Daybreak Weekend: Nvidia Earnings, Medef Conference, BOK Decision

22:27Now, it wasn't the only one. Spain was not necessarily very committed to fiscal discipline as well. But the key difference then, as now, was that growth was much faster there, which helped reduce the debt-to-GDP ratio prior to the pandemic, while in France, it actually increased. And now, then we had the pandemic, which made everything worse. And France, in particular, has had a problem in reining in spending over the past few years. Now, that's due to a mix of factors, including slippage by local authorities, growing spending in pensions, and disappointing tax revenues. And the government's plan is quite ambitious.

23:06It's committed to that. I mean, obviously, the politics of it are quite difficult, as Antonio said. But I would just flag that we also just don't know where the savings beyond 2026 are going to come from, because in the medium term structural plans that France sent to the Commission, and by the way, this is not a France only problem. It's a problem across all the governments. They sent sort of the deficit targets that they want to reach in five to seven years, but they just haven't detailed the tax and spending decisions that will underpin those targets. So the plans are really not credible. Well, let's discuss that further, Antonio.

23:44I mean, it was unusual to see the French Prime Minister lay out the first draft of his spending plans quite early in the summer. There was lots of unpopular proposals in it, like cutting two public holidays, for example. What chances are there really of being able to get a compromise on a budget for France? well just like last year uh where essentially the government collapsed over the budget and then last minute emergency budget had to be approved i think it's going to be very hard for the government to get the budget passed um in a survey that was done in july by french poster poster lab you could see that 72 percent of respondents said that you know they acknowledged that debt must be reduced but that the efforts being demanded by the budget by the government are too great, right?

24:30So it's not a popular budget. Also, same survey, 66 % of respondents say that they want opposition parties to file a no-confidence motion against the government, right? So you can see it's not a particularly popular budget. And, you know, the challenge of the fact that you need to really engage in fiscal consolidation to reduce the budget deficit is compounded by the lack of our parliamentary majority. But that doesn't mean that the government cannot make some concessions. In fact, I don't think the budget in this current form might be able to be passed, but I think the government can provide certain concessions to at least have a chance to get it approved by opposition parties.

25:09And Antonio, because we're thinking about this in the context of this upcoming business conference, where, of course, employers and business leaders are going to be very worried about what it could mean for them fiscally. They've previously been asked to give larger contributions in terms of payroll taxes towards the French budget. I mean, how worried do employers and perhaps citizens have to be about tax rises being part of an eventual budget package in France? Well, I think that depends on the final compromise that the government, if the government can get a compromise, that the form of that will take.

25:42So, as I said, I think there is room for concessions. And I think that's, by the way, probably why the initial draft of the budget looks so tough, because I think the strategy of Prime Minister François Bayrou is essentially to present a very tough budget and then leave room to negotiate with opposition parties. But obviously, consolidation, fiscal consolidation is never popular. So the problem is that opposition parties do not want to be associated with the consolidation efforts. That being said, if you look in terms of potential compromises, so last year, the previous government of Prime Minister Barnier tried to make concessions to the far right National Rally Party of Marine Le Pen.

26:20And then that backfired in the end. Actually, a non-confident motion, as I said, was voted and the government ended up collapsing. So I think the government is not going to look at its right. Rather, it might look towards its left where you have the Socialist Party, which has rejected the budget in its current form. But I think the strategy might be to try to offer some concessions on what the socialists call fiscal justice, which is essentially increased taxes on the highest earners in the country. So I think ultimately you might see some concessions that might look like tax increases, even though the government would try to keep those at a minimum because Macron and Bayou are really fixated on not increasing taxes.

27:02but that might be an area where you might find some concessions that might lead ultimately to the approval of the budget. Anna, in terms of the broader economic outlook for France and for the euro area, I mean, what should we be watching out for, I suppose, the potential pitfalls as policymakers are considering what effect their decisions might have on the economic trajectory for the country? Yeah, I mean, growth in France in the euro area hasn't been spectacular over the past few years. But I would say that given all the shocks that the currency block has been hit by, I think it has been holding up fairly decently.

27:38Of course, you know, there's a big heterogeneity across the area. We have Spain, Greece and Portugal really experiencing decent growth runs while Germany barely growing. France is somewhere in the middle. And now when I think about the outlook over the next few years, I think it's going to be essentially shaped by three things. One is fiscal. And in that, I'm including the defense spending. The other is obviously US tariffs. And the third one is euro appreciation. Now, the euro area had a strong start at the beginning of the year. Essentially, that was due to front loading ahead of the US tariffs.

28:17And that should ensure that growth is above 1 % this year. But the pace of growth, at least in our forecast, we expect it to moderate over the coming quarters to around 0.2%, 0.3%, which is really below trend. And for 2026, we expect 0.8%. Now, it could be worse, and it could be worse generally for the area if we hadn't had this sort of fiscal loosening coming from Germany. Germany has engaged on a spending splurge in infrastructure and defence, which we expect to start feeding through next year. But I would say that sort of that fiscal loosening is really a story that's contained to Germany, because in other countries, as Antonia just now said, the trend in France and in Italy, for instance, is one of fiscal tightening.

29:02So the support from that will be modest. And then the big question is how tariffs and uncertainty will play out. Tariffs will affect all countries, obviously, to different extents. And we expect, I mean, we've had a trade deal being reached, which sort of maybe provides some stability, but taken together with uncertainty, we still expect that to drag on growth. and we're actually expecting a 0.4 % hit to the level of GDP at peak. So, you know, there will be some growth, but it will be modest and sort of, you know, brought down by tariffs and uncertainty overall. Okay. Antonio Barroso, our Senior Geoeconomics Analyst for Europe and our European Economist, Anna Andrade, thank you to you both for helping set us up for what is expected to be a long debate over the French budget and the European budget cycle to come.

29:49I'm Stephen Carroll in London. You can catch us every weekday morning here for Bloomberg Daybreak. Europe beginning at 6 a.m. in London and 1 a.m. on Wall Street. Tom?

29:58Tom Busby:Thank you, Stephen. And coming up on Bloomberg Daybreak Weekend, we'll look ahead to a monetary policy decision from the Bank of Korea. I'm Tom Busby, and this is Bloomberg.

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33:29Tom Busby:This is Bloomberg Daybreak Weekend, our global look ahead at the top stories for investors in the coming week. I'm Tom Busby in New York. South Korea's central bank faces a tough call on rates next week. Economists are divided over whether the BOK will extend its easing cycle or keep the current 2.5 percent rate unchanged. For more, let's get to the host of the Daybreak Asia podcast, Doug Krizner. Tom, South Korea's economy rebounded in the second quarter, although recently the governor of the Bank of Korea, Ri Chang-yong, said it still faces high levels of uncertainty as a result of U.S. trade policy.

34:04Now, trade is just one of many factors the BOK will have to consider in the week ahead. For a closer look, I'm joined by Bloomberg's Brian Fowler. He is senior Asia EcoGov editor for Bloomberg News, joining us in the Japanese capital of Tokyo. Thank you so much for making time to chat with me. As I recall, the BOK meeting in July when the policy rate was held steady at two and a half percent. At the time, Governor Reece seemed to keep the door open to a rate cut this month. Has anything changed between then and now? Well, Doug, so he definitely kept the door open to a cut. He said at the time that four of the board members, that's four out of seven, were open to a rate cut sometime in the next three months.

34:46And that's a pretty clear signal that the bias is towards further easing and probably further easing pretty much in the short term. He also cited concerns about household debt and the housing market in Seoul. And that tends to raise the risk of financial imbalances. And that's something he wants to keep an eye on. And I think another reason why the BOK began its pause in June and July is that there were fading thoughts of the Fed easing policy and the BOK tends to want to move in lockstep with the Fed in order to avoid putting downward pressure on the yuan. The yuan was the weakest major currency against the dollar of last year and that revved up inflationary pressure.

35:31So that's one thing they want to keep an eye on. So when you look at the household debt story, I'm curious, is that more likely to be concentrated in mortgage lending or are there other forms of borrowing that may trouble the Bank of Korea? Mortgage lending is absolutely the key factor there because that's driven by the housing market in Seoul when it's hot and that people tend to borrow money to speculate on that market. And we've seen housing prices rise now in Seoul for 28 consecutive weeks. But on the other hand, the pace of increase has slowed after the government took some steps to cool demand, including putting some restrictions on mortgage lending.

36:16So where do we find the inflation story right now in South Korea? I know that the recent numbers on consumer prices earlier in the month seem to suggest a bit of deceleration. And I just saw the recent print on producer prices. They advanced at an annual rate in July by a half of 1%. Is that considered hot? Consumer inflation is a little bit hot. Consumer prices rose 2.1 % in July. The BOK has a target of 2%. And core inflation rose 2%. So it's right about at the BOK's target. I think going forward, the BOK wants to see if the tariffs have an inflationary impact on prices and if that feeds into the economy more broadly.

37:03So the tariff story is obviously a key part of the trade story. And when I think of South Korea, I think of not only automobiles, semiconductors as well. How have trade flows been, especially to the U.S., in light of these tariffs? We had some early trade data for August showing that exports to the U.S. have started to fall. Until now, we had actually we had a lot of front loading. So exports held up relatively well. Also, companies like Samsung Electronics, the tech sector, did pretty well because the Trump administration put some exclusions on consumer electronic goods. And that's helped put a floor under those exports.

37:46It's also, of course, the supply chain relationships with Apple have helped as Apple has managed to win some exemptions. Going forward, though, as you mentioned, I mean, the outlook is pretty cloudy. Trump has threatened to put new tariffs on chips by the end of this month. And that would be a huge threat to South Korea's economy because it relies very heavily on trade and in particular on trade of semiconductors. So when you think of sentiment on both the business side and the consumer side, what's it been like? How are people feeling? I think they're feeling a little bit worried about how things are going.

38:22The Bank of Korea's GDP forecast for this year calls for 0.9 percent growth. That would be the weakest performance since the pandemic when the economy contracted in 2020. And I think people are thinking the shoe is about to drop. It hasn't really dropped thus far. And there's concern about how things happen, how things unfold from August on. Now, I know recently, within the last several months, there's been a little bit of turbulence on the political side in South Korea. Have things calmed down right now to help maybe support the idea that the BOK has a little bit more flexibility to do its job and not to be distracted by political developments?

39:05Definitely. The new administration got started, obviously, in early June, and that's taken away a huge source of uncertainty. Lee so far has done his best to, first of all, put aside any sort of concerns about diplomatic spats with Japan. And I think he's looking confident, and that's meaning that the government can come through with fiscal stimulus if it feels that it needs to. That is Brian Fowler. He is Senior Asia EcoGov Editor for Bloomberg News, joining from our studios in Tokyo. Let's pivot to one of the most important equity markets in Asia. Hong Kong exchanges and clearing posted record quarterly profit, a gain of 41 percent.

39:51Trading surged with average daily turnover nearly doubling and new listings rebounded with IPO applications topping 200. The exchange's CEO is Bonnie Chan, and she recently told Bloomberg how she is optimistic about international investors returning to Chinese assets and how that will keep momentum strong. Here is part of Chan's conversation with Bloomberg's Yvonne Mann. Another quarter of record profit. You have trading that's been booming and now more than 200 active applications on the pipeline. What stood out to you for this quarter? You know, what really stands out for me for this quarter is the fact that it's riding on a pretty sustained momentum.

40:34If you look at our results, this is actually another set of record half yearly results. We deliver a pretty strong set already for the second half of 2024. And so for me, my biggest takeaway is that actually since I think September 2024, gradually we're seeing a return of interest from international investors. And they want to, again, look for opportunities to deploy more capital to this part of the world. You see it, I think, manifested in many ways, you know, in our daily turnover. But also, I think, you know, in the way that all these investors around the world are participating in our IPOs.

41:23The key question is, is it sustainable? You mentioned about average daily turnover, which you nearly doubled from a year ago. Obviously, with liquidity, it's been quite ample with these self-bound flows. What could extend the streak? Right. International investors are really, again, focusing on China assets. And I think as they try to come back to treasure hunt, it is a very good thing that we have equally a robust pipeline to match their appetite. I think that is very, very important. So you mentioned our pipeline. We have currently over 200 companies already having filed their applications. And in fact, on a daily basis, I'm speaking to a lot more.

42:05So I think, you know, with the backdrop of, you know, really the interest returning in earnest, as well as, you know, all these very exciting investment opportunities coming online, I do hope that the momentum can carry on. How confident are you that Hong Kong can reclaim the number one IPO venue this year? Yeah, people always ask me that question. I think it's certainly good to be sort of all the way at the top of the league table. I mean, at the moment, we're in a very good position and we do have the pipeline to help us deliver and help us stay up there. But, you know, to me, the more important thing really is to make sure that we are able to support the fundraising needs of these companies.

42:52And this year I keep talking about the IPO pipeline. I think we also need to look at the follow-on fundraising, which in fact has raised more money than the IPO proceeds. So year to date, we have raised about 16 billion US dollars, close to 17 by way of IPOs. But we have actually more than 40 billion US dollars raised by companies already listed on our exchange. So to me, so long as we continue to support the fundraising needs of these companies, we continue to improve our listing framework. Are you still doing a lot of marketing or do you think companies are starting to come to you now? I think both.

43:34I mean, companies certainly, I think, saw how well we've done in the IPO space. And so I think on the average, I'd probably meet two to three companies per day or wanting to understand more of what we have to offer. And I want to expand the universe a little bit. I think it's very encouraging that in the past few months, we have seen an increased appetite of companies beyond just the mainland China wanting to use Hong Kong or pick Hong Kong as their listing venue. We've seen a bit of a quiet resurgence in the A-share market, and the IPO market there seems to be coming back to life again as well.

44:17What does a rebound in Shanghai and Shenzhen mean for the pipeline here? I think that will be very, very encouraging because the way I see it, we always say the capital markets is there to serve the real economy. So the fact that capital markets are doing well, you know, should suggest that actually, you know, there's a lot of positive momentum in the real economy as well. China is a big country. It is producing a lot of very exciting investment opportunities. I mean, you see our pipeline, right? It's really filled with a lot of excitement. And there's certainly enough for more than just Hong Kong to support.

44:58And I think increasingly I'm seeing the, you know, the few exchanges in China, right? So Shanghai, Shenzhen, Beijing and the Hong Kong market really playing a very complementary role. Now, for Hong Kong, I think one advantage we have is certainly the connection to the rest of the world. and therefore for a lot of companies when they decide to pick which venue to list, one thing which will gravitate them towards Hong Kong is if they have overseas expansion plans and we actually saw that in a lot of companies which have been listed in the past few months. They want to raise proceeds, they want to therefore use the proceeds to expand overseas And I think that is one thing which Hong Kong can actually serve the best.

45:53That was Bonnie Chan. She is the CEO of Hong Kong Exchanges and Clearing, speaking with Bloomberg TV host Yvonne Mann. And I'm Doug Krizner. You can catch us weekdays for the Daybreak Asia podcast. It's available wherever you get your podcast. Tom?

46:08Tom Busby:Thank you, Doug. And that does it for this edition of Bloomberg Daybreak Weekend. Join us again Monday morning at 5 a.m. Wall Street time for the latest on markets overseas and the news you need to start your day. I'm Tom Busby. Stay with us. Top stories and global business headlines are coming up right now.

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