Latest / Merryn Talks Money / Markets Weekly: Japan’s Bond Shock and the Global Ripple Effect

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Markets Weekly: Japan’s Bond Shock and the Global Ripple Effect · Merryn Talks Money

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  Speaker 1: Bloomberg Audio Studios, Podcasts, Radio News. Welcome to the Merrin
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  Speaker 1: Dogs Money Market Rap. What we talk about the biggest
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  Speaker 1: moves of the markets this week and what is driving them.
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  Speaker 1: I'm Maren Zumset, Web Editor at Large with Bloomberg UK Wealth, and.
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  Speaker 2: I'm joined Stevig, senior reporter of Bloomberg and author of
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  Speaker 2: the Money Distilled newsletter.
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  Speaker 1: Okay, well, John, when we talk about what's driving the
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  Speaker 1: moves and market this week, I had much doubt there. I
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  Speaker 1: will say before we get going that you and I
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  Speaker 1: are speaking before President Trump speaks at Davils.
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  Speaker 2: Yes.
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  Speaker 1: So he's been saying a lot of things this week,
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  Speaker 1: a lot of social media on the go, a lot
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  Speaker 1: of messages, a lot of publishing of other people's messages,
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  Speaker 1: a lot going on. But he hasn't actually spoken yet,
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  Speaker 1: so there may be some fairly massive market moves when
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  Speaker 1: he is finished speaking.
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  Speaker 2: Yeah, and he has been a busy boy this WEEKO.
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  Speaker 2: Actually he's not the only thing moving markets. Ess. Actually,
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  Speaker 2: Japanese election promises that have been moving markets in quite
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  Speaker 2: an extraordinary way. At the star of the way.
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  Speaker 1: It's interesting, isn't it. And you might think looking around
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  Speaker 1: the world geopolitically that the most important thing would be
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  Speaker 1: the idea that America might annex Greenland against against the
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  Speaker 1: will of the rest of the world. But in fact
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  Speaker 1: Japanese bond yills have had more impacted.
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  Speaker 2: I think that's it's probably what's starting, isn't then we
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  Speaker 2: can talk about Trump because because what happened in Japan
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  Speaker 2: is the Japanese bord market yields spiked because the Japanese
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  Speaker 2: Prime minister, they has called the snap election to show
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  Speaker 2: up her power, clearly hasn't spoken to trees amazing, hasn't.
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  Speaker 1: Seen what happens with elections elsewhere. But anyway we go, and.
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  Speaker 2: Of course you need to bribe the electorate whenever you're
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  Speaker 2: going to go for an election. And one of the
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  Speaker 2: hard particular choice has been to say, we'll look for
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  Speaker 2: the next two years, we're going to knock off the
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  Speaker 2: equivalent you know, Japanese vat the sales tax on food,
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  Speaker 2: so it's currently eight percent to zero percent. The thing is,
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  Speaker 2: obviously Japan has got a massive kind of date to
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  Speaker 2: GDP ratio and markets are sort of going, well, wait
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  Speaker 2: a minute, how are you going to pay for this?
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  Speaker 2: And she's sort of saying, well, we're not going to
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  Speaker 2: have to issue more points to pay for it, but
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  Speaker 2: she doesn't actually said how they will pay for it.
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  Speaker 2: And the other thing is that the opposition parties, no
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  Speaker 2: one's saying, well, that's a really daft idea, that's really expensive. Instead,
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  Speaker 2: they're all competing to say make even greater promises, so, well,
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  Speaker 2: you'll scrap it for two years, we will scrap it
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  Speaker 2: for good or I hope we actually cut the entire
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  Speaker 2: V eighty and a half from ten percent to five percent,
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  Speaker 2: and so there's this sort of almost arms race.
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  Speaker 1: Yeah. Well, it's interesting, isn't it that the natural state
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  Speaker 1: of a democracy is generally inflationary, right, Yeah, yeah, I
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  Speaker 1: was reading reading about this the other day. You know
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  Speaker 1: that that democracy is naturally inflationary, but the point was
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  Speaker 1: that capitalism is naturally deflationary. Capitalism tends to bring prices
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  Speaker 1: of stuff down over time, and so there's a conant
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  Speaker 1: tension across all types of capitalist democracies between the democracy side,
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  Speaker 1: which is inflationary, and the capitalist side, which is deflationary.
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  Speaker 1: And that deflationary side has been winning in Japan for
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  Speaker 1: a long time. Yeah, but now the naturally inflationary side
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  Speaker 1: of a democratic society is rising to before.
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  Speaker 2: Yeah, and that is you know, that's really freaking people
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  Speaker 2: out because you know, by by other standards I supposed
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  Speaker 2: to Japanese inflation isn't that high or certainly not compared
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  Speaker 2: to what we've got used to. I mean, that is
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  Speaker 2: actually an interesting point because I think the problem with
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  Speaker 2: any form rule actually is that if you're if your
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  Speaker 2: economy stops functioning properly, then you your way to keep
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  Speaker 2: the vested interests and the people happy is always inflationary.
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  Speaker 2: Ancient Rome was not a democracy, but it's still kind
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  Speaker 2: of destroyed itself through currency debasement and hyperinflation. So I
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  Speaker 2: don't I like to defend democracy. There are too many
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  Speaker 2: people who are against it at the moment, and I'm
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  Speaker 2: a bit kind of worried about that.
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  Speaker 1: Everybody in the studio here is pro democracy with the producer. Yeah,
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  Speaker 1: we're all good, So.
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  Speaker 2: You can leave that. Yeah, so may the Japanese point
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  Speaker 2: you'll spiked, Like the forty years went above four percent
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  Speaker 2: for the first time ever. I mean, okay, they were
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  Speaker 2: only I should In two thousand and seven, Japanese ten
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  Speaker 2: years went above two percent, which we haven't seen for decades,
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  Speaker 2: and it kind of spell over into the rest of
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  Speaker 2: the market as well, and so you know, it's just
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  Speaker 2: another reminder of the you know, bondiel trajetary political risk premia,
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  Speaker 2: and that all obviously Greenland feeds into that, the kind
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  Speaker 2: of chaos, if you like, feeds into that.
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  Speaker 1: Rising bondy els in Japan affect the rest of the world, right, Yes,
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  Speaker 1: they push up bondials everywhere a little bit, and also
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  Speaker 1: create the risk that capital that has long been flowing
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  Speaker 1: out of Japan looking for high yells both back into
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  Speaker 1: Japan because you can get the yield there, and that
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  Speaker 1: pulled capital of all of our economies and could have
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  Speaker 1: as yet unknown effects.
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  Speaker 2: Yeah, definitely. I mean, in August twenty twenty four there
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  Speaker 2: was a big kind of surprise crash in the market,
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  Speaker 2: and that was driven by this same thing, basically the
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  Speaker 2: reversal of the yen carry trade. And one thing that's
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  Speaker 2: interesting I know that. I mean, I think we both
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  Speaker 2: get the BCA research. I remember the chap they're pointing
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  Speaker 2: out that basically the mag seven stocks had kind of
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  Speaker 2: moved in Tangent where I think it was basically the yen. Yeah,
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  Speaker 2: and so one of the big trades that Japanese investors.
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  Speaker 2: Basically the Japanese money going for sas a lot of
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  Speaker 2: that has been invested in MAG seven kind of big
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  Speaker 2: US stocks. So probably the US market is the place
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  Speaker 2: to kind of watch for any reaction because a lot
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  Speaker 2: of people are now saying, well, actually Japanese government bonds
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  Speaker 2: look good valuing there because the yields are much higher
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  Speaker 2: than they were. If you buy any then, particularly if
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  Speaker 2: you think the en going to appreciate, then actually trying
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  Speaker 2: not a bad place to buy g GPS. And so
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  Speaker 2: once that sort of happens, or enough people think it's
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  Speaker 2: going to happen, then yeah, you might see a whole
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  Speaker 2: lod of the money sucked out of the U S stop
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  Speaker 2: marketing back in the Japanese government.
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  Speaker 1: I mean, I think give it on your Meg seven point.
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  Speaker 1: I think it's worth noticing that the nurserk is down
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  Speaker 1: on the air already.
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  Speaker 2: Yeah yeah, down one point.
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  Speaker 1: Yeah, quite big fool yesterday.
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  Speaker 2: So yeah maybe well yeah, well, I think it's interesting
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  Speaker 2: because people again sort of blame that well, the story
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  Speaker 2: is that this is all because you know, Trump is
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  Speaker 2: going to you know, saper rattling over greenline. Notice, but
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  Speaker 2: actually it is probably get more to do with the
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  Speaker 2: tec tonic plates shifting because of the kind of you know,
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  Speaker 2: what's happening in the boind market exactly.
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  Speaker 1: I mean, there is this conversation going on in Europe
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  Speaker 1: going or we can retaliate because you know, Europe has
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  Speaker 1: a trillion dollars worth of bonds and equities and we're
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  Speaker 1: going to divest and we're going to going to that.
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  Speaker 1: And then there is a suggestion that this dynamic is
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  Speaker 1: is already happening, which I suspect it isn't. Although we
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  Speaker 1: would expect a constant rebalancing away from the US, wouldn't
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  Speaker 1: We look here and the US market hitting kind of
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  Speaker 1: seventeen percent or sixty seven point of the global index.
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  Speaker 1: I suspect that peaked at the end of last year. Yes,
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  Speaker 1: the rebalancing will be fairly consistent for the next decade.
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  Speaker 2: Definitely, I mean I think that, you know, I mean,
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  Speaker 2: that's all this all helps with the rest of the
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  Speaker 2: world catch up story to the US, which should have
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  Speaker 2: happened anyway, because it's kind of crazy that so much
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  Speaker 2: global capital as in the US is way more than
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  Speaker 2: it always represents sensible diversification apart from anything else. So
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  Speaker 2: definitely mean, obviously Trump is a catalyst for that, but
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  Speaker 2: it's a move that has been on the cards for
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  Speaker 2: a long time. And none of that is to defend
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  Speaker 2: you know, Trump's specific actions or a specific style one
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  Speaker 2: way or the other.
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  Speaker 1: But you don't have to that, you know how everybody
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  Speaker 1: every conversation we have with them, with everybody, but anyone
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  Speaker 1: who says anything about anything to do with Rum, they
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  Speaker 1: have to preface it was saying I'm not defending but exactly.
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  Speaker 2: But you know boys cream, Yeah exactly. So I think
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  Speaker 2: that's I think that's one thing we can actually quite
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  Speaker 2: comfortably say on Wednesday before Trump stands up. Has been
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  Speaker 2: a big driver on PLOYM well, continue to be a
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  Speaker 2: big driver, not just this week. And then there's Gold. Yeah, God,
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  Speaker 2: it's just kind of bond calls John Silver and Silver,
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  Speaker 2: I mean don't even don't even go. And I mean
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  Speaker 2: Silver's like when sniffing doesn't the one hundred dollars announced Now,
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  Speaker 2: I never thought i'd see that.
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  Speaker 1: I'm back excited we were when I went through fifty, Yes,
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  Speaker 1: and we can leave it. When I went through seventy,
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  Speaker 1: I thought, what are we going to do when it
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  Speaker 1: goes through a hundred. Why don't I own any is
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  Speaker 1: my main question. Yeah, big coin gold.
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  Speaker 2: We've got gold. I've got some gold, Okay, thank goodness, goodness.
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  Speaker 2: I kind of talked to it all this time, and
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  Speaker 2: we have been talking.
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  Speaker 1: About gold and so for a long time. So I
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  Speaker 1: do hope that readers went and had a a little
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  Speaker 1: look at their portfolio. And of course now it's impossible
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  Speaker 1: to say what will happen next with gold and so
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  Speaker 1: over the basement, trade, geopolitics going nuts or canggoriz, things.
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  Speaker 2: Happening one thing, and I texted you. But this morning,
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  Speaker 2: like said, Mark Canny, gave a speech, and Mark Canny
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  Speaker 2: is probably almost the epitome of davorce Man amongst politicians,
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  Speaker 2: I think, and he was saying essentially that okay, everyone
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  Speaker 2: forget that the old rules based orders is dead. And
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  Speaker 2: I do not know what nature of contry and indicator
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  Speaker 2: that is, but I feel that it's a It represents
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  Speaker 2: a peak of something, you know, answers on the postcard
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  Speaker 2: from any license, but.
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  Speaker 1: It probably represents the final turning point for economies back inwards,
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  Speaker 1: where they start re industrializing, start really focusing on energy, security,
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  Speaker 1: on security, on all these things that we've been talking
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  Speaker 1: about for ages, and if you look at the investment
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  Speaker 1: implications of that, just screams commodity super psycho.
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  Speaker 2: Oh mean it does, say, because if everyone needs to
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  Speaker 2: build their own stock pails up having run them down,
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  Speaker 2: because we all bought into what we're now told was
• 10:20
  Speaker 2: a potentk in village of you know, can winter banes
• 10:23
  Speaker 2: and sawder panels and everyone's lovey dovey to each other,
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  Speaker 2: and anyone who objected to that was an idiot.
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  Speaker 1: But right now, Trump's administration said at Dabors yesterday, I
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  Speaker 1: think what is up with Europe wanting to hit at
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  Speaker 1: zero by twenty thirty when they don't make any batteries. Yeah,
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  Speaker 1: so if you want that, you're going to need to
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  Speaker 1: build an awful lot of battery factories, or buy a lot.
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  Speaker 2: Of oil, or buy a lot of oil or right
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  Speaker 2: cool north Sea by cool, we still get plenty of
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  Speaker 2: coll and Brenon.
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  Speaker 1: Okay, it's part of getting too old fashioned for comfort,
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  Speaker 1: John Ald is the idea of money flowing out of
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  Speaker 1: the US and rebalancing of assets around the world. It
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  Speaker 1: has got to be good for the UK. Right We're
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  Speaker 1: still what the third largest stock market in the world,
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  Speaker 1: still over three percent of global equity market capitalization right
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  Speaker 1: here in London, biggest stock market in Europe, etc. And
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  Speaker 1: of course the FOTSI one one hundred last year was
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  Speaker 1: the best performing asset, the fourth best performing asset globally
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  Speaker 1: in dollar terms. So if you're looking to move money
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  Speaker 1: out of the US, you might think to yourself, well,
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  Speaker 1: do you know the Footy one hundred doesn't look too bad,
• 11:30
  Speaker 1: particularly given all those minus and all that old fashioned
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  Speaker 1: stuff that nobody ever wanted before they may now want.
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  Speaker 1: And the rally last year is very concentrated, A large
• 11:39
  Speaker 1: part of the gains came from very few stocks, lots
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  Speaker 1: of scope for that broaden out, lots of scope for
• 11:43
  Speaker 1: it even to drop down below the Footze one hundred.
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  Speaker 1: So while obviously all markets are off this week so far,
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  Speaker 1: it does seem that is going to be rebalancing out
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  Speaker 1: of the US into other markets. The UK, while we
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  Speaker 1: are still saddled with it with a government that doesn't
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  Speaker 1: quite get it, may do really well.
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  Speaker 2: Yeah, I'd absolutely agree. I mean, you're right, if you're
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  Speaker 2: going to diversify the biggest stock market, the first place
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  Speaker 2: you look is the next couple of ones down on
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  Speaker 2: the MSc High Global you know, track cal point and yeah,
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  Speaker 2: the UK is there in Japan's they are basically and interestingly,
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  Speaker 2: both of them have got relatively weak currencies compared to
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  Speaker 2: their history, so anyone who is an overseas investor can
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  Speaker 2: be looking at that and saying, well, I say I
• 12:26
  Speaker 2: make a bump from the currency as well. So yeah, no,
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  Speaker 2: I think that I think the UK market in general
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  Speaker 2: is probably in good shape for the year ahead.
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  Speaker 1: Yeah, and I say that we have a government that
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  Speaker 1: doesn't quite get it, but I think actually they're all
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  Speaker 1: beginning to get it. You know. There were some reforms
• 12:42
  Speaker 1: announced the beginning of this week to listing rules, etcetera,
• 12:45
  Speaker 1: and make it easier for retail investors to participate in
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  Speaker 1: ips and secondary listings, so that there is movement here.
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  Speaker 2: There is good and actually and I think it's good.
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  Speaker 2: I mean the stuff about kind of points being more
• 12:56
  Speaker 2: open to retail investors as well. So from from that
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  Speaker 2: point of view, I do think somebody gets somewhere, And
• 13:03
  Speaker 2: the main reason they keep it quiet is because they
• 13:05
  Speaker 2: know the core voter base is futurely suspicious to capitalism
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  Speaker 2: and anything that makes it easier. But so those are
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  Speaker 2: good things, and yeah, I mean it's weird, but yes,
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  Speaker 2: I think you can probably be quite upbeat on UK
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  Speaker 2: markets outlook for this year.
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  Speaker 1: Certainly anything else we should add, keep a very close
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  Speaker 1: eye on Japan, keep it on Trump, watch Greenland, and
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  Speaker 1: pretty much everything that we've been talking about here for
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  Speaker 1: some time is coming to fruition. Not necessarily in the
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  Speaker 1: way that one would have liked.
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  Speaker 2: Yeah, but at least it's good for the investments that
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  Speaker 2: we thought it would be good for.
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  Speaker 1: That's true, silver Linings, John silver Linings, thanks for listening
• 13:57
  Speaker 1: to this week's Maren Talks Money Debrief. If you like
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  Speaker 1: a show, rate review, and subscribe whereever you listen to podcasts,
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  Speaker 1: is merin Money at Bloomberg dot net.