Street warnings. Citigroup joins jpmorgan in slacking a downturn as Global Sentiment takes a hit. Manus are we all on our way to 2 . Its a most like a shakespearean drama. We cant turn back. 2. 75 . Ld retrace the we have priced ourselves on most oblivion on the probability of a rate cut. The didnt show up last night for the sevenyear option which could be the bond market sending the signal back to the market. A lousy bond auction was almost a welcome reprieve. James gorman says he will meet hard data, hard facts for the fed to move. Lets have a look at some of the other at risk markets. , 25 basis point cut on that market next week. The dollar is slipping this morning. They cut their target on the aussie to 65 from 70. You will see 1 by the end of the year. The dollar index, we are off of a fivemonth high. The risk is a major escalation. We could trip over ourselves between china and the u. S. Into a real escalation. That is the risk we must fend off. Nejra theres a fair amount of gloom out there. The s p 500 headed towards a 200 day moving average. Futures ever so slightly on the front foot. How much of this could be to do with month and four folio rebalancing . And portfolio rebalancing . Lets check in on the markets in asia with juliette saly. When you looking at what are you looking at . Risk off. Asian stocks are holding up their lowest level since the middle of january. You are not seeing what we saw yesterday. It is interesting to watch the cosby. One of the markets in the crossfire of the u. S. China trade war. You have the nick a along with chinese and hong kong markets. Worth watching in the bond market, yields have tick up in new zealand and australia after falling yesterday. Yields on the australia 10year gilts note up. We have been focusing very much on rare earth players. You can see it is paired some of those gains after hitting a fiveyear high. Softbank and focus. A 4 billionor loan against its equity stakes in uber and other startups. It is the biggest funder of that uber ipo. Malaysia, it has risen the most in a year after announcing a special dividend. A little bit of movement coming through on the malaysian index. Manus thank you very much. Global markets continue to react tightened trade tensions. Says theer associates conflict is more than a trade war. He calls it an ideological conflict. He adds that the u. S. Blocking supplies is a step towards weaponizing export controls. You have Morgan Stanleys ceo who doesnt expect a fullblown trade war between the u. S. And china despite the anxiety it is causing and markets. He spoke to bloomberg in an exclusive interview in beijing. Gdp isof the worlds tied up in these two countries. Woulde a major trade war be very bad for both countries. Everybody understands that, i think. I hope that they do. Certainly u. S. Ceos that i spoke to understand that. What we have got is a resetting of this relationship. That makes sense after 30 years of incredible Economic Growth in china. There are certain things on the trade side that need to be addressed. Do i think that this is going to devolve into a full trade war . I dont. Theres too much selfinterest in keeping this thing on the rails. Some people have said to me, if it doesnt happen by the g20, im not sure about the exact timing of when we need some sign of resolution. The negotiators need to come to the table and figure this out. Not everything, that would take decades to get done. We need to get the train back on the tracks. What are the Global Economic implications if we get a fullblown trade war . I think a lot of that is priced in. What you said about where the 10year is right now, where the s p has been moving, unfortunately it is not in isolation. We have brexit going on in the background. There are other things in the u. S. Political environment. The elections are coming up. Theres a lot of macro noise right now. I cant predict exactly what will happen if that 250 billion tariff number kicks in. The bottom line is, the two largest economies in the world did not serve thems some do not serve themselves well i engaging in a trade war. Needs to be more adjustment, more transparency about technology transfer. We need to get this thing back on the tracks. Does it start to impact Consumer Sentiment in the u. S. . Corporate earnings and profits, of course. It interesting. The market psyche is fragile. The market itself on core fundamentals is fine. Eurozone employment is 3. 5 . Who thought this was possible a decade ago . Very muted inflation. Plenty of liquidity in the market. The issue is the market psyche. There is more Downside Risk of an upside risk. More people think the market is headed down into a recession. The inverted yield curve would suggest that. Thats not a good thing. At any point of time when these macro stories hit the news, whether it is premised may announcing her resignation, shock Election Results in australia, around the world you are seeing things that are triggering market reactions. It is more negative news than positive news. That yield inversion in focus for many investors. How concerned are you when you look at that . Its concerning. Its the leading indicator of a recession for the past 50 years. A formerher hand, chair said, it could mean that or it could mean that its time for the fed to cut rates. That surprised me. I think the fed is being decidedly neutral at the moment. I personally feel that is the prudent thing to do. The cut rates ahead of hard evidence of the recession coming is using some of your firepower. They dont have a lot of firepower. Manus that was the Morgan Stanley chairman and ceo speaking to bloomberg. Joining us now is the cio at ccla. Great to have you with us. Lots to talk about. What caught my attention this morning was the state Street Investors index. It has risen the most since january 2018. It shows that investors are decreasing risk even in equities on the chart. What needs to correct here . Investors second it sentiment of the market . Its a good contrarian indicator. Aboutould be most nervous a possible correction. Depressed,ent is that turns out to be a great opportunity for longterm projects. I like that we are climbing a wall of worry. Im concerned if we get a downturn in corporate earnings numbers. Manus good morning to you. Im on the wall of worry with u. S. Ever. Good to see you. James gorman says we are priced for full escalation. This is bond yields and Global Equity markets. For allout priced trade wars or is there more to go . I think he is quite wrong. I think we have 10 Downside Risk. Assuming that would take half a percent off of u. S. Gdp. Ust downturn would leave your on your with a down move in corporate earnings growth. The markets are not price for that. Markets still anticipating for this to be in up your for corporate earnings numbers. 3 i love that you nejra i love that you are taking on james gorman. James versus james. Goldman has done quite a bit of work laying up the most exposed stocks to a trade war, looking at individual stocks and sectors. Is this a useful exercise to do as a stock picker . Only 1 of s p 500 sales come from china. It is an important feature. You want things to be able to appreciate. How long it takes three organize supply lines. If you were to say, its not great for us and china, lets go elsewhere. That process takes an extended time. Train will be relatively glacial. Stock Market Impact will be immediate. Said bad timeso just around the corner. Say, the shutting of while way out of the technology piece is like weaponizing export controls. That the risk is that we slip, we have an exit until slip into a bigger conflict. I think thats a very reasonable assessment of our risk for the back half of the year. What you make of it . I think it is correct to say the technology is one of the big challenges at the heart of this trade spat. I think it is incorrect to say it represents an escalation. I would say that the challenge is to find the top dog in the global place. Standoff which might be described as north asian economic models with japan and korea. In both cases, its more important than worrying about fair trade. Mr. Trump is saying, fair trade is where its at. We want to remain the leading nation. We are not happy that china is and leading use in a number of key fields including technology. How do youejra express that in a portfolio . Do you load up more on bonds or get more defensive in your equity exposure . If we unpack why the bond market is where it is, is because inflation is very layered. We still have a longterm disinflationary forces at work. Aging populations, new technology. We have access production. I think bond yields are where they should be. , youke stronger returns have to look at the quality and growth. You want to see sustained margins and secular growth. Manus hold those thoughts. We will dig deeper into some of those. James bevan taking on mr. Gorman. Lets get into your first word news. Special Counsel Robert Mueller says he couldnt reach a conclusion on whether President Trump obstructed justice. These remarks mostly echoed his report. He made it clear hes not willing to testify about any details of the rush investigation that are germany published. He says that his investigation didnt clear trump of wrongdoing. More volatility and lower returns from Corporate Credit markets. Top executives presented their outlook and urged investors to be on the defensive by favoring treasuries while being selective when it comes to regions and sectors. By far the area of most concern for us is the credit markets. Specifically relating to Corporate Credit risk. Making sure we have a game plan. The Federal Reserve restraining growth while the u. S. Engaged in a trade war with china. Hats according to the she says china is able to bring all the state controlled apparatus to bear on the conflict. She doesnt want the fed to be a burden to the u. S. I think the fed is too interventionist. It is the distortions that occur as a result of trying to artificially move the Interest Rate that can end up being more problematic. Global news 24 hours a day on air and at tictoc on twitter, powered by more than 2700 journalists and analysts in more than 120 countries. This is bloomberg. 3 nejra coming up, wall street warning. Jp diamond and highlighting a shaky trading performance as the global risk piles up. How much longer are the wallets down . We will get into the conversation. Nejra we will manus we will. Bloomberg radio, turn in. This is bloomberg. Nejra this is bloomberg daybreak europe. Lets check in on your markets now. We have a dip on the asian markets. The question is, are we going to a full out trade war . 10 year yields same day. 2. 75 . S p futures managed to frisk out five pips. Valuations, you are looking at valuations that may be are attractive at this level. Nejra possibly. Bytainly a lot of work done rbc and goldman is well on specific stocks and sectors that could be vulnerable to trade war. More than 1 ine of in european equities yesterday. The dollar, near a fivemonth high. Oil about to be supported by this api number. The stockpiles are in focus today. We are also asking the question on mliv, you show the 10 year yield. You can join the debate, reach out to us and the mliv team on your bloomberg. Whats the roadmap to 2 on the tenyear treasury yield . Lets get the Bloomberg Business flash. Bloomberg exclusive. The u. S. Justice department wants tmobile and sprint to lake the groundwork for a new wireless carrier with a run network. Thats a condition for clearing the 25 billion merger. The companies have been pondering additional concessions. The idea of spinning off a National Competitor would be a high bar. Softbanks vision fund plans to borrow about 4 billion against equity stakes in uber and other tech startups. Thats according to the financial times. The funders were discussing loans with banks including goldman sachs. They have been on the hunt for capital to seek new opportunities to invest in tech companies. Ferrari has unveiled its first Production Volume hybrid. The supercar maker is aiming to keep pace with tightening Emissions Regulations but also satisfy car hungry customers. The model will begin shipping in the first half of next year. Ferrari didnt disclose the exact price. That is your Bloomberg Business flash. Manus thank you very much. Back to market sentiment. Of a slump, citigroup says trading revenue has declined so far this quarter. Riskso finding various from the trade war, to brexit. , henew york conference said, clearly trading revenue is down. Adding, things tend to become pretty muted. It was a similar message from bank of america ceo speaking yesterday. He said the bank expects trading revenue to fall by 8 . Saying, its a little better than normal but dont think thats because the Second Quarter was strong. Its because the First Quarter was weaker. James bevan is a manual has been digging into these banks for many years. That theyrned by ubs had a torturous First Quarter. Here we are, the americans are raising the white flag, get ready for another tough quarter. Participatel do you in american or european banks . Jpmorgan still stands out as a core position. That said, if you were to look at the performance of the systemically important Financial Institutions last year, the bulk of them had a bear market. Share prices climbed more than 20 . That says a lot about how difficult banks find this climate of very low Interest Rates. When one thinks about the challenges for the german banks, its a most extraordinary. The balloons Bank Provides money to the eurozone weaklings through the target system. Penalizes the negative Interest Rates. No wonder they have such difficulty in mending their problems. Nejra how much could we see actually modeled . Thee was a great column on bloomberg recently talking about how it might be getting difficult in some parts of Investment Banking but corporate and Treasury Services in u. S. Banks is where the action is at. Absolutely. There is a significant challenge in terms of how much regulation you can commit banks to make. If you go back to the future banking review, in terms of what constituted a lowrisk bank, it suggested that banks should have 30 reserved rather than the 10 that is the global norm. That implies much lower than what we have been used to. Manus theres a number of themes that you make often when you come into the house. I want to touch on one of them. Value versus growth. Whether value is cheap enough. Point, battered and bruised, value stocks offer an opportunity. This is value versus growth. Where do you want to be in the spectrum . Where is the best opportunity for growth . You go for growth . I am still in favor of growth. I believe that the macro market condition that leads to the outperformance of growth are still in place. Some of the signals that encourage us to believe that a stock is growth or value are at the moment misreading. When people look at price ignore multiples, they the fact that actually earnings used to be required. To fund companies. Companies now are much more capital light. I think people should be looking at fully cash flow sales and return of capital. Meaning, how much the Companies Pay in the form of dividends and buybacks. Equitiesay that overall are cheap and Growth Companies are still very cheap. Nejra thats interesting. We had a guest was saying that if you want to really get the returns at the moment, look at those good dividend payers. Where are you finding those at the moment . You need to find not just dividend but dividend growth. I would assume the opportunity to focus on companies is highyield. There are accidents waiting to happen. What i want is a focus on a Free Cash Flow yield. Continue to believe that amazon has a future despite the fact that the company pays no dividends. I want to see the Free Cash Flow. Manus you mentioned a couple of names. Namesy you still like big. They are going through the reinvention stage of gutting and clearing house. Say is about producing Free Cash Flow. Would you prefer you can european names over u. S. Names . I favor the global players. In the states, i have no shortage of names and technology. Im a keen fan of amazon. Over in europe, i see more opportunities. I worry about politics in the eurozone. Although i dont anticipate that there is an existential crisis euro around the corner, i think that rising Political Risk has the capacity to pull the rug from underneath equity Market Performance over the summer. Nejra ubs would agree with you. Thanks so much. Our guest is staying with us for the hour. Coming up, the credit bears have arrived. Top executives at pimco sound the alarm on the corporate debt market. Lots more to discuss next. This is bloomberg. The latest innovation from xfinity isnt just a store. Its a save more with a new kind of Wireless Network store. Its a look what your wifi can do now store. A get your questions answered by awesome experts store. Its a now theres one store that connects your life like never before store. The xfinity store is here. And its simple, easy, awesome. Nejra this is bloomberg daybreak europe. Manus lets get our viewers set up for the day ahead. Data out of spain. We will get the Inflation Numbers for may, which are expected to come in on the soft side. Retail sales for april. It is a day after the ecb side forcest dime remain prominent. And more data, at 1 30 pm, gdp from the u. S. And the fed. That is expected to come in. Growth is expected to be slightly slower than the last quarter. Key data as we keep an eye on bond yields. Eagleok faces a slate of of legal challenges. The fcc could slap it with a fine over data and privacy violations. At 7 00 p. M. , the Federal Reserve vice chair speaks at the Economic Club of new york. Watch for dovish signs from the central bank. We are back to what could drive the bond markets this week, as we are discussing what the roadmap could be to 2 on the treasury yield. Rob burgess drew our attention to the seven year option. It was one of the worst bid to cover ratios since 2016. Maybe we have gone too far, too fast. Also, the other thing to bear in mind is it is sort of a monthend portfolio rebalancing, even if we get a move up in yields and bonds. That is something we are looking at in terms of rubber burgess. Also, the feature for the equity markets. Pimco yes, we sat with yesterday, and the warnings came through fast and furious. The ceo talked about it being like a boxing match you have to punch where you can and take your wins early. It is said to. 5 is attainable because we have gone too far in 2. 5 is attainable because we have too far in rate cuts. Ros is standing by in hong kong. There are plenty of reasons for investors to file just at the moment, according to the moment salie according to the Morgan Stanley ceo. He says the emergent part of the u. S. Treasury yield curve is worrying. It is concerning. Germany did. It shows how anxious the markets are, and there is more news to be anxious about than positive about. Rosalind Benjamin Netanyahu has failed to form a government. Instead he calls it new elections. It throws the trump administrations peace plan into question. The leader could not put together a Coalition Government in the allotted six weeks, the first time in israeli history that this has happened. Special Counsel Robert Mueller says he could not reach a conclusion as to whether President Trump obstructed justice, but these remarks mostly echo his report. He has made it clear that he will not testify about anything not already published, but he says his investigation did not clear trump of wrongdoing. Disney has unveiled star wars galaxies edge. The project is the largest ever addition to disneyland, which opened in 1955. The Company Expects record crowds and caps the time visitors can stay at four hours. It opens to the public on friday. This is bloomberg. You. Rosalind Chin, thank lets get a check on the markets in india. Joining us is neeraj shaw. How much optimism is there that modi will adopt policies to support Economic Growth . Right . You of it, guys are talking about rates going off considered to be a good thing, but the gdp numbers coming out tomorrow, the policy next week, all of it is one thing. The other big thing is what has happened to the markets in the last few days. They are going up. Indian markets are doing well. Part of it you were asking this question about what it was due to. There is a wonderful charge on bloombergquint speech about how on bloomberg which speaks about the flow within the month of may. It speaks about the confidence that Foreign Investors are showing not in the rate trajectory, anything else, but the politics in india. That answers the question that most people have. Its all about what has been exhibited in the Election Results that came out last thursday. Manus they are loading up on those indian stocks. Anybody . Expect a little more, and lower returns from frothy Corporate Credit markets. That is the latest longterm view, courtesy of pimco. Ceo spoke cio and exclusively to bloombergs Jonathan Ferro. Corporate credit on the public side, thats where we should cross, in terms of direct Corporate Credit issuance outside the public space. We look at areas like commercial real estate, residential real estate, we continue to see considerable opportunity. Thats a sector that, despite the Global Financial crisis being 11 years past, we still see frictions in markets, opportunities for investors on the private side as well as the public side. That has been our focus for now. How important is the illiquidity premium that you can get out of private credit markets yet it is twofold. It is probably a couple percent. People get compensated for holding illiquid securities. They are people who could easily hold this kind of paper. Like a pension plan, for example. Of the mosts one interesting risk premiums, but more importantly it is a way to structure transaction where you think you have an edge, and where you understand the industry better than most. You will find what we are doing very attractive, some other things not so attractive, and we are cognizant of that. The liquidity illusion Public Markets is something you talked about in the past, and i would like to talk to you about it now. Do you think enough people are focused on that . You talked about financial ball mark ability about financial vulnerability. Fundamentally, in terms of the structure, the market has gotten weaker. Just make sense of that for people. People are aware of the risks , then you will have a volatility event like in the Fourth Quarter last year, where when you look at returns, it appears people are more exposed to this, these less liquid areas than wouldthan be suggested from the rhetoric. Volatility rates have been relatively low the last several years. You have to look at the markets from a daytoday trading perspective to know that when views shift, there is going to be overshooting. We dont necessarily mean this will lead to another crisis. We do think it will lead to disappointment. Nejra that was Jonathan Ferro speaking exclusively to pimcos ceo and cio. James is still with us. When we look at the credit markets, there has been a boom in bbbs. Be why are we not seeing the same concern reflected in credit markets that we are in sovereign bond markets at the moment . I think people misread some of the data. They look at the average and aggregate markets. One sees a bifurcation between companies, particularly Largecap Companies with significant net cash balances, and at the small end of the market, companies with large amounts of indebtedness that only get by because yields are very low. That is where investors are particularly exposed, to the premise that there may be a rate hike in due cause. However, because inflation pressures remain low, i showed the market expectation that the fed moves down, not up, at the next policy juncture. It was said you need hard evidence, dont shoot your gun off too early. Our days like today, when you , is thisce and gdp it . Thembolden market envisions three rate cuts by 2020. Is that the key . There were two parts to mr. Comments. The second part related to the concerns we might have about cyclical inversion of the yield curve, we are short rates are not being higher than long rates, depending on where you look on the curve. I think those comments are incorrect. In the past, this was a good signal for recession on the way. I would say this time it is not, inflation pressures remain very muted. Foreign demand for u. S. Paper, because if you are sitting in japan or in the euro zone, you salivate at the level of yield available in the u. S. Markets. A lot of that global money has been driving into the states in pursuit of that. Nejra have the markets gone too far, though, james, and predicting a rate cutting cycle, three rate cuts by the end of 2020 . Gets aheadet always of itself in terms of connecting the dots. Last year, there was talk about it getting past rate yield, and that was an extrapolation of what happened when you have normalization of economies. Peoples focus is on, what is the outlook for inflation . If inflation remains low, the bond markets remain calm. I am not protecting a stall in the bond markets. Manus tie that to this, james, a collapsing the term premium. Is that inflation remains low to stable, and yet we see this collapse in term premium. It looks like it is at quite an extreme positioning. It is entirely correct to say we are at an extreme level. The question is, how do you read that extreme position, and what signal do you think it gives . The bears argue this is indicative of imminent recession. I would argue it is indicative of a very wrong global yield where we have japan and germany essentially at zero or minus yields for large chunks of their yield curves, driving money into the global arena in pursuit of excess returns, and equally the premise, that because of significant structural demographic changes and the advent of new technologies through the post industrial revolution, i do think inflation pressures remain very low for very long. Manus james, stay with us. We have more to go. You really are a contrarian. Lets talk about the president of the united states. Mr. Trump is moving to put aawei on export blacklist, at crucial moment for the global ofecom industry at the cusp a global rollout of 5g. The cost is already significant, but the abandoning of huawei will cost Telecom Companies billions more and lead to lengthy delays for the service. The u. K. Begins deploying the new technology nationwide today. What is 5g . How does it work . Who better to tell us this than Annmarie Hordern . 5g could be five times faster than the current standard, with speeds that can reach 10 gigabits per second. The 4300lking in gigahertz range, the socalled super data layer. But you need more coverage, and for that you need more antennas. More data faster and more devices means a big step up for the socalled internet of things, from powering smart factories to downloading your favorite fulllength highdefinition film in just seconds. More antennas, though, means more money. Vodafone won the largest chunk of the uks 5g spectrum, but has slashed dividends for the first time ever. And president froms crackdown could lead to European Telecom moving the groups equipment altogether. Ee and vodafone have already dropped huawei phones from their 5g lunches. Nejra and that presents an opportunity from the likes of ericsson and nokia. Coming up, it is a busy day for the world of emerging markets. Data out of brazil could show the economy contracting in the First Quarter, and there is a slew of data out of south africa as a new cabinet is unveiled. Looking forward to that conversation. Manus absolutely. Bloomberg radio. We are live on your mobile device. This is bloomberg. Manus this is bloomberg daybreak europe. Nejra lets get the Bloomberg Business flash. Heres Rosalind Chin in hong kong. Making benefit in the headway of selling the fiat deal to nissan. It would have control indirectly over nissan. That was the key concern the Japanese Companies had for years. They had an open and transparent discussion about a merger, in a statement. The u. S. Department of justice wants tmobile and sprint to lay the groundwork for a new wireless carrier with their own network. Those are the conditions for clearing the over 25 billion merger. The companies have been pondering additional concessions, but the idea of selling off a fully fledged and National Competitor would be a high bar for them to meet. Ferrari has unveiled the first Production Volume hybrid. The carmaker is aiming to keep pace with tightening Emissions Regulations, but also satisfy its power hungry customers. It will be in shipping in the first half of next year, but ferrari did not close the exact did not disclose the exact price. Manus rosalind, thank you. Andi arabias first day as officially recognized emergingmarket was not great. Arabia todded saudi its main em index, but the bonanza died down after the markets hit a fresh wave of risk aversion. Meanwhile, South African stocks have also suffered a record series of outflows after the international investors. Joining us is jaap meijer. Welcome to the show. We have seen this splendid moment in terms of volume. This is the moment of inclusion. This is passive money, absolutely personified. What happens next . Back atts take a step what happened over the last few days. We saw the 7 billion inflows. There were a lot of guys who were active ahead of the index flows to the tune of about 3 billion. About half was observed by florin outflows foreign outflows, and the other half was supplied by High Net Worth individuals. What we saw yesterday was a correction of the increase. Think going forward, we are not positive. We are becoming more negative, and we cant close our eyes to what is happening in the u. S. Half of the index in ms cir banks. Are banks. The chance of a rate cut is probably around 90 by january of next year, and this has material impacts on target 14 . S at about 9 to we will probably see 10 downside for those bank shares. Nejra great to have you on the show. That explains why you are reducing your saudi bank exposure. Where are you actually adding exposure in saudi at the moment . Lots of interesting stories, but we like the health care space, so we have added health insurance. We have increased our position. We also have the recovery play. Also are playing the social transformation changes in saudi specialist gym player. We also added logistics as well as education players outside saudi. Manus in terms of the momentum and flow of money, they have said to me the next and most important thing is the active money coming in, and maybe this sets the stage for an aramco ipo, or sets the table more robustly in saudi for that story. Would you agree . Jaap i think we will see active inflows, probably. Will take investors an underlying position, clearly. With the way that 1. 4 , they are probably keeping a slightly underway position, but when we move in august when it hits almost 3 , definitely expect emergingmarket guys to be heavily underweight in the market. Phase two for the market to drastically underperform other markets. Nejra let me ask for your thoughts on qatar. What is your view on valuations there . Done a massive update on the market a couple of weeks back. The upside of the equation is the 10 for one stock split that is helping the retail segment. But we have seen no inflows whatsoever in the last two days from our institutional investors, and i agree with that. I think the market will start to underperform. We have seen the latest inflows because of two stocks being included in the index. We have started to see already a selloff. Particularly, qatar fuel probably wants to sell at these levels. We will see further outflows of the market because of saudi inclusion as well as china inclusion as well as potentially but it is still a 5050 chance the having of the weight of Qatar National bank. That will be a big one, and the markets will be drastically underperforming. The economy ist, very resilient. Very low breakevens in terms of a fiscal point of view. Also, because they stepped out of opec, increasing Oil Production and lng. The fiscal breakevens are being reduced, and there is enough capacity to stimulate the economy. Not negative on the economy, but we are still negative on the stock markets. Manus we will see what happens when the Prime Minister goes to the gathering. Spotlight shone on our saudi markets in a whole variety of levels. Do you think the world is looking more appropriately at our equity markets down here, and would you be a part of the active participation in round two . I am not at the moment. I worry with Global Economic momentum slowing, it is still too early to become bullish on emerging markets writ large. I look at the performance of the chilean peso, which hit a three year low against u. S. Dollars. I, for one, will stick with emerging Growth Companies rather than emerging economies. Nejra love the way you always draw the dots for us, james, and meyer jack meyer jabbed mayor coming up, shortterm funds. Can Morgan Stanley ceo said Financial Markets are fragile, but dont expect to collapse in stocks. Manus this is bloomberg daybreak europe. Saysewaters ray dalio increasing export controls would be a major escalation in the standoff. Morgan stanleys ceo tells bloomberg exclusively it is time for discussions to get back on track. Do i think this is going to devolve into a trade war . No, i dont, because there is too much selfinterest in keeping this thing on the rails. Manus asian equities slide as bond market recession signals intensify. This as pimco leadership warns of lower returns from credit. And wall street mornings. Citigroup joins jp morgan in flagging a downturn and trading revenue as Global Sentiment takes a hit. Nejra we have breaking news coming through from the middle east region. An Israeli Company agreeing to buy chevron for about 2 billion dollars, crossing the bloomberg at the moment. Manus, perhaps you will have something to add to that. First we will get to the futures, for the start of cash equity trading at 8 00 a. M. In london. Front for ftse 100. U. S. Futures also on the front, but we saw the s p 500 as today hit a march low. But we could bounce back from that. How much could that have to do with monthend portfolio bouncing . There is a lot of gloom in terms of interviews we have done. Have we gone too far in the bond yields yeah go the bond yields . Manus if you listen to buy dean, we have gone far too far. You needanley says hard facts before you see an aggressive rate cutting cycle from the u. S. Here is your bond markets. There is a moment of stability in the equity markets even though bond markets are flashing , a sign that premium is tanking. The 10 year threemonth curve is moving aggressively into negative territory. When it comes to italy, a lion a day keeps the doctor away. Italy to tell the eu budget tightening would be a mistake. That is not exactly an earth shattering headline, but that does set up the angst we are facing in our markets. Bond market prices are dropping, yields are stabilizing, so we keep an eye on those markets. Nobody showed up aggressively last night in the sevenyear option. What does that tell you . We have gone too far, too fast. Too high trade tensions. Thats what ray dalio says. He gave us his views on the u. S. China conflict, on the trade war. He calls it ideological conflict. He adds that the u. S. Blocking supplies to huawei is a step toward weaponizing export controls. Meanwhile, Morgan Stanleys chairman does not expect a fullblown trade war between the u. S. And china, despite the anxiety it is causing in the markets. James gorman spoke with bloomberg in an exclusive interview in beijing. 40 of the worlds gdp is tied up in these two countries. To have a major trade war would be very bad for both countries. Everyone understands that, i think. The u. S. Ceos i talked to understand it, the chinese ceos i talk to understand it. There is a resetting of this relationship, which makes sense. After 30 years of incredible Economic Growth in china, there needs to be a resetting. There are certain things on the trade side that need to be addressed. Do i think this will devolve into a full trade war . No, because there is too much selfinterest in keeping this thing on the rails. Some have said if it does not happen by late june im not sure about the exact timing of when we need some form of resolution, but clearly the negotiators need to come to the table and figure this out. Not everything that would take decades but we need to keep the train back on the tracks. What are the Global Economic applications if we do get a fullblown trade war . Frankly, a lot of that is priced in. What you said about where the 10year is right now, where the s p has been moving, unfortunately it is not in isolation. We have brexit in the background. There are other things in a political environment, the elections coming up. There is a lot of macro noise right now. I cant predict exactly what would happen if the 2 billion tariff number kicks in. But the bottom line is, the two largest economies in the world do not serve themselves well by engaging in a fullblown trade war. The u. S. Runs a surplus and services. China runs a surplus in goods. We need to get this thing back on the tracks. Does it start to impact Consumer Sentiment in the u. S. , which has held up until now, and corporate profits . The market psyche is fragile. The market itself on core fundamentals is fine. U. S. Unemployment is 3. 5 . Who would have thought this was possible a decade ago . There is plenty of liquidity in the market. The issue is market psyche. There is more downside than upside. More people think the market is heading down and we are potentially heading to a recession than we are the reverse. Thats not a good thing. Thats why you are seeing, when these macro stories hit the news, whether it is Prime Minister may in the u. K. Announcing her resignation, shocking Election Results in australia, around the world you are seeing things triggering microreactions, and it is more negative news than positive news driving it. The 10 year,month, how concerned are you when you look at that . It is the leading indicator of recessions over the last 15 years. The former fed chair janet yellen said it could mean that or it could just mean it is time for the fed to act to cut rates. That surprised me, frankly. I think the fed is being decidedly neutral at the moment, which i feel is the prudent thing to do, to cut rates ahead of hard evidence that the recession is coming is using some of your firepower, and they dont have a lot. Manus Morgan Stanley chairman and Ceo James Gorman speaking exclusively to bloomberg. Daly. G us now is Eimear Gorman says equity and bond markets are price for full exhalation. Specialist. X is the yuan going to bust seven on an escalation . Is the seventh safe for you and the yuan offshore . This is the big question for investors, if and when seven will break. For us, it is focused on the length of the tariffs. Tariffs are no further imposed, but no signs of progress, we think the yuan will. Luctuate around seven with further deterioration in u. S. China relations, we are looking at 7. 20. Nejra all that we have a pullback in equities, you are still seeing them elevated versus some of the investor sentiment, at least by one of state streets measures. That is something you have observed as well, have you as you have been talking to people. How does that impact what concert what currency you prefer . Eimear some perform and others are tied to risk and underperform. It is a nuanced picture. In the fx space, you have probably seen a lack of reaction. Investors are looking for a clearer dollar direction. Investors want to see if the fed is going to stand behind equities. It is like a self the filling proper see prophecy. If equities sell off, the fed will come in and ease policy. Equity performance is almost critical in the reaction function. Manus we debated this last week, that the feds reaction function is a 15 drop in equities, while Donald Trumps is a 5 drawdown in equities. Is the dollar getting too expensive and acting as a headwind . Do you agree with that . Is the dollar getting very pricey . Eimear we think the dollar will outperform if there is risk to global growth. The dollar is where investors will want to be. Global Central Banks will be easing a lot more. We kind of believing that a global safe haven status of the dollar. Nejra even above the yen . Is a moree yen nuanced picture. We think the yens performance has been dented because of outflows from japan. The dollar yen would be expected to move lower, but probably not to the extent we have seen. Manus the one debate we are having is about this roaring, cascading down yields. The nottion from the pboc, thats my freudian slip, im obsessed with china from the doj. Do you see a little bit of pushback . Eimear i guess, in terms of pboc stimulus. We dont think those do anything aggressive in the shortterm. Maybe from china we could get reserve ratio cuts. We think this will be very much to mitigate the downside of risk to growth. We do not think this will create upside risk to growth. It is just going to mitigate the ground side the downside. Nejra thank you. Lets get the bloomberg first word news with Rosalind Chin in hong kong. Rosalind special Counsel Robert Mueller says he could not reach a conclusion on whether President Trump obstructed justice, but his remarks mostly echo his report. He has made it clear he will not testify about any details of the russia investigation that have not already been published, but he says his investigation did not clear trump of wrongdoing. The fed reserve should avoid growth while the u. S. Is engaged in a trade war with china, according to a nominee for the Central Banks board. She says china is prepared to bring all of its apparatus to the conflict, and she does not want the fed to be a burden to the u. S. I think the fed is too interventionist. I thing it is a distortion that the curve as a result of trying to artificially move the Interest Rate that can end up being more problematic. Rosalind Benjamin Netanyahu has failed to form a government. Instead he opted to call new elections. This throws the trump administrations peace plan into question. The embattled leader could not gather a Coalition Government in the allotted six weeks, the first time in israels history that this has happened. Disneys highly anticipated new attraction, star wars galaxys edge. The project is the largest ever addition to the park that first opened in 1955. The company is expecting record crowds and has cap time guests can stay at four hours. Global news 24 hours a day, powered by more than 2700 journalists and analysts, this is bloomberg. Manus coming up, pimco fires a warning shot. The executives of the Money Managers say they expect more volatility and lower returns from Corporate Credit markets. Thats next. A. M. In london. This is bloomberg daybreak europe. Get a quick test of the markets. You have a small bounce in these equity markets. Has a big no doubt, 2. 75 is what you will test on the 10year notes. There is a herd mentality in the market at the moment. A little better off this morning , tracking that bounce in the s p. Nejra the euro is steady after two days of declines, a mere five month high. Support getting a big from entries. Angst is one area investors might be feeling some italy will tell the eu that budget tightening might be a mistake, as markets await an official response from rome over threats of sanctions to its budget. John, good to have you with us. We are waiting to see italys response. What can we expect . They have to reply by the 31st. We can expect italy to justify its position, to say that economic problems are partly due to the trade slowdown, and to emphasize the sluggish economy would be hit by any budget tightening imposed by brussels. He is verything emboldened. Do you think the french tried to deescalate yesterday, or do the italians want to take it to war . Thats what the markets are worried about. Basically the sunday european elections have changed the game. Lvini wants to sa get things done. He focused in the closing weeks of his campaign on bashing brussels and pledging he would try to change eu budget rules. Weaker in away because his ally, fivestar, is weaker. And then you have another front, who willlishment front press for negotiations and possibly a compromise with brussels as they did last year. Manus it is all about the deescalation. You are going to write about off ramps soon. Credit markets and concerns. Pimco says they are sounding the alarm bells on Corporate Credit, warning investors to expect more volatility ahead. Jonathan ferro spoke exclusively to the ceo and cio from their offices in Newport Beach on opportunities in the credit market. Credit on the public side, thats where we see the froth. When we look at areas like commercial real estate, residential real estate, private or public, we continue to see considerable opportunity. That is a sector that, despite the Global Financial crisis being 11 years past, where we still see friction and markets and opportunities for investors on the private and public side. That has been our focus for now, looking to harvest opportunities within that space. How important is the illiquidity premium that you can get from the private Credit Private echo credit markets . It is twofold. Get compensated for illiquid securities, and they are people who could easily hoard this kind of paper. Thisare people who can own , and clearly it is one of the most interesting risk premiums. More importantly, it is a way to structure transaction the way you think you have an edge and where you understand an industry better than most. We are going to find part of what we are currently doing very attractive and some things not so attractive. We are cognizant of that. The liquidity illusion and Public Markets is something you have talked about in the past. I would like to talk to you about it now. Do you think enough people are focused on that . It is a market that has gotten bigger. Of, fundamentally, in terms the structure, it is a market that has gotten weaker. Make sense of that. People are aware of the risks and talk about it, then you will have volatility like you had in the Fourth Quarter of last year. It appears people are more exposed to the less liquid areas of the market than would be suggested from the rhetoric. But volatility has been relatively low the last several years. We just have to take a look and feel the markets from a daytoday trading perspective to know that when views shift, there is going to be overshooting, and we dont necessarily mean this is going to lead to another financial crisis. Lead to it will disappointment in the form of overshooting fundamentals. Jonathan ferro speaking exclusively to pimcos ceo and cio. Interesting conversation there. We question whether the sovereign markets have gone too far or if we get to 2 on the 10 year yield. Meanwhile, the five year bond index is just short of alltime highs. Where are we in the cycle yet eimear you have to be concerned with highyield bond credit at these levels. We are looking for doubledip in china, for growth to slow as we go into the Second Quarter. Even if we look at the u. S. , the First Quarter, if you look and dig down into the detail, the underlying structure of the u. S. Economy is weakening. We saw fixed Asset Investment coming off. The quality of growth is not great. If we have a fullblown trade war, corporate profitability will be hit. That is one major global flareup. Can i ask you about the italianeuropean affair . We are back to square one. Our guests during the week have said this is not an exit stencil threat yet, but then i listened to baron berg yesterday, and they were saying the risk is italy commits fiscal suicide. Have you factored in the potential risk of fiscal suicide . When they busted out against the whole of europe . History is the best predictor of this. Europeanhe parliamentary elections are certainly involved in them. For me, what we are looking at in the euro zone is the election of a president in eu institutions. These rightwing populist groups are very close to getting a blocking minority, which is a way in which they can actually affect who the expresident s are of the European Council and european commission, and that could have a big impact in terms of immigration policy, in terms of moving toward banking and the eu. That is a bigger scale that could affect the markets. Eimear, what is driving the euro at the moment . Is it the underlying growth picture, ecb expectations . Eimear i think it is frustrating for the euro traders. I think we should have more weakness versus the dollar, but you always get this thing where , bute are moving out of em euro will limit the downsize. I think a key for the euro is the ecb meeting on tuesday. We are looking forward to substantial terms coming out of it. Thank you very much, and congratulations on the new cquairie. Over at ma our markets are up and running. We have the saudi inclusion story to deal with on my end. It is about the inflation risk or not in the united states. Nejra lets see how we end the week on bonds when we get that data out of the u. S. What will it take to get to 2 of the 10 year treasury yield . When you are traveling to work, tune into bloomberg radio, live on your mobile device. Good morning. Welcome to Bloomberg Markets this is the european open. Im matt miller. The cash trade is less than 30 minutes away. Than a trade war. Ray dalio says the u. S. And china titfortat is an ideological conflict with serious danger ahead. Morgan stanleys
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