Manus welcome to bloomberg daybreak europe. Energyue of renewable and writ energy, one of the most valuable companies on the german exchange. That income, 857 million euros. Outlook forhe 2017 the company. They dont see the uks retail during Generating Positive earnings. It is the valuable most valuable utility in germany. Will it become independent . These are the top lines concerning the 2017 outlook for this year. They dont see the u. K. Side of the business to let generating a process on the adjusted basis. Net income, 857 million euros. That is the press report as we close off a heavy week of reporting and the European Equity markets. Lets talk about global markets. This is a game of chicken. Potentiallyng at the situation developing into this generations cuban missile crisis. The president of the United States morning the north koreans that if they follow through with a missile threat, they will face Something Like they never thought possible. What is it going to markets . Have a look at gold. This is the volatility. Down she went. It is spiking higher. Revised, you should hold to 10 of your assets. What we have on the Global Politics stage is too confrontational, nationalistic, at more interested leaders playing chicken with each other. Bloomberg has done a survey in terms of where the money is going. Yen is going into swiss. It is bullish on gold. That is the longest run on the upside since march. We will talk more about bitcoin. Risk radar is the manifestation of peoples concern that a war of words could be something much more dramatic. This is your risk radar. Lets have a look at that. We are seeing a drop in terms of the markets. We have the msci equity index down by. 1 . That that is the longest losing streak since july. Japan is closed. In terms of volatility, this is the hung hang seng volatility. Gain since weekly january of this year in hong kong. Hong kong has been the market where it is all in or allout. Lets have a look at dollaryen. This is where the money is flowing. It is flowing into yen and swiss. Yen rallied 1. 6 this week. Chinese have moved on the yuan on their fixing. It falls of the most since january on aweaker on a weaker than expected rally. Thank you. Robert mueller is bearing down on the russiant interference and meisters president ial election. Subpoenas has sent subpoenas to banks for accounting information. Plan to shrink the Federal Reserves balance sheet, u. S. Mortgage bonds face a bigger test. They are lagging behind treasury for the First Time Since 2011. The spread almost doubling since 2016 lows. Irish banks are set to face mounting pressure from regulators to write off bad loans. Arepean authorities beginning to lose patience with some lenders. That could been more Urgent Solutions are soft a month are sought. A campaign is demanded to be the winner of a president ial election. Campaign data showing the premise are one more than 8 million ballots and the vote. In the vote. It escalates a potentially violent political prices crisis. Its biggest twoday fall this year, same thing with the kospi. Good Economic News out of singapore. Second quarter gdp is growing more than expected. Still not helping the stock market, which is down a percent. Is buckinge, noble the trend. They lost is because more than 75 this year. Noble up 11. 4 at the moment. They are coming out and saying that net debt in the first half surged by 1 billion. Defense stocks have been rallying. China mobile not doing much today. Up reason we are putting it there is it is headed for its biggest weekly advance since march. We have more analysts upgrading the stock. Great news out of their Dividend Payments as well. The same in china. Have a look at this chart. The chinese currency is a unique save haven. It is it has beens it has been strengthening. It has been upgraded. Thank you very much. Is stepping up his campaign of pressure on north korea. He delivered the warning after lunch with Vice President mike pence. He said america would bring down iran fury on north korea bring down fire and fury on north korea. If north korea does anything in terms of thinking about attacks of anybody we love or represent or our allies or us, they can be very nervous. They should be nervous. Things will happen to them like they never thought possible. Our guest joins us from hong kong. Where is all this rhetoric heading . We have seen this escalation of rhetoric over the past two days. President trumps comments, then comments and a plan for north to fire missiles at guam. In south korea and japan coming back and saying a warning against that. Have had more comments on the president and we are hearing from people in the region, including the australian time australian Prime Minister. They are saying there try to tempt down some of this rhetoric , so there is some attempt to that. It is a war of words. Managera hedge fund saying this is turning into a game of chicken. Manus indeed. A line from turnbull, the United States has no stronger ally than australia. In terms of defense, we are joined at the hip. The unstion is, we have resolution and now this war of words. Inis not trump on his own terms of pushing back against north korea. Jodi that is correct. He is getting support, and the Prime Ministers comments from australia indicate that. At the same time, we are hearing from china in terms of the editorial in the newspaper saying it is recommending that china not get involved if the u. S. Does anything. Continueis point, they to stay out of this. That will be interesting. We have not heard a statement from china in the last 48 hours. Schneider joining us with the latest on Donald Trumps comments. Joining us is james bevan. Good to see you this morning. It is mounting, the rhetoric. Have you taken any action . James i am monitoring. If you were to say to me, where do i think this is heading, i think this looks more like the cuban missile crisis. Then, this that back was a war of words were the world was on the brink of war, but eventually stability civility prevailed. Is, is north korea actually going to fire a missile . The second, is america going to shoot the missile down . What then does north korea do . I think that eventually civility travails prevails. Manus that unpleasant conflagration, would you concur with ray dalio that this is a game of chicken and you should perhaps add 5 to 10 of your portfolio . Me turn my chart into a longer chart in that volatility is rising. It is not monstrously higher. I moved the chart further. Would you agree that you should have 5 to 10 into gold . James i would not. There is a stronger case for remaining wellpositioned in the equity markets. 500. K at the s p if there was a markdown in prices, there is a buying opportunity. You think these drawdowns we are seeing one. 5 moves 1. 5 moves. Us . E does that take james there are three scenarios. Scenario, central continuethat markets to appreciate on corporate earnings. If you were to say what what i attached to that earnings number, probably 2 growth, 2 inflation. That would give me a 12 month target. Stocks,ck to the right i think i will do well. However, there are a few other scenarios. Where peopleenario see if you want to be a part of the game and put money to work, prices move up strongly, that is a real scenario. There is a 20 probability of a meltdown, meaning people become disenchanted with equities and sell. I think if there was a meltdown it will feel more like 1987. And awas a correction great longterm buying opportunity. Manus we will pursue the conversation further. Is the cio at ccla Investment Management. Coming up, the fed scales back. We will focus on the fed balance sheet. That is next. 1 18 in the afternoon in hong kong. 1 , the seng down bottom of your screen. 2. 1 , the bottom of your screen. Lets talk about the balance sheet. The fed balance sheet. It has been more than a year that they started buying mortgage securities. That was an emergency. Janet yellen promised to shrink the assets, including 1. 7 trillion in mortgagebacked securities. What do investors expect from the market . There is a story out this morning on your terminal. From a guest from singapore. Play . Re the risks at when we talked about the fed tapering, many focused on the tapering of the treasury holdings. Dont forget that during the emergency bond purchases, the fed also gorged on these mortgagebacked securities. This was its method to supply in support for the u. S. Housing market. Now it owns a quarter of this market. They are going to start tapering this year. Start cutting holdings of these securities, so that creates two big risks. The first is the risk to the market for these mortgagebacked bonds. These are bonds of that are widely held by mutual funds, insurance companies, banks. This market may come instead of outperforming treasuries as it has, may go to lagging behind. The second is that u. S. Mortgage rates may rise. The fed added this emergency stimulus to the u. S. Housing market. Now it is taking that away. The u. S. 30year fixed mortgage is approaching 4 now. The record low was closer to 3 . They tapering is going to be slow and gentle and gradual. Dont forget, it is coming. It will have an effect. Manus thank you very much for joining us. That is one side of the market. Data at 1 30pi u. K. Time. It is going to be a part of the focus for the fed. Here are some of the voices over the past few days. We want to get to a year over your number of yearoveryear number of it takes time. They have been surprised by inflation coming to the downside during the spring. Not by tiny amounts. Really by a larger amount compared to the progress we made. Inflation has been coming up short, a little locum relative to our 2 target. You think 1. 5 is not a big deal. It matters that investors believe the fed can achieve its goals. Up from a lowd level seen in 2015 when it was held down by falling oil. The last couple years round the weak side and inflation continues to run below 2 . Manus if youre confident at in a 2 target this is what wes was talking about. There is what they managed to do. They squash the spread. Squashed the spread. Do you think the market can over treasuries when the fed goes to normalization . Is hard toink it say, given we have never been here before. There is the at attention of what will happen in the u. S. Treasury market itself. To date, the u. S. Government has been spending cash rather than issuing bonds. What level of bond issuance to we need to get back on track in terms of relationship, crating paper and spending more money creating paper and spending more money . Be d suspect it would to the market. The 30year yield move up strongly. Anticipate inflation will remain around 2 and the Federal Reserve will not tighten policy beyond 2 . That relatively low inflation outlook, given bonds are poor value globally, they are not going to have the correction that many are suggesting. Manus today we get cpi. Is byfc. You say no crash. Lets go to thirdquarter 2018. The market is not anywhere near a distressed level. 3 would be quite a move, when did . Wouldnt it . James it would. It implies the forwardlooking equities are lower than stated, and that upsets valuation. The second issue is the higher yields means that corporate is going to have many say the u. S. Corporate sector has a decent balance sheet. I would say that is not right. Some companies are investing mouth of debt. I think highyield is the next waiting to happen. The third issue is what it is going to do to Consumer Credit and spending. We have consumers who have been relatively optimistic, because despite the naysayers, we have. Ad wage growth, i think there has been real wage growth. A lot of growth in Global Consumer spending has been a credit. Banks will have less vibrant growth. To me, Global Growth is more likely to be around not before forecasters are expecting. Manus we will make time for the misery index when we come back. James United States has the worlds greatest companies. Manus james bevan cio at ccla Investment Management stays with us. Angela merkel is preparing to kick off a sixweek campaign for reelection. Is the german chancellor heading towards her fourth term in office . This is bloomberg. Track your pack. Set a curfew, or two. Make dinnertime device free. [ music stops ] [ music plays again ] a smarter way to wifi is awesome. Introducing xfinity xfi. Amazing speed, coverage and control. Change the way you wifi. Xfinity. The future of awesome. You are looking at a live shot of the emperors planet. Burress palace. Emperors palace. In the past five days, i can to you that yen has managed to appreciate by 1. 55 . We havent seen that since the end of july. Thats checking out the market. It is a game of chicken, they tell me. Guy that is one way of looking at it. It is not over yet. The ftse looks like it is going to open down by half of 1 . That is a big move relative to recent history. It looks like lumber is going to be opening up softer. Lets go to the gmm. That tells the story as good as anything else. The Hong Kong Market is down over 2 . He saw the s p move yesterday. The fact that it is highlighted like this gives you a sense, and global gmm will do this for you. The magnitude of the move relative to recent history was a sizable one. The kospi down. Lets talk about what is happening in the commodities space. They have been well bid of late. Certainly the metals. Copper is down by 2 . Mcnamee down. Manganese down. Iron ore in singapore is trading down by 5 . Let me bring you this chart. Is the start of the year. That is where we were at the start of the year. Bounced offhave that little line over the last couple days. It is going back to 50. It will be interesting. Manus guy johnson with the latest on the markets and iron ore. James bevan is the cio at ccla Investment Management entity is with us. Lets talk about the misery index. This is what we are talking about. It is all the way back to 1955. What is it and why do i care . James when i think about violation, i think why should variables be connected . It is clear the sum of unemployment and inflation describes the construct of the underlying economy. These are movements in relative terms for variables that describe growth or inflation. Since 1979, the some of the misery index, the some of the Unemployment Rate plus the inflation rate plus the priceearnings multiple, has been if we get lower unemployment, inflation, we can justify a higher stock market. Then we have higher you just heard the fed president. They are warning about the inability to hit that 2 level. The on a planet level keeps coming down. Ises the fair valuation rising, not falling. Manus if you get fiscal adjustments by the yearend, that could add to the story. James stays with us. James bevan from ccla Investment Management. Angela merkel has had a threeweek holiday. She hits the campaign trail today to secure her fourth term as german chancellor. The voters head to the polls on september 24. Jailill visit a former today in east germany where Political Prisoners are held. Her first scheduled public event after the summer break. Matt miller joins us from berlin. Good morning to you. You are going to have a busy six weeks. She is expected to win by 15 points. Is this a confirmation of her fourth term . Is trying to come enter party is trying to avoid that idea, although they have a Comfortable Lead, she had a Comfortable Lead in her first ended upbattle and only winning by a couple points. Keep in mind, for a long time, Hillary Clinton was head of donald trump. Anything can happen. When Martin Schulz came back battle, he was not connect with Angela Merkel. He wozniacki and neck with Angela Merkel. He has lost momentum, and even though she was on vacation, she strong, especially as concerns over things like north korea make it look like the smart choice to have the incumbent ever incumbent in office. Manus even if she does when the election, the coalition is the is an important part of german politics. We know how they might stack up . Matt you are right to focus in on that at the most important issue. Joint with merkels cdu in this current regime enter first regime, in the middle she joined with the fdp. She has a tendency to occupy all of the middle ground. She takes credit for all of her victories personally or get that credit to her party and for all her failures and mistakes, she spreads that going across the coalition. The spd may be wary of joining up with her again in another grand coalition. Just as well, the liberals are fairly wary, because after working with her in her second term, they came back with no seats in parliament. The question is, who is going to join with her . Who would rather just sit in the opposition . In germany, you have got to make a coalition. It is unlikely anybody wins an absolute majority. Manus there is matt miller with the latest on Angela Merkel kicking off an election campaign. Specialss our 30 minute every monday at 8 30 a. M. You could time you time, germany decides. A. M. You take time, germany decides. History potentially in the making. Hillary clinton started with a 15 point lead. Theresa may was strong and stable at the start. Looking at Angela Merkel, she does seem to be in a different position than the others. James she does. The difference is we have the rise of populism in the United States and that united kingdom. In germany, because of the weakness of the euro, expert performance and the high levels of consumer confidence, it correlates with a merkel victory. Manus the flow of money has been driven a growth and politics. Give me a flavor of where we are. We have this washout of funds last year. We are observing more money coming back into europe. One of the unintended is that the central bank considers tapering. The hero becomes progressively more strong