Leadership shakeup. Nejra welcome to daybreak europe. Just after 6 00 in london. Did powell deliver . The bond market seems to think so. We close tire on the s p 500 in yesterdays session. We are on the front foot with futures. We will get to that in todays session. Yield dipping below 2 for the First Time Since 2016. Down another four basis points. Curve flattening. The dollarr and weakened. Down for a three day. That following u. S. Yield lower. Gold jumping to a fiveyear high. Is it overboard . Uti firmly on the front foot. 44. Pot lets get a check on the markets in asia with Juliette Saly in singapore. Great to have you with us. The divergence between the bond and equity Market Reaction was intruding interesting in the u. S. I we seeing a similar thing in asia . Juliet bonds moving higher. Yes, yields are dropping here. Equities also moving higher. We have seen that big money going into gold, holding at its highest level since 2013. Gold miners in australia rally. Nikkei up. You are seeing more money going into the yen. China markets having their best session in six weeks. Up around 3. 3 . We are awaiting Rate Decisions here in the region as well. You have seen a lot of money going into those bonds. The yield on one of indonesias notes, down by 12 basis points. Lets have a look at some of the stocks we are walking. Line could be getting approval for a crypto license in japan. It is japans thirdlargest messaging out. You are seeing weakness in india tech stocks. Thatis on a reuters report the u. S. May cap the amount of visas given to indian workers. In australia having its biggest fall since june 1988 on an intraday basis. It came through flagging first half earnings due to higher crude prices. One to watch in the london session, rio tinto shares off by 4 . This as a cut its fouryear iron ore output estimate. Nejra . Ejra thank you so much great to have you with us as always. Jay powell has open the door to a rate cut, sending the tenure treasury yield below 2 for the First Time Since november 2016. The fomcs dovish evolution was clear in language used in the statement. Uncertainty. Rising the amount of fed easing priced in by bond traders has increased and the dot plot showed half of the participants leaning towards a cumulative 50 base of cuts over the next two years. Less than what markets were starting to price in. The case for additional accommodation has strengthened since our may meeting. I dont know what that means in terms of the size of a particular rate cut going forward. We are always willing to adjust Balance Sheet policy so its serves are addictives. Our objectives. The law is clear that i have a fouryear term. I fully intend to serve it. Thea Goldman Sachs expects fed to cut rates by 25 basis point in july and september and isnt ruling out the possibility of a bigger move if the news flow disappoints. This is according to a note from economists. Joining us now is martin below, chief Economic Advisor at allie martin. What a turnaround in the view. Are we going to get a 50 basis point cut in july . 50 basis points is probably a bit aggressive. It might shock the market that the fed know something that the market doesnt. Nejra isnt it ahead of the market . It is way behind the market. The fed shouldve cut last night. The fed should not have hiked in december. The markets are doing a huge amount of easing for the fed here. It gives them move room not to move. A clear indication that we are in a policy cycle. This is the 16th since 1951. The markets are doing what trump wants, rallying aggressively on this. Investors should be very happy. Nejra 50 basis points in july would be too aggressive. Outline why. Martin they shouldve cut yesterday. 25 basis points means the easing cycle starts. The starting point is critical. Its a signal in america but also a signal for the rest of the world. If we look at 2019, 20 Central Banks and emergingmarket countries have all cut rates. Ratescountries have cut in the best economies advanced economies. Advanced economies are way behind. Many more events economies will have to cut rates during the next six months. Nejra sticking with the fed for the moment, they need to get ahead of the curve. What about the Balance Sheet . How should that factor in and to what they do next . Martin we have had a quantitative tightening phase. That will be rolled up slightly. There is significant room to do many easing measures. They will initially keep it simple and use the policy Interest Rate tool. Depending on how the economic sectors perform, quantitative easing could be switch back on. Initially, they will keep the message simple. Nejra one analyst pointed to a big dovish tale in the dot. We did see addictive definitive shift in terms of the fomc. How do you see that evolving over the next three months . Martin the growth is actually relatively solid. Most parts of the growth are actually the consumption. What is very weak is actually the inflation outlook. Inflation expectations could destabilize. The fed is going to have to speed up the process and might have deliver the 50 if we see another duration and inflation. This is the major inflation problem for all advanced economies. All of the rate cuts are because inflation is significantly declining. Nejra you think there is an economic argument for starting and easing cycle, not just a question of getting ahead of the market. Martin correct. The market senses it. A large part of the bond rally, we have 10 returns in 2019 across global bond markets. In has been the star asset class. Equities are solid but they have been relatively volatile. We had this crash in december. We had a crash in may. The bond market basically has rallied almost every single day since the first of january. The bond market has been the place to have maximum investments. The fed is just going to have to see how the inflation runs. Nejra would you be putting in a structural curve deepening trade . Will be steepen for a bit and then flatten as this involves . Involves . Martin in all rate cutting cycles, the start of strengthens dramatically. We can see further steepening overall in the last 60 years. We get 200300 basis points of rate cuts. The fed is already at 2. 5. They dont have much room to cut here. Secondly, we always steepen. The equity market overall delivers a 15 return in the entire rate cutting cycle, which normally allows 1. 5 years. Nejra on the equity market, the reaction was interesting. We saw a gain in the s p 500. It was the defensive sectors and bob proxies that outperformed. It was not a broadbase. Is the equity market lagging the bond market in pricing the fed or are there are other concerns that need to get out of the way before we see the equity market hit another alltime high . Martin the equity market is more difficult to call. Theres a lot of crosswinds. The growth underperformance that 3050 seeing, we have a basis points downgrade because of global trade. That is the tariff issue. We were expecting before the third of may the potential for a winwin on u. S. China. That has gone out the window. Publicly we dont get loselose. We are a long way from winwin. That scenario is very troubling for the stock market, particularly global trade. Global trade is where economic weakness is coming from. Monetary policy is the inflation footmen. Footprint. The growth issue is fiscal policy. Draghi was very good this week in pointing that out. And has to play a very strong role here. That has a happened yet hasnt happened yet in advanced economies. Emergingmarket economies are way ahead here. Advanced economies have to step up to the plate. Nejra what does that mean for the dollar . Do we started down trend start a downtrend . Martin in the shortterm, the dollar could slightly weakened. Basically had the dollar rally for the last six or seven years. The reason we are a structural bull for the dollar, america is growing it share him almost every measure versus the rest of the world. We have relatively solid growth in america. If growth was to weaken and we have more soft job numbers like an early july, the dollar could have 3 decline. In the immediate term mediumterm, we are balance. Nejra our guest stays with us for the hour. Now that rate cuts are on the tire, traders are basking in the glory. They are doubling down with the details of the moneymaking trade. The volatility market has been interesting over the past couple days. Traders have rushed to adjust a market expectation of cuts. Yesterday, powell only added fuel to those bets. When we look at one way of measuring volatility, this expires in one month. Lets take it over here. This low level is traders shorting volatility, saying bonds arent going to move much. Over the past week, they have had to cover though shorts. The fed may start to price in cuts. Thats what happened after yesterdays fed. Traders holding onto this high level of volatility, the highest since 2010. This trade has started to work out is a smart one. Assuming the fed does cut, theres another trade that looks prudent with the benefit of hindsight. That is when the next rate cut ends. The back end of eurodollar strip has started to resteepen. , the positivea area over here, traders saying we might get a hike as soon as 2020. Traders are ready pricing in the next type. Saying,ve markets now not only is the fed going to cut, its going to be aggressive and quick. Nejra thank you so much. Very great hit there. Tomorrow, we speak exclusively to the fed vice chairman. Dont miss that conversation at 11 00 london time. Lets get the bloomberg first word news with debra mao. Debra the bank of england leaving rates on hold today. The governor may choose to repeat his warning that a few rate rises are needed to control inflation. This fives would put that involves and not with investors. The boe forecast remained rooted in the assumption of a smooth brexit. May investors may see a bump your road ahead. Bank chief hasal reiterated another rate cut is on the table. It lowered its cash rate to 1. 25 earlier this month. Its the first adjustment in nearly four years. They said it was unrealistic to expect that reduction to materially shift the current trajectory of slower economic growth. The bank of japan has kept Monetary Policy on hold but the majority of Congress Things the Central Banks next move will be to increase stimulus. That action could come as early as next month. Kuroda is due to hold his News Conference at 7 30 a. M. London time. Said he wouldsly take action if threatened. The Trump Administration is telling lawmakers that iran has linked with al qaeda. Thats according to the New York Times. It reports there was concern on capitol hill the white house may use the war authorization from 2001 as legal cover for action against tehran. That legislation allows the use of force against those behind september 11. The u. K. Conservative party will pick the final shortlist of two candidates to succeed time Prime Minister theresa may. The battle for the other position will be between jeremy webberichael growth, wins will face the mammoth task of brexit. This is bloomberg. Nejra thank you so much. Coming up, diverging fortunes. The bank of japan sets out his stalling over an hour. Inflation could be on a downward trend. All that ahead. This is bloomberg. Nejra this is bloomberg daybreak europe. Lets get a check in on the markets. We have seen u. S. Futures on the front. Equity markets have taken it well. Not quite as well as the bond markets in the u. S. The tenure japanese yield, deeper into negative territory. The tenure yield in the u. S. Dropping to a 2016 low, below 10 . Weakens for a third day. Gold at a fiveyear high. On the front foot with the prospect of that opec plus meeting and maybe an extension of those cuts according to the top three producers. Lets get a Bloomberg Business flash with debra mao in hong kong. Has muscled its way back in front at the paris air show. It added ordered for order through its new is playing after bowling stole the spotlight. Model has aw customers lined up, bringing overall orders to do hundred six. It can fly further than the max, connecting destinations that were not previously considered costeffective. Facebooks planned cryptocurrency is still a long way off. Thats according to the companys cfo. Policy are already gearing up to scrutinize digital coin. Our makers are planning to hold a hearing next month. We know we have a lot of people to work with. This is a heavenly regulated space. We need to meet with people and thats what we are doing. We are then going to launch. Debra federal authorities are reportedly investigating Deutsche Bank for violating antimoneylaundering laws. It includes a review of the banks of socalled suspicious activity reports. They are prepared by employees. The new york time reports it is linked to jared kushner. That is your Bloomberg Business flash. City to Central Banks and in line with the fed, many institutions around the world are turning dovish. Rate decisions coming today around the globe. Asia hikers making a uturn. Philippines are expected to cut again after a 25 basis point reduction in may. Indonesia is expected to keep rates on hold but scented strongest signal yet that cuts are on the horizon. Brazil and japan held rates steady. The Brazilian Central Bank indicated a willingness to cut. The boj left its Forward Guidance unchanged. The bank of england is expected to hold. Policymakers say a hike in the near future will be needed to keep inflation pressures in check. The hawkish murders bank is expected to raise rates as its oil wealth boost the economy. On mliv we are asking the question, how low can Central Bank Rates go . Usn the debate, reach out to on your bloomberg. Our guest is still with us. Lets start with g10 for a second. We will talk about the boe later. Markets expect average Central Bank Rates in the g10 to fall by around 50 basis points. Match what you expect given what you were saying, develop market Central Banks have further to go . Martin 50 basis point is fine. We are probably 100 basis points on 10 year rates. They are behind the curve here. We could go lower. , otherll also have to Balance Sheet factors are on conventional. They will have to be put into play. That includes fiscal policy. The fiscal issue hasnt been switched on you. Advanced economies could well be , as we have seen in emerging markets. Nejra lets bring the boj into that. Dollaryen has dropped below a 2019 trend line. How does that play into what the boj might do next . Realizepeople have to that corroded used to be in charge of the Foreign Exchange for five years. He intervened by 500 billion in dollaryen during the late 90s. Onis a tactician and Expert GlobalForeign Exchange markets, particularly the yen. If dollaryen breaks 105, boj is going to have to ease quite significantly. Nejra ease how . Martin at the moment, the Balance Sheet expansion at the central bank has been quite small. They have room to significantly increase the Balance Sheet further. It is at 100 of gdp. It could go to a significantly higher level. They would have to purchase fixed income. They would have to buy more stocks. Coronasand put into decision is very significant. They cannot afford to have the yen depreciates. Nejra what about emergingmarket Central Banks . Its a big bucket. We need to differentiate a little bit. They have actually gotten ahead of develop markets in terms of easing. What do we see next . Martin we have 20 emergingmarket countries who have cut rates since jan one. It started on the third of january with the pboc in china. They cut the reserve ratio by 100 basis points. We have had eight of those banks delivering multiple cuts. Cuts,in reason for the they have seen a deceleration in their inflation measures. It has given them the window to cut. We should continue to see emerging markets cut for the rest of the year. Emergingmarket bonds are a star area. Nejra absolutely. Malaysia,dia, brazil, all of these markets, people should have excessive long positions in. Nejra do you expect other em assets to continue to do well based on what the Central Banks do or are they going to be capped by trade war risk . Martin the trade war risk is not going to go away. We have to see how the g20 meeting works out. Aboutucial part emergingmarket bonds and investments, Global Investors are going to be the largest buyers. Emergingmarket currencies are going to potentially do quite well for the rest of the year. Brazilian purchasing bonds or indonesian bonds and you are based in london or new york, what am i going to do with the currency risk . You do not have to hedge as much you prove as you previously wouldve. The inflows are going to be one of the main determinants of those currency levels. Nejra a little bit more complicated. Martin malone stays with us. Coming up, we speak to the governor of the nordisk bank. On of the few Central Banks a hiking cycle. You can test that interview at 10 30 a. M. London time. What a Beautiful Day it is looking to be. This is bloomberg. Hey im bill slowsky jr. , i live on my own now ive got xfinity, because i like to live life in the fast lane. Unlike my parents. You rambling about xfinity again . Youre so cute when you get excited. Anyways. Ive got their app right here, i can troubleshoot. I can schedule a time for them to call me back, its great you have our number programmed in . Ya i dont even know your phone anymore. Excuse me . what . I dont know your phone number. Aw well. He doesnt know our phone number you have our fax number, obviously. Todays xfinity service. Simple. Easy. Awesome. Ill pass. Daybreak europe. Lets check in on the markets around the world. Are. Us gaining, like a lot of asia. Has the feds dovish tone triggered the optimism . Good morning to you. I was talking about this yesterday. We badly needed some optimism from the globe for india to do well. We started off lower today. We were in the red. In the last half hour, it has gone above green. Is a very welcome sight. I would reckon it is the feds tone that has led to this. We want to draw your attention to two quick things. The bond markets have collapsed completely. We are talking about gdp slowdown in across the world. It is definitely happening in india. The aday get auto index staying at fiveyear lows. Lets see if that will bounce back as well. Nejra thank you. You are looking at how the wider market is reacting to the tone. What he looking at . Pretty much as it every asset class has moved off of this dovish tone. China csi up by more than 2. 5 . Strength as well across hong kong. In Foreign Exchange, it is all about the u. S. Dollar. It was weakened against all of its major peers. The fred jumping this reference to being patient on borrowing costs. Bigger thanaction what is happening in the bond market right now. U. S. Treasuries led a global rally. The 10 year yield dropping below 2 . New zealand and australia yields slipped to record lows. Rent and wti both higher this morning. A lot of this has to do with the fact that you have pressure on u. S. Dollar. We have a report of shrinking u. S. Stockpiles. I know you are interested in this well morning. Gold jumping to more than a fiveyear high as the fed signals it is ready to cut. We have seen this happen with gold all three may throughout may. Our mliv strategist actually was saying, we could potentially break a key level and gold actually looks like its doing that. Thank you so much. Lets get the bloomberg first word news with debra mao. The Federal Reserve has dropped its patient approach to Monetary Policy. It is open to lowering Interest Rates as early as next month. That would be the first cut since 2008. The central bank cited increasing uncertainty surrounding the trade war and its impact on the u. S. Economy. Officials are starkly divided on the path for rates with just eight of the 17 penciling cuts by the end of the year. The protections of appropriate policy show many partisans participants believe a cut would be appropriate. Some participants wrote down policy cuts and others did not. Our deliberations made clear that a number of those who wrote down flight flat agree that the case for additional accommodation has strengthened since our may meeting. Has toldesident trump confidants he believes he has the authority to demo jerome powell. Replacing him as chairman of the Federal Reserve board. Powell says the law is clear and he intends to serve his term. Trump has criticized his own pick for fed chairman, saying he disagreed with powell entirely. The Trump Administration has reportedly told lawmakers that iran has links with al qaeda. Dating back to after the 9 11 attacks. Thats according to the New York Times. There was concern on capitol hill the white house may use the war authorization from 2001 as legal cover for action against tehran. The legislation allows the use of force against those behind september 11. Today marks the chinese president s first state visit to north korea in 14 years. It is said to showcase a new camaraderie between the two neighbors. The trip sends the message to President Trump about chinas influence at the head of pivotal trade talks between u. S. And china on the sidelines of the g20 summit in japan. Global news 24 hours a day on air and. Tictoc, powered by more than 2700 journalists and analysts. This is bloomberg. Nejra thank you so much. Lets focus on the race for the European Unions top job. Leaders had the brussels today for another round of talks to elect the next Commission President with the role of ecb president and European Council president also up for grabs. Lets get the latest from bloombergs reporter who was in brussels for us. What are the prospects for a decision on the Commission President today . Good morning. A principle, there should be new Commission President by the end of today. The head of the European Council said yesterday he is optimistic that a compromise will be found. There are big internal divisions. There are competing interests here if you look at the french government and german government. Tonight, it could get ugly. There is always speculation that we could be back for another special summit next week. The issue here continues to be the same, Angela Merkel is not willing to let go of the European Commission job yet. Nejra how is all the horse trading going to impact the search for the next ecb president . Maria its a very good question. There are serious implications. That if the european shouldnt European Commission goes to southern leaders, that will have to be counterbalanced at the European Central bank. Nothing will be agreed until everything is a great. Its interesting. Thatt those comments sounded a lot like mario draghi yesterday. Central bankers should be decisive when taking action. A lot of people read it as, ryman trying to get consensus. We know it is looking very difficult for him. He is a nonstarter for many european countries, particularly in the south. Interesting the timing of those comments yesterday. Nejra definitely. Thank you so much. I want to big up with those comments with Martin Malone who is with us for the hour. Legalo heard that omt is and part of ecb policy. If you get that, it from one of the big hawks out there, does it mean the market can actually be confident that what mario draghi was saying the ecb could deliver will be delivered over the next year . Ready have talked about the inflation level in america declining sharply. This is a bigger problem in europe. They have collapsed. They have no choice but to stuff in the stands on the perception that he is hawkish. Dovish and it is what is needed. With the leadership choice coming up today, clearly that has been a welltimed response. Is main issue in the ecb what to do next. They have slowed down there qe purchases. The balance of qe is going to remain at a very high level. The reinvestments and the techniques of what they use operationally are all on the table. Our main recommendation to the new ecb governor is to get rid of the p. Capital key large amounts of burke german and french bonds because they are the largest economies. The german bond market is quite small. What they should be doing is buying where they can maximize the transmission of Monetary Policy. That means buying more btps. , it has been extremely bullish since last november. They should be trading at 1 , not 2 . That is because of the economic makeup inside initially. They need very low longterm rates to push ahead their economic plan. Getting rid of the political significantlows flexibility for ecb policy going forward. Nejra surely would also help you with your trade as well. Martin absolutely. Nejra would it change it at all . Would you still be focused mainly on italy or would you have other strategies implemented across eurozone debt . I have been talking about these qe trades coming back but buying more french debt. , you can bech debt max long french debt. The main positive is the liquidity. You can do very significant size in the french Government Bond market. Its the most liquid Government Bond market in europe. For extra yield, you are going to have to take some risk. Yes, there is Political Risk initially. It is not as high as it was one year ago. That is why we like that market. Theycb has to see what need to do if inflation continues to disappoint. That is to maximize transition. That can only be done by getting rid of the capital key. Nejra we have been talking about top jobs when it comes to europe. U. K. , there ishe the subject of Job Vacancies to discuss. Conservative members will choose the short list of two candidates to succeed theresa may. Round, boris to 89n stretched his lead votes. His tally of 143 lawmakers is as much as the remaining three candidates combined. The partys members will have about one month to decide between the remaining pair. Is this a structural short or shortterm short . Martin we are structurally short the pound because stability. There is no stability in the u. K. Today. Economically, we have underperformance. Market is inthe trouble. Politically, significant political instability. Legs ofree instability the reason why we expect the pound to continue to decline. We will need to see much more than just two is the leader of the tory party to change that assessment. Nejra we have been talking about inflation. What is interesting is, we talked about the u. S. And europe, how they have been collapsing. The u. K. Is somewhat of an earlier if you look at Inflation Expectations. What does that mean for the bank of england today . In terms of guidance and what we might see beyond today. Difficult is slightly why the inflation level is higher in the u. K. Then has to do with commodity crisis. The u. K. Is a very open economy. The domestic drivers of inflation, we have wage growth. We dont have housing growth. Prices are at the same level. They have decelerated a lot. Theres a mixed picture on the inflation outlook. Central banks love the word transitory. A large part of the inflation level we have in the u. K. Are transitory factors which could fallout. Its a very difficult decision for the bank of england. The rate hikes they have implemented in the last two years were potential mistakes. I would be very surprised if the bank of england wants to push the view that they are hawkish. This would be a mistake. Nejra that would be a mistake. We are going to wrap up in a bit. We have discussed so much this hour. One thing you are pointing out in terms of the complication of equity markets, we can relate this to the u. K. Global. The Political Risk that is front and center. For bond markets, you think it is quite a simple story. For equity markets, not so much. Martin on the equity market, overall the macro picture is relatively ok. We have disinflation so we have monetary easing. The policy mix is really the crucial factor for the macro outlook for equities. , we are going to see more of that. On that side, we could be positive equities. On the Political Risk side, we have to be cautious. The equity picture is not saying, the easy answer as to what the bond market is. Initical leadership risk europe is very high. It is also very high in 2020 with the reelection of trump towards the end of 2020. We could have a very fractured leadership issue in america, as we have in the u. K. With Boris Johnson potentially taking over. We could easily have a u. K. Election in october. Political risks are very high. Political leaders have to set up action plans on what to do economically. Nejra what sort of plans should you set up on the equity market . Martin the political leaders need to get nejra as an investor . You have martin to focus on political action. If we see very solid credible economic plans from political leaders, those equity markets should be aggressively bought. Nejra thank you so much for joining us this morning. Really great to have you as our guest host. Coming up, we speak to the chief executive of unilever. Dont miss that interview at 7 30 a. M. London time. Tune in to Bloomberg Radio live on your mobile device in the london area. We stay with you through the morning everywhere. This is bloomberg. Nejra this is bloomberg daybreak europe. Heres a look at what you should be watching on this big day for Central Banks. At 9 00, the norwich bank is one of the few western Central Banks still on a hiking cycle. 10 00, Vladimir Putin hosts his annual call in show. It is expected to run for three hours. We get a Rate Decision from the bank of england. Expected to keep policy on hold. European leaders are in brussels for another round of horse trading on europes top jobs. 6 00, we should find out the final two candidates in the tory leadership contest. They will be put to a vote of conservative party leaders. We have the annual Mansion House speech. Today we are asking the question on mliv, how low can Central Bank Rates go . Join the debate, reach out to us and the team. The bloomberg get business flash with debra mao. Airbus has muscled its way back in front at the paris air show. It added orders for its newest plane after u. S. Rival boeing stole the spotlight with the mega deal the grounded 737 max 8 now hass is new model new customers lined up, bringing overall orders to do hundred six. It can fly further than the max, connecting destinations that were not previously cost effective. Federal authorities are reportedly investigating if Deutsche Bank complied with antimoneylaundering laws. Thats according to the New York Times. It includes a review of the banks handling of so activity reports. They are prepared for potentially problematic transactions. Some are linked to President Trumps soninlaw jared kushner. Spin,usk is putting a new a customer can have any color as long as it is black. Tesla is choosing white instead. It will cost buyers and it for 1000 to have the car in black. Thats the same price as blue or silver. That is your Bloomberg Business flash. Nejra thank you so much. Jay powell has opened the door to a rate cut, sending the tenyear treasury yields below 2 for the First Time Since november 2016. The fomcs dovish evolution was clear in language used in the statement. Powell cited raising uncertainties and dropped the word patient altogether. Trade was continue to weigh on sentiment. A group of ceos are set to meet with the chinese premier this week. The heads ofg chemical giants dow, ups, pfizer are attending that meeting in beijing. Goldman sachs says stocks are pricing in a 20 chance of a resolution in the trade war. Thats a big turnaround from midapril when architect chanced in an 80 chance of a deal. The market narrative on trade has gradually shifted from a current account imbalances issue into a multifaceted and possibly strategic dispute. Is the Portfolio Manager for u. S. Equities at columbia threadneedle investment. Great to have you with us this morning. It is really interesting. The bond market seemed to take his words will. In the equity market, the gains were more muted. That trade concerns are something that Equity Investors are still grappling with. Absolutely. The trade picture is relatively unclear. The one thing to think about, if you look at the movement in the markets weres, anticipating exactly what happened with the fed yesterday. Thes not unsurprising in least that you would have a muted reaction when one would argue that this expectation of a rate cut was probably already priced into the market. Nejra what do we need to see for the s p 500 to hit that record high yet again . Is it something out of the g20 . It is a combination. For right now, Central Banks are in control. We could say that all the way back to last october. Clearly, what we are seeing is eral ruler reserve and policy that has come down substantially since last november. Federal reserves are in control. As Equity Investors are focused on earning expectations. One of the thing that is holding back earnings expectations is uncertainty about trade. Nejra speaking of uncertainty around trade, you are looking at small caps. If you look at the charts, small and mid caps have underperformed amid increasing geoPolitical Risk. Its not necessarily surprising. What is your outlook from here . Do small caps have further to rally . Asthey stay underperforming this geoPolitical Risk goes on . Two things to think about. On the one hand, small caps are clearly a proxy for rex resolved risk appetite. I think its fair to say that small caps probably struggle from here. The second, its just as important, comes around to giving the leverage that Small Companies have to the domestic u. S. Economy. As much as we are focused on these global issues, will be more important for Small Companies is what happens with the u. S. Economy moving from here. Even absent all of these things that we are seeing around trade, we have seen evidence that the economy was slowing. I dont think there is any evidence right now that we are heading into a recession. We seem to be on a path back to trend growth which will be in the 1. 5 range. Nejra when you talk to the heads of the smallcap companies, what are they saying to you around leverage and investment . Much at now, its very situation where people are in a bit of a holding pattern. Companies arethat moving pretty aggressively around is how to flex their supply chain at this point. For Small Companies, that is particularly important given that they tend to have less flexibility around shifting their supply chains and counterparts. People are trying to figure out, where are these trade discussions going to go . How do we make sure that our supply chain is ready for that . I think its fair to say that there is probably an investment wave ready to be unleashed lunch we have some clarity. Once we have some clarity. Nejra are there any definitive buys that you would say, go for that despite anything that happens . Yes. There are a couple of companies we find particularly interesting right now. In our portfolio, they are reflected. One is companies that are effectively all domestic in terms of their orientation. Seeing thewe are consumer is still doing quite well given where we are with unemployment. Companies that have pricing power. An example of that would be a company like planet fitness. Price fitness is a low jim concept. Trend ofered to this wellness and fitness. They operate in a space where there is not a ton of competition right now. They have no International Exposure or supply chain issues to be worried about. Those are the type of companies that we would be looking lack at that are interesting in this environment. Nejra really great to have you with us this morning. Up, we speak exclusively to richard clatter, fed vice chairman. Do not miss that conversation tomorrow at 11 30 a. M. Bloomberg users can interact with the charts shown using g tv. Analysis andey save charts for future reference. More fed next and all the reaction to Jerome Powells conference. 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 good morning. This is bloomberg daybreak europe. These are todays top stories. Dovish tale in the dots. The 10 year treasury yield slips below 10 and gold hits a fiveyear high. Dont miss our exclusive interview with the fed vice chairman. Andboj surprises the market ops against a dovish statement. We get Rate Decisions from the boe and norway later today. Woes mount for Deutsche Bank. The troubled lender is facing a criminal investigation for potential Money Laundering as another key player is set to depart amid a Senior Leadership shakeup. Nejra welcome to daybreak europe. Just gone 7 00 in london. The start of cash equity trading here in europe in an hour. Looking at the equity markets, with the European Market close, before we got the decision from the fed, laying catchup in terms of what we saw. The s p 500 gained. The bond proxies outperformed. Ftse futures on the front foot. Dax futures high. The40 futures higher by same. We could see green on the screen in under an hour. Treasury yield dropping below 2 for the First Time Since 2016. The twoyear treasury choke yield at a twoyear low. Sturm steepening following powells conference. We could see money continue to move into bonds in the european session as well. We are seeing those 10year bund futures and btp futures on the front foot. Yesterday, we saw the 10year bund yield get as low as 29 basis points. Markets in in on the asia. Juliette saly in singapore with more. Great to have you with us. Quite a bit of green on the screen in terms of equity markets in asia as well. Juliette we certainly are. A very good session coming through for asian equities. The nikkei up. Even though the yen also moving higher. The boj standing pat and not adjusting their Forward Guidance either. A very good session coming through, up by 2. 6 in late trade. This is one of its best sessions in about six weeks. Hong kongs market continuing its very good run this week. 0. 8 . Of the bank of korea governor thinks the fed was more dovish than expected. The cosby tracking higher. Australia stocks having another good session. Led by those gold miners as you saw that gold price surge to a sixyear high. We are watching other assets as well, particularly that aussie dollar. Lets have a look at some of those sets assets. A rate cut is on the table. One of the big four banks in australia is now bringing forward their rba rate cut to july. The yield on the aussie 10year note, down another five basis points. Big moves coming through in indonesias 10year note. They have been a little ahead of the curve. The bank of philippines also expected to come through with a 0. 25 rate cut later this afternoon. The peso nudging a oneyear high. We are seeing dollar weakness today. Nejra thank you so much. The big question, whether that dollar weakness will continue. Jay powell has open the door to a rate cut, sending the 10 year treasury yield load 2 since 2016. The fomcs dovish devolution was clear. Powell cited rising uncertainties and drop the word patient altogether. The amount of easing priced in has increased in the dot plot showed half of the meeting participants leaning towards a cumulative 2550 basis point cut over the next two years. Less than one markets were starting to price in. The case for additional accommodation has strengthened since our may meeting. I dont know what that means in terms of the size of a particular rate cut going forward. To adjustays willing Balance Sheet policy so it serves our mandate objectives. Cross current is a given. We have our tools. The law is clear. I have a fouryear term. I intend to serve it. Goldman sachs expects the fed to cut rates by 25 basis points in july and september. The new slug if disappoints. This is according from a note. Joining us now is the head of fixed income. Great to have you with us on the show today. What should bond traders do next . My guest and the last hour says its a simple trade. You simply by bonds. If only it were that simple. Its worth keeping in mind the valuations we have now. We have a twoyear note that is fully discounting two or more rate cuts. One of the messages in the ,ackground from the fed was this is finetuning. Bey dont anticipate this to the start of a fullblown easing cycle. Needs tohe bond market be careful about getting to ahead of itself. Equally, the messaging that they are putting out there is very dovish. The market has taken it on face value for the time being. All we need now really is the data to follow through to justify it. Nejra if you look at eurodollar futures for september 2021 spread, but they are pricing in is an easing cycle. As my colleague said the last hour, they expect it to be short and aggressive and then back to hiking. Would you agree with that . Thats the role that central bankers are moving towards. This sort of timid and slow price action may be works when you are coming out of a cycle in the tightening phase. If you are seeing some weakness coming through and something of an issue of confidence, there was a case to be made for a shorter term but more aggressive path. Powell exactly what signaled yesterday. Hes trying to make sure that casebody realizes, if the warrants it and things go wrong with trade tariffs and everything else, that they will respond aggressively by doing 50 basis for this point moves. Nejra what traits would you be putting on the curve right now . Maybe we put steepeners on. Some are saying that after that, we will see the curve resumed flattening. Would you be looking for . Charles thats probably right in the short term. It will steepen. It has been noteworthy that the curve normally when you see the market discount a real full rate cycle, the steepening trend is pretty long and sustained. The curve has been pretty muted so far. I think that is telling you that for the time being, investors are really buying into the fact that this is not going to be productive. It will be aggressive and shortlived. If it is then successful, you have to accept neutrality. The curve will go sideways at best rather than continue steepening. Nejra what about the tips market . Ive had some people say to me, look, they want to be buying breakevens. They are cheap at the moment. Is that something you are doing as well . Charles absolutely. That is something we have been positioning. E have been bullish these moves have suited are positioning in general. To have some diversification in the portfolio, we are long break in the u. S. The tone from powell yesterday was very clear. They are targeting inflation. They do want to see it pick up. We are quite comfortable with having that as a diversifier in the portfolio. You probably will all see breakevens pick up over the next couple of months. Clear, whatto be are you expecting from the fed, either in terms of cuts or tinkering around the Balance Sheet strategy over the next year . How does that affect your current long dollar call . We are currently positioned overweight dollars, as you point out. It is worth trading that off against what we are seeing elsewhere. The ecb shifting towards an easing stance at the same time. In the u. S. , they can cut rates. In europe, they can try. It is pretty difficult to get much of a rate cut out of europe at the moment. In terms of the year diff yield differentials, you will see that deteriorate. The dollar is going to struggle to make headway at this point in time. I think that its worth keeping in mind that overall, the u. S. Here is still growing relatively strongly. It is still in a relatively decent position. If it does prove to be finetuning, the idea that the dollar is suddenly going to have a big nosedive is pretty unlikely. You will actually start to see some support come back in. If you believe it is finetuning, i dont think the damage to the dollar will be that significant. If it becomes something more protracted, thats different and we may see a more sustained time of dollar weakness. Nejra will we get a 50 basis point cut in july . Charles for the time being, i will be more cautious than that and say 25. The reason being, the underlying data is not that bad. That the further signs trade talks are deteriorating and we are not going to get a deal, maybe the fed will choose to be more aggressive. For the time being, im sticking with 25. Nejra our guest stays with us. Today, we are asking the question on mliv. How low can Central Bank Rates go . Reach out to us and the mliv team on your bloomberg. Tomorrow, we speak exclusively to the fed vice chairman. Dont miss that conversation at 11 30 a. M. London time. Lets get the bloomberg first word news with debra mao. The bank of japan has cut Monetary Policy on hold. The majority of economists now think the Central Banks next move be to increase stimulus. That could come as early as next month. To holdld a hold due his conference at 7 30 a. M. London time. He has pledged to take action if momentum towards the bojs 2 inflation target is threatened. The Trump Administration is reportedly telling lawmakers that iran has links with al qaeda. Dating back to after the 9 11 attacks. The New York Times reports there was concern on capitol hill that the white house may use the war authorization from 2001 as legal cover to take action against tehran. That legislation allows the use of force against those behind september 11. The u. K. Conservative party will pick the final shortlived of two candidates to succeed theresa may. Boris johnsons place in the final two looks assured. The battle for the other position will be between jeremy joe. And michael whoever wins will have to break the impasse over brexit. Today marks the chinese president s first state visit to north korea in 14 years. It is set to showcase a new camaraderie between the two neighbors. It sends a message to President Trump about chinas influence ahead of potentially pivotal trade talks between the u. S. And china on the sidelines of the g20 summit in japan. Global news 24 hours a day on air and opted clock, powered by more than 2700 journalists and analysts in more than 120 countries. This is bloomberg. Nejra thank you so much. Coming up, diverging fortunes after a foot after a dovish fed. Where the bank of england is concerned, inflation looks like it could be on a downward trend. Is the npc hiking bias here to stay . Thats all ahead. This is bloomberg. Nejra 7 16 a. M. Here in london. 43 minutes away from the cash equity market here in europe. On theet a check in markets. European futures are pointing higher along with u. S. Futures. The s p 500 within a touching distance of a record. Was bond proxies that led. Reaction in the bond market was much more of a clear chair for powell. The 10 year yield dropping below 2 for the first time while eating 2016 lows and the twoyear yield. A dovish till from the boj. It stood pat on policy. The dollar weaker for a third day. Will that continue . Gold hitting a fiveyear high. Jumping following a drop in the u. S. Stockpiles. Signals that the three biggest members of opec to be looking to extend those output cuts. Lets focus on unwelcome news for Deutsche Bank. Federal authorities are investigating whether it complied with laws meant to stop Money Laundering. The investigation includes a review of its handling of socalled suspicious activity reports. Senior eu banks analyst. Just give us your reaction to the latest news in terms of how this as to the challenges for Deutsche Bank. We dont know anything new. We were aware of the Money Laundering question anyway. Nordics,across the this is an going away fast. Very little to add. Its a topic that we knew was coming up. From the outside, you cant have any rallies. We know nothing 12 months into the whole affair. You have share prices that continue to get hit. Deutsche has its own from dust problems. Is the update in july enough . Can they turn around profitability . Nejra we have heard news about possible changes in leadership. Could it provide support to the stock price . It has to be substantial. 50 assets,g about 300 billion plus, its not big enough. There was a story yesterday talking about 25 of crude risk. We have to get something, look at the stock. Its beginning to move. The shorts have not been pushed out yet. Also to get this back on track will require right up. The stocksecorder have not recorded that much yet. There are a lot of people thinking they are going to link capital to address this problem in a satisfactory way. Nejra we have had no headlines coming out over the past three days. What happens next . With any jonathan luck, they announce a wholesale restructuring in the u. S. They cannot exit the u. S. Completely. What would they tell their europeanonal you clients . Look at trading. They were down 20 plus in q1. Its getting easier. It has been so painful for them for quite a long time. Basismbers on a relative should stop looking is bad. Advisory and m a, we have been warned by the u. S. Banks. That will be down again this quarter. They were beginning to look at there. It has to be big. It has to address trading. They are not going to exit the business. Nobody expects that. Nejra great to have you with us. Our Bloomberg Intelligence analyst. Lets turn back to charles. Before we move on to other Central Banks, your thoughts on financials. Do you hold any of your portfolio and in what capacity gekko capacity . Charles we do. It is something we have been reducing since the start of the year. We have been moving up in quality. We have been removing a lot of subordination from the portfolio and going to shorter duration bonds. Generally, we still hold a reasonable sized amount. We hold much less than we did. Byhave tried to reduce risk reducing the subordination. Nejra ok. Hold on one second. I have breaking news coming through from dixons. Its you came u. K. Mobile significantly lossmaking. That might potentially move the shares of when the market opens in just 40 minutes time or so. Phone, circa 275 million pounds. The for your dividend is expected to be flat. Thats the update on dixons car phone. Lets go back to Central Banks. Many institutions are turning dovish. A slew of decisions coming today around the world. Asia making a uturn. The philippines centralbank expected to cut again after a 25 basis point reduction in may. Indonesia is expected to keep rates on hold. It sent its strongest signal yet that cuts are on the horizon. Brazil and spain held rates steady. The boj left its Forward Guidance unchanged. The bank of england is also expected to hold but in contrast with other Central Banks, a hike in the near future will be needed to keep inflation pressures in check. The hawkish Deutsche Bank is expected to raise rates as its oil wells whose the economy. Our guest is still with us. Thanks for your patience. What a spread of decisions and guidance. Let me ask you about emerging markets. Emergingmarket bonds have done really well of late. Is this a market that you would want to continue to add to . Charles yeah, i think so. Clearly, theres a lot of idiosyncratic stories any am. You have to differentiate between high beater, low peter come amid beater. We are Holding Significant amounts of midpeter yen. We think the central bank is aligned with our positioning. Those countries that broadly speaking havent seen in improving situation. The key alluding to what you are saying is really this inflation issue hasnt shown up. Thatawkishness globally potentially we were talking about 18 months ago has not shown up. That is allowing a lot of these countries to respond with Interest Rate cuts. I think that will continue. You get much higher real interestrate and some of these em countries than you do in europe or the u. S. Nejra speaking of more Interest Rate cuts to come in terms of inflation, if you look at what markets expect from a g10 central bank, i can take you to the one youre forward. They are pointing that those rates fall by around 50 basis points. Is that in line with what you expect . How would you position around g10 . Again, those that offered showed a significant reversal. The aussie is a good example. We started the year with a hawkish mindset. Now we are being signaled that we will cut more. I think those that are particularly vulnerable to the trade outlook are probably the most prone to further gains in rates markets and declines in yields. I think aussie will see the same thing. We havent had much from canada lately. Given this reversal, there may be some value in being long canadian rates at this point in time. Per the u. K. And europe, it is slightly different. Europe is very aggressively priced. Very dovishng sounds from the ecb. I think in europe, being long on rates, less compelling than being long of credit. We are most likely going to see a relaunch of the cs pc. Credit spreads may be more of the story in the eurozone. The u. K. Is very difficult to make a call. We are still currently waiting for a new tory leader. We will see what will happen with brexit. The uncertainty is so high. Outcome. St a binary im glad im not a policy maker for the bank of england. Interesting is that the u. K. Is the alere in terms of Inflation Expectations if you compare it against europe and the u. S. Just a final question on the boj. We are expecting to hear from kuroda in the next few minutes. Will they ease and if so how . Ratess i think touching is not their game. I think its going to be qe focused. Buyinging to be more more equities, potentially buying more bonds. Firmly that they are committed to the qe path. I think that is probably the most likely Pressure Point that they will tap on. Nejra thank you so much for joining us. Great to catch up this morning. Coming up, we speak to the bank, onef the nordic of the suit few Central Banks on a hiking central cycle. We are still waiting the boj press conference. We are over 30 minutes from the start of cash equity trading. Thats it for daybreak europe. Bloomberg markets, up next. Thatuture is higher to higher. Anna good morning welcomed to the european open. We are live from the city of london. I am anna edwards alongside matt miller. Matt the big punch bowl is back. Stocks and bonds valley around the world rally around the world. Gold touches on levels not seen for half a decade. The open is in 30 minutes time. Anna no signs of patients