We will talk to the man himself, jeff currie, later on this hour. I want to talk about what is happening in the u. K. , take a look at sterling. Marcel barnier says a brexit transition is not a given if a decent agreement if a disagreement persists. David he says never mind. Now lets turn to our top two stories. Jeffrey gun lock is right all along, the the 10year yield. L on the 10 year and keeping the government open. Lisa joining us is abramowicz of bloomberg you have the 200day moving average with the s p starting to flirt with that 200day, and that goes to be correction we have not seen in a while. We bounced off the 200day twice in 2016. Luc, have we found the bottom . I am not sure yet. Lets check out another chart. We were talking about early in january, world equity index euphoria, right now, looking at my terminal, s p 500 members are overbought. 0. 4 . The shares oversold up to about 1 3. It might be good news of a contrarian indicator, but around these time, the chinese devaluation, we actually peaked at a much higher share over toward constituents. It does seem like some of the bloodletting and the auditing of stocks has further to go. David this is what i dont get, lisa, how much is just technical . As opposed to something changing in the fundamental ongoing economy . Fundamental as the economy, people are saying it is still strong. David then why is it doing this . Lisa lisa that does not mean the market cannot reprice. Evaluationsg price have gotten too high, especially the fact that you have the low yields that are rising, especially with the credit deficit, and right now, everything is being priced to perfection of your even if there is a technical seller or a rebound, things could change. , and to havehanged the repricing of expectations. I think that is what you are seeing is people wondering how long is this going to continue, where are we going to reprice . So the conversation alix so the conversation a few days ago is this could change to the vix and u. S. Equities. What is the conversation today . Luke right now, the conversation really leads us into the bond market. Yesterday, pretty much stocks. We know the lows and bonds did not go at the highs. Yields were actually rising during the selloff. If you are talking about before selling from risk parity involved, it is not just contained to u. S. Equities, the cost of asset classes. I will say this, yesterday, if you looked at the credit default index of credit, you actually were starting to see a little bit more concerned dided in than you yesterday. That indicates it is spreading a little bit. Alix lets get to that. Come inside the bloomberg. This i totally make fun of jeff dunlap, 2. 6 , well, he was right. You can see when we wound up hitting that level in breaking through, equity markets started rolling over, and the question becomes, lisa, when do yields get impacted enough to get the private investors coming back in and chill everything out . Lisa this is a complicated question. It sounds simple, but it has to do also with supply and demand as well. Right now, what you are seeing is it is not so clearcut why a japanese investor or European Investor would buy u. S. Treasuries, because the hedging costs have risen so increased inas yields. The currency has exposures of they would have for treasury yields, we are not that highyielding, so it is not that attractive. If you dont have that bit and you have more supply, all of a sudden, the bonds can actually come out and can demand more yield. David so why are they so high . Lisa because the dollar has fallen. There is the expectation that the dollar could weaken and there is a trend there. David so it looks Like Congress will be a little less volatile at the moment. Early this morning, they passed a house and senate bill. What you are looking at is a 10year yield on the treasury. What youre looking at is money jobs numbers came out on friday, and the two verbalized in the middle have to do with the budget deal earlier this week, and the last on the right is just this morning. You can see how they do tend to go up as they come to terms here. What is the concerns about the deficit spending. . Luke i am not sure if that is something that is coincidental or something that has just happened in the last couple of cases. On the inflation risk, this idea that this market selloff is really about yields, it is really about deflation. The majority this year, and u. S. 10 year yields have been driven by premiums, certainly that has been around, but the traders who think this is about inflation should talk about the trade or inflation risk. Threeyear inflation paths are not going to show the benefits over averages over 3 or not showing any sign that people are worried about this. It is fairly low levels. Lisa i actually dont think it is a coincidence that you saw yields go higher. The figure deficit is becoming an increasing concern for bond traders. Alix great stuff, guys. Appreciate it. Lots to dig into. What are you reading this weekend . Luke everything. I did not get to read too much this week. Alix Lisa Abramowicz and bluecollar and luke kawa, thank you. Dimock joins us from arizona. Tom, a real pleasure to get your perspective after a really dramatic six days in the market. How are we set up on a potential basis Going Forward . Tom right now is an opportune time. We reported that these days ago, and we did not identify as a high risk in the market. Our objective at the time remains the same on the s p example, 2564. S the risk downside should pretty much all that level. We are looking at the market right now, really a replica of the januaryfebruary 2014 decline. If you recall, in january at that time, we turned bearish, we were looking for a possible replication of the 1929 decline. Weshifted gears and said were going back up. Our usual, that is expectation on a rally or decline. If we break that, we go to 11. 2 , and that is what we are dealing with right now. 11. 2 off the s p high. We got complementary downside objective of 15248. When you compare history, i want to go back to 2007, because that is what my mom has been thinking about, when you see this decline. Compare the s p and 2007 and now, and what you see on the downside. Tom we have a preamble, and it is called the setup. We look for nine consecutive closes, and we reported that in 1987. It hit a bottom at that time, down 10. 2 . Currently, as of yesterday, we are down 10 . Inwe are somewhat alignment with 1987. We did decline a little bit additional, and then we rally. That is what we are looking for here. We have a good chance that today could mark the love. Ideally the low. The same thing happened in 1949. Same thing in 1987. Alix part of it also might have to do with the vix. That is what sparked the drum on monday. Take a look at the the drama on monday. Take a look at the vix chart. Tom it typically does give us advance notice on what to expect in the markets. The vix back in early january identified a bottom. Broke that solid line, which we call our set of trend market, we knew that we vix was going to move to the upside. We did not expect it to move the way it did. The fact that it broke the solid line and terminated there, it tells us the vix will go higher. I think we will just move sideways with the vix, but we got to play it almost week by week to determine if it will go higher. It looks like it exhausts itself. It was unprecedented. And asked why did the same thing. Xy did the same thing. S p, the a semion the queue qqq, the new york stock exchange, they are all there, but they are all invalid or disqualified brakes. If they had shifted to qualified brakes, we would have extended decline, but it does not look that way yet. Right now, we are on a deflection point, but it looks like markets will turn up. Alix commodities have been holding in. Equities have really started to roll over. We have seen a downside for oil in particular, a 60day moving average. If we take a look at where we are, have we bottomed in commodities . Tom i think so. I think bonds need about two more down closes, the 30year bond and the fiveyear. More down closes i think successfully lower, they should exhaust to the downside, pricewise. That should exhaust as well. I do not know how it will be explained fundamentally or resolved, you know, with the bonds price moving up and the stop moving up at least temporarily but i think they will move in unison together. Alix tom, i love getting your perspective after a tumultuous week. Tom demark looking for the bottom, demark analytics, thank you so much. Coming up, more on the markets as we wrap this tough week for stocks. Here is where we set up for the year. We are still up by about 18 for the doubt, but we are negative on the year. It has been a brutal week for stocks. This is bloomberg. Taylor this is bloomberg daybreak. Yourtaylor runs with Bloomberg Business flash. Amazon is setting of a Delivery Service to compete with ups and fedex. They are shipping was los angeles in the coming weeks. Pick them up from thirdparty merchants and ship them to consumers. Qualcomm has rejected the Largest Technology takeover bid in history. It is what broadcom calls its best and final offer. That leaves the future of the proposal to be decided by shareholders next month. China has waited almost 25 years. Now the world was the biggest oil buyer is getting its own contract. Starting next month, china will start lifting oil futures in shanghai, seen as a challenge to the benchmark, west texas intermediate and brent. And that is your Bloomberg Business flash. Alix thanks, kailey. Here is what some experts had to say. It will go on much further, much further, and be much more with thet than spending behavior, and that could start to influence sonomic outlook, but first far, i would say we had a 10year correction, off 10 , 11 , 12 . We had more than a couple of 10year treasuries. I will argue it is not really done, because these things take time, and it is hard to have such a dislocated without having all kinds of wreckage around that you are not expecting. This is much more great online, getting priced in. It was not a big deal, but now that its unwinding, and the dollar market is realizing the decline from qe, so we have to be ready. Week, 30. 6 billion last u. S. Equity funds seeing 33 billion. By far, the u. S. As a that got hit the hardest. Join us now is Darrell Cronk, Wells Fargo Bank cio. Thinkl right now, we equities are approaching they are not quite there yet a good level. Places just say, alix, where you can try Topline Revenue growth, places like financials, industrials all make sense at this moment. The fixedincome market, it is probably time to play a little more defense than offense right now. David give us the call. We are approaching the point what assumptions are you making, for example, about Interest Rates . Notties are 3 , and 2. 5 . Darrell it is likely. David what is that due to equities . Darrell moore downside, david. I think the key 200day moving average is important to watch. That 2538. If we breach that, we probably do extend lower. Started up early this morning, now we have turned them negative. It looks like we might have a little more downside yet today before they really step in. Alix Paul Mortimer of bnp paribas has my favorite quote on the spirit the problem is the gap between the Monetary Policy has become a sort of nannying, handholding, overprotective fairytale, and the return to the. Dult real world is jarring reality and fantasy have to be reconciled. Do you agree with that . Darrell i do. But whatever adjective you want on it, extraordinary in monetary stimulus. The narrative is turning quickly from monetary stimulus and a slow and gradual walk back from that to almost extraordinary fiscal stimulus domestically, right . Bill, have got the tax. Nd now 300 billion in a year if you annualized that over a fiveyear, 10year period, you are talking about almost 1. 5 trillion. David the budget is almost as big as the tax reform deal was, and we made such a big deal about tax reform. Long was a time not too ago, global synchronized growth was going to bring us out of this alix like, 10 days ago. [laughter] david exactly. I can remember that. How much of that is similar because we had more and more you start notonce seeing that leverage, the global Dividend Growth does not look like it is growing so much . Darrell i may disagree there a little bit, david. I think the growth story is intact. In fact, if you want to talk about the budget deal, that additional high government strength adds to gdp growth, not detracts from it. It causes concerns in the debt longterm and where Interest Rates ago, but it is actually gdp confident. Verye story is still strong, not just in the u. S. But in europe, and that is the difference, i think, where the concern was around gee, are we heading to a global slowdown, like when china caused those problems . David come back to your call. Are you seeing the benefits from this . It is that increased rates coming up more volatility, so can the benefit get smaller . Darrell absolutely. Your margins should expand. Basically back to where we were in october, november on 10 spread. ,lix all right, Darrell Cronk you are staying with us. David in the end, congress came up with a way to keep the government going, spending more than 300 billion a year. We will look at what that means for the federal deficit next. This is bloomberg. David early this morning, Congress Finally agreed on a budget that will he the government funded for two years and put off the debt storm for a few years. But they are borrowing another 300 billion a year, which may not take the federal deficit to a new record, but it does come close. This chart shows the federal deficit going way back over time , and where it goes down, the federal deficit goes up. In 2007,ly plunged 2008. It is coming back up as the deficit is going back up. Schenker. E now marty shanke a turn. A heck of marty it is. It is basically the government giving a home equity line. They can write checks for the next year at whatever level they want without any control whatsoever. So we have to hope nobody forecloses. Marty that is correct, david. Darrell typically at this point, you have the factory contracting, not expanding. Ins could be 800 billion the deficit, next to 1 trillion. That is very unusual with a tolerated gdp and record unemployment where we are. David this all goes back to some of the concerns about inflation, that we are ramping up fiscal stimulus. Darrell that is right. The real key, you just heard about wage inflation. Wage inflation with productivity i growth is good inflation. Without it, is not. David marty, what about fiscal hawks, deficit hawks . What happened to that . Marty deficit doves. David not one person stood up and said this is too much. Marty it has been a startling thereal, gop values, that is no issuing any fiscal restraint whatsoever. If this but it had been delivered by barack obama, there would be republicans [laughter] be boycottswill with signs. Marty yes. This would not have happened. I would not discount the bipartisan nature and this 72 democrats won a lot of a house and this pulls 72 democrats went along in the house and this goes both in the senate and in the house. Darrell i do not know if it is good. I think they will still take a run at it. It is infrastructure money in this budget, 29, but the real 200 billion the president is proposing, that will take a lot, david. I do not know if they will get there. David marty schenker, Darrell Cronk, thank you so much. Coming up, we will hear from jeff currie of Goldman Sachs next. This is bloomberg. Alix this is bloomberg daybreak. I am alix steel. We made it, everybody, to friday. Futures are down by about 95. A big selloff in emerging markets. Over to europe, you can see the dax almost felt by 2 . It is still trading in the u. S. , but less than we thought throughout the rest of the world. This will no doubt be an active trading day as you head into the weekend. The safety trade, dollaryen actually on the upside of. 1 . It is a mixed dollar story today, and the stories continue to be south, bond, sell, bond, yields moving higher at 2. 3 . The vix still elevated route the week, and crude below a 50day moving average, 100day moving average, only three dollars away. What technical downside could we see . Lets get an update of what is making headlines outside the business world. Kailey leinz this year. Ailey congress ended a brief Government Shutdown. The house narrowly approved 300 billion that will extend the debt ceiling for a year. A number of republicans and democrats voted against the measure. Rand paul blocked the senate vote for hours. He was angry about the billions of spending increases at the center of the deal. For the first time, a member of the dynasty that rules north korea is visiting the south. Kim jonguns sister will meet with south koreas president moon for lunch tomorrow. In china, inflation at the factory level is moving. The price index rose 4. 3 in january from a year ago, the Third Straight month of slowing down. Worldsgests that the biggest trading nation will not be passing on much inflation to the rest of the world in the near term. Global news 24 hours a day, powered by more than 2700 journalists and analysts in over 120 countries. I am kailey leinz. This is bloomberg. Alix . Alix thank you. A Global Market selloff, one market that started some type of chain bulk. You are looking at a normalized , the bulk is the blue iem is the red line. Goldman sachs last week upgraded their rank calls over 80 if this months and double down today on the bullish stance of commodities, driven by the robust backup. Joining us now is the man behind that call, jeff currie, Goldman Sachs global head of commodities research. What do you make of the last few days . Jeff i think the Global Financial markets have been a case of what we had last year, meaning you have shortsellers, momentum traders, the Systematic Trading strategies, trading down drafting the markets, and i think when you look at the position, it is much tighter. Once you break through these limits, boom. Remember, oil had corrections last year. It was a difficult year for us last year. What we are seeing is that now spreading to the rest of the financial markets. Alix if you take into account well, for example, copper below the 100day, oil nearing the 100day, very close when it comes to brent. What is the shortterm Downside Potential . Jeff when you look at oil, the magic number is 63. 15. Alix you have to get specific. [laughter] we learned to, get specific last year. We would argue it is still very much intact. What we are seeing represents several different factors. One, they are far more of an like theted aspect, shanghai metals industrial complex. They are looking through this noise. Lesshe markets that have to sellers, the momentum ts players, all of them are driving because fundamentally, nothing has changed. The irony is the selloff in the equity market was that inflation point last friday because of strong Global Economic growth, which is really the foundation of our upgrade on commodities. Alix which commodity will provide the best hedge to inflation and protect if we see an equity selloff . Jeff what we find isjeff gold typically does provide you that hedge, but you have to wait for it. Gold only works with the systematic risk. What we are seeing is trading risk, not systemic risk. Alix 1400, right . Jeff yes, 1475. Wti, onemonth to 12month spread, showing a potential tightening in the market. What does this show you . Time spreads do not lie across every model. When the time spreads are tight, like what we see with brent as well as with wti right now, it is telling you that the underlying fundamentals environment has not changed. You go back, and you can see back in your chart, you go back a month ago, a year ago, the spread is very weak. Why . Because you had excess supply in the market and not nearly as strong demand. You can see when that spread turns green that we have substantially stronger underlying fundamentals. That will not change. David what would you call trading risk and systemic risk, at what point does that get breached . Jeff jeff it has a fundamental impact, and that channel for trading with fundamental risks is outside conditions. We have seen the basis points tightening positions before todays selloff. Chart, and thea piece where we get our updated commodities, financial conditions where the best ever recorded. Alix and they tighten, by, like [laughter] jeff exactly. The economic environment is very positive, which is why we stand by our upgrade. Alix the other phenomenal backup as we are talking inventory. Take a look at the bloomberg here. You are looking at the average inventory for this time of year in the u. S. , that yellow line. The white line is what we are actually seeing. The moret makes us all impressive is they are actually using less crude. When they come back to the market, what kind of stop could we see in terms of supply . That is the core of our call for 8250 come of market is far tighter than what we anticipated, even then what opec anticipated. Not only was demand growth stronger, but i think the it is tracking. , a 6. 6 Global Growth right now. Our expectation is 5. 5 percent. Global growth is tracking 5. 1 , whereas our expectation is 4 . That is why you are already far behind in terms of the inventory, but as you get into this and need more maintenance therefining, we get past chinese new years, which, do not forget, is starting this upcoming weekend. That will put a damper on demand these markets will come out much better. David but it will correct itself because they will start to produce more. How long do you have . You have a flag, but how long is the lag . Jeff to suppliers one is opec, which we do start to see a year and up this the other is coming from the shell source. The u. S. Has been shale source. The u. S. Has been hamstringed. Alix will they stay disciplined . Because back in the day, there was so much cash in the sidelines that someone could say hey, guys, i need to money, oh, go call them, they will give it to you. Jeff recently, i like to argue the same. The Strong Financial method that you had in the tech sector attracted capital away from the old economy and into the new economy. So as long as you had new economy printing financial metrics far better, it is going to be difficult. David is it likely that the correction, lets call it a correction right now, will actually increase the financial discipline . Because the markets will be even less generous than they were before and tolerant of certain new behaviors . Jeff it depends on when the dust sectors. The biggest sectors are the yield economy and the tech sector. The last time we saw a discount the size between oil prices and the oil equities was in 1998, 1999, the dot com boom. So the question is how long can this last . In the dot com boom, it had the runup in Commodity Prices in 2003 and beyond. The tech sector looks a lot healthier and can contain itself. Alix on a brighter basis, you brought this up in one of your notes, which i love, commodity allegations, we have a chart, it has risen, but it is not at the pace we have seen before. How much allocation to commodities can we expect in the shortterm . Jeff can congress, we did our macro conference, and we asked the audience what they would like, and 59 said overweight commodities. So the view is there, but the conviction is not there. So what can we change the conviction and the positioning . I think once the dust settles from the correction, as you called it, we will be in a position where we can start to proceed. Like inflation was a catalyst for the selloff, raise the conviction, you can get the position of. Alix is the perception that you frontloaded returns in the commodity market . Jeff i would say no. If you look at returns coming at them and you had 30 returns, historically, in this environment, the average return is 50 per annum in metals, 30 in energy. When you look at where we are historically, i like to emphasize this is what we invented the Goldman Sachs Commodity Index for this kind of environment in which you have strong Global Economic growth in the late cycle. Remember, that picture we put up with wti, it pays investors to be long on oil. And then the diversification. Worked for not energy this past week. It did not work for energy, but we still have the correlation. Alix and high yields for energy, for the spread, is like, 4 . Back in 2016, we had, like, 18 . So a perspective for sure. Jeff always, a pleasure. A great day to catch up with you. Jeff currie, Goldman Sachs global head commodities research. David . David we took a look at who lost how much next. And as you come in today, you can tune into our colleagues tom keene and jon ferro from 7 00 to 9 00, and then pimm fox joins 10 00,m 9 00 until bloomberg surveillance all across the United States of america on sirius xm radio. This is bloomberg. Kailey this is bloomberg daybreak. I am kailey leinz. Mikeg up in the next hour, s well, Goldman Sachs Asset Management global head of fixed income. Goldman sachs Asset Management global head of fixed income. Now your Bloomberg Business flash. Walmart is spending money on the ecommerce leader flipkart. It would be part of a deal that would boost flipkarts valuation to as much as 20 billion. Feeling the pressure. Movie passes it has been warned that longterm viability is in question. The start of has 2 million subscribers who can watch one film a day in a theater for less than 10 a month, but the more members act, the faster movie moviepassns cash burns cash. 2017 was described as unusual an eventful, but the danish coming sees profit rising in 2018. Maersk is selling energy units to focus on transport. That is your Bloomberg Business flash, alix. Alix timeout for the wall street beat. Jim watcher says the next bear market in stocks will be more catastrophic event jim rogers says the next there market in stocks will be more catastrophic. Jeff bezos and other billionaires get crushed after the market selloff. Finally, the final offer, qualcomm offering 120 billion takeover offer. David joining us now is jason kelly, executive editor, and Michael Lewis is up, way up. N iowas like to look at what customers are reading before i come out here, and i think Michael Lewis to just dictate the phone booth. But it is always. Jason what is so interesting about this piece, it is very well worth reading, maybe we should put it on the train, but you just get a sense of washington with trump sort of re and permeating everything that she goes to the Trump International hotel, he watches with steve bannon. David lets go to our main story, jim rogers, he said it will be the worst in our lifetime, to have a bear market again. This is not a big shot. Jason certainly not a big shock that jim would say it. He is a big voice in all of this come and again, people listen to what he has to say. They always want to hear it. What struck me about the story, and i think we have the quote from mike evans, who knows a little bit about what he is talking about, he is the president of alibaba, he says since starting the business over 30 years ago, i am sure he will be right at some point. Alix but even if it is right at the end of the day david he also has a point, the leverage drops over the world since 2008, we are really leveraged now. It will be harder to deal with. Is an the leverage point interesting one because i do think that even though we should be able to know this empirical l therey are varying perspectives on this. When we spoke to jamie dimon, he said no, this is not like, 2008. The that love it is not the debt level is not the same. It does seem like what we heard a lot this week, which is it will not be all of the obvious things. Alix we are not going to have the same problem every time you have a market correction. David also, you include the public with the Balance Sheet in the central bank, it is start on ghis it is joh inormous. Bezos losing amazon stop your obviously coming it is not lose it if he does not sell it, but it is pretty amazing. By 5 billion. You have buffett dropping by 3. 5 billion. Zuckerberg lost 3. 4 billion. Meaning it will have an impact on even the rich guys. Jason absolutely. Now, to be sure, for jeff bezos, he is up 14. 2 billion for the year for this year, in 2018. Alix this is the broader conversation. We talk a lot about this dum money coming in before the selloff, but we learn that there are signs that the smart money came in before the selloff as both are getting hit at the same time and it is exacerbated by the selling. So you could make the argument it is more wider spread. With a Hedge Fund Guy yesterday, and he said Fund Managers were calling him, crying, and he had a savings like you are ok, you are good at this, you can do this. He had dinner with some guys, and he had to hug them because they are also up. All so upset. Jason i got off the train last night in westchester i sure Hedge Fund Guys come with is, too, david this guy skipping off the train volatility is back, this is where i make my money. So he is not crying. David lets turn to qualcomm. This saga goes on. Broadcom is not giving up. Jason right. There was a sort of window in the statement went qualcomm came back and rejected it and said maybe we will talk to you, lets see what we can do. There is a lot of talking on the broadcom side. This is a massive deal that everyone obviously is talking about. When it comes down to in terms of whats next is going to go to the shareholders. That is an about a month. There is still the regulatory issue at the end of the day, too. Jason and qualcomm did mention that in their rejection, their fears about antitrust have not been assuaged, which is a fair point. We actually talked about it on our podcast this week. There is so much discussion around the intricacies of this deal, but also what it means to the broader market. Obviously bankers are salivating about, but in terms of what the deal means, we will probably not know for a month. Alix you guys always win. David four is it a deal with negative keep litigating forever. Thanks so much to jason kelly, great to have you here. Watching china next. On the bloomberg terminal, if you want to check out tv , you can watch us online, check charts and graphics, just check tv on your terminal. This is bloomberg. David ok, this is what i am watching today. We are talking all about the equity markets. China being stable and having sort of stable growth is important to make sure this does not get a lot worse. There is a lot of concern about what is going on in china. The chart here showing the shanghai composite index. Look at that. Chinese regulators are sending sickness about the signals security yuan, the regulators are sending signals, so they are rocking the boat a little bit. They have to keep it together for Global Financial markets. This harkens back to alan ruskin, making a note yesterday, talking about the new Currency Capital flows. China has capital flows on mike any other government. If they want to come all they can say is take more yuan offshore. David it is connected to u. S. Trade central action with that issue, that actually there may be a shift now, reserves in treasury building, actually left the capital swells, let private citizens invest at a time when we were borrowing more money back in washington. Like,right, and that is, fools will to what we are seeing in the bond market. You take the fact that perhaps they will be less interested in treasuries, and you have a real gap. At what yield do you need to see on the 10year for private investors to make of that shortfall . I dont think the market knows that yet. David you talk about the treasury auctions, and we had two sort of weak ones now. How much of those foreign guys are not coming in the way you would expect them to . Given all the turmoil, you think they would rush to safety. No, it has not been a rush to safety, and the question becomes what a safety at the end of the day . What then do you buy . We had higher yields, treasury is not safe, be dollar seems confused, gold is not performing like it should. That raises questions for investors. The Interest Rate on cash, we have cash because of safety. Alix absolutely. Great point. It has been a very interesting week, and we might have an interesting close as well. S p off by just 5. You had a deep selloff yesterday. Overall, we have seen about 5 trillion wiped from global equities. That selloff spread in asia now spread to europe, but it seems like the u. S. Wants to stem the the of the selloff into last day of trading on its week. The dollar is kind of mixed. Yields are unchanged but still around the highest level that we have seen since 2014, reverberating throughout the market. Volatility sort of calm. Crude to the downside come off 1. 5 , dangerously close to the 100date moving average. And the question we are all asking have we bottomed out . Coming up, mike swell of Goldman Sachs will help answer the question. Alix a week of payment, the most on record as the market craters into a correction. Bond stays higher. Business, Congress Passes an agreement to boost spending by 300 billion, adding to the tax reform. The week that was. This is where we stand. S p is broadly flat on the morning. Asia. A sell in the u. S. Is trying to stem the downtime. Euro dollar is down. Its a mixed dollar story. After the monster move we saw in the selloff, it is picking up steam throughout the week. Oil is continuing to roll over. Futures are fluctuating after the selloff. Theye at global stocks as find the weakness. There are some participants in the last few days. This is what they are saying. If it were to go on much further and be more persistent, it could start to affect spending behavior. I would say this is small potatoes. We have had a correction. Double had a more than of 10 year rates. That has to have implications for the rest of the capital markets. Its not done. These things take time. Its hard not to have wreckage around your not expecting. More, the qech online is getting priced in. That is unwinding. I think the market realizes the is not came from acuity stepping away in we have to be ready for more. Alix we are seeing the most money on record being pulled from equity funds last week. Is the coheadus of a Global Fixed Income Portfolio Management for Goldman Sachs. He oversees 1. 2 trillion. I cannot think of a bond a bond guy i want to talk to more. You have been a short rates. Differente had a few trades that work coming out of the financial crisis because of qe. I said this worked until it wont work anymore. I think its coming to roost. A lot of the low volatility type trades that were free money as a result of central bank being there consistently, those trades are unwinding in 2018. Duration is one of them. The equity market is a big question. Alix what do you short . Mike a couple of things. Think ratess we do will continue to rise on the margin this year. 280 of the 10 year, thats a level that has a lot of accommodation and demand overseas. You heard about will that demand for treasuries continue as we balloon the deficit . We think the yield curve is going to steepen. Said it is flatter, it is a free lunch. No longer. Now that we are talking about inflation, we will see normalization in the yield curve. A couple of other things we think our trades that really benefited from qe to we think of reverse in 2018 are mortgages spot by the fed the cousin was a free lunch. Corporate credit is the big question for a lot of people. This could be meaningful widening. David why now . We knew this was artificially low for some time. We knew Central Banks would be pulling back. Move . Tral bank made a what caused this . Row for a few years in a david was it the triggering event . Was it the budget deficit . Inflation hasnk been worn away. There has been a lot of complacency. Andtopic of complacency crowded trades has caused an environment where when there is a shift, it could be pretty significant. Thats what we see right now. The inflation number came up higher than expected. The leverage trade with something that surprised a lot of market participants. A lot of traits of been very crowded. I think we need to watch those. Alix where do you own risk and yield . Probably the best place to own it yield right now is the short end of the curve. Lets not a bad of place to own a. The other section is cash may not be a bad place given the volatility. Cash is somewhat attractive. The second thing is and i heard the earlier segment the challenge for overseas investors in terms of the ability to get dollars, we want to continue to lend dollars. The cross currency basis, hedging back to dollars, the one place where we think there is opportunity for yield is local emerging markets. Deal betweeng emerging markets in developed markets. There are some markets where yields are attractive. If alix we are going to get to credit in the next hour. This is a term premium. How much are investors needing to buy the long end . You continually see it rise. Mike i think we have a long way to go in terms of the yield curve. We are nowhere near normalization. Result, you combined the environment where inflation normalizes and the central bank stops buying everything and given the free lunch to investors, you will have a lot of money come back. It haseign demand for been the big driver. One of the big shift people are not talking about and this is one of the things that has its been changing over the course that other banks are talking about removing accommodations. When rates rise outside the u. S. , that changes the dynamic. Meaningful have steepening. You can see steepening in the u. K. You will see it. Us is the joining chief strategist. I want to type look at what happened take a look at what happened. 50 through the 50 and the 100. How are you position heading into the weekend . You were on a friday at monday scenario like last week. There is a tugofwar right now between the overnight lows in the s p futures and the cash, which you had yesterday. Theres the virgins. In the first hour, we will get some indication. About yieldtalking curves and the shift, you have to realize that in the United States, our Interest Rates are way above almost all of those foreign countries. Germany, u. K. , france, spain. If youre going to make a shortterm trade, yesterday was the peak. Particularly for continued weakness in the equity market. There, i amut watching everybody trying to buy below. That does not happen. I bought the high and sold the low far more often than the other way around. Look at the equity markets, if you read prices according to Interest Rates, assuming it 3 , what does that suggest to you the low is and how close are we to it . Peter if you go back to where y werent 3 , its lower than it is now. I dont think the issue is lots the absolute level of Interest Rates. Its the trending Interest Rate combined with inflation expectations. Sidepen to be on the other of that trade. I dont think inflation is going to be accelerating because if you look at dr. Copper, look at what that is done. If you get down into the two 90s, you are back to where you were last year before we accelerated. There are no signs in the real economy to me. Coffee, allodities, of these where inflation is picking up. Put yourhe had to money on one or two stocks, what would they be . Peter i dont look at individual stocks because we are more of a macro shop that an index trader. Things are going with the consumer. Lisa and mastercard, they are the modernday of whether youre shopping for your couch or in a store, you use your card. They are dangerously close to breaking Technical Levels if they do not hold. That is a far more of a warning sign. Alix thank you so much. 2. 8 is the top in 10year . What do you see it as . Top probably 3. 5 probably we are looking at the u. S. Market and we are saying the race went up x amount. It is tight yielding a for a reason. Going into a hiking mode. We have some level of inflation elsewhere. Toont think its enough change the dynamic of the economy or equities. We still have a strong economy. We just had a huge stimulus. Equities look attractive, but bonds not so much. Alix this is what the fed is thinking about it. We are 90 minutes until the cash open. It feels calm after the selloff over in asia. Tiny bit of buying coming into the bond market on the margin as we settled down the treasury market. The vix is calm as well. This is bloomberg. Amazon will have a Delivery Service that will compete with fedex and ups. The company will roll out the shipping with Amazon Service in los angeles in the coming weeks. Packages andk up ship them to consumers. Qualcomm has rejected the Largest Technology takeover in history. They turned down the best and final offer of 121 billion. That leaves the future of the basel to be decided by shareholders. Almart is in talks to take stake in the india ecommerce leader. It would be as much as 20 . The deal would boost the price valuation to 20 billion. That is your bloomberg is this flash. Alix heres what bill deadly had to say about the soft. The implications are marginal. Its not going to change our thinking about the outlook. Furtherng to go much and be much more persistent. It could start to affect Household Spending behavior and that could influence the economic outlook. Snow far, this is small potatoes. Alix do we have it . Mike i think we have a ways off from thinking about that. Thinkingo stop about about Central Banks and their asset allocation. People need to look at fundamentals and get back to basics and stop viewing the central bank bailing you out at all times. If we have a 20 decline in the stock market or move into a recession, thats why the bank is removing accommodations. I dont think people should be thinking about it that way. Thats the wrong way to invest in gets people in trouble. David we have to get to that point. People would agree we are not to that point yet. The question is how much is priced into the market of that security blanket of the Central Banks . Mike it depends what market youre talking about. The equity markets reacted violently. The longer term, they do look good. If you look at a lot of different rate products, the credit markets as an example, they have only started to price it in. Take years and years. Its going to be a painful go. The key point is volatility is up and people should take a look at their asset allocations and be thoughtful. I think people will be more focused over the next couple of years. Alix that is something you brought up that i wanted to focus on, Foreign Investors. If youre japanese are european a want to buy treasuries, youre not making money if you have to hedge. I what point do yields rise enough that it brings in the private to offset the Public Market buying less . Mike i dont the gets going to be the foreign buyers that are enticed. They have maxed out on the dollar. Alix what that due to yields . . A lot of Foreign Investors of not been able to buy quality assets. They have gone down in quality. They moved into bank loans. Thats concerning when you have investors that are high quality and moving into lowquality assets. You have a little bit of a bubble environment that has been created. Those assets dont come back in the near term. David how much is washington . Efecting that dynamic now you have 300 billion in your more from congress. Going to increase supply of treasuries, but foreign buyers may have maxed out. Mike and the gets to have a meaningful impact. Thats one of the reasons why we believe the curve is steep and will have to be a low supply and demand overseas is not likely to be there. David what is the effect going to be on corporate debt . Will corporate follow the same route . Mike we believe so. Has been ofredit one of the biggest beneficiaries of the liquidity event post financial crisis. As people start to think thats the longer there and they think about things going bad. It that means more volatility. The free lunch there is over. Credit has been the darling. It has given people return. I think you will see a reversal of that in 2018. As long as you dont see a default environment, that is going to be a buying opportunity. Alix we have much more coming up. What do they think of europe . We will get their perspective next. How they stack up in terms of growth and what is the trade in the peripheral bond market. This is bloomberg. David yesterday, we heard from mark carney about the challenges facing the british economy as they head into brexit. It wasnt that long ago that markets were focused on the flights of greece. Todayinkler has a piece were he looks at the stark contrast today between greece and the u. K. We welcome him now. Thats a fascinating piece. Ratess about gdp growth in greece. Ask economists surveyed by bloomberg, its definitive. Greece is going to grow much faster than the u. K. This year, next year, probably in the years to,. Thats partly because the eu itself is benefiting and you could say it may be the biggest beneficiary. The u. K. Made a decision to opt out of the eu, its created uncertainty. Its a double whammy for the u. K. You have Global Investors who are wondering what next and they have no idea. People in the u. K. Have no idea. They are alone in greece is a part of the growing economy that is europe. Its the biggest single block of gdp in the world. People forget that. It is growth by association. They had somed fundamental reforms. Have they made those reforms . Matt its a work in progress. Greece said there was no way they were going to return to opt out. They are going to benefit every step of the way the europe expands. David as you look at credit, how do you contrast the . Eriphery with the u. K. Mike i think the one comparison people would like is the weather comparison. If they can import the weather from greece, you would have a higher gdp in the u. K. Greece started from a very low base and they are recovering. There is still and a norm us amount of adjustment of has to occur in greece. Thats where the comparison ends. The point about growth in europe is interesting, how do you play that . We do think gross will continue to surprise in europe. Whereare certainly places its not doing. We play around the periphery of the euro. We think because of greece and spain and italy, the euro will continue to press as a result. Rates need to be low and keep the currency week. Eastern europe, we think they benefit from that. Thats number one. Secondly, deflation is still very large. It will surprise the target. The real yield is more attractive in europe. Matt this is the bottom line. 2012, with greek bonds in where you bought when it british voters decided to leave the euro, greek bonds have the best return by far. They were cheap. David you are starting from a low base. About . Nce at all by low and sell high. If you bought greek bonds, you may a lot more money than u. K. Alix compare that with what we see in the spanish and italian thread. Should this be blowing out . Mike i think blowing out the strong. There is growth in europe. Thedebt problems are off radar right now. It would question is how do you as a bond investor really profit. Norway,ook at sweden, czech republic, poland, hungary, extremely strong growth rates. That ise a Central Bank Going to do something about that. The ecb is going to keep europe week. From a currency standpoint, there is a lot of potential. Much more is coming up. This is bloomberg. Retail. Under pressure like never before. And its connected technology thats moving companies forward fast. Ecommerce. Real time inventory. Virtual changing rooms. Thats why retailers rely on comcast business to deliver consistent Network Speed across multiple locations. Every corporate office, warehouse and store near or far covered. Leaving every competitor, threat and challenge outmaneuvered. Comcast business outmaneuver. Alix this is bloomberg daybreak. Equity futures are trying to stabilize after the selloff from yesterday spread to asia and europe. In other asset classes, gilts take a break. We see some selling on the margin as yields are up by one basis point. Thats the highest level since 2014. The dollar is mixed, the vix is softer and crude gets weaker. We are still a stones away from that 100 moving average. Goldman sachs stays bullish. This is with making headlines. Ended one of the surest Government Shutdowns of all time. The house passed a twoyear budget bill that raised federal spending by 300 billion. It placed the debt ceiling on hold for a year. The public and senator rand paul had blocked the senate vote for hours. He was unhappy over the extra spending it. The sister of the kim jongun president has shaken hands of the south korean leader. She is the first member of the dynasty the rules north korea to officially visit the south. She will have lunch with the south korean president. The brexit negotiator has waived the prospect that the deal could fail. There are substantial disagreements with the u. K. Over period. Year grace they almost certainly wont concede when the u. K. Leaves march. Global news 24 hours a day powered by more than 2700 journalists and analysts in more than 120 countries, this is bloomberg. Alix thank you so much. The equity weakness finally starts to spread to other asset classes. Come inside the bloomberg. The vix is the yellow line. The highyield credit spread is the blue line and the investmentgrade is the white line. You start to see some cracks in the Corporate Credit market. Joining us is Barclays Capital had of strategy and the Goldman Sachs Asset Management. We have more widening to go . Brad we have to react. It has not been the eye of the storm, though its been a volatile week. You see the derivative indices react more quickly. They will have to be catch up. We will have the. If we do stabilize the market, it has been fairly stable. We could stay at these levels. Alix what to do with Corporate Credit . Ake we are looking for little bit more widening in the highyield market. When you look at that chart and you look at the decline in volatility, its highly correlated to credit. Its the beginning of an environment of volatility. We look for wider spreads. David help me here. Some of these derivatives were based on low volatility. It seemed like you couldnt lose. His or something equivalent in the credit space . Is the that people are making that will never spread . Theres nothing of that leverage out there. The reason the derivative indices is under performing as is the one place you can trade options. You are trading away volatility. All i was moving around because of that. Its not even that much in comparison it. Thats one of the things about the credit market, if you think about what we did 12 years ago, there was more leverage, more Financial Leverage embedded in credit markets that is in there today. The equity markets continue to sell off and we could get widening. We are not going to get just that. Leverageis true the structure is no longer in the market. There is a lot of embedded leverage in the credit market. Toot of people are borrowing buy credit. When you think about the overseas investors, they are borrowing to buy credit. Its not an unwind situation. If the music stops and the demand declines, it could have a Significant Impact on credit. The repatriation of Balance Sheets and assets from companies that offshore assets are bringing that money home. Equityy buy back debt or or invested. These were highquality corporate Balance Sheets that are coming back and selling. Thats putting more pressure on the market. With interesting this week as you have some stress. Seen 30 billion worth of deals come in. I understand the distinction for highyield. What do you do with investmentgrade . Mike investmentgrade might not be the eye of the storm. Rates,s first, highyield. It doesnt end there. You have to think about the assets that have seen all the capital flow in the. Investmentgrade as well as classes. The spigot will be turned off more quickly. I think you have to look longerterm. You are not getting compensated for the risk of being wrong. Options, you need to get compensated for that risk you are selling it. Braddock there is a difference between spreads and yields. Think its tighter this year total returns are negative because of the move in rates. We are going through an earnings season where fundamentals are pretty good. The reason the equity market is selling off is not because fundamentals arent good. At the most safe part of Balance Sheets, thats going to be reflected positively in spreads. Alix in theory, if you want to play rising rates, you would have those. What youre taken were leverage loans go . You had this week among all of these risky asset classes, the most in flow they have seen since march last year. I think the technical picture there in terms of the demand, the owning close to 62 of the market, those show no signs of stopping. From the demand side, its going to be quite stable. Its not going to have upside. And the are rising fundamentals are ok, this is way to get yield. Thats where we think they wind up. Mike i agree. Other loans are a good place. More going to have a bearish credit environment. They are Higher Quality than owning highyield and the nature is attractive. When you have collateral, go back to the earlier stage. Its hard for me to believe that the search for yields and we have had it has been so rapid, that there havent been some bad decisions made. Pushedis money been where people couldnt afford it . Mike a lot of the decisions of been made. Weve been in a very bullish economy. It hasnt really mattered significantly. I dont think its any single place. There was too much leverage in the energy sector. Think we will see as the liquidity event unwinds. We will see were those areas go. People continue to lend. I think we will see it over time. We are not going to be in a significant default. The issue is not that there are holes in credit. The bigger issue is the demand can change. In it gets what we will see 2018. I like senior clos. I like lending highquality. Assets. O buy u. S. That want toople leverage up credit, thats a great thing to do. To get a lot of enhancement, its a very attractive place versus Corporate Credit where you have a risk where stuff happens. Its a very good place to be. David thank you brad it for joining us. Mike will be staying with us. Coming up, equity markets bled this week. Did any other markets fair better than the rest . We will look at the sellout on emerging markets. Next. Today, you may want to listen to the radio. Tom keene and Jonathan Ferro are on every morning. Pimm fox joins tom. You can hear it in new york, boston, the bay area, all across the United States on serious satellite radio. Live from new york, this is bloomberg. We are here in the enterprise green room. Member of the Senate Budget committee. Now, to your business flash. They will launch a proxy fight to replace the board. According to people familiar with the matter, they will replace the ceo. Rubbermaid, crockpot, mr. Coffey are some of the brands. The company that could disrupt hollywood is feeling the pressure. Itspasses been warned longterm viability is in question. It has more than 2 million subscribers. The more members it adds, the faster it burns cash. China has waited 25 years. Now the biggest oil buyer is getting its own contract. China will start lifting local currency in shanghai. Thats a challenge to the dollar denomination. That is your number business flash. David we have breaking news great the present has just signed that historic budget deal that was passed overnight by the congress. That means the government will keep Going Forward and we wont have to hear about continuing resolutions for another two years. We look forward to that. Equity markets took a hit. Perhaps surprisingly some the markets that were most volatile did better than expected. The blue line is emerging market stocks. The white is developing markets. The emerging markets are not done as much. We welcome the ubs team chief economist. Still with us is mike swell. You tony. O turn to explain to me was going on with the emerging markets. Will they outperform . Back to 2015,o they suffered a lot. It was a very bad time for emerging markets. They get cheap and began recovering. If you go back, its coming off much lower valuations. We feel they are still pretty cheap. Its one of the reasons you see this performance. We see good growth and a lot of these markets. Its a good moment in terms of the fundamentals. A lot of investors have done well. The volatility is moment mainly from developed markets. David talk about the fundamentals. How much of this is fundamental, how much of it is technical within the equity markets . You know brazil well. How solid are they . Tony they have the worst recession in modern history. 7 drops in gdp for example. Its coming out of a very deep bottom. We have very low Interest Rates because of the deep recession. All of these things are setting up result have its best year since 2011. David thats despite the political turmoil. Tony he may not be the candidate. We have a election and there is always volatility in an election year. The desire for reform comes out of brazilian society. Recession sent shockwaves. Equities. Talked about lets talk it comes to emerging markets. What are the opportunities there . Mike i agree with the point that you have undervaluation. Andhave concerns in 2015 2000 16. Its not crowded. Its not a situation where people are over emerging markets. You had the taper tantrum and the worst asset class was emerging markets. Its where everybody through their money because it was the la la land for investing. You have strong fundamentals and a situation where you have underinvested people. I think its attractive and will continue outperforming it. On the debt side it, you were talking about Eastern Europe and latin america versus asia. Has the easy money been made it . Alix has the easy money been made . Mike not necessarily. We will stay invested. Where would you buy or take risk . The concept on the equity side and these debt side of having more exposure to benefit from the growth resurgence is very coordinated. Emerging markets are getting back to outperforming developed markets. I like the easy money has been earned. You have a significant under valuation. Cominga lot of money is of the equity markets. Where is that money going. People will cash out and sell their equities. Tony we see slight outflows. Theink people are taking sense that if the correction in the markets is technical, its really about certain it trades that got to crowded. The fundamentals come into play. I think people are staying invested in emerging markets. The fundamentals are good. Valuations are not that bad. They are cheap historically. Alix do you want to buy em fx . Areasits one of the only that weve been dying yield buying yield. Have get compensated for the risk. There is also risk on the side in terms of the judgment that has to occur. Theres a lot of debt there. It was a make sure you get compensated for the risk. Ofid there is a perception pure credit risk. A lot of people say there need to be reforms in brazil to do business there. It hinders and ability to make money. Where are they on that . Tony i think the next government will have an agenda of Economic Reforms to make sure its easy to do business. They have Good Progress in getting stuff done. Im positive on that. Alix will they keep cutting rates . Tony we had a huge monetary thing in brazil. There is a lag to that. Think its done for now. Alix the steps into a dollar conversation. If you have higher yield, how is that reverberate . A lot of the demand for the dollar comes down to the desire for people to own a broad assets in the u. S. And equities in the u. S. Otherve a situation where economies of and growing at faster rates. The dollar doesnt look like a great place. Inflation. Uptick in how aggressive is the fed it . Youve seen significant underperformance of the dollar and emergingmarket currencies to well. It is poised to do better as people price and more hikes from maybe. And longer run, you will see stronger growth outside the u. S. The dollar is not a great backdrop. Alix its great to get your perspective. Thank you. Its great to have you for the art. Coming up, we are less than a mark our way from the market opening. We will be live with the traders take. Check out tv and watch us online. Interact with the straggly. Go to tv on your terminal. This is bloomberg. Alix i am watching of the market. Alix you have five of the 11 sectors in a correction and 3 trillion have been wiped. Weighed in. This is what he had to say. We are somewhat in alignment with 1987. We did decline a little bit. Then we rallied it. Thats what were looking for now. The low. Ld mark we close down today. We start up next monday. Alix for more on the trade, we are joined from chicago. Will we hit bottom today . We will test those lows. We had the big selloff monday and tuesday overhead futures make those extreme lows. To testoften come back those pressure points. It will be interesting to see what reaction we have today. I think its correct we start to stabilize. The vix right now is nowhere near it was earlier this week. The fear factor is gone. Also, bonds are not near low. They affirmed up a little it. I feel a little bit better but where the market stance. Yesterday was a downward push. It was only 4 . Were not talking about catastrophic times. Its a profittaking unwind. Otherwise, its not just us. Its a global blowback. 70 . P is still up we are unchanged over the last three months. You in positioned today when we have seen acceleration . In percentage terms, focus on percentages. The week. N 6 on even to bring up 1987 is farcical. That was down 23 in one day. We are at extremely high levels. You buy, you sell, or you keep your hands out. From a traders perspective, the reward risk is on the fireside. If it goes out, you are not out that much. I think there is more upside potential. Every time people got short, they got slammed in losses. Alix its great to hear your perspective. Its going to be an interesting way for the close today. David youve got two days until the next trading day. Joiningeve wood will be Jonathan Ferro. This is bloomberg. Retail. Under pressure like never before. And its connected technology thats moving companies forward fast. Ecommerce. Real time inventory. Virtual changing rooms. Thats why retailers rely on comcast business to deliver consistent Network Speed across multiple locations. Every corporate office, warehouse and store near or far covered. Leaving every competitor, threat and challenge outmaneuvered. Comcast business outmaneuver. Jonathan 30 minutes to the start of trading. This is the countdown to the open. Jonathan coming up, global stocks and stability. A weeklong equity market plunge sends the s p 500 and the downward direction. An hourlong Government Shutdown , producing agreement to reduce federal spending by 300 million and the ballooning federal budget deficit will force the u. S. To borrow more than 1 trillion this year. County downfield and about 30 minutes, the s p 500 enters direction territory at the close yesterday and heads for the biggest weekly loss on the s p 500 since 2011. Futures beginning to firm up as we inch towards the cash open up by. 6 and the other markets, eurodollar showing strength, but yields up to basis points with 2. 84 . The big bang the big headline ,
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