Stocks Dip Lower in Runup to US Jobs Data

Stocks drifted lower and the dollar hovered near two-month lows as investors stayed cautious ahead of key US economic data that may signal where interest rates are headed. The yen strengthened. For more on what is ahead this week, we heard from Isaac Poole, Chief Investment Officer at  Ascalon Capital.

Plus - Weakness in information tech shares led the equity market lower. Shares in Broadcom fell more than 5.5%, after Friday's 11% decline. It's all in response to a disappointing outlook issued last week, especially on gross margins. Broadcom has fallen by nearly 18% over the last three trading sessions. We spoke to Greg Halter, Director of Research at the Carnegie Investment Counsel.

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Episode Transcript

Speaker 1 (00:00):
Bloomberg Audio Studios, Podcasts, radio News.

Speaker 2 (00:11):
Welcome to the Daybreak Asia podcast. I'm deg Prisner in Japan.
Equities are trading lower as the market looks ahead to
Friday's rate decision from the BOJ. Governor Uwaita is widely
expected to raise the policy rate to the highest level
in three decades. That would be a twenty five basis
point hike, which would bring the policy rate to seventy

(00:32):
five basis points in the State's equities edged lower and
the moves were somewhat subdued in front of a couple
of key data points. Tuesday, we'll get the employment reports
plural for October and November. We'll also get data on
retail sales. That's where we start the conversation with Isaac Poole.
He is the CIO at ascalon Capital. Isaac spoke with

(00:55):
Bloomberg TV host Sherry On and April Hong.

Speaker 3 (00:59):
Talk to us about what you are positioning for this
week and the extent in which you are putting wheat.

Speaker 4 (01:06):
On the data.

Speaker 5 (01:09):
I think that the data is still very important, albeit
a bit sale in some senses, but we will start
to get an idea of just how quickly the US labor.

Speaker 4 (01:20):
Market is slowing. I think the trend there is very clear.

Speaker 5 (01:24):
It's showing up in the private sector data, and to
the extent that it surprises to the downside, I think
there's a real risk there that equities which have really
been banking on a big reacceleration in earnings and growth
could just be wrong sided and wrong footed by the
data this week.

Speaker 4 (01:46):
Yeah.

Speaker 3 (01:46):
I remember when we spoke to you. I think this
was some time in September. You flagged you know, you
underwear equities. It was about the valuation risk. We've kind
of seen how it's panned out. As we approach the
end of the year. Is that assessment to you as
an investor, Is this time to pick up a bit

(02:06):
more tactically or are you staying away?

Speaker 5 (02:11):
I really think it's not time to chase the dips
or by the dips at the moment. I would approach
the end of the year and early next year with
an abundance of caution because the valuations are so stretched
relative to your history. There really will need to be
not just good earnings growth next year, but reacceleration in

(02:32):
earnings growth to justify the valuations that we're seeing at
the moment, and as we've come through, particularly the second
half of this year and into twenty twenty six, there
are just no clear signs that we're going to see
that reacceleration, whether it's in economic growth or in earnings growth.
So as we're looking at equities, we look across the

(02:54):
US but also other major developed markets and think that
this is a time to be a little underweight equity risk,
either in absolute terms or by taking lower beta exposures,
just to try and provide a little bit of resilience
given the eyewatering valuations that we see at the moment.

Speaker 3 (03:13):
Which are the other DM equity markets that you're underweight.

Speaker 5 (03:17):
A bit on, Yeah, we're a little underweight the US, sorry, Europe,
and we're underweight Australia. We've been quite diversified across our
global developed market holdings and been very careful about really
targeting quality and value within the equity sleeves.

Speaker 4 (03:38):
But overall, as we've seen this year, that.

Speaker 5 (03:41):
Diversification has really been a benefit to portfolios. But we
still think that the valuations are just not compelling enough
and the outlook is just not solid enough to move
back towards the neutral stance just yet.

Speaker 3 (03:58):
What is the strategy for you in fixed income.

Speaker 5 (04:03):
I think fixed income has been so important this year
and it's shaping up to be even more important next year.
Is the FED looks somewhat less certain on its policy
outlook in Australia, the IRBA looks a little less certain,
same with the ECB.

Speaker 4 (04:19):
We've really preferred to.

Speaker 5 (04:21):
Move up quality in fixed income, so that means selecting
investment grade credit and specifically short spread duration over high yield.

Speaker 4 (04:30):
There's been very good absolute yields.

Speaker 5 (04:32):
On offer there and a little bit more downside protection
compared to high yield. And then in the Govey's space,
we've really wanted to be short of duration. There's still
a lot of risk as you move out the curve
from sticky inflation, from the less certain pathway from the FED,
from fiscal uncertainty in the US. All of this suggests

(04:56):
that the curve could bear steepen, and we really want
to a little bit short on the duration side there.

Speaker 3 (05:04):
Isaac, I want to ask you about New Zealand as well.
Behold that tour, because we have some Treasury Department economic
projections from New Zealand and it's telling us that it
sees slower economic growth this year and then a rebound
following on from that, and the government also expects to

(05:25):
see a later return to a budget surplus. So it's
this idea that maybe the long end could continue coming
under pressure.

Speaker 4 (05:33):
Globally as well.

Speaker 3 (05:34):
We are seeing the Keiwi against the green bag maybe
firming up a little Isaac. I wonder if you could,
you know, react, how are you expecting perhaps global debt
as well as we see a sort of hawkish turn
among some of these developed market central banks.

Speaker 5 (05:55):
This is a challenge because inflation really did not get
under control globally, whether you're talking about Oceania with Australia
and New Zealand or the US, and that's wrong footed
central banks a little bit at the moment.

Speaker 4 (06:10):
They've wanted to cut rates.

Speaker 5 (06:12):
They want to cut rates to protect the economy, but
that stick inflation is.

Speaker 4 (06:16):
Making it challenging.

Speaker 5 (06:16):
And then you throw into the cauldron there the fact
that governments continue to spend. There's not a real clear
signal anywhere I think in the developed markets that governments
want to get their debt levels under control or their
deficits under control, and that does just continue to put
that upside pressure on global longer dated yields, and we've

(06:37):
seen that in the volatility that we've had this year.
We've seen that in the selloffs we've seen over the
last couple of months, and I think that's going to
be something that will persist through twenty twenty six and
make that fixed income selection within portfolios really critical in
a way that it probably hasn't been over the last
twelve months.

Speaker 3 (06:59):
Isaac, what about them was in the dollar and goal
this year? Do you also see a similar seam persisting.

Speaker 5 (07:07):
I think that gold is really a risky position at
the moment. We've seen non traditional buyers really come into
the gold market, and by that I mean retail buyers.
Last year, of the last eighty months, as gold pushed higher,
there was a lot of central bank demand, there was
a lot of traditional demand.

Speaker 4 (07:28):
In the consumer sector.

Speaker 5 (07:30):
But at these prices that's starting to dissipate, and the
people who are coming in to buy, the ETFs and
the mums and dads in the retail market.

Speaker 4 (07:39):
And we know when we look back.

Speaker 5 (07:42):
Over the last twenty or so years, gold has a
habit of turning lower, and when it turns lower, it
does so quickly, and it does deeply forty percent falls
are not at all uncommon, and I think that right
now at these levels, you want to be extremely cautious
with gold.

Speaker 4 (08:01):
There's an analog there with the US dollar.

Speaker 5 (08:03):
All the negative sentiment around the US dollar at the
start of this year is given way to a pretty
tight range for the USC and I suspect as the
FED becomes a little less certain there is real scope
for the US dollar to strengthen up a little bit,
not just at the back end of this year, but
probably through the first half of next year.

Speaker 2 (08:23):
That was Isaac pool Cio at ascalon Capital, speaking with
Bloomberg TV host April Hong and Sherry on Here on
the Daybreak Asia podcast. Welcome back to the Daybreak Asia Podcast.
I'm Derk Krisner. In the US session, we had weakness

(08:44):
in information tech shares that led much of the equity
market lower. Broadcom was down by more than five and
a half percent. That on top of Friday's eleven percent decline. Now,
all of that was in response to a disappointing outlook
issued last week, especially when a to gross margins. Broadcom
shares have fallen nearly eighteen percent over the last three

(09:06):
trading days for a closer look at market action. I'm
joined by Greg Halter. He is director of Research at
the Carnegie Investment Council. Greg is on the line from
just outside Cleveland, Ohio. Greg, thanks for being here. Big
tech has obviously been a major theme for so much
of the year, and we've seen some de risking from

(09:26):
the group lately. I'm wondering whether the overall theme, especially
where AI is concerned, will remain intact in twenty twenty six.
What do you think There's.

Speaker 6 (09:37):
Been certainly some skittishness on the part of investors relative
to the large companies, you know, Oracle, If you look
at their CDs, it's they're hitting higher levels. You know,
these companies have produced so much cash and free cash
flow that there's some concern that that wave maybe abating

(10:02):
a little bit where they have to take on debt.
It's really a company specific situation. I believe some companies
are probably more exposed than others. Very you're right, very
interesting market. But I'd also say that, you know, none

(10:23):
of this stuff happens if we don't have the power,
if we don't have the electricity, So that's a huge
crux in the hole situation right now.

Speaker 2 (10:34):
You mentioned the story on Oracle. Last week's projection on
cloud revenue missed analyst forecast. The company also boosted its
annual cap spending target by fifteen billion dollars, and on
top of that, Oracle more than doubled its future lease commitments.
So in response, we have seen, and it shouldn't come

(10:54):
as a big surprise, Oracle's credit risk reaching a sixteen
year high last week. Now, I know the term price
to perfection gets thrown around a lot. How does that
apply in your mind.

Speaker 6 (11:08):
Well, for the market as a whole, I certainly don't
think so. I mean, you've got various sectors of the
market that have not done much at all, like energy
and healthcare. You have seen utilities perk up, certainly for
some of these companies. You know, you need to see
those numbers come through for the NVIDIAs of the world

(11:29):
and Amazons and Microsoft. So from that perspective, yes, But
I also wouldn't say that the valuations are all that crazy.
Certainly are not relative to what we saw in the
dot com era. So it's really a strange, strange market.

Speaker 2 (11:46):
I think it's interesting to look at the ways the
Trump administration has been impacting markets. Put a tariff issue aside.
For the moment, I'm thinking of the move to eliminate
tax credits on electric vehicles. It was just to we
heard from Ford Motor and the company is undergoing a
major overhaul now to its EV strategy. So away from

(12:07):
the auto industry, I'm interested in the other areas that
you believe the administration is having an outsized effect.

Speaker 6 (12:16):
Well, whenever you have a new administration, there are changes,
no doubt. This one seems to be, in particular, more
of a wrecking ball of sorts. You know, just look
what's happened with the agricultural side of things, and you know,
soybean purchases from the Chinese and so forth. You know,
what Ford is saying is that they're going to convert

(12:38):
this so they can, i think use some of the
fuel cells for battery storage or power storage. You know,
that's very interesting. That kind of doesn't have anything to
do with car manufacturing and Tesla. You know, if you
look behind their numbers and their segments, that's probably for Tesla,

(12:58):
one of their fastest growth gowing business is the whole
battery storage side of things. So you know, behind the
scenes in these companies, if you dig in they're really
not what you think they are, and Ford seems to
be moving that way as well. And a lot of
this is being driven by the administration. I mean, even
if we get a fraction of those dollars that come

(13:19):
here to build plants, that's huge. That's we haven't seen
that in a long time.

Speaker 2 (13:25):
We know that the administration has expressed some openness to
the fintech industry as well as crypto. Today we heard
from PayPal the company has applied to become a bank
in the US. So talk to me about the changes
that we're likely to see unfold next year when it
comes to banking and financial services.

Speaker 6 (13:45):
Yeah, it's a great question, and we do continue to
like the banks, especially especially the larger banks. But you know,
if you start looking at the mid and small they're
trading it, many of them at book or below book value.
So good opportunities there, we think. But the change in
regulations that will probably probably be coming and enacted here

(14:06):
in the new year will be helpful to the banks
in terms of reducing their costs. The uptake of stable
coins I think maybe really take people by surprise at
how fast this may occur. You've got these cross river
Bank and some of these others that were granted charters

(14:27):
as well last Friday. So that whole space is changing,
and maybe it's to the detriment of the of the rails.
And when I say rails, I mean things like Visa
a MasterCard where all these payments run. Maybe that doesn't
or is not as strong or solid of a business

(14:50):
going forward, depending on how all this information and business
flow with stable coins starts to play out.

Speaker 2 (14:58):
So how do you see Fed policy is a part
of that story. We know that there is a move
now to lower interest rates. Maybe we only get one
more rate cut in the new year. Markets right now
are expecting I think two quarter point rate cuts. Talk
to me a little bit about how you see the
FED influencing the market in twenty twenty six.

Speaker 6 (15:20):
It's probably more theater than anything. I mean, we're talking
twenty five basis points or fifty basis points. Does that
really make or break that many businesses? Sure, lower rates help,
but if you're on the cusp of having to need
twenty five basis points, you know a lot of other

(15:43):
things have to go well also, So again there's a
lot of theater on who's going to be the chairman
who are going who will the members be in the
bottom line analysis? You know, again, if you're looking at
twenty five or fifty basis points, that's that just doesn't

(16:03):
seem to be a whole lot given where we are.
And again maybe maybe more political theater than anything.

Speaker 2 (16:11):
We've already seen some rotation away from megacap tech names
and into stocks with valuations that maybe aren't as richly priced.
How much more of that trend do you expect.

Speaker 6 (16:24):
Well from from the standpoint of some of the companies
that have had historically high pes. And these aren't the
you know, the mega camp names, but companies like Sintas
and Costco, Waste Management, Republic Services, these companies have historically
had very high pees, premium pees, and we've actually seen

(16:46):
those share prices, you know, they haven't really plummeted, but
they haven't really gone anywhere in the last year. And
I think some of those dollars have been recite into
utilities which have actually done fairly well. Healthcare is starting
to receive a bid. Even energy, if you can believe that,

(17:08):
with oil at fifty eight or whatever it is these days,
starting to see some interest. So there does appear to
be this rotation among sectors, what.

Speaker 2 (17:20):
About rotating money out of the United States.

Speaker 6 (17:24):
We at Carnegie are not big fans of international investing.
We probably have not had much in the way of
international exposure overall for ten plus years. Frankly, it's until
this year it's been a good move. You know. We
believe it's hard enough to keep track of companies and

(17:44):
their businesses and their accounting in the US. Let alone
go outside the US and try and make sure that
the accounting and other rules and regulations are up to snuff.
You know, our system here in the US has its faults,
but we know what they are.

Speaker 4 (18:01):
At least.

Speaker 2 (18:02):
Are you fully invested right now? Maybe you're holding onto
a bit of dry powder in anticipation of some sort
of pullback.

Speaker 6 (18:10):
How to blanket answer that question because we have about
twenty separate portfolio managers here. But if I had to
put a blanket statement on that, I would say we
are probably pretty well invested, mainly inequities, certainly some individual bonds,
and the cash holdings have been really kept to a

(18:31):
minimum for a couple of years.

Speaker 2 (18:33):
Now, Okay, Greg, we'll leave it there, Thank you so much.
Greg Halter is the director of Research at the Carnegie
Investment Council, joining us from just outside Cleveland, Ohio here
on the Daybreak Asia Podcast. Thanks for listening to today's
episode of the Bloomberg Daybreak Asia Edition podcast. Each weekday,
we look at the story shaping markets, finance, and geopolitics

(18:57):
in the Asia Pacific. You can find us on apple Spot,
the Bloomberg Podcast YouTube channel, or anywhere else you listen.
Join us again tomorrow for insight on the market moves
from Hong Kong to Singapore and Australia. I'm Doug Prisoner
and this is Bloomberg