Transcripts For BLOOMBERG Bloomberg Surveillance 20170524

While maintaining the price of Economic Growth . This is bloomberg surveillance. Im mark barton. We have headlines from the ecb. It says debt sustainability concerns have risen in the last six months amid a potential increase in yields. The ecb says risks to Financial Security stemming from Financial Markets remains significant, mainly because of the possibility of a rapid repricing in Global Fixed Income markets. It says an abrupt repricing could materialize because of spillovers from high yields in advanced economies, in particular te advanced economies, in particular the United States. The fed has raised rates twice since last year and policymakers are predicting two more in 2017. Unconventional stimuli are moving close, the officials caution that in the light of inflation and Global Economic risks, qe must be unwound gradually before higher borrowing costs should be discussed. We will speak with matt miller about this. A quick look at the markets today. The stoxx 600 is up by 1 5 of 1 . The german 10 year, a little changed, 40 basis points. The aussi dollar in the wake of the china rating cut by moodys, cutting the rating on chinas debt for the first time in almost three decades. The aussi is chased lower. And brent crude ahead of the 0. 5 ,eeting is up by 54. 45. Lets get to the bloomberg first word news. Reporter amber rudd says thousands of troops are available for deployment to help police guard Public Events around the country following the manchester suicide bombing. 22 people were killed and dozens injured. Authorities are now hunting for possible compasses. Prime minister theresa may announced Intelligence Analysts raised the u. K. Terrorist threat levels from severe to critical, the highest level, for the first time in a decade. Our assessment is not only that an attack remains highly lightly, but that attack might be imminent. Debt ratinginas has been cut by moodys for the First Time Since 1989, reduced to a1. This challenges the view that the nations leadership will be able to rein in debt, while maintaining the pace of Economic Growth. The authorities have recognized the risks at home with economic leverage. Account to thento point where we think leverage will increase more slowly than in the past. These measures will not be enough to completely reverse. Reporter and Philadelphia Fed president Patrick Parker says june is a possibility for the second rate increase of 2017. , this comes as futures pricing suggests most expect the move went the fomc concludes its next meeting on june 14. First and foremost, i continue to see three rate hikes for 2017 as appropriate. We have one under our belt and given my forecast right now, we will talk about that during the moreim sure, icy tw see two over the course of this year. Global news 24 hours a day, powered by 2600 journalists and analysts in more than 120 countries around the world. This is bloomberg. Mark . Manus President Trump has not pope francis at the vatican. This is his first overseas trip since taking office. He will meet italys Prime Minister and president later. Trouble that come continues with his first budget being dismissed. Vitor constancio is in rome for us. Given the opposing views of trump and the pope on a number twossues, do you think the managed to find Common Ground . Kevin well, the pope and president meeting in vatican city in st. Peters basilica, exchanging gifts this morning, as it is morning in rome. The president gave the pope books, including a book with some of the first writings by dr. Martin luther king. The pope, then giving the president books on family, gospel, and here is where it gets interesting, on the environment. The environment is one of the key areas of differences between as president and the pope, who has been outspoken as an environmentalist. He did not publicly bring up their differences on capitalism or immigration. Youll remember in the summer of 2015 when the pope came out against the then candidate Donald Trumps rhetoric on building a wall. The president will also be speaking with the vatican secretary of state. Ess of course, is the pop more political apparatus of vatican city. This is where some of their differences could emerge, privately. They did meet privately, including melania trump, who wore a more traditional vieleil. Mark meanwhile, the attention turns to the president s fiscal agenda. The 2018 budget was unveiled yesterday. To what extent do we have support for this budget and how will this budget differ from the ultimate edge it, when it is from the ultimate budget, when it is argued amongst lawmakers . Kevin not much of support at all. A lot of republicans came out in congress, saying the budget is dead on arrival. Last week when i spoke with mitch mcconnell, he laughed it o ff because of these proposed entitlement cuts to a host of entitlement programs back in the u. S. , noting lawmakers do not follow through on any president s Budget Proposal, republican or democrat. Democrats are against this and several republicans are against this. Primarily speaking, this is another way for the white house to set their agenda moving forward. Clearly, they showed their priorities, they want to cut entitlements and boost military funding. Mark thank you, Kevin Cirilli. Medecin, whon jean joins us for the hour. Thanks for joining us. Today the ability of donald trump to push through his agenda is becoming more and more difficult. What impact will that have across Asset Classes . Right now, if you look at markets, for us, the investors, ay has changed in the sense that the options are now trying to reach a deal with passive reforms. Within the we see is fixed income market or on the Foreign Exchange market. All the trump relfation trade has vanished. Mark it has or not . It has. So, what is left. Is the economic backdrop Strong Enough . Absolutely. We see a synchronized growth around the world, which is supporting many markets. But many markets as well outside of the u. S. That is important for investors right now. But also what we have to keep in mind is, looking back to what happened with obamacare, there was a failure, followed by success. We should not completely rule out any kind of reform, or any political effects being implemented. Right now i would say you can only factor it as a kind of additional positive element. In a way, it is quite positive for investors. Mark so, what do we invest in . You highlight the fact that especially in the u. S. , the market has been driven by technology stock. Have we seen the gains in technology . Who might take the baton from here . Isthe key word for investors diversification in the sense that when you look at the nasdaq, it has been moving theer annually 80 since start of the year. There is a limit. Probably what investors should do is not to get rid of the sectors, because you still have strong growth coming from technology stocks. Obviously, you want to diversify ,ut of the top five tech stocks which are the market capitalization to the bottom 250 stocks. Therefore, look for ideas in the smaller companies, like for example inside the u. S. , as well as outside of the u. S. Beyond that, i would argue that you can diversify your portfolio. Dont just be focused on Growth Technology companies. Look for more value stocks and here you can obviously factor the eurozone, banking stocks, or even gold and resources. Mark jean medecin, Investment Committee member at carmignac gestion stays with us. Stacarsoneak with block. Earnings beat analyst estimates. Astax profits fell 3. 10 business and food costcutting overcame weakness in the clothing unit. Morgan stanley says it will cut back on using recruitment bonuses to poach business and costcutting established financial advisors. Ubs signals similar moves and they will honor existing recruitment deals and include start dates by the beginning of december. The company is developing new recruiting policies and plans to roll out a new digital tool this year. The u. S. Justice department has sued Fiat Chrysler over claims the diesel power pickups and suvs had Illegal Software. The claim alleges that nearly 400,000 vehicles were equipped with so called devices. The company is reviewing the claim, but is disappointed the suit has been filed. Mark the ecb says debt sustainability concerns have risen in the last six months, stemming from a potential increase in yields and political uncertainties. The ecb is publishing the annual stability review. The next meeting is on june 8. Mario draghi will get the chance to discuss his view on the matter when he gives his speech in madrid. Frankfurt and in will be interviewing Vitor Constancio shortly. Talk us through the primary concerns in this semi annual Financial Stability review. Matt well, the primary concerns are that debt sustainability will become a problem with the rise in yields in certain areas. The fed is expected to raise rates two more times this year closer ecb is getting and closer to discussing the possibility of normalization of policy. Interestingly, the ecb, unlike the fed, has talked about the importance of unwinding qe before it thinks about borrowing costs. That will be something they will be talking about in the press conference. Im about to run over to the ecb to listen to the rest of the Financial Stability review. Also, a warning in the Statement Released about banks preparing for brexit. The ecb, saying get your preparation done early. There are important to the Financial Stability of the Banking Industry to have all your ducks in a row before brexit happens and be prepared for any possibility, as far as outcomes of the talks. Mark bloomberg wrote this great story today, draghis lieutenants as the ecb braces for exit strategy debate as we approach this critical june 8 meeting. It seems as if draghis two main lieutenants are delivering a different message. Peter perez on one side and ben walker on the other. Does this highlight the difficulties of the unwinding of draghis Stimulus Program that he faces through the end of the year . Matt in one sense, it does. On the other hand, if you are in a position like mario draghi you want to hear differing opinions before you make of your mind. So, he has got one guy on the dovish side and one guy on the hawkish side. These are his right hand and left hand me. It will be interesting to see what Vitor Constancio thinks. The last couple of times i interviewed him after a Financial Stability review he told me a couple things about his view on inflation. You thought we would be close to the ecbs target rate in 2018. I will see if he still thinks that. I interviewed him interestingly, about five months ago and there was concern that u. S. Prices were going to drop. That did not really happen. Ecb wasd, he said the ready with continued Monetary Policy support. The question this time will be, are you going to be able to make that commitment as you get closer and closer to normalization after tapering bond purchases in april . Will he be able to keep up that safeguard for european lenders . Mark matt, we will speak to you later. Matt miller, still in frankfurt today. A fascinating debate, isnt it, jean medecin . Where do you stand . Is there a risk of keeping Monetary Policy too lose . Too loose . Or is it, keep it loose and wait for inflation to pick up . You dont want to make the mistakes of the past, tightening policy too soon. I think this is a work in progress. In a way, it is supporting the equity markets of both countries because right now we have very accommodative Monetary Policy and probably, it will going for quite some time, even if the Monetary Policy might be gradually less accommodative, but still accommodative. What is fascinating with what we are hearing right now from the ecb is that they are laying the ground to give them a lot of thisbility to deal with normalization policy. A few weeks ago we heard the report that unemployment was higher than what the official figures suggested, and therefore, they expected core inflation to remain moderate. The strength of the euro will contain inflation. That gives the ecb a lot of ammunition to precisely time the normalization of the Monetary Policy. Mark how tricky is the path, jean . The worry is markets could misread your mi intentions and financial conditions tighten and you are not achieving what youre aiming to achieve. How difficult is the past, not only for the ecb, but for the fed as well . We will stick with the ecb. I think if we discussed the fed, they succeeded in blurring the picture, and therefore preventing a more stressful financial condition. As far as the ecb is concerned, even if we are talking about the danger of rising rates and the stability of the region, we have to keep in mind that the level of yields we are heading, either with debt in france, germany, and even countries like italy or sprain, the currency of yields is a lot lower than the average cost of their debt. Person gap. 5 so, obviously, there is a little bit of room for rate normalization before triggering any kind of stress. Mark jean medecin stays with us. Off in, will be fed jump june . That is the big question as markets anticipate the move. Patrick karger says next month is a distinct possibility. This is bloomberg. Mark breaking news out of france. French president macron will seek an extension of the state of emergency. The Emergency Powers have been in place since 2015 and are set to expire mid july. Yesterday in the u. K. We were informed the terror alert has gone up to the highest level, critical from severe, the first time in 10 years. President elphia fed Patrick Harker says june is a distinct possibility for the u. S. Central banks secondrate increase of 2017. Investors are awaiting the release of the minutes from the fomc meeting. Markets are anticipating a move next month. Based on strong economic outlook, i continue to see three rate hikes for 2017 as appropriate. We have one under our belt and given my forecast right now, we will talk about that during the moreim sure, i see two over the course of this year. K are we with an two are we within two more this year . It is a distinct possibility. The fed is more resolute towards hiking rates. And now there are more reasons for that. One is obviously Inflation Expectations. Two, when we look at the growth of the economy, obviously, we have this synchronized growth pattern, which is supporting the feds Monetary Policy and normalization. Third, the first two hikes we have seen recently have not really triggered any kind of tightening of financial conditions, which is also playing in the feds hands. Down fed fund futures came because of what was being perceived as a crisis in washington. There were days of bad headlines for the president. Expectations came down. They have come back up again. Derail the fed . Yes or no . Jean that is a bit extreme, but the fed will factor politics in. It is very clear there is a fine balance between the normalization of the Monetary Policy and the pace you might expect on the one hand and what is happening in washington and a very aggressive fiscal stimulus will impact the way the fed is looking at the normalization of the Monetary Policy. The two are not separated, but derail is too extreme they were. Mark you mentioned inflation. Inflation is undershooting the 2 target. Are you comfortable inflation is on theare you comfortable inflas on the right path . I am comfortable that the deflation fear is over. It is very clear, wherever you look in the world, that we are seeing the Inflation Expectations reoccurring and the actual inflation number gradually grinding higher. The their important thing the important thing to understand is the end of inflation does not mean we are on the verge of a very strong inflation acceleration. Positive we are in a environment for investors right now because we have Inflation Numbers which are neither too hot, nor too weak. , staying withecin us. 15 days to go until the u. K. s general election and political campaigning was suspended after the deadly attack in manchester. We will focus on the u. K. And the brexit negotiations. That is next. This is bloomberg. Mark lets get bloomberg first word news. Arehousands of troops available for doughboy meant to help police guard Public Events. 22 people were killed and dozens were injured during the manchester attack. Theresa may announced analysts had raised the u. K. Threat level to critic or for to critical for the first time in a decade. A further attack may be imminent. Trump has met the pope. That was his First International trip since becoming president. Is due to meet the italian Prime Minister later. The first budget has been dismissed by critics as a fantasy. It would negatively impact many of the working poor who propelled him to the white house. Chinas debt rating has been cut for the First Time Since 1989, the move challenges the view that the leadership will be able to rein in debt while maintaining the pace of growth. Withe authorities have high leverage and have high reform. We think leverage will increase more slowly. These measures will not be enough to reverse increasing leverage. Patrick parker says june is a possibility for the second Interest Rate increase of 2017. That comes as pricing suggests a it concludes its next meeting on june 14. Hikesontinue to see rate for 2017 as appropriate. I see two over the course of this year. Global news, 24 hours a day, this is bloomberg. Mark with the u. K. Coming to terms with the worst terror attack in decades, there are questions about whether the atrocity and the Terror Threat being raised to its highest level will affect Consumer Confidence. Sterling is heading lower. Could drop to 1. 20. Lets have a look at this. The blue line is what analysts are telling us where sterling will be at the end of the year. The argument is it does not matter what the outcome is, sterling is going down. The u. K. Is set for a damaging brexit process. Is it a bad thing . Not necessarily. What we have seen in the brexit vote and when we have the first wave of the pound weakening, there is rebalancing happening. Consumers are being squeezed. We have seen a peak in exports and the is shrinking. This is calling for being specific and disciplined in where you want to invest in the u. K. Consumers suffering means certain sectors will continue to negative of this imported inflation. On the other hand, it means not everything is necessarily bleak. Of us are focused on the ftse 100. Ftse 250,eper and the indices at or near record highs. What is that telling us about the Underlying Health of the economy and expectations for the economy . Pound haskness of the been good from a transaction impact or a translation impact. Nevertheless, investors have to bear in mind if you make 20 on portfolios, it is not necessarily a positive outcome. It supports the idea of being global in your Investment Strategy and not just being focused on domestic margins. Mark if you give us a bit of 100 billion, we are out of there. The same day, the ecb is laying out its guidelines, these are the things we want to focus on. We are not going to talk about trade until this is discussed. Upthis both sides setting positions or are we in for a tricky, early start of the negotiating period when it begins . There is posturing. It is good negotiating tactics. Sometimes, things get out of control. Maybe there will not be any deal at all. This is something we factor in. Diversification is important, looking beyond your market to invest your money. Avoidgive us an example you are doing. Most of our funds are global funds. When you are looking at the ,pportunities around the world in emerging markets as well as well, we talked about the Banking Sector. They are quite appealing when you consider how the Banking Sector is critical. Those are examples where, when you have strong conviction, you are not necessarily forced to implement it. Mark we were speaking about peter earlier. He says underlying inflation, the risks have vanished. It is a solid, cyclical recovery. And points to strong growth in the Second Quarter. Mario draghi speaks later. Lots of central bankers talking in the last 24 hours. Will opec agreed to an extension . Vienna. Ive in mark you are watching bloomberg surveillance. We look at european stocks, we are fairly steady after closing high yesterday. Action in the asian section from moodys downgrade of china. We paired some of the losses. The u. N. Moved lower. Where we see the impact in. Urope is on the miners if you look at the stoxx 600 isic resources index, it edging to negative territory for the year, down for the year. They are one of the worst performing groups on the stoxx 600. Looking at the commodities space, looking at oil rising for sixth day. A some technicals on brent. Above 54 dollars a barrel. It has moved above its 200 day, 100 day, and 50 Day Moving Averages. A golden cross. The 50 Day Moving Average has crossed the 200 day average. This has only happened four times in five years. It generally marks a multiweek trend. Keep an eye on this ahead of the up tonutes as we build the possible june hike. I want to show you the Treasury Bill and the treasury bund spend. Yields in the u. S. Moving lower, relative to the german 10year bund yield. It is moving lower. We are at about 18 basis points on this spread. It is expected to tighten to 150 basis points by the end of next year. A low it hitt after the u. S. Election. Mark gold in the golden cross. Is set to extend production cuts. Iraq is removing one of the last remaining articles of the ink of the agreement. Manus i am joined by bill, the ceo of ppi. Welcome to bloomberg. Happens inabout what vienna. There is a pathway for opec metric its new external if demand holds up through the rest of the year and into next year. If we do not get too much of a supply reaction from the u. S. Shale patch. Is society reestablishing itself . Is playing its role for a long time. They have made a commitment to do whatever it takes to stabilize all prices. Have unspokeng to oil price targets. We are going to know and measure performance. You have a lot of caveats to that. Manus bob was with us earlier. Compliance has been done because you are able to pull forward. Members andr opec really beginsrs today. Would you agree with that . Russia is going to be more. Hallenging it is going to be tough for them to hang with the program. They are committed to doing this and they want to see all prices stabilized. Qeus we talk about infinity. 26 is gone. 50 in a bandwidth . 50 as a flow would be a Great Success for opec at this stage. Is withw the problem the high numbers, it will spark a new wave of supply. A bunch of hedging activity that would put them under pressure again. Hear what do you want to from the russians . Get on board with a november deal, but it took it a long time to get on board. They watched to see if opec fulfilled its commitment to us. In january, they had a lot of cold weather related shutins that helped them. The other story we have is from trump. It is not going to move the dial. If it evenk opec gets agreed. It would struggle to get through congress. Takes some of the shine off of oil as a strategic commodity. In terms of volume, it is a nonstory. Sales would be eked out over a long time. This boxingve match, the iea saying stay the course and you will have a deficit by the end of the year. Who do you side with . The iea has committed to its demand view. That has to come in for that forecast to work. We saw a week First Quarter a weak First Quarter. We have to be sure that weakness is not carried through a trend that lasts all year. Fractures keep coming at rs keep coming in at 50. It is having a big impact, but it is also libya and nigeria have managed to stabilize their recoveries. Manus lets see what we come up with in terms of the agreement. The storm clouds stayed away for just long enough. , we will seew manus. Rein in leverage while maintaining the pace of Economic Growth . This is bloomberg. Mark you are watching bloomberg surveillance. U. K. Retailer Marks Spencers has reported earnings that beat analyst estimates. Costcutting overcame persistent weakness in its clothing unit. Morgan stanley will cut down on recruitment bonuses to poach advisers. The firm will honor existing recruitment deals approved by june 16 and include start dates by the beginning of september. The company is developing new recruiting policies. The u. S. Justice department has sued fee at chrysler over claims diesel powered vehicles or fitted with Illegal Software that allow them to pass omissions tests. Tests. Sion the company says it is reviewing the complaint but is disappointed the suit has been filed. Mark chinas debt rating has been cut for the First Time Since 1989. Themove challenges the view nations leadership will rain and data a while maintaining the pace of Economic Growth. Authorities have recognized risks that come with high leverage. We take that into account to the point we think leverage will increase more slowly. These measures will not be enough to reverse increasing leverage. Ink can china rein leverage . What is more important than the pace of leverage is whether it is coming from. Because they are financing their sovereign debt, locally, debttically, we never had prices. They can keep going on for a little longer. For china, the name of the game is with the Banking Sector and the prospect of facing some default on financing for infrastructure. It is not calling for systematic crisis, it is calling for selectivity. Reflation trend we have been seeing is very positive for china. We have seen the corporate debt to gdp ratio declining by a fraction. Necessarily accelerating in terms of it in terms of Economic Growth, but is accelerating in terms of nominal growth. Mark we have seen a slight turn on the ppi. It is just coming off of its highs. If it stays where it is now, at nominal growth, which is a lot higher than what it has been in the past year. The growth of credit has slowed down a little bit. The two curves crossing and creating for corporate debt. Mark the announcement is ultimately about debt. Crisishina face a debt relative to gdp levels . The crisis will be triggered by domestic investors losing faith in investing in the china needing foreign capitals to finance. Considering the level of accounts of china, the latter is not a concern. It will be more down to the capacity of the leadership to maintain the trust and confidence of chinese , to keep financing. It is very low, around 12 to gdp. Thank you. Bloomberg surveillance continues. Guy johnson will be here in london. Tom keene joins us in new york. They will bring you the european th the Vice President. This morning the army guard at buckingham palace. Srime minister may orders guard for key locations. The home secretary said it is likely the manchester bomber was not acting alone. In rome, the president meets the pope, bearing gifts of Martin Luther king jr. Moodys markdown chinas Credit Rating. China is not happy about it. I have got to say it, folks. China is moody. Im tom keene. Guy johnson does not like my opening. We will talk a lot about manchester. Going to the markets, china being told their position by a Credit Ratings agency. Guy and the market largely ignoring it. I think this is the Rating Agency catching up at the markets. The markets have been aware there is an issue with chinese debt. I dont think there is much more to read into it than that. The question is, what happens further down the road . There will be an issue with chinese debt . Tom we are showing elevated yields this morning. Right now on manchester with our first word news. Reporter for the first time in a decade, the u. K. Has raised the Terror Threat level. Prime minister theresa may is taking unprecedented security steps and has ordered the military to guard sporting events and concerts. In france, president macron has asked parliament to extend the state of emergency that is due to expire in july. In the vatican, the president met with pope francis. Afterwards, the president was hurt thanking the poepe. The pope gave his book on the importance of protecting the environment to the president. Couple moret on a Interest Rate hikes from the Federal Reserve this year. That is according to Philadelphia Fed president Patrick Harker. First and foremost, i continue to see three rate hikes for 2017 as appropriate. We have one under our belt and i think, given my forecast right now, and we will talk about that during the q a, im sure, i see two more over the course of this year. Hiker harker said a rate next month is a distinct possibility. Moodys has downgraded chinas Credit Rating for the First Time Since 1989, cutting china to a 1. They cited the material rise in debt. At the same time, they changed the outlook from negative to stable. Stocks and shanghai fell to a sevenmonth low. The yuan fell too. Global news 24 hours a day, powered by 2600 journalists and analysts in more than 120 countries around the world. Im taylor riggs. This is bloomberg. Equitiess look at b, bonds, and currencies commodities. There is not much going on. Equities spread flattens the yield curve, but amid rising yields for both the two year and 10 year. That is a bearish flatten her and has the attention of people, guy. Schneider at pimco yesterday, quite adamant about a bearish flatten her in bearish flattener in our future. Guy not much of a sense of direction coming from europe this morning, the same in the u. S. A little bit of a selloff in euro sterling, but not a big one. We see solid data coming out of the eurozone. Ist i am interested in, tom, that we have not seen much of a reaction from the china downgrade. Is affected because of the commodities link. The shanghai composite is barely budging. Tom lets look at a picture of that. Let me first look at the bigger picture, the chinese fiveyear yield. This function is my favorite for fixed income. Here is the five year yield, back to the financial crisis, lower yields off the crisis. Notice these peaks here. This is a higher fiveyear yield. And as you get up to 4 , that might be a point of tangent. I want to show what guy has talked about twice. Mr. Johnson is always right, right, right. That is the chinese fiveyear yield. On the moodys news, there has not been that much of a move up today. Guy, what do you have this morning . Guy i want to talk about oil. The market appears to have largely priced some of this in. We have a white line showing the brent contract and it has picked up over the last few days. Momentum is with the market. The brent 200 Day Moving Average is the blue line. You can also see the 50 Day Moving Average. Oil looks fairly solid. The question is, how we already priced in that we will see this ninemonth extension . Let me take you back to this story surrounding china. Moodys has cut chinas rating for the First Time Since 1989. ,ets go to edna joining us out of hong kong. Not a surprise, but the timing was there anything curious about the timing we should Pay Attention to . I guess it is a reminder of the challenges that china still faces in trying to rein in the amount of credit in the system. Movies put them on watch one year ago. Movie puodys put them on watch one year ago. They are not confident policymakers are implementing the kind of Structural Reforms needed. It is something of a slap on the wrist for china and a reminder that even if the overall net income of the economy is contained, they still have to go before the rest of the developed markets on the world stage. Tom i guess the basic idea is higher yields, slower economy. Does that relationship work in china . Reporter well, as you mentioned in your chart earlier, the impact has been subdued. China is not a big external grower. External debt is less than 4 of gdp. It is not what you might see in other economies of its size. In fact, that is exactly what we saw within the markets. There is a feeling that the overall impact on bond yields it could impact Property Developers and bankers, but the net effect should be contained, given the strength of the Balance Sheet and the current trend of the nations banking system, too. Guy great stuff, as ever. Edna, joining us out of hong kong. N reinhard cluse. Is this a surprise or a cause for concern . Would you have any concerns if somebody came to you and said, i am thinking of purchasing chinese debt . First of all, china has been such an important driver of Global Growth over the last decade the any signs of a slowdown in china and a complicated slowdown in china is important for markets across the world. I dont think, as you said earlier, that this was a surprised, per se. But the timing is a surprise, of course. Overall, i would not read too much of the Rating Action into the macroeconomic outlook. We expect at ubs that chinese growth will slow down from 6. 7 this year to 6. 2 next year. There is a slowdown that will be felt in europe. We export about 10 of our goods to china and this is important. Of course, we have to take on board that over the last couple of years, financial deepening has played a role. Now there is a concern about debt levels and we have to take that on board as well. However, we do not expect a hard landing in china. We expect a structural, multitier slowdown. If that goes according to the plan, the outlook for europe will not be undermined by this. Tom you made a brilliant observation about the distinction between goods and services in the european union. I dont see enough on that. The simple answer is germany is a good economy and france is a services economy. Expand on that. What does that mean for mr. Draghi, and for europe . Over the last couple of years, as you said, the growth rate in services has been a lot higher than in manufacturing goods. Less te eurozone produces han 80 services, only 20 or less is the share of manufacturing in gdp. It means that our traditional ands on producing goods exporting goods is somewhat outdated. The Service Sector is very important and that forces the ecb to take a broader approach. Tom theyre interesting. Very interesting. Reinhard cluse will continue with us and we have Kevin Cirilli in rome. The terror attack in manchester would be front and center, if not for the news of the budget of President Trump. During the next hour, our surveillance expert is scathing on the trump budget. This is bloomberg. This is bloomberg surveillance. Toshiba might seek bowers from the Westinghouse Nuclear power unit this fall. This is according to the chief operating officer. The company put westinghouse into bankruptcy in march. Westinghouse has been hit with billions of dollars in losses. It is not engaged in Business Combination talks with glencore. They approached them about a combination and there is no certainty 80 will happen. Shares of bunge soared 17 yesterday, but have fallen. The chairman of bloomberg lp is a senior independent director at glencore. And in the u. K. , full year earnings Beat Estimates. This offset weakness in the retailers clothing unit that will boost hopes that marks and spencer ceos will put the company back into growth. Guy thank you. Now, in its Financial Stability review, the ecb says repricing risks in fixed income markets remain significant. We are talking about the u. S. Here. At an event speaks in madrid later today, but before that, matt miller will speak with his secondincommand, Vitor Constancio. We bring you the interview during this show. Lets get back with reinhard cluse. I have on the screen here, the u. S. 10 year spread. We have come up a little bit. Does the ecb have something to worry about here, as we start to see the ecb getting into gear with what happened surrounding the rates cycle, that it will pull european spreads higher . How big a problem is that . We have seen easing of Monetary Policy over the last couple years andqe in particular has depressed global bond yields. That also holds for european bond yields. Now that we expect the ecb to move towards Monetary Policy normalization, where the demand for the government bonds in the context of the qe program decreases, we have to take on board this scenario that global bond yields, that european bond yields, that rise. For example, in countries where sovereign debt is the highest, italy or portugal, there is a concern that a significant rise in spreads could lead to problems, and anyone else priced off these markets. Guy you have a couple factors coming together, what is happening in the states. And the fear that we will see a change of language in june, and that could point of towards a change of policy further down the road. We know what this looks like. How clean is this Market Pricing story going to be . If you get it wrong, the periphery stock does look vulnerable . At ubs, we expect the ecb will change its language during the next two meetings, june 8 and july 20, so they tighten the communication to prepare the markets for a tapering decision on september 7. The aim must be from the ecbs perspective to prepare the market well. Not too hawkish in the communication, but also not too dovish. The market should know what is coming up, so on september 7, when we come into the office in the morning, we should be clear what is coming on that day. There should be no surprises. That should be the most important thing, to also prevent european bond yields from rising and a temper tantrum from being triggered. That means ecb communication will be very important. Tom reinhard cluse, thank you so much. And now, jerusalem, rome. The president of the united tours in the middle of his to europe. It is the home of the president of italy. Like and israel, they have a president and Prime Minister. This is president tour to europe. Trump in the palace and this goes back to pope gregory the 18th. The president , after meeting with the pope earlier today. He will meet with the president and the Prime Minister as well in italy. This is bloomberg. Tom it is quite a summer residence. Pope gregory iii built this in 1583. This is where the president of italy lives. Mr. Is mr. Mattarelli and gentiloni meeting the president of the United States. They will have many issues to speak of. Kevin cirilli is in rome on this trip. Kevin, what is so different about riyadh and israel, and now rome . What is the biggest shock on the trip as you moved to rome . Kevin the pope made a political statement. Earlier today, the president exchanged gifts with pope francis. President trump, deciding to the literature written by Martin Luther king to pope francis, a highlight from when the pope at the joint session of congress back in washington dc a little more than one year ago. Pope francis decided to give books to the president that included literature on family, as well as gospel teachings, and the environment. That is one of the policy differences between President Trump and pope francis. The other two being capitalism and immigration. They sparred over that quite vividly on twitter. Is nowrtion of the trip concluding, which has taken the president to the heart of the themuslin world and jewish world with president netanyahu, and now to italy, where the president and the first lady received a private tour of the Sistine Chapel and st. Peters basilica. Tom they are meeting with the government of italy. I will assume it is a warm up for brussels. What is mr. Trumps message to european leaders . Kevin well, i think he will head to brussels from here and it will be about nato allies paying their fair share. If you remember back to when Angela Merkel visited the white house, they had public statements. I think there has been a collective shift prior to the bombshells coming out of washington regarding the president sharing classified intelligence material with the russian diplomats. That said, they will be looking to brussels to ease the concerns of President Trump regarding his relationship with russia, and he will press them for more money. I can tell you that here in italy with Prime Minister paolo gentiloni, the anticipated key difference is iran. The president is focusing much of the first portion of his trip criticizing iran, particularly former president barack obama and the negotiation of the iran deal. The saudis and israelis agreed with him on that. The italians do not. Guy is it fair to say that thus far this trip exceeded expectations of those who put it together in washington, and does it more difficult from here . Kevin that is a great point. In terms of trying to micromanage the optics of this trip, the white house has been successful, keeping the president and his top advisers out of the view of the press. They clearly want to stay on message, not having to address any of the bombshells of reports that have emerged from washington. We have not heard from the president very much regarding the Budget Proposal he and his administration released yesterday. Clearly, they are trying to stay on message. You,Kevin Cirilli, thank joining us from rome, tracking the president on his trip. Lets get back to reinhard cluse. When do we Start Talking about the next Prime Minister of italy . Most people would expect that the next election in italy would take place sometime between february and april next year. Guy yes. I hope we have some between now and perhaps later in the year when the markets will start focusing on the italian election, sometime in between then that we could focus on the issues that will bring europe forward. So, i hope we will get some room for politics in the markets. Guy when we do start thinking about it, how seriously will it come through into the European Space of pricing . France was a risk. Italy could start polling very strongly. To give you a technical answer, it would depend on how strongly the five Star Movement will poll against the 45 . That would give it a supermajority. According to the current polls, none of the parties in italy will be close to that level. The markets could be relatively relaxed. Tom reinhard cluse, thank you. We are covering many stories, but one of them, elevated valuations within equity markets. We will speak with Michael Wilson from Morgan Stanley, the chief u. S. Equities strategist. Guy johnson in london and tom keene in london. Kevin cirilli with the president in rome. Lets call it a late may day in new york. This is bloomberg. You are watching surveillance. I am guy johnson in london and tom keene is in new york. Minister issh prime warning that another terror attack may be imminent and she is taking unprecedented steps to prevent it with the military guarding landmarks and sporting events after Intelligence Analyst raise the Terror Threat level from severe to critical 21st time in a decade. Police searching for a accomplice is to the suicide bomber who killed 22 people at an Ariana Grande concert in manchester. The french president will Ask Parliament to extend the state of emergency that will expire in july. Pope francis appears to have sent a message to the president , they met at the vatican and the copygave the president a of his book on the importance of protecting the environment and later this week President Trump is heading to a meeting of World Leaders who will want into honor of the u. S. Commitment to climate change. President trump budget what delay the base buildup and delay big increases in multibilliondollar weapon systems, more money would be put into troop readiness and precision weapons. Says themptroller budget does not significantly change the budget that had been projected by the obama administration. In the philippines, their president is striking back after battles between Government Troops and militants claimed to a islamic state. Now under martial law which will include the setting up of checkpoints, curfews, and the ability for the government to build jail suspects without going before a judge. Global news 24 hours a day, undl law which will include the setting up of checkpoints, powered by more than 2600 journalist and analysts in more than 120 countries. I am taylor riggs. This is bloomberg. Of the interim the end always means oil vienna always means oil. One of the most interesting cartel,s of opec, the he has written four years with insight on opec from the crash of 1986 on and forward and he joins us from vienna. What is the power of the cartel in 2017 . It is magnificent. Stories they are powerless or do not know what they are doing. Opec has a lot of power and they multiply that our by getting the stories they are russians powered by giving the russians on their side of the cable. Tom is the microeconomics of supply and demand, which are you focused on, demand dynamics of oil or still supply, supply, supply . Shortly that is a trick question. You have to want to vote. You are right you have to the supplyside dynamics in the last few years which is the dynamics opec is looking to change. Guy let me hold that thought. I want to bring news to the audio study pretty british follies have arrested three mid three men with relation to the manchester incident. Has beene thus far easy, how much harder does it get from now on . It does not get a lot harder. Upove it when people hold pictures of the 1980s or 1990s and how always compliance after you reach certain things. It is not that relevant, is it . All that matters is how serious are saudi arabia, russia, and the rest about wanting to fix this market. They have shown in the last couple of months that they can be very compliant. They have shown that, at times in the 30 or 40 or 50 years, it is about the forward. Guy thus far they have brought forward maintenance as a result of compliance has become easier. Russia does not have a lot of wiggle room when it comes to starting up or slowing down its fields. From a technical, management point of view, has it been easy to deal with these numbers as far . The pressure must be going growing to put on a little bit, howiraq is a classic case much harder will it become and the you expect to see lower compliance numbers Going Forward from here . No, i expect the opposite, you are right, so far, they have had a laugh, they cheated themselves by complying with production cuts and not taking a barrel out of their export program. That now needs to happen. Into the summer, they need to cut their export programs. Intent the question of and there you see the language tightening which is what i expect this summer. I expect to see both, production compliance and export cuts. Oil priceve been call, range bound, a different set of opinions at bloomberg surveillance. Very few people look for a lower oil price, it is more about stability, do you agree . Butt is about stability also about stability at a higher price and i think you are right, very few people look at a lower price because it is difficult to imagine how prices will collapse. About i am coming back to compliance i will like to get a different angle, mexico has hedged forward, iraq is thinking about it. If i rock exhibit hedging forward iraq takes about hedging forward, what message would that send . No, hedging is a different message. You are right. Mexico has always had to hedge because they are dependent on the income. The ministry has hedged. Iraq talks a lot, i would love to see them head, go for it. We know that outfits like exxon or saudi arabia or aramco, do not ever had because they would overrun the market. They would probably not achieve a lot by doing that and just bring the long end of the curve down. What is the point of it and purpose of it . Tom they would china is in the. We waited decade for a hard landing. How does china affect the price of oil . Greatly. Of late, there has been the Chinese Consumer who does the driving and consuming of gasoline or flying and consuming of jet fuel. Driven a lots have of oil demand for china and that is going fine, the oil growth demand in china. You have the chemicals and their propane consumption, they are growing steadily with diesel a question. The chinese economy is becoming ever more complex. And ever more driven by consumers, rather than by Mining Equipment running around the mountains. It has become a more complex economy and doing just fine with problems like everybody else. Saw issues agencies fit to take issue with it. Tom folded into Credit Suisse, asian economics as well, the you have an optimism on china with can be an optimism that supports the price of oil which can be an optimism that supports the price of oil . I do on the demand side and that includes china. That is founded on the big idea that, across emerging markets, we have more consumers and it becomes a numbers game with a rising middle class. These middleclass expands and wealth expands, i am optimistic about oil demand. Guy one final quick question from me. Can i take you back to what you said about hedging . The shape of the curve, the largely upward shape of the curve at the moment allows the u. S. Shale teams to hedge forward. Gameis keeping them in the in some ways. Is there an issue is there a line of thinking that opec could adopt this, what we need to do is invert the curve and drag it down, therefore hedging forward is very difficult . That would have an impact into the United States. Do you think we will get into curve control in the way that opec thinks Going Forward . You can probably tell, despite a backdrop being lovely, that i am squirming, it is a little bit too contrived. On every count. The show producers, yes they hedge, they had 17, they underfed for 18 and have not touched 19. All those parts of the curve are slipping down and shale producers are facing what for many is ever more uncontrollable inflation, how do you hedge that . Not for sure how much more hedging there will be. The curve has done the job. The shaleying to producers and everybody in opec has done a lot of homework to figure out that it is difficult to mess with the show producers who are their own animals and opec does not control them. Opec is powerful but for them to expect that they can somehow force the business points of the american shale production juggernaut, i do not think they are intending to do that here and hedging on their own part, on the part of opec producers, maybe one or two of them may have a financial issue. Messing the intent of with the show producers, i do not see that. Guy thank you the shale producers, i do not see that. Guy thank you. Reinhard cluse is still with us. Where do you see crude going . The inflationary story out of europe continues to be really subdued and that is likely to keep the ecb on track and doing what it is doing for quite some time. Brent 60 we work with on average this year and 65 next year, slightly higher than the future curve. Important in europe, changes in the oil price, 10 per barrel, that affects the inflation the future 0. 4 in of oil price is important for the inflation forecast which means it is important for the ecb. On the other hand, it is important for gdp growth and the consumer, Lower Oil Prices will likely be in europe because we are not a great net oil producer. We are a net importer which means the longer Oil Prices Stay low, the better it is for the european consumer and four households, because also consumption makes up for 55 of gdp and if we all get a lift for our purchase power through low Lower Oil Prices, that helps. Russia saying they can cut output levels by 310,000 barrels per day. The euro goes up, that is fantastic. You have a 65 oil price and a much stronger euro, euro at 120. Reinhard what counts is the price of oil denominated in euros, oil prices go up and the euro gets stronger, the import price of oil does not move as much as the dollar price of oil would suggest. That is a factor. Tom reinhard cluse, thank you so much, with ubs. She choose glass, that is what somebody told me about the Foreign Security and Exchange Commission chair, Mary Jo White in the 8 00 hour across bloomberg. Stay with us. Guy 5 45 a. M. In new york. The british capital, tom keene joining us from the big apple. Police arrested three men in connection with a suicide bomber who killed 22 people at a concert earlier this week. The british Prime Minister has announced a terrorism threat has been raised to its highest level, from severe to critical. That means an attack is expected imminently. Detailsnue to see surrounding this story. I want to pivot to what is happening in the u. K. More weadly, just one factor, continue to see inflation rising in the United Kingdom and continued to see the savings rate falling and continued to see pressure on wages and Consumer Confidence has been going down for a while. You can see it on the chart. Still with reinhard cluse of ubs. So much into the mix, the british consumer has to deal with from what happened in manchester to what is happening with wages and brexit, etc. Do you expect that continue to go lower. Reinhard yes, i think confidence will continue to go lower because the falling sterling will lead to a further increase in inflation. We are about 2 and will go close to 3 , that will cut into real wage growth and household purchase power. The brexit negotiations will prompt corporate in the u. S. To become more cautious about hiring and investing. Guy there seems to be a problem and you see this in the United States but certainly in the u. K. , that labor, despite the tightening labor market and the nehru, labor does not feel it can come out and say, i will like some more money, police. Reinhard this is not the time when labor, employees separate negotiation power. Guy the labor market is tight, they should. Reinhard you are right, ways growth by historical standards is quite subdued at the moment. We think that is because of many ent, low productivity with reasons, low productivity, wage negotiation process is always backward looking and the unit may have looked at previous rates of inflation. We also see a good reason to assume that the strength of the labor market is overestimated, because underemployment does exist, these are people on temporary contracts who would love to work more. That means they do not have a great negotiation power to ask for higher wages. You tot me ask philosophical question of the day, i saw articles yesterday that said eu leaders have been stunned to respond to the beginnings of these negotiations. Do you agree, does the european union, particularly did mr. Juncker misjudged the british response . Reinhard the most serious part is yet to come. The negotiations have not even started. They will come later in june. I would assume that the negotiations will be quite complicated. There are a lot of important issues that have to be discussed, including the financing, which as that which has aroused emotions. The bigger issue about the post eu deal and any transition deal will be very complicated and we fear that the time we have for these negotiations, which is a little more than one year, 15 months, is not good enough, that may lead to more insecurity on the sides of households with of i remember the gloom june 24, june 25, june 26, the world is coming to an end and i know that guy johnson is beside himself over the documentation he will have to do to go to paris on one of his weekend junkets. Other than guy johnsons travel pain, what is the biggest ramification for britain or should we be more optimistic . Reinhard the issue is that while you are correct, the initial reaction of the u. K. Economy has been more muted, we have seen greater resilience than we did anticipate. We think that the negotiation process over the next two years will be complicated. It will imply a great deal of uncertainty. Nobody says this will be longterm uncertainty and longterm damage, but in the transitory time of the next two years, it will force corporate to become more cautious on investment and hiring. And the rise in inflation that will come on the back of a Weaker Sterling Exchange Rate will mean that purchase our of the housing sector will probably suffer further declines. Guy plenty more to discuss, stick around. I can recommend no other function, tv on your bloomberg. You get this fantastic sidebar. Has everything you need, the news flow, access some of the functionality, data check, you can pull out all of the chart you want. Fantastic chart. Please use it, tv. This is bloomberg. Tom the president of the United States visiting the president ial palace in italy, this is the opulentf 1583, which is the on large in size, 20 times larger than the white house, a different approach to government and the symbolism of the old world. The president meeting with the president and Prime Minister of italy on a brief trip after meeting with the pope today. With us with perspective on europe and the linkage to our Financial System is the chief economist at ubs for europe, reinhard cluse. Interview after interview, people go and then there is italy. Why is italy so troubled, a debt buildup or a lack of growth . Reinhard i think it is the lack of growth. Lack of inflation combined with the highest debt to gdp ratio in europe. If we leave greece aside. That means that there is some potential for broader damage in europe it italy were to enter trouble. Guy why do not we had a deal on greece yet why dont we have a deal on greece yet . Reinhard because the debt restructuring negotiations with will have to take place are very political he Sensitive Data politically sensitive. Politically sensitive ahead of elections coming up. , thank yourd cluse so much. Appreciated. Guy johnson, i like how you mentioned greece, it is percolating, something we are maybe not watching today but you have to feel that june is a greece month, isnt it . Guy i spent many a summer on rooftops somewhere near a square, could this be another one of those . Tom our team in london and athens following this closely what we see in this raging battle between europe and the International Monetary fund. Coming up in the next hour of Morgan Stanley chief u. S. Equity strategist with us, looking forward to that, Michael Wilson with optimism on the market. Some of the nuances of the Sector Analysis very important. Stay with us, in london, in new york, this is bloomberg. Tom this morning, three men arrested in connection with the manchester attack. Prime minister may orders static armed regarding at the locations. In rome, the president meeting people there and get, five books of Martin Luther king jr. Movies market down the chinese Credit Rating, china not happy. China moody this morning. This is bloomberg surveillance. In new york and guy johnson is aligned it with the news out of manchester shows us the broader and bigger investigation right now. Guy this was always the concern, Security Forces in the United Kingdom, the individual was not acting alone and as a result, the news we have seen ,urther arrests is interesting given the fact the Prime Minister has raised the Security Threat level in the United Kingdom to its highest level. You are looking at pictures from manchester. Tom there we are with further mourning and a number of people and identified and missing. We need a full update on manchester, here is taylor riggs. And the u. K. , three men arrested in connection with the suicide bombing in manchester that killed 22 people, police not releasing any other details. The British Government has raised the Terror Threat level from severe to critical for the first time in one decade. That means another attack may be imminent and Prime Minister theresa may taking unprecedented security steps having ordered the military to guard landmarks and sporting event. At the vatican, President Trump met with pope francis and the president was heard thanking the pope and saying it was a great honor to be there. Pope francis gave the president s book on the importance of protecting the environment suggesting he may add his voice wanting the president not to bring it on the paris accord. You can see more hikes with the Federal Reserve according to Patrick Parker. Strong economic outlook, i see three rate hikes for 2017 as appropriate, one under our belt and, given my forecast, we will talk about that in questionandanswer, i see two more over the course of this year. He said in new york that a rate hike next month is a distinct possibility. Duties has downgraded chinese Credit Rating since the First Time Since 1989, they cut china from aa 32 a1 and movies side of the likelihood of the material rise in debt and the burden it would put on the government finances. It changed the outlook from negative to stable at the same time with socks and shanghai falling to a sevenmonth low and you want falling also. Yuan falling also. Global news 24 hours a day, powered by more than 2600 journalist and analysts in more than 120 countries. This is bloomberg. Boringeck it is a data check but it is not, it is nuanced. The big fat 1. 33 in the middle of the screen is a flatter yield curve but it comes amid higher Interest Rates. A fire to year yield. At the same time, not as steep of a yield curve which is a big deal. That is a bearish flattening. Guy it is, lets talk about europe. There has been no direction for european equities today. P 2 10 of 1 the cable rate is everything but eurosterling is one to watch. A little bit softer. I want to point you to what we have been discussing in the last hour, the china downgrade, the market was already there and therefore you have very little reaction in dollars and very little reaction in the shanghai. Place it ina and to perspective, our special thanks to jan stuart of Credit Suisse for smart analysis linking china in the oil market, that interview from vienna. We went from here to here rapidly. Guy is right, not much of a move in the last 24 hours, but a five year getting back to where it was in 2007, 2011, and 2013. A higher yield over 4 would be a big deal in china. Guy how much more momentum is there any brent price . 100 and 200 Day Moving Average. This is brent. We have come up through the 50 as well. Is this a story where the market is already priced in the fact that opec will deliver a ninemonth extension . Tom very good. We have a couple of things to talk about. The msm group, washington, he is with them and he formerly served on the hill and helping politicians provide clarity. Did we get clarity on the budget yesterday . I someone democrat politician through it in a wastebasket and made a social media moment. Did you throw the budget in the waste basket . Only figuratively, not accurately. By the end of the day today, we can all throw it in the basket. It is not a seriously policy document designed to give congress attention. I refer to it yesterday as a trump political rally on a piece of paper designed for ideological purposes and not policy purposes. Tom . Lawrence summers who agrees with here is Lawrence Summers who agrees with you, skating in enoughhington post, fair if you believe in supplyside are, scum of the egregious accounting error in a president ial budget in nearly 40 years, i have been tracking them , the Trump Administration has not yet made significant economic announcements that needs a minimal standard of competence and honesty. That is brutal from the former secretary of treasury. On this double counting, have you ever seen it before . Not like this but the president , any president can put out a budget and say anything he or eventually she wants to say, you will get some kind of response like this but no real check or balance on it. Congress has said, republicans and democrats, they will not Pay Attention to this. Lets move on. This is nothing more than donald trump saying to his base, if i were king, this is what i would do and not a serious effort of what we are likely to see. Two things this does is make a shutdown more likely in october and make tax reform less likely this year. Deal, isart of the this just a, this is my opening salvo, all the way out to the extremes of what could even be viable. As a result, we will start out here and work our way in, is there anything to that. . That. That theory . I heard that but he is turned so maybe the law, politically dangerous, it harms his own base when they realize what is there that it is hard to believe he will be able to maintain this as an opening bid. I think this is a one off, lets throw it out there and get some political make some political hay and get a few headlines and move on. The president was not in the country and not even in the same time zone where the budget was offered. This is not a serious effort, i do not think, the first time i can remember in 40 years since the budget act was put in place in 1974 that the president was not in washington when his own budget was revealed. Guy who wrote it do you think . Clearly mick mulvaney, the director of office of management and budget. Hard to imagine who else could have done it. The Economic Team is not in place in the assistant secretary of the treasury are not in place, Steven Mnuchin was not involved in the rollout yesterday. It is almost as if the Trump Administration contracted this out, outsourced the work to the House Freedom caucus to get the budget out and maybe the heritage foundation. The whiteork done in house, they were focused on the overseas trip and the russian investigation. Tom i want to bring this chart up, deficit to gdp, not debt, the deficit to gdp was ugly, down we go, clinton salvation, we roll over prices. We rolled over to 3. 4 deficit to gdp. Where is that statistic in five years . It will be worse. This is not what the budget said yesterday but the budget is based on former secretary of the treasury set on a variety of accounting gimmick, it makes a rosy scenario and dynamic score look good. Deficit reduction elimination at the end of 10 years as this budget predicts is phony. , wherex or seven present will that number 6 or 7 , where will that number be . Higher than that, not lower. Tom thank you so much. On bloomberg surveillance on radio, a conversation, i love this. , one of the most interesting politicians from oklahoma city. We will speak to him in the 8 00 hour. Really looking forward to that. This is bloomberg. This is bloomberg surveillance. Toshiba macys buyers for a majority stake in its Westinghouse Nuclear power unit this fall according to the unit chief operating officer, the putnese Company Westinghouse into bankruptcy in the u. S. In march and westinghouse has been hit with billions of dollars of lawsuits from cost overruns on nuclear projects. American grain trader says it is glencore, theith commodity giants as it approached them about a combination and there is no certainty a deal will happen. Shares soared 70 yesterday but have fallen in premarket trading and we should know peter is the german is a senior independent nonexecutive director at glencore. In the u. K. , a full year earnings that Beat Estimates and cost cuts and improvement in the food business offset persistent weakness and the retailers clothing unit which will boost hopes their ceo has set the chain on a longawaited path to growth. That is your Bloomberg Business flash. Tom lets look at a chart come equity markets not on politics or on the president or trips, in london on radio, the most famous chart on radio, taylor riggs memorizing this. I have taken the dow, the depression on the left and up we go. It has been a linear function, even with the socalled carter malaise of the 1970s and 1980s. Michael wilson out of michigan and kellogg northwestern hasnt toured equity predominance at Morgan Stanley and is their chief u. S. Equity strategist. Adam parker took a statistical tax, will you do the same thing . Numbers matter. A want the mental gating factor of the fundamental views. My style is about the traditional fundamental equity Portfolio Manager attack, we have quantitative function within Morgan Stanley which is separate. Tom lets link them, the pe ratio and the partial different you of price and earnings, which matters . Michael earnings which have been the story for the last 12 month. Earnings bottomed on a rate of change bases in the First Quartermatters . Michael of 2016 and it has been a global earnings story. That is what is driving stocks, not about the budget or the trump trip to the middle east. The market is following that linear cap you are showing on the chart which is an earnings story for the last 100 years which drives stocks higher. Tom somebody coming in with money and an institutional guy behind this, whatever the case, you have to acquire shares this morning, what is the enthusiasm to step into bluechip stocks this morning . Michael we have been consolidated, the First Quarter was the best we had globally since the Second Quarter of 2009. The best performance we have had since the Second Quarter of 2011 which are big numbers. The market has not done anything for the last four to six weeks and people are disappointed but it is just consolidating the gains and waiting for the next catalyst which will be the same as the catalyst in the First Quarter, Second Quarter earnings. And gdp likely in the u. S. Will accelerate again. Guy good morning from london. Which is better from an earnings perspective, europe or the United States . Michael from the rate of change, europe is growing faster and the reason why is because they have not had a love Earnings Growth for seven or eight years and the comparisons are easier. They are more cyclically year to the Global Economic recovery. The u. S. Is showing tremendous breadth and we have an earnings recession in three or four sectors in 2015. We are seeing for plenty of earnings opportunity in both markets but europe is likely to grow faster this year. Guy there has been a lot of money coming in which started at the beginning of the year and pick up after the French Election coming into europe. How much more catchup is there to get us to where we should be in terms of the relative story . Michael you have to go back seven or eight years, this is any most hated bull market in history. We have had a zero net inflows to u. S. Equities in the last eight years. While 1. 4 trillion go into bond markets. Ets and mutual funds, not a active story. You have to ask yourself, is this bull market going to end without any enthusiasm . U. S. Oney coming into the equity markets, what u. S. Equity markets have performed all these other regions we have not seen that. The idea of wage growth, it has been ok in the United Kingdom with lots of angst about inflation coming up flat to declining real wages, do you have that angst in the United States and how does it come over to the equity market . Wages have disappointed this cycle but i do not think disappointed as much as people thought. Unemployment is as great as we have seen since the 1970s and maybe 1930s in some ways. Unemployment is now a rate where we will see wage growth increase and that is what is happening. Tom we will come back with Michael Wilson, i have 18 things for us to talk about, he will bit be with us for four hours, Michael Wilson is with us this morning, later, Mary Jo White, the foreman looking forward to her with david gura. This is bloomberg. Tom we welcome all of you worldwide. Johnson in london and i am tom keene. Are following manchester with three arrests made within the hour and are speaking on economics, finance, and investment. We are looking at the president s trip, a shift from religion to politics. Kevin cirilli joint does in rome. Joins us in rome. How hot and steamy it is for the president who looks back at the news flow in washington . From the just got word vatican about the meeting between President Trump and pope francis. The vatican says they have a successful meeting talking specifically about middle east peace and the protection of christian communities. National security security as a whole coming up at that meeting. They also wrote in the statement that they hope for serene relations. The pope and the president got off to a rocky start when donald trump was campaigning with regard to immigration. An exchange of gifts, political undertones, the president reeling books written by Martin Luther king to the pope and pope francis returning with a metal symbolizing peace and a book on environmental protection. ,om when i look at all of this i wonder what is going on in the backandforth between riyadh and washington, tel aviv and washington, now rome and washington. Is this a president distracted by domestic events . Kevin they are trying not to let on, if they are. The entire trip has been carefully orchestrated to keep the focus on the president s meetings and he will head to brussels for the nato summit following his meeting with the top officials from italy. I have been told that the secretary of the treasury Steven Mnuchin has been updated regarding the developments in riyadh. They had announced a new cybersecurity as well as combat Terrorism Financing workforce that they are hoping the u. S. Is hoping to work with arab nations. The bottom line is that in italy , this is a shift to geopolitics because later on today they will be meeting with the political leaders from italy and then to brussels for the nato summit and a return to italy for g7 meetings. Guy this is a very on message trip we are seeing in front of us. How is that happening, given the experience of the first 100 days . , following they manchester attack, we software the first time that global events have influenced the residents First International trip, he said, speaking in bethlehem, the terrorists who perpetrated the manchester terror attack were evil losers must be obliterated. That was the first time we saw an unscripted measure but they were prepared remarks, prepared statement the president gave. When he goes to brussels and returns here, he will be faced with the global leadership. Anecdotally speaking, both in saudi arabia and israel, there was a lot of signage on the street welcoming the president. I have not noticed any in italy. Tom you look like gregory peck. On your roman holiday. He will go with the president to brussels, stay out of the heat. Michael wilson with us with Morgan Stanley, very quickly and we will come back and talk equity markets, the fiscal budget, and my distracted by the deficit, the debate of the budget if i am in equities . Michael yes, distracted by politics for the last year. Tom worse with the budget . Michael no, this is washington politics at its finest and will not affect the next several quarters or several years. Your prior guest was talking about negotiating ploy and i agree with that. These budgets are always 11th hour and it will not affect the next several quarters in terms of earnings and growth. Guy Michael Wilson, stick around, coming up in the next hour, more, we will talk to the ecb Vice President , matt miller talking to him that is coming up and this is bloomberg. I am guy johnson in london, tom keene is over in new york. Tom, time for our morning update. It comes from the ecb. We will get there in a moment. Vitorbeen hearing from constansio who has been speaking with bloombergs matt miller in frankfurt. I think that markets have done very well. Our reactionary function in the Monetary Policy, i do not fear a position where they would be surprised by what we would do in , reflecting the new situation, the new development. Markets know that we are committed to certain policies until the end of this year which by definition means that we have something in the markets before the end of the year, closer to the end of the year. Markets understand that very well. Any problems or turbulence resulting from our Monetary Policy decisions Going Forward. As you said, Financial Stability is always implicit in the concerns of central banks. But we see the Financial Stability is something that has to be addressed by the market potential policies, meaning the changes in decisions about the regulation and subdivision of financial inclusion. Do you have to be especially cautious . If you want to make it clear that there is some change by the end of the year, that leaves out june and it makes sense to be cautious in june because youve got the fed moving again in june. Im not anticipating what the Government Council the governing council will do in june or etc. I am pointing out something that is evident, that we are committed explicitly until the end of the future. Before the end of the year in my perspective, closer to the end of the year, that is not an important consideration. It is just the problem of analyzing what to be the best time what will be the best time to do it. Vitor constancio, the number two to mario draghi who will be treating in speaking in spain, talking to matt miller. There clearly concerned about getting the messaging right. They dont want to go into any kind of taper tantrum. They are worried about the effect the fed will have as well, maybe dragging yields higher. A lot to think about for the ecb Going Forward. I just wonder whether they are a little bit upset with focus on inflation. Tom that is the talk of their book. I would say the book is the headlines and the newspaper. Maybe it is on italy as well. The gift that keeps on giving is decent european growth. That is a change for them. , as get 12 first word news busy newsday. Here is taylor riggs. There are a number of developments in the investigation into the manchester suicide bombing that killed 22 people. Police have arrested three men in connection with the attack. They are not giving any other details. Prime minister theresa may is warning that another terror attack may be imminent and is taking on president steps to prevent it. The military will start guarding landmarks and sporting events. Intelligence raised the Terror Threat level from severe to critical for the first time in a decade. Philippines, the president is striking back after battles between Government Troops and militants linked to the islamic state. He has put the islands under martial law, likely to include the setting up of checkpoints and curfews and the ability of the government to jail a suspect without having to take him before a judge. Morgan stanley will cut back on using bonuses to hire brokers away from other firms. The bank intends to honor any recruiting deals by the middle of next month. Bank of america is taking similar moves. The u. S. Labor department briefed banks on potential conflicts of interest. Global news, 24 hours a day, powered by more than 2600 journalists and analysts in more than 120 countries. I am taylor riggs. This is bloomberg. Tom thank you so much. Guy johnson, the news out of Morgan Stanley is something about the broker wars has it department inhe october. It will be fascinating looking back over decades and decades about how firms find revenue of what the path forward will be with the sharp differences between Merrill Lynch and Morgan Stanley. Again, this is a story about regulation and how regulation is affecting the Financial Sector and whether or not that regulation has gone too far and how the Current Administration will change that. We will see. Tom that whispering you heard on set when taylor riggs was giving us that story was a general counsel from morgan michaelwhispering in wilsons gear dont you say a thing. Im not going to ask you about the executive offices of your firm. Eckel wilson with us. I want to go back to equity one 01. This is the chart, the famous des screen. I picked it for two reasons. You know it and i dont own it. I know you can talk about individual stock but lets get a lay of the landscape. Growth, ok dividend versus the 10 year yield, it is colgate, i believe they will be in business tomorrow. Right there is the mother of all dates, Michael Wilson, which is the pe and the pe forward. Is that 25 multiple on a bluechip stock . Now you are right in my wheelhouse of what our call is all about. This is a bond proxy. If you think about 2008, there has been this extraordinary policy,f monetary extraordinary recovery from the financial crisis which was devastating. All the risk premiums have come down to normal based on the safety of the investment. Highyield bonds, commercial real estate, high and trophy end trophy property, it is a safe return. Tom in the heritage of Morgan Stanley, i think years ago, steve belgrade did the development of your sector growth. My radar is upof when a guy like you says it is a dividend proxy a yield proxy, all my radar goes up. Is your radar up about Dividend Growth . First of all, Dividend Growth is outperforming straight dividends. You can see that in stocks that have suffered. The market has paid up for yield and for growing yield in particular. What is happening is, equity risk premiums, the traditional equities, the ones that we grow, are the ones where equity still has room to fall. Expansion can happen away from the safety docs. The financials, the technology, industrial, etc. Guy michael i want to show you a chart. This is an etf. I want to make it clear to our audience, this is the bond proxy, effectively. In some ways you would expect it to come down but it has gone in a Straight Line all the way that the 2012. The market continues to buy the etfs, so what do you think the future is . The you expect the line to keep going up . What will the story look like on volatility . It was a sense of what is going on as money continues to move this way. This is another example of the environment we have been in. People are paying up for safety, quality, low balls and other reflections. Our call is we are at the end of a cycle here, particularly in the u. S. At the end of a cycle, what happens is you get upside ball. Weve had low volatility over the last several years as the world is normalizing but as you get to the end of an Economic Cycle in the end of an equity bull market, you get upside first before you get a rollover in the equity market. We havent seen that yet because the ball is still low but we anticipate that as economic acceleration because growth comes through on earnings. Tom back to the pe discussion. Lets look at the big fat dividend. This is on the horizon now. Ive got lousy Dividend Growth here. Let me get my little football thing up here. Lousy Dividend Growth, a big fat dividend of 5 . Half the valuation. Are you a yield called this morning . Hog this morning . Not really. Not only is it a growth in the digging of in the dividend, it could be going negative. It is a safe yield but if you to start if you start to get inflation with wage growth you suddenly dont want a fixed coupon, you want one that is going to grow with inflation to protect you. Guy i love busting his chops. Tom Michael Wilson of Morgan Stanley, with decades of work across all equities. He has been in the trenches on this for many, many years and he has bought a lot from tiffanys. He may be darkening the door after the session. Iran through the press release. Tiffanys did not mention mr. Trump or the effect on their landmark store on fifth avenue. From new york, from london, from tiffanys, this is bloomberg. This is bloomberg surveillance. I am taylor riggs. Lets get the business flash. Japan has taken a 4 billion stake in u. S. Graphics nvidia. The largest shareholder, according to people familiar with the situation. Business softening plans as the biggest investor in technology in the next decade. Once again, Fiat Chrysler has run into trouble with the u. S. Government. The Justice Department is suing the automaker, claiming it cheated on diesel omissions tests. Fiat chrysler intends to expand defend its stocks critically. Dealers have accused Fiat Chrysler of falsifying results. That is your Bloomberg Business flash. Guy thank you very much taylor. The opec and nonopec joint committees are meeting in the anna. In vienna. The final decision by the participating nations will come tomorrow, we understand. The weather in the end is a is inclement but raving it for us. Braving it for us. You are going to learn what wins boxing match. The iea says they are cutting at a current rate and they will have a deficit by the end of the year. The opec barrel finders that will meet today, and the Monitoring Committee will scare the pants off of opec. That is a polite way of putting it. I caught up with the venezuelan minister a little bit earlier and he is confident about complying. Well,will speak today as the result of the presentation, it normally meets before the joint committee. What we have seen so far is that in a quarter of the year, it draws to a sharp decrease in inventories. So we are looking forward to seeing those. So reduction in inventories by the end of the third quarter, hitting the fiveyear average by the end of the year. This message coming from the venezuelans, coalescing on the a la cart menu. Six months, nine months, 12 months . Venezuela, algeria, russia has the saudis. The iraqis are due to arrive shortly behind me. Is the objective here . To keep the price elevated, moving up . Is it to get the global oil story back into balance to beat the u. S. Shale teams . What is going on . Youve just about the epitomized the Biggest Issue for opec. Staying fully relevant, staying fully in command of being able to demonstrate we can hold a price. Ae minister said he had moment where he embodied the series the spirit of what opec wants to be. We are relevant. Along with russia, we are very relevant. At that end, we are going to do everything in power. The saudis new generation on the deputy. Opec is still very. A talking a boxing match of technicalities. Tom manus cranny, thank you so much. Indiana. With Michael Wilson, we look at equities. Exxon mobil back to the beginning of the bull market, it is a bank masquerading as an oil company. I got through oil over top of it, down to 100, it is sort of messy chart. Exxon has a life of its own. Where are you on that ugly Dividend Oil Stocks right now . You said, income proxies. They have done better than the not panies, but oil is it is stuck in a range now. It is going to be in a range for years which means stocks are probably going to be stuck. Guy he went to michigan, so youre not going to run for, but is just about, it a use of cash frustration. It is a brave new world and they have to throw more cash. One of the things the Big Oil Companies did a poor job of was that probably spent too much money. Some of the ones now curtailing their capex are doing better. Market is rewarding capital efficiency which is different from what we are seeing in the rest of the equity market which is now, for the first time in eight years we are seeing companies be rewarded for capital spending. This is a shift in the marketplace where the dividend payers may not work as well Going Forward with the market watch now in organic growth only being delivered if you spend the money. Guy the aramco ipo is coming. What is the portfolio affect . We dont know the timing yet but clearly it is probably going to put pressure on existing wheelchairs in the marketplace to make room for that in the portfolio. Said, we dont have timing on this yet and we dont know if it is going to happen, if oil prices are very volatile next year. It is going to drain, probably some ownership from existing equity shares in the marketplace. Are tom going to continue this discussion, continue to monitor the news out of the United Kingdom. Kevin cirilli in rome as well. On your desk at Morgan Stanley, i would to just you look at Michael Wilson here. Go over to, you can the right side. Look at a chart, grabbed it, bring up that segment with wilson and Morgan Stanley and you can steal semi log charts. This is bloomberg. Guy this is bloomberg surveillance. I am guy johnson in london. Tom keene in new york. Shortly, bloomberg daybreak americas. David westin, jon ferro and alix steel. Alix steel talks about oil. Later on today, talk to the show players. We are going to talk francisco blanch. He heads up the commodity shop at bank of america and the issue is what is opec going to do . Nine and six months extension, did a boost output . 35 atputs could fall to barrel. Theres so much new on this as we talk about ecb and the exit strategy, it is all about opec and their strategy. Prices proppedp but retain market share . A big question. Tom within the supply analysis, within your reading of hydrocarbon, is opec feeling like they can control the supply dynamics . I dont know if opec feels that way but the market doesnt think so. Cal has made opec he relevant in that. Opec had a downside but potentially not the upside because of shale and they havent yet transitioned. Opec is about politics. Put them together and technology is winning out. Tom thank you so much with mr. Blunt coming up. Mr. Blanche coming up. Look at the fixed income markets. There is a chart we showed many times. , the single best chart, the day of the election and the day after the election, here is the enthusiasm of republicans in control. We roller twice, we rollover now many where we were on november 8. Do you care about the yield curve . What is talk about going on. We did get a boost after the election and people that too excited. We saw that reflected in the equity market. We saw that in the Equity Stocks and high beta cyclicals. We have been pricing trump and republicans out. I would argue a lot of the progrowth policy stimulus is now being priced out. Can you scroll that back three years . Tom i think we could do that. See how it pops in here . We are demanding to do this on the bloomberg terminal. We can do it for Michael Wilson. Long chart slope matters. Down we go with the gradual flattening of the curve. Maybe a little further . Tom you are killing me here. James gorman would never do this. How, bonus round, this is we use the terminal at Morgan Stanley. The yield curve actually peaked in early 2014. In 2013 that was basically tapering. That was the beginning of the hiking cycle for the fed. That is the primary trend. The yield curve is moving down for the last two or three years. This is very normal as the economic expansion continues. We are a late cycle, a classic late cycle. It will continue to flatten until we get to the end of the second but that is an ominous sign for stocks. But not today. Guy ive got a chart which shows that investors are pulling money out of u. S. Small caps at the fastest rate in a decade. Is that the right trade . They were doing it at the fastest rate after the election. We think small caps could have another relative move later this year on a couple of things. The Earnings Growth for smallcap stocks has been more powerful than for largecap companies. We have more operating leverage. They are the beneficiaries of deregulation and potential tax cuts which we think still happened. Tax cuts will happen by the First Quarter of 2018. We believe small caps are going to have a run. Tom thank you so much Michael Wilson with Morgan Stanley. On Foreign Exchange, not all that much going on this morning. I put dxy down at the bottom. 97. 34, showing stasis in the market, euro down. Stay with us. Kevin cirilli with the president in rome. This is bloomberg. A debt fueled china is hit by since 1989. Wngrade the finance Ministry Says the move is absolutely groundless. President trump budget meets resistance in d. C. And skepticism on wall street. The pathway to a balanced budget it paves with an accounting gimmick. Investors look to debate for insight on the 4. 5 trillion question. It is the same. A trillion here and a trillion there and then real money. It wasyou said that and like everett dirksen, billionaire. Jonathan you are watching bloomberg daybreak. I am Jonathan Ferro alongside david westin and alix steel. Futures pretty much dead flat on the s p. The euro marginally firmer. A retreat from 112 in the last 48 hours. 2. 28 your yield on the 10 year. Alix it is a busy day. 10 00 a. M. Eastern we get home sales. Half an hour later, t