Day in the u. S. And u. S. Markets closed. Europe falling 20 below the daily average this time of day, mixed, lower by 4 10 of 1 as investors cautious in the wake of the Missile Launch from north korea, sending money into haven assets like bonds and gold. Out of equities which are unchanged. Fallinges in red against the dollar and yields in green falling commodities, among them, gold rising. Busy week. When isnt it a busy week for Central Banks . Itsswedish bank removing easing, the latest central bank to make the hawkish shift as Inflation Gains and scandinavias largest economy. The blue line is underlying inflation. The central bank holding its benchmark repo rate unchanged at eliminating the chances of a near rate cut. That was the right bank, u. K. Guild flashing a warning sign for investors. The yield on 10 your notes jumping 23 basis points last week, crossing the main peak and ending the established downtrend as the markets adjust to a more hawkish statement from the bank of england. Mark carney last week, vital resistance points to parent 1. 30 and 1. 34 , according to a tech analyst at bloomberg. 1. 25 is where we are today. Paypoke to ruth about world , the big gainer and european equities, the biggest gainer with shares soaring today, up by 27 . Record advances while the Payment Processing company, the former unit of rbs. Certainty an offer will be made, it has to comply with u. K. Takeover rules. Jpmorgan must say by august 3, whether they intend to bid feared the biggest gainer by europe, lets get the first word news. Has ratcheted up a geopolitical tension by announcing it launched its first Intercontinental Ballistic Missile, President Trump said they need to be run day and. Ined in. It is official, President Trump will have his first meeting with the russian president this friday. That according to the white house. They will meet while they are in hamburg in germany at the g20 summit. The Justice Department wants critics of President Trumps travel ban to leave questions about it to the Supreme Court as the state of hawaii challenges the enforcement, the Justice Department asked the federal judges to deny hawaiis request for clarification. And qatar, the force minister will not say if the country has agreed to demands from a saudi arabia Led Coalition but says that qatar has combined with financing rules and plays a positive role in fighting terror. The coalition accused qatar of funding terrorism and being too close to around. Iran. Global news 24 hours a day, powered by more than 2700 journalist and analysts in more than 120 countries. This is bloomberg. Mark thank you. Joining us to share major market themes is the head of multiassets at elgin. Thank you for joining us. Last week was a massive week for central bankers with a number of highlevel officials, mark carney, mario draghi, speaking in that gathering, the symposium. The stands was a bit more hawkish, wasnt it . The impact on the yield curve was quite pronounced across the globe. Does that change your assessment, the hawker stands from those men . On Asset Allocation . Not really. We felt that there was a reluctance before to accept what happened to yields, they were too low in europe and in the u. K. I think people are reading too much into this, the idea it is a coordinated central bank approach, it would be correlated can we saw today that the Australian Central Bank has reflect the concerns about its own economy and the interest will be canada which is next. Mark sweden was less dovish today. John they are more stuck in the european vortex. ,s rep becomes more hawkish they can afford to without unduly affecting their currency. It is more about that than anything else and mark carney will be anxious to not change rates unless he has to, we have one rate hike for next year. That reflects when we think they will unwind some of the loosening of the Monetary Policy that they put in place. Mark has the move up in yield played out, the doubledigit move across yields in developed sovereign bond markets that we saw over the last week . Has it played out or further to come . John in europe and in the u. K. , it reflects a fair view of fundamental value. The chance for recessions in the future and what we see as the path of centralbank rates in the future, they look close to fair value but we think in the u. S. , they are still too low, particularly over the first five years when the market is betting that more than two rate hikes till the end of next year where we think there could be four. Mark the market will have to become more aligned with the fed we start more dovish and sometimes it catches up. Is it playing catchup . John yes but surprising they have not caught up more. Lets look at the function as you speak to highlight what we are saying. This thousands the probability of a hike tells us the the fed of a hike, said there will be another rate hike but one price and by markets. The one they are not prepared to agree with and believe is the fed, despite the fact there is they are the only one on the path to monetary monetary tightening. Mark u. S. Yields should beware be where . John we think the fiveyear should be 50 basis point higher. Andhink that a significant if the fed can put in place three rate hikes next year, the market will be forced to ewp reprice. It is a mystery why inflation is not high wage inflation. Mark why isnt it . John there are lots of the most pervasive is the threat of automation, people are worried about asking for higher wages in case it leads to Companies Investing more in. Capex. The numbers printed by the fed are higher than in the u. K. And europe because of things like the introduction to new technology which can city deflationary real growth is higher and of real growth and real Income Growth perceived real Income Growth for individuals is higher than the printed number suggests, the less inclined they are to offer pay hikes, they are they can feel a more improved standard of living than the official number suggests. Mark where is the value of the global ball think there is a you in value in the emergingmarket currency, the technicals are any strong and it is not expanding market. A lot of you have a lot of people trying to buy bonds in the market and that is just upsetting the investor flows flowing in with the new issuance, much more attractive that in other areas when you have more new instruments coming through. On that perspective, coupled with the fact emerging markets will be more resilient as rate hikes may happen in the past, higher foreign reserves and more prepared for crisis. We saw this with russia in 2014 when there was a real believe that they may come under pressure but they just raised Interest Rates and a repaint Foreign Debts and used reserves to keep their economy and companies going. Imf on steroids which worked. The reason is because they did not get a sudden stop because they had lots of reserves and could pay out against the foreign liabilities. Basis, we think that we think that inflation on bonds are attractive. Mark highyield, a wonderful were ate know where we the beginning of 2016, close to 10 and to come down to the almost record low of three years ago, 50 basis points shy of that. When you look at that, you have to bear in mind that in partial default cycle. And most vulnerable sectors, energy and oil, we have been through that and we saw it more resilient than expected and we are coming out of a default cycle. One of the dangers, look at scratch rather thans think of the default cycle and some companies have lost in the fund caused knowing that more fed rate hikes are coming and they are expected default and highyield ross these are low and we think it is attractive on a carry perspective, despite the low yields, probably another 100 basis points this could go. Mark stay there, a lot to chat about. John roe with us for the entire hour. From the italy finance minister, he is speaking on the rescue that was approved earlier. Someone said the plan is sustainable and includes limited use of taxpayer money. This is bloomberg. Mark live from london, i am a mark barton. The european close in roughly 16 minutes. Tweaks from President Trump, some of the Political Risk facing investors today. From elgin. Ohn roe koreanly, post north missile test, it has not been confirmed, is the Market Reaction it was obvious, gold up, bond up, stocks down. It has calmed down. Markets are incredible at coping with geopolitical flashpoints. ,ohn they are at the moment this was supposed to be the red line, the Intercontinental Ballistic Missile and north korea said we have had a go and succeeded. Were left with, we need to do more about north korea which was not be reaction anticipated. The reality is it is quite difficult to do that much about it without china and putting more pressure on north korea. The way china is going, we will have to work with them because were worried about a refugee crisis and having u. S. Troops in the region and the instability of having up a close rival. Mark does it affect our Asset Allocation decisions . John we have Systemic Risk generally high, the risk rise so low, a vix barely moved since we have a selloff in rates and the events today and on the basis of that, the Systemic Risk indicated at high levels. This in and of itself does not change that but reflects the environment we think we are in. It is amazing how it will not take much reaction for donald trump before markets priced differently. If he said boots on the ground, we have to place our Sovereign Health over a relationship with the chinese, you would start to see a different reaction. Against the backdrop come it looks minor at this stage backdrop, it looks minor at this stage. Mark where are you story . More recession may be needed to break low volatility. Says goldman. They look at 14 similar low volatility regimes since 1928, in equity markets, that is the case, what you were just saying u. S. Recessions have been linked to the spike in oil price. In reality, recession looks like a remote possibility for most countries at the moment, though some signs in the u. K. That that is becoming more mark this is the probability in the u. K. Of a rate hike in december. Down tojune, singledigit. We talked about it a bit in the last segment. Is that ridiculously high . John it is high. The reason it is high is because of other measures they can take, if they want to slow things. The prudential regulator came out today and said it thinks they need to review consumer unsecured Consumer Lending is getting out of control and they will review that. They think lending standards have become more lax while one year ago they loosened lending standards. Come august, they were word about what is happening in the economy, they could react by taking funding schemes and started the early they could review it was august which would be another measure at their disposal. If they let it keep running, it gets hard to say we are worried force the end of the year. They do not feel like the obvious measure, we have a slowing consumer, increasing Interest Rates will not place the pad up to bring inflation down significantly. Most of the fall in the pound is where we are now because of brexit risk rather than the small cut in Interest Rates. It does not feel like an obvious policy, and there in mind that historically mark carney has not been keen to raise rates and prefer to use macro prudential policies. Mark he often hints at something but does not follow through which is a wonderful story on the bloomberg by mark gilbert. John roe stays with us and coming up, Oil Rebounding from earlier losses. What is shaping the global oil market. The ninth date it is up, best run of the year. Mark live from london, i am mark barton. Gaining, continuing the nineday rally, despite rising opec supplies. And Oil Strategist is here and john roe from elgin. 2010. Un since investors shrugging off the opec output increase . John it appeared it appears, i do not think there are too many producers who are cheering this. Things moving in the direction they would like to see. I think there are worries coming up. ,e have seen opec output rising up 260,000 Barrels Per Day month on month into june. We have had libyan production continuing to increase. It is now over one million Barrels Per Day an average of ,000 in june. 850 we are moving into the peak of summer temperatures in the persian gulf. We will start seeing more crude being burned for Power Generation in saudi arabia and elsewhere. That means the cuts will start having more of an impact on their exports. They will be more painful for them to make. There will be pressure to produce a little bit more. Balanced against that, we saw a significant dip in u. S. Production, in one week of figures. You cannot read too much into that as we have a hurricane in the gulf of mexico. We had a big maintenance in alaska. Both of which are temporary factors. I think the market is perhaps reading more into that. Mark how are you reading it, you are long oil . How do we best play this oil market . How are you planning long oil . John positioning got very negative but that is one reason we are positive and we expect much bigger draws in the third quarter. Against that, we should see confidence that the market will tighten with the big surprise being the increase in u. S. Of why alongside libya and nigeria. We are worried about in the u. S. More supply to go. As a push up the number of rigs, they use pad drilling, so they are unable to complete all the wells with any two months they do not count as brawl that uncompleted but expected to be completed rapidly. As drilling goes up, the delay in productivity coming through and you will see it, even if numbers of drills level off. That is the concern we have. I think the big draws will give more confidence. We have play that through the the ruble as ase prompt strong positive carry and a lot of people like it. And we oily currency have gone along with oil stocks evaluation ofcked Oil Companies against crude and opened up this big 10 which against where we feel the regress price of the stock should be versus where they really are. We think it is evaluation discount, which should give us return. Mark tensions around cutter, what impact does that have . Little at this point, i was listening to you a couple of minutes ago talking about geoPolitical Risk and how that is being ignored. Nowhere is that more true than in the oil industry. Opec,re of middle east not at war with itself but not venezuela on the brink of crisis. Oil markets are shrugging it off , either of those has the potential to worsen and to disrupt supply. Mark thank you for joining us. John roe stays with us from elgin. Look at work european equities are trading, four minutes away from the european close. Little change, independent state in the u. S. And volumes are down today. Barely moving. I will leave you with the currency board. Ierling slightly weaker than anticipated and construction pmi data out of u. K. Today. This is bloomberg. These days families want to be connected 24 7. Thats why at comcast were continuing to make our services more reliable than ever. Like technology that can update itself. An advanced fibernetwork infrustructure. New, more Reliable Equipment for your home. And a new culture built around customer service. It all adds up to our most Reliable Network ever. One that keeps you connected to what matters most. Mark this is the european close us stocks finish in european trading. Movement for major european equities. Yesterday, investors cautious today with money flowing into yen, gold, bonds, riskier assets like stocks after the north korea fired a Ballistic Missile intercontinental. Down for 10th of 1 and basic resources as oil is up. It was down after eight days of gains but up for the ninth day, the best winning run since 2010. We love our stats at bloomberg. Two they pushed it to explore alternatives to its plan 6. 4 billion takeover of texasbased huntsman saying the deal will destroy shareholder value. Part of this growing trend right now of shareholder i fit is a, targeting that activism targeting european companies. Clarence up 3. 3 . Declines in tech and Telecom Shares causing the dax high relative to the measure for the euro stocks 50. The new volatility index surging 23 in june after seven straight months of declines, the longest run since 2000. Lets get to earnings, the years may be shifting as analysts trimming expectations for corporate earnings as gains in macro data may be peaking, according to analysts at jpmorgan trace. J. P. Morgan chase. This is europe, excluding the u. K. , the white bars are global and the blue bars, the change after months of positive revisions. This coincides with Central Banks giving signs they are ready to tighten liquidity. A wonderful chart. Lets check in on the bloomberg first word news. More from new york. President trump says china should put a heavy move on north korea and end the nonsense. That was his reaction after north korea announced it has launched its first Intercontinental Ballistic Missile which would bring kim jonguns 15 close to building a missile that could reach the u. S. Neither side has exhibited that offer a federal Appeals Court says extend in a cannot obama era admissions standards which could set back the donald trump demonstration plan for rolling back antipollution rules. The court says the epa can reconsider a rule that limits omissions from oil and gas wells that the current rule has to remain in place in the meantime. Family of a the libyan man convicted of the 1988 lockerbie bombing has started a campaign to clear his name. He was convicted in 2001 for the bomb that took down pan am flight 103, killing 270 people and later died of cancer. A lawyer for the family has presented evidence to a criminal case review commission. And venezuela, the Opposition Alliance will hold an unofficial boat to gauge support for a National Unity government. Antigovernment protests have been going on for months and have spread to the poorer neighborhoods of caracas. The president is preparing for a Constitutional Convention that critics say it would give him more power. Global news 24 hours a day, powered by more than 2700 journalist and analysts in more than 120 countries. This is bloomberg. The u. S. Markets closed today for the Independence Day holiday,nalysts joining us is james a cross asset strategy from ubs Wealth Management and john roe is still with us. Clientsthat 82 of your think that now is the most unpredictable time in history. How does that play out when it comes to strategies, investment themes that you are looking at for your clients . It is an interesting dichotomy between what they are saying and what they are doing. 82 say it is the most uncertain time in history but they are still very much invested. In themes like equities, and particularly in the eurozone. Doing, that isd something you find . John you always think you live in relatively uncertain times. Finally number of may be elevated, over history, the people think they are in volatile times because it is easy to remember the risk in times and harder to remember the risks that did not occur in previous times. It does sound like that is elevated. Mark equities are good but last week, janet yellen was noted when she said that maybe some assets are a bit rich, do we include equities in that . Comedo not think we would equities for the most part are at longterm averages in terms of their valuation multiples. We are seeing Earnings Growth has come through in the eurozone and in the u. S. That can burn multiple down quickly and for our part, where you may see degrees of bubbles forming, not the equity market, more inclined to point towards the bond market which is boosted by policies over the years and potentially some markets which have been tied to the story. Mark you would not have seen my last chart when i was down in front of the platform, my earnings revision chart, j. P. Morgan chase chart that shows analysts have started trimming expectations for corporate earnings. What is going on . The trim and expectations after a strong run of outflows, we take a step back and look at the bigger picture, particularly in the eurozone, the earnings over the past few years have been one of a slope, predicting doubledigit at the first of. And the year down the slope to a 0 growth. This is the first year without that pattern emerging, the predictions of the first of the year staying the same or raising. Mark is that pattern broken, bc elope pattern the sea slop pattern . John it is, it is the exception when that does not happen. Analysts are bullish about their Asset Classes and quite keen to appear positive about the company. Rather than bottomup and topdown. An unusual year and the fundamentals do look better for europe because of more space in the economy. On the flipside, not as much inflation which is a key concern. Mark longerterm investment intos, james, we will get some of those. Talk us through these, emerging market infrastructure, security, safety, energy, efficiency, automation, and robotics. As we do approach the midand we it link than investment horizon and look for to multiyear horizon. That points us towards longterm schematics. We like to bring together megatrends that are fairly indisputable. Those being population growth, population aging, and urbanization. The intersection of those three megatrends present interesting potential investments for us. You mentioned the security and safety, that is one high on our list. U. S. Federal reserves have increased spending on several security by 50 cybersecurity by 50 over the last two years and we believe that trend will continue. I grit economy level, across the developed world between. 5 and 1. 5 of gdp being lost to cybercrime. These are the trends, that regardless of trends, will be structural growth areas and appealing for our clients. Mark what are your longterm schematics . John similar, democratic demographics are similar. Fromy, where we flipped this peak oil being all about when you get peaks apply to when you get to demand, not in more than 15 years. We always had increasing energy usage. Technology, intersection between technology and energy is crucially important. The speed at which oil demand gets destroyed, for transport which will be a function of how quickly autonomous driving comes through. Be will enable the other two renewed faster because of higher car usage and the high percent of the time a car is used, the more attractive electricity used relative to oil as a fuel. Mark great stuff. Will get your final thoughts on Global Markets in a matter of minutes. Andian finance minister other italian officials speaking on the rescue of monte if italy will have a 70 stake in monte dei paschi and they plan to pursue a return to the stock market and the rescue plan will not include firings. The watch that on tv on the bloomberg. This is bloomberg. Mark this is the european close on bloomberg markets. Lets get back to the cross asset strategist at ubs Wealth Management and john roe from elgin. Aboute talking earlier geoPolitical Risk and how markets have had this amazing capability to shrug it off. This year the dutch and french elections, u. K. Election was a surprise. One in germany in september. To what extent are that election throw up a shock. . The german election is interesting, all of these critical events, the consensus would be it is the one that we have the greatest certainty of the outcome that Angela Merkel will be reelected. This fight the greatest certainty of outcome, also the biggest tail risk. Antacid we have leadership coming from france in the european project, if germany lost its figurehead, the impact of the markets would be far greater than any adverse outcome we have had previously, brexit or the italian referendum. Wayill see this only right but the biggest tail risk. Mark is it too early to position, to hedge, to protect ourselves against the terrorist tail risk . The best way to navigate such tail risk is to spread a portfolio through diversification globally and across Asset Classes. Rather than paying for your hedge, you are paid to take the hedge, diversification. We generally see an implied volatility a fantastic forwardlooking predictor of returns. When we see volatility index, 15. The vix, below the market normally is pretty good at pricing these risks when volatility is low, it pays to be invested. Mark germany versus italy, something you mentioned in the break, what we are seeing in italy with the resolution of monte paschi, the partial recapitalization, the germans were not happy. , not everyone is happy and they are worried about the banking project. Not a level playing field. John interesting because Angela Merkel wanted to appear proeuropean through the election cycle and that is because she did not want to give schulz room because the german population are very proeuropean. She wants to be proeuropean but without promising anything. As soon as she promises things, that can get the population on her back. Doesnt want say recapitalization is ok or commit to a single physical budget. If you look at the broader economic backdrop, the big problem for europe is on one side, you have germany with less than 70 debt to gdp and falling at about 3 per year. On the flipside, italy, 130 debt to gdp and rising. How on earth do you come up with one Monetary Policy that suits those two reasons. The fact that Angela Merkel will get reelected, while in italy 50 of the people will vote for extremist parties highlights who the policy has suited more. A mix of fiscal and Monetary Policy, how suited has suited the germans more than the italians who wouldve probably like bigger measures to help with their monetary burden. They have got unemployment in italy nearly as site as it has been at any point in the last 25 years. Germany has remarkably low unemployment relative the last 25 years. How do you come up with one Monetary Policy that works for both of those is a conundrum. Mark not just Monetary Policy but how do you further move the european project along . If and when Angela Merkel wins her fourth term. Does she have the freedom then to change her stance . Would argue that for the most part, when you get the alliance of germany and france at the heart of europe which looks like we will be having, the european project generally moves forward. These things are pendulums that swing one way or the other. By and large, these elections are the critical election for 2017. That said, when we do research we tend to find correlations between sectors are more thatful than the Country Companies are domiciled in. We would be focusing on the sectors and winners and losers and if you look at the core financials at this point, in the eurozone, they will benefit from the rising rates, extremely cheap relative to the u. S. Peers , looking at sectors rather than countries at this point. Mark when it comes to financials, not country specific, you say european financials are a by buy . Exactly, we put our bets on the eurozone financials and the energy stories. A lot of people will push back and say that vibrations are higher across equities. When you look at these sectors, they are value place where you can extract value. The energy is a strong Cash Distribution yield and the financial is geared to the rising rate story, a commendation we think will be attractive. Mark is the tech rally over . We know it is been quite significant on both sides of the pond. Stoxx 600, Technology Index off its multiyear high, the high a month or so ago, the highest since 2002. Have we seen of the best of the gains in technology in europe . We would argue no but look at u. S. Companies more than europeans, in the u. S. , the tech sector is far larger and more diversified. When we look at structural , we arend cybersecurity confident we have a structural growth story in the i. T. Story that will continue to perform for years to come. Know there ise to clear position in this space as tech stocks have been quality stocks, momentum stocks, all of which put together something led to considerable flows into the space. Mediumterm, we bet on structural growth rather than positioning and say tech stocks continue. Mark anything you disagree with . John they positioning side, that has cap does away from it. We tend to get nervous once a sector becomes the most position sector and it became the most position sector, it sold off because you knew you need new capitalists to keep the sector higher whereas like european thee prefer u. S. Energy, area we tend to focus on because we like the evaluation story and we like the fact that everyone else hates it. Mark good logic. Thank you both. We will get final thoughts from john and a second, the italian finance minister and other italian officials speaking on , he says paschi rescue they will have a 70 stake in the bank and says that the antiin bank deal may be useful for other eu member states. And monte paschi plans a return to the stock market as soon as possible. Once the full event on the bloomberg at tv. This is bloomberg. Mark live from london, i am mark barton and this is the european close on bloomberg markets. Back with final thoughts from john roe. We basically answered all the questions he and his team talk about. What message do we get from low nominal and real Interest Rates . We did not discuss, how sustainable is the pickup and world trade growth . John it is sustainable and we think that because china will probably remain a decent pace of growth for the rest of the year. We have the congress in the thequarter, they will biggest risk is donald trump and his protectionist rhetoric, he is deliberately holding off on announcing the steel outcome until after the g20 summit which could be a bad sign because you get the same thing with the paris field where he waited for after the summit and said i am out and almost avoided the need to talk to people he may have been treating badly by simply refusing to accept where he was until afterwards. That is the downside. The fact that china is going well and europe is doing well point to a continuation. Mark what question do you get asked most . By clients . John what are the risks, given volatility is understandably low, what are the catalysts from here that could go wrong . In the u. K. , we need to keep in mind that the announcement today and the loosening of Credit Conditions with a real risk, saving is a multiyear low, undertook percent, which reflects the extra borrowing under 2 , which reflects the extra borrowing. Geopolitically, north korea, donald trump and the potential for protectionism. Finally, Central Banks have said it will site tighten policy and we have a risk that they start doing it and bond markets get scared, rates rebound risk off. That is scary for the portfolios. What may be as bad, continued inflation disappointment in the u. S. With becomes a question of is it possible to generate inflation, or to do so would you have to go so crazy that the bubbles you create are unacceptable and you get a revision of fed policy . Fork is very flat and generally that if it is inverted, a concern that the fed what they did earlier, operation twist where they extended the bond purchases. Something that appears to have been successful is the japanese and the yield curve targeting, saying, we are not knocking shortterm rates down but set 10 year rate of zero and if you want to bet against us, you try. When we racel you short and rates the long and rates go up, do not agree, we will force the rate of. Rate up. Mark the Illinois State senate approving be 36 billion spending plan in a bid to end the budget impasse and avoid ending cuts. Independence note, day, tune into bloomberg tonight at 8 00 p. M. Eastern for alix steel and matt miller cohosting the boston pops fireworks spectacular live from the boston historic esplanade. That is it for the european close. This is bloomberg. Announcer the following is a paid advertisement. For time lifes collection. From beautiful downtown burbank. Announcer it is the best of the laugh in from time life. It has been 50 years since america heard this. Alright, sock it to me. One ringy dingy. Two ringy dingies. [laughter] announcer and this. May i suggest you look that up . News of the future, 20 years from now