There is nothing wrong with them. David co and they have the capacity to borrow. Vonnie yes, and lets make it clear. They are the third to have cut this. Jonathan this as brent climbs to be fourmonth high. Lets check in on the markets. Futures are positive ahead of the open. The ftse up around two points, there is a story on the luxury goods in there. If you switch up the board quickly, the dollaryen, a sevenday losing streak. Can we break that . Up. 5 inflation as a 15 month high. And april it skews the number a little bit. We will get to that. There it is on the screen. 7 and brent crude making a fourmonth high. We have lots of news to get to. Lets get to david with the first word news. Both menosecutors say involved in the brussels bombings were involved in renting apartment. 16 victims died in the attack 16d suicide bombers killed others at the airport. Forces in syria are working on the strategic Hilltop Village. The area has been held by groups opposed to the government since 2012. A russian Helicopter Crashed and killed two pilots. And lawmakers have pushed a step closer to impeachment. It was the first formal test of congress. Ae brazilian royale reached high on speculations that would be out. The impeachment could amount to a coup. 2400 journalists and more than one edge of 50 news bureaus around the world. Jonathan saudi arabias Credit Rating has been cut. This is a surprise to many. Because on the financing side in saudi arabia, things look great. Is that a justification for the move, where commodities are . You are absolutely right. They are taking a view on the oil prices and they are forecasting wti prices of 75 for this year. The finances of saudi arabia look weaker and that is why they are cutting the rating. The main undermining of the decision are the very low prices. Saudi arabia 50 of the gdp. David the kingdom has already taken action to reduce the deficit. Even though they are weaker than they were, they have large reserves and they also have not borrowed much from the Capital Markets at all. They have a lot of growing room. Is there a chance they will not take the bills . There is no chance, whatsoever. Theyre getting the ratings cut but it is coming from a high level of ratings. They were aaa and they went to aa and now it is a aa minus two still a very good rating. There is plenty of room for saudi arabia to continue. They have one edge of 40 billion in reserves. Right, theretely is a lot of maneuvering. They could take loans from banks. The debt is very low. This is the first situation since 1999, at that point the debt ratio was very high. Today, the debt ratio is 10 of the gdp. Many countries would like to have that kind of debt. Vonnie exactly. Is this just a warning shot on the part of fitch . 1. 7 percent gdp growth a lot of developed nations would love to have that. Yes, i think the rating agencies are taking a very cautious view. We dont really know where oil prices will go. If you a barrel believe this is only a shortterm drop in prices and were going to go back to 100 that it is a different situation. There is a new king and there is a lot of tension in the middle east with isis and a population who will need jobs. And i think the geopolitical results on saudi arabia is one factor that is pushing this. Just a few minutes ago, fitch cuts the ratings. It is clear where it is going at this point. Crystal ball to look into saudi arabias finances. They have a complex system. This is what the imf sees as far as the debtgdp ratio. You can see that for a long time it was negative. He can as they had so much in it didnt go above the zero line but the imf is forecasting this decline. I have to look into it to see what oil level the ims is assuming. It looks like they expect it to climb to 44 in 2020. Japans largest brokerage is shutting down operations here. It is the most in almost two months. Michael moore joins us now from london. This is just another from the slew of banking headlines where parts of operations are shutting down. When do we see the end . Michael i think it will be a while yet before we see the end of it. A lot of banks have been cutting back and we see that today with citigroup. There is a number of headwinds, whether it is regulatory or the market environment, and until those letup, this is not the end. David i will confess, i have not been following this closely. I understand they are ranked 49th in equities in europe with a 2. 2 market share . Michael right. Hey tried to build up in the equities business and never got to the scale where it made sense and it was profitable. They were running at a loss outside of japan for a while now. So as you say, this was not a business that seemed like it was going to turn around soon. That is why you are seeing the cuts. Jonathan stick with us. I want to bring in matt. Story . S just a baking pulling out of europe and cutting jobs . It is a difficult story. Do you see more of this happening . Euro,when we look at the we recognize that some of the symptoms are symptomatic of broader monetary issues. If you look at the total structure in europe, japan and america, it is higher today than it was in 2007. Bout time we have seen a of risk aversion, we have seen Central Banks come to the floor with easier policies. The problem is, negative rates really hurt the profitability of banks because they take away the deposit earnings franchise. And that means the banks have a fortive Net Interest Margin losses. So whether you are struggling with trading or the more traditional banks, low Interest Rates in an environment of excessive debt make it difficult to absorb losses. One of the things we saw in japan where banks trying to deal with a similar dynamic. We think this is a very challenging environment. David i wonder what the connection is between the banks who have to deleverage and have to come out and get the economy going. Those things are pointing in different directions. Matthew they are going in different directions. You have an Exchange Rate in europe and that is a source of stimulus. You see unemployment starting to improve at very high levels. Confidence is a improvement. But having said that, you have a dynamic where the banks are still sitting on large amounts of nonperforming loans, and the sovereign mechanisms for any bailout of the banks is not clear and so you have this kick the can down the road phenomenon. Vonnie in terms of the economic need the bank to function much better then we would in the United States . Matthew the more qe that you have done or the lower Interest Rates are, it harder it is for banks to balance the Balance Sheets. The european Banking Sector went from above 20 to 6 today. You cant really grow your balance sheet. So the policy that is aimed at stability the economy has arguably slowed the ability of the banks to grow their Balance Sheets going forward. David ok. Thank you for joining us. Ofing of next, speaking banks, italy has come up with a plan to help the financial firms. Details coming up on bloomberg. David you are watching bloomberg. Citigroup is planning to cut staff in london. That is according to people familiar with the matter. The lender will dismiss 70 traders this month. They have shrunk by more than 40,000 since taking over in 2012. With growinging demand of suvs. Point one million citizens, suvs and minivans were sold last month, 9. 8 higher than the same month last year. Mercedesbenz boosted their sales twice as fast as bmw in the First Quarter. Increased 30 in march. Compared to a 6 increase for bmw. David Italian Government officials have called for 5. 7 billion funds to this is part of the push to focus on banks. Italian banks have been among the worst performers and they did rebound on the nude on the news of funds. In go now to john for lane rome. How does this work . John the numbers are a bit disproportionate. Nobody is saying that this fund will solve the whole problem. It is part of boosting Investor Confidence and getting the Banking Sector to try to tackle this problem. And there will be various investments and incentives. It looks as though they can be as opposedook value to market value. But we are waiting details. There on face value are the longterm issues. It looks like this fund helps the capital ratings but the longterm issues, the piece that you have written about, can it get through the legislation that makes it easier to recover the loans that have gone bad . John he can get the legislation through the italian parliament, the problem is brussels. Taliane talking to an i officials saying they have been in touch with the European Commission and they are confident that they will push it through. The whole problem with the aid component is crucial with this. There have been tough negotiations that will be ahead with brussels. Vonnie one of the ways that they will get around the rules . By making a private manager management. Why didnt they think of this before . John they should have done this when the eu rules allowed the state to step in, that is what germany did. The italian ministers complained that there predecessors did not take advantage of that opportunity. The way that they are trying to get around this is that the state lender is going to have a minimal role, it is not quite clear what yet. But the whole emphasis on private investors and lenders and institutions will enter this mechanism. David this is important to italian banks but also to italy overall. You wrote this profile of the prime minister. Explain why this is so essential to turning around the Italian Economy . John just a little anecdote. We walked into his office and there was a sword on the chair and he brandished it. We asked what he would do with it and he said, it italian banks and he brought it down with a slice. And a senior official in the isment told us that helping to slow down the economy and it is reducing the capacity of banks to actually lend and italy is only just clawing out of a recession. Vonnie that is some anecdote. su can catch john follain article on rebooting italy and we will have more with Matt Mclennan now. I know that you are invested in europe and we will get to that in a moment. Continue to join us on bloomberg. Jonathan long considered an moreings matt miller has on the outlook for this year. Matt really, for earnings in general, it has been a pretty bad start. Some are saying the worst start since the financial crisis. Take a look here. They are the most read story on global wall street. The biggest aluminum producer in United States. Theyre cutting manufacturing because of Lower Oil Prices and because of shrinking margins as the chinese demand for commodities slows. Boeing is one of the biggest customers and cut production of the jumbo jet in half and that is not good. The shares are down almost 30 , 26 . And they have lost everything in the premarket that they gained yesterday. Analysts are protecting a broader drop for on the s p 500. We showed to discharge yesterday. We are looking at a contraction of 10 with calls for flood earnings back at the start of the year. If you check out this function on the bloomberg which i just pulled up, you can see that so far we have 21 out of 500 Companies Reporting but we are looking at disappointing earnings in other places besides energies. This is the surprise. As you want to do is click on this tab, the growth tab. We are not seeing a lot of that. This is considered an earnings recession. Lets check out juniper, shares falling in the premarket. The californiabased company says sluggish demand from Corporate Companies and telecommunication providers cost q1 revenue to fall. They have weaker than anticipated demand across the from some major tony gwynn indications companies in europe. This company is a bellwether as well. Had au know that lvmh disappointing earnings report, product had a disappointing earnings report. The luxury system in europe looks bad so it is not just oil. We are looking at telecommunications, aluminum and everywhere you look, earnings are contracting. European, japanese and u. S. Earnings are off. Jonathan it is not looking good. We are looking at low returns and a market that is incredibly correlated. Where do i go for a noncorrelated return . In a world of nonmonetary abundance, you are exactly right. The return looks disappointing going forward. Ratios are high and margins are high. Andeturns with duration fixed income are challenging. So we believe that if it returns you havence reforming, to scope the portfolio from the bottom up. If the problem is monetary abundance, focus on the assets that are here. We try to find individual businesses that have the capacity to generate cash flow, whether it is Companies Like in japan that has a strong position in mobile and Broadband Networks or oracle in the United States with a 7 Free Cash Flow yield and a strong maintenance revenue or even heidelberg cement in germany. They have a high Free Cash Flow generation. It is finding those businesses rightakind with the Free Cash Flow yields that make sense in this environment. If you want uncorrelated returns, you have to own funding that can be a head to your portfolio. For us, we find a potential hedge in the old. The cousin of its lack of utility as a commodity, it is scarce and resilient. David give us a sense of proportionality. 75 hew we are about investors and businesses. If we can own businesses as good prices, that make sense to us. With equity, we have 12 involved with the latest mining shares and we have the rest in cash and shortterm sovereign bonds. David that is Matt Mclennan and he will be staying with us, im happy to say. Up next, talking about inc. Earnings. Jonathan good day to the city of london. Tom keene, i miss you. You heard tom keene, he is on Bloomberg Radio and joining us here on bloomberg. Matt mclennan is with us as well. Futures are positive throughout the session. A 15 month high, a big surprise for the pound, we broke through 1. 43 on sterling. East of this year and march of last year, we are not comparing apples to apples. That is why we have the upside surprise we have this morning. Secretary isavy facing off against marine corps leaders who resist hiring women for all combat jobs. He will discuss his intent for gender education. Now to the race for the white house. Hillary clinton is criticizing Bernie Sanders record on guns and immigration. Bernie sanders is keeping up an aggressive criticism of Hillary Clintons ties to wall street. The next debate is on thursday night in brooklyn. And ted cruz is the and that quick Hillary Clinton in a matchup among married women who are likely election voters. Against donald trump, Hillary Clinton beats her rival. Global news, 24 hours a day and powered by our 2400 journalists. Vonnie thank you. Today, our morning mustread is a morning must watch from an interview tom keene did earlier this morning. No, it wasnt posed red sox opening day. It was a wonderful opening day. Jonathan what are you doing . Tom it was wonderful. I dont think Jonathan Ferro even knows who lobby your is. David did you want to talk about oil . Vonnie im sorry. To jeff curryten on an inflection point. The inflection phase. We are seeing be supplied be curtailed but we are not there yet. That is why we argue for a trend this market until we see those deficits. Tom to review, he was really good. Is 55 is theere terminal value, that is a low number. David what is the ideal price for oil . Tom just for the mathematics there, the differential equations going on, it is really interesting. There is a partial equilibrium and analysis where every production nation has a different equilibrium point, including the united kingdom. Jonathan i thought it was really interesting when he talked about how this is not going to be a market change. The output freeze is at an alltime high. What does he say about the rebalancing . How long will that take . Are cuts to u. S. Show production enough . Tom shale production is the key variable against saudi arabia. Fitche upset with the rating cut. Vonnie yes, will banks owned the Energy Companies . Tom that is too dramatic. But what is interesting is that in certain nations, that may be true where banks will own the companies or will the governments own it . Onis exceptionally cautious the size of the debt. It is the size of the debt to the company at the nation that we cant perceive in the United States. David how does that affect your portfolio . Matthew if you look at our portfolio, we are not huge investors in the energy market. We do worry about the fact that this is a market where we would acknowledge 70 to get oil out of the ground and with 80 of the reserves are state owned producers. They may not act rationally in an environment like this. Or they may perceive rationality be rationality to be going up to volume. We are extremely selective and recognize that low oil prices could be good for the rest of the economy. So we focus on this but we dont have a direction. Tom that goes to the idea of Interest Rates. What is the great distortion of Commodity Prices going down . Matthew ultimately, Commodity Prices going down is a good thing. In the short term there is a hit to fixed Capital Investment as you have the step down in Commodity Prices. But it helps expand disposable income in the world. And it can produce complexities. Think of the situation in saudi arabia. They have a pegge