June 17, 2025 • 26 mins
Oil climbed and most stocks in Asia followed losses on Wall Street as concerns mounted that an escalation of tensions in the Middle East will trigger a more direct US involvement. West Texas Intermediate crude rose as much as 1.1% in early trading Wednesday after settling at the highest in almost five months the previous day. US equity futures slipped, as did Australia’s benchmark index and Hong Kong futures.
Staying with geopolitics, The White House's review of the Aukus pact — a security arrangement between the US, UK and Australia — is rattling one of Washington’s closest alliances, and playing right into China’s hands. It sends yet another signal that America First might just mean everyone else alone. First announced by former President Joe Biden in 2021, the multibillion-dollar deal commits Washington and London to help Canberra develop a fleet of nuclear-powered submarines over a 30-year period. It was designed to help counter Beijing’s growing influence in the Indo-Pacific. For more, we turn to Bloomberg Opinion columnist Karishma Vaswani.
Plus - Federal Reserve officials are widely expected to leave interest rates unchanged for a fourth straight meeting on Wednesday, reiterating they want more clarity on the economic impact of a wide array of government policy changes before adjusting borrowing costs. Policymakers have warned President Donald Trump’s tariffs could boost inflation and unemployment, but so far, steady hiring and cooling inflation have allowed Fed officials to keep rates unchanged this year. We speak to Bill Campbell, Global Bond Portfolio Manager at DoubleLine.
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Speaker 1 (00:02):
Bloomberg Audio Studios, Podcasts, radio News.
Speaker 2 (00:11):
Welcome to the Bloomberg Daybreak Asia podcast. I'm Doug Krisner.
An escalation of tensions in the Midis triggered more anxiety
and markets. In the last session, Oil prices jumped to
a five month high in New York trading on speculation
the US may join Israel's attack on Iran. WTI settled
just under seventy five dollars after rising by more than
(00:32):
four percent.
Speaker 3 (00:33):
Earlier in the day.
Speaker 2 (00:34):
President Trump met with his national security team, and before
the meeting, Trump posted a demand for Iran's unconditional surrender.
On top of that, the President warned of a possible
strike against Iran's leader, Ayatola Ali Kameni. We heard from
Australia's former ambassador to Israel, Dave Sharma. He said, it's
in Australia's interest to make sure that any tensions arising
(00:57):
from this conflict do not manifest themselves in Australia.
Speaker 4 (01:02):
We should be looking to support diplomatic efforts, but bearing
in mind, what is it is the outcome that we
see and we want a Middle East that is at
peace with itself, that can grow and prosper and the
truth is that Iran has been a massively destabilizing force
in the Middle East now for decades, not only through
its pursuit of nuclear weapons, not only through its imperialistic
(01:22):
designs on its neighbors, but through its support to armed
terrorist groups such as Hasbola and Lebanon. But who tis
in Yemen. It's propping up of the Asad regime in
Syria for many years, it's fermenting of sheer militias in Iraq.
What we would like to see is a situation where
that sort of destabilization does no longer occur.
Speaker 3 (01:42):
Now.
Speaker 4 (01:42):
Whether Iran is prepared to countenance that or not, or
at least whether this particular leadership in Iran is prepared
to countenance that or not, that is a question for them.
Speaker 2 (01:51):
That's Dave Sharma. He is Australia's former ambassador to Israel.
By the way, the New York Times is reporting Iran
has prepared missiles and other military erry equipment four strikes
on US basis in the Middle East should the US
join Israel's war against Iran. So let's stay with geopolitics
for the moment. The Auchus Pact is a security arrangement
(02:13):
between the US, the UK and Australia. It was first
announced in twenty twenty one by then President Joe Biden.
But now the Trump administration is reviewing this agreement and
this is rattling. One of Washington's closest alliances. Joining me
now is Bloomberg opinion columnist Korishma Vaswani. She has been
writing about the review and its ramifications. Korrishma joins me
(02:36):
now from Singapore. It's always a pleasure to chat with you, Korshma.
Can we begin by having you remind me the structure
of the Auchus Pact.
Speaker 1 (02:46):
Well, at the heart of this arrangement was an agreement
between the US, the UK and Australia that would, again,
as you pointed out, signed by President Biden in twenty
twenty one, that would help Australia develop a fleet of
nuclear powered submarines over a thirty year period, and it
would involve both the US and the UK. America would
(03:10):
provide superior technology, the UK would help Australia build these
nuclear submarines. But ostensibly it was also a way to
counter China's growing influence in the Indo Pacific, and at
the time when it was announced, China was very upset.
It saw it as another example of the American supremacy,
the desire to maintain that in the Indo Pacific, and
(03:33):
as an attempt by the United States to contain China's
influence and military and naval power, which has been, as
we've talked about on your program before, growing rapidly over
the last few years. But now given that the White
House has come out and said that they're putting this
agreement under review, they're going to look at whether OCUS
(03:57):
is aligned with the President's America First Agenda. I'm quoting
from the Defense Department there, And you know that's really
sort of making a lot of allies and partners in
the Indo Pacific nervous, not least the Australians themselves, who
are really counting on this commitment from the United States.
Speaker 2 (04:18):
So I know that AUCAS involves, as I said earlier,
the UK, Australia, and the US, but when we think
of other allies in the region, I'm thinking of Japan
and South Korea, this probably would be a very concerning
development to those countries as well.
Speaker 1 (04:34):
Yeah, and I think it's even wider than that, because
it speaks to the commitment of the United States to
the region. And it's really confusing, right, Doug, because you know,
just a few weeks ago, at the Shangrila Dialogue, which
is this regional security summit held in Singapore, you had
the US Secretary of Defense Pete Hetz talking about the
(04:54):
US commitment to the Indo Pacific. He said that America
is here to stay. Chinese didn't show up this time
the way they have in the past, So that was
a really easy win for the Trump administration to point
out that Washington is really committed to this region. But
it comes with a sort of transactional aspect because he
(05:14):
also talked about the need for allies Asian partners to
boost defense spending. Very much what you hear from, you know,
the Trump administration when it talks to Europe as well,
that it's like, basically, everybody needs to pay more and
this can't be the United States responsibility. And that's fine,
(05:35):
there are reasons behind that. That's perfectly reasonable, but it
does feel sometimes that it's a bit of a carrot
and stick relationship. You know, you have to pay more
or we're going to pull out of OCHUS for instance,
which appears to be the undercurrent behind the rhetoric of
the Defense Department when it comes to this particular deal,
(05:56):
and I think what that does is it just you know,
it doesn't build goodwill, It doesn't create the kind of
partnership that you need with one of your closest allies
in this part of the world.
Speaker 2 (06:05):
So, Karishma, we have seen among NATO countries a definite
willingness to spend more of their GDP on military defense.
I'm thinking of Germany in particular. Obviously this is tied
to war in Ukraine. Can you give me a sense
of the willingness of the countries in the APAC has
spent more if we're using aucas as an example of
some type of cooperation with the United States that would
(06:28):
ultimately help these countries defend against some perceived threat that
China represents.
Speaker 1 (06:34):
Yeah, I mean, I think that's a really good point.
And we've seen the commitments coming through loud and clear.
You know, everybody from Japan to Taiwan to Australia itself,
they've been talking about arming up. And you're seeing a
trend across Asia for defense budgets. They've been on the rise.
Everybody's spending more on defense, and I think the statistic
for Australia. Currently CANBRA has military spending at about two
(07:01):
point four percent or it's on track rather to achieve
that by the mid twenty thirties. But the United States
wants Australia to up that to three and a half
percent of GDP. So, you know, it's the gap between
what the US wants and what is currently on offer,
and each country has its own sort of particular and
(07:21):
unique circumstances to be able to try and achieve that.
But on the whole, across the board, the Trump administration
I think has been quite successful in convincing Asian countries
that they need to spend more on defense.
Speaker 2 (07:35):
So how do you think this is being viewed in Beijing?
Speaker 1 (07:40):
Oh? I think that this makes China very happy because
for the you know, on the one hand, there are
now real concerns over whether ORCUS will go ahead in
its original form. My views that it will. I think
that the United States would, even given the Trump administration's
transactional nature. I do not think that the White House
(08:02):
would allow this security agreement to fall by the wayside.
It would be problematic and possibly embarrassing. But I think
that there will be compromises and concessions made on the
part of the Australians who will feel compelled to do
some of the things that the United States may be
asking for behind closed doors. And what that does is
(08:23):
play into Beijing's narrative that America first means other countries alone.
And you know, China has consistently positioned itself as the global, sensible,
rational leader in the Indo Pacific given what appears to
be sort of an erratic, you know, behavior, the erratic
(08:44):
nature of how Donald Trump does business on the global stage.
And I think that these kinds of agreements and the
reviews of these agreements just add credits to that narrative.
And even if they're not saying it publicly, because you know,
the Australians have been very quick to sort of defend
the review and dismiss it as just business as usual.
(09:07):
I've spoken to diplomats who've said to me, well, it's
not a great look, and it does mean that countries
like Australia are going to have to think and are
already thinking about what this means in terms of future alliances.
So you're going to start to see you know, Japan, Australia,
South Korea coming together, maybe India as well, to sort
of find a way through working without the superpowers. They
(09:31):
can't do it completely, but I think you're going to
see a lot of middle and smaller countries banding together
as it as these larger nations sort of you know,
have this each country for themselves approach to global politics.
Speaker 2 (09:45):
So imagine for a moment that the US does play
a diminished role in August. Can you imagine a world
where the Europeans, let's say, step in to fill some
of that void.
Speaker 1 (09:57):
Yeah, I can, and I think that been talked about already.
You know, the Europeans have been in the past, certainly
recently talking to the Australians about what kind of military
engagement or any kind of you know, partnership that they
could work on. It would be challenging given the number
of countries in Europe, but not impossible. And again, I
(10:19):
think these are the kinds of partnerships that we will
see being formed going forward, and I think they are necessary.
In fact, I think they are essential because countries cannot
navigate this next period of what appears to be this
sort of you know, I hate using this word, but
multipolar system. That's the nature of politics these days. And
(10:42):
I think they're going to have to band together in
that way, no doubt.
Speaker 2 (10:45):
About that, Karishma. It's always a pleasure. Thank you so much,
Karishma of Vaswani Bloomberg Opinion columnists joining from Singapore here
on the Daybreak Asia podcast. Welcome back to the Daybreak
Asia Podcast. I'm Doug Chrisner. So, the Fed's two day
(11:05):
meeting will wrap on Wednesday afternoon, and the Central Bank
is expected to hold rate steady this month and in
July as well. And at the same time on Wednesday,
the Fed may telegraph its intentions through its revised economic
and rates forecast. Now, markets right now are continuing to
bet on the likelihood of two quarter point rate cuts
(11:27):
this year, the first move perhaps fully priced in for
the October meeting. Today we had yields down right across
the treasury curve. And to help us take a look
at what's happening in the macro and especially in the
fixed income space, I'm joined by Bill Campbell. He is
Global bond portfolio manager at Double Line. Bill is on
the line from Santa Monica, California. Bill, thank you for
(11:49):
making time to chat with me. Talk to me a
little bit about the moving parts that you see in
the macro right now and how they fit with the
inflation story, particularly as it relates to this spike that
we have seen over the last couple of days in
crude oil.
Speaker 5 (12:04):
Doug, thanks for having me back, and you know, what
a time to come back and discuss macro. There are
countervailing forces happening, you know, across the macro landscape at
the moment, and you see them playing out in the
interest rate market when we look at long term rates.
You were just mentioning the rally that we've seen today,
(12:27):
but if you look back, you know, just for the
past month, we've seen rates rising, you know, moving ever higher.
It's our view here at double Line that you know,
the that medium term pressure or the likely trajectory for rates,
especially in the long end of the curve over the
next quarter, is higher. But near term we're seeing now
(12:50):
treasuries exhibit a little bit of that flight to quality
or flight to safety property that they'd had in the
past due to the increased geo political concerns around Israel's
current operation in Iran and the potential for the US
to potentially strike the four TOOH enrichment facility in Iran.
(13:12):
Now that being said, the countervailing force to that rally
that we saw is exactly what you alluded to, is
higher oil prices. Over the past quarter we'd actually seen
oil prices falling to a local low, and just over
the past couple of weeks, with these rising tensions in
(13:33):
the Middle East, oil prices have again spiked from the
low sixties up to the mid seventies. And as you know,
oil prices have wide have kind of a wide reach
in the way that they impact the economy and prices
in general. And the concern here is that over the
(13:55):
next couple of months, higher oil prices could lead to
higher gas prices, higher shipping prices, and that could put
upward pressure on inflation, which then would counteract some of
this flight to safety that we've seen. So the balancing
act that we are really watching play out in the
long end of the US treasury curve is this you know,
(14:18):
back and forth of will increase deficits, the potential for
higher inflation and h you know, the the pulling back
of purchases by global central banks of treasuries pushing rates
higher be offset by the potential you know, flight to
quality that we had seen in the past.
Speaker 3 (14:41):
Uh, there's one caveat to all of this.
Speaker 5 (14:44):
When the tariffs were initially announced by the Trump administration, Uh,
something strange happened in the long end of the interest
rate curve. We actually saw yields rise, and that was
counterintuitive to the flight to safety trade that we have
gotten used to over the past three decades. And you know,
the return on the geopolitical concerns is another nuance that
(15:06):
we need to separate as fixed income investors of will
the market view, you know, an upcoming hiccup to growth
as more of a US specific growth shock with a
US led slowdown or a global growth shock with a
global growth slowdown potentially driven by the geopolitical concerns, And
(15:28):
the answer to that question will answer in the near
term which way interest rates may trend. But on the
long term we think that, you know, over the next
several quarters, you know, to the next year, the pressure
still should be higher, you know, on interest rates.
Speaker 2 (15:44):
So we had the meeting yesterday from the Bank of
Japan and not surprisingly, the BOJ held its policy rate
steady at fifty basis points. The BOJ also announced a
plan to begin to slow the pace of its bond
market buying, the JGB purchases that the BOJ has been conducting.
What is your understanding of how that's going to impact
(16:07):
the global bond market story.
Speaker 5 (16:09):
Yeah, So the reduction of you know, their quantitative you know,
their their tapering program is not actually going to you know,
be implemented until April or the second quarter of twenty
twenty six. The reason that they did that, though, is
we had seen you know, a tremendous spike across the
(16:34):
Japanese government bond curve, Japanese government yields, you know, rising
ever since the Bank of Japan decided to stop their
yield curve control policy about a year and a half ago,
and you know, that's caused a lot of concern about
the pass through you know, from higher yields to the
(16:54):
Japanese economy. And you know, obviously this is one step
in the direction of trying to curb the pace of
the rise of Japanese interest rates.
Speaker 3 (17:06):
But the rise of Japanese interest rates is.
Speaker 5 (17:11):
Happening alongside the rise in the US interest rates, the
rise in long term United Kingdom interest rates. And I
think that this is now a global issue that all
central banks and all treasuries and ministries of finance are
going to have to think about and deal with going
forward that long term interest rates continue to rise, and
(17:36):
I think are rising on a secular basis. And when
we look at the outlook for the fiscal trajectories not
only in the United States, but in the United Kingdom
and in Japan and to a certain extent in the
European Union. When you look at countries such as France,
they have a very difficult trajectory, very difficult outlook that
is likely to put continued pressure not only on US
(17:58):
and Japanese interest rates, but I think long term interest
rates across the global government bond market. And that's why
at double Line, you know, we're continuing ourselves and to
you know, talk to our investors about favoring more of
the belly to the front end of the interest rate curves,
because we still believe that interest rates between the two
(18:18):
year and let's say the seven year or the two
year and the ten year maturities, you know, should exhibit
that flight to safety quality and you can pick up
you know, high quality gield. It's once you go to
those longer tenors past ten years, that you're really starting
to deal with these long term forces that maybe you know,
(18:39):
signifying a structural change to what we've seen over the
past several decades.
Speaker 2 (18:43):
You know, it was only a couple of weeks ago
when global bond markets were unnerved by the issues around
fiscal deficits, not just here in the US, but jurisdictions
like Japan as well. And I'm curious, has the concern
over fiscal deficits really faded into the background where the
bond market is concerned.
Speaker 3 (19:02):
The fiscal policy.
Speaker 5 (19:03):
I think it first of all, I think when we
look at markets, unfortunately, it seems that you know, markets
have a difficult time trying to hold on to multiple
themes at once, and you know, we focus on different themes,
you know, as we move through time. And as an
example of this, uh, you know, first, you know, around
(19:24):
April Round Liberation Day, the main theme that we focused
on was tariffs and what new US foreign policy would
do to the bond markets, putting upward pressure on interest rates.
Then we moved over, you know, to focusing on fiscal
which has been the past month or so, uh, you know,
focus for long term bond yields. Just recently, the new
(19:46):
geopolitical concerns that popped out of the Middle East have
taken the front and center focus, and I think that
is really what we're trading now. But we need to
break out as investors what is short term cyclical move
which maybe move over the course of a couple of
weeks to a couple of months, versus the long term
(20:07):
secular move, which is the general trend that tends to
last quarters or even years.
Speaker 3 (20:12):
And in that respect, you.
Speaker 5 (20:14):
Know, we do think, you know, there may be a
potential for a little bit more rally if we see
the US enter into the Israeli I ran conflict with
the bunker buster bomb to try to you know, address
the Iranian fourtoh enrichment facility. That may cause a little
bit more near term flight to safety.
Speaker 3 (20:34):
But over that longer term, the.
Speaker 5 (20:36):
Structural quarterly or yearly trend, we tend to think that
the forces that we discussed are likely to keep you know,
upward pressure on interest rates. And that's you know, until
unless and until we see a break a change in
fiscal policy. In broad central bank policy, central banks again
(20:57):
are stepping back from their purchases, which is is removing
a price insensitive buyer from the market and allowing interest
rates to rise and we need more clarity around our
long term inflation forecast as we discuss there's lots of
questions about tariff pass through and energy price passed through.
Until those bigger questions are answered, we think that the
(21:20):
longer term trend of interest rates.
Speaker 3 (21:22):
Is still higher. Bill.
Speaker 2 (21:23):
Before I let you go, let's talk a little bit
about what's going on the dynamic and the currency market
right now. You mentioned the have in trade and perhaps
the idea that the US treasuries would be a beneficiary.
I'm imagining that the dollar would be a beneficiary as well.
Certainly that's what today's price actions seem to indicate. And
frequently the end is a beneficiary of haven buying as well,
(21:46):
but that didn't really seem to be playing out today.
How is everything that you're kind of laying out there
connected to foreign exchange?
Speaker 5 (21:54):
Yeah, I think the dollar is probably a front and
center for most investors right now. Discuss you know that
piece in just a little bit more detail. After Liberation Day,
we've seen, you know, well, really after the president, the
new President Trump came into office, and then especially after
the Liberation tariff, you know, announcements, we've seen a pretty
(22:18):
aggressive move lower in the dollar. There have been a
lot of reports that this has been foreign you know,
foreigners starting to dump their large investments in the US,
but I have really not seen significant evidence that that
is the case. In fact, what I think has been
happening is, yes, there's been a large amount of foreign
(22:39):
investment in the US, but a lot of that investment
was left unhedged up until this year because hedges are expensive.
So for the first couple of quarters of this year
where the dollar came down you know, about nine ten percent,
I think that was more reflective of foreigners increasing the
hedges that they had on their dollar investment, and I
(23:02):
think that is now roughly played out. Now the theme,
the macro theme is now switching from uncertainty about US
policy to uncertainty about global growth. So with increased geopolitical risk,
now the uncertainty is shifted.
Speaker 3 (23:19):
From the US to the globe.
Speaker 5 (23:21):
And if that continues, I can see a near term
upward pressure you know on the dollar.
Speaker 3 (23:29):
You know.
Speaker 5 (23:29):
Again, in this let's call it two week to a
couple of months cyclical trend, but ultimately we believe a
double line that the secular trend has started with the dollar.
Over the next couple of years is likely to trend lower.
And the idea really underpinning this is that the massive
(23:51):
amount of foreign savings that's come into the United States
over the past three decades, which the BEEA now estimates
as of the end of four q TWEO the latest
data available at sixty two trillion of foreign savings or
foreign investment in the United States.
Speaker 3 (24:08):
You know, that is an overweight position, and.
Speaker 5 (24:12):
We think some of that can start to unwind, that
there will be portfolio diversification of that back towards home countries.
And then secondly, we think that the idea that the
dollar is going to you know, continue to be the
main unit that underpins global trade, we think that that
is also going to continue to erode, as we've already
(24:35):
seen it evidenced by central banks now signing memorandums of
understanding between each other to settle trade between their countries
and their own currencies. So, for example, why should Australia
and Singapore need the US dollar to settle trade between
those two countries. In fact, they should, as developed economies,
(24:58):
accept each other's current see which they now are, and
over time, their reserve currency baskets are going to reflect
that increasing the holdings of each other's currencies while simultaneously
decreasing the holding of the dollar. So for those two
structural reasons, we think that over time, the trend of
(25:19):
the dollar on the long term basis, you know, should
continue to trend down even but near term we first
need to get through the you know, near term geopolitical
risks that may cause a little bit of this flight
to safety reversal in the dollar higher just over you know,
the very near term.
Speaker 2 (25:37):
Bill will leave it there. Thank you so very much.
Bill Campbell there. He is Global bond portfolio manager at
Double Line, joining from Santa Monica, California. 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 in the
(25:59):
Asia Pacific. You can find us on Apple, Spotify, 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
Bloomberg Audio Studios, Podcasts, radio News.
Speaker 2 (00:11):
Welcome to the Bloomberg Daybreak Asia podcast. I'm Doug Krisner.
An escalation of tensions in the Midis triggered more anxiety
and markets. In the last session, Oil prices jumped to
a five month high in New York trading on speculation
the US may join Israel's attack on Iran. WTI settled
just under seventy five dollars after rising by more than
(00:32):
four percent.
Speaker 3 (00:33):
Earlier in the day.
Speaker 2 (00:34):
President Trump met with his national security team, and before
the meeting, Trump posted a demand for Iran's unconditional surrender.
On top of that, the President warned of a possible
strike against Iran's leader, Ayatola Ali Kameni. We heard from
Australia's former ambassador to Israel, Dave Sharma. He said, it's
in Australia's interest to make sure that any tensions arising
(00:57):
from this conflict do not manifest themselves in Australia.
Speaker 4 (01:02):
We should be looking to support diplomatic efforts, but bearing
in mind, what is it is the outcome that we
see and we want a Middle East that is at
peace with itself, that can grow and prosper and the
truth is that Iran has been a massively destabilizing force
in the Middle East now for decades, not only through
its pursuit of nuclear weapons, not only through its imperialistic
(01:22):
designs on its neighbors, but through its support to armed
terrorist groups such as Hasbola and Lebanon. But who tis
in Yemen. It's propping up of the Asad regime in
Syria for many years, it's fermenting of sheer militias in Iraq.
What we would like to see is a situation where
that sort of destabilization does no longer occur.
Speaker 3 (01:42):
Now.
Speaker 4 (01:42):
Whether Iran is prepared to countenance that or not, or
at least whether this particular leadership in Iran is prepared
to countenance that or not, that is a question for them.
Speaker 2 (01:51):
That's Dave Sharma. He is Australia's former ambassador to Israel.
By the way, the New York Times is reporting Iran
has prepared missiles and other military erry equipment four strikes
on US basis in the Middle East should the US
join Israel's war against Iran. So let's stay with geopolitics
for the moment. The Auchus Pact is a security arrangement
(02:13):
between the US, the UK and Australia. It was first
announced in twenty twenty one by then President Joe Biden.
But now the Trump administration is reviewing this agreement and
this is rattling. One of Washington's closest alliances. Joining me
now is Bloomberg opinion columnist Korishma Vaswani. She has been
writing about the review and its ramifications. Korrishma joins me
(02:36):
now from Singapore. It's always a pleasure to chat with you, Korshma.
Can we begin by having you remind me the structure
of the Auchus Pact.
Speaker 1 (02:46):
Well, at the heart of this arrangement was an agreement
between the US, the UK and Australia that would, again,
as you pointed out, signed by President Biden in twenty
twenty one, that would help Australia develop a fleet of
nuclear powered submarines over a thirty year period, and it
would involve both the US and the UK. America would
(03:10):
provide superior technology, the UK would help Australia build these
nuclear submarines. But ostensibly it was also a way to
counter China's growing influence in the Indo Pacific, and at
the time when it was announced, China was very upset.
It saw it as another example of the American supremacy,
the desire to maintain that in the Indo Pacific, and
(03:33):
as an attempt by the United States to contain China's
influence and military and naval power, which has been, as
we've talked about on your program before, growing rapidly over
the last few years. But now given that the White
House has come out and said that they're putting this
agreement under review, they're going to look at whether OCUS
(03:57):
is aligned with the President's America First Agenda. I'm quoting
from the Defense Department there, And you know that's really
sort of making a lot of allies and partners in
the Indo Pacific nervous, not least the Australians themselves, who
are really counting on this commitment from the United States.
Speaker 2 (04:18):
So I know that AUCAS involves, as I said earlier,
the UK, Australia, and the US, but when we think
of other allies in the region, I'm thinking of Japan
and South Korea, this probably would be a very concerning
development to those countries as well.
Speaker 1 (04:34):
Yeah, and I think it's even wider than that, because
it speaks to the commitment of the United States to
the region. And it's really confusing, right, Doug, because you know,
just a few weeks ago, at the Shangrila Dialogue, which
is this regional security summit held in Singapore, you had
the US Secretary of Defense Pete Hetz talking about the
(04:54):
US commitment to the Indo Pacific. He said that America
is here to stay. Chinese didn't show up this time
the way they have in the past, So that was
a really easy win for the Trump administration to point
out that Washington is really committed to this region. But
it comes with a sort of transactional aspect because he
(05:14):
also talked about the need for allies Asian partners to
boost defense spending. Very much what you hear from, you know,
the Trump administration when it talks to Europe as well,
that it's like, basically, everybody needs to pay more and
this can't be the United States responsibility. And that's fine,
(05:35):
there are reasons behind that. That's perfectly reasonable, but it
does feel sometimes that it's a bit of a carrot
and stick relationship. You know, you have to pay more
or we're going to pull out of OCHUS for instance,
which appears to be the undercurrent behind the rhetoric of
the Defense Department when it comes to this particular deal,
(05:56):
and I think what that does is it just you know,
it doesn't build goodwill, It doesn't create the kind of
partnership that you need with one of your closest allies
in this part of the world.
Speaker 2 (06:05):
So, Karishma, we have seen among NATO countries a definite
willingness to spend more of their GDP on military defense.
I'm thinking of Germany in particular. Obviously this is tied
to war in Ukraine. Can you give me a sense
of the willingness of the countries in the APAC has
spent more if we're using aucas as an example of
some type of cooperation with the United States that would
(06:28):
ultimately help these countries defend against some perceived threat that
China represents.
Speaker 1 (06:34):
Yeah, I mean, I think that's a really good point.
And we've seen the commitments coming through loud and clear.
You know, everybody from Japan to Taiwan to Australia itself,
they've been talking about arming up. And you're seeing a
trend across Asia for defense budgets. They've been on the rise.
Everybody's spending more on defense, and I think the statistic
for Australia. Currently CANBRA has military spending at about two
(07:01):
point four percent or it's on track rather to achieve
that by the mid twenty thirties. But the United States
wants Australia to up that to three and a half
percent of GDP. So, you know, it's the gap between
what the US wants and what is currently on offer,
and each country has its own sort of particular and
(07:21):
unique circumstances to be able to try and achieve that.
But on the whole, across the board, the Trump administration
I think has been quite successful in convincing Asian countries
that they need to spend more on defense.
Speaker 2 (07:35):
So how do you think this is being viewed in Beijing?
Speaker 1 (07:40):
Oh? I think that this makes China very happy because
for the you know, on the one hand, there are
now real concerns over whether ORCUS will go ahead in
its original form. My views that it will. I think
that the United States would, even given the Trump administration's
transactional nature. I do not think that the White House
(08:02):
would allow this security agreement to fall by the wayside.
It would be problematic and possibly embarrassing. But I think
that there will be compromises and concessions made on the
part of the Australians who will feel compelled to do
some of the things that the United States may be
asking for behind closed doors. And what that does is
(08:23):
play into Beijing's narrative that America first means other countries alone.
And you know, China has consistently positioned itself as the global, sensible,
rational leader in the Indo Pacific given what appears to
be sort of an erratic, you know, behavior, the erratic
(08:44):
nature of how Donald Trump does business on the global stage.
And I think that these kinds of agreements and the
reviews of these agreements just add credits to that narrative.
And even if they're not saying it publicly, because you know,
the Australians have been very quick to sort of defend
the review and dismiss it as just business as usual.
(09:07):
I've spoken to diplomats who've said to me, well, it's
not a great look, and it does mean that countries
like Australia are going to have to think and are
already thinking about what this means in terms of future alliances.
So you're going to start to see you know, Japan, Australia,
South Korea coming together, maybe India as well, to sort
of find a way through working without the superpowers. They
(09:31):
can't do it completely, but I think you're going to
see a lot of middle and smaller countries banding together
as it as these larger nations sort of you know,
have this each country for themselves approach to global politics.
Speaker 2 (09:45):
So imagine for a moment that the US does play
a diminished role in August. Can you imagine a world
where the Europeans, let's say, step in to fill some
of that void.
Speaker 1 (09:57):
Yeah, I can, and I think that been talked about already.
You know, the Europeans have been in the past, certainly
recently talking to the Australians about what kind of military
engagement or any kind of you know, partnership that they
could work on. It would be challenging given the number
of countries in Europe, but not impossible. And again, I
(10:19):
think these are the kinds of partnerships that we will
see being formed going forward, and I think they are necessary.
In fact, I think they are essential because countries cannot
navigate this next period of what appears to be this
sort of you know, I hate using this word, but
multipolar system. That's the nature of politics these days. And
(10:42):
I think they're going to have to band together in
that way, no doubt.
Speaker 2 (10:45):
About that, Karishma. It's always a pleasure. Thank you so much,
Karishma of Vaswani Bloomberg Opinion columnists joining from Singapore here
on the Daybreak Asia podcast. Welcome back to the Daybreak
Asia Podcast. I'm Doug Chrisner. So, the Fed's two day
(11:05):
meeting will wrap on Wednesday afternoon, and the Central Bank
is expected to hold rate steady this month and in
July as well. And at the same time on Wednesday,
the Fed may telegraph its intentions through its revised economic
and rates forecast. Now, markets right now are continuing to
bet on the likelihood of two quarter point rate cuts
(11:27):
this year, the first move perhaps fully priced in for
the October meeting. Today we had yields down right across
the treasury curve. And to help us take a look
at what's happening in the macro and especially in the
fixed income space, I'm joined by Bill Campbell. He is
Global bond portfolio manager at Double Line. Bill is on
the line from Santa Monica, California. Bill, thank you for
(11:49):
making time to chat with me. Talk to me a
little bit about the moving parts that you see in
the macro right now and how they fit with the
inflation story, particularly as it relates to this spike that
we have seen over the last couple of days in
crude oil.
Speaker 5 (12:04):
Doug, thanks for having me back, and you know, what
a time to come back and discuss macro. There are
countervailing forces happening, you know, across the macro landscape at
the moment, and you see them playing out in the
interest rate market when we look at long term rates.
You were just mentioning the rally that we've seen today,
(12:27):
but if you look back, you know, just for the
past month, we've seen rates rising, you know, moving ever higher.
It's our view here at double Line that you know,
the that medium term pressure or the likely trajectory for rates,
especially in the long end of the curve over the
next quarter, is higher. But near term we're seeing now
(12:50):
treasuries exhibit a little bit of that flight to quality
or flight to safety property that they'd had in the
past due to the increased geo political concerns around Israel's
current operation in Iran and the potential for the US
to potentially strike the four TOOH enrichment facility in Iran.
(13:12):
Now that being said, the countervailing force to that rally
that we saw is exactly what you alluded to, is
higher oil prices. Over the past quarter we'd actually seen
oil prices falling to a local low, and just over
the past couple of weeks, with these rising tensions in
(13:33):
the Middle East, oil prices have again spiked from the
low sixties up to the mid seventies. And as you know,
oil prices have wide have kind of a wide reach
in the way that they impact the economy and prices
in general. And the concern here is that over the
(13:55):
next couple of months, higher oil prices could lead to
higher gas prices, higher shipping prices, and that could put
upward pressure on inflation, which then would counteract some of
this flight to safety that we've seen. So the balancing
act that we are really watching play out in the
long end of the US treasury curve is this you know,
(14:18):
back and forth of will increase deficits, the potential for
higher inflation and h you know, the the pulling back
of purchases by global central banks of treasuries pushing rates
higher be offset by the potential you know, flight to
quality that we had seen in the past.
Speaker 3 (14:41):
Uh, there's one caveat to all of this.
Speaker 5 (14:44):
When the tariffs were initially announced by the Trump administration, Uh,
something strange happened in the long end of the interest
rate curve. We actually saw yields rise, and that was
counterintuitive to the flight to safety trade that we have
gotten used to over the past three decades. And you know,
the return on the geopolitical concerns is another nuance that
(15:06):
we need to separate as fixed income investors of will
the market view, you know, an upcoming hiccup to growth
as more of a US specific growth shock with a
US led slowdown or a global growth shock with a
global growth slowdown potentially driven by the geopolitical concerns, And
(15:28):
the answer to that question will answer in the near
term which way interest rates may trend. But on the
long term we think that, you know, over the next
several quarters, you know, to the next year, the pressure
still should be higher, you know, on interest rates.
Speaker 2 (15:44):
So we had the meeting yesterday from the Bank of
Japan and not surprisingly, the BOJ held its policy rate
steady at fifty basis points. The BOJ also announced a
plan to begin to slow the pace of its bond
market buying, the JGB purchases that the BOJ has been conducting.
What is your understanding of how that's going to impact
(16:07):
the global bond market story.
Speaker 5 (16:09):
Yeah, So the reduction of you know, their quantitative you know,
their their tapering program is not actually going to you know,
be implemented until April or the second quarter of twenty
twenty six. The reason that they did that, though, is
we had seen you know, a tremendous spike across the
(16:34):
Japanese government bond curve, Japanese government yields, you know, rising
ever since the Bank of Japan decided to stop their
yield curve control policy about a year and a half ago,
and you know, that's caused a lot of concern about
the pass through you know, from higher yields to the
(16:54):
Japanese economy. And you know, obviously this is one step
in the direction of trying to curb the pace of
the rise of Japanese interest rates.
Speaker 3 (17:06):
But the rise of Japanese interest rates is.
Speaker 5 (17:11):
Happening alongside the rise in the US interest rates, the
rise in long term United Kingdom interest rates. And I
think that this is now a global issue that all
central banks and all treasuries and ministries of finance are
going to have to think about and deal with going
forward that long term interest rates continue to rise, and
(17:36):
I think are rising on a secular basis. And when
we look at the outlook for the fiscal trajectories not
only in the United States, but in the United Kingdom
and in Japan and to a certain extent in the
European Union. When you look at countries such as France,
they have a very difficult trajectory, very difficult outlook that
is likely to put continued pressure not only on US
(17:58):
and Japanese interest rates, but I think long term interest
rates across the global government bond market. And that's why
at double Line, you know, we're continuing ourselves and to
you know, talk to our investors about favoring more of
the belly to the front end of the interest rate curves,
because we still believe that interest rates between the two
(18:18):
year and let's say the seven year or the two
year and the ten year maturities, you know, should exhibit
that flight to safety quality and you can pick up
you know, high quality gield. It's once you go to
those longer tenors past ten years, that you're really starting
to deal with these long term forces that maybe you know,
(18:39):
signifying a structural change to what we've seen over the
past several decades.
Speaker 2 (18:43):
You know, it was only a couple of weeks ago
when global bond markets were unnerved by the issues around
fiscal deficits, not just here in the US, but jurisdictions
like Japan as well. And I'm curious, has the concern
over fiscal deficits really faded into the background where the
bond market is concerned.
Speaker 3 (19:02):
The fiscal policy.
Speaker 5 (19:03):
I think it first of all, I think when we
look at markets, unfortunately, it seems that you know, markets
have a difficult time trying to hold on to multiple
themes at once, and you know, we focus on different themes,
you know, as we move through time. And as an
example of this, uh, you know, first, you know, around
(19:24):
April Round Liberation Day, the main theme that we focused
on was tariffs and what new US foreign policy would
do to the bond markets, putting upward pressure on interest rates.
Then we moved over, you know, to focusing on fiscal
which has been the past month or so, uh, you know,
focus for long term bond yields. Just recently, the new
(19:46):
geopolitical concerns that popped out of the Middle East have
taken the front and center focus, and I think that
is really what we're trading now. But we need to
break out as investors what is short term cyclical move
which maybe move over the course of a couple of
weeks to a couple of months, versus the long term
(20:07):
secular move, which is the general trend that tends to
last quarters or even years.
Speaker 3 (20:12):
And in that respect, you.
Speaker 5 (20:14):
Know, we do think, you know, there may be a
potential for a little bit more rally if we see
the US enter into the Israeli I ran conflict with
the bunker buster bomb to try to you know, address
the Iranian fourtoh enrichment facility. That may cause a little
bit more near term flight to safety.
Speaker 3 (20:34):
But over that longer term, the.
Speaker 5 (20:36):
Structural quarterly or yearly trend, we tend to think that
the forces that we discussed are likely to keep you know,
upward pressure on interest rates. And that's you know, until
unless and until we see a break a change in
fiscal policy. In broad central bank policy, central banks again
(20:57):
are stepping back from their purchases, which is is removing
a price insensitive buyer from the market and allowing interest
rates to rise and we need more clarity around our
long term inflation forecast as we discuss there's lots of
questions about tariff pass through and energy price passed through.
Until those bigger questions are answered, we think that the
(21:20):
longer term trend of interest rates.
Speaker 3 (21:22):
Is still higher. Bill.
Speaker 2 (21:23):
Before I let you go, let's talk a little bit
about what's going on the dynamic and the currency market
right now. You mentioned the have in trade and perhaps
the idea that the US treasuries would be a beneficiary.
I'm imagining that the dollar would be a beneficiary as well.
Certainly that's what today's price actions seem to indicate. And
frequently the end is a beneficiary of haven buying as well,
(21:46):
but that didn't really seem to be playing out today.
How is everything that you're kind of laying out there
connected to foreign exchange?
Speaker 5 (21:54):
Yeah, I think the dollar is probably a front and
center for most investors right now. Discuss you know that
piece in just a little bit more detail. After Liberation Day,
we've seen, you know, well, really after the president, the
new President Trump came into office, and then especially after
the Liberation tariff, you know, announcements, we've seen a pretty
(22:18):
aggressive move lower in the dollar. There have been a
lot of reports that this has been foreign you know,
foreigners starting to dump their large investments in the US,
but I have really not seen significant evidence that that
is the case. In fact, what I think has been
happening is, yes, there's been a large amount of foreign
(22:39):
investment in the US, but a lot of that investment
was left unhedged up until this year because hedges are expensive.
So for the first couple of quarters of this year
where the dollar came down you know, about nine ten percent,
I think that was more reflective of foreigners increasing the
hedges that they had on their dollar investment, and I
(23:02):
think that is now roughly played out. Now the theme,
the macro theme is now switching from uncertainty about US
policy to uncertainty about global growth. So with increased geopolitical risk,
now the uncertainty is shifted.
Speaker 3 (23:19):
From the US to the globe.
Speaker 5 (23:21):
And if that continues, I can see a near term
upward pressure you know on the dollar.
Speaker 3 (23:29):
You know.
Speaker 5 (23:29):
Again, in this let's call it two week to a
couple of months cyclical trend, but ultimately we believe a
double line that the secular trend has started with the dollar.
Over the next couple of years is likely to trend lower.
And the idea really underpinning this is that the massive
(23:51):
amount of foreign savings that's come into the United States
over the past three decades, which the BEEA now estimates
as of the end of four q TWEO the latest
data available at sixty two trillion of foreign savings or
foreign investment in the United States.
Speaker 3 (24:08):
You know, that is an overweight position, and.
Speaker 5 (24:12):
We think some of that can start to unwind, that
there will be portfolio diversification of that back towards home countries.
And then secondly, we think that the idea that the
dollar is going to you know, continue to be the
main unit that underpins global trade, we think that that
is also going to continue to erode, as we've already
(24:35):
seen it evidenced by central banks now signing memorandums of
understanding between each other to settle trade between their countries
and their own currencies. So, for example, why should Australia
and Singapore need the US dollar to settle trade between
those two countries. In fact, they should, as developed economies,
(24:58):
accept each other's current see which they now are, and
over time, their reserve currency baskets are going to reflect
that increasing the holdings of each other's currencies while simultaneously
decreasing the holding of the dollar. So for those two
structural reasons, we think that over time, the trend of
(25:19):
the dollar on the long term basis, you know, should
continue to trend down even but near term we first
need to get through the you know, near term geopolitical
risks that may cause a little bit of this flight
to safety reversal in the dollar higher just over you know,
the very near term.
Speaker 2 (25:37):
Bill will leave it there. Thank you so very much.
Bill Campbell there. He is Global bond portfolio manager at
Double Line, joining from Santa Monica, California. 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 in the
(25:59):
Asia Pacific. You can find us on Apple, Spotify, 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
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