Rally and 30 points on the s p 500. There arent many things that story thanter the market rally in. Lisa you said it before, fiscal support, more fiscal support, lower rates. This is what is driving it. I wonder at what point fundamentals catchup because we are not seeing the Economic Data to justify this, and yet, people are looking forward to data they are expecting as we see reopening start to take hold. Clearly, what we see in the next few months is common sense sense, an economy that goes from shut down to reopening. You will get that month on month sequential improvement. July will look better than june. August will look better than july, if we can keep on reopening. Part two is the limit of the recovery, the limits of normalization, how dependent we are on a vaccine, on improvement from the science side to really adjust the limits of that normalization. I think at the moment, were focused on the sequential improvement. At some point, youve got to get your hands around the longer term, how quickly we can normalize. Lisa also, people are talking about a vaccine, yet i dont see much from the mark executives the merck executives coming out and saying we cannot commit to this timeframe, and did not sign onto President Trumps pledge of a warp speed vaccine. You have to make sure it can get bulk toor in enough create herd immunity, and that it is safe. Jonathan theres a ton of hope, and theres nothing like the equity market to put on rose tinted glasses to start seeing the world in a better way. Hope about stimulus, hope about the science. We all want to live in a better world, and this equity market is encouraging that hope at the moment. Lori calvasina of Rbc Capital Markets joining us now. You have been far more conservative than most as we have rallied from the lows. We are looking at the drawdown. What are you looking at now . Lori nothing has really changed in our view. We are not looking at daytoday trades. For us, theres enough valuation in this market. The rally is very new slow driven, very fragile, and our opinion. We think you will see choppy waters now through yearend. I would say that tape is tempting to chase, but not when we think we should be chasing right now in terms of getting right now in terms of getting more bullish. Lisa so lets [indiscernible] performance this month versus the s p in two years. I am wondering whether that has run too far in your view, or whether this is catchup given how much it has lagged behind. Lori i think it is the latter. I used to be a focused smallcap strategist. During the qe era, i was exclusively focused on small caps. When i hear people talking about the market not matching fundamentals, that is exactly what we heard about small caps in the qe era, and they ripped. Even though this is a fed liquidity driven rally, the small caps havent really ripped. Look at the russell 2000 against either the nasdaq or the s p 500, and just take it back back take it back a bit. It has really been more range bound than a breakout. We had a couple of these melt ups like weve had the last few days where it felt like they were taking off, and they petered out. The price action underneath the surface is still telling me that while the market is in very risk off mode, it hasnt really been there throughout this rally. The market is still indecisive if you look under the surface. Lisa if you take a look at the russell 2000 so far, are you saying you would consider going into certain areas of these small and Midsized Companies . Lori the last big smallcap piece we did last month, we said we would be market weight the small caps relative to large caps. We thought very much it would be the pendant hump on the trajectory of the Economic Data, whether or not that trade could be sustained. I think you brought up a great point on normalization. Frankly, as ive talked to investors over the last six weeks or so, theres a lot of doubts about whether we will be back to normal anytime soon. That is a limiting factor on smallcap performance. That being said, if you think we have seen the worst of the itnomic data in 2q, and starts to get a little bit better here, you dont want to be underweight. So we think keeping a balance between your small caps and large caps makes sense at this point. Jonathan the problem a lot of people have got right now is the realization of missing out. The nasdaq has basically filled the gap. The russell hasnt come up but it is still 40 off the march lows. What do you say to those people that have missed out on the rip . Lori one of the things people are struggling with is that the rip is really driven by a lot of stuff that people that you and i talked to, the institutional community, dont like to buy. When we look at prior recession recoveries, it is short in names, the really distressed parts of the market that tend to work in these recovery trades. It is lowquality companies by any measure that you can pick. I think the frustration i sense from talking to investors is not just that the market is ripping and might not be there. A lot of people i talked to did try to get positioned for recovery, but it is not the kind of stuff they want to begin longterm that is doing well now. That creates an additional layer of frustration. Lisa youre making jonathan you are making the case to stay overweight consumer staples. Lori we like it better than consumer discretionary, which we are underweight. We are overweight utilities, industrial, and health care. I mentioned the concept of balance in small versus large. We also want to be balanced in terms of are sector exposure. Health care is our favorite longerterm growth play. I will tell you that with staples, we actually think the sector looks quite cheap again if you look at it against next years earnings, which we think are too high for the broader market, but with think are pretty reasonable for consumer staple companies. Consumer staples has also been a part of the market that has been so deeply hated. That is usually, when it is as hated as it has been, it has been a good three to fiveyear outperformance signal. If you are going to play the consumer, we think it is a better way to go than the discretionary stocks. Lisa we are speaking with Lori Calvasina, head of u. S. Equity strategy at Rbc Capital Markets. I always love speaking with lori, not only because she is really smart, but because she is also experimenting with this homeschool situation, which has led to questionable productivity of all of the parents out there. John has done a really good job highlighting how people are moving to cyclical stocks, financials and energies seeing a real gain recently. I am wondering how far this rally can go if we dont see momentum continue in the amazons and netflix. What is your thought . Lori i think it is a limiting factor to some extent. These are the biggest in the market, and you need them to go up if we see the market continued to climb higher. If they dont, you have to see a lot of the other big sectors in the market do a lot of heavy lifting. That is just because of the disproportionate market cap share of some of those big tech companies. Other areas like financials are just going to have to work even harder. Ive watched the financials. It is another trade that has only taken off recently. I really question the outperformance ability of financials on a longerterm basis if rates are going to stay low for a long time. We really need to see 10year gilts move up for that sector to outperform. Im not a bond market person, but it really have some doubts that this is a longerterm outperformance trade. It feels like a shortterm move off the bottom to me. Jonathan you are an equity Market Strategist that spend a lot of time thinking about positioning, so talk to us about positioning, and whether the path of least resistance right now is some of these names and financials these names in financials that are so underground. Lori what is interesting on positioning, we spend a lot of time looking at Hedge Fund Positioning because they are some of the most important dictators of price action in the market today. Financials have been a deep and chronic underweight for hedge funds for a very long time. It is like postfinancial crisis, we just saw a lot of hedge funds decide they are not going to play there. They decided to play in i. T. Services as opposed to the banks. Theres a Pressure Point for hedge funds if we do get a real long, true outperformance. They are going to be underexposed. It is going to hurt them. It has the potential to sort of drive them back into that sector and drive the prices up substantially. But i have been saying the same thing for three or four years, and it hasnt happened. All we really tend to see our shortterm trades driven by Value Investors and long only investors. They get to a certain level, and the hedge funds never pick up the baton. So the potential is certainly there, but the willingness i am not sure is. Jonathan Lori Calvasina of rbc capital, always fantastic to get your thoughts. Send our best to the whole family, and thank them for letting us borrow you for a couple of minutes this morning. This is the issue for financials, isnt it . I think it is the number one issue. What happens with rates, and how low will we remain where we are with rates at the moment . If the fed has got to go through with yield curve control, does that mean they try to flatten the whole curve, or do the appreciate some of the benefit that comes with a much steeper curve anchor the . End, keepthe front the long entire. Lori i was actually looking this morning at the gap between two year and 10 year u. S. Treasury yields. It is hanging in at about 50 basis points, and it has bring pretty stable, not surprising given that we are talking about yield curve control. Theres also the question of credit losses. Jamie dimon raised this yesterday when he said that they could possibly see a faster recovery than some people expected, leading to lower credit losses. A big wildcard people arent talking about as much as we head towards reopening. Jonathan what was the jamie dimon line . The fed could get out of bazooka, it deployed the old military the old military. On the s p 500, positive by a little more than 1 . Next up on the program, we had down to washington, d. C. To catch up with our colleague on the latest in congress and their next move as they look to hong kong. From new york, this is bloomberg. Ritika with the first word news, im ritika gupta. In hong kong, hundreds of protesters returned to the streets, demonstrating against chinas plan to take more control of the city with new National Security measures. Right have police fired pepper spray and projectiles. Meanwhile, the richest person in hong kong has come out in favor of the chinese law. The billionaire says it is every countrys right to address its National Security concerns. The European Unions executive arm is coming out with an unprecedented stimulus package to deal with the worst economic emergency since world war ii. It calls for spending 823 billion. 2 3 of that will be in the form of grants to member countries. The rest would be in loans, paid for by borrowing on financial markets. The u. S. Is considering a number of ways to punish china for that crackdown on hong kong. The Trump Administration is weighing whether it will declare whether the former colony has lost its autonomy from beijing. Amongst the possible sanctions, freezing assets from chinese officials and businesses. There could also be visa restrictions for Chinese Communist party authorities. A defining moment for elon musk and spacex. Spacex. If all goes well, a spacexs rocket launch this afternoon from cape canaveral, the first astronauts have traveled on a commercial vessel. Global news 24 hours a day, on air and on quicktake by bloomberg, powered by more than 2700 journalists and analysts in more than 120 countries. Im ritika gupta. This is bloomberg. This is bloomberg. I went directly to the president to get an answer on this, and he said to me that he is displeased with chinas efforts, and that it is hard to see how hong kong can remain a Financial Hub if china takes over. Jonathan the White House Press secretary weighing in on the situation with the United States and china. That situation breaking down, tensions flaring, doing nothing to this equity market. We are positive on s p 500 futures by 33 points, up by 1. 1 . Treasuries just a little bit lower, yields higher, up two points to 0. 72 . The dollar weaker against the stronger euro. Eurodollar coming up just 0. 1 . You and i have been talking about this. Slowly, quietly, and the background, the chinese currency slowly breaking down his these tensions continue to build. Lisa i am struggling to understand the trigger point here because we are seeing these tensions build, and they are expected to only increase ahead of the election. As you pointed out, this is a bipartisan effort to try to punish china for some of the trade measures, for some of the issues and the lack of transparency around covid19. That definitely seems to be out there, weighing on the currency, but not really anywhere else. I am struggling to understand what it would take for that to change. Jonathan lets bring in bloombergs Kevin Cirilli for the latest out of washington, d. C. I understand theres a bill going through the house that the president carefully taking a look at. Can you give us some of the details . Kevin it has bipartisan support from republicans and democrats. Both parties are in agreement here, one of the rare geopolitical issues where republicansee and democrats agree. That institutions in china could be sanctioned. The u. S. Could put them on a sanctions list. I am told this is just the first step in what could be a longerterm process, so the punishment could get increasingly worse if beijing does not back off. Therehow much emphasis is on responding to chinas encroachment on hong kongs independence, versus the recovery we are seeing ahead of the election . How much does President Trump really want to see a china tension story play front and center as he tries to rejuvenate the economy . Kevin politically speaking, the president views it as an asset politically speaking to be tough on china. Both former Vice President joe biden and President Trump have both said that they would be the more aggressive resident in terms of dealing with xi jinping. So it is not that one particular party is saying that there should be a different handling of how to deal with china. That is a stark contrast, mind you, to how russia played out in the 2016 election. , both 2016 in russia democrats and republicans are in agreement. There has to be a more aggressive policy geopolitical approach to dealing with china. Bidens campaign is saying that he would know how to do it because he would be able to rally european allies. The Trump Campaign is saying that President Trump has proven to be xi jinpings worst nightmare. Jonathan lets talk about next steps. Beijingscussed whether has actually talked about the special trading status of hong kong to the degree that it would back away if it was threatened with it. The administration, according to our reports, looking at the ,ussian route of things sanctions on individuals, businesses, and maybe not necessarily Going Forward with rescinding the special trading status of hong kong. Kevin that is really where all of this is headed. If china can say in the shortterm that perhaps that would not have significant economic decline for them or negative impact in the short term. However, what we have seen over is this two weeks steady, incremental approach from u. S. Policy from both parties taking little steps against china. I think the next step is not just dealing with china, but other countries. As should look at india another. One state Department Official pointed in that direction. I would also note these types of International Standards around different sectors, 5g, as well as the energy sector, and trying to get europe in the u. S. Back more on the same page. That is something the president has struggled with. It is not viewed necessarily as an asset come but that could start to change over the next couple of years. Naively, previous administrations have focused on shaping and influencing the behavior of the Chinese Communist party, and i think you get to a point in time where youve got to recognize, times up. Actuallylity to shape the coming is party is really limited. As we look at this administration, i wonder if we are witnessing the shift now, that there is a realization that they cant influence and shape the behavior of the Chinese Communist party, and with got to focus on what we can do at home, focus on the supply chain, get on board, and create a wider sphere of influence with the United States at the center of it. Kevin further, this is a realignment of the Foreign Policy approach. Democrats and republicans are in agreement. To your point, the u. S. Policy for the past two decades has been engaged with the chinese coming is party. Sometimes, silence can speak volumes. I would argue that the president has forecast that in the last three weeks because hes not said that he once to get on the telephone with xi jinping at all. This is a president who has with kimrequently jongun and other foreign adversaries, and now getting a bit of the u. S. Cold shoulder and saying, you know what . If you are not going to play ball, we can find another country to invest in that will. Kevin cirilli with the latest in washington, d. C. Thank you. Always great to catch up with you. I think it is absolutely critical. Are we moving away from trying to influence the behavior of the Chinese Communist party . But i am struggling to understand the political will right now. Yes, kevin is saying it is a bipartisan issue, and yet it is unclear how we get there. We have been talking about the idea how theres a lot of pushback in re