Chinas factory deflation deepens in may with Producer Prices falling the fastest in over four years. A surpriseower in jump of u. S. Inventory. Manus its just gone 6 00 a. M. In london. It is seven in frankfurt. The seat of the latest breaking news story about banking. Capital. Erberus a five page letter. This is the language that is being used. You got the same story in front of you. An abject failure to take appropriate actions and the refusal of management and the Supervisory Board to acknowledge the seriousness of the situation. Good morning. Nejra good morning. Exactly. Basically, the letter talks about commerzbank suffering from leadership, lax resolve to slash a bloated cost base. This is according to bloomberg news. That raises the possibility of a shareholder revolt if the bank refuses to appoint its representative. This demand is likely to be a topic of the Supervisory Board meeting wednesday according to a person familiar. What else has caught your eye in terms of what we learned overnight and market commentary . Manus i think this goes back to probably its almost as good as political satire. Humble pie, i would be in it. What an admission of having missed this rally. If hes questioning the veracity of whether it was a bear market or not, and then he says i have to eat some humble pie, my question is, does this mean a rerating for benchmarks . Does this mean more cash need to be deployed . I go they are coming off a lofty perch. Lofty perches are hard places to fall from. Nejra absolutely. Its the question of what exactly has driven the rebound. We have seen u. S. Equities. Again, what do we define what happened from february to march is a bear market to guide us into what happens next. This week and today when we talk about the fed, those questions are raised about the potential for yield curve control. Another note out that again reiterated that perhaps the fed would be targeting if it were to target anything. Of course, youve got gundlach looking at the 30 year yield getting to 2 and it could be the fed steps into control the long and yields. Closest to the highest level since 2016. In terms of the bull markets, were looking at green on the screen again in asia. Yesterday, a pause in the u. S. Rally but futures point to the u. S. And europe. The 10 year yield not moving too much. In terms of the dollar, and has dropped in eight of the last 10 years in june. Are we going to have another painful june for the dollar . It is not looking good so far this month. Jeffreys the currency may slump below level seen in early march. Sayingot Deutsche Bank that dollar weakness has more to go. A little bit of softness in the oil price as well. Manus the dollar is almost like a wounded animal, isnt it . It was almost like a wolf that snapped back yesterday. But we can talk more about the dollar in a moment because vigilance is at play. Vigilance but no change, that is the expectation of todays fomc. The central bank and the u. S. All but certain to keep its benchmark rates on hold. Officials will also target the growth for the First Time Since the coronavirus outbreak with increasing focus of parities and the joblessness. Feds another on the agenda, potentially yield curve control. Jeffrey gundlach expects the central bank to follow through with the policy if the 30 year rate becomes unhinged. He said stocks will likely fall from the lofty perch. He is not the only wall street heavyweight to voice out about stocks amid the pandemic. Hedge fund manager has walked back his concerns. If there was a franchise for humble pie, oh my, there would be a milelong to own that because weve had huge gulps of it. Me included. Nejra joining us as the chief strategist at principal global investors. Great to have you with us. Lets kick off with the yield curve control debate. We just heard . View. Goodlachs it could force fed frontend intervention. Do you expect any signals on yield curve control this week . And if the fed acts, what sort of yield curve control would you expect . We shouldntnk expect much today. Not going to be announcing much change in action. If anything, they will acknowledge the outlook is a little better than what they were expecting, certainly since they have the meeting. In terms of yield curve control, i think it is in the future. I believe it is more the belly of the curve. Yield curve control is really difficult. I have seen it in previous times, historically, it has tended to fail. I also agree that from a longerterm perspective, if we were to see it rising among inflation, and you were to see a rise in the yields, i think the fed will step in at that point. I just dont think it will happen today. Throughout all of this, the central scenario on the positive Growth Outlook is completely based on the assumption the fed is going to keep yields really low. We have to keep that in mind. There is a significant steepening so i think the fed could step in. Manus good morning. The three years across the different curves. In him, an unhinged moment 30 year paper would be 2 . Mortgage and in america people mortgage much further out in the curve than europe. What is unhinged about 2 . Seema yeah, it is an interesting one. In the u. S. , it is slightly different. Theres a real concern the longer end, that will hit people and takehome pay, the help they are getting. I think it is kiwi look at the longer end. But the inflation concern will play out. Given the amount of Monetary Policy and fiscal stimulus we have seen, if theres going to be a building up, it will play out on the long end. I dont think it will be a concern for right now. Nejra also, seema, the counter to that is if you flatten the curve, it harms the banks and that is why there are some out there last month that were saying maybe it would be two or five years that would be targeted. Is that more viable argument because the fed would not want to do anything negative for the bank . Seema yes, exactly. When we look at the yield control is to be focused, seeing as we dont have any inflation questions for a year to focus ons easy that side of the curve. It is easier to maintain some kind of control. As you said, they want to make sure financial banks are not hit really badly. Financials have done pretty well over the last couple of weeks. A large part of that is a steepening of the yield curve. Given that the fed is unlikely to have a huge steepening, it does see we wont have financials playing out for a sustained period as long as the fed is in play. Youre just, beginning to torch up the conversation. We will return to this debate in a moment. Seema shah, principal global investors, our guest host for the morning. We have full coverage on the fed decision. Special report 7 00 p. M. This evening london time. The nuances will be critical for the market. First word news this wednesday morning. World Health Organization is walking back its comments on the asymptomatic spread of coronavirus. A day after saying people without symptoms passing on the illness was very rare. It now says it is still unclear. The head of the agencys emergency diseases unit says previous suggestions were misunderstandings of her comments. Backlash with a their decision to back hong kongs controversial security law. An investor says it is uncomfortable about the decision. The Parent Company is one of the biggest shareholders. Mike pompeo has also describe the move as kowtowing. Portuguese finance minister wont seek a new term as president of the euro group. The announcement triggers a race, leading one of the blocs most powerful bodies role in the eu often divided among political lines. That is in total position for the job. A stronger contender. Executive isief stepping down after controversial comments on the george floyd protests. In response to a tweet calling racism a Critical Public Health issues, he described it. The tweet because the company its partnership with reebok. He says he is resigning for creating a rift in the crossfit community. Global news 24 hours a day on air and on quicktake by bloomberg, powered by more than 2700 journalists and analysts in more than 120 countries around the world. Nejra . Bruce richardsp, expects a surge in bankruptcies to continue. We will hear from him next. This is bloomberg. Manus it is daybreak europe. I am manus cranny. Markets waiting for the fed. What will be the rhetoric from that . Equities are higher. What it can take is off the lofty perch . The deployment of stimulus in europe is the narrative. It is the key narrative to these markets. Euro stocks nearly up by half a percent. Yield curve control or just double down on stimulus . What are the heights for the bond market . 2 on 30 years paper. Inventories rise in the u. S. Off. Marathon Asset Management chairman Bruce Richards has they highyield market has come back with a records, but there are problems brewing and he spoke in an exclusive interview with bloombergs vonnie quinn. Bruce what you saw over a fourweek period in midmarch through mid april is the fed and its Balance Sheet 2 trillion. The Balance Sheet in total, three chile dollars to 7 trillion rate that is a lot of assets to buy. I think what comes out of tomorrows meeting is they will slow down the pace to about 100 billion a month. Coming down from 2 trillion a month. Beacuse the market because the markets have done their job by normalizing. The liquidity added has really fixed the liquidity in the system. Tomorrow, we will get forward guidance. Rates will be zero for a very long time. Count on 2023 or longer. Of course, talking about the yield curve and whether there is a fixing to the yield curve, but i think most of the comments will be around the fundamentals in addition to Monetary Policy. Fundamentals is really all about jobs and gdp. Of fed we have a bunch programs aiming to help companies and maybe do your job for you in some ways. The rate is Something Like 4. 5 . We are at the highs in the most recent cycle. What happens next . Do we get another leg lower . Do we get more fallen angels . Do we get a bunch more distress . Bruce thats a really good point. When we spoke last, the highyield market was 12 . Now it is 6 . Weve had record buying for highyield bonds, with 50 billion of inflows coming into mutual funds and etfs and others, record inflows. With that, the markets feel a lot better. Below that market and below the surface are these undercurrents you are talking about. So although the markets are somewhat healed now, the real economy is not an a lot of these companies are not. This a lot of problems brewing. What do we expect with the default rates . We reported at marathon since the beginning of covid, since midmarch, weve reported 60 bankruptcies in the United States totaling about 100 billion. We think that 100 billion will grow to 400 billion. The default rate will go to 18 cumulative which rings you to an annual default rate at 10 . 10 andgo from 4. 5 to before this will be all over, there will be a committed of rate that is four times the 4. 5 we have already seen. Downgrades, the downgrades are coming and they are coming ferociously. We have 20 downgrades, close to 30 downgrades for every upgrade by moodys and s ps credit agencies. Ratio is so0 1 much greater than we saw in the great financial crisis when the ratio was more like 10 1. In terms of fallen angels, you have mentioned that. About 200 billion thus far. Investment grade has fallen to highyield. We think the number is close to 400 billion as this plays out over the next year, yearandahalf. What is really ailing companies are revenues, despite the fed injecting all of this liquidity and market rushing into equity markets and the credit markets. Markets should improve because little kennedy the liquidity has been healed in a big way. The u. S. Is a 21 trillion gdp. The fed has added 3 trillion to its Balance Sheet. In fiscal spent, that has been about 3 trillion. 6 trillion on a 21 trillion gdp, that is 28 . Vonnie on the bankruptcies for a second, that 400 billion, will that be the liabilities on the Balance Sheet . Bruce total debt outstanding on these companies that filed for bankruptcy in aggregate is 400 billion. It is currently 100 billion. We think it is a fourfold increase from here. Manus some pretty big numbers being thrown around by the chairman Bruce Richards. Lets put some of these numbers to our chief strategist at global investments, seema. He calls for these companies to blow up to 400 billion. That takes us from 4. 5 to 10 annualized, cumulative 18 . I just wonder whether the yield compression you have seen i know gtv is working hard. Highyield has compressed down. Do you think that compression in highyield from 12 to 6 and over treasuries is pricing 400 billion of default . Or do we need to redo the pricing . Seema that is a very negative scenario. It is a lot worse than we saw. No, i dont think the yield spread moves we have seen would price and that kind of scenario but i agree. There are a lot of risks out there. From our perspective, although we think q3 could be ok, theres a lot of fiscal stimulus. Q4 is when you can see a reckoning, where maybe some governments start to take away the help they have been providing and that will bring a wave of bankruptcies. With it, another rise in unemployment. We agree there are problems building in the credit space. Wherever you are within credit, it means you still need to be looking at ones who have less leverage and those that are able to sustain themselves through what i think is going to be a rocky journey. Seema, you have a measure that you term risk velocity and you talk about the corporate debt, fallen angel risk moving from a headwind to a tailwind. Your comments about what could drive equity markets higher in terms of the rise of etfs and systematic investment based strategy moving from a headwind to a tailwind as well. That said, when you look at equity markets, you say we should not expect much more than consolidation. Why not . Seema yes, i think the etf space, on the risk parity investment, that really drove that downturn during the march markets. As we saw volatility fall, it almost expired, propelling markets higher. Now i think we are facing a lot of problems with regards to the Central Bank Stimulus not having created the economic reflation that they had been may be hoping for. With all those Economic Risks building up and also with a huge markets and economics, and makes it vulnerable to any sentiment. If we were to see a disappointing economic number, maybe another risk in terms of new wave of infections, i think theres a real vulnerability that the market could come down. Now until then, given that the risks are building up, and makes sense we should expect consolidation. Nejra yeah, it is interesting as well because with reflationary rebound, value is unlikely to have a sustainable performance. We have a chart showing that steady stocks posted their worst week versus value in decades. Seema stays with us. Next, we will talk about china feeling deflated. China factory prices decreased in may as Consumer Price gains a slow. Could it open the door for a rate cut by the pboc . This is bloomberg. Nejra this is bloomberg daybreak europe eigh. Here is what you should be watching out for today. The ocd releases the economic outlook, twice the analysis of the economic prospect of member countries. Ecb Vice President speaks during a webinar organized by the International European affairs. Watch out for u. S. Inflation data as well. We will get the cpi number at 1 30 p. M. U. K. Time. We are awaiting a Rate Decision from the fed at 7 p. M. U. K. Time. Now china factory deflation deepened in may and Consumer Price slowed, suggesting an uncertain recovery on the coronavirus slump. Seema shah is still with us. This speaks again to the suppressed demand still in china. What does it mean for the prospect of stimulus . Seema right. I think may china, be expectations have been running ahead of themselves. China moving towards a very rapid recovery. I think maybe todays data is a reminder things should be slowed. China thatean for there is Still Necessary stimulus to come. I think this will mean they can keep Going Forward and not concerned about increasing inflation on that regard. As we start to think about this, there is real insight and regard to demand recovery for what we should anticipate. Manus i was looking the debate is this. What happens in china has done great impact on e. M. , on everybody. But, if we look at e. M. Relative to d. M. , and the stimulus that comes from china, 3. 5 of gdp, russia just under 3 . A look at the discount on e. M. For the s p 500 and it is wider than we have seen since 2008. Re overly penalizing bashar we are we overly penalizing e. M. At the moment . Seema i dont think so. There is a potential for a catchup story, but the fundamentals are very concerning to me. They are facing a number of real concerns. Six month agos us in regards to coronavirus, a number of these areas are still just experiencing the first wave. Cases really rocket and that should be the key driver for those markets. What this has also done is in focused investors minds into the kind of imbalances we are seeing. Manus seema, we will pursue the conversation. Seema shah stays with bloomberg. This is bloomberg. Us good morning divide good morning from dubai. Stocks higher ahead of the fed Rate Decision. The fomc will release its first quarterly forecast since december. Markets will be looking for any comment on why sisi. Jeffrey gundlach says controllable happen. Investors tumble over the stock a producer crisis falling at the fastest pace in four years. Crude oil hits lower. Welcome to daybreak europe. All, Jeff Gundlach said if the 30 year gets to 2 , the fed might start, the stocks might fall from their lofty valuations. We could see a weaker dollar, and that has been the story the past several days. On the yield curve control, it is interesting. What could they signal . Jeffrey gundlach talks about the long end. Securities saying it is more likely the front at the fed is going to target. Treasury bills might be the target because of all the issuance. Rising 38 yields. Could be unhinged according to jeffrey gundlach. The steepest since 2016. Where do you go to yield curve control . Do you go at the 30 year . Market, dipping. The dollar is almost like a wounded wolf that attempted a snarl yesterday. To the oil market. We are rolling oil. Crude stockpiles are expanding. Will get to 42 to 45 as we keep an eye on that. The mliv team going hard on the aussie dollar this morning saying it could plummet through the elevator shaft. Anyway, lets talk about the European Unions coronavirus recovery package. It faces headwinds from the budget hardliners. Germany believes the agreement can be reached quickly. News indeo tracks the europe from brussels. She has the latest. Germany, they are optimistic on striking a deal. That is the court here isnt it . Yes, and there are two reasons. They came up with the idea by the European Commission and the european leaders and they are of holding the presidency the European Council for the next six months. They brought this down quickly in a way we can all go on holiday with a plan. That is germans. They will have to convince some of the most fiscally conservative countries. European leaders are meeting next week in brussels. The expectation is very low to actually agree on anything. The latest speculation is that ultimately there will be a meeting, perhaps in person in brussels, where Angela Merkel, macron, and the rest, sign a deal, but only in july. Efforts to soothe trade tensions with the u. S. Have stalled. What happened . All of the european officials they are not expecting much out of the trade talks. Both ways, u. S. To europe, europe to u. S. , in july. That is ongoing between boeing and airbus. Europeans do not want bigger tariffs. They have been crystalclear, if we see tariffs, we will immediately. The u. S. Has been distracted. There have been many issues. Impeachment, protests happening in america, but also the fact there is an election. It is almost just wait and see. Personal animosity between Angela Merkel and donald trump. He has decided to pull u. S. Troops out of germany. Nejra now let us get to the first word news. The world Health Organization is walking back comments on the a systematic spread of coronavirus and after seeing people without symptoms passing on the onus was very rare. Illness was very rare. Statements were a misunderstanding for comments. Decision toor a back hong kongs security law. A libra investor said it is uncomfortable about the decision. His Parent Company is one of the biggest shareholders. The u. S. Secretary of state mike pompeo has blasted hsbc, describing the move as a corporate cow town. Corporate kowtow. Flexibility includes temporarily raising the limit of the companys debt to earnings ratio for tiffany. Global news, 24 hours a day, on air and at quicktake by bloomberg, powered by more than 2700 journalists and analysts in more than 120 countries. Manus it is all about nigeria. The Oil Production cuts, great desk agreed to in july. This is bloomberg. Nejra this is bloomberg daybreak europe. Risk is on. Asian equities having their longest since 2017. U. S. And european futures back in the green. The 10 year yield is steady. June tends to be a bad month for the dollar. It is shaping up that way. Softness in the oil price as well. Glory it is resplendent fading. Lets get to an exclusive interview. The oil market is lower after the u. S. Industry reported a surprise jump in inventories. If confirmed it would be the largest build since the end of april. From africas biggest producer, the head of the Nigerian Petroleum corporation, he says the opecplus deal was necessary and the nation will comply. We spoke exclusively earlier. Take a listen. This rebalancing of the toket, so we dont have produce oil and give it up for this we will see that works by pulling down the supply and creating a balance. Manus does this mean youre going to close the discounts you have been selling your oil out . Absolutely not. , as you will go away know. What we did the last two months was to close that gap. July, wed of june or will pick up the discount. Manus when will we get to full compliance . The overproduction of the earlier month. Current numbers, we look at definitely numbers, by the end of we will see full compliance from nigeria. We are in good shape. Deal do you think the that was struck by opecplus creates a floor for oil . What will this deal do to the price of oil . It will bring normality by the end of year. We can stabilize the price by the end of the year. A completely shut down as result of the opecplus, i do not think that is sustainable. If that happens see that. Hink we will the business you run produced, the assets a comfort zone. Manus are you going to have to cut Capital Expenditure . Down tooal is to get 10 by the end of 2021 taking sure that will bring down our costs. As we trade around 42, makeu think it is going to compliance within the opecplus family, do you think its going to make it harder . Not at all. I do not see that manus what about saudi arabia, kuwait, and the uae . It appears to be a little bit pressure on the market. Is that more pressure on nigeria to comply . Not really. We are going to comply. I do not think it is a challenge for us. I hear you when you say you are trying to make the business more efficient. Can you sustain this year without job cuts at nnpc . What is informing that more than the cost is actually the issue of efficiency. Conversationive with the managing director of the Nigeria National petroleum corporation. It is a pretty magnificent turnaround. Back to 40. He talks about the risk in the back half of getting back to normalized level of mans. Of demand. I think what we have to anticipate is that the only time we can get that, we know that is not likely anytime soon. There is goingt to be a household portion. Withfinances and also regards to concerns about the virus. There are going to be industries that struggle. Demand for oil, i think where the prices are make sense. Until demand is ok. I lost you there for a moment. Until demand has improved, we should not expect oil prices to return to a level where they were elevated earlier this year. Nejra makes sense. For the rest of the year, someone we spoke to on the show, i believe it was this week, said in general, investors do not expect volatility in oil prices for the rest of the year. Was that a view you would get behind . I agree. I do not think we should expect to see a sharp drop. Things are going to improve a little bit from here. Q3 is going to be ok. It just means the volatility we have seen is not just in oil markets, but across all markets, is probably the high this week. Manus a lot of people have been debating what comes out of the other side. When we look at bond markets the result could be stagflation. If you look at the stagnate or impulse, workon can inflation come from . Could come from the supply chain or the flower for the bread that i eat . There are clients always asking us, one of their key points is, should we be concerned . More about the inflationary spike then deflation. The foodcomes from price area. When we think about the number of companies existing by this time next year, perhaps that will mean more pricing power. This is a deflationary period and demand is muted. We would anticipate inflation returning within two or three years. A lot of countries look to bring their Companies Back home. Until then it is a major concern of ours. Lots more to talk about coming up. Schools out in the u. K. The Prime Minister forced to do a uturn on education. What else will he can see it as he works to get the economy moving again . Think of yield curve control as i cap on bond yields. Shorttermally cuts interest rates. In this time the overnight lending rate. The pandemic lead the fed to restart bond purchases for round four of quantitative easing. The aim, to hold longerterm rates down. Track forconomy on its worst recession since the great depression, the fed should go further by charging a specific longterm rate. By buying as many bonds as needed to get there. Central banks across asia already do this. India manages its yields. The fed has gone down this path before. During world war ii, it capped the yield on 30 year bonds without having to buy large amounts of debt. This is more appealing than following japan shortterm rates below zero. That was explaining yield curve control and we will have full coverage of the fed decision 7 00 this evening london time. Let us turn to the u. K. Were a british Prime Minister will announce his latest action on using the u. K. Lockdown. He has already abandoned the plane for Primary School children to return in september after teaching unions and local authorities criticize the government strategy. Nonessential retailers will be allowed to reopen june 15. Are the Downside Risks piling up for the pound you combine the outlook for the we. Economy with the fact are still in brexit deadlock . Valuation run our models, the u. K. Looks to be the cheapest. Think the fundamentals for the u. K. Are dire. Not only have you had the u. K. Coronavirus, but you have the brexit talk. Economy is the u. K. Struggling. It really cannot afford to have a chaotic end to this eu relationship. We would be suggesting to investors to take a step back, even though the value was looking attractive at this stage. Manus if you look at the big themes this week, commerzbank, activist investor three breasts look activist investor, i at the m a, astrazeneca, gilead, the risks around that. Activism and m a, any response to those themes if that is what is going to come out of a post covid world . Exactly. When we look at what is going to be the legacy of coronavirus, activism is going to be playing apart. Not only has it highlighted income disparities around the world, one of the reasons you are seeing so much protest across the u. S. , but the focus on environmentalism as well. This, the consider social tensions that have been rising in the u. S. This is going to be long term. There will be changes coming from this. It may be that at some point markets take more and we could see impacts. See activism having a lingering effect after covid19, but also, the other thing that has happened recently is it is the end of the buyback era. In europe, companies beginning to issue stocks at a greater rate than they are purchasing them back. What does that mean to you as a dante Equity Investor as an Equity Investor . When we consider financials, typically the ones that benefit the most from buybacks, this is taking a very important marginal buyer from the market. We continue to think financials are going to struggle. At least we are not seeing sustained shift. It does also mean technology, which is one sector which has not had to get involved with the government, is more likely to see participating in buybacks. It does propel tech further. One of the reasons we select technology with expensive valuations. Some of the big themes that are simply not going to go away. Much shah, thank you so for being with nejra and myself. Fixed income cells. Letterng to a fivepage we have seen in a confidential email. Group outlines it is seeking two seats on the commerzbank board. The Second Largest Bank suffering from leadership, unprofitable revenue, lacks the resolve to slash a bloated cost base. Likelythe demands will be a topic at commerzbanks Supervisory Board meeting wednesday. It also raises the possibility of a shareholder revolt should the bank refused to appoint its representative. We will be watching commerzbank sure at the open because that is it for bloomberg daybreak europe. Foot in termsont of u. S. And european futures. Pean futures. Anna welcome to Bloomberg Markets the european open. Matt good morning. Today, the markets say it is all about control, from yield curve to board seats, markets are focusing on power plays at the fed and big banks. Cash trade is less than an hour away. The fatal debate