cover of episode CIO House View Monthly Livestream - February

CIO House View Monthly Livestream - February

2025/2/17
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UBS On-Air: Market Moves

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President Trump's recent executive order imposing additional tariffs on imports from Canada, Mexico, and China is discussed. The tariffs on Canada and Mexico have been temporarily paused due to border security negotiations, while the situation with China remains uncertain but likely to involve future negotiations. A pattern of tariff threats followed by negotiations is anticipated throughout Trump's second term.
  • Tariffs on Canada and Mexico temporarily paused
  • Chinese tariffs anticipated to be part of negotiations
  • Pattern of tariff threats and negotiations expected to continue

Shownotes Transcript

Hello everyone and welcome to the CIO House View monthly live stream. Today is Thursday, February 6th, 2025 and I am Amantia Muhedini. Thank you for joining us. Today I'm joined in the studio by my CIO colleagues David Lefkowitz and Leslie Falconio and virtually from our biocolleague from the governmental affairs U.S. team, John Savarkol. We always appreciate hearing from

from you, David, Leslie, and John. And of course, we particularly appreciate hearing from our audience. And so please make sure to ask us a live question. You can do it by clicking the button, ask a question that is already open and we'll integrate your questions during the discussion. All right, so let us start by diving right in. We'll start with John.

John, lots is happening in the policy realm. Over the weekend, President Trump signed an executive order to impose additional tariffs on imports from Canada, Mexico, and China. However, since then, the tariffs on Canada and Mexico have both been temporarily paused as a result of border security negotiations. A lot is happening. Please give us an update. Catch us up.

on where do the tariffs stand today? Are they just a threat? And, you know, do you think this kind of environment is the new normal? Sure, Amantia. Thank you. And it's nice to be with you today. Yeah, I think that the tariff announcements from last weekend were not very surprising, except with regard to China. I think there was always an anticipation that the higher tariff levels on Mexican and Canadian goods would be imposed.

But I think most people thought that the Chinese tariff increases would come later through a negotiation. All of the tariff increases and all of the threats are really all designed to trigger a negotiation to address a U.S. grievance. And in the case of Mexico and Canada, it's all about immigration, fentanyl imports, and

maybe a handful of other issues. If the U.S. gets their way on those issues, then the tariff threat will be pulled back. And that's exactly what we saw happen with Canada and Mexico over the last few days. It's very possible that there could be a pullback

of the Chinese tariff increases as well. It is likely that President Trump and President Xi will talk next week. So there could be a pause in those tariff increases as well. But my sense is that there will really be a longer term deal that will materialize over a couple of months

with the U.S. and China. And I do believe that the tariff increases will be paused at some point in the near future. I think this is the way to look at all of the tariff increases. We saw that there were threats last week against the government of Colombia, other Central American countries who were not willing to accept tariffs.

immigrants in the U.S. from those countries back. So the tariff increases in many cases have had their effect and the tariff threats have been pulled back. I expect that pattern to follow throughout the year. I think that there will be tariff threats virtually every other week

on some country, again, designed to address a U.S. grievance that Trump wants resolved to the satisfaction of the U.S. It is likely that the next president

Next group of countries that will be subject to higher tariff threats will be the European Union. I've heard that those could come as early as February 18th, and they would focus on steel and aluminum and copper products. Those were subject to tariffs back in the first Trump administration.

And we expect that to happen toward the end of February. So I think people should get used to the pattern of tariff threats followed by negotiation. If the negotiations are successful, then the tariff threats will be pulled back. If not, they'll be implemented and life will go on and negotiations will continue. And that'll be a pattern you'll see throughout the entire Trump second term.

Yeah, thanks, John. It's clear that we'll be operating at a high level here of news and headlines changing, and I'll come back to our team about what this means for investors. But before that, let's stay with you. Lots happened in the last three weeks. President Trump signed several other executive orders that had nothing to do with tariffs. Is there anything in there that stands out that we should be thinking about from your perspective? Well, I think the thing that stands out the most are the

numerous executive orders and actions on immigration. It's clear that President Trump wants to prioritize this issue above most others. I think he views this as an issue that maybe was one of the two issues that won his election for him, inflation being the other. So I think he's really going to

press hard on the immigration issue. Many of the executive orders on immigration were very ambitious

and they're being enacted right now. Congress does need to weigh in and help him with immigration with new funding, but this is a good start. If you're interested in his immigration agenda and like it, then he's gotten off to a good start in that regard. It's important to remember that a lot of these executive orders will not be enacted as Trump intends. Many have kind of a

kind of a questionable legal basis for their implementation. So not all these executive orders are going to be implemented as Trump has intended, but certainly the immigration orders are probably the ones that leave the most mark on my mind as being most significant, most far-reaching, and probably the most important to the Trump agenda as it moves forward.

That's helpful. Sounds like even in this realm, we expect maybe more of a kind of announcement, executive order, some of which pull back based on implementation or legality. Now, beyond the White House, in D.C., Washington's facing a couple deadlines over the next few weeks.

extension of the debt ceiling, government funding, and potentially the looming kind of expiration of the lower tax rates by the end of this year. So can you identify what are the milestones that really matter and we should be tracking to?

Yeah, I think, you know, when you look back at January 20th as the start of the Trump administration, it was easy to predict that we'd see this flurry of executive orders once he assumed the office. That will continue for a couple of weeks, but the executive orders will slow down a little bit in their volume. Executive orders are important because they have the force of law in most cases while the president is still in office.

But they're relatively weaker in the sense that they won't necessarily continue in the next administration. So Biden – so Trump is really looking forward to Congress enacting issues –

that strengthen his agenda, such as the Trump immigration and deportation effort really needs additional funding, and Congress can provide that. So Congress will work on different what are called reconciliation bills over the period of the next two months, and they will focus on immigration, defense, and energy.

And without the passage of those, Trump will be limited in what he can accomplish in all those areas. So Congress will slowly work on passing a budget resolution this month.

And then they will have to focus on the extension of government funding, which presently expires on March 14th. So that's a key deadline. The budget resolution can be done on a partisan basis with just Republican votes. The government funding extension has to be bipartisan because it needs 60 votes in the Senate.

So this is going to be a tougher issue. Government shutdown threats have become pretty much the norm in Washington, so I'm not sure that markets would react strongly to that. But then later in the summer, Congress will also have to deal with an extension of the debt ceiling, and that is an issue that will have to be resolved on a bipartisan basis. And certainly any tinkering with that, any challenge to the U.S. meeting with

its debt obligations will certainly get the attention of the markets. We've seen that happen before. Markets have responded poorly or badly to that. That could happen this year because that's a bipartisan issue. So what we expect, more executive orders, the passage of a budget resolution to get

Trump more help and funding on some of the issues. Government funding extended by mid-March. The debt ceiling in the early summer. And then probably in the second half, we will see action begin to move forward on the extension of the tax cuts from the 2017 bill. That's kind of a rough calendar, and that's what we expect to see in the months ahead.

That's great. Very helpful. March 14th, this first deadline is about, what, five weeks away, which is a lifetime in the current environment. So now let's move on to market expectations. David, I'll start with you. We'll go back to this question of tariffs since it really only was this week, believe it or not. So what are your expectations now on current tariffs and their implications of markets? And generally, what's your framework in thinking about tariffs?

Yeah, thanks, Vimantia. So I think John laid it out well. I think that, look, you know, tariffs are going to be part of the conversation. I think it's important to keep in mind what do we think the goals are of the administration in terms of tariff policy? And I think there are a couple of things. John talked about sort of the transactional nature of, you know, wanting to get something from certain countries. So, you know, we don't take those types of tariff threats too seriously. They probably will get negotiated away.

But then there's an overarching goal and Treasury Secretary Besant was in the media yesterday talking about this. There certainly is an overarching goal from this administration

that they want to reshore a lot of, you know, as much production as possible back to the United States. And I do think, you know, investors have to be prepared in that scenario that we will see tariffs and they will go forward on certain products, on certain countries, and in certain segments of the economy. That's going to be probably one of the tools to help encourage moving production back to the United States. That all being said,

At the same time, President Trump doesn't want to see the economy get damaged, right? So we think they'll be calibrated. And as a result, we don't think this is going to have a huge impact on economic growth. But I think investors do need to be prepared that there probably will be tariffs that will be put in place, just like they were in Trump's first term. And in many cases, they still remain in place.

And that could be a source of market volatility. So I think investors need to be prepared for that. But all things being equal, we would expect any volatility we do see in equity markets, that's probably going to be a buying opportunity. You know, again, we don't think the administration is going to shoot itself in the foot here and ultimately do damage to the economy. But at the same time, they do, there are some things they want to encourage, like bringing production back to the United States, which may require tariffs in some cases. Yeah, that's true.

that's helpful. And I mean, you're pointing to what John just said of the two issues which President Trump ran on, inflation being one of them. And any particular sectors that you think will be most affected? Yeah, I mean, look, if you think about it from a public market perspective, I mean, the sectors that are

most exposed to foreign trade, you know, it's gonna, it definitely is tech, right? I mean, you think about the entire consumer electronics supply chain, that is in Asia and in China. So, you know, we'll have to see how that, how that pans out. Consumer discretionary, I mean, they import a lot of things from overseas as well.

and the industrials companies as well, I would say also are somewhat big importers. So those would be the areas I would take a closer look at now, but until we know the specifics of the policies

and on what countries and what products and things like that, it's hard to get more specific than that at this point. Yes, makes sense. That's why we're watching markets and headlines. And I mean, Leslie, it's really kind of similar, different question to you. There's obviously a lot of uncertainty as we're understanding these policies. There's also been a story of U.S. economic resilience. So how are these two things coming together in how treasury yields are reacting and what we're seeing?

I mean, volatile, number one. We've had a lot of volatility in treasuries, obviously. But I think even prior to this week, if you go back to September when the Fed started cutting, we had a complete decoupling, right? The Fed cut and interest rates went up. And one of the reasons why they did was a concern over reacceleration of inflation.

And then when you overlay these concern over tariffs, I mean, what we have is the market, you know, getting concerned again over inflation. So what we saw is that you have these short end moves up as inflation expectations go higher. Right. And then they say, OK, Fed, you're not going to cut or you're not going to cut as much.

Now, what we do know, that's the first part of it. The second part of it we know over the long term, you know, tariffs can impede growth, right? But the market doesn't look so much in the long term. They're really going to focus on the short term. And even though the Fed and we believe, you know, these tariffs, if they should occur, are one-time price increases, the market is so focused on that inflation side, which really started from the decoupling back in September, that's really how the market was reacting in terms of saying, taking out some of these cuts. Now, these cuts are back in now, probably because...

They were implemented, some of these tariffs, but also, too, and to David's point when he was talking about Besson, you know, we've seen what's been really important is that the market has seen some softness in economic data, but the relief came in terms of the refunding announcement.

which was yesterday, right? As we know, bond vigilantes have been screaming very loudly in terms of interest rates spiking higher because of increased supply and such. And what really Besson gave, at least for the time being, right, is that they're not going to increase the supply going forward. And more importantly, he's not going to change the composition, meaning that most of the funding of the deficit is going to come from T-bills, not by necessarily increasing five or ten-year treasuries.

So that really was a big part of the tenure coming down as well. But it's been incredibly volatile. We made a new low of 440, but two weeks ago we were at 480. And I really don't think that's going to change anytime in the short term. Yeah, that's interesting. So let's look at really the short term. Tomorrow on Friday we'll have the employment report. It's widely expected to show signs of cooling. So what does this mean in terms of kind of the Fed next steps?

interview? You know, the consensus is about 170, 4.1 for the employment. But honestly, even if, and we do have some base adjustments, which could sort of cloud the data a little bit in terms of cooling, but say hypothetically it comes out softer than what's expected, there's no question tender treasury yields will come down, you know, fairly significantly. I don't think it alters the path of the Fed. Now,

Not right now. I think, you know, the price again, two cuts right now. We believe two cuts as well in 2025. I just don't think this one number is going to be enough. You'd have to see consecutively weak numbers. But, you know, it's supposed to come out still fairly strong. But if it's on the weaker side, I think the Treasury yields would rally more than back up right now. Okay. Sounds good. So now with all that is happening, this is a really tough question, but how are we positioning? And maybe we'll start with you, David, on the equity side.

Yeah, sure. I mean, I would try to keep the big picture in perspective here, right? And we've had obviously a very strong bull market over the last two plus years. And I think there's been sort of three drivers that have been driving that bull market. And we think those three drivers are still in place. We've had durable economic growth. You know, we think that's going to continue. We're in the middle of

fourth quarter earnings season and the message we're getting from corporates is that, yeah, earnings growth remains healthy. I mean, there's a little bit of some downgrades to earnings estimates because of currency, but that's not a big thing in the scheme of things. So we feel pretty comfortable that we're gonna continue to see some good economic growth and good profit growth going forward.

Secondly, is that inflation has improved quite substantially over the last couple of years. It's moved down to the, call it, high twos range. We think there are still some disinflationary trends that we'll see in the data, especially sort of the shelter component of the inflation data.

So we still think that combination of durable growth, sort of benign inflation, that's still a favorable environment for equities. And then you layer on top of that the AI story, which...

which obviously has been a bit more volatile in the last couple of weeks, but we think it's still in place. So still think it's a good backdrop for equities. I do think you need to recognize that valuations are higher and maybe those drivers I talked about aren't quite as powerful as they were two years ago when they were less appreciated by the market.

But we still think the direction of travel is higher and we're looking for 6600 on the S&P by the end of this year. Now, within the market, you know, still think, you know, tech is a good place to be. Given some of the AI trends, we just saw the CapEx numbers come up from a number of the cloud service providers. But we also think it makes sense to broaden the lens and look beyond tech. So.

We've liked financials for a while. That's an area of the market that should benefit from one of the cleanest ways to benefit from deregulation. So that's positive. And then because the economy is doing fine, we should see a pickup in activity, loan growth and capital markets activity, mergers and acquisitions under a new administration. So all that helps financials. And then we just recently got more positive on health care.

This is an area where sentiment has really come down quite a lot because of the policy uncertainty in Washington. And ultimately, we don't think there's gonna be dramatic changes in the environment for healthcare companies. And as a result, we think eventually we're gonna see a revaluation higher in healthcare

That being said, it probably will take some time to get that clarity. As John talked about, there's a lot of things that have to get done this year in Congress, and health care could be part of the conversation when it comes to extending the tax cuts and how to pay for things and things like that. So it may take some time, but we think the risk-reward here is looking more interesting. Yeah, that's great. And really the key takeaway is

take a step back, look at the bigger picture and the backdrop. Now, Leslie, what does this mean in terms of fixed income? Well, I mean, volatility creates opportunity, but unfortunately when it comes to credit spreads, we're not seeing any. I mean, these credit spreads, particularly in high yield, have been very, very tight with very little movement. And that's why we're saying really neutral in that sector. And we're waiting for that volatility to hit higher embedded credit quality to really take advantage of that.

I mean, we still stay with the higher quality sector simply because lower credit quality is a bit too tight. I mean, we like things like, you know, investment grade corporates, even though spreads are tight, you know, you're getting 5.7% yield, very good carry, very good demand from, you know, fully funded pension funds, insurance companies, foreign investors.

And we still like five-year treasuries, agency MBS. One of the things that we have as a diversifier that is still on the cheaper side in terms of, you know, relative, cheaper relative to other asset classes, are the senior loans. And we went into senior loans in December strictly because, one, to diversify in terms of not having interest rate volatility, and plus it just really has a higher carry. And, again, because we still believe the economy is going to be strong, we think the sector will continue to do well.

So we're really looking for volatility outside of interest rates to really go into that deep embedded credit to have some opportunity there. Okay. Yeah, that's helpful. So still in the high-quality segment, and we're looking for that opportunity. Quick reminder to our audience here, if you have a question, click that big red button that says Ask a Question, and we'll make sure to answer it. And now...

I will say, David, I did not stop you when you said AI earlier. I was saving a question here. So the other thing that made the news over the last week, 10 days, who knows, was DeepSeek and their kind of innovation in their new R1 model, which did generate a market reaction when it was announced. So can you just kind of give a recap there? Why was it important and how are you seeing it?

Yeah, sure. I'm sure everyone's well aware of DeepSeq and probably has maybe even played with it themselves. So let me give you our take on this. I think what's important to recognize is that, I mean, obviously it's a cheaper version, but what's important to recognize, it's an optimized version of a leading edge model.

Right. And what that means is that we sort of need these types of innovations to help reduce the cost of of innovation in AI. But at the same time, it doesn't necessarily move the frontier and advance the the the the capabilities of these models. And the only models that can continue to do that are these leading edge models that are still very expensive to produce and create.

And that's why, so what this means, if I had to bottom line it, there's been a lot of concern, okay, this cheaper model, it's much more compute efficient. The one from DeepSeq, does that mean we're not going to need all the chips that we thought we were going to need and all the data centers and all the other stuff? We don't think that's the right conclusion to draw. We think, yes, there's going to be simpler, more efficient versions of these leading edge models.

But the leading edge models are still, the companies are still going to be investing in the leading edge models to advance their own AI capabilities. And I think that's the message you heard this past week from the tech companies themselves, right? I mean, Google had a massive increase in their capital spending number, which was really much higher than anyone was expecting.

Microsoft also talked about higher capital spending, not only this year, but next, their fiscal year, which is in June. So fiscal 26 is still going to be even higher than what they're going to spend in fiscal 25. And then obviously Meta came out a little bit earlier with some of their comments.

Yeah, I think the data suggests that there's really not a material change in the AI investment thesis. Our bottom line is that, yes, there'll be cheaper versions of some of these capabilities. That's going to speed adoption, which is ultimately a good thing. But at the same time, companies are still going to be incentivized to invest in those expensive models because that's where you can really break new ground in terms of capabilities. Mm-hmm.

Yeah, that's great. And I mean, really what you're describing is not too different or foreign from other cycles of technology innovation. We've talked in this forum and other forums that the AI kind of story really in some ways was both new and not new at all. This is technologies which are now scaling. And so it's very interesting. This is maybe another chapter in the same story that we are reading and watching. Just kind of waiting here and seeing what questions...

we have from the audience. And really, I mean, as we think about kind of the core backdrop here, you both mentioned that U.S. growth is a core component to how we're thinking about both the fixed income and the equity calls. Maybe

Maybe we can recap for our audience here some of the elements that we're watching there. So it's AI, it's tariffs, anything else that you would really bottom line? Like what are the things that we're watching on U.S. growth that we haven't discussed already? I think what John mentioned in terms of immigration is a big part of it in terms of payrolls. There's no question, but there's just a lot of unknown there. And there's still a lot of unknown in terms of sequence and duration in terms of these policy changes that's going to impact growth and inflation. I mean, if you're

If they did go through with the 25% and it was safe for a long period of time, obviously that would be a fairly large headwind to both, to growth and inflation. But I think it's just too uncertain right now to really put a number on it. Yeah, and in terms of, yeah, like...

Labor market is key, right? So, I mean, I still take some solace in the fact that we have more open jobs or quite a healthy level of job openings relative to the number of unemployed. So that's usually a healthy sign. On top of that, if we look at the more cyclical components of the job market, like manufacturing and construction, those have still been

They've weakened a little bit, but they're not sending any sort of alarm signals. So at the end of the day, the job picture is always going to be crucial. No, fair. And the other part of this, I mean, David, you already talked about tariffs earlier in our conversation. But just to put a fine point on that, if tariffs remain in place, if they escalate, what could the impact on U.S. growth be?

Yeah, I mean, so again, just to our base case is that there will be some tariffs. They will have a little bit of a negative impact on growth, but we don't think it's going to derail the story in a big way. But yeah, obviously, like if we had 25% tariffs on Canada and Mexico, that would be a big hit. I mean, we feel that because we do a tremendous amount of trade. There's a tremendous amount of trade between the three countries. And especially with

In the auto sector, a lot of products...

move back and forth across the border multiple times because the supply chains are so integrated across these three countries. So this would be a fairly big tax on the U.S. economy, and we would probably feel that, which is also why we don't think it's going to happen. Right, exactly. And it's about 30% of our exports between Canada and Mexico from the U.S., and so that's your point, that's John's point earlier in the conversation, too. Yeah.

Yeah, fair. And I think we have another question here for John. Again, lots of interest from our audience on tariffs. And so, John, from your perspective, how do you think about tariffs in terms of global trade and kind of global growth and negotiations around that, I guess? Yeah.

I think they'll serve as a hiccup to all those trade flows this year. But as Leslie and David have mentioned, it's really hard to predict exactly what's going to happen. I think that we should look at what Trump does, not what he says.

He is going to say a lot of different things that are simply not going to materialize. So I expect the tariff implementation reality to be similar to what we saw in the first term. There will be new tariffs. I think they'll be limited. There will be a lot more tariff threats.

And in his mind, they're working. I mean, look, there are already concessions made by Mexico, Canada. Other countries have already made concessions to tariff threats. So he's going to continue to do that. And the U.S. has the leverage to make those demands and to get concessions. So I think that ultimately people will stop paying attention to the threat so much and

and really look to see what he actually implements. And I think it'll be similar to a first-term experience. And I would just say that the only things that will force Trump to reverse course is whether they are actually inflationary and whether the markets...

tend to tank because of tariff threats. If those things happen, then Trump will reconsider. He doesn't want to be known as the inflationary president. That's in part why he won. He doesn't want to be known as the president who dragged down the stock market. So those things will be, he'll be sensitive to those things. And I think those will be the things rather than any other issue, including advice from his

from his people in office, I think those will be the things that force him to slow down or reverse course.

Yeah, that's great. And maybe we'll leave on that as perhaps one of the final points, John, which was look at what is actually being done versus what is being said. And David's point on let's take a step back, look at the big picture here, especially for investors. So I don't know if we have any other questions. Just checking in with the studio other than what we've received so far.

So, yep, and it looks like we are ready to wrap up. Of course, you can always reach out to your UBS advisor for any questions. That's how you can reach us. And thank you for spending time with us today. Reminder, our next CIO monthly live stream will take place on Thursday, March 6th at 1 p.m. Eastern.

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