Transcripts For BLOOMBERG Bloomberg Daybreak Americas 20170519

It is a safe haven trade and commodities. David the president is getting out of town, traveling for nine days to five cities in four countries. Marty. I want to start with what the president said, he was going to bloomberg best during the slot. Yesterday, when he was at the News Conference with the present of columbia, he was talking about the investigation. Marco rubio came out and said he thinks the president is entitled to his opinion it, but we are a country of laws. Are they having doubts about whats going on in the white house question about marty there has been a powershift that has been enabled by the chaos that has ensued in this presidency. The establishment in washington, the people who make the government run have taken the upper hand and are the special counsel gives republicans cover to assert him selves and set their own agenda. David as the president goes around europe, as he tries to seize back some feedback. Marty they have planned this trip. Staff is notts shown a tremendous ability with logistics. This kind of trip requires intense planning and advance work. Lets see how they perform on the foreign stage. Things can go wrong and theyd better not if he wants to make his message clear. David hes going to be gone for nine days. Cant they proceed ahead on tax reform . Give the congress some room to work. It will be interesting to see if he tweets while he is away. The vacuum could well be filled by Congress Actually doing something. The budget will be dead on arrival. Both the house and senate are going to set their own agenda. It will make headlines, but its not going anywhere. David thanks so much. Jonathan there is a treasury market. Lets bring up the 10 year treasury over the last month. 217 or 218. W as it is now at 224. We have granted lower on the tenure. How much has this been a risk off move and how much of it has been fading in the reflation story . I think its a combination of both. Ie last week, its been would argue that at 225, the market is already priced out of trade. The equity market had not. If you look at pricing, the market still has a 70 chance of the june hike. They are comfortable with where the fed is. If equities fall as the trump trade gets priced out, it is largely the fear that the equity market is going to be where it is. If we do not get this, there is still this showing up. At,than whatever you look it is a flat curve. What is the message coming out of the spread for the Federal Reserve . I think its telling you that the market has priced out the trump trade. The market sees to hikes between now and next year. We have only priced into fed hikes. That, if you get significant deregulation and structure reform. Going to getly not that. We are probably going to get a couple of more hikes. Alix are you still short five . I am. I think the race line view is we get some tax reform. I think this week tells you you should heads the downside risk. Could volume is low. I think in the next couple of weeks, there is significant risk. Youre getting leaks on a daily basis. Do have some sort of testimony, thats a big risk to the market. If he suggest there was some interference, we are going much faster for a much bigger pricing out. We are going to be much lower in rate. I think you hedge that risk out. The baseline view is still that the republicans control all three chambers of government. They should try to get some tax reform. Its just working on the details. Over the nexts week or so can get back into focusing on health care. Alix next week, we get the fed minutes. How much of a game changer is that going to be . I think they will suggest a june hike. The market might ignore it. There is a remarkable amount of consensus. They want to hike a couple more times and let it go. How close are they . We are the little bit further than june of next year. If there some agreement that september,do this by that could be a big shock. The march minutes were not that clear. What i would be watching for is do they have a consensus with treasuries and mortgages . What is the endpoint of the Balance Sheet . My senses these are very Big Questions and there are not consensus is on the committee. Im worried about the equity market. You are getting significant withdrawal of accommodation. We dont know if youre going to get the trump stimulus. About thehave talked divergence between the bond market and the stock market. Does it appear its moving toward the bond market being right and the stock market he in wrong . Extent it depends on whether you get this handoff. The way i read the disconnect between the markets was you are getting physical easing. They can handle higher rates. If disposable income is higher, where the convergence may happen if you dont get any physical easing. The fed is telling you they are responding to reducing the labor market. They want to see hiking. Thats when the bond market might be more correct than the equity market. Orid do you need tax form perhaps Infrastructure Spending . Is it enough to have the deregulation. They are doing that. That is good enough. Deregulation is a longterm issue. I think the market gets a little bit excited about that. It is creating longterm growth. I think these are longterm issues. If you deregulate today, we will test whether credit has been weak. Im not sure its only a supply issue. Maybe you do get deregulation and productivity picks up. Thats not something that will move. The fed is not owing to move the market. You do need easing in the terms of infrastructure. I am bearish on infrastructure because its not clear how you pay for it. If you get tax reform, i am skeptical that is going to happen. You are basically getting deficit finance tax cuts. That is ultimately what the free market is pricing and and that will allow the fed to move faster. Alix a 50 year bond. We are considering it. You have talked to treasury. What is your call . Whatthink a lot depends on size of the tax bill we get. If you are getting 2 trillion additionally, they dont need to go further up. There is a lot of demand for bills. One of the fascinating studies was as you extend between the five your points, the treasury pays a significant amount for. There is not a huge captive buyer. I dont want to trivialize it. You cant do it in three to five years. We are talking 6 trillion. That was the president s plan. Then you have to go out the curve. Alix its great to see you. You are sticking with us. Theexclusive interview with nato secretarygeneral ahead of the president s visit to the middle east. This is bloomberg. David brazil was rocked by the president in taped to give hash scandal the car wash that has rocked that nation for years. The markets reacted across the board. Joining us now from brazil is rp or a chief. Welcome back. Before we get to the markets, lets talk about what is going on with the scandal. What do we know . What do we know about the political consequences for him. Statement inued a nine that he did anything wrong. 4 00 localke around time yesterday. Step down would not as local media had been speculating. Hesaid he would fight and did not do anything wrong. A little bit later, we got the audiotapes released. Its difficult to hear. Most of the local media are saying it is inconclusive what he actually said. The Audio Quality is very poor. Some analysts still say the conversation is very damaging. Happeningonversation is not ideal. David what is the likely we would have another protracted impeachment process . Julia its a possibility. Some were calling for him to step down, the quickest way out of this. Now that he is not, we still need to see what the next steps are if we are going to get more information. Just, we were on track for the reform. The perception is congress is now come to a halt and there is going to be no discussion. Jonathan for the investors that went into brazil, we had so many people say by brazil specifically. Is the legislative agenda on hold until this is sorted out . Juliette markets reacted very poorly. Rally is mostly sold on the reform agenda. We saw that very strong reaction withe market yesterday stocks and currency hitting circuit breakers. Thats the worst date since 1999. That was hinging on reform. If he does not get impeached, does he have a mandate to pursue his reform legislation . Julia we still need to see. If there were some reports of parties abandoning his coalition, which has been his strength. He is a very experienced politician and has managed to get congress to vote with him. Now it remains to be seen. Exit theed it might coalition. They said they are waiting to see. They are not jumping ship at this point. We need to see how strong he can keep the coalition at this point. David thank you so much for reporting from brazil. Alix its been a crazy week for brazilian markets. The tenure jumped 176 basis point just today. Thats the most since 2014. We highlighted mexico and brazil and argentina, investors really want to get in. Then we see the e. M. . Idiosyncraticn issue with brazil. You can see it go elsewhere. My biggest beer is if Interest Rates rise significant, if the fencing tests its soon it, some of the flow that has gone overseas will come back. You are getting higher rates with treasury. I think thats one thing to watch. The other thing would be protectionist rhetoric. If the legislative agenda in washington stalls, do we get much more protectionist rhetoric from the administration around nafta. I think if that comes back, some of the e. M. Clozel slowdown. You will see that spillover effect. I think those are two things to watch for. Potentially going to go for brazil as well. Alix we had a china bond auction today. There was not a lot of demand. The yield was the highest in two years. If china stays stable, does that make all the difference . Is that reflecting some kind of stress . I think china is potentially slowing. Of big question is how much a stimulus are we getting from china . The hope is there is going to be credit easing or physical stimulus. China is going to be important to be managed. The slowdown is going to be somewhat smooth. You can get the slowing of Growth Without panicking the market. They upgraded and in asia. Alix when we saw that move higher, how do you distinguish between good e. M. And negative e. M. . Giving the Global Markets, it becomes important which e. M. Youre going to pick up versus another one. Yield becomes important. It is stillking very much alive and kicking. It is about abiding finding that best place. Good, itrgue if its means overall global rates can rise. You have people saying Global Growth is picking up. Get some get accommodations. It depends on the level of Interest Rate looking for high rates. I think it will fall. David you will be staying with us. Coming up, bill bradley. Lasts key in an acting the tax reform in 1986. Live from new york and washington and broadcasting around the world, this is bloomberg. Jonathan lets get you up to speed on the Market Action. We do bounceback a little bit. We continue to firm up. Futures are up 34 points. What a week it has 10 in the fx market. The euro dollar is up. 6 . Over toeek, higher by full percentage points. Its the biggest week of gains for the euro since june last year. That is really shaping things in the fx market. Treasuries, yields are higher this morning. Thats the story across assets. Lets get you up to speed. The Worlds Largest maker rise 9 machinery has through october. Demand is improving, especially in south america. Saudi arabia has agreed to build for combat ships from Lockheed Martin. The deal is valued at 6 billion and it may be announced tomorrow. Leading visits at the semiconductor unit. They have emerged as the top contenders. Offered is set to have 20 billion. Liam cooperman has agreed to a lighter penalty. He will pay 4. 9 million in there will be no impact on his ability to keep running his hedge fund. He had refused tougher settlement officers because he said he did nothing wrong. About twice what the government wanted to settle. About 16 million to charity. Forhey asked you to settle 8 million . You give somebody money if youve done something wrong. If youve done nothing wrong, you dont give the money. 5 million for most of us would be a real money. Or him, its not going to change his lifestyle. Jonathan it changes the fund. 3. 5. Now down to about it has taken a big hit. The back story to all of this is fascinating. Reports around september, it was a Family Member at another fund that noticed suspicious activity around the company. To thered off a Letter Company asking for an investigation. Little did they know that would spark an investigation on leon cooperman. Think it has taken a hit on the fund and his reputation. Alix the highlight is he did not in a band. Steve it out of it got a ban steve got a ban. It was supposed to be the new crackdown s. E. C. David is this a different form of the trump trade . Perhaps. They wont enforce things as vigorously. Alix he wasnt going to get any kind of a dan. Jonathan yes and had to agree to any wrongdoing. Its an interesting story coming up a little bit later. The nato secretary general ahead of the president s visit to the middle east. Up next, we are live in terror on. From the exit, you are watching bloomberg. So we need tablets installed. With the menu app ready to roll. In 12 weeks. Yeah. The world of fast food is being changed by faster networks. Data, applications, customer experience. Which is why comcast business delivers Consistent Network Performance and speed across all your locations. Fast connections everywhere. Thats how you outmaneuver. From new york city, this is bloomberg daybreak. Futures are a positive moving north 35 points on the dow. It is the calm after a storm throughout the week. We head towards a week of losses on the benchmark. If you switch up the boards, treasuries yield are lower about 217. We put on another two basis point, but the euro strength dollar weakness continues. Up 6 10 of 1 . That is the story. Lets get you to headlines with emma chandra. Emma wikileaks founder Julian Julian has been living in london for the past five years. He feared if you left the embassy, he would be arrested and indicted to the u. S. The Justice Department is reconsidering whether to charge him for his role and disclosing classified information. President trump and ice trying to stop in at the investigation. He says it is ridiculous to think that he has done to amount to an impeachable offense. Trump says former senator joseph pick ton is the top become the newest fbi director. Is bound to stay in office. She approved hush money for the former House Speaker. They set a full investigation will prove he is innocent. Global news 24 hours a day, powered by 2400 journalists in more than 150 news bureaus across the world. This is bloomberg. David thank you. To the middle east as President Trump makes his way to saudi arabia or today is the day wellbig election as Voters Decide if they will keep for a second term. Is our anchor over there. Set the stage for us. What is at stake in the selection . Rarely has there been a day so important for the middle east or for iran since the founding of the islamic republic. We are outside of one of the key religious sites in downtown taliban. Tehran. The amount of people and amount of energy is incredible. But of out on the sidelines. Efed up security. They are trying to do crowd control in light of everything happening. The polls are open until 11 00 this evening and we expect the results possibly tomorrow. 55 million eligible iranian voters will be sharing their voice today. Show onhat is a poll who is likely to prevail stuck on the line clerics there are quite a few polls out there. The person trying to engage enrollment has a slight edge over the conservative cleric. It is understood he has the blessing and endorsement of the supreme leader. As we said, President Trump is on his way there. This is a traditional rival. Goes, what doa they the timing is very interesting. It is sensitive. It, tom donald trump trying to distract from the narrative in the u. S. Heard about some of the sanctions. Iran has responded as well putting sanctions. It was a tense relationship under barack obama. Games trump sees a lot of g ains that could be made telecoms is a lot of gains that could be made. Look at some of the bigger banks like jpmorgan and Morgan Stanley, they have a slice of the cake that can be the biggest ipo in the history of the kingdom. David thank you so much. Not only that, you have the Public Investment fund expecting to invest 40 billion. A lot of trading over the next few days and saudi arabia. The Foundation Director of economic research. John, give us some of the numbers you are expecting. See deals trading will we over the next 48 hour . John we will see a lot of deals on the military front. Deal willhe vessels be agreed. We are going to see a lot of announcements when it comes to the Missile Defense program of saudi arabia. Saudie are going to see aramcorelated deals between companies such as ge and the government of saudi arabia. You have the bluest of the blue off american seals visiting saudi arabia blackrock, citibank, Morgan Stanley, jpmorgan and the likes. But, it is also going to be about understanding where we are Going Forward with a vision 2030 and the u. S. Commitment and President Trumps commitment as it comes to the vision of saudi arabia wants to diversify away from oil. Jonathan it raises the issue of mixing politics with business once again. Talk about the politics of the radar system. Reports leaning on Lockheed Martin to cut the price of it. Why is this radar system so significant, and the transaction so significant from the United States and lockheed going into saudi . John well, it is a very important Defense System that wants to provide and support saudi arabias overall aerial defense. They do perceive that is being a vulnerable point, and they want to defend themselves even better than what they have pity against any arabian threat. This is very important for the Strategic Defensive saudi arabia. As we have read earlier, that is something that is going to be finalized and the saudis are getting a good deal by lowering the price tag. Alix the relationship between saudi and the u. S. Was clear they pump oil and the buy it. That has changed in the last four years and will change Going Forward. Now it is about saudi and shale competing for market share. How does that change the conversation . John well, it is a great question. It basically has to do with this relationship about politics and economics, business and the issue of iran. It will be a lot about lets get our two countries to work on a mini to work on many trade deals. Saudi arabia is privatizing in that program will provide 200 billion worth of deals, but also, it is about commitment, something that obama did not want to do for the sunniarab world. It will be about iran and how we are going to help and assist saudi arabia to defend, but also politically commit to saudi arabias sovereignty against the iranian threat. It will be about the muslim world. Remember, there are World Leaders in the region video are World Leaders in the region visiting. Trump is going to talk to the muslim t where where the muslims are fitting within the new u. S. Foreign policy. Alix the other dynamic is you have big buyers of treasuries from the saudis. Where are we now and the story . How does that play into this weekend . Selling. Ere they have not been selling as much. Reserves have stabilized. It is not such a big deal is a treasury buyer, but you may argue. We had significant buyers come in. And the dojecb taking rates lower. Oilalization has slowed as well as outside of the oil world, but the foreign and private investors have made up that share. The key issue for that be what happens with the doj and the ecb as they start stepping back. You will then see, i would argue, somewhat of a bigger impact. You dont have the official by missy private by slows down. May i add something . David go ahead. Interesting since november 2016, the saudis have been buying additional u. S. Tbi lls. 14 billion has been added to tbills on the saudi side. Now they have 14 billion which interesting because they see an opportunity and the u. S. Economy. That is important to note. David john, as President Trump to saudi way over arabia if you are the king better economic ties backing the plan with the United States on the one hand, but on the other hand, backing saudi arabia against iran. Which one do you want . To beright now, you want with someone who was stable, solid, and predictable. That is definitely saudi arabia. Saudi arabia is the most important country in the middle east. Saudi arabia needs to succeed in its attempt to diversify away from oil because it is a stabilizing force. This is what President Trump needs to understand. Alix john, thank you so much. Great to chat with you. Next coming up next week am an allstar lineup of guests. The full lineup for you covering markets and geopolitics. This is bloomberg. This is bloomberg daybreak. This is the enterprise green room. An exquisite interview with nato. Ecretary John Stoltenberg billion and Richard Branson is hinting he make it back into the u. S. Airline business. He is talking with Alaska Airlines over how long the airline must payroll tees on his Virgin America brand. Alaska has been paying branson. Tv hen tells bloomberg will see what happens. One of the pioneers of Remote Working is telling its workers to cut back to come back to the office. Ibm has given thousands of remote employees in the u. S. A choice abandon your work home leave the company. That it would speed up the pace of work to returned offices. Untitled portrait sold some 210 million. Only 10 other works of ever broken the 100 million market. The buyer was a japanese Online Retail magnet. That is your Bloomberg Business flash. Jonathan i always had this in thef my bed and background, working from home. [laughter] david that is not going to work. Jonathan it is not going to work for ibm either. [laughter] jonathan the ecb acknowledging outlook for growth is looking better but remained worried. According to the april meeting, some members says the wrist real gdp can be characterized as balanced given the improvement of recent data and indicators in the decline of political uncertainty. The nuance is important. Talk about the significance of that. The june meeting and a couple of weeks amid ecb if they will make that shift and remove that down risk focus. The next event is a mother tapering the next event is another tapering. The market is going to see the second reduction. The next step will be selected by. At some point, they are going to hike. Bonds have started to rise. Look at the treasury bond spreads. Treasury bonds have compressed. There is a lot more room to go. Fonts look extremely low. We are talking baby steps. They are talking baby steps for less accommodations. German Interest Rates should be higher here. Theres a conversation about changing the sequencing of the removal of accommodation. That conversation is exposed of the on the south side. The ecb, the core of the ecb, trying to change that back and get it back to focus. We are not going to change the sequencing of the removal of accommodations. They are incredibly sensitive to their communication to the market right now. Does that make sense . It does because they are trying to grapple with a whole lot of markets. They have the currency play. Shifting the sequences and shifting the sequence is confusing to the markets. They are trying to move the yield curve. 2006. Going back to it is the pace of buying. If they have to come off a bond buying in the have committed through december and they are at 60 billion still, do they have to come off of that gradually, youre not talking about a rate hike for a good long time. The market is bracing for any hikes. What is the pace in the reduction of buying . May be in the september timeframe they will announce. And then, what is the Forward Guidance . The economic environment does not argue for such a long period. If they go to 40, maybe next sure they go to 20. There is a huge distortion with the market. As the ecb, do you say, do we get out of the game . They tried that in 2011. They said it was a mistake. Conditioned by the past and that is your approach going for . It is a riskmanagement approach. Extremely gradual because it is hard to ease any further. You take these very gradual steps, but ultimately, it will come down to inflation. Growth is picking up. Inflation is a u. S. Issue. Inflation is turning lower in the less inflation is turning lower in the u. S. Do you hedge them lighter . Inflation is starting to pick up, and i am not seeing signs of wage inflation. Alix thank you. Youre sticking with us. Check out tv. You can watch us online and interact with us directly. Just go to tv on your terminal. You can click on our charts and terminals and listen to interviews if you missed it. This is bloomberg. David this is bloomberg. Im david westin. China appears to be proceeding, managing it slowdown in getting its reliance around credit. He asked him about the says areties he compared to the u. S. At this point. Opportunities in china are expanding. Were finding a lot to do here. Right now, thats we are not as sure as we were, but we are way overweight. Is not a china being any less of a disaster, it is. But we are seeing really interesting one off actions in the u. S. He says, relatively, he sees more opportunities in the u. S. Should we be worried about the politics here . Does that take some of the wind out of those sales . Priya yes, the medical risk is notoriously high. Political risk is notoriously high. If we can get past the nearterm and congress can go back to the legislative agenda, we can get focused on stimulus. My big fear is are we dealing fiscal stimulus or derailing it . Russianabout the investigation, but this obstruction of justice issue as long as we can get pass it over the next few weeks, we need to get back to Getting Health Care done. We cannot go back to tax reform until we can get health care done. I hope they can work on health care and get it out of the way and then Start Talking about taxes. David does Robert Mueller makes it more likely . He will get up and running and then will want to have a secret investigation and will want to say to congress, please dont push this too hard. Collusion,he russia a quid pro quo, it is extremely credible. Congress can say, you run with it. If congressstion that the james comey thing get pushed back. We want the entire memo. If they decide to go after the coming issue separately, you have that going on in the near term. Jonathan you said the treasury market has the inflation trade. Risk exclusively. Have we made that discount . Priya four inflation expectations, absolutely. They are Getting Health Care done i would say the same name for the five and 10 year treasuries. They can absolutely rise here. We are seeing it more asymmetric if congress can start working on health care and taxes. But you have to be concerned about headline risk, comey thing. Riskis where the down side jonathan comes along. The bull market has been doing ell with the paralyzed d. C. What is different . Priya because you have the fed and the different reaction. The fed is saying, we think the output gap is closed. At some point, let the portfolio runoff. Is weason i am concerned do not get the fiscal side, where is the growth going to come from . Literally growing 1. 5 without any accommodations. Jonathan great to catch up with you. Thank you very much. Coming up later, a midday real yield 30 minute dedicated to fixed income. Matt from Morgan Stanley will be catching up with us. In new york, as the count you down to the opening bell, it is the calm after the storm with future stable of 33 on the dow. From newark, you are watching bloomberg. Jonathan hoping to leave the chaos behind them, president to his first foreign trip since his inauguration. If you thought the impeachment of one brazilian president was dramatic, they brace for two in a row. From new york city, good morning, good morning im Jonathan Ferro along with david westin and alix steel. Futures up a quarter of 1 on the s p 500. Treasuries are up two basis points at 225. The story that does continue is a story of dollar weakness. We are seeing calm affecting the treasury curve. 96 basis point is that spread. You pointed out, dollar continued to grind out. The vix is a little bit softer, describe good way to the other Asset Classes. David President Trump promised to come to the white house to drain the swamp, but the swamp looks like it is striking back. Here is a senior executive, marti shanker. On the one hand, we had the president saying i think it is ridiculous. And he is talking about the investigation an investigation hes talking about the relationship and the investigation considering the russian campaign. Rubio is the republican. What is the relationship between the run republicans on the hill and marti it was uneasy. Before the special counsel was appointed, it has become a little bit more strained, but what the special counsel does do is it gives the republicans the opportunity to lead that issue be handled and they can move on with their own business and away from dealing with daily donald trump controversy. David does the fact that the president will be out of the country for nine days help that . In washington go about its business, including the white house and the Treasury Department . Marty you would think it would give them room to do that. Just merely by the time zone differences, a lot of the action will take place in the morning, leaving the evenings or the afternoons and evenings free for theirng them to do business. As long as donald trump stays on message and doesnt diverge from the script, it will give some room for them to get stuff done. For instance, the budget will get introduced next week. David as long as he stays on script, that will be interesting. That he ism believes good oneonone when he meets with World Leaders. Could it be successful for him and changing the narrative . Marty yes. In all of those encounters at the white house, he has been pretty good in dealing with foreign leaders and coming out with what seems to be reassuring messages from the u. S. Indeed, that is what he wants to do overseas is reassure our allies and reassure nato, and get some deals done, and get out without any controversy. David thank you so much. Jonathan what a week has it been for the markets. Joining us is making green. Megan green and. I want to talk about how intraday price action continues to shape longerterm narratives. People would say the agenda has become unhinged. Then everyone turns around and says everything is ok. Longerterm stories on the back of intraday moves. There are two major stories that the average investor should be focused on one has to deal with china. Chinas massive credit impulse has come to an end, which is why we are seeing Slower Growth rates. The markets have become more choppy because of that. It is gone from acceleration phase two deceleration phase. To whent all comes down and how much, kind of fiscal stimulus to beget, but even that is only the catalyst in a bigger narrative. Ist is, the u. S. Economy transitioning from the cycle to a late cycle. Typically, that goes one of two ways either the fed titans just enough to cool either nough toti coo cool things down and forces the fed to go much tighter than the market perceives. Then we end up with an inverted curve. That is what this really comes down to. Fed is intenthe on going very slowly and will carefully try to avoid inverting the yield curve. Everyone trading off headlines in the political chaos we have seen this will be a really slow burner. Taken all of the oxygen out of the room i killed care and tax reform. It is taken all the oxygen out of the room in terms of health care and tax reform. We have the Midterm Elections. The developments mean that it will get harder to get things in the next two years. This investigation is going to take forever. Probably not years, but certainly months. It will drag on for a long time. Jonathan does the magnitude of most determine what will happen stuck on a line banks pete back in march. Many investors have been invading the inflation story. You picked up on china. In canada most significant aspect. At this point, the whole trump trade has been not yourely unwound, but if look at nominal rates and a number of fed hikes expected, it is one trade. At this point, enough has been underpriced that the markets are in an equilibrium. The markets are ok there. The bigger question is chinas credit impulse. They were pumping 30 credit growth as a percent of gdp after a very weak 2015 when the economy was barely growing, and it worked. Our version of chinese gdp is around 8 right now. It is working, but that growth rate and a credit impulse has come back down to zero. Now we have to wonder and wait what the next chapter will be in our senses that rings will be stable and our sense is that things will be stable and ok. Especially now the fiscal stuff has been priced out of the market, like your other guest said, but it will probably not happen until a year. At that point, we can move on to the fundamentals again. Megan, is china a fundamental story again . They seem to be addressing their problem. The are slowing down the growth, but it is growing at a nice clip. China is booming right now. But there are real downside risks. They are really starting tota p they are really starting to tap the brakes. Meetingident having a banks. G to rein in the year, it will be fine, but for next year, china will star slowing down faster and that will have real implications. A lot of the stimulus is behind the global reflation trade, not so much for the u. S. , but for southeast asia, japan, and europe. Alix the transition mechanism i confidence is priced out. What does that mean for the hard data . Everyone says hard data will catch up with soft. Iswhat you need to look at the big global drivers like the lack of productivity growth, or demographics. The u. S. Is a 2 economy. It will be hard to shift our initial gdp to move off that significantly and a stable way significantly in a stable way. Alix thank you. Coming up, an exclusive interview with jens stoltenberg. Dont miss that. This is bloomberg. The world has the largest maker of Farm Machinery has made his profit forecast for the year saying its equipment will rise 9 through october. Says demand is improving, especially in south america. Saudi arabia has agreed to buy four new generation combat ships from Lockheed Martin according to people from a with the transaction, the deal is died at 6 billion. It may be formally announced tomorrow in President Trump horizons audi arabia on the first leg of an eightday trip. In brazil, the president is bowing to stay in office. Approved hush money from the former House Speaker behind last years impeachment. They said a full investigation by the Supreme Court will prove him and assent. Alix thank you. The news reverberating following throughout brazilian Asset Classes yesterday. Here is a quick round up. This is what happened to the it is the biggest drop we have seen in nine years. An extreme down move. Itssaw it you road all of you saw it erode it outperformance. Brazil was the outperformance, now it is a underperformer. Peru rolling over a little bit, but the other emerging markets holding up at the same time. You cannot will out what happened with the raile as well. You can get a feel of how dramatic the down move it was. Dropwas one of the worst since 1999, a dramatic move to the downside. Today, things look a little different. In paris roseetf the most since january. The brazilian etf in the u. S. Yesterday saw the first inflow since april. With us is making green with us is megan green and yuri. But am no expert on brazil, i am bullish on yen. On em. E. M. Underperformed the Global Market consistently for about five years and by 500 points. Now, we are in this reflation driven by china. China is at the center of this. Not brazil or any specific country. The fundamentals are much better. Good reminder of why em trades at a 12 multiple and not an 18 multiple when the u. S. Trades because they are emerging markets and these things happen. Happen in developed markets as well, but the fundamentals alix how can you be positive on e. M. If you are worried about china . I am not worried about china. All i am saying is that that credit impulse this is the third one since 2008 hearing it is now waning. You get the shot of adrenaline and then things settle down because the economy overheats. As megan says come at this point, i dont think china is at risk. Maybe a year or two down, china goes through these shorter cycles than developed markets do, but you know, where we are on the other side of a bigger credit impulse, and the longterm risk for china israel. Just to give you a sense, in 2007, it would take 6 trillion 4 billion rmbe growth. That credit lever eventually will create problems. I dont think that is a 2017 story. Jonathan i was told that the best emerging market story was sterling. [laughter] alix how do you allocate to emergingmarket . Jonathan i we talking a blanket em environment for etfs . It is all relative on how you are benchmarked. Investor, and0 40 within that 60, you are 40 u. S. And 20 nine u. S. , and then you are half developed and then half not developed, i would go half developed stocks and then half not. Anative to u. S. , the u. S. Is underweight. E. M. Is an overweight. Alix for many people, that is how they do allocate those long positions. Jonathan there is a fear around brazil that would make a memo amount of the index. No. I see this almost as what couldve happened in france but the election. You are in this low volatility period of outsize returns against very low vol. You have to look at the bigger picture, the larger, underlining tailwinds are headwinds. Those are all positives and e. M. Is under owned. Em rallied 167 and took in 155 billion of flows said the fed very 2016 bottom. People are very wary of eff are good reasons, but that is that wall of worry that will ultimately take is higher. Alix the idea is that inflation is coming down. If that narrative Still Holding after brazil rolled over . It still holds, but you are right. The biggest implication is what happens to pension reform. Upping comeren the without being up and coming. If this does go forward and that there is another impeachment, brazil will be stuck in this political turmoil for a while. David you will be staying with us. And coming up, we will talk to bill bradley. What does he think about the chances of reform this time around . City, from our viewers worldwide, this is bloomberg. Jonathan the ecb is not attain the outlook for growth is looking better, but remain worried about the inflation process. Some members consider the risks to real gdp cannot be characterized as broadly balanced, given the improvement in recent data and indicators that the decline of political uncertainty. Still with us is megan green and jurrien temmer. We keep carrying buy europe, buy europe. Do you buy the buy europe story . Europe is a lot cheaper than the u. S. , which is probably overvalued. Five buy in that sense, but the idea that we have this soft versus hard interpretation, it exists in europe as it does in the u. S. The ecb would like to remove their accommodation, but just because Emmanuel Macron won the population doesnt mean populism is over in europe. Consensusthere is a out there that the Political Risk has diminished because we got over this french hurdle. When does the italian hurdle come up . They have an election by march of next year. It will not happen by september. Most likely, it will be next year. We had aan conversation about e. M. S just a moment. To add a little rest, would you go to europe, or would you go to e. M. . I would go to both. I have been one of those individuals in the last six rounding the table on europe. Buyerd have still been a of europe because if Marine Le Pen had won, it would a it wouldve been a very hard mandate for the separation of european this whole mindset of Central Banks trying to get out of their zero are negative , andest rate policy and qe how damaging that is for the market, i think that was very much last years story and the year before because there was no growth. On the central bank is trying to tightening as the fed has been trying to do, against a lack of growth, it does not work. The markets, you know, struggle when it happens. But now, we are in a growth mode. Earnings in europe are rising just as they are in this u. S. E. M. Is trading at 12 times. Europe is 14 and 14. 5 in the u. S. Is 18. These are all forward. Nings these are more these are all forward earnings. They have better tailwinds unless inflation. When i look at asset allocation, i would be underweight for the u. S. An overweight in nonus, but specifically europe and emerging markets. An investmentas rather than a trade, what do you think of the prospects of the European Union . We had le pen and merkel meet last week. Is it possible to have the passing of the pot is it possible to have the passing of the baton from monetary to fiscal . Payor broke german in a believe in german orthodox, but the approach to growth in europe will continue. From a price competitiveness perspective, the real concern i have relating to our discussion on china, is that if t chinaaps is that of china taps the brakes they have more exposure. It may be a case of policy makers giving up on structural reform because we have had growth. As a stimulus goes away, you may have the tide go out. Thed to wrap this up is European Investment really a base effect situation . In the long run, there is not a huge potential for growth . Inflection points happen when the rate of change peaks or goes off. You cannot wait for the actual level to turn because markets discount. I believe fiscal is unlikely in europe because of fragmented it is, but we have to remember that since the eurozone debt crisis of2010 to 2012, a lot adjustments have been made. If you look at the real Adjustment Exchange rate for portugal and greece, they have come way down. We have made progress. Jonathan thank you. More bloomberg coming up. You are watching bloomberg tv. Jonathan from new york city, you are watching bloomberg daybreak. Im Jonathan Ferro. And a doubt4 positive 3 10 of 1 on the s p 500. Straightr a second week of losses on the s p, but 1. 4 down on the week by points. If you switch up the boards, treasury yields lower as low as 218. High over the last month as well. Yields up a single basis point. But the dollar weakness story continues across the g10 space. That euro strength story continues up three quarters of 1 . Lets get you headlines with emma chandra. Emma and iran, boating is underway in a president ial election. Irani is will decide whether to get us on the honey a second term. Top electedndle office back to conservatives. Most opinion polls have showed innovate. Wikileaks founder julian has moved a step closer to freedom. Sweden is dropping a sevenyear long investigation against him. Julian has been living inside for the pastassy five years. He feared if he left, he would be arrested and next diet to the u. S. Is Justice Department wondering if they should charge assange. According to a government willial, the trump plans cut discretionary spending, but medicare would not be touched. Lawmakers are likely to object to cuts in certain programs. David thank you. Before he joined the company, but after he wants to two championships as a new york mets, bill bradley was in the senate. His name comes up in every conversation about tax reform. As a leader who worked across the aisle to rewrite the tax code. Back in 1986, when Ronald Reagan was president , senator bradley joins us. Simple question you know what is required. Could it be done in 2017 what you did in 1986 that bill the odds are against it. What you need if you are going to do tax reform is unique principles to guide you. You need a committed president and a talented treasury secretary. And you need a chairman from the ways and Means Committee was tax reform. If you dont have that, or any one of those, you will have major problems. David if you talk to the chair of the finance committee and you talk to bradley, brady, i am sorry. They say theyre committed to it and they have basic principles. They agree on more than a disagree on. Bill the first thing you need to do if you are going to do tax reform is put a specific proposal out there. It is great to talk principles, and it is great to talk ideas, but you have to put a specific proposal out and measure it against the principles you have espoused and have to be able to say if it is tax reform, do the wealthy pay their fair share stuck on the line do you have market allocating resources as opposed to the finance committee and the ways and Means Committee stuck on the line is a clear . David the primary goal is growth. We need to get growth for the economy to benefit everybody at all income strata. What could be done in your opinion that will make sense and would be progrowth of the tax code . Think cleaning it up would make a big difference. Over one trillion dollars of loopholes in the tax code. Since 1986, it has gotten worse yearbyyear with tax reform as tax bills added more and more loopholes. It would make sense to clean up the loopholes. Of course, the benefit of doing that is you can lower the rate, but beware of the two favorite friends riding tax legislation that is a rosy scenario. Growth numbers that are off the wall and cannot be justified. And dynamic scoring, meaning if you try to rate, you will have a dramatic increase in revenue. History shows that is not true. I think if they are serious, they would clean up the tax code of the loopholes, and they would lower the rates. Alix i am glad you brought those dynamics because if you are looking at the markets, they are pricing in lower Corporate Tax and then boom, you will see growth pickup in all things will be great. Is that true . I think that it is not wise to make economic decisions based on something that has not happened. That is what the market is doing now. They are already pricing in the accomplishment of tax reform on the corporate side, for example. But it has not happened. I think it is a little dangerous to do that. Alix but if it did happen, did you notice in your years that there was a transmission mechanism from we fixed taxes here, therefore, Companies Wind up spending x . Is that real . From we have cut taxes corporations and we did have some increase in Overall Economic growth, but it was driven as much from the individual side, which is making tough decisions on tax loopholes. Is that a 1986, we cut the rate from 50 to 34 . Lower income people got a that probably one of the biggest tax cuts of their lives. People usedcome loopholes to reduce their taxes. David the solution is to simplify, cut the rates, and eliminate the loopholes. Corporate interest induction is that something that should be eliminated or cutback . Bill it is not productive to go down the list and say yes or no. Would you going to do with distribution neutrality . Youe are a lot of things can eliminate. There are trillions of dollars worth. Today, i do not think we are going to pick the three or four. Lets have less dead and more equity. In a sense, that is not a bad idea, but in isolation, you cannot answer that in isolation. It is like trying to answer, what a we going to do with taxes if we dont know how to fix the president . We do not know how to fix the president unless he reveals his tax returns. [laughter] Robert Mueller may have something to do with the tax returns from the president. What about revenue neutrality . That is a big issue. Should that be a big issue today . Bill in 1986, in terms of the principles i enunciated, we had two operational principles one was revenue neutrality, and the other was distributional neutrality. You cannot give a tax cut to upper income people and it ended up that we gave a big tax cut to the lower income people. Distributional neutrality, not tax burdene way the is distributed, and not increasing the deficit. As i said earlier, the issue on the deficit will go back to our two friends of budgeting and tax writing, which is a rosy scenario and dynamic scoring. David in distributional equality neutrality, it is a different world than it was in 1986. If you look at the percentage of taxes paid by the upper 12 , it is a huge amount. Bill the question you want to know is you can do that if you eliminate loopholes that they use. Example, the top 5 ended up paying a higher percent of the total tax revenue. Why was that . We eliminated the loopholes that the bulk of them used to avoid paying taxes, thereby leaving the rest of us pay more than we should. David you had a reasonably popular president in 1986 in Ronald Reagan. Have seen dramatic events unfold this week, how much of a barrier does that place before the senate and moving forward on tax reform . Does it take the president off the Playing Field and let them go on their own . Bill it puts a big burden on the whole process. Ronald reagan was committed. I remember a visit to the white house monday, and we could tell the president anything we wanted to say and i said, mr. President , i know you are interested in testing from because when you were a highly paid actor, the tax rate was 90 . What i am interested in taxi from because as a basketball player, i was a depreciable asset. [laughter] we know the problem had to be solved. Unless a president has an emotional commitment, unless the president has a treasury secretary that knows how to get things done when jim baker did in 1986, it is going to be difficult. Thisnk the president at point, has manifested any interest or knowledge about what the processes. David many thanks to bill bradley. Jonathan he won two nba championships. What an introduction. Thank you very much. Is it you up to date the scores futures up on the dow. Positive on the s p 500 did after a choppy weakened see the dominated through wall street. If you switch up the boards quickly, it has been choppy for treasuries. Up a single basis point. The story that has not stabilized is the dollar weakness story against the euro and the yan. David gura standby with a special guest. Abigail a special welcome. David President Trump embarks on his first overseas trip. His first thought is riyadh. Then he will travel to rome in brussels. He has been critical of the alliance and the financial commitments numbers have made. That will be one subject of debate. My next guest joins me, jens stoltenberg. There are two duo there are two subjects at the senate. The u. S. Secretary of state says to get to the plant by the end of the year. How reasonable is that . That is feasible because we are now discussing concrete proposals on how we can agree on the concept of National Plans outlining how the different nato allies will make good on the promise they all made back in 2014. And theto stop the cuts spending and gradually increase in move towards spending 2 of gdp on defense. We have already seen nato allies have started to increase defense spending. They still have a long way, but they have turned a corner and started to move in the right direction. David there is so much on natos plate counterterrorism, migrant process how much emphasis has to be on funding . Defense spending funding is critical because we need it to finance all of the activities. Collective provide defense in europe, responding to russia andrted Eastern Europe crane. Part andeeds to play a terrorism stabilize our neighbors. We need to invest more in defense. After the end of the cold war, nato allies reduced defense spending, and that is understandable because when pensions are going down, it is possible to reduce defense spending, but not pensions are increasing again, and they have to increase defense spending. The president spoke at the coast guard commencement saying he will strengthen old friendships and seek new partners. But partners who help and not take and take and take. How damaging effects had of rhetoric when you hear that . President trump has clearly stated to me in several conversations, last one was last month that he is strongly committed to nato and that is been the message from his from the Vice President to secretary mattis, tillerson, and mcmaster. His is a commitment the highstakes is increasing its military persons for the first time in many years. At the same time, all allies understand that we need a fair burden sharing, that is the reason why allies agreed that spending less 2 on defense has to increase and they have started to move in the right direction. David what are you hoping to hear from the president of the United States this week when he memberso you and gathered in brussels when he speaks to you when members gathered in brussels . Jens i expect he will reiterate a strong commitment to nato. Also, of course, his expectation that nato should do more in the fight against terrorism, and also invest more and defense. I expect so because that has been his message sense the elections. And also because a strong nato is not only good for europe, but a strong nato is important for the United States. And the cold war has fought for the stability in europe. Security and prosperity for north america. David there was a piece in Foreign Policy magazine that alleged the summit will be different because of the participation of President Trump the speeches will be shorter, it will be limited, and there will not be detailed declaration to follow the summit. Can you confirm that those two changes are being made . Jens it is totally wrong. The whole story. Meetingting is a normal conducted an organized and weducted in the same way conduct our other nato meetings. There is notat going to be a public statement, but that was the case at the with the newly elected president back in 2001 because this is not a fullfledged nato summit. This is a meeting but we have a new u. S. President meeting nato leaders. It will be an important meeting, he focused meeting. It will focus on burdensharing and what more nato can do to fight terrorism could terrorism. David defense ministers were gathered in brussels earlier this week discussed nato possibly joining the Coalition Fighting islamic state. Do you expect that issue will be resolved by the conclusion of the summit on the 25th . Nato and all that it provides, providing support for the Coalition Fighting. We provide support and retrain iraqi forces. The question is whether nato can do more, and also whether nato the a formaln member of the coalition . Stronglyes are advocating that. It would increase our ability to coordinate with all the nato allies that are members of the alliance. This is an issue that is not being discussed, and i expect decisions to be made soon. David how big a consent is intelligent sharing . Is that a hurdle for some allies, especially in light of the meeting that we heard reported at the white house with a president revealed some sense of information to the russian in the Russian Foreign minister . Jens intelligence sharing is an important part of the nato cooperation. Inppreciate that nato allies the United States are sharing intelligence with nato and other allies almost every day. That is important for the strength of nato. I am confident that all nato allies are able to handle the intelligence that they receive from other allies and partners. David the u. S. Is sending more personnel to afghanistan, expectation that nato would match what the u. S. Were to send. The u. S. Lives to make a decision after the meeting concludes. If they decide to send more troops to afghanistan, how quickly could nato react in kind . They would react quickly, but first, we have to decide how many troops are going to be there. We have approximately 13,000 troops now in afghanistan. Half of them are u. S. Troops. The other half are european, canadian, and coming from other countries. We are now discussing whether we increase, not a big increase, but an adjustment. Again, i expect decisions to becoming it i expect decisions to be made in the coming weeks. We are looking into whether there is a need for some increase in the troop levels. David there was a huge ran somewhere attack last week there was a huge Ransomware Attack last week. I believe cybersecurity attacks is becoming a great concern in nato. What is your position of how to combat it . Jens the Cyber Threats is something that we need to take really seriously because we has a more sophisticated and more numbers and more high and higher frequency of cyberattacks against nato allies and against nato networks. Therefore, nato is responding by significantly increasing our Cyber Defense capabilities. Cyber also deciding that attacks can trigger what we call article five, so they cyber attack can be regarded an attack on all allies. Are also now establishing as a military domain meaning will have air, ceiling, and cyber as operational domains. To helpsupport allies them improve their food Cyber Defenses with joint exercises where we share technology, and best practices. We also have to adopt a change because the cyber threat is constantly changing. We have to be ready to respond. That is what we did last friday when we want all allies on the mounting cyber attack he saw last weekend. David thank you, secretary general. That was secretarygeneral, jens stoltenberg. Jonathan coming up, we are live in tehran, as the president of the United States, donald trump, kicks off his foreign trip. You are watching bloomberg. Jonathan from new york city, lets ways through the Market Action could the action. Futures firmer up 33 on the dow, positive a 10th of 1 . What a week it was involving the biggest oneday drop since september 2016. Still down on the week by one full percentage point. It does not match the magnitude of the drama in d. C. Whippeasury market really y. Between two to four. For me, the action is right here in the fx market. Equities has stabilized and the bond market has stabilized and crew has stabilized and crude has stabilized. What has not stabilized is the dollar weakness story. Eurodollar up 7 10 of 1 on the day. Against thedollar g10 space over the last five days. Dollar is the base currency and everything up by two full percentage points. It has been a big start and it has not stabilized. Alix if you take a look at spreads, that will tell you a different story. It should be at 109. His Political Risk shifting more to the u. S. . Fadehan where did we reflation trade first . In bonds . In fx. Probably the latter two. David that is where you see the Political Risk first is in fx. You saw it with sterling. Jonathan dollar weakness is a story for us in the next hour. Coming up next week, dont miss an allstar lineup. Coming up in the next hour, we can you done to the opening bell. It is 34 minutes away. From new york and four u. S. Viewers worldwide, you are watching bloomberg tv. Hoping to leave the chaos behind him. President trump hence the middle east in his first foreign trip since his inauguration. Stability returns to equity markets after a tumultuous week in d. C. Sends volatility to its biggest gain in almost a year. Stocks steal the spotlight but it is the Unnamed Companies in tech that is getting the attention. Im Jonathan Ferro. The storm earlier in the week, this is the calm. Equities up. 3 . Market, yields up a single basis point. 2. 24. What stands out to me is this dollar weakness store that has been stabilized yet. Eurodollar punching its way toward 1. 12. Alix looking at the individual movers in the stock market. Deere is up 7 . , sales also inn line. They highlighted south america, said strength was large there, but that was before the brazil drama. Sugar, corn selling off because brazil was selling up a lot of their crops. Autodesk up 13 in the premarkets. This is a Design Software maker, lost . 16 in the first quarter, but that was much better than expected. Trying to shift to a Cloud Company as well. Nate friday potentially mna friday potentially. The wall street journal a has made aat vistr takeover offer for dynegy. This would help them expand out of texas. Some analysts say that it would make sense. In a weaker sector, some are uniting against the. David President Trump is about to get on a plane for saudi arabia. One of the questions now is whether he will name a new fbi director on his way out of town. Joining us now is marty schenker. He word yesterday was that may name somebody on the way out of town. Where are we today . Marty we are now hearing that may be he is getting some advice to take some time, and that is in the context of Joe Lieberman being among the front runners. The assumption in the white house was that he would breeze through them and ultimately he might, but there are a number of expressingho are concern about a political appointee in that role. David he certainly does not need another fight over confirmation on a hill. If he can get someone in place to start to put this behind him, can he get back on his agenda . Marty it depends on who that person is. From the names on the list, it is a relatively safe choice but you really want a great choice. Just like this special counsel ler, you want to make that kind of a splash if you want to get the narrative changed. Lieberman does have broad appeal in the senate and the house, but the senate is where he has had to be confirmed. But a number of Democratic Senators said that he should really go for a career Law Enforcement person for that role in the context of everything going on. David when the president travels internationally, he takes a fair amount of the executive with him. Does that mean that while he is gone there will not be anything done in washington, or can they get to work without him . Marty we journalists hope so. The budget will be presented to congress tuesday, so we will have new surrounding that, even though it is essentially dead on arrival. The news flow out of washington, anyway, should diminish. It is now going to be europes problem to deal with. He will make news as he moves around europes capitals. David problem or opportunity, you never know. Jonathan i love his reporting, i want to know where his tie is from. So stylish. Im going to send them and email. Joining us more from the action in d. C. , the head of Barclays Public research, as well, jim bianco. Dollar weakness story still has not stabilized. The equity market has, the treasury markets have come off a bit. Why is dollar weakness still so pronounced . Jim i think it has more to do with europe. The european economy is surprisingly to the upside. It is more about better news out of europe as opposed to bed news out of the u. S. If that is the case, we are back to the weak dollar 40 of s p earnings comes from overseas, and it helps them on the bottom line. Jonathan is that another reason to stay long equities . Reasonsre are a lot of but i dont think the washington turmoil is necessarily one of them. You wouldy, yeah, want to stay long equities, i dont expected to rebound immediately, but it should stay around the levels. Thethan sean, what is number one question you have had from Market Participants all week . It is already a very crowded agenda. You have health care, you have the budget resolution. And by the way, you have a Midterm Election next year. The talent there is really tight. All this time you talk about russia, comey, is time taken away from repatriation, taxes, all of these other issues. Comehan we have people the program through the morning and say in the treasury market at least a lot of the trade is out of the market. Are you having those conversations with clients and investors who say, we dont think it is a 2017 story. We dont think it is a story anymore. A few months ago, we did a survey of our clients. About 63 thought they could get tax reform on the corporate side. I think clients are beginning to back away from all of that given all the news coming out of d. C. David something that you mentioned, which we had not been paying attention to, the 2018 budget. They have a new budget coming out on tuesday. Marty says it is dead on arrival. Why is the process important . Shawn you have the cbo reporting on health care, which will influence the senate. You are right, this is the telephone book that is published, the white house book for the public. There will be a lot of problems here because you are cutting all departments except for defense, homeland security, and veterans affairs, and you are trying to negotiate with democrats on tax reform. Number two, if you are thinking about Infrastructure Spending, people talk about repatriation to help pay for infrastructure. If you are cutting the department of transportation by 12 but then you are going to create a trillion dollar infrastructure package, democrats will say, i cannot trust this guy. Bank of america coming out saying there was a . 9 billion withdrawn from the u. S. In the past week, the Third Straight week of withdrawals. , or thosee right call flows going to be reversed, are we done here, or is there more that should be picked up . Jim typically flows follow performance. Im not surprised we have seen these outflows in the last three weeks because the market has been struggling since march 1. If the market rebounds to new solid highs across the board, i suspect you will see flows follow. I dont think flows drive the market, i think they more follow it. Alix we were already seeing weakness ahead of that. Some of the ecodata coming in weaker, soft data rolling over as well. What is your base case for stocks if the market does not get anything from d. C. And you still get a fed who is still looking for june . Jim i think those two playoff of each other. If you dont get anything out of d. C. I agree it depends on whether we get the budget or the probusiness agenda that trump wants, more than russia and comey. Tax cuts, that would help the market go higher. You would also see an offset of that with a more aggressive fed. If we dont get that and the markets struggle, we would question your june has passed, whether there would be another rate hike for the rest of the year, so those two will offset each other. I think the market will probably stabilize from here and turned sideways to hire from here. Shawn our equity strategists think if there is a tax deal not done, you could see a drop off in the s p of up to 10 . Jonathan a tale risk introduced this week. Impeachment. Materially higher risk than six months ago. You had to apply a percentage to it, what would it be, given what you know, what you dont know, and there is a lot of that . Shawn that is a very tricky question. Clearly, the risk has gone up and clients are asking all the time, especially nonus clients. My response has always been, there is a long road ahead. You have this special counsel during the investigation, said an and potentially house investigation. We have had only two impeachments in the u. S. The house would have to bring forward articles of impeachment, you need a majority vote, and that it goes to the senate. There is a long road ahead to get there. Jonathan i knew you would hate me for asking. David as well. David i agree, we have a long way to go before we get to that. Both of you will be staying with us. Coming up, democratic congressman Bill Pascrell joins us to discuss nafta. This is bloomberg. This is bloomberg. David this is bloomberg. Im david westin. Steven mnuchin said breaking up the biggest banks would be a huge mistake, easing concerns the administration plans a revamp of wall street. In a Dramatic Exchange yesterday, Elizabeth Warren called his comments bizarre. I have never said we are in favor of breaking up the banks and separating. Let me try it one more tim. We are going to run out of time. What does it mean to be in favor of 21st century glasssteagall, if it does not mean breaking apart these two functions in banking . I would be more than happy to come and see you and followup. Just tell me what it means. Means. Ll me what it tell me what 21st century glasssteagall means if it does not mean breaking apart those two functions. Its an easy question or an impossible question. It is a complicated question and there are many aspects of it. The simple answer, which we dont support, is breaking up banks from investment banks. We think that is a huge mistake. Are shawn and jim. Wendy or not you agree with Elizabeth Warrens position or not, it is a fair question, what did he mean when he said we should have a 21stcentury version of glasssteagall . Shawn the administration is still trying to figure out its policies. I think they are starting to figure out that some of these things are not so easy. Treasury has a series of reports coming out on financial reform. How they plan on tackling doddfrank, they could use other areas where they will need congress to undue regulation. They spend a lot of time on this and we expect to see them over the summer. David he did come out and say he was in favor of some new version of glasssteagall. He must have thought about it or talk to somebody about what that meant. Is this a form of ring fencing . Correcthe senator was in challenging him. I get your line of questioning on this. By the way, this was in the gop platform at the convention, something you have heard throughout the campaign and administration. In coming out saying this is taking a different direction on this. It does not surprise me too much. Barclays has published quite a bit of research on the future of financial reform. I think people are getting ahead of themselves undoing doing all of doddfrank and the volcker rule. It does not work that easily. Asked twoshe different questions, one was should you break up the banks, which is very loaded, which the treasury secretary will not say yes, look at jpmorgan, breakaway investment ranking and have it as a separate company. Then she followed up by saying breakaway Investment Banking from traditional banking. That is more nuanced. You ring fence but you dont break up the bank. They were having two separate conversations, werent they . Jim absolutely. I dont expect to see the secretary in that line of questioning to lay out his proposal. If they are thinking about that, how they are thinking about tackling volcker, too big to fail, systemic risk, it will come out in these treasury reports. David jim, does it matter . We have heard from the biggest banks and they say they would do nothing different. Does it really matter, in the real is this World Business world . Jim i think it matters. From election day through march, stocks rantarks up 25 on this idea that they would see more favorable regulation, they would also see a water yield curve because the fed was rising rates. Dayl of 15 since election on this idea that they will get some sort of favorable regulation and will not get something that will be injurious to them like busting up the banks. I do think it matters. Alix what is interesting, jim, we did not see financials participate in the stabilization we saw yesterday in the s p. The stone baked into s p financials, or is it still positive . Beenwhat financials have struggling with shortterm is the flattening of the yield curve. The youll curve has been flattening a lot and that has been working against them. Financialsrtterm, have been focused more on what the fed will do, how wide the yield curve will get. On the 10your8 yesterday, not a good situation for being long financials. Offthan you get that risk bid into treasuries, a flatter yield curve, bang on the financials. Then the agenda will fall to the wayside as well. A look at the financials, we peaked in march. Looking for a positive catalyst. Alix asked the question why they are under pressure. Where is the catalyst going to come from, if not from the yield curve . Jim that is it, the yield curve will be one positive catalyst. That would be a more aggressive fed. Maybe if they began to talk about the Balance Sheet and start to water the yield curve. The other one is regulation. If that is not going to happen or will go slow, that is my financials have been meandering sideways for the last couple of months and will probably continue until some clarity comes on one of those two fronts. Alix thank you so much, shawn, jim. We have some dovish news from the fed. St. Louis fed president jim bullard speaking in st. Louis. Here is what he is saying, the data since march has been relatively weak. U. S. Growth has converged around a trend of about 2 and current fed hike rate is not necessarily appropriate. No surprise. Jonathan dovish news from the Federal Reserve and everyone was thinking, who . I bet it is jim bullard. Alix you are seeing some buying come into the market. Sensitivity remains. David people said moves in the market would not cause them to hesitate in june. Now maybe they need to have a second thought. Up, d. C. Drama and a spike in clinical risk. We will be talking about the vix for you next. Jonathan next week, we have an allstar lineup. City, we continue to count you down to the opening bell. A Beautiful Day in new york. Futures firmer. The opening bell is 10 minutes away. Alix it was the move i have been waiting for, the vix finally moving. These green lines are three standard deviation moves in the vix. The pink is three standard deviations down. Six deviation moves higher in the vix over the last two years. Joining us from new york is the jeffries head of product management. How do you trade the vix right now . We have done some interesting stuff on the vix. , inesday was a huge move percentage terms, really big, but even in absolute terms. We looked at those three standard deviation moves. Only about 40 of them back 22 years, excluding the financial crisis. Movesnd after such big the market tends to act pretty well. On a threeday basis, it goes up a percent. We saw some of that yesterday, this morning. Also really compelling up 6 . Where does that leave us Going Forward in terms of positioning . We saw a lot of shorts coming into the market. That was really about expecting an upside. Where are we in terms of positioning . I cannot speak for vix positioning as well as general positioning. Even before comey was pretty negative. We found a lot of the indicators off. Ump policy had come the highest quintile tax Rate Companies have underperformed since the election, hmos have performed well. That is the view that status quo will continue. That is one of the reasons why this has been a shallow selloff thus far. People were pretty skeptical going in, even wednesday, with the fbi. Alix do we need to rerate for a different type of landscape . About the 10, 20year average. Are we going to see it cap at 15, is wednesday the best we are going to get . Its interesting, over the past year, there are always offense that are unexpected. In the past year between brexit and trump, all that has happened since, certainly seems like the world has gotten used to these unexpected things in a way, and it is hard to surprise the market with much these days. That is probably one of the reasons why we have been at the low levels and are likely to stay, barring some sort of major crisis. Certainly, earnings and Economic Growth at this point would not suggest that anything like that is coming up. Jonathan where is your colleague with a baseball bat . I had so much fun with that last time. Bustingam sure he is heads in a figurative sense. Great to have you with us. The opening bell is coming up. Futures up 39 on the doubt. Positive seven points on the s p 500. Equity markets stabilizing. Muchr weakness still very in focus. From new york, you are watching bloomberg tv. Jonathan from new york, you are watching bloomberg daybreak. 22 seconds away from the opening bell. Futures up 38 on the dow. In Global Equity markets after a volatile week fueled by the d. C. Drama. Despite that, we are on for a second week of losses but the s p, just 1 . The magnitude does not match the drama coming out of the capital all week. As you hear the opening bell in new york, treasuries stabilizing. 10year. He where we had not seen stabilization, dollar weakness, down. 6 on the day. Dxy pulling back to 97 for much of the year. Lets get you the cash open. Alix calm is a good way to describe this friday. The dow up by 28, the nasdaq up by. 3 . The s p is still looking for its second week of losses, however, and the dow and s p are still done 1 over the last you days but it was monday that the s p hit new record highs, so keep that in mind as we round up the week. Individual names coming in with earnings. Lets start with mckesson, up its rival trumps Cardinal Health. It raised its forecast after Cardinal Health cut its forecast. Gap, one of the upside retailers. Better numbers from walmart and home depot. They question with earnings. 2 . Now up Old Navy Sales was really the key here. Down 14, continues the week retail story we saw through the earnings season. It had an earnings miss, also missed on revenue and is also formulating a plan b if sales do not hold up, cutting expenses. They say the tax return issue may have caused some issues. A fascinating week in the market. The wednesday session was so fascinating. This is for the week, individual sectors in the s p. Financials were hit extraordinarily hard, off by 2. 5 . Financial down 3 on wednesday alone. Have not made up a ton of that loss. Tech,als, industrial, telecom all down. Financially tech and leading the rally, and both are showing substantial weakness Going Forward. Jonathan joining us now to break down the open is chad morganlander and the bloombergs reporter oliver renick. You better be long the dollar, short treasuries, superlong u. S. Equities and make sure it is centered around financials, industrials, and materials. This week they got hammered. I wonder how crowded that consensus trade is in equities in the u. S. . Chad i believe there are slim pickings when you forecast out those 12 months, the total return we are looking for is roughly 5 . That said, there are ofortunities, seams opportunities, but we are starting to get into nosebleed territory in valuation. When you look at highyield, also nosebleed territories. We would be more circumspect about return over the next 12 months. Would say yes, however, i would push back a little bit on the nosebleeds. I feel we have moved a few rows closer. What is interesting about the past couple of months, we had decent Earnings Growth. Instead of being at 22, we are at 21. Overall historically, it is very high. Jonathan we no longer need the oxygen tank to breathe. People it encourages because despite the debt on wednesday, the overall benchmark level has risen, record highs before that drop. And we did it against a p e ratio still moving lower. It does invigorate some folks look at the fundamentals. Chad the question is what is fueling that Earnings Growth to justify the valuation . A lot of that is coming from the em side, credit creation there, as well as european markets, european economy improving gradually. Nonetheless, a lot of that is oil and gas. When you look at the s p 500, about half of it, for earnings and Revenue Growth. If you believe like we do that over,d gas will roll creation in china will decelerate, and market cap to gdp in the u. S. Is quite elevated, then you have to step away as a Value Investor and say it is time to flatten out the ong, do not gol into these high data, high momentum stocks. Alix you have investor flows still moving into value, but if you follow the conversation, you would have missed out on the monster rather we have seen. So how do you square your knowledge with what the price action is actually telling you . Chad we are focused on the United States at this point. That said, when i look through companies, looking for proper return, and we do our own bottoms of equity analysis, we have a hard time finding those companies that justifies the valuation. Another aspect of this, so i can answer correctly, as the fed raises Interest Rates, and we believe they will over the next three to nine months, perhaps on the three times, 1. 75 fed funds rate, the cash market looks a lot more attractive than the highyield market, equities as well. There will be this push and pull. We believe that will create a lot of volatility. Itid more tracked and then was, but 1. 75 Interest Rates is not high. If you look at priceearnings ratios over time, the absolute numbers are very low. Doesnt that adjust what you can tolerate in priceearnings ratio . Fundsyou have the fed rate well below the inflation rate, and as you see the fed funds rate march higher and the ecb change their signal on what they will do, that will create the stabilization. Price pressure on the earnings ratio. Thise not calling for massive credit dislocation but we are being a little bit more cautious with our viewpoint. Alix in terms of the cautiousness, the fangs have been relatively insulated from the geoPolitical Risks. They got hit because of the repatriation fears, particularly apple, but where are we with the Tech Leadership story . Oliver there is a deep bench on the tech stocks we have out in article today. Fang stocks have not done well this year, but what has kept the market upload has been tech him about not just those nicknames, s, nonhousehold names that have been doing well, graphics card makers, chipmakers. In the tech index, 84 of the companies in the s p 500 tech index are up on the year. Close to utilities as well, which has done well. I think part of that is the idea that the Domestic Trade was not as strong as people thought coming out of the election. You have that multinational exposure and that is where all the flows are going to. Bank of america has a great report out this morning. I think 11 straight weeks of perhapsing into tech, over time, if that continues, that is an area that gets crowded. Jonathan is that a significant story, to play the International Recovery . Chad everyone is looking for multinational exposure and growth. That sector plays into both of those avenues. Techke largecap old world. Microsoft, oracle, cisco. We would also look at google. When you get into the other large cap tech stocks, growth rates are quite vibrant, but they have a modest the celebration on the top line and you could have a readjustment. We would just be somewhat more careful about those companies. Jonathan down 7 yesterday, the Sales Forecast coming out as well. The ceo of the Company Painting a lovely picture for the next coming years. Give us your sense. Chad we have been in the stock four years. Always three is steps forward, one and a half steps back, and then followed by three steps forward again. From a valuation perspective, it makes a lot of sense. No debt on their Balance Sheet. Consistent cash flow. We believe over the long run, the next three to six years, their Revenue Growth will be higher, and margin stability will always be consistent not always, but the ceo whatasked they would do with that huge cash pile. The answer is always bringing it home if we get some repatriation. As an investor in the company, is that how you want to see the cash allocated . Chad we would just want them to reinvest back in the business because of the return of investment being so high, that would create intrinsic value. That said, ciscos business is growth by acquisition. It has been that way for the past 10 years. We should see a modest bump in the dividend as well as modest buyback, but growth by acquisition is probably where they will go. Alix what do you do with a stock like apple, which some say is a value stock but also a growth stock at the same time, how do you structure that . Apple is a value stock, we dont own it because we believe over the long run they will be more Competitive Forces coming into their main business. We would shy away from apple. I understand how people are making the case for owning it because of the huge cash piles, consistent free cash flow. For us, that is one that we would rather see a little more topline growth in an individual company. Jonathan chad Morgan Lander, great to catch up with you. Oliver renick, thank you as well. Here is your stability. 25 . S firmer, stocks up viewers york, for our worldwide, you are watching bloomberg. This is bloomberg daybreak. Morganup at noon, stanleys global head of Interest Rate strategy. Jonathan it was the week where volatility increased in d. C. To a certain extent where the calm was broken on wall street. Here are the highlights from the conference in las vegas, weighing in on the week that was and the drama in d. C. Trade that we have all embraced, has driven the markets to new highs in equities, is coming to an end. Nothing to run around with your hair on fire. , a lotre recalibrating of the expectations we had of things getting done are getting adjusted. We have had more than four months of street inflows of Foreign Investment into emerging markets. Reversing the November December trade. We saw a big selloff in ems. We have seen the reverse. It will become a more difficult environment. It is evident the markets are pushing back further if not orcounting completely one two of the major programs reform planks. We need to see if we can get these policy measures forward. Some concern but not anywhere near panic. Jonathan chad Morgan Lander is still with us. Looking at the action at the salt conference, remain calm seems to be the message. Yes, but also know where you stand on valuation. It seems that to be the message out of salt as well. They are looking at the progrowth initiatives, when are they going to get done . We believe they will be pushed back a bit. Also when they do go into effect , how much of an impulse to the u. S. Economy will there be as well as to Earnings Growth . We believe it will not be as great as everyone is anticipating. David so dont count on it anytime soon. Even if you get it, it will not justify the valuations you have. Problem in thea market and that is why we are suggesting the long Term Forecast on return of equities , asoughly 5 to 5. 5 opposed to 10 at this point. The growth dynamics we have in the u. S. Is roughly 2. 25 and 2. 5 . That said, Earnings Growth around 5 , as well as Revenue Growth around 5 in 2018. Alix talk about reform and taxes. Thats talk about brazil. We are seeing some buying coming in now in the u. S. Brazilian etf. You like em on that kind of reform . Chad if there was substantive reform, yes, but right now we are light on em. When it comes to brazil, the cloud of uncertainty will continue for the next 12 months. Shyhink investors should away from brazil in particular. With china, substantial pressure due in part because of credit growth. They are being so elevated people should invest elsewhere or shy away and reflect on what kind of impulse that has had on the commodities market as well as global trade. Alix i will reflect on that, thank you, chad. That is my jam. I was making fun of his reflecting comment. Billp, bill cresco pascrell will be here to discuss the equity markets. A tiny rally underway right now. The dow up by 58 points. This is bloomberg. David this is bloomberg. Im david westin. The head of trade yesterday notified the administration that they are brought to trigger that renegotiation of nafta what you. Joined with a colleague on the house ways and Means Committee expressing his department, saying it was hard to square improving and modernizing nafta after mr. Trump had called it a disaster. And pascrell from the Ways Means Committee joins us now. Tell us exactly what you have had bob light house or do it not just improving and modernizing, do you want him to tear it up . Bill the irony is i had met with him in the morning and afternoon, thought we had made ourselves clear. And thed some specifics letter he was going to send to us in order to get these 90day was totallyng, inadequate, very vague. Person, iit educated would not give him more than a three out of a 125 basis one to five basis. David what were some of the specific that you wanted there . Bill currency manipulation, which has talk about death spirals with china. 360 billion is by , the balance of payments. This is a terrible situation we are in. We want those things to be renegotiated in a nafta agreement. Automobilesn, when are partly made in one country , and then wenother negotiate with a second country, we want that source to be very clear. This is the trouble we got into with the south korean trade deal. Third, environmental issues, labor issues, particularly specific to mexico. Their stock must go up with any trade agreement. I would insist upon it. Mainly what our workers will be getting out of this in the long run. We started off with a dramatic speech by the president. What we got was a letter of timidity. David lets go to the negotiations with mexico and canada. Do you believe over on nafta has been good for the country, would you be willing to blow it up altogether . Bill i would not be for that. I dont think it has been for the betterment of the nation if you look at all of the data. Even the agriculture in mexico, which was a big deal. I think we need to renegotiate it properly. Articleress, under one, should be involved heavily, not just messenger gatherers. I hope he takes over from secretary ross. I have confidence in him but he is obviously providing the Company Message right now. I want him to be the independent person he has been in the past. I think we can have real ,egotiations with a Congress Democrats and republicans involved, so we are not giving americans lipservice. David what do you see as the effect of the dramatic backing up of the president . The question, can it be the president s own investments and canada and mexico, couldnt be that talk is ap, he ran his mouth off you would have thought after listening to the president during and after the campaign, that he wanted to blow up nafta, that he wanted to throw it out and start over again. Im not asking for that. I just want to know whether environmental issues, labor issues, currency issues, are involved in this renegotiation process so that we are clear in the congress, which has the authority injury negotiations to put our two cents in as well, not after the fact. David talk to me about your constituents and how they are affected by this. They had benefited from cheaper goods, without a doubt. How would they be affected by the destruction of the nafta structure . Bill this is a question of balancing. I dont like the word balancing but let me use it here. Its a question of making sure that we trade with other nations. We cannot live in isolation, no two ways about that. Won our people working in this country to have good paying jobs and not see many of these jobs that have gone to mexico or other countries. We want to be partners with mexico but we will not be lackeys for mexico. This is more important to me than debating over a wall that will separate two societies that have a lot in common. I think this is an important issue. We all look forward to it. Right now, we want to see what direction we will be going in. We hope the congress has something to do with the direction we are going in. Currency manipulation is costing one million, 200,000 jobs in the United States of america just to china. What about the other countries where we have had this . David do you think the Mexican Government is manipulating the peso . It has gone. But i dont know if it is anything because of what the government has done. Bill after nafta, the economy was better. I want both nations to be helped, but i dont want us to be second fiddle in any deal, whether we are talking about labor, the environment, where products are made. Origin is a very big issue with me, personally. I see that is taking a lot of jobs, particularly the rust belt and the northeastern part of the u. S. David Bill Pascrell, thank you for being here. Bill an honor to be with you. Jonathan what is ironic the biggest source of weakness of the peso was President Trumps talk about nafta. The other irony is they back away and they get the peso strengthened they want. Nothing more to add. The session looks like this. Equities firmer. Up 80 on the dow. We are up. 5 on the s p 500. From new york, you are watching bloomberg. York, and vonnie quinn. Toi am mark martin, welcome bloomberg markets. Vonnie here are the top stories we are covering from bloomberg and around the world. President trump takes off on his first overseas trip since assuming the presidency. Will it help quiet the growing storm around his presidency . We will hear from a noted short seller. Find out why he thinks that this pharmacy is due for a huge decline. We are watching for wild swings in brazils markets as the Company Faces a prospect of impeachment in the same year. Scandal hits president taylor. It should be a sleepy fri