Guy stoxx 600 has gone on holiday. Ignore it. The china trade, something is happening there. We are down, names like glencore under pressure. That stock is up by 6. 14 . The luxury story is interesting because the china narrative fees into that story. Basically, european stock markets, as you would expect in august, are on vacation. Alix we will get to that in a second. S p up. 4 . U. S. Steel is up 27 , a potential m a story. They are looking at different alternatives. You will speak to the ceo and about half an hour. The 10 year is up by three basis points. Urc and u. S. Real yields move higher you are seeing u. S. Real yields move higher. This is the dollaryuan. It is the offshore market, so it could move more and you can see it up by about. 3 . Part of that is a weaker china story. Guy she is not going to let that theme go. The question of the day is about real yields. We debated this in our morning meeting. It is about what is happening in china. We know when china cracks, bad things generally happen. Look at this chart. This feels like we are doing battle of the charts, which i used to lose. This is the story i think we should focus on. China real estate going into the Financial System and then into the Banking System is a story you want to Pay Attention to. You look at country garden. Its bonds are being smashed. How does the Chinese Government deal with this . Could this spiral out of control . It sounds exciting, but it is not yet. The real yield story is. I will not give you much of the limelight, but i think this is a great chart. Alix this is battle of the charts and i do not know what to say about that. I wanted to show what i thought was the question of the day, the 10 year real yields, the highest level we have seen since 2014. Since 2022. If you look at the trend line, we have broken above a multidecade trend line. Does that have repercussions through the markets . This is just the 10 year yield. It is the real yields we want to focus on. Guy if youre going to show up with the wrong chart. Alix this is not my fault. I did not make the chart. Guy lack of preparation. Preparation, very important. Question of the day, which is where we are going here, is what is the real problem here . Is it real estate or real yields . Lets try and figure this out. Germany clearly very exposed to china. I am going to start with you. Which side do you want to take in this story . It is a beautiful chart, guy. Guy so i won battle of the charts. If it were me judging, you would get 10 out of 10. I will side with alix here. I think the problem or opportunity is in real yields. We are seeing this interesting upheaval in treasury markets and bond markets particularly when it comes to the long end. We are seeing that steepening action in the yield curve led by the long end but a lot of the perpetrators are afraid. We have heard it is not the yield curve inversion you should be afraid of. It is the steepening after. We are seeing that now and it is an indication of the longterm adjustment in yields and in some ways it is a shock for people who have been used to low yields for the last decade. Is an opportunity if you are an investor. You are getting compensated for holding bonds, a bit of a problem if you are a bond bull, now saying that treasuries look overvalued and the trajectory of yields will be upwards from here. Alix u. S. Real yields are at 78 basis points. What do you think, real yields or real estate . The battle for real estate will be the governing factor for a lot of the German Companies like the auto sector, but we can get back to that later. 30 to 40 of their revenue is from china. We saw it last week. Digital industries down 35 in that quarter, all down to china. When you do that accounting, it is hard for the German Economy to see that. The real estate sector within the German Economy has suffered its worst decline in the Fourth Quarter since 2000. There is a Silver Lining we may be yields matter last to the German Economy because they have fixed rate mortgages. In terms of monthly payments, germany as well insulated compared to europe. Guy we will talk about real estate in a moment. In terms of the china exposure, is Germany First in line . If we were to see cracks developing in the chinese economy, how quickly could it translate to the German Economy . How much has happened under the hood to segregate operations and this sort of thing . We talk about big risks. I wonder how much these companies have been able to segregate these things. There is a degree to which they are on the front lines. These guys are all going to feel the heat and now tesla is cutting prices and making it worse for them. Alix at the same time, you have this rise in u. S. Real yields pushing the dollar higher, not necessarily something we are prepped for at the moment. I wonder if that exacerbates the pressure we are seeing. Absolutely. The reality here is it is all part and parcel of the same issue. What we are seeing is this readjustment in borrowing costs in the form of higher yields but that will have repercussions for the cost of financing for companies. That is part of the issue we are seeing in china. A lot of these Property Companies are now contending with higher rates if they want to access additional funding from bond markets. That is a reflection of what we are seeing in treasuries as well. Guy the equity market is pricing in a significant retrace of this. Equity markets do not like the idea that we will see real yields look like this for a long time. If this becomes if real yields look like they are going to be sticky at current levels, how big a reaction could we see in stocks . Kristine depending on who you speak to, despite the gains we have seen this year, this has to be one of the unhappiest rallies we have seen in a while. It feels like a market where investors are waiting for the other shoe to drop so they can book gains. Real yields being able to compete reasonably well with the equity market sounds about as perfect an excuse as you could find for an Equity Investor who is nervous at the moment and unsure whether we will see a recession or soft landing. It sounds like a great opportunity to reconsider whether to get into the bond market for the second half of the year. Alix we talk about the china Property Market in relation to germany and the export industry, but what is up with berlin real estate . Basically you have a situation in berlin where there is a housing shortage across germany and you are missing targets in terms of building new properties. You will see a drop off of new housing being built over the next year and a half. You have policies meant to save tenants and for real estate to be affordable. These hold onto these things and sublet them to people like me and monetize and make huge amounts of money off of this. When you go out to find an apartment, you have to be careful because Everyone Wants to move somewhere else and see something different. Alix that sounds like new york. Thanks a lot. I feel like guy won battle of the charts. Guy of course. Alix thanks for nothing. Coming up, we continue our conversation on the question of the day. What is the real problem, real estate or real yields . We will take the problem to laura cooper. This is bloomberg. I think this is going to be a healthy correction for the markets. This is very seasonal, for marcus to have a correction into the fall. Guy talking basically about the fact that she sees some sort of correction coming this summer that could be driven by the spike we are seeing in real yields. That is our question of the day. What kind of threat do you worry about most . What is the real problem . Is it real estate . You could be talking about commercial or chinese real estate or this rising real yield. Who do you think is right . Alex or me . I think there are pockets of stress in the Real Estate Market , so the fact that we have seen real yields climb has had knock on effects to emergingMarket Equities and taking steam out of the tech rally. Perhaps the near term is more around the real yields, but as we think about next year we may start to see real yields provide a bounce for equities but i think it is all about the inflation dynamics and whether we see this disinflationary trend persist. Alix she said me. She said it was me. To that point, is it just the jump in real yields or the absolute level of real yields . It is like the adjustment predicates the fact that they keep rising. We do not know if that is true. And price action over the past couple weeks, it has been about the pace of the increase we have seen in real yields. Going problematic, it Going Forward, it will be problematic if they stay at elevated levels. If we think about the public debt load, that will be under increasing challenge. If we think about the 10 year yield, the fact that growth is moderating, we could see investors take on more duration bids. In the near term, inflation is showing signs of easing, so that could keep real yields on the back foot but it is a key thing we are watching for. Guy this is how policy is meant to work. If yields if real yields were to stay as they are now, it will be the economic effect for the u. S. Given we also have this positive fiscal push that we are seeing . Laura the u. S. Consumer has been the ballast of support. It is one of the key reasons the u. S. Economy has proven to be as resilient as it has. We have seen in Consumer Credit data that consumers are accelerating their borrowing. At the same time, they have depleted their cushion of savings from the pandemic. We think the consumer will come under increasing pressure and some rates start to materially way weigh on consumer activity. The economy is less rate sensitive than it has been in the past. That effective tightening takes four to six quarters to feed into the economic picture. We have yet to see that fully materialize. Even as the fed is likely set to pause, they are still going to keep rates in that restricted territory for some time to really see the effects of that tightening. Alix where is the biggest mispriced in the market . Laura it is this debate around are we in the late stage of the Economic Cycle or the early stages of the cycle. Clearly, investor positioning in the past month or so has been toward cyclically oriented sectors. We are kind of taking a barbell approach positioning, so we do like pockets of those cyclicals where we think economic damage is priced in. Industrials as well, we are starting to see more attraction, but positioning that for example, the s p 500 is a High Conviction call because you still get the defensive benefits if the tech rally persists. Guy translate that into european. Laura we like european energy. A lot of the Recession Risk is in the price. We still see europe entering a recession in q3. It provides an attractive opportunity. Industrials is interesting because it is seen as a cyclical sector. We are starting to see signs that it is benefiting from structural tailwinds. If we think about the decarbonization trend, industrials are set to benefit even though we are entering the late cycle of the european economy so there are pockets of opportunity even given growth challenges. Guy europe does feel like a proxy play on china. If this gets ugly and china and we are dealing with a real estate crisis and you have an asset manager under threat, that could pull in the chinese Banking System and it starts to get ugly quickly. The obvious place to price that in is in europe. Alix but do you with germany or france . Or both. Laura we were debating this at the desk at black rock this morning. A lot of the luxury trade has played out. Key sectors have driven the rally in europe. The Consumer Discretionary side incorporates luxury, so we expect that to lose momentum. We think china weakness is going to be contained. European equities have benefited from the spill over of soft landing sentiment. We have had the short squeeze over the past couple months. China has been a negligible input and i struggle to see that becoming the key material risk for european equities because there is a lot of bad news in the price. So less of a catalyst on the downside and more on the upside. Laura potentially in the sense that domestic demand is sluggish. We saw that from inflationary data that suggests we are going to see easing at the margin and not necessarily robust stimulus. Guy it is it could get bad but the theory is the chinese will step in. I am wondering which you want to focus on. Is it it could get bad or the government providing stimulus . How should you think about that . I guess we do not know yet, but in the past it has been stimulus that . Is have responded to. That markets have responded to. Laura as an investor, it is all about positioning around this so we like emergingMarket Equities relative to developed Market Equities because of the tilt and his proximity to the u. S. We have scaled back our local currency position because of Dollar Strength and we are seeking exposures in hard currency. It is about being tactical given uncertainty out of the china growth complex. Alix i feel at this point it is 11. This is bloomberg. Guy European Equity markets coming into the end of the day. Lets talk about the countdown to the close, the preclose market check. There are lots of things we can call it. I want to talk about a friend of mine. It is good to see him still making waves and markets. Washes of switzerland upgraded, getting an upgrade. The reason they are rating it as a buy is because the stock has been dinged up and the valuation opportunity exists. Rolex is doing a certified used market and watches of switzerland could be one of the biggest beneficiaries. The real reason im doing this is because of a fantastic piece on the bloomberg terminal comparing two things that did well in lockdown and not so well sense. Im glad to see puppies are stabilizing. Alix the average price of puppies increased by just over 1 in the past year but that did outperform rolex. So that is something. Speaking of inflation, parent people are trying to give up puppies because they cannot afford to feed them. This is a knock on effect of inflation that is not ok. Guy in theory, watches do not cost anything once you own them but anyone who has tried to get service for a watch knows that is not cheap. Puppies grow into bigger dogs and cost a lot to look after, but i would argue watches are not a zero expense Going Forward. When you automate sales tax with avalara, you dont have to worry about things like changing tax rates or filing returns. Avalarahhh ahhh to finally lose 80 pounds and keep it off with golo is amazing. Avalarahhh ive been maintaining. The weight is gone and its never coming back. With golo, ive not only kept off the weight but im happier, im healthier, and i have a new lease on life. Golo is the only thing that will let you lose weight and keep it off. Who loses 138 pounds in nine months . I did golos a lifestyle change and you make the change and it stays off. soft music guy European Equity markets have definitely gone to the beach. Nothing is happening. It has been like this for a few days, but we are going sideways in a hurry. Basically, everybody is horizontal. We are stuck when it comes to the stoxx 600 and have been for a while. That seems to be the ongoing narrative. There you go. It is incredibly tight, so we are barely budging and that is the narrative. We are into that trading environments. Is anything going to shake us out of that . We will talk about real estate in china and real yield, which could have a big impact on equities. Do we need a shock to get equities to go down from here . Do we need a shock to get out of this recent range . We may have to wait until september to find out. In terms of single stocks, watches a switzerland of switzerland, we have mentioned that. China is probably the biggest effect on europe. Glencore is down by 2. 66 . This is a dollar enter commodities into the mining story. That is a factor you need to bear in mind. When courts down by 2. 66 . Lvmh is down by a little less. You have the domestic story and china, just concerning them up but also the narrative that china has now allowed group travel out of china into places like europe and the United States. That should be positive for the luxury story. What does the we carol . If you are on holiday, you do not need to worry about this. We have pandora earnings coming up. I think the main data point this week from europe will be out of the United States. Out of the united kingdom. Tomorrow, we get the wage data and after that we get inflation data. Which of these two are going to be more important in terms of having an impact on where the bank of england is going next . I would argue probably the wage data tomorrow. If wages stay as they are now, it will be hard for the bank of england to think about halting the rate progression or cutting. There is an expectation that we will see acceleration. We have wage data coming out plus inflation data. Which do you think the bank of england will watch more closely . Probably inflation data. If we are still looking at annual wage growth in the u. K. In excess of 7 , that is too strong to be consistent with 2 inflation targets. Even if we get downside on inflation, you are looking at a hawkish situation in the labor market. The bank of england still has more data to see what it is still something we think is consistent with another rate rise and the possibility of rates staying high for an extended period. Alix what level of wage growth do you think the central bank is comfortable with . We would usually try to think about wage growth around 3 were no more than 4 to be consistent with 2 inflation in the long run. If wage growth starts coming down and there is a prospect of wage growth coming to those levels, the bank will feel more comfortable. You want momentum in that direction but we are above those sorts of comfortable rates of wage growth. Guy i want to come back to wages versus cpi data. We will see a lot of energy affects dropping out. How far are we away from the end of the process and the danger that as we see gasoline prices go back up we could see volatile Energy Markets into the winter . Energy contributions are going to turn negative soon and stay negative, but we want to discount that and focus more on core inflation data, so when we are thinking about Services Inflation it is still high. We see it staying steady, a function of the fact that labor markets are tight and wage growth is strong. We could see softening Energy Prices and food prices. The extra leg down toward the 2 mark still seems some way off. Alix this is harkening back to gdp data. Why do you feel the economy is holding up as well as it is despite headwinds that you have described in terms of inflation and wages . Consumer spending was strong. Although inflation is high, the cost of living squeeze is losing its edge we might see a situation where this excess savings that consumers built up, may be some wealthy households are using that and it might be the case that some leading indicators, maybe they are overly pessimistic on what is going on in terms of u. K. Consumer spending. Guy i am hearing everything you are saying and i think the bank of england has more work to do. We have one more rate rise but the point we are trying to hammer home as we do not think the prospect of rate cuts is likely at least until the end of next year and that is predicated on the idea that you still have stickiness in the inflation system such that the need or appropriateness of cutting rates is some way off. Guy a quick look at the end of the day in europe, a little high during the auction but it looks like european equities have gone on holiday. Next, we are going to be talking about the big steel deal that we are watching develop in the United States. U. S. Steel with a takeover bid. What will it take to make the offer reasonable . We will find out next. This is bloomberg. Guy coming up, former ceo cftc chair timothy massad. This is bloomberg. Alix one potential deal we are watching is u. S. Steel and clevelandcliffs. Both stocks are up today. Then looking into a strategic alternative. This would be a tremendous deal in the steel universe. Not my personal universe, but the metal universe. We want a take on where it goes from here. Joining us now is the clevelandcliffs ceo. I know it is a busy 24 hours for you. What is your pitch to u. S. Steel shareholders . Thanks for having me. My pitch is simple. I am providing u. S. Steel with an opportunity for shareholders to monetize a lot of good work they have done so far and Going Forward be able to extract from our combination that is extremely powerful and create the largest steelmaker in the world, the fourth outside of china. That is a situation the United States has not had for decades, a very good reset and restart with a National Champion in the United States, able to take care of business. Guy good morning. Talk to me about the tone of the conversations you are having at the moment. Are they positive . Is this just a negotiation at the moment . Do you think you might have to go hostile . Talk to me about the tone of the moment. Lourenco i think the tone is good. This is a negotiation between two publicly traded companies. I am ready to deal myself with my lieutenants and Management Team and u. S. Steel has a different style in terms of using. I know the playbook. They reject but they do not reject my first offer. Alix so not hostile yet. You would go hostile but you do not have to . Lourenco they called mike market my offer unreasonable. The offer is reasonable. We will get to the right spot no matter what. I am doing this with the union. The union has the right based on the Bargaining Agreement they have to counter. They will not support anybody else other than clevelandcliffs, so we have this locked in and that should do it. Guy do you think it is about price . If it is not, what is it about . Lourenco we are right there on price. I made an offer with a 43 premium. That is very unusual in the m a world. That was a recognition of not only what u. S. Steel has done so far, which i commend them for doing so, but also what i am bringing to the table. It has been good with u. S. Steel. It will be better for the shareholders and employees if the company combines with clevelandcliffs. Alix to that point, is it really the synergy conversation . Analysts are saying it will be about the electric arc furnace, basically taking scrap and melting it into steel. That is a more carbon sensitive way of manufacturing steel. Is it just that . Lourenco it is 500 million a month so it is a lot of money and i have a track record of achieving. The last three years, we overachieved. We know what we are proposing. We know what we are doing. The shareholders of u. S. Steel are the shareholders of clevelandcliffs, so they know better. Guy this is basically an ongoing operation you have been conducting. You are rolling up the u. S. Steel industry. Is this the last piece of the puzzle . Do you think you can go further . Do you think the authorities will let you go further . Lourenco all the top 10 companies are built through mergers or acquisition. The number one of the world is from shanghai. The second is a merger. One was itself a merger. You have the picture. Clevelandcliffs is like these other interNational Champions. We are going to be a giant among giants. Alix what we have not seen as the ability for your stock to close its gap with your peers. Does this close that gap . Our cost cuts going to close the gap . Lourenco i do not see the gap you are seeing. Guy on a Stock Performance level, you are underperforming your peers. Lourenco i am not. Alix i am looking at the chart. Newport for example is outpacing since their rally started in june. Lourenco your timeframe is since june . Alix im looking at the whole year. Since the last quarter, you have underperformed. Lourenco im trying to buy u. S. Steel. I trade at 5. 5 and they trade at three something, so im given the shareholders of u. S. Steel immediate multiple appreciation that they have been pursuing for a long time. By the wake of that is a Great Company but it is number 16 in the world. They will be number 17. Guy i want to come to this question about the role ups. Is this the last you can do with u. S. Antitrust issues starting to grow . You are going to be a giant in the United States. You will be able to compete. Will you be able to get bigger after that through acquisitions or is this the last big deal that you can do . Lourenco that is a difficult question my very premature because i have not cleared this yet. Particularly because my track record is to do things and create jobs instead of eliminating jobs. We added 1700 jobs here in full support of the union that is nonnegotiable is the biggest confirmation of that. This place a big role when we talk with regulators. It is not just about defining market share. But jobs and wealth generation. That is something that is can create. But we are not talking about future deals. We are talking about this deal. Alix just for the u. S. Economy, steel prices have been rolling over a bit. We are not seeing the kind of stocking we would have seen from end users because people are worried about where the economy is going. Where do you see the u. S. Economy going . Lourenco going very well. We are in a moment that the recession talked about for almost a year now did not materialize and will not materialize. We are able to navigate this perfectly. The main markets were not affected and we will continue to grow. We are doing fine. Just fine. Guy is this a reflection of the fact that president bidens Inflation Reduction Act is having an impact on Infrastructure Spending in the United States . Do you see that Strong Economy because of what has been announced and what the federal government is doing at the moment . Lourenco among other things but we are talking about an administration that has been the most proworkers that i can remember. We are rebuilding the middle class in this country. We are generating highpaying union jobs in the midwest. That is incredible for generations to come. Talking about 10 years from now, that is what we are building. We are building a legacy. Alix if the legacy means your costs increase in the shortterm, you are ok with that . Lourenco i did not say that. Alix im just saying if i draw the conclusion if you have an agreement with the unions and that is part of increasing pay, does that hurt you even if you are creating jobs longerterm . Lourenco no. I do not see it is vantage because i have a unionized workforce. I have the data and numbers and i can compare and see a difference. At the end of the day, it is about philosophy and what you believe is right and wrong, so i am not only a ceo that works both the union but i am prounion. I have the numbers. Guy we are going to leave you there. We will watch with a lot of interest. We will be watching this space. Thank you very much. Great to get an update on where the offer is going. Lets talk about another story as well. Shares of Hawaiian Electric are tumbling after concerned that it was its power lines that cause the deadly maui wildfires. Talk me through the case against hawaii and hawaiian. We have seen this in california. We have seen risk elsewhere, that when the environment 10 shall he becomes an environment that could create a tinderbox, electricity is turned off elsewhere. Was that the case here . It is important to point out at the top there has been no official determination over the cause of the fires. That investigation just started. It will probably take weeks, if not months. The weekend, our reporting revealed a number are on the ground investigating powerlines and the potential source of the devastating fires. In addition, we heard a utility regulator in hawaii criticize a company for not turning off power ahead of these high winds that were predicted that really fanned these flames and knocked down power lines around the time of the blaze. Alix i hear you that we do not know why. I feel a good template may be pg e in california. Can you walk me through how that unfold in and what we might learn from that experience . Mark great question. With pg e, californias largest utility, they were driven into bankruptcy because there clement was found to have started probably some of the worst wildfires in californias history. There was basically two main fires started during these giant windstorms. Although it took a while for the initial investigation to play out, it became clear from reports on the ground that power lines were involved and that plunged stock. That is similar to what we are seeing with allegations of power lines being the cause of the fires. It has caused a 40 drop in Hawaiian Electrics stock price, which is an incredible drop for a utility. They normally move within 4 or 5 , so the concern among investors is the utility could be liable for these fires and investors are selling first and asking questions later. Guy if these scenes continue, if we see ongoing issues and droughts and lack of rainfall, how longterm do these utilities manage that risk . What action can be taken other than shutting down the grid, which seems like an extreme reaction . Mark it is an extreme reaction. What we are seeing is an effort to do things like bury power lines. There has been aggressive vegetation management. There is a set up in california of an extensive weather Monitoring System so utilities have a good clue on when fire conditions arise, where the highest risks are so they can protect lines or shut them off in an isolated way to limit impact customers. Other efforts include covering power lines, but it is a longterm investment and something Service Utilities will have to fix. Alix thank you. We appreciate your time. Looking at the markets, not a ton of movement. Speaking of, you have bloomberg tech coming up at the top of the hour. Coming up, you will have the ivp partner joining bloomberg tech. 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