Bloombergs European Headquarters in london. Im francine lacqua. But that is back in focus after janet yellen said she is ready to raise Interest Rates this year. The Federal Reserve chair said she intends to let the labor market run hot for a while to heal the lingering scars of the Global Economic crash. Lets check in on how the markets have been responding. Mark, they seem to be pleased to have clarity. Mark clarity is the buzzword. After the muddled message last week, theres clarity. Janet yellen yesterday paving the way for a rate hike in 2015, giving a sense of certainty. Investors love that. Risk assets are rising. Have a look at the msci. Before today, it had fallen for five consecutive days, falling every day since the Federal Reserve kept Interest Rates unchanged last thursday. We got a bounce back today. European stocks are rising. The dollar is gaining. Gold is falling as well. Emerging markets, asian stocks swinging between gains and losses. The certainty has given investors a bit of a boost after this fiveday 4 drop in this gauge for global equities. Francine, emerging markets are going to the effected affected by an Interest Rate hike by the fed. One of the emerging markets thats been battered by the prospect of high Interest Rates is malaysia. The ringgit today falling to its lowest level against the dollar since 1998. Its on track for its biggest weekly slump against the dollar since the height of the Asian Financial crisis in 1998. What were seeing is, not only is the prospect of higher Interest Rates scaring oilstors, but this is an producing country. Oil has been coming down. This country relies on trade with china. We know about chinas financial woes. Theres also a political scandal in snaring the Prime Minister. This is the worstperforming asian currency against the dollar in the last 12 months. In that period, the dollar has risen by 35 . Thats quite an astonishing move. I want to get back into equity markets. Theres a big election taking place in spain this weekend, in catalonia. What this election is doing, its casting a cloud over the spanish stock market. The spanish stock market, the ibex, this benchmark right here has fallen by 8. 5 over the last month. Alongts rebounding today with other european markets, but its falling over the last month. The concern is that this election could lead to a separatist victory which could lead to the region being separated from spain. This matters because the region accounts for 1 5 of spains economic activity. Spain has been the breakaway economic success this year. Spain doesnt need catalonia breaking away. Other concerns are Companies Like santander, companies deriving a lot of their profits from emerging markets like latin america. Thats been dragging on the ibex as well. Worstperforming european benchmark over the last month. Watch out for those elections on sunday. Francine thank you. Mark barton with your asset check. Lets introduce our guest host, patrick armstrong. Hes going to be with us for much of todays show. He helps manage around 1. 2 billion pounds in assets. Welcome. Lets look at what janet yellen had to say. Yellen most of my colleagues and i anticipate that it will likely be appropriate to raise the target range of the federal funds rate sometime later this year and to continue boosting shortterm rates at a gradual pace thereafter. If the fomc were to delay the start of the policy normalization process for too long, we would likely end of having to tighten policy relatively abruptly to keep the economy from significantly overshooting both of our goals. The United States has experienced very low inflation on average since the financial crisis. In part reflecting persistent economic weakness that has proven difficult to fully counter with Monetary Policy. Francine we should of course mention that fed chair janet yellen has resumed her planned schedule after feeling unwell towards the end of that speech. She felt dehydrated and was seen by medical staff. Lets introduce patrick youre sticking around for half an hour. Thank you so much for joining us. Janet yellen yesterday seemed to be pretty certain that shell be able to raise Interest Rates this year. Last thursday, she didnt. Nothings changed in the last seven days. Patrick nothings changed. She was talking about Deflationary Forces, bringing current inflation into the picture as a decisionmaking metric. If you would have listened to her in august or july, she would have said we expect to raise rates in september. It is status quo. Every decision we go into, we dont know what the outcome will be. Francine clear guidance is clearly not working, right . What do you make of last week . She was spooked by market turmoil and now shes brave enough . Patrick maybe its just where the vics was. By the time we get to october, maybe markets have settled. She didnt want to set off maybe a bear market. Francine our twitter question of the day is, do you believe janet yellen will raise rates in 2015 . Patrick putting me on the spot on that one. I would have said no yesterday. Today, im thinking she will. They are all consistent with that they want to do it. Even though nothing will change by the time they get to october and nothing much will change by december. The economy is running not full steam, but doing pretty well. Unemployment may fall below 5 . Francine we are so obsessed with the timing. The important bit is that they raise a little bit, then stay on hold for a while. Patrick they need very loose conditions. With other Central Banks already cutting Interest Rates, taiwan,nd they see the and the ecb a small tightening from the fed relative to Everything Else may be a little bit more impactful than just the 25 basis points in isolation. Francine do you think the market made a mistake not to raise last week . Thats the only thing thats changed. I wouldnt call it a mistake. Given the anxiety and where everything was last week, theres very clear Deflationary Forces that china can export to the United States. If they hike early, that is a potentially bigger mistake. Francine last time we were here, you talked about china. You had numbers from alibaba. Are you more at ease with whats going on in china . Patrick chinas slowing. Its not going to achieve 7 growth. The official number will be slightly made up anyway. Nike had very good numbers. China isnt going into a hard landing. Theyve got 3. 5 trillion to put into fiscal stimulus. They will start to ease that. Theyve been very proactive on the monetary side of things. Fiscal stimulus is the next thing they are going to engage in. That will drive chinese consumption if they do that effectively. That will be great news for equities as a whole. Francine great news for equities. Whats your favorite play . Equities are probably due a correction . Patrick theyve had that correction, havent they . s a correction. We were short u. S. Equities. Weve closed that now. I was buying the euro stoxx 50 yesterday. I think that is very cheap. U. S. Has Deflationary Forces, but europe even greater with the euro where it is. Francine patrick, thank you so much for joining us. Stays with usong and we will be talking about europe next. Heres a look at what else is on our radar. Volkswagens board is expected to name the successor to former Ceo Martin Winterkorn. 27 u. S. States have begun a joint investigation after the worlds biggest carmaker admitted cheating over emissions tests. Japans rate of inflation has fallen below zero. The bank of japans main leisure fell 0. 1 from a year earlier. Haruhiko kuroda is expected to discuss the economy with Prime Minister shinzo they. But to our meeting today according to nikkei newspapers. We will also hear from an Ecb Governing Council member. Jens weidmann is speaking later today. ,ming up on the pulse driving vw. Fed its not just the looking to raise rates. What about bank of england . We will be talking to former member kate barker. Loss, how many iphones can apple sell . We will look at demand for the new models as they arrive in stores today. Francine volkswagens supervisor board is expected to appoint Monteith Mueller later today. The carmaker attempts to repair its tattered reputation. We are joined by International Correspondent hans nichols at volkswagen headquarters. Ryan chilcote is outside a dealership in london. Hans, is Matthias Mueller clear of the scandal . Hans in some ways, porsche doesnt have a diesel problem. If you think the problem is focused on diesel, mueller isnt necessarily tainted by it. They have one diesel offering. In some ways, he has a bigger challenge. The entire european Auto Industry has a bigger challenge. Behind me, you can see greenpeace. They have pinocchio. They are protesting. They are saying, no more lies. What they are saying is that the Diesel Scandal in the United States is just the tip of the iceberg. In some ways, you look at the body language and the pronouncements from her again laters and they are on the same page with greenpeace. The eu want to test everything. They are urging all countries to test. Theres a report out in a spanish newspaper that 720,000 the a kohls will be tested there. When i spoke with Matthias Mueller i asked him, is there a danger if regulators went too far . What would they do to the industry . Challenge to. Educe the co2 giveshould be careful to new orders. Its a huge challenge for the car industry to fulfill the targets. Hans so theres a danger that regulators go too far . Yesterday, we were talking about how a single report by this group, the International Council for clean transportation, had moved the share price of bmw by x3 thatse they had an didnt meet standards. It was polluting 11 times more than the european allotment. I expect the conversation is going to shift from vw and turn into a broader story of, is diesel a Safe Technology . Is it a Clean Technology . Greenpeace is going to try to keep that on the forefront. Francine emissions probes piling up. The scandal has increasingly Global Implications for vw. There are probes around the world. Hans i think the most Interesting Development is that 27 u. S. States are starting their own investigations. Not only do they have to deal with potentially the department of justice, there are 60 classaction lawsuits that have been filed, and youre going to have a potential fine from the Environmental Protection agency, then you have these 27 states, maybe more. It gives you a sense of how many jurisdictions they are going to have to deal with. Thats why Matthias Mueller needs to find a solution. I dont know if they just remove the software. That is what dr. Winter corn was implicating. Then theres a pr solution. Thats going to be more difficult. Then theres a potential criminal liability aspect and civil liability. Matthias mueller is an engineer. He started as a toolmakers apprentice. Hes a pretty sharp guy. Hes turned porsche into a profit center. Iny had 3 billion in profit 2014 on 190,000 vehicles. Francine hans, thank you. Ryan, you are in the u. K. , outside a dealership. What do dealers think about the scandal . Ryan what the dealers want right now from volkswagen is more information. In the United States, the dealers at least know that some of volkswagens models will not be sold going forward. Some of the diesel models. Here in europe, they dont even they know even less than that. There is information about recalls or compensation. Interesting to hear the dealers stateside actually writing a letter on behalf of or in support of the head of the w in north america. You would think they would want him out. Actually, they say the new boss in north america that came to office in january of last year has helped turn vw around in the u. S. Market and it could be very catastrophic for the u. S. Market if vw was to get rid of him. After they wrote that letter last night, we learned that vw intends to get rid of their north american too. Hes one of the three top executives we expect to go. The relationship is critical. In many countries, dealers are the only way that a manufacturer can sell its cars. They have to sell their cars through the dealer. In europe, they can sell in some cases directly. All the same, dealerships are enormously important. They need the dealerships to be happy. They also need them to be profitable. Otherwise, theyre going to turn their backs on volkswagen. Francine this will have global impact. What do we know about vw sales overall . Question. s the big so far this year, looks like and has sold just over 5 million cars. Thats giving vw the upper hand in its battle for supremacy in the car market in terms of global total sales over toyota by a very thin 20,000 margin. Vw was facing declining demand in china. Now you have this problem in the United States. Morgan stanley saying this scandal could cost the w 4 of its global car sales. In other words, vw is looking pores poised to lose if supremacy. The u. S. Is going to hurt. Diesel engines were a huge part of their strategy in the United States, the worlds second are just car market. Francine thank you so much, Ryan Chilcote and hans nichols. We have a big wrapup because this has huge ramifications for carmakers. Lets widen this out to the macro picture in europe and bring you patrick armstrong. Patrick, thank you for sticking around. You own some bmw shares. They had, what, the stock price fell . Whats going on . Patrick all of germany, not even the carmakers, theres a potential contagion about made in germany things. I would be very hesitant about getting into the w right now. I think the issue surrounding germany as a whole will pass. It is a scandal with a particular company. Francine is this almost like the libor moment for carmakers or is it just a very unfortunate event . Patrick i hope not. You cant tell for sure, but this, what vw did wasnt a mistake. It was a clear deception. I would be surprised at this point if its affecting the whole industry, but its too early. Its justified that youve seen a discount across german automakers. I do think that will pass. Vw has years and years. They are trying to draw a line. They took ownership of it. They fired the ceo. The overhang in terms of lawsuits and how this is going to affect the brand, thats going to last for years. Francine some notes said this is a breaking of the trust of the u. S. Consumer, which is probably the most read up consumer in the world. Others saying this is such a disaster that it will impact like you were mentioning the made in germany and possibly euro. That seems a little farfetched. Patrick buy a month, that will be forgotten i think. People overreact in the shortterm that this impacts everything. In reality, its much more focused on vw. Maybe diesel as a whole. In the United States, diesel has a very small penetration base. This make a lot billion this may kill off diesel in the United States. Francine i was looking at some charts. For the first time in 11 years, the italian index is performing better than the dax. Is it the right time to get back into periphery . Patrick i think its the right time to on europe as a whole. I think the whole regions cheap. Germanys caught up the w and china. I think its a good time to be buying dax as well. Francine patrick, thanks so much for now. I want to turn now to japan where inflation has turned negative. It is the first decline since april 2013. Bloombergs james baker in tokyo. Can we expect a pickup in inflation anytime soon . Its hard to say if you believe what the bank of japan is saying. They say inflation is going to take up to 2 next year. If you speak to economists we speak to, they say thats not going to happen. It depends on what happens with oil prices. Once you strip oil prices out from the indicators, it rose between 0. 8 and 1 in august. As you said, cpi is negative. It partly depends on what happens with inflation. It partly depends on the overall economy. Youre definitely not going to see the speedy pickup in inflation that the bank of japan is predicting. We are currently at 0. 1 . To go from there to 2 in the next 12 months, 11 months actually, is going to be a very tall order for japans economy. Francine are we actually going to get more from the bank of japan . It seems inevitable that we get something in october. Thats what ive asked economists. Governor kuroda has said earlier that he thought that inflation might go negative, and thats not necessarily going to force them to act. One indicator theyre looking out more now, energy. If you take him at his word and look at the inflation indicators theyve said they are looking at more and more, that means they may not have to ease more. They may say, if you ignore oil, theres no reason we should have to ease. Theres also the expectation that it is going to happen on the last day of october. Francine james, thank you so much. Yellen reaffirms her belief that the fed will hike this year. Could the bank of england do the same . Patrick armstrong, final word . Next year . Patrick next year, i think things are shaping up. They will probably have an Unemployment Rate where any further job growth, you start to see inflationary forces. Francine patrick, thank you so much. We speak to kate barker next. Welcome back to the pulse. Im francine lacq