Doubleline Global Bond Strategy Fund Portfolio Manager Bill Campbell joins Yahoo Finance Live to discuss the outlook for the global economy as the Russia-Ukraine war continues, Russia seeking military aid from China, and the outlook for commodities.

Video Transcript

BRIAN SOZZI: OK. Let's turn our attention back to the Russia-Ukraine war and what it could mean to markets globally in the weeks and months ahead. Bill Campbell is a portfolio manager for the DoubleLine Global Bond Strategy Fund and joins us now. Bill, thanks for getting up early for us. We appreciate it. I liked your new paper that you put out recently, noting we could see a bipolar world because of this war. Explain to us what you meant and what it might mean to markets.

BILL CAMPBELL: Well, Brian, thank you for inviting me back. It's good to be back with you. I think when we start looking at the medium-term implications of what's happening with the Russia-Ukraine crisis, one of the elements that we've been digging into are maybe the secondary implications of the sanctions. And what we've seen with these financial sanctions, not only has the West basically removed Russia from its financial system, but it's pushed Russia and China now much closer. We had already started to see a Russia-China axis or alliance start to build.

One of the key moments I think was leading into the Olympics when Russia and China signed a very large trade and commodities deal. To date, we haven't seen China condemn Russia's actions. And actually, overnight, we've seen reports that Russia now is asking China for assistance on a military basis for military equipment. I know China is trying to distance themselves right now from those reports. But our thinking here is that removing Russia from the SWIFT system is pushing Russia and Chinese alternative payment systems forward.

Both Russia and China have a SWIFT alternative. China has a digital currency and electronic payment system. And we think that over time, the financial linkages, the geopolitical linkages, and the trade linkages between those two large economies and important players in global trade are only going to deepen. And that's going to have important implications for a lot of countries who will need to decide, do they want to be closer to maybe the Russia-China economic and trade orbit, or do they want to be closer to the Western trade orbit?

And beyond just the trade linkages, it has currency implications as well, as countries may start to think about how quickly the West was able to mobilize sanctions in the dollar, and euro, and G7 currency system and maybe decide that over the medium term, it's time to diversify away from the large holding of potentially US dollars in the reserve currency baskets, which dollars currently are about 60% of the world currency reserves. So that could also be another implication.

- Well, and Bill, just sticking with that for a second, the US dollar versus the yuan has exploded to the upside over the last two days. Biggest two-day move I think in months here. I'm just wondering-- that means that yuan is weakening relative to the US dollar, not strengthening. I'm just wondering what implications a further weakening of the yuan if this trend continues could have on the US dollar, or any other currency trends you think playing out in this space?

BILL CAMPBELL: Well, I think when we look at what's happening with the Chinese currency, I think the risk premium that's being built in is a couple of fold. China is being currently hit by the effects of their internal regulatory shift that they've been going through, as you noted at the top of the hour. They're also locking down due to a zero-COVID policy, which is continuing to hurt growth. So both of those are internal growth headwinds that will continue to put pressure on the currency going forward.

The other item that I think is becoming a bigger player in just the near-term outlook for China's currency is the potential for geopolitical or sanctions being put onto China itself. There always was concern that China would help Russia skirt the financial sanctions, whether it was through their banking sector or other means. So there has been a lot of concern that there would be Western sanctions targeted at China.

And I think the news just over last night that potentially Russia has asked China for military help only escalates those fears. So what we're seeing being built in in the near term in China's currency I think is the geopolitical risk premium, as well as what has already been there is concerns about the near-term domestic growth outlook. So in the near term, I think that those headwinds may continue to build.

In the medium term, though, I think that the world is looking at reordering a lot of the trade and financial linkages that have existed for decades. And especially in emerging markets, we're going to have to see which way do countries try to align more with the Western financial system and Western countries, or do they try to maybe move more towards that Eastern Eurasia bloc?

- And how do you see this playing out with commodities because we were just talking about the volatility that we've seen of prices going up and kind of crashing in certain markets. There is a lot of ring fencing that's being done around Russia right now. And there's also unintended side effects, knock on effects, that we've seen. JPMorgan just disclosed Friday-- or actually, reportedly-- is facing up to a billion dollars in losses because of the nickel trade. I'm just wondering how you see this reordering affecting the commodities markets.

BILL CAMPBELL: Well, I think there's several implications. First and foremost in the West, when we look at Russia and Ukraine, we're looking at two countries that hold systemically important positions across energy, metals, agriculture. So inflation is going to be a continued issue. It's going to keep central banks on the tightening path, maybe disappointing market expectations that are hoping for a little bit of back off. We saw that happen last week with the ECB. And the Fed is likely to take off and start hiking interest rates this week.

So I think first and foremost, inflation in the commodities market is going to be key. I'm worried that the longer this goes on, the more we're going to have supply disruptions across all commodities, especially in agriculture. And that could lead to more geopolitical unrest in the coming months and quarters. Finally, when we think about moving back to our initial discussion, one of the natural off takers for Russian energy is going to be China.

And when we see that energy switch, what we're seeing is we could potentially see a bifurcation in the market where China is able to source more supply from Russia, and you could have higher prices developing in the Western economies due to the supply shortages that are coming from these sanctions. And maybe the commodity-- at least the energy sector over in Asia may be a little bit more insulated, which could also have implications in and of itself. So I think just looking at how this conflict is playing out, those would be the key areas that I would focus on on how commodities are rippling through the global economy.

BRIAN SOZZI: And of course, Bill, this is a Fed decision week. The Fed largely expected to hike rates 25 basis points. Through the prism of the bond market, are you seeing folks start to get worried or positioned for a potential recession this year?

BILL CAMPBELL: I think the yield curve or the spread differential between the 10 year and 2 year interest rate dropping-- Brian, when you visited us at the beginning of the year, I think it was around 80 basis points. Today, it's around 25, 26 basis points. That differential in the bond market tells us that, yes, the bond market is getting very concerned about the growth outlook and growth prospects. That being said, we're seeing nominal yields continue to rise across the board. Not only in the United States, but across G7 economies in general, which is telling you that I think a lot of traders are worried about a persistently high inflation.

So what we're really looking at is the potential risk that a lot of people really don't want to say, especially politically, is stagflation. And I think banks are caught between a rock and a hard place right now. Growth is slowing. We have an exploding risk premium in markets due to geopolitical risk, and now an inflation risk. Inflation risk has been with us for some time. But it continues to rise. So central banks' first mandates is price targeting or addressing inflation.

And even though that this a lot of this inflation is supply driven and hiking interest rates really just impacts the demand side, that's the only tool central banks have. And given the level of inflation, central banks, I think, are going to be forced to continue the path that they're on. Look at what the ECB-- if any central bank had cover to make the pivot to be more dovish, it was the ECB last week, and they surprised to the upside. They're reducing their asset purchases instead of extending them. So that just shows the pressure that central banks are under despite the headwinds to growth.

BRIAN SOZZI: Well, I can tell you, Bill, my food bill has certainly inflated since I came to visit you guys at DoubleLine HQ in California in January. We'll leave it there. Bill Campbell, portfolio manager for the DoubleLine Global Bond Strategy Fund. Good to see you again.