Trump-Xi: Stability without resolution

0:00Patrick Coffey:Hi, I'm Patrick Coffey and this is the Barclays Brief Podcast. So we've seen some world-changing East meets West encounters over the years. Big suits, red carpets, tense smiles, always accompanied by a great wall of photographers. Think Nixon and Mao, Reagan and Gorbachev, Rocky and even Drago. And last week, it was the turn of President Trump and Chinese President Xi Jinping. So with the handshakes now over and the red carpets back in storage, what is the lasting impact of this latest meeting and what does it mean for markets? With me to discuss this is Mitul Kortetja, head of FX and EM macro strategy in Asia.

0:44Patrick Coffey:Mitul, thanks a lot for joining. Thanks, Patrick. It's great to be in discussion with you on this topic. Great. So going into this latest Trump-She meeting, expectations for a major breakthrough were pretty low. Now that it's behind us, the story seems to be one of stable optics, limited substance and a market more interested in what didn't happen than what did. Is that the right way to think about it? And what, if anything, surprised you the most? I think that is the right way to look at it. We did not get a great amount that came out of it in terms of substance. There was a lot of handshakes, a lot of smiles, and that in itself is positive.

1:24But in terms of something tangible that markets could get away with, there wasn't much. I think the two-month delay to the trade truce was probably the most tangible thing that came out of that. That is positive. But again, it might be smaller in terms of the magnitude of that extension than many people have been hoping for. It means that the two upcoming meetings between President Trump and Xi this year will also be quite important.

1:50Patrick Coffey:Yeah, and you had a situation where both sides wanted some stability ahead of important domestic events for both leaders coming up. How did markets interpret the outcome? Was there anything in the reaction across equities, FX or rates that investors may have missed? I think markets reacted in the way you would expect. There was no breakthroughs, as we mentioned. Stability is key in this relationship. I think stability helps global markets because if we don't see that, clearly there is more volatility. Unfortunately, though, it's come at a time when there is volatility in other areas. Rates markets have been highly volatile recently because of the move in US yields, worries about fiscal, etc.

2:31But I think from this meeting itself, clearly what came out was a stable outcome. There's at least two more occasions when the two leaders will meet in the months ahead. We may see more breakthroughs there. You know, this meeting going into was really a lot about geopolitics. It was about trade. It was about AI. We still look for more details on all of these. And we could see that in upcoming meetings. But for now,

2:56Patrick Coffey:I think we should be happy with stability. Sure. But we didn't hear about technology, rare earths, Taiwan. So that can seems to have been kicked down the road. So let's pivot to, you know, what you were talking about, the bond market right now, which is the key market story. And think about it through an Asian lens. And let's maybe start with Korea, because that sits at the intersection of technology, trade and FX with the semiconductor industry there, giving it particularly close ties to both the US and China. What are you watching most closely there at the moment? I think Korea's economy, as you mentioned, is really, really linked to what's going on in terms of the US technology hyperscaler investment trend.

3:38A lot of that demand, it's finding its way through to Korean companies, tech companies, and also, of course, Taiwan. So both Taiwan and Korea have really benefited from this. So I think now, Now, for now, what we're seeing is that demand remaining really strong. Korean and Taiwanese exports have been super strong on the back of that. Korea's economy is doing well. The current account surplus has surged. I think what we will be seeing going forward is whether we see any signs of softening there, whether this starts to peak out because we're at really, really high levels. But for now, it's helping these Asian economies in particular.

4:14And there's a cycle here that it's not just helping Korea and Taiwan, but it's also helping the likes of Malaysia and other economies, Singapore, to a less extent, even Thailand, which benefit from the down chain from this massive strength in demand for exports

4:31Patrick Coffey:of chips, hard drives, memory, etc. Let's stay with that for a second then. So of those markets you just mentioned, which stands out as most interesting to you right now? Well, I think really looking at this, it's a top-down view of those that are more tech-orientated. And we You mentioned Korea and Taiwan, to a less extent Malaysia. China, of course, also really benefiting from those tech-related AI exports. And that's why we've seen all these economies seeing very, very strong export performance. On the other side of the coin, there are other economies that have not done as well for the likes of Philippines, India, which are less tech-orientated, for instance, that have probably struggled in terms of that tech export boom.

5:12But look at India's growth story. It's still a very strong one. So I think the region has still been very, quite resilient in that respect. Yeah. Remind me, where's the Indian economy growing now? Well, India's economy is widely expected to continue to grow at a 7 % plus pace in the coming few years. It's done very well from a domestic consumption, domestic growth story. Credit growth has been very strong. So India is doing well.

5:36Patrick Coffey:But what it's not doing so well on is exports. Tell me the transmission mechanism from softer exports in India through to FX. And what do you expect the trend to look like over the next year or so? Well, I think the transmission mechanism is limited from India's perspective. India is very much a domestically orientated economy. The currency has come under pressure, but a lot of that is because India has still a current account deficit. It relies on external capital flows. There's been a lot of focus on these foreign or FCNR flows, which have been basically dollar inflows coming into India and attracting very high deposit rates.

6:13And that's resulted in a lot more inflow than had been anticipated coming into India. So that's helped India's balance of payments. That said, we still expect the currency to come under some depreciation pressure, just not as aggressive weakness as we've seen in past months. And I think the rest of Asia as well. We're in a strong dollar environment at the moment, and Asian currencies have come under varying degrees of pressure. But I would still say that Asian currency markets are behaving better than Asia's rates markets.

6:42Patrick Coffey:Sure. Well, you talk about varying degrees of pressure. I guess the poster child for that right now is the Japanese yen. So let's move north and think about Japan. And it's relevant because just before the Xi meeting, President Trump spoke with Japan's prime minister and reportedly raised concerns regarding the weak yen. So how are you thinking about Japan from here? Well, from a yen perspective, we still think that the yen will depreciate in the months ahead. Now, there is a lot of attention on what the Bank of Japan is doing with monetary policy. They tightened policy recently. We do expect, again, at least two more hikes and a terminal rate that could end up being around 1.75 % from a market perspective.

7:27But even then, real rates will be low. Japan continues to see capital outflows from retail investors. M &A activity still means that money is flowing out of Japan in terms of outward investment. We're not necessarily seeing any real repatriation of flows into Japan or domestic allocations. So the net conclusion here is that the yen will ultimately remain under some downward pressure. The one caveat I would say here is the risk of intervention from the Japanese authorities and potentially allied with the US.

7:59Patrick Coffey:So that's something that would prompt a bit of caution in terms of how much the yen weakens. Yes. And that intervention that we saw a couple of months ago, we discussed on the Barclays Brief podcast. So let's just move back now to Asia as a whole. So the Iran war is, what, seven months or so old? Oil prices have surged, energy costs are rising, and clearly inflation concerns are back on the agenda, and bond yields are rising seemingly everywhere. Which Asian economies to you look most vulnerable if energy prices remain elevated? The first thing I would say is that, as you said, this has gone on for a long time.

8:37And the expectation was that the conflict may have ended sooner. But Asia's held up really well. There was an expectation. Asia's the biggest oil importing region globally. And yet we've not seen that sort of pressure on inflation. We've not seen the pressure in terms of fiscally, in terms of subsidies. We've not seen that sort of pressure on currency markets. Now, yes, interest rate markets have been coming under pressure. But a lot of that has come from the U.S. and the simple fact that US rates have been going up, US bond yields have been rising, and that's hurt Asia rates, especially more recently.

9:10But vulnerabilities in terms of importers, as we highlighted, have been the likes of Philippines, India, which are big oil importers. But again, like I say, I think markets have been surprised by the resiliency of Asian currency markets. And even for bonds and rates markets in Asia, it's not really been attributable, this pressure to oil. It's played a part, but a lot of it has been some of that pressure from US rates.

9:36Patrick Coffey:Okay. Well, last question, because we're coming up to our 10-minute mark, Mitchell, but when investors think about Asia, the focus is often around China. We started this conversation thinking about China and US relations and those bilateral talks. What do you think is the most interesting story that's unfolding beneath the surface in Asia at the moment that perhaps markets haven't fully appreciated? Well, I think the AI story in Asia is extremely interesting. The race in terms of what China is building out in its AI infrastructure and compare that to what the US is doing. And there's always a sense that China has something up its sleeve in terms of a new AI development, as we've seen in past years, that could come as a surprise for the global economy, global markets.

10:25But broadly, this is where I think the upside surprise for Asia is going to continue to come from. It's how Asia does in this AI race currently in place. And I think there's going to be more positive developments on that front in the next few months and next few years.

10:39Patrick Coffey:Yeah. And I guess if we tie it back to the Xi Jinping-President Trump conversation, what's interesting is they held their first formal talks last week about AI. So there seems to be some progression and development there as well. Absolutely. I think this was expected to be a key topic. Like, obviously, going into that, there was some expectation that there may be at least some talks about how to shape governance of AI. Didn't really see a lot of that. The Board of Trade is going to be something that's going to be in focus between the two countries. Sure. And for our listeners, you should check out last week's show with Ross Sandler and Ronnie Wexler talking about the AI race versus the AI pace.

11:17Patrick Coffey:Mithil, thank you so much for joining. Busy day over in Asia again today. So thanks for being here. Thank you. I think there are two ways one can think about the latest meeting between Trump and Xi. So if you're an optimist, you can take comfort from the meeting. The lines of communication between Washington and Beijing are clearly open. The tone was constructive and the two sides even held their first formal talks on AI at a critical time for that industry. A more cynical take is that the meeting was heavy on symbolism, but relatively light on substance. And I guess one might argue that the trade truce is really a stopgap and that many of the big disagreements between the US and China are still there.

12:02Patrick Coffey:But perhaps that's the point. Because for markets, geopolitics is becoming increasingly difficult to separate from the economic story. So whether it's trade, technology, supply chains or currencies, it makes China and the broader Asia region so important to watch in the months ahead. Thanks a lot for listening to The Barclays Brief. Do hit subscribe and we'll see you again next week.