Nejra welcome to daybreak europe. A fourth day of green on the screen for asian equities. Donald trump has talked about being in the final throes of coming to a phase one deal. A mixed picture below the surface. We are seeing a weakness in chinese equities, after the biggest drop on industrial profits on record. The u. S. Benchmark hit record. The fx, the aussie is the underperformer in g10. A two rate cut call for the rba. Some poll showed yesterday that the conservatives are narrowing their lead over labour. Oil slightly off on the back inventories. On donald trump says the u. S. Is in the final throes of a trade agreement with china signaling progress on a deal that has been years. Works for two but in a interview with the fox news host, trump said he is holding up the trade deal to ensure better terms for the u. S. Joining us is Patrick Armstrong. We keep hearing records on all u. S. Benchmarks, does it surprise you . Patrick it is a narrative that that is why we are hitting new feds, but i also think the and what it is doing, not important. E, is the trade deal is important, you dont get significant Global Growth without a rebound and recovery in trade, and to be escalation of the trade war between the u. S. And china is very important. That is what if is one trade deal is. If. Floor under think that basically, there shouldnt be newescalation or no tariffs, or a rollback of existing tariffs. Nejra so the question comes into play, whether President Trump out of a goodwill will put a pause on existing traffic should. Do you think you will on existing tariffs. Do you think he will . That has been enough to push markets to an alltime high every time we get a sound bite that we are close to a deal. It will be a shallow deal, it has artie been headlined what the deal will be. The next stage that people are hopeful for, i am very pessimistic we get any progress on those. I think those are Strategic Issues about technological transfer, Enforcement Mechanisms on things, those are where things fall apart. Trying to dust china committing to manage their currency as they have him, to stop any weakening of the yuan. That is what we will get, i dont think will get much more than that. Nejra safe arguments sake that phase one gets through, does the market start to wake up to those structural issues, or is the conviction there enough to push markets to a new high . Patrick the markets have been waiting for it, and you dont the dayssure the market before you get the deal. Once we get the deal in place, i think it will be a very high bar to get over to get the next deal done. I think it is time to get out of u. S. Equities, they are incredibly expensive. The u. S. Is at the same level it was in the tech level of 2000, so not unprecedented. But that two precedents where it did happen were very good news for equity investors. When we got to 2. 3x price the sales. The only time in history never dropped was in september of 2018, and the tech bubble of the First Quarter of 2000. S ps earnings are down this year where they were last year. Market is up 25 . Think a lot of good news is nejra priced in already interesting that you brought up the tech bubble. Impeachment proceedings, where the economy is, and the argument was that you can see further gains in tech from here. You say you want to shift out from the u. S. Would you stay in certain sectors . Patrick i Like Health Care in the u. S. The last two months have been good for it. But you have Political Risk with health care because you have some very leftleaning political candidates. I think the rhetoric will be much harsher than the politics should one of the leading democrat contenders become president. First if they get nominated and if they get elected, how harsh will the publicist, with republicans in the senate how harsh will be her policies the be with republicans in the senate. I think that is a defensive sector that isnt incredibly expensive. Utilities, staples, sectors where people are hiding out. They are very expensive and very inflated. Nejra if we see an inflection in earnings in the First Quarter of 2020, that could give another leg up to equities. But is that going to continue, but momentum . Patrick i think it is. If you see a rollback of the tariffs, that should be a boost to pmis, manufacturing. It is possible you get that post, but i am not sure you will. There is a bit of a lack in tariffs hitting. Never fish Patrick Armstrong from gourmet wealth, stay with us. Turn to china, profits from their industrial enterprise fell , the biggest drop since 2011, and it comes as domestic demand slows. Early indicators point to a seventh straight month of slowing growth. We speak to tom, our china correspondent, joining us from beijing. Let us kick those numbers come around us through the details. Tom grim data, as he outlined, in terms of industrial profits. Three straight months of decline. A drop of 9. 9 in october, that is a record. It follows a contraction of 5. 3 in september. What is that happening . Factory prices are in deflation. You have lower factory prices come those are dragging on the profitability of these firms. Then there are investment decisions. Will they call back on investments . Indeed, we have seen the curbing its investments as well. Bloomberg economics says. , look, this should be ringing alarm bells for the central bank in china. They say it reinforces the case for more cuts, and Interest Rate well. S there are other economies out there looking at 10 and they say they would agree with that analysis. Nejra is that because there are concerns about the slump in industrial profits, that it will start spilling over into the labor market, which is very important to chinese policymakers, as they have said many times . Tom the labor market is absolutely central, because of stability. The party, the government is focused on stability. That is a number one issue for them. If you start to get to a point where investment is restricted so much by the private sector that they cut back on hiring, certainly, that will be a concern. Currently, implement here is at 5 , if you believe the official statistics. That is where you are hearing from economists that the pboc will have to step up to support the economy if the slowdown continues. You point to the early indicators. We have one bellwether, south korea. They saw there is dropped 10 . The other bellwether our sales managers. They report a record rope in terms of sentiment record sentiment. Ms of one bright spot according to early indicators, was exportoriented economies, up inng to maybe a tick demand. We have pmi data on saturday from china. We will be looking ahead to that to flesh out the picture in germany. Mackenzie, joining us from beijing. Thank you so much. Still with me is Patrick Armstrong. You were just saying that you think now my bedtime to rotate time to rotate out of the u. S. Using there will be significant. Mms from the pboc . Atrick they have shown reticence to do significant stimulus. I think they will lower the reserve ratio, things like that. Be subtle stimulus, and it should keep the economy moving along. We do have some Chinese Companies that we own, alibaba, tencent, big technologytype companies. They are reasonably attractive, japan is where we are really looking to allocate right now. I think that is an area that is cheap right now. Unprecedented multiples almost. China is cheaper, its own history of earnings, yields of 2. 5 , which is very attractive, versus negative rates in japan. If you are looking to move out of the u. S. , japan is where i would put my money right now. Nejra in general as well, how would you be looking for protection . Is yen your preference, gold . Ettrick fish Companies Like japan patrick youre looking at japanese companies. They are not exporting companies, that the japanese consumer has been very resilient. We are looking at a 5 dividend deal. We want to belong yen we want to be long yen right now. Nejra and gold, do you like it in the portfolio right now . Patrick i like it because it is a hedge against the Biggest Issue right now. If we dont get a trade deal, you have an escalation of the trade war. Trade war wars, if they keep forward, they turn into currency wars. Not to make a bad pun on purpose, but that is when gold will really shine. Nejra is that something you are bracing for a the moment . Patrick it is not something we expect, but if you put something in the portrayal of session in the port footer that will do its job, i think that is what we now,. Ight we dont expects it, but there are a lot of scenarios where you could see it happen. Nejra you say you dont really expect any stimulus to come from china in terms of the slow down at the moment . Needed they dont exactly. If you have progress on trade, i think that will create a natural flow. Pmis are still in contractionary phase, but we have started to see the pmis. Tion slow in if you get a resolution on trade, you will see that move back into expansion. Minor stimulus will be enough. Nejra do you like exposure to companies that have exposure to the Chinese Consumer . Patrick it is not something we are actively seeking. We have alibaba and tencent, they are exposed to the consumer. It is an area of strength right now. Hiring is good, which increases are good in china, all of that playing into the Chinese Consumer remaining. Nejra are dollar bounce something you are looking at the moment . Patrick the sixth alien dollar the 6you look at billion issue, i think that is a good pick up right now. They are doing them basically so that chinese corporates have a benchmark to issue their bonds against right now. I think that is a good premium right now. Nejra thank you. Patrick armstrong stays with us for the hour. Lets check on the top stories in the first word news Jeremy Corbyn has. Response,the parties after a rabbi suggested the u. K. Labour party leader is unsuitable for office. The party appears to have made gains on the back of lance to dramatically reshape the british economy. I made it very, very clear, protectin government any committee that is under any sort of any sort. We will support the necessary funding to protect to an gods, temples, and mosques. We will protect the cemeteries also. We will not allow antisemitism of any form in our society. Nejra british carmakers are calling on the next government to deliver a brexit deal. Manufacturers and Traders Association says key requirements include if frictionless border. Carmakers say they has spent more than 500 Million Pounds preparing for the uks exit from the e. U. A white house budget official says he want his superiors that a hold on security aid to ukraine could be illegal, but he waited months without a response. Mark sandy told the impeachment inquiry that President Trump had up. Cted the eight the held meanwhile, congress has invited the u. S. President to an impeachment hearing on december 4. President trump has called the inquiry a witchhunt. That is your bloomberg first word news. Coming up. , a strategy change. One fed governor says the u. S. Economy is solid, but outlines plans for inflation targeting. Plus, we speak to the european Incoming Commission president , ursula von der leyen. Dont to miss that conversation, after 3 00 p. M. London time. We will be live in strasburg throughout the day. Traveling for work, tune into Bloomberg Radio live on your mobile device or on dab general radio in the london area. This is bloomberg. This is bloomberg daybreak europe. Let us check in with juliette singapore. Great to see you. You are focusing on comments from the rba and a bit of pressure on the aussie today . Juliette absolutely. We are seeing asian stocks rising on those comments from President Trump that we are in the final throes of this trade deal. We have seen asian stocks move higher for a fourth session. The nikkei closing of the. 25 . N up a little downward pressure, though in china on that disappointing industrial profits number. And australia, as you mentioned. There was some dying in the equity market. Have a look at my chart there was some buying in the equity market. The indicated that qe could be an option if you see the cash rate get to a quarter of 1 . But the governor is indicating that is unlikely to be the case. Chief economist bill evans, he yen ofwn as the do forecasting Interest Rate cuts, he said you could expect cut four times next year. Forecasting that the rba will use about unconventional monetary pull perhaps to look at qb for the second half of next year. Nejra Juliette Saly in singapore, thank you so much. Now lets get the bloomberg is a flash. A longtime ally of President Trump is facing an investor call to step down. Blackrock capital, which controls about 2 of colonies stock says it has lost confidence in his leadership. It says the Company Needs change to avoid a shareholder exodus. Citigroup has been fined 44 Million Pounds by the bank of england for years of inaccurate reporting about its capital and levels. Y it is the biggest ever find by the u. K. Financial regulation authority. It says between june and hadember of last year, they flaws in the systems they used to give information to financial regulators. Citigroup says it has mediated all issues. Planning to go directly to shareholders to prevent its case for a tie up in the latest push for a deal backed by carl i can. Xerox said it will not apologize for its aggressive tactics in pursuing a merger, despite being fined twice. It will urge shareholders to call on the hp board to pursue what they call a compelling opportunity. Governor Lael Brainard has struck a positive outlook on the us economy, while advocating longerterm changes. Speaking in new york, brainerd recommended pursuing a policy inflation flexible averaging. She said it may be helpful to specify that policy aims achieve time. R she added that given the persistent shortfall of inflation from its target over recent years, it would imply supporting inflation a bit above 2 for some time to compensate for the period of underperformance. She added, well Downside Risk remains, the fed had taken significant action by lowering Interest Rates this year. Patrick armstrong is still with us. This is an ongoing conversation about changing the framework at the feds. Does it make you think perhaps that there is a bias to further cuts that the market has been pricing . Patrick may have been pricing it already. There has been a lot of debate in the fed that the last two cuts should have happened. The statements right now are of bernard would the interpreted as very dovish. The unintended consequence of that is when you have inflation 3 , you have to get punitive and go below. I think she is presenting it as a way that we can let the economy run hard if we need to. I think that is the fed policy anyway. I dont know if formally adopting this makes sense, but i think in for money to have said that we would not be word if inflation went above our target. Nejra in terms of the prospect of inflationary pressures, is the Market Pricing that correctly . Patrick i think the market is pricing lower from longer, and i dont know if that will end up being the case. I have probably been too much of an inflation hawk the last two years, when i have been thinking inflation is around the corner, given the unprecedented monetary stimulus. It has not materialized. If you look at core cpi, significantly above 2 , though, the feds measure in the ecb has been significantly below 2 . The whole world is in an era of disinflation. You have technological change driving that. Eventually, the zero Interest Rate policies will probably create some inflation i dont think i would be extrapolating 1015 years out of zero inflation. I think it is very hard to see how it will have a significant inflation. Nejra earlier this week, we heard from Jerome Powell talking about the glass being more than half full. In terms of what the fed has done with three rate cuts so far, what could be the effect of that, will that just reverse the previous hiking, or will it be able to extend the expansion the way that Jerome Powell talks about it . Patrick i think the three cuts have been important. What he has done now where he has signaled the pause, he has done that not even by conscious decision but by building up the sheet. The organized repo issues they had in september created a nice liquidity flux at a time when they were not cutting. That said, i think, is clearly i dont think they will be hiking by any means next year. There is a potential for a card if we dont get a trade deal, were if the Global Economy continues to slow there is a potential for cut if we dont get the trade deal or if the Global Economy continues to slow. It is not too far off in the future now where we are getting into the election cycle, and you will really want to move markets if you are the fed, in the month before an election. Nejra you talked about the fact that you might be willing to move out of u. S. Equities, apart from health care. How would you want to position around the curve . It is popular in wall street to bet on further steepening in 2020 . Patrick we have an option on steepening. Volatility on steepening is actually cheap right now. Steepening is something that is happening already. We had a flat yield curve, and that has really changed since august. I think we are probably going to get that, and if the fed is on hold, it lets the economy run hot, than you might start to see the long and get higher the long end get higher. We dont have a big position on volatility right now. It is not speculative shorts on volatility, you get a huge kerry took short volatility, but you get punished if you get long. So we dont have a position on volatility. Ne