbers for a month or two. And on the CPI front, I’ll just throw this out there. And Albert can make fun of me for it, but I don’t really care where the inflation readings come in as long as it’s above 5% the Fed still going and it’s still going with its previous plan, and it really doesn’t care, quite frankly.

TN: That’s good to know.

SR: I just think it’s one of those it’s going to be a no. It’s going to be a no reaction type deal. Unless you get a huge break, then you might get a little bit of a come down on twos through sevens or something. But that’s about it.

AM: Yeah. I mean, as much as I want to make fun of Sam on that one. Yeah. Nobody cares about the inflation. Nobody cares about the inflation number right now until the election season starts really ramping up in about June, July. That’s when I agree with Sam with the retail sales are probably crater or starting to lag significantly in May and June. But yeah, prefer inflation. It’s just like everyone is expecting a 7.9 to eight point whatever, you know, so it won’t be a surprise.

TN: Great. Okay, guys, thank you very much for this. This is really helpful and I appreciate it. Have a great week ahead.

SR: Thank you.

AM: Thank you, honey.

Categories
Podcasts

Impact Of PBOC (China’s Loose Monetary Policy)

BFM 89.9 asks Tony Nash from Complete Intelligence on how China’s PBOC adoption of looser monetary policy will affect the yuan and the broader Chinese economy. 

This podcast first appeared and originally published at https://www.bfm.my/podcast/morning-run/market-watch/impact-of-pboc-chinas-loose-monetary-policy on December 24, 2021.

Show Notes

SM: BFM 89 nine. Good morning. You’re listening to the morning run. I’m Shazana Mokhtar are together with Philip See. It is Christmas Eve, Friday, the 24 December 9:06 in the morning. But in the meantime, let’s take a look at the activity on Bursa Malaysia.

PS: It’s flat like Coke without any bubbles.

SM: Oh, no, that’s the worst kind of flat.

PS: Yes, the foot sabotage. Malaysia is flat slightly down .09% at 1515.

SM: So still above 1500.

PS: Still above 1500.

But it’s been yoyoing a bit green and red so far. But the rest of the markets across Asia are in green territory. The Straits time is up at 3100. Cosby also up 58% at 3015. Nikkei also up zero 6%, 28814. Now, just to bring your attention, looking at the crypto Bitcoin 5998.65 above the 50,000 mark. Theorem also uptrend 4114115.184. Now, if we shift over to the currencies, ring it to US dollar 4.11988. You’re seeing some strengthening there. But across the other two currencies pound and sing dollar, we’re seeing some weakness there.

Ring it to pound 5.62967. Ring it to Sing dollar 3.0922. Now, looking over to the value board. Really. Smattering of small caps actually driving it, but cost number one Ata IMS at .72 cent unchanged, followed by SM Track up 13% at .13, followed by Kajura Tran asphas flat at .26%.

SM: Okay, so that is the snapshot of Bursa Malaysia at 9:09 this morning. We’re taking a look now at how global markets closed yesterday.

So if we look at the US markets, they closed in the green. The Dow was up 0.6%. The S&P P 500 was up zero 6% as well. The Nasdaq was up zero 9%. So a lot of optimism going into the Christmas weekend. Joining us on the line for analysis on what’s moving markets. We have Tony Nash, CEO of Complete Intelligence. Tony, good morning. Thanks for joining us today. Now 2022 is just a week away. And given the triple headwinds of Fed tapering, Omicron and a China slowdown, will there be a difference in how developed and emerging markets in Asia are going to be impacted?

TN: I think with the tightening in the Fed and with what emerging markets are going to have to do, meaning in the near term, like China is going to have to loosen. So I think you’ll have a strengthening dollar and more of a rush for capital into the US, so that should at the margin, kind of help US markets stay strong across debt and equity. Other things. I think in emerging markets it could eventually China loosening. The PVC loosening could help demand in emerging markets, but it’s going to be hard to get around the hard slowdown that started in China around Omicron.

PS: I see.


And so when you contrast that to the Fed tightening, right. You said China PBOC is adopting a looser monetary policy. How will this affect the UN in relation to those Asian currencies in which there’s a lot of trade between these two countries?

TN: Yeah. CNY has been strong for a protracted period, and it’s made sense on one level, so China can import the energy and food, particularly and some raw materials that it needs in a time of uncertainty. So the PVC has kept it strong through this period. What we’ve expected for some time. And what we’ve shown is that after Lunar New Year, we expect the PPOC to begin to weaken the CNA. We don’t think it’s going to be dramatic, but we think it’s going to be obviously evident. Change of policy, Chinese exporters, although they’ve been producing at not capacity, but then producing pretty.


Okay. China is going to have to devalue the CNY to help those exporters regain their revenues that they’ve lost over the last two years. So we’re in a strange period globally of moving from kind of state support back to market support, whether it’s the US, Europe, Asia, we’ve really had state supportive industries, state supportive individuals as we move beyond covet. Hopefully we’re moving more into a market orientation globally, and there will be some volatility with that.

PS: Yeah, but I was wondering for China, especially, I’m interested to know what the state of the Chinese consumer will be in 2022 because the government is worried for slow down. Right. And wouldn’t they want to expedite and give a bit more ammunition to the Chinese consumer?

TN: They would. But the problem is with Chinese real estate values declining, a lot of consumer debt is secured against real estate. And so the ability of Chinese consumers to expand the debt load that they’re carrying. Is it’s pretty delicate? It’s a fine balance that they’re going to have to run. So either the economic authorities in China push real estate markets up to allow Chinese consumers to keep debt with their real estate portfolios, or they make other consumer debt type of rules that allow Chinese consumers to hold more debt.

Real estate is the part that’s really tricky in this whole equation in China, because if real estate values are falling, the perceived wealth of those consumers is falling pretty rapidly as well, and the desire to consume excessively, it’s just tempt out.

SM: And I suppose still sticking to our view of China looking at metal commodities, what metals have been affected by the slowdown of demand in China? And do you foresee a recovery for them in early 2022?

TN: Yeah. We’ve seen industrial metals like copper and steel, and those sorts of things really slow down dramatically compared to where they were earlier in 2021. We’re seeing reports of, say, copper shortages at the warehouse level at the official warehouses in China, but that’s not real. What we’re seeing and I speak to copper producers in Australia and other places. What they’re telling us is that those copper inventories are being shifted to unofficial warehouses to create a perception of shortage. So we may see a run. We may see an uptick in, say, industrial metals prices in early 22, but we don’t expect it to last long because the supply of constraint is not real.


So until demand picks up for manufacturing and goods consumption. And the other thing to remember is we’ve had a massive durable goods wave through covet. Everyone’s talked up on durable goods. Okay, so there is almost no pent up demand for durable goods. And this is the stuff that industrial metals go into on the demand side, there are some real problems on the supply side. There seems to be plenty of supply in many cases. So we don’t necessarily see the pressure upward, at least in Q1 of 2022 on industrial metals.

PS: And that’s why I’m quite interested where you say that this demand is, I think slowly going to dissipate because yesterday key US inflation gauge sharpest rise in nearly 40 years, right? Personal consumption expenditure surged 5.7% in November. How long do you think this elevator level will last?

TN: Well, US consumers are pretty tapped out. So I think inflation happens for a couple of different reasons. Some people say it’s only monetary. Not necessarily true. We’ve seen real supply constraints that contribute to inflation. We’ve seen demand pulls because of overstimulating economies, and those two things together have accelerated inflation. And so we have to remember at the same time in 2020, we saw prices. If things go down pretty dramatically around mid year, say a third of the way through the year to mid year to just after mid year.

Some of these inflationary effects have been a little bit base effects because prices fell so hard in 2020. But we have seen consumption ticking up because of government stimulus. And we have to remember if the Fed is tightening things like mortgage backed securities, their purchases of mortgage backed securities will slow. Okay, so if people can’t refinance their house or buy new houses again, those wealth effects dissipate if you have a home. If your home price is rising, whether it’s the US or China or elsewhere, the wealth perception is there and people have a propensity to spend.

But if the Fed is pulling back on mortgage backed securities, then you won’t necessarily have that wealth effect that will dissipate. So government spending will decline marginally because build back better didn’t pass. We won’t have that sugar rush of government spending flowing into the economy early in 2002, although we may see something later. I believe governments love to spend money. So I believe the US government will come with some massive package later in the year to bring government spending back up.

SM: Tony, thanks very much for speaking to us. And an early Merry Christmas to you. That was Tony Nash, CEO of Complete Intelligence, giving us a quick take on what he sees moving markets in the final year. In the final weeks of 2021. Looking ahead to 2022.

Categories
Podcasts

Synthetic Economy

Tony Nash joins the BFM Morning Run podcast from Malaysia and explained why we have synthetic economy and how to navigate through this. Also discussed are tech stocks — is this the end for them?

 

This podcast first appeared and originally published at https://www.bfm.my/podcast/morning-run/market-watch/synthetic-economy on March 4, 2021.

 

❗️ Check out more of our insights in featured in the CI Newsletter and QuickHit interviews with experts.

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Show Notes

 

WSN: Nasdaq closed sharply down last night, continuing a trend that sees it almost erased all its year-to-date gains led by declines in Apple, Amazon and Tesla. Is this the end of big tech?

 

TN: I don’t think it’s the end of big tech. I think investors are taking a pause. We saw tech jump a lot in the wake of Covid. Investors are really starting to wonder how much additional growth is there over time. We’ve seen the work-from-home stocks and other things really get lifted through Covid. But how much immediate rapid growth is left is where a lot of the investor questions lie.

 

WSN: Is this also the beginning of a trend where we really see the rotation from growth into value?

 

TN: “Value” is a scary word right now. It has been for a long time. We have a ways to go, but I think we could get there. We’ve been talking for a few months about a pullback in March and we expect the pullback to continue and will begin to recover in late March, April. So we think this has a little ways to go unless there’s dramatic intervention by central banks and other things. But we think this pullback is not ideal but it’s necessary given stretched valuations and stretched expectations. So this is healthy for us. We just need to figure out what to do with it.

 

PS: Just give me another angle that instead of looking at it from values about sector specific, because yesterday, energy and financials did do relatively well. But was the energy upside due to the rising prices? And how does that correlate with OPEC’s decision coming soon with respect to oil production?

 

TN: I don’t think it gets really much more complicated than rising oil prices. These energy companies generally are still extremely bloated, extremely inefficient. Aside from the crude pressurizing, there really isn’t a lot that we see driving it. So we do expect commodities to take a pause. We’ve expected this for some time. We’ve seen copper come down by five percent or something.

 

Over the past few trading days, crude oil has leveled off in general. It’s not rising as fast as it was. Some of this has to do with CNY starting to weaken a bit. Chinese and the U.S. Dollar to start to strengthen their sort of related, but they’re not necessarily one and the same. So as we see some of that, an unraveling of some of that, Kerry, we’ll see some commodities start to come off of it as well.

 

WSN: BDA shows that the U.S. manufacturing grew at its fastest pace in three years. So are we really on the road to recovery?

 

TN: I don’t necessarily think that the economic growth expectations that we’ve seen from economists saying seven percent growth or something like that are necessarily the right way to go. When we look at the growth that we saw in Q4 and the growth that we’ve seen in Q1, I’m not sure we’re already back, at least in the U.S., to where we were before the virus. And so it’s really questionable for an economy that’s been growing one to three percent, depending on the year. Is a seven percent growth rate really warranted? Additionally, when you see things like deflation and the Chinese CPI, those two growth engines, we’re not necessarily seeing the rapid growth that some people have been claiming.

 

PS: Just another angle then, which is employment data, because December, January data didn’t meet expectations. What’s your outlook for February then?

 

TN: It’ll probably be OK. I think if the employment data is extremely positive. The US is susceptible to politicization of macro data just like everyone else. If we see a pop in employment data, I think they would be revised out. All of these macroeconomic indicators are revised three or four times. If we see a pop in a sample of employment data, which they look at a subset of houses and companies, they don’t look at the entire economy. If we see a pop, which we’re not necessarily seeing, we think that would be revised out over time. So I would say be really careful about optimism here. OK, it’s great. I live in Texas. We just announced that Texas one hundred percent open yesterday. All this stuff. It’s great to be optimistic, but we’ve really had synthetically driven growth. It’s not necessarily real growth. It’s all subsidized growth in many, many countries over the last, say, nine to 12 months.

 

WSN: That’s very true because this the twin Goldilocks effect of monetary and fiscal stimulus but somewhat related to unemployment numbers is that if the number is better on Friday, do you think markets might get nervous? Because that’s one of the indicators the feds are looking at to raise rates.

 

TN: We’re in that place where bad news is bad news and good news is potentially bad news. So we really have to be careful. What’s going to happen to Treasuries? Is the Fed going to raise rates? How does all that work if we start going to hot? I think it’s the right question that you’re asking. When we have an equity market and global equity markets that are so stretched, if the cost of money, which is what interest rates are, starts to rise, then we really have to be careful about equity valuations.

 

PS: During a deep dove into a specific sector, which is basically all this office collaboration companies like Zoom and Slack, what’s your outlook for those kind of sectors in the short term and mid-term?

 

TN: It’s good. They’ve grown a huge amount over the past year, but I really think we have to look at what growth is. They’re likely going forward, meaning there is growth. But is it as fast as what we’ve seen over the past year? I think the answer is probably no. They are probably also working on their revenue models to monetize some of the things that they’ve been giving away for free for the past year. Like a Zoom call is free. How do they monetize those things? That’s a serious question, but what are they substitution for and what do they enhance?

 

They’ve been substitution for meeting face to face people in the same office. But as more places go back to work, albeit slowly, they won’t necessarily need that for day to day, although it’ll still be used. Again, my question is the growth will be slower, but I would hope it’s better growth, meaning more monetized growth.

 

WSN: All right. Thank you for your time. That was Tony Nash of Complete Intelligence, giving us his views on markets and a very important point in that all these work from home teams may be the easy money is made because we did see stellar growth. Right, as everyone switch to zoom calls and all these kind of new technology. But now the question is, are we going to really see profit coming in? Is there going to be margin expansion?

 

PS: I want to know how they’re going to monetize and whether they’re going to expand the services beyond what they do. As Tony, you see, a lot of it is kind of free of charge. So what is the business model going to evolve to deliver sustainable profit? It’s a big question mark for me.

 

WSN: Yeah, and one company which hasn’t impressed is actually Snowflake, and that’s a data cloud company. Now, they announce a revenue for fourth quarter, which came in at one hundred and ninety million U.S. dollars, slightly better than the one hundred seventy eight million dollars that was expected. So this represents I mean, it is impressive when you just look at the headline numbers. It represents one hundred and seventeen percent growth year on year. But like as Tony highlighted, this company actually suffers a net loss.

 

So their net loss widened to one hundred and ninety nine million U.S. dollars. That’s more than double that 83 million in the. The same period a year ago.

 

PS: Yeah, I mean, the markets didn’t like it because the stock dropped eight percent on Wednesday. I mean, just a reminder to all of you guys, Snowflake was the largest IPO in 2020. Right. So with respect to guidance, snowflakes specs 185 to 200 million U.S. dollars in productivity in the first fiscal quarter, which is will be up about 90 to 96 percent year on year.

 

WSN: So, yeah, you can be hard on a stock that has a fantastic concept data. Right. Everybody wants that in the clouds. But in a day, patience with investors will run thin if you don’t make money. And that’s the reality of any business. So I think, like you sit like what Tony highlighted those companies where you see stellar revenue growth, but not profit after a while.

 

Market’s not going to tolerate it for that long. And when they issue like a set of results, which are below expectations and widened widening, no losses, no end to that, you know, no no sense of when are they going to turn around. I think you then see that sharp sell down again.

 

PS: And take, you know Tony, said something really interesting. Bad news is bad news. Good news could be potentially bad news.

 

WSN: Is that there is the cup half full or is it half empty? Sometimes the market is like this, the same set of data. Depending on the mood, the sentiment can be viewed either very positively or negatively. So if you get a better data but you’re in a positive mood, you can say, oh, the worst is over, let’s look forward.

 

But if you’re in a bad mood or you think the market’s being pessimistic and resolve, everyone’s like, oh, no more to come. So who knows? But up next, we’ll be speaking to on JinMing MP for Bungay about Malaysia’s economic recovery. Stay tuned. BFM eighty nine point nine.

 

Categories
Podcasts

Is The Rally Ending?

Tony Nash joins BFM 89.9 The Business Station for another look at the global markets and to get a sense of whether this is the end of the bull run. Also discussed how September is expected to be a volatile month. Will there be a fiscal stimulus for small businesses? Will banks and other financial institution get the next round of stimulus? And how about the oil prices — where is it going?

 

This podcast first appeared and originally published at https://www.bfm.my/podcast/morning-run/market-watch/is-the-rally-ending on September 24, 2020.


BFM Description

 

Speculation is rife over whether US lawmakers will be able to come to agreement over a new stimulus package, as deadlines loom. Federal Reserve Chairman Jerome Powell also warned that more stimulus will be needed, and all the uncertainty took its toll on US equities overnight. To get a sense of whether this is the end of the bull run, we speak to Tony Nash, Chief Economist and CEO of Complete Intelligence.

 

Produced by: Mike Gong

 

Presented by: Roshan Kanesan, Lyn Mak, Noelle Lim

 

Show Notes

 

LM: BFM eighty nine point nine. You’re listening to the morning run with Lyn Mak, Roshan Kanesan and Noel Lim, 707 a.m. Thursday, the 24th of September. And in round about 15 minutes, we’re speaking with Paul McManis, chief enterprise business officer at Maxus, to discuss how companies can best adapt to a post covid-19 business environment. But before that, we’re taking a look at the markets.

 

RK: Well, the markets were in the red, actually. The Dow was down two percent. The S&P 500 was down two point four percent, and the Nasdaq was down two point seven percent. How did Asia do?

 

NL: Well, Nikkei index down point zero six percent. The Shanghai Composite was up 22 percent. Hang Seng marginally point one percent of the Cosby eight point zero three percent stay up point seven percent. The FBI. CIA, however, was down one point six percent. And I guess that’s on the back of some very important news at 12:00 p.m. yesterday.

 

RK: Yeah, it’ll be interesting to see how all these markets open today on the back of the US market closing.

 

LM: Absolutely. So for more on international markets this morning, we have Tony Nash’s chief economist and CEO of Complete Intelligence on the line with us this morning. Tony, thank you for joining us. Now, U.S. equities retreated sharply last night as Jerome Powell warned that more stimulus is needed. While it seems more likely that lawmakers will be able to agree to this. Is this the end of the rally and perhaps the reality check that market’s needs?

 

TN: Well, I don’t know if it’s the end of the rally, but I know we had a conversation on August twenty sixth. I think it was when I caution you guys that September would be a really rough month and very volatile. And I think we’re certainly in the middle of that. So how much further will it go? We think it has a little ways to go, but so we don’t necessarily think there’s a huge rally coming. But the caveat to that is stimulus.

 

So if stimulus comes out this week from the U.S. Congress, which there has been a bill going through and there may be some reconciliation in in some of the committees to get some stimulus out, that could help. But I think the Fed I think what what the Fed has said is, you know, they’re out there doing their work. They’re getting loans out to larger companies. But really, fiscal stimulus has to take place for smaller companies until we have that.

 

I think markets are pretty upset.

 

RK: And if we take a look, sorry, OK. And as we take a look at some of the banks like HSBC and others, they’ve taken a bit of a beating from the Vincent report. Will this have a an impact on the rotation of play into the finance sector, do you think?

 

TN: I think it will certainly for those banks that have had issues around laundering money and other things, allegedly. Yeah, I think it’s a big problem because investors don’t want to invest in risk. There’s enough risk in their daily life. But for those banks who aren’t flagged, I think there’s a real opportunity for them. Unfortunately, the sector itself is having difficulties today. But you did see some movement in things like insurance and other things where you do see money moving in and looking at oil prices rising.

 

NL: U.S. oil inventories are keeping oil prices fairly subdued. Where do you see oil prices heading in the short term?

 

TN: We don’t see a lot of movement. You know, we see WTI in the high 30s, low 40s. We see Brent around the mid 40s. The problem is we just haven’t had that consumption rebound that’s needed to drive oil prices higher. There is a lot of discussion about a supply side issue going into the first half of next year that might push prices higher. I’m not entirely sure that that may happen. But even when we look at things like petrol prices, they’re probably 30 percent off of where they were a year ago.

 

And we really don’t expect that to change for six to 12 months.

 

LM: Thank you very much for speaking with us this morning, Tony. That was Tony Nash, chief economist and CEO of Complete Intelligence

Categories
Visual (Videos)

CNA’s Asia First: US market pullback, less intense fear of COVID

Tony Nash joins the Asia First team again for another look at the US market pullback. What was the reason for that — is it the Biden’s VP candidate, the stimulus, or others? Also discussed were the market sentiments and what Nash thinks is lacking in the US economy right now. He also shared what Americans feel about COVID right now and what it means for businesses. Lastly, they discussed East Asia versus South Asia.

 

This video is the segment of Tony Nash from the August 12, 2020 full-length video episode, which was originally published by CNA for their Asia First show. You can find the source https://www.channelnewsasia.com/news/video-on-demand/asia-first/wed-12-aug-2020-13015722 

 

Show Notes

 

CNA: Tony Nash joins us now. He’s founder and CEO Complete Intelligence. He’s speaking to us from Houston, Texas, USA. Tony, we’re seeing this pullback in the markets overnight. I don’t know if it comes as a surprise to you. Is this the realization that the stimulus package might not be imminent. Is this who Biden has picked for a running mate or are there other factors at play here that have influenced the market?

 

TN: It’s really more about yields than anything. We’ve seen the impact of yields on precious metals. The impact on silver was most dramatic. But with equities, we saw a little bit of a pullback then. But we don’t necessarily feel like equities are in at a correction point at the moment. It might be some political news on Joe Biden’s VP candidate but I don’t necessarily see that being a disappointment. I don’t think there were huge expectations there.

 

There isn’t big COVID news in the U.S. There’s not necessarily major China news outside of the Alex Azar’s visit to Taiwan and the Hong Kong stuff, but there isn’t huge market impact on that. So really, it’s about yields and it’s about the expectation of stimulus.

 

CNA: Right, how much further downside do you see for the markets then?

 

TN: In the U.S., we think markets are fairly healthy assuming stimulus is coming. Now, U.S. legislators have gone for the rest of the summer. But there’s really nothing keeping Trump from issuing more stimulus like what he did over the weekend. I mean, there are things legally but he’s issued an executive order over the weekend to do that and it was a fair bit of stimulus coming down the pike.

 

What’s missing is stimulus for small and mid-sized businesses, which we had in May, June, but that really dried up at the end of July. So, we’ve seen almost 200,000 small businesses close in the U.S..

 

Really the question is, will there be more stimulus there in terms of cash flow to help the demand issues that small and medium-sized businesses are seeing in the U.S.? One of the key things that we’re finding, over the last week we’ve seen a lot of clarity come around whether American kids will go back to school at the end of August or in September. We’re seeing more and more school districts coming online saying yes they want kids back in school. Many of them in person some of them virtually but that helps American workers get back into the office as needed and where needed and gives them focus. So I would expect productivity to improve quite a lot in Q3 as parents and kids are back in school and many of them are back there physically.

 

CNA: But the case counts in the country. I mean, that certainly is weighing on sentiment is it not? And you know the idea that the country hasn’t quite got a hold on it, there is a possibility that they will have to start, stop the economy and it’s not as straightforward as going ahead with those lockdowns. When you do it a second, third time, that’s just going to have this permanent damage to the U.S. economy?

 

TN: Sure, that’s right. But I think the focus in the U.S. has really gone away from case counts. People are really looking at mortality. They’re really looking at clusters. They’re really looking at transmissibility. And so, I think in the U.S., the sentiment and the desire to close down. Generally, people are kind of over it. The fear of COVID is not as intense as it was two months ago. People realize that it’s a disease, it’s a virus. It comes and goes. The incidence rate and the death rate is actually fairly low.

 

The U.S. has done tens of millions of tests and so people are realizing that the high case counts are very related to the tests and this is going out through a lot of different mechanisms at the state level and the national level in the US. It’s not to say it’s gone. It’s not to say that we have zero cases. But a lot of countries in a lot of locations that say they have zero cases. I’m not necessarily sure that the testing is being done as thoroughly as it could be.

 

CNA: All right we’re also seeing that improvement of economic indicators in the Asian region, industrial output, some export figures look like they are on the uptrend in China for example. How much of this is going to be a divergent play east Asia versus south Asia for example?

 

TN: We really see east Asia lagging, although the Chinese data like the auto data that came in yesterday it looks okay. On year on year basis it looks pretty good. But I’m not necessarily convinced that that’s sustainable, given the demand issues that we saw in the first half of the year. There are ongoing worries that we’ll see issues in China’s economy and political issues in China with Hong Kong and other places.

 

We’re expecting east Asian markets to really not do well this month. We’ve expected kind of more than a one percent decline this month in east asian markets generally between say one and three percent based on the market in south Asia because they’re less China connected. We expect them to be flat to slightly down. So,  this month generally we’re expecting a slight pullback in Asia but south Asia fares a bit better than east Asia, although it’s not that dramatic.

 

Categories
Podcasts

Claims, Caution, and China

Tony Nash, CEO of Complete Intelligence speaks with BFM 89.9 about the US market rebound, what to expect in the third quarter of 2020, jobless claims and US unemployment, and Hong Kong amid the US-China cold war or trade war.

 

BFM Notes

It’s been an eventful weekend in politics, and all eyes are on whether markets will reflect the renewed uncertainty. We reached out to Tony Nash, CEO of Complete Intelligence, to help us break down Federal Reserve chairman Jerome Powell’s comments before the US Senate Banking Committee, data expectations, and what the potential impact of Hong Kong losing its special status might be on emerging market currencies.

 

Produced by: Michael Gong, Roshan Kanesan

Presented by: Noelle Lim, Roshan Kanesan, Lyn Mak

 

Listen to the BFM Podcast here.

 

 

Show Notes

 

BFM: Thanks for joining us, Tony. So now, Jerome Powells made some comments before the Senate Banking Committee pointing towards a cautious rebound in the US economy. But nevertheless, U.S. markets closed in the green on the back of some positive housing data. So could you help shed some light on what’s happening here?

 

TN: Sure. We had the positive housing data. We had a broad tech rally. We also had Boeing like 14 percent today on a test flight on the 737 Max. So it was simply a test flight and it was a successful test flight and Boeing rallied 14 percent. It’s a major component and it has an impact on broad market activity. So there are some good things happening, but certainly low expectations environment.

 

BFM: Do you expect end of quarter rebalancing by funds, would that costs significant market volatility? I mean, could you just give us some thoughts about this?

 

TN: As we’ve said before, we expect volatility to continue through probably mid-August. So we will see some rebalancing and we will see as these investors figure out what the right value is for the assets they’re invested in. So we’ll see some change. We’ll see a lot of people kind of take it in Q2. And Q3 is a brand new quarter, so they’ll wipe the slate clean. We’ve seen a lot of companies dump everything but the kitchen sink into the Q2 earnings. Well, but we expect them to. And so Q3 will be hopefully a whole new world. And and we’ll be approaching something more positive by then.

 

BFM: Right. And Tony, when we look at the every week, we’ve been paying very close attention to the jobless claims numbers, right? What are your expectations of the US Weekly jobless claims numbers this week and June Non-Farm payroll data that’s expected on Thursday or Friday overtime?

 

TN: Well, we saw a huge jump in non-farm payrolls in May of 2.5 million, which was pretty massive. Also, the unemployment rate improved from almost 20 percent to like 13 percent. So, we expect things to improve gradually. We don’t expect the two million, although I hope we do, but we don’t expect that magnitude. But we do expect jobs to continue to accumulate as companies gradually come back. So the initial wave of companies opening up in the US produced a lot of new jobs. But now we’re starting to see that continue, but not necessarily at the same magnitude. But again, if we see 2.5 million or more, that will be a delight, everyone.

 

BFM: So now, Tony, fluctuating crude prices and as well as bankruptcies like Chesapeake Energy make oil stocks seem like a bit of a risky proposition. Shouldn’t investors still be considering energy companies as part of their portfolio?

 

TN: Well, I think you have to do with caution. So we look at things like crude oil inventories in the US reached an all time high of something like 540 million barrels about a week and a half two weeks ago. So there’s plenty in storage. I think if you’re investing in energy companies, whether they’re the developers option companies or service providers or whatever, I think you just have to go in with your eyes open to know that the growth there and the draw down in inventories is not likely to be a quick one.

 

TN: So, again, it’s just you have to understand your own risk profile. You have to understand your own tolerance and then go in. I mean, when you look at something like Chesapeake, that was, it happened. And I don’t think it was a complete surprise. But you also look at BP. They sold off their chemical business to Eneos over the weekend. And so some of these companies are hiving off other businesses so they can focus on their core business.

 

BFM: So, now you know, the latest piece of news where US is going to revoke Hong Kong’s special status. So what do you make of this piece of news in the larger picture of the trade war, the Cold War between China and US?

 

TN: I think it puts Hong Kong… It’s another piece in the puzzle to put Hong Kong in a light that it doesn’t really want to be put in, which is one country, one system. Hong Kong has for the last 20, 30 years, been the special place where you can access China without all the baggage. But what we’ve seen with the security like coming in is if you’re in Hong Kong, you’re also accepting the China baggage, which means you have to self-censor your comments, which means you have to be really careful about everything you do and say. And if you’re an investor, that’s a pretty difficult place to be. And so I think, the announcements in the State Department of not selling this technically sensitive equipment there, it was inevitable.

 

I don’t necessarily think it’s a surprise. I think from the Chinese side, it may have been a surprise. But I think they were kind of deluding themselves if they didn’t expect it. So there is accountability for China’s actions and it’s been as they’ve moved into Hong Kong, there have to have been ramifications and were seeing those, and there will be more. And China will have to understand that if they want the benefits of open, say investment markets, they’re going to have to limit their desire to control a number of aspects around business.

 

BFM: Thank you very much for speaking with us this morning, Tony. That was Tony Nash, CEO of Complete Intelligence, giving us his insight into global markets.

Categories
Visual (Videos)

Is coronavirus the straw that’s going to break the camel’s back of the US bull market run?

Tony Nash, CEO and founder of Complete Intelligence, is a guest on Asia First of Channel News Asia and was asked if COVID19 (coronavirus) will stop the US bull market run, the why’s of the way market is moving, mandatory policies, and what investors should do. Below are the show notes:

 

Is coronavirus the straw that’s going to break the camel’s back of the US bull market run?

I don’t think so. I think what we’re seeing is a view that it’s good to be paranoid/worried. We need to remember that the markets here is in a pretty euphoric state, and had a rapid acceleration since then. A lot of markets are looking for a reason to be more defensive, some see that the market is a little overvalued.

 

Why are markets moving the way they are — they’re important parts of the value chain but they’re not China? 

In the US, we have business optimism, consumer optimism at high numbers. There is a lot of positive momentum here. COVID19 is a catalyst to bring for a lot of people at getting defensive. But the fatality rate is very small. 66% of China’s manufacturing capacity is back on. It seems China made a decision to make them working and spending again.

 

How about mandatory policies? What are the odds that the Fed will cut given the possible impact of Coronavirus on the economy?

I don’t think the Fed will cut, and they will wait to see how and if it gets bad. We have a really strong dollar now. And if other countries become more aggressive without the US being aggressive, the depreciation of their currencies become problematic for their debt market and their trade balance. We need to be careful about the central banks in emerging markets becoming more aggressive in supporting their economies. It’s very complex math from here on out.

 

Are you seeing Beijing not letting certain companies fail?

They are in a position where they can. China has put these measures in place. I don’t think anybody blamed China for the measures they’re taking to get their economy back on track. It’s other countries where there is a lower incidence of the virus, where people become more skeptical, from a central banking perspective.

 

What is the portfolio re-alignment that you are suggesting?

It looks like people are getting defensive. This isn’t at all surprising. People are waiting for a couple of weeks.

It seems that the broad market in the West is becoming aware of the risk of COVID 19, which is good for the robustness of markets in the medium term. As these investors get accustomed to COVID19, they will factor that into their risks. But right now, it seems to be a shocking risk and so short term we should just expect more volatility.

 

Watch the interview on Channel News Asia.