April 17, 2024 • 22 mins
Featuring:
Kirsten Fontenrose, President at Red Six International, joins us to discuss the latest US sanctions against Iran
Shuli Ren, Bloomberg Opinion Columnist, sits down with us to discuss China Vanke and China's real estate troubles.
Dominic Schnider, Head of Global Commodities & Forex at UBS Global Wealth Management, sits down with us to share his perspective on APAC markets.
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Episode Transcript
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Speaker 1 (00:00):
Bloomberg Audio Studios, podcasts, radio news. This is the Bloomberg
Daybreak Aisia podcast. I'm Doug Krisner. You can join Brian
Curtis and myself for the stories, making news and moving
markets in the APAC region. You can subscribe to the
show anywhere you get your podcast and always on Bloomberg Radio,
(00:23):
the Bloomberg Terminal, and the Bloomberg Business app.
Speaker 2 (00:26):
We wanted to take a closer look at the conflict
between Israel and Iran, and we're joined by Kirsten Fontenrose,
now president at Red six International. Well, it doesn't appear
at the moment, Kirsten, that Israel will respond in the
short term to the Iranian attacks this past weekend, Israel
has reopened schools and Iran has opened its airspace. But
(00:50):
we do have these other complications Jenny Yellen, for instance,
saying that the US will apply new sanctions or more
sanctions on Iran. What are some of those options that
the US holds at the moment on sanctions.
Speaker 3 (01:03):
The US already has a host of sanctions on Iran,
mostly based on counter terrorism laws in our domestic law books,
but law authorizes US to sanction Uran's energy sector, financial sector,
including its central bank, shipping, construction, mining, textiles, automotive manufacturing industries,
(01:24):
it's arms trade, as well as components of their government,
including the Supreme Leader and the Islamic Revolutionary Guard Corp
or the IRGC, plus any entities that conduct transactions with
these or otherwise support them.
Speaker 4 (01:38):
So it's a really broad writ.
Speaker 3 (01:40):
We expect that any new sanctions will be focused on
export of petroleum and petroleum products or import of components
for their drone or missile programs. A lot of those
components are commercial and off the shelf, and the Islamic
Revolutionary Guard Corps often sets up cover or front companies
that will import from UNWA actors who provide parts to
(02:02):
the commercial sector. So sometimes it's a whack a mole
game of the US contacting these companies and saying, we
know you didn't mean to do this, but you're going to.
Speaker 4 (02:10):
Have to stop doing it.
Speaker 3 (02:13):
One of the criticisms of the Biden administration has been
that the sanctions that have been in place have not
been enforced, so we'll probably see a lot more than
wave of enforcement as well. In fact, the Congress the
US House of Representatives passed four new bills yesterday, two
of which really are intended to kind of hold the
Biden administration to enforcement, and two others that focus on,
(02:34):
for instance, secondary sanctions and the humanitary exemptions piece in
the existing sanctions. I'm happy to go into a little
more on those sanctions if you like.
Speaker 1 (02:45):
I'd like to get your sense on to what extent
Iran is reliant on Russia for some of these weapons
that we're talking about.
Speaker 4 (02:55):
The trade is actually in the other directions, so Russia
tends to stick by Iran, and a lot of this
is because Russia is relying on Iran for much of
the weaponry it is using in its war on Ukraine.
Speaker 3 (03:06):
It has a couple of its own really capable drones,
but the drone it's been having the best luck with
is the shot HAD one thirty six, which is an
Iranian model, and Iran agreed to a technology transfer that
is allowing Russia to build these domestically. Now they expect
to have four factories up and coming years, and some
are already being produced. We don't know how much is disinformation,
how much is sort of a military deception campaign, or
(03:28):
how much is really being produced of those drones domestically yet,
but The reason this relationship is meaningful for Iran is
not only the income from those arms transfers, but also
because of Russia's veto in the UN Security Council that
has been used and will probably continue to be used
to protect Iran, to defeat attempts to mitigate its import
(03:49):
of a lot of these weapons components, to block arms
and bargoes, to hold it responsible for certain kinds of
support to proxy militias around the rest of the Middle East.
Russia has been a very use full aid to Iran
in the Security Council with that VITO, So a lot
of the technology is actually going the other way, but
the political support is.
Speaker 4 (04:10):
Coming this way.
Speaker 2 (04:11):
And the sanctions on Russia haven't led to China, for instance,
not buying oil from Russia or getting gas. So you
wonder if some new sanctions are applied by the United
States and even the EU, because the EU could could
well join in with some new sanctions. But if the
sanctions aren't enforced, and we're seeing that, you know in
(04:32):
day to day life, you know, you wonder whether or
not really a pledge to crack down more is more
important than new.
Speaker 3 (04:39):
Sanctions exactly, And that is part of what the House
of Representatives is thinking. So, for instance, we're seeing one
of these bills that was just passed is called the
Iran China Energy Sanctions Act of twenty twenty three. So
it's been in process, but there's been a sense of
urgency obviously this week. And it expands the secondary sanctions
regime evolving Iran to include all transactions between Chinese financial
(05:04):
institutions and the banks in Iran, which of course are
already sanctioned that handle any sort of petroleum product trade.
So you're seeing China wrapped in there, and you know
these additional secondary sanctions coming on. Congress is also saying, okay,
administration in Washington, we want you to prohibit the Treasury
from issuing any licenses to a US financial institution to
(05:26):
engage in trade with Iran other than humanitarian aid, and
we want you to oppose IMF assistance to Iran. And
in order to make that happen, we're going to make
it law. So they've passed the No US Financing for
Iran Act Act of twenty twenty three. Of course, these
are just coming out of the House. You know, they're
not complete yet. There's also the around sanctions accountability Act
(05:47):
of twenty twenty three. All these names sound the same,
but this one requires the president to issue regulations that
ensure those humanitarian exemptions to US sanctions don't actually go
toward facilitating terrorism internationally or trading.
Speaker 4 (06:00):
Weapons of mass destruction. Well, and there was a final one.
Speaker 1 (06:03):
I'm sorry to interrupt. I was just going to get
your take on what we know of what's happening at
the war cabinet in Israel and the extent to which
the conversation is going on between Washington and the war cabinet,
to the extent that the US has any influence over
what happens next.
Speaker 3 (06:20):
It's an ongoing conversation between Washington and this war cabinet.
And then Europe is weighing in. Arab governments are weighing in.
A lot of folks are out from outside, are trying
to encourage restraint, saying, you run a couple of risks here. One,
you start a retaliatory cycle. Two, the world is giving
you a little bit of goodwill because you shot down
(06:41):
with all of our help ninety nine percent of this
barrage of weaponry that came at you. And this is
reinstated belief in the fact that Israel has impenetrable air defenses.
You know, after October seventh, they lost a little bit
of that belief in their strength of defense because of
the intelligence failures on October seven. But now with the
defeat of this deluge in the sky, they have restored
(07:05):
some of that and it's probably going to be really
good for their defense industry, their domestic defense industry, and
it's good for their relationships in the region. People want
this kind of partner and it required this coalition of
Arab partners with Israel that sent COOM.
Speaker 4 (07:21):
The US Central Command has been building for years to
create this umbrella of Aaron missile defense. But all of
these partners are saying.
Speaker 3 (07:28):
Please don't start a cycle of escalation, and please don't
make it hard for us with our publics, because they
are not particularly fond of the idea that we are
defending quote unquote Israeli sovereignty right now. They are instead
messaging that this is truly an issue of their own
sovereignty and that no matter where a drone or missile
comes from, they will knock it out of their airspace.
(07:48):
They've all been Jordan, UAE, Saudi, even Egypt have been
really clear that This is not an issue of defending
one country over the other. This is an issue of
national sovereignty and the desire not to see these things
fall out of the sky onto their own citizens.
Speaker 2 (08:02):
Kirsen, are we learning that sanctions just don't really work
as well as perhaps administrations believe they would, because we
mentioned the Russian sanctions and now we have all these
sanctions already on Iran. And you know, by the way,
if the EU were to join in, would that make
a difference.
Speaker 3 (08:21):
It makes a difference on the messaging, and it makes
a difference whether we can get other parts of the
world to also join these sanctions, places where the US
doesn't have as much leverage. Perhaps we get countries in Africa,
Latin America, places used as transit places, used for cover companies.
Speaker 4 (08:36):
But it really all comes down to enforcement.
Speaker 3 (08:38):
And evasion, and those two things impact how successful any
sanction is going to be. So the Biden administration, while
in talks about a renewed nuclear agreement, let off the
pedal on the sanctions enforcement, hoping that this would be
a signal of goodwill to the Iranian regime and they
would then be willing to negotiate in greater faith that
(08:59):
didn't happen. And again, as I mentioned, you're now seeing
Congress kind of tie their hands on potentially tyler hands
through the house. We'll see the Senate says on enforcement.
And then Iran has been really active in trying to
devise ways of evading sanctions. Some of this is operating
outside the US and Western financial systems. So but their
(09:21):
clients for this kind of activity happen to include the
largest purchaser of energy in the world, which is China.
Speaker 2 (09:27):
Kirsten Fonton Rose, president at Red six International.
Speaker 1 (09:37):
We're joined now by Bloomberg opinion columnist Chuli Wren talking
about her column on China Von Kah and the company
denying that it's running into difficulty. Wonka is a China's
second largest property builder bry Sales, and I think Shuly
feels as this says a lot maybe everything about what's
(09:58):
happening right now in the China property market. Surely it's
always a pleasure expand on that. How is von Kau
kind of giving us a window into everything that's going
on with the property market in China.
Speaker 5 (10:11):
It can be surprising how fast China's a property developers
run out their cash one by the way, It's nothing
like a China Evergrand or Country Garden. It is one
of the best run and the well managed companies in China.
But what we are seeing is that the cash level
is drinkling really fast, even though it's achieving operating positive
(10:35):
operating cash flow. In other words, that the company's call
business can be still profitable and lucrative, but in the
end it's running into cash troubles.
Speaker 2 (10:45):
Well, yeah, it's cash is not sufficient to cover the
bonds maturing this year, so I mean it needs extra funding.
It needs that extra capital. I think it would be
difficult to sell shares right now or even dead. So
I suppose that means, you know, going to the banks,
and we saw yesterday they set aside seventeen to eighteen
billion dollars were of assets to service collateral. But the
(11:09):
question must be how stable are those assets given that
they are tied to property.
Speaker 5 (11:16):
Right, So that was a news report, and then the
company did not come from or deny it, which to
me is a reference to be honest, exactly like what
you said, Brian, A lot of They do have a
lot of investment assets. They own a lot of shopping
malls across China, but The question is how much are
these assets work? And that, by the way, are these
(11:38):
assets being pledged away already? I mean, what we are
seeing in China is that the remaining real estate developers
they're trying to puzzle out their assets and flow them
as some form of reds right, and then like a
stay owned enterprises can say, Okay, I don't want to
they are a real estate developer, but I can buy
a publicly traded ate. Question is how much are these
(12:03):
assets worth? And that's yes, that's a big question marketing
in China rants is.
Speaker 1 (12:08):
That the only solution that the regulators, the leadership in
China is able to come up with, I mean to
kind of go the route that you just described, carve
them up into reads and let kind of the investment
dollars from kind of the domestic pension industry to be
invested in these companies.
Speaker 5 (12:28):
Well, so far, the Chinese government wants to is still
talking about so called the market oriented solutions. Basically, they
don't want to do anything else, and they're hoping that
the financial markets will take up the reads just like
what you said, pension and insurance companies will do that.
But it's really hard to do because I mean, the
whole economy is in the deflation right, and which means
(12:50):
that its asset prices should also be in a downward
spiral trend, and we just don't know how to value
these opaque commercial assets.
Speaker 2 (13:00):
It could one of the options I didn't mention was
it could go to its largest shareholder, Shenjan Metro, But
it seems that that company is not that willing. What
are the difficulties in that relationship at the.
Speaker 5 (13:15):
Moment, Well, Shinjin Metro only owns twenty seven percent, so yes,
it is the largest shareholder, but it can say I'm
not the majority shareholder. And the one CU has been
listed since nineteen ninety one, so basically, all the mom
and pops and minority shareholders, we are actually majority LEA
shareholders and we are not going to take a responsibility.
(13:38):
How are one Could's financial triples?
Speaker 2 (13:40):
Ye?
Speaker 1 (13:41):
So how are the difficulties at one coh impacting entrepreneurship?
More broadly? You make that point, and I'm curious about that.
Speaker 4 (13:50):
I think One.
Speaker 5 (13:50):
Could is a very interesting case study because it's so
famous and it went public before Danshakin came to Shanjan.
For the Southern who are in nineteen ninety two when
the previous leader talked about the economic reforms and opening
up China. And one is also based in Shanshan, and
(14:10):
Chenchhan was the first city in mainland China that opened up.
It's a property market and allow people to own homes.
Right before that, we no Chinese own any homes. So
if one Curt fails, I think it really is a
best sentence unfortunately to Dan Shoppings edision.
Speaker 2 (14:30):
So it seems that the government is probably the final
straw here that it can't let evergrand and country garden
and one could go down because the municipalities and the
provinces have to have somebody to sell their land to. Right,
So is that the most likely outcome is a state
backed bail out?
Speaker 5 (14:52):
I think so. I mean one cur is really one
of the very few privately health developers left. I mean
everyone else is day old, right, Like, it's basically still
the state's money buying its own land. But I think
right now the Chinese government it knows it's trouble, and
then the trouble is just so big and daunting that
(15:13):
it's just paralyzed. It just hopes for the best. I
think at this point.
Speaker 1 (15:18):
Surely it's always a pleasure. Thanks for making time to
chat with us. Bloomberg opinion columnist Truly Wren talking about
the situation with property developer China Wonka.
Speaker 2 (15:34):
We look at markets all throughout the program here on
Bloomberg Daybreak Asia. And joining us now for some closer
analysis is Dominic Schneider, head of Global Commodities and four
Exit UBS Global Wealth Management. Dominic, thanks very much for
coming in. So if we take the big broad macro view,
it's been a risk on environment here for most of
(15:54):
the early part of this year. I just over the
past month or so it's gotten a little bit more
sticky with you inflation readings in the United States, and
we've seen the S and P five hundred go from
a gain of ten percent to only up about six
percent year to date. And the commentary that we got
from j. Powell today was a little bit of a change.
He's really talking now about higher for longer, not being
(16:18):
convinced that inflation is coming down to the extent that
they would need it. And so one end result of
that is a strong dollar. Is the strong dollar as
likely as anything to disrupt the sort of positive feelings
that we've had for most of this year, and is
it about ready to get serious?
Speaker 6 (16:35):
Well, if you look at the dollar in general, I
would say we still have a little bit more to
go on the strength side. I mean we can still
price out all the cuts. There are still some cuts
in there, so I think from that angle, dollar strength
has a little bit room to runs. That means, for example,
your dollar goes to one point h five from a
temporarily below Do I think it needs completely to alter
the macro landscape? Probably not. Just pricing out in itself
(16:59):
would not derailed economy. Obviously, if we start to think
about hiking rates, that will be a complete different game changer.
But we're still the opinion that inflation dusty salerate, which
growth comes down and earnings are maybe outside some of
the tech names not as strong, So we don't need
to make that drastic change. But it's pours a little
bit cold water, as you said, over some of the
risk one story, and maybe that's not so bad off
(17:20):
the good rally a consolidation, that's good. Then we need
to see if growth is better outside the US. If
that comes through, the rally can continue.
Speaker 1 (17:28):
I'm wondering whether or not you feel the market is
a little complacent, not a lot, but a little complacent
on the level of geopolitical risk right now. I mean
you could make the case yes, obviously a lot of
the dollar strength is tied to this rate environment here
that we're dealing with in the US, but there may
have been some haven buying recently, particularly given this escalation
(17:49):
that we've seen over the last couple of days in
the Mid East. And then the second part of that
is whether geopolitical risk has the potential to push commodity
prices up just a little bit.
Speaker 6 (18:01):
Well, I must say, I mean, at the end of
the day, the Middle Eastern crisis hinges or for the
global market, it's all about what happened to oil, And
I think the old market so far thinks, okay, nobody's
really interested. Things are definitely escalating, but nobody wants any
disruptions on oil supply for maybe also presidential reason. You know,
when you go for an election, you don't want to
(18:23):
have necessarily a higher oil price. And everybody else also
here in the East. So I think everybody's mind is
keep oil flowing, and I think that keeps the uncertainty constraint,
at least for the broader market. We also could say
that in case of oil, there's probably already a five
dollars up to ten dollars risk premium there on the
supply side. But clearly if something would happen and we
(18:44):
get straight up for most something like blocked and or
at least we lose one or two million barrels suddenly,
I think then the prices will jump quite a fair bit.
And in that context, I think oil is actually a steal.
If you think about you get an insurance asset, normally
you pay for it, and here you get actually probably
paid with the forward curve being downward slopes.
Speaker 2 (19:04):
But one of the issues is the strong dollar. Obviously,
I mean oil priced in dollars, so if the dollar
is strong and it sort of mitigates perhaps the gain
in the oil price. And I'm just wondering whether or not,
you know, the lack of safe havens at the moment
could be you know, changing mix a little bit. I mean,
bonds are being sold off here and yields are running
(19:24):
to the upside, so it's not exactly that investors are
buying bonds as a safe haven. What is a safe
haven at the moment besides gold and the dollar.
Speaker 6 (19:35):
You rightfully said there is not really much. I think
still in that environment it would hold some commodities, to
be honest, because I think in the context of the
Middle Eastern crisis, holding oil makes a lot of sense.
But in terms of obviously that comes with a fair
bit of volatility close to thirty. There is not many
safe haven you might want to think about. More towards
(19:56):
Latin America. You're going to go for some of these
higher yielding currencies. They're not safe haven, but they are
closer to the US economy. They give you good yield.
I mean that's something to maybe hide or look for
a middle through pass, I would say. But beyond I
would say dollar goal not much. You can look at
(20:16):
the Swiss franc but story is a little bit broken
given what we have seen with the SMB and the
policy change here. But that could come back at some point.
Speaker 1 (20:24):
Talk about things that are broken in terms of haven's
the Japanese currency. I mean, we're flirting here with one
fifty five. We've got JP Morgan Private Banking saying along
with Bank of America both saying one fifty or one sixty.
I'm sorry, it could be the next milestone. What's your
outlook for the end, I.
Speaker 6 (20:41):
Will be thinking that basically in the short term dolly
into trade more towards the one hundred and fifty. Obviously
that was under the regime of thinking there's still going
to be three rate cuts. Now rates stay high, I
mean one hundred and fifty five, we're higher, clearly possible.
It's probably too early to position yourself in a long
ym position, given where yield differentials are and how focused
(21:03):
the market is at this point in time. So at
this point in time would say yen clearly not to touch. However,
I mean look at let's look at the longer term picture.
I mean it's it is cheap, the economy does well,
but we obviously really need to see the buch a
little bit moving the needle here.
Speaker 2 (21:19):
Well, your pretty equity is conversing. So if we had
more time, I'd ask you if the megacaps could be
a safeye it well.
Speaker 6 (21:25):
Save that for next time.
Speaker 2 (21:27):
Was a pretty strong balance sheets, Dominic. Thank you so much,
Dominic Schneider from UBS.
Speaker 1 (21:34):
This has been the Bloomberg Daybreak Asia podcast, bringing you
the stories making news and moving markets in the Asia Pacific.
Visit the Bloomberg Podcast channel on YouTube. To get more
episodes of this and other shows from Bloomberg, subscribe to
the podcast on Apple, Spotify, or anywhere else you listen,
and always on Bloomberg Radio, the Bloomberg Terminal, and the
(21:55):
Bloomberg Business app.
Bloomberg Audio Studios, podcasts, radio news. This is the Bloomberg
Daybreak Aisia podcast. I'm Doug Krisner. You can join Brian
Curtis and myself for the stories, making news and moving
markets in the APAC region. You can subscribe to the
show anywhere you get your podcast and always on Bloomberg Radio,
(00:23):
the Bloomberg Terminal, and the Bloomberg Business app.
Speaker 2 (00:26):
We wanted to take a closer look at the conflict
between Israel and Iran, and we're joined by Kirsten Fontenrose,
now president at Red six International. Well, it doesn't appear
at the moment, Kirsten, that Israel will respond in the
short term to the Iranian attacks this past weekend, Israel
has reopened schools and Iran has opened its airspace. But
(00:50):
we do have these other complications Jenny Yellen, for instance,
saying that the US will apply new sanctions or more
sanctions on Iran. What are some of those options that
the US holds at the moment on sanctions.
Speaker 3 (01:03):
The US already has a host of sanctions on Iran,
mostly based on counter terrorism laws in our domestic law books,
but law authorizes US to sanction Uran's energy sector, financial sector,
including its central bank, shipping, construction, mining, textiles, automotive manufacturing industries,
(01:24):
it's arms trade, as well as components of their government,
including the Supreme Leader and the Islamic Revolutionary Guard Corp
or the IRGC, plus any entities that conduct transactions with
these or otherwise support them.
Speaker 4 (01:38):
So it's a really broad writ.
Speaker 3 (01:40):
We expect that any new sanctions will be focused on
export of petroleum and petroleum products or import of components
for their drone or missile programs. A lot of those
components are commercial and off the shelf, and the Islamic
Revolutionary Guard Corps often sets up cover or front companies
that will import from UNWA actors who provide parts to
(02:02):
the commercial sector. So sometimes it's a whack a mole
game of the US contacting these companies and saying, we
know you didn't mean to do this, but you're going to.
Speaker 4 (02:10):
Have to stop doing it.
Speaker 3 (02:13):
One of the criticisms of the Biden administration has been
that the sanctions that have been in place have not
been enforced, so we'll probably see a lot more than
wave of enforcement as well. In fact, the Congress the
US House of Representatives passed four new bills yesterday, two
of which really are intended to kind of hold the
Biden administration to enforcement, and two others that focus on,
(02:34):
for instance, secondary sanctions and the humanitary exemptions piece in
the existing sanctions. I'm happy to go into a little
more on those sanctions if you like.
Speaker 1 (02:45):
I'd like to get your sense on to what extent
Iran is reliant on Russia for some of these weapons
that we're talking about.
Speaker 4 (02:55):
The trade is actually in the other directions, so Russia
tends to stick by Iran, and a lot of this
is because Russia is relying on Iran for much of
the weaponry it is using in its war on Ukraine.
Speaker 3 (03:06):
It has a couple of its own really capable drones,
but the drone it's been having the best luck with
is the shot HAD one thirty six, which is an
Iranian model, and Iran agreed to a technology transfer that
is allowing Russia to build these domestically. Now they expect
to have four factories up and coming years, and some
are already being produced. We don't know how much is disinformation,
how much is sort of a military deception campaign, or
(03:28):
how much is really being produced of those drones domestically yet,
but The reason this relationship is meaningful for Iran is
not only the income from those arms transfers, but also
because of Russia's veto in the UN Security Council that
has been used and will probably continue to be used
to protect Iran, to defeat attempts to mitigate its import
(03:49):
of a lot of these weapons components, to block arms
and bargoes, to hold it responsible for certain kinds of
support to proxy militias around the rest of the Middle East.
Russia has been a very use full aid to Iran
in the Security Council with that VITO, So a lot
of the technology is actually going the other way, but
the political support is.
Speaker 4 (04:10):
Coming this way.
Speaker 2 (04:11):
And the sanctions on Russia haven't led to China, for instance,
not buying oil from Russia or getting gas. So you
wonder if some new sanctions are applied by the United
States and even the EU, because the EU could could
well join in with some new sanctions. But if the
sanctions aren't enforced, and we're seeing that, you know in
(04:32):
day to day life, you know, you wonder whether or
not really a pledge to crack down more is more
important than new.
Speaker 3 (04:39):
Sanctions exactly, And that is part of what the House
of Representatives is thinking. So, for instance, we're seeing one
of these bills that was just passed is called the
Iran China Energy Sanctions Act of twenty twenty three. So
it's been in process, but there's been a sense of
urgency obviously this week. And it expands the secondary sanctions
regime evolving Iran to include all transactions between Chinese financial
(05:04):
institutions and the banks in Iran, which of course are
already sanctioned that handle any sort of petroleum product trade.
So you're seeing China wrapped in there, and you know
these additional secondary sanctions coming on. Congress is also saying, okay,
administration in Washington, we want you to prohibit the Treasury
from issuing any licenses to a US financial institution to
(05:26):
engage in trade with Iran other than humanitarian aid, and
we want you to oppose IMF assistance to Iran. And
in order to make that happen, we're going to make
it law. So they've passed the No US Financing for
Iran Act Act of twenty twenty three. Of course, these
are just coming out of the House. You know, they're
not complete yet. There's also the around sanctions accountability Act
(05:47):
of twenty twenty three. All these names sound the same,
but this one requires the president to issue regulations that
ensure those humanitarian exemptions to US sanctions don't actually go
toward facilitating terrorism internationally or trading.
Speaker 4 (06:00):
Weapons of mass destruction. Well, and there was a final one.
Speaker 1 (06:03):
I'm sorry to interrupt. I was just going to get
your take on what we know of what's happening at
the war cabinet in Israel and the extent to which
the conversation is going on between Washington and the war cabinet,
to the extent that the US has any influence over
what happens next.
Speaker 3 (06:20):
It's an ongoing conversation between Washington and this war cabinet.
And then Europe is weighing in. Arab governments are weighing in.
A lot of folks are out from outside, are trying
to encourage restraint, saying, you run a couple of risks here. One,
you start a retaliatory cycle. Two, the world is giving
you a little bit of goodwill because you shot down
(06:41):
with all of our help ninety nine percent of this
barrage of weaponry that came at you. And this is
reinstated belief in the fact that Israel has impenetrable air defenses.
You know, after October seventh, they lost a little bit
of that belief in their strength of defense because of
the intelligence failures on October seven. But now with the
defeat of this deluge in the sky, they have restored
(07:05):
some of that and it's probably going to be really
good for their defense industry, their domestic defense industry, and
it's good for their relationships in the region. People want
this kind of partner and it required this coalition of
Arab partners with Israel that sent COOM.
Speaker 4 (07:21):
The US Central Command has been building for years to
create this umbrella of Aaron missile defense. But all of
these partners are saying.
Speaker 3 (07:28):
Please don't start a cycle of escalation, and please don't
make it hard for us with our publics, because they
are not particularly fond of the idea that we are
defending quote unquote Israeli sovereignty right now. They are instead
messaging that this is truly an issue of their own
sovereignty and that no matter where a drone or missile
comes from, they will knock it out of their airspace.
(07:48):
They've all been Jordan, UAE, Saudi, even Egypt have been
really clear that This is not an issue of defending
one country over the other. This is an issue of
national sovereignty and the desire not to see these things
fall out of the sky onto their own citizens.
Speaker 2 (08:02):
Kirsen, are we learning that sanctions just don't really work
as well as perhaps administrations believe they would, because we
mentioned the Russian sanctions and now we have all these
sanctions already on Iran. And you know, by the way,
if the EU were to join in, would that make
a difference.
Speaker 3 (08:21):
It makes a difference on the messaging, and it makes
a difference whether we can get other parts of the
world to also join these sanctions, places where the US
doesn't have as much leverage. Perhaps we get countries in Africa,
Latin America, places used as transit places, used for cover companies.
Speaker 4 (08:36):
But it really all comes down to enforcement.
Speaker 3 (08:38):
And evasion, and those two things impact how successful any
sanction is going to be. So the Biden administration, while
in talks about a renewed nuclear agreement, let off the
pedal on the sanctions enforcement, hoping that this would be
a signal of goodwill to the Iranian regime and they
would then be willing to negotiate in greater faith that
(08:59):
didn't happen. And again, as I mentioned, you're now seeing
Congress kind of tie their hands on potentially tyler hands
through the house. We'll see the Senate says on enforcement.
And then Iran has been really active in trying to
devise ways of evading sanctions. Some of this is operating
outside the US and Western financial systems. So but their
(09:21):
clients for this kind of activity happen to include the
largest purchaser of energy in the world, which is China.
Speaker 2 (09:27):
Kirsten Fonton Rose, president at Red six International.
Speaker 1 (09:37):
We're joined now by Bloomberg opinion columnist Chuli Wren talking
about her column on China Von Kah and the company
denying that it's running into difficulty. Wonka is a China's
second largest property builder bry Sales, and I think Shuly
feels as this says a lot maybe everything about what's
(09:58):
happening right now in the China property market. Surely it's
always a pleasure expand on that. How is von Kau
kind of giving us a window into everything that's going
on with the property market in China.
Speaker 5 (10:11):
It can be surprising how fast China's a property developers
run out their cash one by the way, It's nothing
like a China Evergrand or Country Garden. It is one
of the best run and the well managed companies in China.
But what we are seeing is that the cash level
is drinkling really fast, even though it's achieving operating positive
(10:35):
operating cash flow. In other words, that the company's call
business can be still profitable and lucrative, but in the
end it's running into cash troubles.
Speaker 2 (10:45):
Well, yeah, it's cash is not sufficient to cover the
bonds maturing this year, so I mean it needs extra funding.
It needs that extra capital. I think it would be
difficult to sell shares right now or even dead. So
I suppose that means, you know, going to the banks,
and we saw yesterday they set aside seventeen to eighteen
billion dollars were of assets to service collateral. But the
(11:09):
question must be how stable are those assets given that
they are tied to property.
Speaker 5 (11:16):
Right, So that was a news report, and then the
company did not come from or deny it, which to
me is a reference to be honest, exactly like what
you said, Brian, A lot of They do have a
lot of investment assets. They own a lot of shopping
malls across China, but The question is how much are
these assets work? And that, by the way, are these
(11:38):
assets being pledged away already? I mean, what we are
seeing in China is that the remaining real estate developers
they're trying to puzzle out their assets and flow them
as some form of reds right, and then like a
stay owned enterprises can say, Okay, I don't want to
they are a real estate developer, but I can buy
a publicly traded ate. Question is how much are these
(12:03):
assets worth? And that's yes, that's a big question marketing
in China rants is.
Speaker 1 (12:08):
That the only solution that the regulators, the leadership in
China is able to come up with, I mean to
kind of go the route that you just described, carve
them up into reads and let kind of the investment
dollars from kind of the domestic pension industry to be
invested in these companies.
Speaker 5 (12:28):
Well, so far, the Chinese government wants to is still
talking about so called the market oriented solutions. Basically, they
don't want to do anything else, and they're hoping that
the financial markets will take up the reads just like
what you said, pension and insurance companies will do that.
But it's really hard to do because I mean, the
whole economy is in the deflation right, and which means
(12:50):
that its asset prices should also be in a downward
spiral trend, and we just don't know how to value
these opaque commercial assets.
Speaker 2 (13:00):
It could one of the options I didn't mention was
it could go to its largest shareholder, Shenjan Metro, But
it seems that that company is not that willing. What
are the difficulties in that relationship at the.
Speaker 5 (13:15):
Moment, Well, Shinjin Metro only owns twenty seven percent, so yes,
it is the largest shareholder, but it can say I'm
not the majority shareholder. And the one CU has been
listed since nineteen ninety one, so basically, all the mom
and pops and minority shareholders, we are actually majority LEA
shareholders and we are not going to take a responsibility.
(13:38):
How are one Could's financial triples?
Speaker 2 (13:40):
Ye?
Speaker 1 (13:41):
So how are the difficulties at one coh impacting entrepreneurship?
More broadly? You make that point, and I'm curious about that.
Speaker 4 (13:50):
I think One.
Speaker 5 (13:50):
Could is a very interesting case study because it's so
famous and it went public before Danshakin came to Shanjan.
For the Southern who are in nineteen ninety two when
the previous leader talked about the economic reforms and opening
up China. And one is also based in Shanshan, and
(14:10):
Chenchhan was the first city in mainland China that opened up.
It's a property market and allow people to own homes.
Right before that, we no Chinese own any homes. So
if one Curt fails, I think it really is a
best sentence unfortunately to Dan Shoppings edision.
Speaker 2 (14:30):
So it seems that the government is probably the final
straw here that it can't let evergrand and country garden
and one could go down because the municipalities and the
provinces have to have somebody to sell their land to. Right,
So is that the most likely outcome is a state
backed bail out?
Speaker 5 (14:52):
I think so. I mean one cur is really one
of the very few privately health developers left. I mean
everyone else is day old, right, Like, it's basically still
the state's money buying its own land. But I think
right now the Chinese government it knows it's trouble, and
then the trouble is just so big and daunting that
(15:13):
it's just paralyzed. It just hopes for the best. I
think at this point.
Speaker 1 (15:18):
Surely it's always a pleasure. Thanks for making time to
chat with us. Bloomberg opinion columnist Truly Wren talking about
the situation with property developer China Wonka.
Speaker 2 (15:34):
We look at markets all throughout the program here on
Bloomberg Daybreak Asia. And joining us now for some closer
analysis is Dominic Schneider, head of Global Commodities and four
Exit UBS Global Wealth Management. Dominic, thanks very much for
coming in. So if we take the big broad macro view,
it's been a risk on environment here for most of
(15:54):
the early part of this year. I just over the
past month or so it's gotten a little bit more
sticky with you inflation readings in the United States, and
we've seen the S and P five hundred go from
a gain of ten percent to only up about six
percent year to date. And the commentary that we got
from j. Powell today was a little bit of a change.
He's really talking now about higher for longer, not being
(16:18):
convinced that inflation is coming down to the extent that
they would need it. And so one end result of
that is a strong dollar. Is the strong dollar as
likely as anything to disrupt the sort of positive feelings
that we've had for most of this year, and is
it about ready to get serious?
Speaker 6 (16:35):
Well, if you look at the dollar in general, I
would say we still have a little bit more to
go on the strength side. I mean we can still
price out all the cuts. There are still some cuts
in there, so I think from that angle, dollar strength
has a little bit room to runs. That means, for example,
your dollar goes to one point h five from a
temporarily below Do I think it needs completely to alter
the macro landscape? Probably not. Just pricing out in itself
(16:59):
would not derailed economy. Obviously, if we start to think
about hiking rates, that will be a complete different game changer.
But we're still the opinion that inflation dusty salerate, which
growth comes down and earnings are maybe outside some of
the tech names not as strong, So we don't need
to make that drastic change. But it's pours a little
bit cold water, as you said, over some of the
risk one story, and maybe that's not so bad off
(17:20):
the good rally a consolidation, that's good. Then we need
to see if growth is better outside the US. If
that comes through, the rally can continue.
Speaker 1 (17:28):
I'm wondering whether or not you feel the market is
a little complacent, not a lot, but a little complacent
on the level of geopolitical risk right now. I mean
you could make the case yes, obviously a lot of
the dollar strength is tied to this rate environment here
that we're dealing with in the US, but there may
have been some haven buying recently, particularly given this escalation
(17:49):
that we've seen over the last couple of days in
the Mid East. And then the second part of that
is whether geopolitical risk has the potential to push commodity
prices up just a little bit.
Speaker 6 (18:01):
Well, I must say, I mean, at the end of
the day, the Middle Eastern crisis hinges or for the
global market, it's all about what happened to oil, And
I think the old market so far thinks, okay, nobody's
really interested. Things are definitely escalating, but nobody wants any
disruptions on oil supply for maybe also presidential reason. You know,
when you go for an election, you don't want to
(18:23):
have necessarily a higher oil price. And everybody else also
here in the East. So I think everybody's mind is
keep oil flowing, and I think that keeps the uncertainty constraint,
at least for the broader market. We also could say
that in case of oil, there's probably already a five
dollars up to ten dollars risk premium there on the
supply side. But clearly if something would happen and we
(18:44):
get straight up for most something like blocked and or
at least we lose one or two million barrels suddenly,
I think then the prices will jump quite a fair bit.
And in that context, I think oil is actually a steal.
If you think about you get an insurance asset, normally
you pay for it, and here you get actually probably
paid with the forward curve being downward slopes.
Speaker 2 (19:04):
But one of the issues is the strong dollar. Obviously,
I mean oil priced in dollars, so if the dollar
is strong and it sort of mitigates perhaps the gain
in the oil price. And I'm just wondering whether or not,
you know, the lack of safe havens at the moment
could be you know, changing mix a little bit. I mean,
bonds are being sold off here and yields are running
(19:24):
to the upside, so it's not exactly that investors are
buying bonds as a safe haven. What is a safe
haven at the moment besides gold and the dollar.
Speaker 6 (19:35):
You rightfully said there is not really much. I think
still in that environment it would hold some commodities, to
be honest, because I think in the context of the
Middle Eastern crisis, holding oil makes a lot of sense.
But in terms of obviously that comes with a fair
bit of volatility close to thirty. There is not many
safe haven you might want to think about. More towards
(19:56):
Latin America. You're going to go for some of these
higher yielding currencies. They're not safe haven, but they are
closer to the US economy. They give you good yield.
I mean that's something to maybe hide or look for
a middle through pass, I would say. But beyond I
would say dollar goal not much. You can look at
(20:16):
the Swiss franc but story is a little bit broken
given what we have seen with the SMB and the
policy change here. But that could come back at some point.
Speaker 1 (20:24):
Talk about things that are broken in terms of haven's
the Japanese currency. I mean, we're flirting here with one
fifty five. We've got JP Morgan Private Banking saying along
with Bank of America both saying one fifty or one sixty.
I'm sorry, it could be the next milestone. What's your
outlook for the end, I.
Speaker 6 (20:41):
Will be thinking that basically in the short term dolly
into trade more towards the one hundred and fifty. Obviously
that was under the regime of thinking there's still going
to be three rate cuts. Now rates stay high, I
mean one hundred and fifty five, we're higher, clearly possible.
It's probably too early to position yourself in a long
ym position, given where yield differentials are and how focused
(21:03):
the market is at this point in time. So at
this point in time would say yen clearly not to touch. However,
I mean look at let's look at the longer term picture.
I mean it's it is cheap, the economy does well,
but we obviously really need to see the buch a
little bit moving the needle here.
Speaker 2 (21:19):
Well, your pretty equity is conversing. So if we had
more time, I'd ask you if the megacaps could be
a safeye it well.
Speaker 6 (21:25):
Save that for next time.
Speaker 2 (21:27):
Was a pretty strong balance sheets, Dominic. Thank you so much,
Dominic Schneider from UBS.
Speaker 1 (21:34):
This has been the Bloomberg Daybreak Asia podcast, bringing you
the stories making news and moving markets in the Asia Pacific.
Visit the Bloomberg Podcast channel on YouTube. To get more
episodes of this and other shows from Bloomberg, subscribe to
the podcast on Apple, Spotify, or anywhere else you listen,
and always on Bloomberg Radio, the Bloomberg Terminal, and the
(21:55):
Bloomberg Business app.
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