Transcripts For BLOOMBERG On The Move 20160928

Saudi signals accommodation while all traders old their breath. Opec meets today in algiers but can it reach a deal . Key question in oil markets that been pushing round equity market. Green territory. We were flat on the stoxx 600. Up. Ill see how we end bankyes on opec, deutsche clients seeking to build the biggest newspaper saying that it is off the table that they would take help from the German Government. We have been hearing from them saying capital is not an issue. Will the markets by his calm reassurances . Guy lets talk about what the gmm tells us about what is happening around the world. The nikkei down 1. 31 . The s p and us in positive territory. The Consumer Confidence data was reasonably bullish yesterday. We have seen it option below 50. In terms of what else is happening, new zealand is a little soft. A littlegian currency softer. A little bit of a reverse of what we saw yesterday. The dollar is up though decides to drop off the screen. The market opened 27 the market open is 27 minutes away. The chief executive of Deutsche Bank has dismissed concerns about finances. Newspaper thatd capital is currently not an issue and accepting Government Support is out of the question. His comets come after shares in germanys largest lender extended losses to a record low in the wake of the u. S. Requesting 14 billion to certain settle a Mortgage Backed securities case. Royal bank of scotland will pay 1. 1 billion to settle claims it sold faulty or its backed securities to u. S. Credit unions. The agreement closes a lawsuit filed on behalf of to Corporate Credit unions. Rbs has not admitted fault and says the settlement cost is substantially covered by provisions. The Company Faces Mortgage Securities disputes including involving the federal Housing Finance agency in the justice department. In asia areartners said to be in discussions about leaving Goldman Sachs. Planning to depart after 15 years and Michael Smith, head of Southeast Asia is in talks about leaving. Comment. An declined to miller and smith could not be reached for comment. S, a tireless advocate for middle east peacekeeping has died at the age of 93. He suffered a stroke having entered hospital in tel aviv two weeks ago. Elder statesman of israeli politics and the last surviving link to the countrys founders. He held all of israels top civilian posts in occur that spend spanned more than six decades. Global news 20 for hours a day powered by more than twice 600 journalists and analysts in more than 120 companies that countries. This is bloomberg. Caroline expectations of a deal to stabilize the oil market are low after iran said it wanted to raise its output. Bloomberg spoke to Russias Energy minister ahead of the meeting. Came we all came to see the market balancing of possible and everyone understands it there is a need for markets [inaudible] so everyone is in favor of propping up the market [inaudible] caroline not just russia but nigerias oil minister gave his take on the options open. Freezes at current levels are still fairly high and would not make a serious impact. There have been some arguments that we have it willing partnership as it is right now because of what is possible. Situation, hee will not have much impact on prices. Carolina a very is a team on the ground. Momentum does seem to be building toward the next one in november. It lookshat is what like at the moment. The situation is changing by the hour. Saudi arabia has taken the lead here to try to carve out some sort of consensus. We heard from the Saudi Oil Minister late last night and he said he was positive on opinions aligning and interests being put on the same page and he also outlined how there would be exceptions in a possible supply freeze. They would be able to produce at higher levels while the others would cut back to what he called a previous achievement. That makes it tricky because a lot of the members here field that they want to continue pumping at record levels and feel why should they be the ones that cut back so we will be looking out to see what they can do in terms of common ground, can they bring everyone on the same page . We are waiting to hear from iraq which has been vocal in terms of their entitlement to additional supply. 500,000 euros a day is what they are arguing. They are producing 33. 7 Million Barrels a day. You look at the Global Supply situation, what is happening with u. S. Crude and in a the situation becomes alarming. The stakes are a lot higher and we will have to see whether they can come to a consensus. What does iran want . Has long held the view that they are entitled to presanctions production levels. They were targeting around 4 Million Barrels a day. That light has not shifted. What has been interesting about the iranian position is the Iranian Oil Minister says he has not seen a saudi proposal which goes against what sources were telling us, against with the algerian oil minister was saying in terms there was a proposal to freeze production at january levels. Iran would freeze and saudi arabia would cut. Not getting a lot of positive feedback on the proposal. We will have to wait and see whether they can find some common ground. The iranians go they are entitled to 12. 7 of market share. They have 10. 7. We will see what they can do. By thank you. Is joining us. Ng hard how are you positioned on oil . Patrick we are short on oil. We have a big implied volatility. I think that is a very high carry strategy. Anytime there is a potential agreement, oil spiking 3 we are adding to the shorts and taking profits one or two days later. Carolina bets against oil. E have the world index really moving in tandem with oil. Is that we should be putting against our bets on stocks . Bit of a long position in stocks. We have been selling equities into the really and we are doing our short will position as a hedge against our long equity positions. Some nice portfolio characteristics where you are in an environment where all these are highly correlated. Nice offset against risk asset which are equities which are getting a bit expensive. We think there is still room on that set of things. Guy is there any money to be made in Oil Services Equities . Patrick i do not think so. They are not cheap. There is a lot being priced into the stocks that there is going to be cuts on the producers, on the Services Side of things. There has not been a dramatic slowdown on the u. S. Side of things. Rig counts are moving up but i do not think there is a lot of bad news priced into those anymore. Caroline the discussion on oil fits into our next topic. Goldman says reflation is on the way as the bond market signals agreement. We talked positioning. Then it is the open. And rbsat Deutsche Bank and the ecb president prepares to face his critics in berlin. It is an interesting conversation. Do not miss our exclusive conversation with the former bundesbank boss. Ask about whether marco well backstop or not germanysl backstop biggest bank. So much going on today. A closed session of german parliament. Germanys a speech on feature future. Lets get you up to speed on the Bloomberg Business flash. Walmart is in discussions to invest as much as 1 billion into indias Biggest Online retailer. That is according to a person familiar. He said walmart would take a Minority Stake which has an evaluation of around 16 billion. The move comes as the companys Battle Amazon in ecommerce. The south korean Court Dealing with the receivership is considering starting the process of the container line. They have called for a meeting of officials who are evaluating the business. The move comes after an analyst said yesterday that Miller Maersk could buy a smaller rival. In afterhoursl trade after the Worlds Largest athletic brand posted future orders that missed analyst estimates. Contented cannot maintain growth. Orders rose 1 as of the end of last month. Analysts had projected a 5 gain. Adidas and under armour have taken the nike the toll on nike. Fund plan to management. The bank has a market value of about 49 point 5 billion, more than 500 million beating estimates and the most outlets of any chinese lender. That is your bloomberg is this flash. Guy inflation is about to make a serious come back and serious is the important part of that sentence. Investors anticipate Consumer Prices will rise one point 3 annually. That is the highest level based on bank of america data. This is a chart you can see in front of you. Many Central Banks have a 2 inflation target and the boj has a symmetrical target. Just a reflation or slightly grind higher, should we be repositioning for more inflation and i will ask our guest. 1. 3 . Were 12 months ago we worried about falling into deflation. You have to take it right now. Inflation is something you can hedge against quite cheaply. There are so many risks from higher Interest Rates that you have all the equity and yield plays. If you can hedge against inflation, hedge against higher Interest Rates. That is the thing. 1. 3 inflation is very low but that is significant in terms of where Interest Rates are. You have negative real yields in almost all developed Government Bonds and nominal yields on quite a few bonds right now. You can short those instruments right now. It is not cost you anything to short them and that is your hedge against inflation. Bonds will fall with inflation. Five years from now it will be very difficult to explain as an investment answer, why werent you shorting these things when whygot hate to short them, were you shorting things that had no cost to short them . Youre not going to continue with this negative Interest Rate and if you do it is a different world. It is a good time to be hedging even if you do not expect inflation to jumped are medically. It is something that will have credit happen quickly if it does happen. Japan ever reach in excess of 2 , will the u. S. Get off to the 2 figure . There is no signs of it happening nearterm. That is what all the banks are trying to do, all these quantitative easing, negative Interest Rate policies are designed to reflate the economy. 2 targets and inflation is not hitting that. We have extended liquidity cycle that will eventually stoke some inflationary fires. I do not see it nearterm. That is not the time to be putting on hedges when everyone knows it is had it is coming. You want to do it when it costs them is nothing to put on. I would view it as a hedge rather than a tactical position. Guy what are the implications of significantly high yields . Way would have moved a long. If you look at the economics of this there is a compelling reason for believing that yields will be significantly higher going forward. It is hard to get everyones head around that but there is quite a compelling case for it. What does Everything Else look like in a world where outside the u. S. , 10 years yielding 3 . Case the only compelling is that it is cheaper versus bonds. Basically, you see a multiple compression on all of the risk assets. Everything is getting its value because it is a zero Interest Rate environment. You have qe and loose Monetary Policy keeping and supporting valuation multiples. Once you get to a 3 multiple on the tenure, the s p false percent if it happened overnight, it will be a gradual fiveyear thing. Hopefully earnings go into that and you do not see the big selloff. If you got here today you would see a 30 or 40 selloff. When that short u. S. Equities, fund, we aref our long 20 percent u. S. Equities in different sectors and long european equities. We will do well in that environment because we think the u. S. Needs the leads the Interest Rate curve. The central bank will start hiking rates, the only place the consumers confident in spending. The 10 treasuries something that is the benchmark for risk assets globally. Guy stay with us. We are minutes away from the opening. Rbs is the bailout lender agreeing to pay 1. 1 billion. Faultylaims it sold Mortgage Backed securities. This is bloomberg. Caroline its to the open. All eyes on Deutsche Bank. The ongoing debate continues , it is then the bild most widely read newspaper. The chief executive saying raising capital is currently not an issue, accepting Government Support is out of the question for us. Worries over potential costs of a u. S. Probe are overblown. Talking of u. S. Probes and payouts. Tarred with the same brush. It is in lockstep with Deutsche Bank. It has sell it settled one of the smaller elements of the obvious story. There is another to settle. It will be interesting to see if the stock is affected. The other one i want to mention, little shy, definitely below expectations. The ceo has indicated they have seen no impact this far from the exit brexit. He british consumer continues to spend. they are still wanting to go traveling. They are booking up their cruises for the summer. 20152016 underlying earnings growth, they are raising it saying trading remains robust. Lets get a quick take from patrick armstrong. Overblown forate, you, not too worried . Patrick i am actually very worried. People have had a it of a sugar rush. You have the government talking nott fiscal spending and just sticking to a tight budget the way they were six months ago. That is almost a euphoria brexit has not hurt anybody. As we get into the real debate on brexit, it is a binary discussion and there is no wiggle room on either side. The u. K. Wants to access to the Common Market and is not want to provide labor. I do not think there is going to be a positive outcome. Caroline thank you very much. Guy good morning and welcome. Im guy johnson at bloombergs European Headquarters in london, alongside Caroline Hyde in berlin. We are moments away from the start of european trading. Caroline has your morning brief. Battered. Guy, banks the deutsche ceo rules out government help. Rbs is slapped with a 10 digit fine. Awhen will the bad news for banks end . Labour exclusive. Deutsche banks impotent Monetary Policy and animal spirit. Thats at 8 30 a. M. U. K. Time. And crude compromise. Saudi signals a compromise while oil traders hold their breath. Amy today in algiers, that can they reach a deal . Trading flat as we had to be open. Guy trading flat. Mildlyxpecting a positive start for european equities. Lets show you whats happening. See how the Market Makers markup these stocks. A little rise in the auction. Be pushedike we will by Forward Momentum and see what comes out. Were waiting to see what happens with the Banking Sector today. London is on the front foot, harris is also on the front foot. Were seeing some games coming through by 2 10 of 1 . Lets break up the stoxx 600 and show you the national basis. Spain, ireland, sweetened, everything sweden, everything in positive territory. Well. Cranny is with us as manus when you look at the stoxx 600 there are three big issues. Consumer confidence in the u. S. Is what boosted the equity market to the highest level since 2007, and still theres the probability of a rate hike drop. Probabilities are rising on the open, which takes a little bit of relief rally. But draghi is in berlin. He is going in there, talking a fiscal game. Probabilities are rising on theyellen, justify yourself. That is the message from the markets. She will speak Deutsche Bank, front and center. Led, autostechs have up 11 . Keep an eye on the price of oil. Will the arabians and saudis make a deal . 10 year Government Bond giving mark carney a printed view in the herald in scotland yesterday. He seems to have shifted gears in terms of his perspective on the u. K. Economy and its ability to weather brexit. One thing which does concern me slightly is the bid to cover ratio is dropping. This is the 15 year sector, dropping 2. 38 times. A number of weeks ago it was at 4. 14. Lets have a look at some of the individual names on the move. We are looking at Deutsche Bank and sainsburys. The we have here is report is talking about sterling devaluation. Still unclear in terms of the effect on consumers. There were additions to garner strength, but they did away with it. Theyre going for cheaper every day, sales down by 1. 1 . We wait and see that Deutsche Bank opening price. 2016 is about profitability versus 2011, which is about solvency. Thats the take from the market. Deutsche bank will wait for an opening price. Guy phoenix is offering to buy abbey light from deutsche. Price tag would be 935 million, the deal would be financed by a 250 million new bank facility. Searching they are looking at Deutsche Banks assets and thinking, maybe john cryan will take an offer. Maybe thats whats happening. Fornix offering to buy it 930 59 michael moore, the Bloomberg Finance team, joining us. Patrick armstrong, still with us. Is that what people are thinking in the market right now . Looking at deutsche and thinking, maybe i will have that . They will have a look. This has been in the works for a while now. A couple weeks ago, we knew this was coming, and this has really driven by the change in the regulatory Capital Requirements. Owned leading up to the crisis, the Capital Requirements on those businesses have gone way up. A lot of the banks are getting their insurance units. That is why you are seeing this move. Deutsche bank may need to do some other noncore training. Guy Deutsche Bank stock is popping this morning. Its being battered to a certain extent. Its trading near 10, so if it comes down it will be a long way. Do you think thats what the market is thinking . Right, we see a headline that says they will offload assets, there could be more to come . If you are in john cryans head right now, you are thinking, i need to look at every single line of this and figure out whether i want to keep it . Do you think we are giving granular in terms of what they are doing . I think so, and i think the market likes any sign of progress. Even though they knew this deal was likely to come, getting into some sort of finish line, being able to show some progress on some of these steps they are doing to improve the Capital Position and strengthen the bank, make it more focused, i think the market appreciates that. In the last week, you havent seen a lot of news items for Deutsche Bank. It has been a lot of sentiment moves. We have known about the doj discussions; that has been out there, its just the market kind of reacting to that. Caroline patrick, i want to talk news items. John cryan has been making his own, talking to the build in germany, trying to reassure investors and savers saying that capital is not an issue currently. Do you believe him . With whats currently in their, yes. I think we have an ok Tier One Capital ratio, but they have to improve that. Whats not clear is how they will improve it. You can see how it makes sense. The markets put a. 3x multiple for Deutsche Bank. Any other bank can buy it and get a higher multiple. Any equity issues will be incredibly elusive with the overhead of fines, so they wont want to do that now. Its probably a winwin scenario, for Deutsche Bank can score some assets. Michael, we course, are seeing this u. S. Investigation, of potential 14 billion was the immediate number, and that has become a systemic issue. Rbs moves in lockstep, hit with a fine. How much is this consuming the entire sector . It certainly is. I think it is something off the front radar screen. Theyre focused on low Interest Rates, and some of the other issues the banks face, and this has brought back into the fore the amount of fines that are still coming from things that happened a are nine years ago. Thinking, maybe we are past the worst of it. Then you have another fine like rbs, where there are so many outstanding legal issues that the banks have to wrap up before they can say, its a clear path forward on the capital front. Guy Deutsche Bank is saying it sees an 800 million euro pretax loss from what is happening. Not all good news. Would you be short deutsche at this point . No, i think its a risky short right now. Everyone knows the bad news there. They only have to pay one third of the fine, or Something Like that, which is what the Goldman Sachs bank ago she hated. I think the stock would move higher. Guy michael, great stuff. Thank you very much. Patrick armstrong is going to stay with us. Caroline coming up, we will be digging in more to draghi on the defensive. The ecb president faces history critics. We will break down what to expect. Then we speak exclusively to the ubs chair on the troubled german Banking Sector. And Goldman Sachss chief in japan joins us to talk abenomics. Marketsom bloombergs most influential summit. This is bloomberg. Caroline welcome back. Lets update you with breaking news out of Deutsche Bank. It will be selling off the insurance part of its business, to phoenix for 935 million pounds. Deutsche bank saying that this hits them with the loss, about 800 Million Euros pretax. Nevertheless, it does have a net positive impact in terms of their capital. No Material Impact on the available, distributor will items overall. Remember how much we have lost in terms of market value over the last few trading days. Guy its part and parcel of the ongoing process of consolidation within the life business. Phoenix is one of those big consolidators. In on the markets and talk about whats happening we saw some strong Consumer Confidence data out of the u. S. Yesterday. The markets boosted positively. Asia didnt have a good session but europe is on the front foot. The dax is being helped by the Banking Sector this morning, up by. 7 , outperforming the ftse but not the cac. Lets get you caught up away need to know with rosalind chin. Rosalind thanks, guy. Deutsche bank is trading higher as it sells its u. K. Insurance group for 935 million pounds. Meanwhile the ceo says that capital is currently not an issue, and Government Support is out of the question. They have come under increased pressure since the u. S. Requested 40 million to settle an investigation into Mortgage Backed securities. The royal bank of scotland will pay 1. 1 billion to settle claims it sold Mortgage Backed securities to u. S. Credit unions. The agreement closes lawsuits filed in 2011 on behalf of to Corporate Credit unions. Not admitted it, and says that the submittal mean and the u. S. Justice department. Two Senior Partners at Goldman Sachs in asia are said to be in discussions about leaving the bank. According to people familiar with the matter, asiapacific Banking Solutions had Anthony Miller is planning to depart the bank after 15 years, and Michael Smith is also in talks about leaving. Goldman sachs declined to comment. Miller and smith could not be reached. The architect of israels defense establishment, who evolved into a tireless advocate for middle east peacekeeping, has died at 93. According to a person familiar with the situation, he suffered a stroke two weeks ago. The Nobel Peace Prize laureate was the last surviving link to the countrys founders. He held all of israels top civilian post in a career that spanned six decades. Global news, 24 hours a day, powered by over 2600 journalists and analysts in more than 120 countries. This is bloomberg. Caroline . Caroline rosalind, thank you. Here in berlin, mario draghi gets a drilling. German lawmakers questioned the ecb president in the rare chance to press him on controversially low Interest Rate policies. The closed session is due to last about 90 minutes. Our germany editor joins us with the details. There have been very outspoken critics to german lawmakers, and it looks as though we could get tough questions. But its not going to be a red carpet welcoming for the ecb president. Well, i think it will be a very civil and civilized welcome. The thing is, the last time he spoke to them was four years ago, to the bundestag here in berlin. Its been discontent, dissatisfaction at what the ecb has been doing. Its been brewing for that whole time. Last time, that was right around the time of the outright monetary transactions claim, which was also very controversial, highly controversial, and now of course it is about the superlow rates that have also drawn a lot of criticism. Caroline there is such an extent that we have had Wolfgang Schaeuble almost laying draghis feet, claiming hes behind the rising populism between the afc and deutschland. Yeah. Schaeuble has been very outspoken. Of course he is also a very wily politician, who knows that there is a home front, and on the other hand there is draghi and the ecb. Chancellor Angela Merkel has in much more reticent. But this is whats be honest, its an opportunity to ask questions, and its also an opportunity to vent at draghi and let him know there is this level of dissatisfaction. They have been calling for a long time for an exit plan of low Interest Rates. Guy the real story in germany right now is not whats happening with negative rates, but with Deutsche Bank. What kind of exchange do you think you might see there . Well, that hasnt been what the german bundestag members have been focusing on. When they have been talking to us in fact they have been trying to keep on top of Deutsche Bank, off the agenda. What is true is that the ecb president being in your room is a chance to ask you about this, and also about the broader Banking Sector issues, which are viewed with a lot of anxiety in germany. Italys banks, and now Deutsche Bank. Draghiuggie comes out comes out at the end, we may hear more on that. Guy always a pleasure to get you want, sir. Thank you very much. Our germany government under. Still with us, patrick armstrong. Patrick, central bankers are signaling to politicians, we are running out of road, we are getting to the end of what we have the ability to do, you need to take over. Do you think politicians are listening . He should be saying i have done my bit,. I dont know if the german ones will be listening, but the rest of the world is listening. Most of europe would like to see a bit more fiscal spending. America is clearly going that way, china, japan. If you are watching for reason to be bullish, i think it comes through infrastructure and a bit more fiscal stimulus that has been lacking. Draghi will be seeing that on the front foot, but i dont think guy in many ways this is a tragedy of the commons argument. He can sit there and go, the u. S. Will do it, the u. K. , japan why on earth do i want to do it . Well, its a very german not to do it. Their economy is doing reasonably well. If savings rate is one that, you could find a way to get german consumers to spend, that may be enough, and it may be more important than any fiscal stimulus, although its a difficult egg to crack. Caroline give us your sense of where bond markets go, in particular, and the Asset Classes within europe. You would expect more stimulus to come, continuous negative rates . I think negative rates will stay for a while. I dont think they will get more negative. It will be an extension of quantitative easing. He has always said it is openended. In december you will get to the point where they say, this is more extension, another 12 months at minimum. You are at your limit, basically. I think more of what he has done will continue, but real, new measures are difficult to put in place right now. I dont even think they are needed. The euro zone economy is ticking along at 1. 5 growth, which is not creating enough jobs, but you do need it to get where you need to be. Caroline patrick armstrong, great to be with you. He will be staying with us. Up next, the Consumer Confidence. We had it in europe as breaking news, but the election uncertainty does little to intimidate the u. S. Consumer. What does it mean for fed confidence . This is bloomberg. Guy welcome back. So, Consumer Confidence rose in september to the highest level since before the last recession in the United States. Report fromng to a the new yorkbased Conference Board in the United States. 104. 1, beatingt expectations at the highest level in nine years. I have the charter my bloomberg. Still with us is patrick armstrong. This is what is meant to be happening, but its the only bit of the u. S. Economy that seems to still be functioning and delivery. Its a big chunk, and it is working right now. Yet this morning i checked the policy of the fed rate hike in december, less than 50 . Yeah. Next timethe economy to the economy running hot. She said in the press conference that we want the economy to run hot before we start hiking. I dont know if she is referring to december, or a stream of hikes. Its unlikely we get to the point where it is hot by december. You can see why confidence numbers have improved. People feel safe in their jobs right now. Thats really were confidence comes from. Buying,. S. Consumer is things are ok on the Global Economic front. Guy you point out earlier how nervous you are about the bond market, the treasury market. He also pointed out this chart he its a minimum volatility basket. It buys the least volatile stocks in the s p 500, procter gamble, johnson johnson, utilities, people who cant get yields in bonds. It has all the elements of a bubble. Its the perfect showcase for anybody. You dont want equities, but these equities are great companies, they pay you a dividend deal. But the reason they are risking now is that they are extremely expensive. This index trades at 27x earnings almost, 3. 33 times value. Sense; ifall makes you have a price, you have to pay for these things. If this starts to selloff, these are people who want bonds. You could see a significant multiple contraction, because people dont want to be in equities. At the first sign of weakness you may see a big effect. Caroline a big effect globally . Is that going to hit european assets, asian assets . If you do see higher Interest Rates, it will hit everywhere. But i am really concerned about the most expensive assets, that people are think are piling into the safest equities. I think they are safe from a business perspective, but they are not safe for me multiples perspective. Procter gamble is a great company, but do i want to pay 24 times earnings . Utilities at 12 times earnings . The Business Models are fine, its the multiples people have to pay to get exposure to the thats where im concerned caroline and when you are looking at u. S. Consumer confidence going down, we had germany coming in at 10 today, 7 in france, italy coming up. Is a utility is that we should be looking at in europe as well . What you think in terms of Consumer Sentiment . European equities, you can make the case more so than u. S. Equities on the yield side of things that you are getting a 4 dividend yield versus one that is giving you none. Thats a big spread. You are getting 3 dividend yields versus treasuries of 1. 5 . There is a wider margin. I think you cant make it as can greatly. Guy thank you very much. Hey hows it going, hotcakes . Hotcakes. This place has hotcakes. So why arent they selling like hotcakes . With comcast Business Internet and wifi pro, they could be. Just add a customized message to your wifi pro splash page and youll reach your customers where their eyes are already on their devices. Order up. Its more than just wifi, it can help grow your business. You dont see that every day. Introducing wifi pro, wifi that helps grow your business. Comcast business. Built for business. Caroline welcome back to on the move. 30 minutes into your trading day. A quick checkout ab inbevs. We have been hearing from the chief executive of that business, saying that the merge will be named ab inbev. We know trading has been suspended, as we wait for the really big headline to drop, as as a be miller voted largely in favor of the deal to go through. Guy caroline, lets quickly check on the markets. This is the picture you see around the confidence. Yesterday, a solid session driven by Consumer Confidence. Now we are back to prerecessionary levels. This morning we are seeing markets rising, germany outperforming, deutsche performing well, cac up, london lagging a little bit. We are up around 1 on the stoxx 600. The Banking Sector is front and center. The market is a little concerned, the turmoil swirling around Deutsche Bank, with simmering concerns about the health of the european Banking Sector. Germanys biggest lender touched record lows this week. Where next . Joining us is the ubs chairman. Good morning to you, sir. Good morning. Guy the story that sparked the latest round of concern was the believe that the German Government wouldnt backstop Deutsche Bank. Deutsche bank is systemically important. Can we seriously believe that the government backstop is not available . I would start with what is the problem to be fixed. If you look at where banks are now, they have raised their capital by a factor of seven, song by ten relative to prepress. The system itself is much more stable, and so are the individual players between the various banks. It has largely been reduced to a sustainable level. My view is there is a much more stable system. When regulators needed to intervene last time, there were institutions that went down. Germany is one example. In my view, the system is much more stable. Intervention in the future will only be driven by the need to stabilize the system, and there will be no focus on single players. Guy this is not a lehman moment . No, i think we are solid from where we were in 2007. We have all issued huge amounts of capital. Are capital is about 14 . Bankould run a large before the crisis. Much more loss of capacity, and on top, we are issuing billing bonds. So there is a much broader set of issuers that are an instrument available in case they need to have a loss. Of capacity is massive its a question in the market that i think about capital, not about liquidity, but more about Business Model. As ubsas ubsou you german there is no concern. Over the last year, we have massively reduced interbank exposure across the board. Not just single institutions but across the border. The interbank market, which was unsecured, has really come down massively. Investment companies, pensions funds, companies have really reduce their exposure to the banking market. So have banks reduced exposure to each other. A lot of what we are seeing in the market now has to do with sustainability and risk capital. Its more about profitability and Business Models, and those are the various concerns in the market, where the banks need to do hard work. This is an unprecedented environment, and you need to have a Business Model that is weather proofed. Diversity of the business you are in, excellent of the businesses you are doing. R,roline mr. Webe between the biggest players, is there consolidation . Globally, we are talking about a regime where too big to fail is the core focus of many regulators. Only have seen is they have tried in the past to make global systemic banks survive vulnerability of the system as a whole. I dont see at this point in time, given the direction regulators have taken, that we will see mergers or acquisitions the between the major players. But we have seen is some organic growth, growing in certain businesses. We see banks focus on niche business, specializing in various business directions. I dont think this is the time for large m a. At the samewe see banks focus oe time europe is over banks, and their needs to be consolidation in the market. But that will only happen over time, slowly, and more organically than what is discussed. Caroline and also, what has been happening you talk about a Global Banking system. Its a global issue that has hit Deutsche Bank and john cryan, a 14 billion payout being waived by the department of justice in the United States. Is that a reasonable amount . It is not for me to judge. I have no insight whatsoever into the exposures of other financial institutions, so i cannot comment. Guy how long is the workout . We seem to be in this process which is just taking so long in terms of getting out of the d whatial crisis an happened prior and after it. The shadow hanging over european banking is so great, it makes it so hard for the transmission mechanism to work in europe. For the Banking Sector to do what it needs to do. That might be true for some in the market, but i can assure you that when we changed our Business Model, we change the focus of what we do at ubs, that was in 2011, 2012. We were an early mover in the market. Fortunately, the stability of the system doesnt depend on those who move fast and early. Stability depends on everyone moving and the average move, more driven by the speed of those who move at the slowest, which is why the new regulation taking hold is a bit like watching paint dry. It takes a long time. You really have to have everyone on board in changing their Business Model in adapting to the realities. Some have been more sluggish than others in that process, and that is what we are seeing. If you do the same transformation of the bank that we did in 2012 to 2015, if you do that more in a more adverse, risk off environment, it is more expensive, it takes longer, and exposures or longer. Time is of the essence. Getting to the new regulation, the new paradigm is key, and Everyone Needs to move. Unfortunately the stability depends on the slowest. Guy has regulation gone too far . We hear reports that those in germany, elsewhere, are pushing back and saying, enoughs enough. We have taken this too far. I think the u. S. Is in a much better place to think about where the banks are. Europe is at the same time trying to stimulate Credit Demand and stimulate credit growth by banks. At the same time, regulation already tells us that when the thing thatmes, one will change massively is credit exposures. Why with banks that are waiting why would banks that are waiting increase their credit exposure and originate credit when it might come so its more an issue of timing. And europe has been slow in adopting to the new paradigm compared to the United States. As a swiss bank, we are not european, because with the wind is outside the eu, and we have a Business Model focused on the u. S. And asia. We adopted much faster in that process that many european players. And the regulation comes at a point in time where it starts biting, and where it is counteracting some of the centralbank action to reinvigorate credit growth. Weber, you talk about timing of the essence to change Business Models. What about in terms of addressing the legal issues in the United States . How are you preparing for some of the more outstanding cases that remain . Are any a key concern, and should they come faster so we can put it behind us . Listening tooblem the question because could you repeat it . Caroline the u. S. Of course. In terms of the usa legal ramifications, this is what is still haunting. Business models need to be changed, but legal payments need to be made. Are there any still outstanding legal issues of key concerns to you at ubs, and how quickly can they be resolved . We have a very clear display of all our legal risk. If you look at our Second Quarter disclosure on legal sections, we have been very transparent and seen all the exposures. We have provisions for those exposures, and we will not comment on anything that we will announce. But i think we have been very transparent in showing these exposures. We have also been fast and settling our exposures. When some of these trading issues hit the banking system, we have collaborated with authorities and settle the issues. I think that was the right attitude. We need to put a bottom line under these exposures, and banks need to move to new Business Models, where they are much less exposed. And we need to improve the quality of our compliances, the quality of controls, and that is something we are voting out throughout the bank. It is work that needs to be done, but it takes time to do it, but it is the right direction to go. In the future, we are focused on much less operational risk, much less things happening in the bank, and conducting business in a transparent and client focused way. Were in the process of doing that, and the exposures we have have clearly shown that. Lever, please stay with us. We need to talk about whats happening with Monetary Policy. We will talk a little bit about fiscal policy. In the meantime, before we switch gears, i want to get everyone up to speed with the Bloomberg Business flash and rosalind chin. Rosalind guy, walmart is in advanced discussions to invest as much as 1 billion into indias Biggest Online retailer, according to a person familiar bill. They say walmart would take a minority statke in it. The move comes as the two companys Battle Amazon ecommerce. The south korean court is considering starting the sale process of the Oil Container Central District court calls for a meeting with officials evaluating the business. The move comes after an analyst said yesterday that miller burst could be considering buying hanjin shipping. Nike shares have fallen in afterhours trade after the Worlds Largest athletic brand posted orders that missed analyst estimates, renewing concerns that it cant maintain growth. Orders rose just 1 at the end of last month. Analysts have projected a 5 gain. They are in competition with adidas and under armour, with slowing sales growth in their home market. And shares of the bank of china are flattening in hong kong after the worlds biggest ipo since alibaba two years ago. Tight gin israel the bank has a market value of about 49. 5 billion, more than 500 million customers, and the most outlets of any chinese lender. And that is your Bloomberg Business flash. Guy thank you very much. Lets get back and talk about whats happening with Monetary Policy. Axel weber, a subject he knows something about. He was the boss of the bundesbank, and its interesting that we see the head of the ecb going in front of german proletariat today. Inflation, inflation targets, lets talk about all these things. This is a closeddoor session taking place today in germany, but nevertheless, Central Banks around the world and mario draghi is no exception are signaling clearly that we are reaching the limits of what Monetary Policy can achieve. I heard you at the conference saying that the world needs to wakeup. They are signaling to lawmakers, to governments, you have to do something, you have to pick up the baton. Do you think governments are listening . I think the problem has two dimensions. The first is that Central Banks have taken unprecedented action, and loomed in many countries to what i call a quarter solution. But Monetary Policy carries all the way, and where fiscal and structural policies have been taking the backseat. To some degree, it is Central Banks with that situation unfolding. By moving early and fast and bold, they signaled to other politicians that they can take their time to put these policies in place. A good paradigm for that is abenomics. If you look at its third hou arrow, if you want that to fly, it takes longer. You should fire at first. What Central Banks can do is bridge that time until structural policies and fiscal policies that need to go through parliament, that take time to decide and implement. Here, what we have seen is just the opposite. Central banks move fast and bold, and the other players relax. I think the other issue mario draghi faces, the european or german parliament, its more about transparency. Its not about a wakeup call to parliamentarians. I think with Central Banks need to do, because they are outside of parliamentary control, they need to explain what they are doing. And i think that is a good and worthwhile exercise. But a general Central Banks need to ask themselves, have we really not done too much . Have we really not produce incentives for others to take the back seat . I think there is some truth in that. Guy have qe earnings favored the 1 , and if so, what are the implications . Mario draghi has been clear, yes, it does have redistributive effects. And if you look at the general policies we have seen, depressing yields on fixed incomes and driving people and investors into riskier assets, which is what this policy does, favor those who have the risk bearing capacity and the ability to control the risk. Thats not your average man on the street. These are sophisticated investors, institutional investors. To some degree there has been redistribution. If you are willing and able to take risk, and if you can bear any losses associated with that, you has benefited from the current environment. And if you are looking for safety, like pension funds, you were not doing well. In a way, there is redistribution. The more affluent part of our societies have seen the value of their wealth go up, where the average part of society has seen erosion, and that has been continuing to bifurcate. Its one of the discussions we had, and it will come up in the european elections. These redistribution policies are usually not the core rebate of the central bank. Central banks will do more Nuclear Policies to focus on preventing inflation, to ignite inflation, to intervene massively and markets. To do that has been a new policy paradigm, and i think it has its downsides. My guess is at the moment that the downside, the risks of these policies are starting to outweigh the benefits in stabilizing the system. Medium to longterm, they are a huge risk. Its not that the Central Banks dont see that they have clearly communicated that they are coming to a point where they have to do a sober Risk Assessment of whether more of the same is going to fix the issue, given that it hasnt fixed the problem for eight years. Caroline last time we heard from mario draghi at the ecb meeting, he said the banks stopped blaming that interest margins are stable. Do you agree with him . Well, i think Central Banks have embarked on chasing an inflation target that is increasingly difficult to achieve. If you look at the bank of japan, where they has invented a new set of policies, and i think that will continue, Central Banks will continue to invent new policies, too. But they havent really achieve the objectives they set themselves. In the past, at the bundesbank, the bank used to talk about an unavoidable inflation, and they tried to control inflation on top of what was unavoidable. Now i think Central Banks have to start the debate again unachievable inflation, and trying to aid core inflation targets that are simply unachievable and are equal to massive continued stimulus for a long period of time. In my view, is not conducive to credibility, and if you continuously mr. Target, you lose credibility in the market, and Central Banks need to have that credibility. Look at the u. S. There is a debate of what the market expects a very lower trajectory than the fed itself has announced. And the markets view is that they will come around. The Market Players think that the fed is having to change the policy because their judgment on the Interest Rate trajectory is too optimistic. It assumes an ability to tighten earlier. That is not a good place to be in Central Banks, because it undermines their credibility, impact their ability to guide the markets, and that is the core of what Central Banks need to do. They need to regain that credibility. And the dialogue as parliamentarian in germany as part of that process. Oline how much guy sorry. Caroline how much is it eroding your own Business Model . Should the ecb setback negative rates . Impactst on various Business Models of the banks. We have a diversified Business Model in terms of the business we are in, our choices we want course if yourf clients are cautious about investing and have a large portion of their portfolio in cash, it is impacting on profitability. At the same time, negative shortterm Interest Rates and a flat yield curve that is negative for long. Time makes it hard for the breadandbutter businesses, and turning that into longterm credit engagement. Its unprofitable as well, because you are talking about majority transformation. Every part of the Business Model of the bank is impacted by the current environment of negative yields, of flat yield curves, and of a massive intervention of Central Banks in the market. By some of the assets that in the past has really been bought by other players, and are depressing yields. Its a very difficult environment. Guy lets feed off that a little bit. The big liquidity story at the moment is that everybody has it as their number one priority. Liquidity is everything. People are forced to pay liquid assets, to are their portfolios, running a big cash how does that end . How do you work your way out from that . They are buying into assets that spans. 10, 15 year life absolutely. To give you an example, on the day of brexit, the longest running swiss Government Bond, which had a date of 2064, was dipping into negative territory. Lock in ago 48 years, shortterm loss, or a smaller loss. That is a very unfortunate choice for investors that need to buy secure assets, because they run the pension fund or look after investors money. In the longterm, i think Central Banks will have to step back from these massive interventions in the market, because there is not a single price of a single asset in the market that is not distorted. The only way at the moment investors are trying to take some yields is by moving from traded assets into not so frequent we traded assets. They are basically trying to secure a liquidity premium, or they are trying to have tighter money in private equity for longer periods of time, because untreated assets, the yields are suppressed. A very difficult environment. And of course the issue is, as some of those risks materialize when the economy normalizes and Interest Rates rise, you can lock in losses over a long period of time. Investors in my view still do the right thing and buying riskier assets, because they are understanding that the Central Banks will keep the current set of policies in place for a longer period of time. But this is an artificial support for equity. It is not a fundamental, based on earnings capacity. It is a liquidity driven investment. As soon as liquidity on the horizon starts to change, like when the fed changes policy, people move out of these engagements, and that is where you see sell down in the market corrections. Very volatile times. Sometimes a single day in the stock market is way larger than the annual expected return you have. That is a situation where you cant lose on a single day more than the average expected return, and that is a very unusual and difficult situation. Guy great pleasure seeing you. Thank you for taking the time. You will carry on with us. Ask a lever, chairman of phoebe axel weber, chairman of ubs. Well carry on this conversation. Caroline . Caroline its going to be a fascinating discussion. Great to have him on. Lets keep the conversation on Central Banks going. That wexel weber, and have another voice to bring into the conversation. We are joined now by the vice chairman of Goldman Sachs. Wonderful to have you. I know you have been at the event in hong kong. Give us a sense of when the boj control yields rather than how much they buy in terms of bonds is that the right shift . Well, the verdict is still out, isnt it . Its still very confusing to a lot of Market Participants as to the actual underlying intention of the shift in their gene. There regime. I think many people are interpreting it as a signal that perhaps the central bank is reaching its limits on its quantitative monetary easing framework, and it has become more sensitive about how flat the yield curve had become, not to mention negative Interest Rates and what that combination has done to hit the financial industry hard. By targeting and pegging the 10 year bond yield at zero, leaving open the option to dropping rates further the short end of the curve, i think they are trying to normalize or steepen the yield curve so its not so damaging to the financial sector. Weber just saying that abe should have fired the third arrow first. How far behind the curve is he . Think it really depends on what we are talking about when we say the arrow. For some people it means they are not opening the floodgates to immigrants, or they havent allowed companies to revise their hiring practices so they can cut people and staff at a moments notice. That is the bar, but they havent done that. What they have done is, number one, introduced Corporate Governance reforms that they have never seen before, the idea that boards have to be independent, that you have to explain why you have shareholdings. That is a transformation, i think, of corporate japans behavior these of be the shareholder. Theavis s shareholder. Most japanese women are working parttime, not fulltime, so there is still a lot of work to be done to getting more women working in fullterm positions, and leadership positions, but we are starting to finally move the needle. With respect to some of these things, it is very hard to see that i thinkeeds, it is unfair to claim that there has been nothing done on the third arrow. But it is absolutely true that it is a work in progress. They still need to work hard and dismantle various regulation, try to open up competition, open up opportunities for secular growth, because all the stuff on monetary easing in fiscal using is just buying time. Guy we have to leave it there. Thank you very much for taking the time to join us. We will carry on a conversation here. It losses as saudi arabia signals it may compromise with iran. We are live at the opec meeting. Ilife. He bank sells ab its ceo was reported to have ruled out Government Support. We hear from the Deputy Governor of the bank of england at the Bloomberg Markets most influential summit live on the pulse. Welcome to a special edition of the pulse live from london. Francine lacqua is host