The g10 space. All european bonds selling off and oil getting wrapped up into all of that. We want to highlight all the market moving news from our washington dc offices. Washington, where you have President Trump speaking last night at a fox the conference about responsibility of china with the pandemic. Pres. Trump we have a pretty good roadmap right now. , we have to 60 protect his people. Maybe they stay back longer. But i think you can have it both ways. I think a lot of people want to go back. They just want to go back. Alix Kevin Cirilli joins me now with more. What else did we learn from the president . Walk this forward now that the senate is coming back to d. C. Today. Kevin good morning. The president in that fox news town hall making a declared a statement as it relates to negotiations with lawmakers, saying he would not support any economic stimulus lesson it includes a payroll tax cut. Drawing aent clearly line when it comes to a payroll tax cut. Predictionssed the for the virus, saying it could be 100,000 deaths due to covid19. Make, in point i would addition to tough talk on china, he once again asserted that tariffs might be back on the table as it relates to china, no doubt signaling that the economic relationship with the u. S. And china is entering into another volatile phase as a result of what we have seen from covid19. Alix thanks so much. Now we want to turn to europe, where European Manufacturing suffered an unprecedented slump in april. Output, new export orders, new orders, and purchasing activity all falling at record rates. Michael mckee has more. Similar to what we saw in asia, what we are seeing in turkey, for example, lower pmi. Michael absolutely, and the think. Are bad as you record lows in france and italy, 11 year lows in germany and spain. A headline measure of euro area activity fell to 33. 4, the lowest since the series began in 1997. The measure of output plunging to 18. 1. 50 is the ostensible dividing line between contraction and expansion. In a report, the European Manufacturing is going to take a long time to overcome covid19, and the recovery from shutdown will be frustratingly slow. Germany and france have asked economists to look at how the two countries could perhaps coordinate some sort of canonic rebound stimulus to reboot their economies. The french finance minister Bruno Le Maire has words that may not make donald trump very happy. He says they will not increase taxes on individuals to pay for the damage of the coronavirus, but says they want to move ahead with a digital tax scheme and a global tax on multinational firms. You mentioned this earlier, tomorrow a big day and europe as germanys Supreme Court rules on whether it is constitutional for the country to participate in the earlier program of qe the ecb did. The Public Sector Purchase Program has been pending for more than half a decade. If they rule against it, analysts say it would create chaos, but the bedding is because of previous cases that were similar in nature, they will probably approve it. Definitely some market risk. Alix definitely, and you are seeing all european bonds under pressure with the exception of u. K. Gilts. Italian yields up by almost three basis points. Thank you very much. It was a pretty tough quarter in many ways for Berkshire Hathaway , saying First Quarter net income plunged to a loss of almost 50 billion. Away wasmerica lend among the losers, and berkshire steak declined by almost 12 billion. Airlines, he wound up selling all of them as well. Coming up, more of your morning trade and analysis on the markets in todays first take. This is bloomberg. Alix time for bloomberg first take. We are going to give you the news. You get the trade and analysis of the markets. Anding us is michael mckee, mark mccormick, Td Securities global head of fx strategys. In the previous segment, mike laid out the big events we are watching this week. We come into it with a risk off field. Yen and dollar story over the next few days . Mark i think this is definitely a good set up for the u. S. Dollar. Last week there were a lot of centralbank meetings, but also big monthend flows. Those are very bearish for the dollar, and i think a lot of people were trying to read into the gdp reports and Central Banks and glean some kind of insight from that, but i think what we are getting now is the markets are now focused on the rising u. S. China trade tensions once again. That sets us up for a stronger dollar outlook start outlook to start may. Alix we had that rally in april, so we are trying to price plus we have china. By the way, happy star wars day. It is not just the u. S. And president obviously trump raising the specter of additional tariffs, which are a tax on the american people, at a time when they dont have the money to pay for it, but Warren Buffett today saying he has sold out of airlines, so we are seeing airlines helped lead the market lower. Then you have this risk in germany of the Supreme Court, and overall, we have seen only a slight downturn in the rate of increase in covid cases. Weve been locked down for more than a month and much of the country, and while the curve has flattened, it hasnt really started to go significantly lower. I think you put all of that together and you have reasons for people to be a little wary of whether or not they are getting too far ahead of themselves by buying. Mark, whatder, currency is going to have the most sensitivity to a stronger dollar. We saw a lot of long positions coming into the euro, for example. The lira is around a record low. What is your take . Mark definitely good for the broad dollar. You include developed markets and emerging markets, so when you go underneath the hood, i think europe is one of the things we want to watch right , especially as we get to the midpoint of the summer with a no break at deal and no brexit transition. That is a big lumber sterling, which is extremely overpriced on some of our models. I think about the rising geopolitical tensions, another problem for the euro, largely because we know how it trades in an environment where we have the u. S. china trade tensions rising. At the same time, we also have debt sustainability and the european political fragmentation , which was a big driver during the sovereign debt crisis, and while it is not a nearterm risk , it is a risk for the euro largely because the Global Economy tells us the euro should 1. 05. Ing about so it is definitely a negative euro trade, but also, the Australian Dollar looks very vulnerable right now. Before we need a washout people can get reengaged, so across the g10, this is just bad for emi the whole. Alix i just want to point out some italy headlines breaking here. Down industrial out but 45 year on year, and only seeing gradual recovery after the lock down. Weigh in on this one. It is very similar. Carson block had a note out saying that, i just cant see equity values near where they are today. The underlying economy is on its knees and my thing investors have yet to understand that and see what it looks like when bankruptcies cascade through the economy. You see that in the divergence between asset prices ended the rices and the underlying real economy. Mark markets are generally forwardlooking, so they try to much bad news is they can into the future. We see record stimulus coming out of the u. S. Come out of other parts of the world. Add up the physical credit supply limits plus the monetary response, it is a great environment where people want to look past the bad news. The problem is when you look at what markets are pricing in terms of the reality. You cant look past what the next one to three months are going to look like, especially because we dont know what the lockdown exit strategy looks like. We dont know if it is more of a then the curve starts to rise again and we start to see some of those numbers move in the wrong direction, so the lockdown has to move back a step. I think markets are just discounting too much positive things into the future on the fact that the fed is willing to backstop the market. It is going to create a dislocation, and that is exactly where we are right now. I think we need to see markets price and the reality of the data in with the Economic Outlook will be in the next couple of months, alongside rising Geopolitical Uncertainty once again. That puts a premium on things that are overpriced. Alix i love that you brought up into supply. That leads us into the treasury refinancing announcement we get this week as well. Mark makes a good point, but if you are going to have the fed is a backstop you wind up at some point having yield curve control, the debt issuance in some ways is more irrelevant. Michael right now we are treating it that way. It doesnt seem to be bothering anybody. This point, there doesnt seem to be any pressure on rates, so as long as that happens, the fed doesnt even need to ramp up its purchases and raise questions of whether or not it is monetizing the debt. We will see what the final total is, but i think in the markets, it is not going to matter how much, but just the functions of howthey do it, what tenor, much are they going to continue financing with bills, which is what theyve been doing up to this point. Whether they start trying to term out more of this debt, taking advantage of the low Interest Rates, that the comes a factor, too, when you Start Talking about a phase for relief program, whether or not infrastructures pending is done. A lot of people saying we should be doing it now because it is so cheap. Alix from that perspective, it is ok that asset prices in the underlying economy can diverge because of that backstop. If you dont play that trade, you are missing out on any kind of rally. What do you do . I still think the way you think about it is everything is relative to us. The way we are trying to frame this, you look at the u. S. Dollar and the correlation versus rest of world equities, that correlation has been solid since the start of the trade wars. I think a lot of it has to do with equities are basically discounting mechanisms to think about future growth outlook. I think one of the big drivers that will continue to maintain this is looking at relative equity prices. Even if all Global Equities start to see a washout, largely because they recouple with what we are expecting in terms of where earnings are going to be, where profits are going to be over the next three months, we think the u. S. Equity story should be at least a little better than where the rest of the world is. The models we track are more expensive than u. S. Equities, and at the same time, u. S. Equity sectors just look at are positioned in this kind of environment, where you think about communications. That shouldthings do better in this environment, u. S. Equities should outperform europe, which is another reason why the euro should continue to underperform. Another thing you think about, where are equity markets most mispriced, it is in asia, where chinese and korean equities are very expensive since the start of this process. If you think about rising u. S. china trade tensions whats again, those look vulnerable, so it is still a positive dollar story. Even if everyone goes under, u. S. Equities probably just dont pull back as much. Alix jp morgan echoing that as stocks fording u. S. That same reason. Italytake into account and what the Constitutional Court may rule on the efficacy and legality of the ecb bond buying program, what kind of risk is embedded into the market right now would it comes to italy and sovereign at, and what should it be . Mark theres not a whole lot priced in. I think regardless of what we get from the german Constitutional Court, the structures that we have in place and the pepp from the ecb is going to allow them to buy it. I think the market has fully embraced the notion that for at least the next year, italy has got a backstop, but it is really thinking beyond that, whether or not we get some kind of sustainability mechanism. The ecb has already scrapped the environment. Theyve already found a way around that now, so i dont think there needs to be a big premium on italian btps right now. The question is, in a year or two years from now, the ecb stops buying italian debt. Who is going to service the italian debt as the economy is structurally weak, the population is aging, and italy hasnt seen its economy grow since precrisis, never minute crisis . You add those things together, there needs to be a premium on btps, but it is not this level right now because you dont want to fight the ecb. It is something down the line that i think we will definitely need to focus on. Alix super interesting distinction. The whole dont fight the ecb, dont fight the fed. I want to get your take on boeing and small caps. Boeing is not to getting is not taking government aid because it could debt markets. Small caps really staged a rally over the last week and a half. If the fed is going to buy highyield debt and fallen angels, we can go buy small caps. What is the logic there . Michael the logic is the fed, that they are in place and ready to buy stuff. It creates the idea that there is a buyer of last resort, so if you make the trade, there is somebody you can pass along your loan to, and that will keep you from having to get stuck with it if theres nobody on the others. That helped boeing in the sense that boeing didnt have to go to the government to get cash. On the other hand, that is a little bit of a government put because boeing is such a big defense contractor does a feeling in the market as they will never go bankrupt. The fed can maybe buy stuff, so maybe you want to look at that. It will be interesting to see as , andconomy moves along small caps usually lead us out of recovery, it will be interesting to see what sectors and what kinds of businesses investors think are worth putting money into as the economy starts to come back. Alix totally, and what do these Companies Look like when they come out of it . Great conversation this monday morning. Ask very much for bearing with me. Mark mccormick, good to talk to you. Ockham a key, thank you very much as well. Throughout the next two hours, go to gtv on the terminal and look at anything we may have talked about. This is bloomberg. Viviana this is bloomberg daybreak. Roche is the latest company to get emergency u. S. Approval for coronavirus antibody test. It is designed to identify people already exposed to the virus. A potential deal this week could create the u. K. s Biggest Telecom operator. Liberty global and telefonica are in talks. Bloomberg has learned negotiations are hinging on their being equal control. Private Equity Firm Silver Lake partners investing 753 million in indias geo platform. That comes days after facebook agreed to invest in the business. Geo is the digital unit of reliant industries, controlled by asias richest man. He has been trying to reduce debt. That is your Bloomberg Business flash. Alix thanks so much. Long,the start of a painful, and uncertain recovery for oil demand. Suggest gas stations bottoms at the end of april. Traders suggest it will take a year or longer before demand hits the prepandemic level of one Million Barrels of oil a day. Traffic levels in china, rush hour in beijing, guangzhou, and shanghai are completely back to normal. Coming up, President Trump promises a conclusive report linking the origin of covid19 to china. We will hear from george magnus, Oxford University china associate. This is bloomberg. Save hundreds on your wireless bill without even leaving your house. Just keep your phone and switch to xfinity mobile. You can get it by ordering a free sim card online. Once you activate, youll only have to pay for the data you need saving you up to 400 a year. There are no term contracts, no activation fees, and no credit check on the first two lines. Get a 50 prepaid card when you switch. Its the most reliable wireless network. And it could save you hundreds. Xfinity mobile. Alix welcome to bloomberg daybreak. Im alix steel. Its a risk off day. You are off the lows of the session for s p futures, but still deep in the red. No doubt you want to blame for Warren Buffett dumping out of all of his shares over the weekend. Board switch up the board and you can see the different reactions within asset classes. Btps and european yields in general are a different story, all higher as selling takes place. Questions over whether or not the german Constitutional Court will find the ecb Bond Purchasing Program legit or not. Oil getting all caught up in the risk off as well. Up by about six dollars. The focus now shifts to the relationship between u. S. And china. President trump continuing to blame the country for the coronavirus out big and vowed to give a strong case, proving and putting to the origins in the country. He spoke at a fox news town hall last night. Pres. Trump they made a horrible mistake, and they dont want to admit it. We will give a strong report as to exactly what we think happened, and i think it will be very conclusive. It could have been stopped on the spot. Incompetence or they didnt do it for some reason. Doesnt change how you feel about president xi . Pres. Trump im not going to say anything. I had a very good relationship. This virus should not have spread all over the world. They should have let other countries go in and put it out. Are you considering new tariffs on china as a punishment for their handling of the virus . Pres. Trump well, it is the ultimate on this meant. I will tell you that. Alix joining us now is george magnus, Oxford University china center associate, also the xisr of red flag why china is in jeopardy. When i want to talk about china and the internal workings, i turn to you. What is the probability that china is indeed in some respects responsible for this . What are the nuances here . George i think whichever way you look at it, the bottom line it bottomallyax line is basically lax regulations. Whether that is the animal markets, where most scientists leave the infection originated,r whether there is a case whether it is strong or whether there is one, that the Intelligence Community or certain elements of the Intelligence Community, if you eyesve the socalled five report the australian media says it got a hold of. The report saves there is a 5 probability that it happened. We dont really know. We wont know until there is some kind of collaborative inquiry. Laxer way, it is about regulations. That is the bottom line for me. That is something i suppose the world citizens need some insurance about, that those regulations will be tightened up. Alix when we hear the rhetoric from President Trump, also taking aim at china, does that make kind and more willing to do that and look at regulations . Or does it make them more likely to clam up . George it is very tricky. Theres obviously been a huge battle going on since february about the narrative. Il about february, they is february, the narrative was one in which china was seen to have failed at controlling the infection, maybe by oversight, whatever the reason might be. Then as the western world got into its own coronavirus funk and scrambled around trying to find its own solutions to this terrible pandemic, china was beginning to pull out of it because they are six to eight weeks ahead of us. One innarrative was which they were the ones successfully dealing with it, providing Global Public goods in the form of ventilators and mask and medicines and so on. So this narrative now becomes really key. Theres been a big backlash, i would say. Certainly in the United States, that goes without saying, but also in the United Kingdom and germany, france, italy, lots of places that previously might have kept a little more quiet about it. Big backlash against this narrative. , they do lot of people want to find some kind of way of getting some closure to this, but the chinese are very sensitive to this for historical reasons. Any claim that intervention or foreign intrusion, the regard whichiliation for them, is really important. We have to find a way to engage with china to try to get to mutually beneficial interests that we have in terms of how to stop this ever happening again, but it is not clear with that path is. Potentialeems like a path is also the potential for greater levees now back in focus between china and the u. S. Do you envision that actually happening . George obviously, as people may remember, it was not long ago that there had been a truce arranged between the United States and china in january. It wasnt a solution to the trade war, but it was certainly a truce in which the United States canceled tariffs that were supposed to come into effect in the beginning of , to which the chinese responded by making promises about importing more u. S. Products this year in 2021. This trade truce has been pretty much left high and dry by the effects of the coronavirus, the lockdowns, and the effects on global trade in the local economy. Veryven that it is also sensitive year politically for the united date because of the election in november, it is quite likely that the inistration will consider if the president said so the u. S. Andd looking at options under which they might resurrect those tariffs which they backed away from in january. I am not saying it would achieve anything necessarily, but i think we have to kind of be alert to the fact that it certainly is within the armory of the white house to impose those tariffs again on china for whatever reasons. It would be maybe a political reason, maybe for punishment or whatever. Alix at the same time, the fundamental backdrop if we look a year or two from the crisis is that we might see a faster shift supply chains as we try to get supply chains closer to home. Theres a renewed to about protectionism as well. What is the longterm revocation longterm ramifications when it comes to china being the supply chain country of the world . George thats a great question. My view is that the pandemic has acted as an accelerant in this because even before 2020, we already had strong for operating in china, that they were considering, and some actually have already come a parts of their supply chains outside of china to other parts of north asia or to lowcost thetries in asia, and cases some american companies, moving production to mexico and so on. So i think if anything, the coronavirus problem and crisis has really underscored the decisions that Companies May have been considering to do this because nobody really is going to feel comfortable with a sole supplier in terms of a country or company within china. So diversity of supply chain sourcing and shortening of supply chains for example, in terms of medical equipment, nobody is going to want to be hostage to having to import stuff in a panic from some other country. You have to do it at home. This is a case of just in case reduction displacing justintime production, and i think more more companies will have to consider doing this. Alix really interesting distinction, george. Thanks so much. Always wonderful to catch up with you. George magness joining us from Oxford University. Out with earnings. They did beat on earnings, but they do see lower levels of productivity. They said that will likely continue at their production facilities. They see disruptions on raw material available. They see chicken production for the rest of the year will be lower. They see the export markets will absorb much of the increase production they do have. Beef industry supplies are up, and they are unable to provide any sort of operating margin guidance as they are looking at slowdowns and idling of production, and they continue to see lower levels of productivity. We do want to update you now on what is mickey headlines outside the business world. Viviana hurtado is here with first word news. President iviana trump estimates as many as 100,000 americans could die from the coronavirus. A month ago, the president said he hoped the death toll would be less than 60,000. So far, more than 67,000 americans have died from this disease. Staying with President Trump, he is promising more federal help for jobless americans. He says the next round of stimulus must include a payroll tax cut. That is an idea that even republicans lawmakers havent embraced. In the u. K. , it wont be back to normal soon. The transport minister saying the company will take a gradual path out of its lockdown. Still, the government will soon publish guidelines on how to return to work. Britonshows 2 3 of oppose lifting the lockdown right now. 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 the v on a hurtado. This is bloomberg. Im Viviana Hurtado. This is bloomberg. Alix thank you. Oil now falling after a supplyay rebound as the glut continues to worry the market. Also, if you have a bloomberg terminal, check out tv. You can watch us online. Go back, rewatch. Check it out. Tv. This is bloomberg. Viviana you are watching bloomberg daybreak. Softwaree unveiled aimed at helping companies safely reopen their offices. It will help orchestrate shifts for when employees can work on site. Salesforce says they will also help manage Emergency Response procedures. J. Crew filing for bankruptcy. The chain has been unable to revive sales of its preppy clothing line. Plus, debt from long ago has crushed it. They will confirm debt into equity. The company has also secured 400 million of new money. Shares of chinese Property Developer soho china plunging today. Talks between the company and Blackstone Group have stalled. Blackstone was considering investing, but the coronavirus making it difficult to assess the business outlook. That is your Bloomberg Business flash. Alix thanks so much. Oil falling today, snapping a threeday rebound, although the percentages are a little misleading. , kimmeridgeben dell Energy Cofounder and managing partner. Youve been in the industry for quite some time. We are seeing banks start to come up. At what point do you see opportunities to put money to work in this space . Ben i think we continue to see bankruptcies throughout the year as the opportunities get better as the year goes on. The price will continue to be volatile, and you might see oil continue to trade in the single digits. We will have a full redetermination. We will see a number bankruptcies crystallize. Alix when is your best guess on when that wind up happening . I thinkhink ben third quarter, fourth quarter, we will see a number of e ps go e ps go of bankrupt. Companies will probably preemptively look to file. When you reconstitute these, the question will be what do the debtholders want to do with them. We are going to see a number of asset sales drop out of that towards the back end of the year, or you will see them merged into other existing companies. Alix so how do you distinguish what a Good Opportunity may mean for you as you get to the time where it may be ready to put money to work . Beenour view has consistent over the last two or three years. Those that will survive these type of commodity price environments, the challenge we had over the last decade is too many being focused on growth, and too many wells being drilled. Sense, evennt make 20. 0 oil, we let alone a number of these fringe assets are never going to be drilled and are just going to disappear from the map. So do you need a recovery in oil prices and a supply shock to make these investments worthwhile . Dont ben you dont necessarily need material recovery, but sub 30 oil prices dont work for anyone. Perhaps the Biggest Surprise in the market is that there are still 371 horizontal rigs running, which underscores the uneconomic activity of these operators. We have 123 operators in the u. S. Which highlights the segregated nature of the u. S. Industry. In my mind, no one drilling a well today is drilling and economic well. Investors should be questioning why these management teams, csuite, and boards are continuing to destroy value after a decade of having done so. Our view is that 2021, we could see continued pressure on the commodity, particularly because Airline Traffic is probably never going to recover to historical levels in the near term. Our view is we might recover to 95, 96 Million Barrels a day of demand in 2021, but we wont recover to the historical levels. When you look at 2022, theres a lack capital going into the ground now. You will likely see an impact on supply, and you could see Oil Prices Higher than the forward is indicating today. Alix what is the best way to access investments . Is it equity . Is it that . Is it is it debt . Is it going out and buying the land, buying the rigs . Ben markets are challenging and that you have to be very select, and the equity markets have rallied back somewhat in the last few weeks in the commodity. I think that mix it difficult to put new money to work. , thenk for most investors real opportunity today is in the highyield market. In the asset sale market, virtually nothing is transacting in the sense that Public Companies cant sell assets today without diluting their financing metrics, so theres really no transactions happening. On the organic leasing side, i dont think anyone is outdoing new organic releasing because you can essentially buy these assets in Distressed Companies without having to pay for the acreage today. Alix really good to catch up with you on the Shopping List in your perspective. Ben dell of kimmeridge, thank you very much. Argentina teetering on the break of default again at the peso continues to fall. We will take a look at the broken fx market and other ems in todays traders take. This is bloomberg. Alix time now for traders take. Joining me is Damian Sassower of bloomberg intelligence. I wanted to break down argentina for a second. The economy minister was writing over the weekend that it is in interest e best cannot continue to spend government revenues on debt payments as some creditors have effectively asked. Itsimple he impossible is simply impossible. How will the market react to that . Damian i agree with a lot of what he said. For me, it comes down to the fact that existing creditors, regardless of if argentina is able to pay today, they are expecting a certain coupon payment. In order for them to own this debt, they expect to be paid something. That is where the discussion lies. Argentina is proposing a three year moratorium on debt payments, a 60 reduction, and exist or is taking to that big and investors just arent taking to that. You see that on the bottom half of the chart. Argentine locals have lost confidence in the local currency. ,hey are parking cash offshore in this case in neighboring org why neighboring uruguay. Difficultg to be very to convince creditors otherwise, so i expect another hard default in argentina, unfortunately. Alix is argentina going to be alone in this . I know it has some idiosyncratic weaker fxt you see a as the dollar continues to grind higher, and covid wreaks havoc on all of the countries and their fiscal deficits are going to expand, isnt this going to be a common refrain at this point . Damian argentina is far from alone. Oft given the size alone u. S. Dollar debt, granted, it is only valued at 1 3 of that now, but we have until this friday to see if foreign creditors will accept the offer. I imagine they will not. But theres another 320 billion plus of total debt with the imf and other multilateral lenders, so theres a lot here. Clearly you cant ignore it, but its size relative to other frontier or lowquality emerging sokets is without peer, something needs to be done here. I dont know if this will be the boilerplate example for other countries, but it certainly needs to get resolved in the nottoodistant future. Otherwise we will have a lot of creditors sitting on the sidelines with their hands in their pockets for a while now. Askinge said we are not creditors to lose, but to make less. That is not necessarily a refrain that creditors like to hear. Good to catch up with you, Damian Sassower of bloomberg intelligence. Coming up, we speak to the man behind many restructurings, Guggenheim Securities cocha irman. This is bloomberg. Alix pmis crushing pain. Asian pmis sink. Sink. Ders and output all President Trump accusing china of a coverup and promising a conclusive report on the pandemics origins. Some countries emerge from lockdown. Italy faces the german Constitutional Court, and the u. S. Waits for the latest read on unemployment with a lot of potholes ahead. Welcome to bloomberg daybreak on this monday, may 4. Lets get a quick check on the market. The s p is off the lows of its session within the futures market. Richard breslow, former trader at bloomberg, had the best line. The world needs a Mental Health day. Just building on the pessimism we are seeing in the equity market. The dollar off the highs of its session as well. Some currencies turning positive. The dollaryen still touched lower on the day. Oil continuing to roll over just a touch as well. Watch those airlines as Warren Buffett says he sold all of his stakes in the last few weeks. Those obviously coming under some pressure in premarket. Joining me for more on the market is barry knapp, Ironsides Macroeconomics partner. He joins me now. If i set you up for the week, you have italys constitutional ash excuse me, your minis excuse me, germanys Constitutional Court. What our clients talking about the most . Barry i think the Economic Data in the u. S. Is really creating dissonance cognitive for people where we have cumulatively 30 million new unemployment claims, the paperwork por report at the endf the week the payroll report , at a end of the week point when the stock market has had a pretty good bounce off the lows. I think that dichotomy between the two is really the big struggle for investors. How do you think about that . Some of it to me is just straightforward Business Cycle stuff. The stock market bottomed roughly 100 days before when you would expect a recession to end, i. E. The end of june, but some of it has to do with what likely wasnt overshoot on the way down as well. I think that for me is the biggest broader issue. I dont think people have quite moved forward to talk about what 2021 looks like and the broader implications. I talked a bit about this being more of an inflationary cycle as opposed to a deflationary cycle. That is really not entering the discussion yet. I think it is more about the nearterm ugliness of the data in the stock market that is not looking quite as bad. Inflationarythe conversation, but i want to pivot off of something you said, that you thought we overshot to the downside and the selloff was overdone, reflecting too much economic pain. Does that mean you expect that a recovery, or just the trough is not as bad as we thought . Barry if you think about Business Cycle since world war ii, the median decline is 21. We went down 35. Given that this is likely to be a shorter recession, albeit likely the deepest one, you wouldnt think it should be as 73, 75 as 1973, 1975. You can see it from about march 9 on. Liquidity, the treasury and mortgage futures basis is probably the best example of this, just the differentials between the cash in the derivatives. It completely imploded. The fed had to add liquidity to solve that, but the reason is because of misguided Financial Sector policy that created different treatments for cash and government securities in the banking system, and then the failure of the risk parody strategy when treasuries the strategy when treasuries started going down. Was back to 1987, which was my First Financial crisis. Part of the recovery was just the reversal of that from the fed. Now we have the bigger questions of solvency. Thats the discussion that the Economic Data relates to. Alix where are we with solvency . On the other hand, theres a rhetoric that you look at smallcap underperformance, and no doubt we see a default cycle. The fedr is that we see being able to issue 20 billion of debt. In . H are you looking that m in the camp we are getting a little background here, im sorry recovery looks very much like a typical recovery. If you really market from the bottom and look from the states sorry, but i am getting a recording, another feed into this line. Well, that is not good. Well, why dont you barry oh, its gone. Sorry. Alix thats all right, it is work from home. Barry to me, at looks like a typical recovery. Earlystage cyclicals are acting as bad as the would expect them to act. Im in the camp that you should still be long those earlystage cyclicals and at this recovery will work out, but to be sure, the links of the Population Based controls is a big issue here. I think we are probably mishandling the recovery. Ow long those controls last is really crucial in how the whole solvency question unfolds. I think it is likely we will tests,r them through that the mortality rate of this virus is not as bad as we thought and the economy will start to open up, but we wont know for another month or two. Im sorry, i have this of the recording coming in. Alix ok. Im sorry about that, barry. Thats unfortunate. We will be taking a look into that for sure. Why dont you hang tight with us. Let me do one more market check, we will take a break, and see if we can get barry back on the line. We are taking a look at a relatively risk off day, but the s p off the lows of the session. Also, definitely want to check in on individual stocks. Airlines are the worst losers in the market, delta off 10 . All on the Warren Buffett call. We also have earnings trickling out as well. We will try to get barry back on the line. This is bloomberg. Alix barry knapp back with me. We worked out his technical issues. So if you think about what occurred, we had this liquidity phase of the downturn, and the fed bought a ton of , both ins and agencies fixed income treasuries and in the fx. And howave moved on to much damage has been done by Population Based controls. If you look at the group action and the equity market, we had a period of underperformance, then a strong. Of performance. If you look relative to recent Business Cycles, it still looks very much like a typical recovery out of the lows. We still expect that those earlystage cyclical sectors could play to the recovery be sure, the to length of these Population Based controls are critical. Where we got in trouble into thousand nine was not during the early stage of the recovery. It was based on policy mistakes later on. So it is really critical Going Forward. If you look at the 30 million new unemployment claims and then compare it to the continuing have got new jobs are returned to work. At the jobslook survey, a lot of people still seem to think they are attached to their workforce because of that differential. I think the damage is not that severe, certainly not as severe as you would expect listening to a lot of the economists or bond Market Investors and the like. Contingent ontill us getting out of these controls fairly soon. I think it is still worth being long in the earlystage cyclicals. Alix so where do you want to take on risk . Think its funny because i got caught up in this discussion with clients about equity versus credit, and i went back to my notes into thousand nine, and i was writing at this yielding banks were 25 . Some yields in the Energy Sector do look pretty attractive, so to me, it is not equities or credit. It is equities and credit, and look for which part of the capital structure in each sector is more attractive. But i would definitely be long u. S. Equities. I would be long credit in places like energy, where you do your analysis and decide whether you think there will be solvency or not. Marketid the treasury and the stuff that the fed is buying. I would not be buying that based on the fed buying more because they are likely to buy less. Lets wrap it up with this. If they are going to buy less, but the treasury is issuing more, what happens to yields . Near term, we are still going through the deflationary shock, so i dont expect too much to happen. Lows do expect that the the cycle and the low for the 30 year market is in. I dont want to make predictions on that because people have died on that sword on a number of occasions. I do think that this is a very different Business Cycle than the last cycle. Financial cycles tend to be very disinflationary. This is not going to be a disinflationary cycle. The number one forced to put downward pressure on inflation for the last three decades was global goods prices. All of the massive excess capacity and the rest of the world. I think that disinflationary completely ebbto and even reverse, so the trend will be one of rising inflation. We have to get through the disinflationary shock first, but it has big long term, locations for sure. Alix you are not alone. A lot of economists also calling for that. We will get you back to talk more about the inflationary risk there. Barry knapp, thanks a lot for sticking with us and your patients. Coming up on the program, the great separation. That is what bank of america is calling the current market environment. More with chris hyzy, bank of , when we come back. This is bloomberg. Alix one thing everyone is starting to watch now is what is happening with states within the u. S. Cities and states across america have had their budgets walloped by the virus pandemic. If you take a look at the states that have the largest budget deficit, that is an issue as well. Morgan stanley also writing about that over the weekend, saying as many as 34 states could see budget losses of more than 10 . Some cities actually have it worse. The result is that municipal employees are getting furloughed and Police Forces are facing drastic layoffs. Some states are better prepared. States is for the 50 under 8 . Some states have nothing yet to put aside. Obviously, a lot of stress being put on state jets. House speaker nancy lizzie saying there has to be aid for states. Some republicans pushing back on that, saying if they couldnt control their expenses, they shouldnt necessarily get a bailout. Definitely watching that as we get deeper into this crisis. Lets get deeper into a market check. We are looking at s p actually, looking at the ftse 100 trying to flip into positive territory. S p still down by about 18 points. Within the bond market, you are seeing pretty much flat for yields. Same thing for gilts in the u. K. Seeing him a selloff in most of the bond market in europe. Italian yields up by two basis points and spanish yields up by about six. The canadian dollar, Australian Dollar now to now catching a bit of a bid, but so does the yen against the dollar. Oil is still pretty heavy here. About 0. 46. Lets give you an update on headlines in the business world. If jan hurtado is here with your business flash Viviana Hurtado is here with your business flash. Viviana a deal could create one of the Biggest Telecom operators after a merger. Now to retailer j. Crew. It filed for bankruptcy. The chain has been unable to revive sales, plus, debt from a longago leveraged buyout has crushed it. J. Crew will convert debt into equity. The company also had secured 400 million of new money. We end with roche, the latest company to get emergency u. S. Approval for a new coronavirus antibody test. The swiss drugmaker promising production will scam up quickly. The test is designed to will scale up quickly. The test is designed to identify alreadyho have contracted the virus. Alix we want to look at the main events happening here, as well as europe, over the coming week, no doubt ending with job stay in the u. S. On friday. Michael mckee is with me now. It is not just jobs. Theres a lot to get to before that. Walk me through how we are set up for this week. Michael we get some Additional Information on the steady the economy wednesday from the ism, the nonmanufacturing. The Service Industries index. This is interesting because when we were going up in the economy, the Services Index was going up faster than the manufacturing index, then fell more slowly when we dipped into this, but now it should be pretty dismal because most of the damage that has been done has been done to services, and they represent 70 to 80 of the economy. Of course, we get adp on wednesday, the first look at jobs for the month of april, and we expect it to be terrible. Ben job stay is going to truly awful on friday and ways we have never seen before, so i expect the markets will be looking at it and going, hm, and then move on from it. The question is what happens next. May is truly a month when we find out how bad april was. Alix i feel look it could be i wills something maybe be saying on friday or throughout the week. Potentially we will get some twentyyear bonds and get an idea of where the treasury is going to issue on the curve, which will give us an indication as well as an indication of potential demand. Walk me through what the street is expecting. Michael at this point, they are expecting the treasury to move out on the curve with a little less bill issuance and a little more of the coupon issuance. The question is how they divide that up among the various tenors, and how much of an increase we see for the quarter in each one, and whether or not the new twentyyear is going to make it to market this time or not. There hadnt been a lot of call for it earlier, but now with all of this new issuance, there may be some more demand for a different kind of coupon to hold onto. It is going to be interesting for the markets to see where the treasury decides they can get the most bang for the buck and get the cheapest financing for the longest time. Alix i was interested in how it circles back to the fed because what we havent heard from the fed last week is just for how long, how much they will be buying. That is a more hawkish signal that they are not necessarily going to be all in on the bond market. What are economists really thinking in terms of that . Michael if you think they are buying to hold down Interest Rates and force people farther out on the risk curve, they are not there yet. That may come when we start to see the economy expand again and they try to and sent they try money,nt people to spend but they have been buying to ensure that there is a secondary market, a buyer of last resort. But still, the amounts they are buying are astounding. They were buying 75 billion a day, the most ever during qe , now they are down to 10 billion. So how much further do they go for the time being . They dont see a need to ramp up because markets are functioning. The real question is what do they see needed for stimulus. Right now theres no point in stimulus because no one is going out to spend money. Alix exactly. Barclays had a note over the weekend talking about at what point does the fed policy actually become less expansionary, saying that at some point, the Balance Sheet is going to get so big that policy will become extraction errors will become expansionary, or at least less contractionary. Michael it is only beginning to be talked about. It has been in europe in the conversation for quite a while. Theerser reversal rate went interest the reversal rate when Interest Rates get so low, that banks dont make money. We have never been in this kind of situation. In theory, you should see some crowding out. You should see higher Interest Rates. But we keep exploring the frontier and pushing farther, and there doesnt seem to be any negative market impact. So for right now, it is a theoretical discussion, but it doesnt seem to be one that has or that is causing any caution among buyers. Alix really appreciate it. Thanks for jumping in, bloombergs michael mckee. Also taking a look at some of the big movers of the morning. American airlines down by about 10 . Warren buffett in the market, selling his airline stocks. 7 ,l caribbean also down down 70 year on year. Tyson foods also down. They expect slow productivity to continue, and the cal revenue is down in april, taking down like wynn. Coming up, we speak to jim milstein, Guggenheim Securities cochairmen. This is bloomberg. Alix this is bloomberg daybreak. I am alix steel. Happy monday. We are off the lows. Even s p trying to flip into positive territory. A writer from bloomberg says the world needs a Mental Health day is a lot of crankiness permeates the market. The dollar is still moderately stronger. You are seeing risk or riskier currencies like the aussie dollar in positive territories. Yields going nowhere in the u. S. Up with the Global Growth and also risk off story as well. Congress is turning its attention to negotiations over another round of economic stimulus. You have the battle lines being drawn over 1 trillion in additional spending. ,oining me is Jim Millstein Guggenheim Securities cochairman. During the obama administration, he oversaw u. S. Treasurys investment during the financial crisis. Also joining me is bloombergs sonali basak. There is a story with the fed backstopping riskier companies, you will see a lot of Indebted Companies stay alive. Boeing issued a ton of debt and the state of these companies when they come out will be terrible. What you think of that narrative . The fed has reopened the highyield and investmentgrade markets with new facilities they have announced. Last month, you had 37 billion of highyield debt issued and 200 85 billion of investmentgrade debt. ,hese are not record amounts but these are huge by ends for a market facing a steve huge buy ins for a market facing a steep recession. Even though the fed has not lent a dime, the fact that they are standing as a backstop has opened these markets wide. Companies facing a significant stillrnings and revenues have access to the credit market , which, obviously, liquidity is an important thing is you are facing a recession. The question for investors is how long of a bridge are they creating . When you put new money into Corporate Credit facing is a given it downturn in its revenues, how long is that liquidity bridge you are creating and isnt long enough to get to the other side of this recession . That is the question investors need to be facing up to. Sonali is the liquidity bridge able to stop a lot of the job losses we are seeing now . On the other end of the corning you have the fiscal stimulus. I am wondering what you think about the fiscal stimulus ability to get americans through the crisis. Isnt a lot contingents on a recovery later next year or early next . Jim the program andy lee cares act, and the fed corporate the program, and the cares act is premised on a vshaped recovery. That Companies Get back to where they were in january by december. If that proves not to be the case, then the bridge provided by these bills may prove to be too short. This may just be the beginning and fouract one, 2, 3, by the time we are done if this proves to be a long and deep recession. Sonali what does america look like coming out of this . We are watching debt levels sort and it is hard to talk about that when things need to be done to save the economy. What are the ramifications that these enormous debt loads will have on our u. S. And local governments . Jim lets start with the corporate sector. Coming in to this crisis, the corporate sector was more levered than it had ever been in American History, about 10. 5 trillion dollars of outstanding corporate debt, of which half is highyield and half is investmentgrade. Of the half that is investmentgrade, half is the lowest wrong of investmentgrade. The federal budget coming into a 4. 7 trillion budget funded with 1. 2 trillion of debt, i. E. A deficit. As a result of the cares act, we are now at a 4 trillion deficit on a 7. 5 trillion budget. The federal debt will increase 4 trillion as a result this year. A decline in gdp and an increase in debt were debt to gdp will be 100 . On the other end of this, assuming we are done, and i do not think we are done in terms of federal spending and stimulus , we are going to be at the highest level of debt to gdp in American History other than right after world war ii. The corporate sector will be extremely highly levered, the governing sector will be highly sheetd, the fed balance will have expanded enormously in order to support the corporate sector and the government sector coming out of this. There is one clear implication that a budget that is this far deficit, and basically 10 of gdp is the run rate deficit of the cbo is now forecasting. That is a budget that will need to be addressed in some serious fashion on the others have this. One thing investors need to take era of taxt is the cuts is over. There are going to be corporate and personal income tax increases on the others out of best to bring the budget closer to balance. The federal budget does not have to be balanced, but the deficit has to be reined in so it is not increasing faster than general economic growth. Do get a cares 2, 3, 5, or another 3 trillion stimulus, what is the most effective way to help the economy and the workers manage on the other . Jim if you break down the cares act, probably the most important stimulus in that is the support for income, the extended unemployment and increased Unemployment Benefits for the 30 million americans rendered unemployed in the last six weeks , and the paychecks coming out of the Treasury Department for people earning less the 90,000 a year. That is money in peoples pockets that supports their ability to meet their payments and take care of their families. Again,ere going to do it that is where, given the high level of unemployment we are now facing as the slow recovery comes, it will take some time. Support for individual income during these periods is the best form of putting a floor under the economy. Isremental lending, which half 1 trillion of the cares act involved, and that is being magnified or augmented by the fed, with their primary Corporate Credit facilities and secondary market Corporate Credit facilities. Incremental lending, putting more debt on individual , whenate Balance Sheets cash flow and income and revenue are the problem is probably not the wisest strategy. Sonali you said the era of tax cuts is over. What does that mean for corporations and individuals . I know in light of this crisis there is a concern about income inequality coming off the back end of this. Does that mean the rich will be taxed happier in the future . Jim i think so. I think it is inevitable. I think the budget is so out of balance at this point that it is not merely a question of getting our Spending Priorities together and making difficult choices, but the income side of the federal budget needs to be addressed. That means people who have been fortunate enough to be able to make significant incomes are going to have to make a greater contribution. These programs that have been plummeted over the last six to eight weeks have buttressed the credit markets and in some sense the equity markets. We have had a big rally over the last six weeks in the equity markets as a result of the massive intervention of the federal government and the fed in the credit markets. Support for the investor class is something the investor class will ultimately have to pay for. If we are creating a backstop against credit losses, then eventually, if this government is doing that much for that class, that class will have to start paying for it. Alix so great to catch up with you. So much more to delve into. Jim millstein, Guggenheim Securities cochairman, and bloombergs sonali basak as well. We want to give you an update on what is making headlights outside the business world. 100,000 many as as many as 100,000 americans could die from the coronavirus. This estimate comes from donald trump joint at the beginning of april, President Trump said he hoped deaths would total less than 60,000. So far more than 67,000 americans have died. President trump is accusing china of trying to cover up the coronavirus outbreak and he promised the u. S. Government were released a conclusive report on the pandemics chinese origins. He says imposing tariffs would be the ultimate punishment. An exclusive Associated Press so itying china could stock up on medical supplies. The italian Prime Minister facing a growing revolt by business and local rivals. Starting today, the nationwide lockdown is being used. Pressure to speed up the reopening will likely increase. New deaths attributed to the virus have fallen to the lowest level in almost two months. 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. I am Viviana Hurtado. This is bloomberg. Alix . Alix thanks so much. Adapt as, Ceos Companies face unprecedented crisis is. We will talk to clarke murphy, Russell Reynolds associates etf. Check out the charts we have used. Go right to gtv. Browse them and check them out. Gtv. This is bloomberg. Viviana this is bloomberg daybreak. I am Viviana Hurtado with your Bloomberg Business flash. Unveiling software aimed to help companies safely reopen their offices. Will also manage Emergency Response procedures. Now to shares of chinese Property Developer soho china plunging. Bloomberg has learned talks between the company and Blackstone Group have stalled. Blackstone was considering investing in soho china, but the coronavirus outbreak making it difficult to assess the business outlook. Firm Silver Lake Partners investing 753 million in indias geo platform. That comes days after facebook agreed to invest in the business. Geo is the digital unit of reliance industries. The conglomerate is controlled by asias richest man, who has been trying to reduce debt. I am Viviana Hurtado and that is your Bloomberg Business flash. Alix thanks so much. Time for bottom line. We take a look at sectors and companies were watching. Today our focus is on companies reopening and a time of uncertainty and the changing role of the ceo. Joining me is clarke murphy, Russell Reynolds associates ceo. Russell reynolds is a Global Advisory research firm. To get youruld love perspective as to halep your clients questions have evolved. Where were they six months ago and where are they now . Clarke the most important thing is how fast their pivoting. This came on quickly and it will last sometime. It is about how fast they are automating, how fast theyre adjusting supply chains. As we see tough times in europe and the u. S. , asia has been open and running for months. We have businesses adjusting. Different parts of the world are pivoting quickly. On that, what are the steps ceos are taking to reopen their business and how they look at their cash flow models Going Forward where if your restaurant you have to have your table space, you have less cover coming in. Walk me through what ceos are thinking about that. Clarke their adjusting. If you look at the restaurant business, they are building a huge takeout business. They are helping Health Care Workers with meals. It is what can i do on the shortterm but in the longer term im preparing for people being farther apart. Supply chains that were far apart are becoming more localized. Whether it is a huge company adjusting supply chains and bringing it closer to home, or if it is the restaurant business. You are also seeing restaurant chains saying casual dining, we have a casual dining chain that says this will be more important when we reopen. We will take bigger leaves as some malls get rid of things. People who are nimble and reacting shortterm, being on offense and defense at the same time. Is interesting, getting a bigger footprint. What are people saying about supply chains . How quickly can ceos adapt to that . Years ago we were working with companies around the world saying how do i digitize chunks of my supply chain to make it more efficient, some of them being more howainable, a couple saying do we adjust quickly . This crisis shows us a lot about leadership. The best leaders are showing we are where we are. How do we accelerate the changes we will make any way to react to this crisis . Great leaders we are working with are those who will pivot faster and will move on the things we thought would take too long, we will make investments. It is like looking at silver lake and facebook in india. Here is the opportunity. Lets move faster than we would have thought we would. If the fed is allowing companies to borrow a lot last, borrow at lower rates, do you get the feeling we will see a lot of debt being taken on for m a and expansion . What is the appetite for that . Clarke two answers to that question. One, we think the m a market from a corporate standpoint, looking at opportunities they did not think they would have, so there will be m a. Trying to pick the right leaders to make the integration happen faster from a corporate standpoint, and again in the markets, given where Interest Rates are, the opportunity to refinancing. The credit markets are saying lets have liquidity to do the things we do. Perspective,ate the board saying this is an opportunity, and from a credit perspective, market saying if this can help one company be stronger, there probably is more debt, yes. Alix what kind of companies will we see on the other side . Highly levered, Indebted Companies . How are ceos thinking about that part . I think you will see companies bigger and smaller, meeting some will have the opportunity to divest. Larger opportunities , this is the chance i have to buy that asset. Others will say i need to divest that underperforming asset. It is equally about debt levels that it is thinking strategically longterm back to the offense and defense, where we are seeing in brazil and asia ok,europe companies saying i have to deal with my liquidity now. We will be in good shape. The baker moves i want to make in entering markets or exiting underperforming markets, now is the time. Alix how do ceos view china . It feelslast 72 hours like we are ramping that backup. How do they view that relationship . If you react in the last 72 hours, things are heating up. Timeline, or 15 year one thing you see is the supply chain shifting where other parts of asia will pick up manufacturing and distribution. That is less about the politics than the realities of supply chain reliance, but from a longterm perspective, and looking at chinas role around the world as an operator, i think those remain the same. Are they going to reduce the reliance on individual factories in china were supply chains . Yes. But the longerterm role of the chinese economy in the world remains the same. Jonathan alix that is an interesting distinction. Thank you so much. Clarke murphy of Russell Reynolds associates. Market at the stock an Inflection Point question mark more on todays technical speaking coming up. This is bloomberg. Alix time for technically speaking. Mike mcglone joints me now. We were talking about looking at the s p versus the covid cases and asking if we are at an Inflection Point here. Mike hello. That is the way i look at it. If we are at a good signal to sell in may, it is here now. What is scripted is the market hit bottom. Write about the time that cases peaked. The time that cases peaked. You see coronavirus cases divided by the 20 day average. The future will be about the economy. The stock market has already had a 50 correction. If theres anyplace you should be looking for resistance, it is here and now. Alix if you take a look at the s p versus bonds and commodities , what is holding up better, what is the relative play . Mike that is the key thing. It is the battle between liquidity and clear signs of deflation and commodities in bond yields. There is a significant separation with rising stock prices and commodities and bond yields that say it we will keep going down. If the stock market turns over, there is no hope for commodities or yields to go up. I feel the risk is outdated against stocks at this level. Alix always great to catch up with you. Mike mcglone of bloomberg intelligence. That wraps it up for me. With up on the open jonathan ferro, chetan ahya will be joining him. This is bloomberg. Happy monday, everybody. Jonathan from new york city for our audience worldwide, good morning. The countdown to the open starts right now. Another big week full of data punctuated by an ugly payrolls report. 30 minutes from the opening bell, here is your price action. Equity futures lower coming off a mild week of losses. Off the lows of the session but still down. 70 5 on the s p 500. In the bond market not much of a bid. Yields higher by a single basis point at 0. 63 on the 10 year, and in the oil market, crude much lower earlier in the session. Now down just 1. 8 to 19. 40. That is the price action. That start with the big issue. The administration doubling down on its criticism of the Chinese Communist party. Mike pompeo getting things underway. The Intelligence Committee continues to do its work. They should ce
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