Bloomberg Audio Studios, podcasts, radio news. Welcome to the Daybreak Asia podcast. I'm Doug Krer. The Japanese equity market is back online after a 3-day weekend and the Nikkei is at record high levels. Now, a portion of these gains seem to be tied to reports of Prime Minister Takahuchi being set to call a snap lower house election that would likely increase her ruling LDP seat count. Joining me now for a closer look at markets in the Asia-Pacific is Bloomberg Markets Live strategist Mark Cranfield. Mark is on the line from Singapore. Thank you so much for being with us. Give me a sense of what's driving the price action in Tokyo right now.
Japanese markets were doing pretty well even before there was talk about a Japanese election, but that really has helped to spur additional gains. They were on holiday yesterday, so that's why you're seeing a big catchup today. But certainly through the futures market we saw indications that we were going to have a very strong start with the market. So it looks as though Japan will probably have general elections in the middle of February. You can expect that Prime Minister Takahuchi is in a strong position and appears in the polls, which will really reinforce spending plans, which will be good for the Japanese economy and further boost the equity market. At the same time, there won't be much of an incentive for them to try and talk up the Japanese yen, which is pretty weak on a global basis, at least until that election is out of the way. So investors in the equity market will probably continue to enjoy the benefit of a fairly weak currency while it's looking good for stocks. So that's why you're seeing such a good move today. And of course in the background there's still this ongoing tech story, particularly AI-driven, which Japan has companies that are benefiting from, just as they are in Korea and other parts of Asia as well.
So a large stimulus package combined with perhaps less in the way of trying to intervene in the currency market to deal with the yen weakness that you described. Where does that leave the Bank of Japan? They've got a rate decision next week.
There is no expectation at all from people in the financial markets that the Bank of Japan will change policy in the near term. So it's almost a dead meeting before it starts. Although there will be forecasts that the Bank of Japan will upgrade some of their forecasts for the outlook for the rest of the year, which will be important, especially on the inflation front, because they've been talking about wanting to get inflation down to 2%. It's been stubbornly high around 3%, but there are signs that it's beginning to soften. If the Bank of Japan sounds confident that they can get it down to 2%, in a way that's a double-edged sword because they want to raise interest rates to the neutral level. But if inflation is starting to go down, they won't get support from politicians to raise rates early. So it's a little bit of a problem for the Bank of Japan there. But in the past they've usually been pretty straightforward. If they see a chance to revise inflation lower, they will do so. So by the time the dust has settled on next week's Bank of Japan meeting, people will probably think that we're still a very long way from achieving neutral interest rates in Japan.
So the big story that we're dealing with here in the States today, key Republican lawmakers basically speaking out against this grand jury investigation of Fed Chair Jerome Powell. What have the ramifications of this investigation done to markets in the APAC?
When we first broke that yesterday, initially there was weakness in US assets. The US dollar was a bit weaker. We saw equity futures take it on the chin, although they recovered during New York trading. Slight weakness in treasuries but a steepening of the curve which seems to have sustained for the time being. What it means from global investors: they are looking at this and thinking that the Federal Reserve decision later this month is going to be even more difficult to call than usual. The Fed has been pretty split. If you look at the last two decisions, although they lowered interest rates, it was not a unanimous vote by any means. Some people were looking for bigger cuts, some didn't want any at all. It looks as though Fed Williams today spoke out in defense of Jerome Powell, saying that the central bank should be allowed to continue and they shouldn't be interfered with by these external factors, just get on with their job of focusing on inflation and the job sector. So it looks as though Federal Reserve officials are willing to push back, which will probably mean they're less inclined to lower interest rates at the next meeting. So from a markets point of view, they're not going to get the kind of boost they've seen from previous meetings. All in all, it may well backfire if the authorities are taking on the Federal Reserve. They may not be helping from a monetary policy point of view.
Yeah, we heard from former New York Fed Bank President Bill Dudley today and he was saying that Powell will have a tough time backing further rate cuts because people will ask, is he doing it because the economy needs it or because President Trump wants it? So the issue of Fed independence right now is still very much front and center. And I'm wondering about the overall de-risking that may be taking place with respect to US assets despite the fact that in the equity market today we did have the Dow and the S&P extending fresh records.
And it's not just that. The rest of the world is starting to look a lot more attractive. If you look just here in Asia, we've had Korean equities, Japanese equities, Chinese stocks all doing extremely well. They're all identifying themselves with positive stories at home. Some of that money is starting to leak abroad into Asian markets. It will do the same into Europe as well. So there are alternatives, and on a relative basis some of these markets are cheaper than the United States. So global investors have got other places to put their money these days. It's no longer a story. Two years ago your story was much clearer: if you weren't in the United States then you weren't going to enjoy great returns. That's not the case anymore. There are other places people can go. You can see companies like TSMC in Taiwan, Samsung, and we're expecting very good numbers out of Chinese tech companies as well. So there are plenty of other companies making very large profits, doing well in the AI space. They can take away funds from the United States.
So, you mentioned the Chinese equity markets. We've been seeing record turnover and by many accounts continued strength in Chinese hardware tech in particular. Is this all related to the AI trade?
It's also because the government is getting behind it as well. It is of course related to AI, but also because the Chinese authorities are helping to boost lending into those areas and they're putting their weight behind it. They've shown that these are key areas for the development of the Chinese economy, and when things are aligned in that way in China, that usually works out pretty well. So people won't ignore the positive signals coming out from Beijing in that respect. But of course the companies still need to show they can make money, which for the time being they are doing, and there's a lot of optimism. You can see companies like Alibaba – the stock is performing extremely well, and this was a company that was almost written off just a couple of years ago.
And a lot of strength continuing in the South Korean equity market with the Kospi up by more than 1% in the early going here today. Is this a trend that you expect to continue, coming back to the tech trade?
It's getting pretty rich by any measure. When you look at the incredible performance of the Kospi, but the chip story in particular is still very strong. It might be hard for international investors to be throwing new money at these kind of levels. They'd probably like to see a bit of a correction first, and it would probably help if the Korean currency was a little bit stronger as well. There hasn't been much of a turnaround there, but certainly any kind of pullback in these markets, Korea would be right near the top of the list where people want to get back involved. Japan wouldn't be far behind either.
What are you looking at between now and the end of the week that really has the potential to drive a lot of the price action?
Really, the bond markets have been quite modest in their reaction so far to this fallout from the investigation into the Federal Reserve. If we see curve steepening, it would take a lot of people by surprise here in other asset classes. If it becomes more serious by the end of the week, if long-term yields in the US start to tick up quite a bit higher, that would really spill over. The Japanese long end of the market is having a pretty bad day today – there are some local factors for that – but where Japanese yields go, US treasuries are often heading in the same direction. It would spill over to Europe pretty easily. So by the end of the week, we could certainly have a situation where G10 long-term yields are rising fast and equity markets won't be able to ignore that. So really, they need to get a handle on what's happening there. If they can't get sentiment to be improved in the bond market in the US, it could be dangerous across asset markets.
Do you see a little bit less volatility between now and the end of the week in the currency space? We talked about the yen weakness a moment ago. In the early Monday session in the APAC region, there was dollar weakness as well. Are things going to be a little bit more stable here in the next few days, do you think?
It depends where the action is elsewhere. A lot of focus in the Asian time zone has been on precious metals, where there's some incredible action in gold, silver, and platinum. People have been spending a lot of time trading those and less on currencies. So is there something else to trade? Is there a bigger story somewhere else? If the bond market or the equity market or precious metals have a bigger story, then FX will stay calm. But if not, attention will probably switch back to the local stories, whether it's the Chinese yuan, the Japanese yen – all of those things in their own right can get people excited. But for the time being they're taking second place because there are bigger stories elsewhere.
Mark, we'll leave it there. It's always a pleasure. Thanks so much. Bloomberg Markets Live strategist Mark Cranfield joining from Singapore here on the Daybreak Asia podcast.
Welcome back to the Daybreak Asia podcast. I'm Doug Krer. We take you now to Shanghai where UBS is hosting the 26th Greater China Conference. And it was there we caught up with Sergio Ermotti. He is the CEO of UBS. Ermotti spoke with Bloomberg's Steven Engel, and the conversation began with Ermotti offering an outlook for UBS's business in China.
