Transcripts For BLOOMBERG Bloomberg Surveillance 20170529

If you happen to be watching from the u. S. It is a bank holiday in the u. K. , too. Chinese markets are closed as well. The stoxx 600, pretty flat there, bearing all that in mind. The dollaryen, pretty unchanged at 111. 31. We did see a little strength earlier after those comments from John Williams. Cable is up. 2 . That has been moving fairly strongly ahead of the u. K. Election and a sterling did have its worst week this year last week. And keep your eyes on the 10 year italian yield. It looks like it is down two basis points. It was moving higher earlier, after comments from the Prime Minister. Lets get the bloomberg first word news. Reporter north korea has conducted another missile test. South Korean Military Officials Say the missile, which appears to be a scud variant, was fired off of north koreas east coast. It comes just days after World Leaders vowed to take tougher measures against kim jong un. British airways says many of the Computer Systems a running again. That is as the carrier pushes to recover from the Massive Technology failure that disrupted hundreds of flights and stranded thousands of passengers worldwide. B. A. Says it will run a full schedule today and intends to operate a full schedule from heathrow. I know this has been a horrible sign for customers. Some of you have missed holidays. Some of you have been stranded on aircrafts. Many of you have been stuck while you waited for information. On behalf of everyone have British Airways, i want to apologize for the fact that you had to go through these very trying experiences. Reporter the u. K. Home secretary says there are potentially more suspects at large regarding the investigation into the terror attack in manchester. Amber rudd said the investigation is still in full tilt. Salman abedi tilde 22 people last monday. People last monday. John williams says three rate hike this year makes sense. He said the u. S. Economy is growing nicely and is close to the feds twin goals. I think the data has been very good. 08,000 jobsng about 1 every month and unemployment is below 4 . I think the economy is doing well. We have got good momentum. We have a little bit to go on our inflation goal, but i am optimistic. We need to continue the process we started. Chinese industrial profits rose 14 in april from one year earlier. Int bill bonded the 20 march and an 8 rise the year before. South african president zuma has survived a bid to oust him. They decided yesterday not to vote on a noconfidence motion in him. Pressure has built on zuma to quit after his decision to fire the finance minister. Global news 24 hours a day, powered by 2600 journalists and analysts in more than 120 countries around the world. This is bloomberg. Nejra german chancellor Angela Merkel has given her strongest indication yet that europe and the United States are drifting apart. Speaking at an Unit Campaign rally, she suggested reliable relations forged since the end o f world war ii are coming to an end. Times in which we can fully count on others are somewhat over. Say we why i can only europeans must take our destiny into our own hands. Of course, in friendship with the United States. In friendship with great britain. With good neighborhoodly relations whenever possible. In burkhard bring varnholt, joining us from zurich. Thanks for joining us on the program. Burkhard, do merkels comments cause you any concern after this g7 meeting . Thank you and good morning to you, too. No, they do not cause may concern. In a way, she is only stating the obvious. It has been quite visible for a period of time that the interests of the United States and europe are moving further apart. Interestingly, this might turn out to be a blessing in disguise. What usually happens when the world outside of europe looks more unpredictable, europeans might at this point in time move closer together and address what has been missing for so long, namely institutional reform and a way forward for the European Union and the eurozone in particular. Nejra so, you see this could be a positive for europe on the one hand, but what about the rest of the world . Are we going to look at this g7 and see it as a turning point in history in terms of International Relations . No, we should not read too much into it. Most7 used to be the powerful economic countries in the world. Those times are long gone. Nowadays, when you look at the g7 economies, these are not the seven most powerful economies in the world. They missed much more important ones, namely those from asia and emerging markets. That is why the g20, if anything, is more relevant and important than anything. What the g7 really is about is, its about countries that share similar thoughts and philosophies on values, on governments, institutions, the rule of law. And the only thing you can read into this from a markets perspective is that europe must get its act together to step up security and that is from a markets perspective. It is good news for the defense and security companies. Nejra that is what you are focusing on from the markets, the security aspect. What about protectionism . Protectionism is a real and present challenge. It remains to be seen how that will pan out in the years to come. Without any doubt, protectionism is not good for growth, prosperity, and markets to say the least. But so far, so good. This has mostly been talk, not action. This year global trade is actually moving up, not down. But we must remain very vigilant about this. There is cause for concern that we must monitor with the protectionist rhetoric we have been hearing u out of the current u. S. Administration. Nejra Burkhard Varnholt stays with us. And stay with surveillance. Coming up, John Williams aims for what he calls a goldilocks economy. But is that just a fairytale . Plus, passenger pain. British airways apologizes after hitits huge i. T. Meltdown. How much could end up costing the carrier . Nejra you are watching bloomberg surveillance. Lets get the Bloomberg Business flash. Reporter 200 air italia flights were grounded. The union urged the government to nationalize the airline. The government has already ruled out the option and is looking for a buyer. Vietnams dominant airline is in talks to become the First Company to list the shares abroad. It has been approached by london, hong kong, and singapore and will meet with officials in new york later this week. Received shareholder approval to boost the ownership to 49 from 30 . We have been approached by some foreign stock exchanges, including london, hong kong, and singapore, which expressed their interest in our stock. We dont want to hide our hope to become the first Vietnamese Company to lift shares overseas. Reporter saudi arabia could attract tens of billions of dollars in Foreign Investment if the stock market is added to the msci emerging markets index. To 35ticipate up billion of inflows. Largest oil exporter is looking today for his a fight its economy out of looking to diversify the economy out of fossil fuel. Nejra John Williams says three rate hikes this year make sense, including the one we had an march. He said the u. S. Economy is growing nicely and is closer to the feds twin goals. I think the data has actually been very good. 08,000 jobsng about 1 in the u. S. Unemployment is below 4. 5 . I see it going even lower. We have got really good momentum. We still have a little ways to go with our inflation goal, but i am optimistic. I think we need to continue the process we started of getting Interest Rates back to more normal levels. Nejra still with us is Burkhard Varnholt, deputy chief Investment Officer at credit suisse. He joins us from zurich. You heard the comments from the San Francisco feds John Williams, talking about we are as close to the feds mandate goals as we have ever been. Could we read that as, this is the best we will get in terms of inflation for a while . Fornflation seemed gone quite some time and what really killed inflation clearly is not be federal Monetary Policy, but it is the internet, the sharing economies and the network economies. Companies,flationary who really transformed most companies in most sectors into prize takers, rather than prize setters. With little inflation in sight, John Williams is right. This year Monetary Policy will be about walking the talk. Ast means two rate hikes, they have guided the public to expect. But that is a small step in not a big picture because the big picture is Capital Market yields remaining lower for longer in the absence of inflation. And also in the presence of demanding success, securities from aging ofulations who are in need longterm government security. Nejra certainly a lot of people saying, it is those demographics weighing on the longer end of the yield curve. I want to bring up this chart, you cant see it, but all it shows is the 10 year treasury yields at 2. 25 , near those lows for 2017. It is tracking treasury volatility, which has been coming down. The treasury market is stuck in a doldrums and we have the yield coming down. Are investors underestimating the impact of fed a tightening, given where yields are right now . Well, one thing investors might be underestimating is the risk or opportunity, whatever way you want to look at it, that u. S. Capital market yields could be trading at a very low range for a considerable period of time. That is, for a few more years. That is a scenario investors might not be fully prepared for or pricing in. It is a serious possibility when you look at the mediumterm outlook. Despite the Central Bank Rate hikes we do expect for the remainder of this year, set by John Williams. Nejra very quickly, i have talked to a lot of people about the fact that the phillips curve does not seem to be working. If we get a sudden uptick in inflation, what could that do to bond markets . Im sorry, i am not sure i got the question, but when you talk about the phillips curve, something we all learned in academia, it brings to my mind something from ben bernanke. Somethings work in practice, but not in theory. I would not rely much on theory because sometimes it works and other times it does not. Nejra ok, Burkhard Varnholt stays with us. Up next, with 10 days to go until britains general election, polls suggest the race is tightening. We focus on brexit and the u. K. Election. This is bloomberg. Nejra you are watching bloomberg surveillance. Im nejra in london. British airways says many of the Computer Systems a running again following the weekend of chaos caused by a Massive Technology failure. Thousands of passengers were left stranded worldwide. Iag have a follow this morning. The airlines ceo, alex cruz, apologized for the disruption. I know this has been a horrible time for customers. Some of you have missed holidays. Some of you have been stranded on an aircraft and some of you have been separated from your bags. Many of you have been waiting for information. On behalf of everyone at British Airways, i want to apologize for the fact that you have had to go through these trying experiences. Campbell that it Benedict Campbell joins us from berlin. Give us the latest. Hi, from berlin. The latest is, the system appears to be more or less back to normal. A couple cancellations here and there, maybe about one dozen, but that is nothing compared to what we saw over the weekend, 300,000 passengers stranded. You all saw the pictures of heathrow airport, which looked terrible. We all saw the ceo speaking. He is that it was a horrible week and for everyone and im sure he is including himself in that. He is looking at a couple of horrible days, if not weeks, going forward, thinking about and trying to explain how this could have happened. We know that it was a power outage of sorts, but we do not know the details. Therell will be a lot of questions, how a power outage, as a simple as it sounds, could disrupt a company the size of b. A. Nejra talk through how disruptive they could before the companys reputation as well. Yeah, there is obviously the financial fallout and the reputation fallout. Alex cruz has had this job for about one year now. He came on board from the welding low cost unit of the parent company. Those are the main assets there. And he took on the job about one year ago and coming from a low cost company, that was in his dna. Already you are thing that sort of seep through some of the coverage now in the u. K. They are saying, what happened here . Did they cut too close to the bone . On the financial side, the stock in madrid is trading down quite materially today. We dont have reliable numbers yet on what it might cost iag. If you think about 300,000 customers demanding compensation, that is potentially a hefty bill. Nejra managing editor of global business, thank you so much. Lets stay with the u. K. With 10 days to go until the general election, polls suggest the race is tightening. According to our online points, may is 8. 5 over the opposition party. You can see all the latest information on your bloomberg. Lets get the thoughts of Burkhard Varnholt. Is the u. K. Election a market event for you, and how are you positioning, if so . It is no longer a market event because it is fully priced in it was probably, strategically speaking, a good choice for Prime Minister may, who is likely to be reelected, ensuring continuity in these negotiations. A long and short of it is i see no insurmountable political obstacles from reaching some kind of a deal after those two years of negotiations, provided that the diplomats will be given the discretion to be able to negotiate this behind closed doors. But what makes this possible is that clearly both sides have a strong economic and political interest in continuing the collaboration. At the same time, their economies are listed by a strong economic tailwind that is lifting many. And it should make it possible to find a safehaven deal for both britain and the rest of the eu. Nejra sterling had its worst week this year last week. We are higher today by. 2 . Im sorry. I did not hear you. Nejra sterling, where does it end the year . Cable . Sterling has had a good run, one that we expected and took advantage of. But we also took profit, i should say, just last week as we feel it has run most of its course here, and it seems wellpositioned, well priced, especially against the euro and against the dollar, we see more value potentially in the dollar. That should rise again once the storm of the washington slides away. Nejra Burkhard Varnholt stays with us. Up next, where is the inflation . The question mario draghi is likely to face if he gets a grilling at the European Parliament. We look ahead to that next. This is bloomberg. So new touch screens. And biometrics. In 574 branches. All done by. Yesterday. Banks arent just undergoing a face lift. Theyre undergoing a transformation. A data fueled, security driven shift in applications and customer experience. Which is why comcast business delivers Consistent Network Performance and speed across all your locations. Hello, mr. Deets. Every Branch Running like headquarters. Thats how you outmaneuver. Tthats why at comcast,t to be connected 24 7. Were always working to make our services more reliable. With technology that can update itself. And advanced Fiber Network infrastructure. 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. Nejra you are watching bloomberg surveillance. Lets get the bloomberg first word news. Heres taylor riggs. Taylor north korea has conducted another missile test, drawing condemnation from south korea and japan. Military Officials Say the off the eastired coast and flew 450 kilometers towards japans exclusive economic zone. It comes days after World Leaders vowed to take tougher measures. British airways says many of its Computer Systems are running again as the carrier pushes to recover from a Technology Failure that disrupted hundreds of flights and stranded thousands of passengers worldwide. B. A. Says it will run a full schedule today at gatwick and intends to run a full longhaul schedule from heathrow. I know this has been a horrible time for customers. Some of you have missed holidays. Some of you have been separated from your bags. Many of you have been stuck while you waited for information. On behalf of everyone at British Airways, i want to apologize. Secretarye u. K. Home says there are potentially more suspects at large in the investigation into the terrorist attack in manchester. Amber told the bbc he operation is still at full tilt. The suicide bomber killed 22 people last monday in britains worst terrorist attack in more than a decade. Federal reserve bank of San Francisco president John Williams says three rate hikes this year makes sense. He said the u. S. Economy is growing nicely and is close to the feds twin goals. I think the data have been very good. We are adding 180,000 jobs a month in the u. S. Unemployment is below 4. 5 . I see it going lower. Weve got good momentum. We still have a little ways to go on our inflation goal but im pretty optimistic. We need to continue the process we started. Taylor Chinese Industrial profits rose 14 in april from a year earlier as global trade increased. That builds on a jump of almost 24 in march and 8. 5 the year before. South african president jacob zuma has survived a bid to oust him. According to members of the National Executive committee, it decided not to vote on a noconfidence motion. Tossure has built on him quit following his decision to fire the finance minister, a move that sparked public protests. Global news 24 hours a day powered by more than 2600 journalists and analysts in more than 120 countries. Im taylor riggs. This is bloomberg. Nejra thanks. Mario draghi will be quizzed by members of the European Parliament later in what will likely be his final appearance before next weeks ecb policy decision. While the recovery is strengthening, draghi will point to continuing low inflation as he makes the case for giving policy on hold. Lets get the thoughts of Burkhard Varnholt. Is draghi going to turn up today wearing his dovish tie . Burkhard for sure. Lower in is even europe than it is in the United States and it is being driven by the same secular forces. Mario draghi is providing Monetary Policy to europes weakest link, which is the mediterranean periphery, italy in particular. As long as italy goes to vote in the First Quarter next year, talk about tapering will be more talk than action. Mario draghi will surprise provide supportive Monetary Policy. Andill see more of that that is a tailwind for the european stock market that we have witnessed for quite some time. Look ahead to the meeting as well in june, is there anything in the language, any shift you might expect, some small changes to what theyve been saying about Downside Risks and Interest Rates remaining low . Burkhard i think the risks that will be pointed out are the Political Risks. The risks of populist countries ,eeking an exit of the eurozone which must be avoided at all cost, and will be. Other than that, the variations in language i expect will be minimal. There really is no immediate frontpage threat to the eurozone at this point. Nejra you were talking about inflation earlier. Ive got this chart here showing the inflation rate in terms of the cpi and the core as well. We are expecting the data this for may. How a decline i mentioned the phillips curve earlier in relation to the dilemma facing the fed. What is it going to take in the eurozone to see that lift in inflation that the ecb wants to see the for this talk of tapering begins . Burkhard to really see a lift in inflation, we must see declining output gap. We must see a decline in Unemployment Rates, especially in countries where unemployment remains stubbornly high, such as france, spain, italy, and others. Only when that is visible and when the digitalization i mentioned which turns so Many Companies into price takers is complete, we will see an increase in inflation in certain areas. Then the only caveat that remains is what happens to commodity prices, energy in particular, but then we can separate the impact of Energy Prices from the other inflation factors. Yield is the 10year bund correctly priced at the moment . Burkhard it certainly doesnt look like it. Clearly, germany is the eurozone and europes strongest performing economy at this point. Its current account surplus is larger than that of china. It is firing from all cylinders, working at full employment. By economic theory, you would expect that with 2 nominal , germanlus inflation Capital Markets yields should be higher than today, but they arent because theyve been turned into the parking lot for all those that are still scared of the risks of the eurozone calamity, and our parking their liquid assets in the german bund , which looks to be the strongest link in the current setup. Nejra weve been talking a lot over the last few days about the treasury bund spread. Ive got it on this chart against the euro dollar spot right. If you look at the euro and you look at that versus the treasury bund spread, is the euro fairly priced or too strong . It seems that the dollar is underpriced. Against looks fair swiss franc but it seems too strong against the dollar, where the carry should develop more magnetic power in terms of attracting more foreign direct inflows into the dollar, reflecting the superior carry, and also the higher real Interest Rate that is expected after the next fed move in the United States. Nejra record fernald, if udc a. L. At credit suisse, thank you for joining us on the program. Coming up, what are the inflationary risks facing wealthy investors . We speak to ubs High Net Worth investment strategist, Maximilian Kunkel. This is bloomberg. Nejra you are watching bloomberg surveillance. Im nejra cehic. Lets take a quick check on your markets. You markets closed for the bank holiday and memorial day in the u. S. The stoxx 600 fairly flat, but a number of the u. K. Stocks not factoring into that. If we look at dollaryen, slightly higher on dollar. That could stay fairly range bound for the day. Sterling higher on the front foot, up 0. 3 , after its worst week this year last week. I also wanted to show you the 10year italian yield. Gilt markets are closed. The bund yield is fairly steady but the italian yield up to basis points. Following some comments from matteo renzi. With judgments about inflation dominating discussions at the world Central Banks, my next guest cautions that overweight holdings of cash and bonds mean many investors dont seem to be positioned for inflationary risks. Hes Maximilian Kunkel, ultraHigh Net Worth investment strategist at ubs switzerland. Right to have you on the program. Thanks for joining us. Do you think the market is getting the inflation story wrong . Yes,ilian to some extent, but it is not so much about the market, but positioning of , institutional as well as individual investors that have positioned themselves more against deflation risks, and that is a risk we are currently seeing. Nejra if we look at the data, earlier i brought up a chart of eurozone inflation and how that is posing a challenge in terms of the ecb coming out with tapering talk here ive got u. S. Inflation. Im sure you are familiar with these numbers. Both core cpi and pc showing declines. Given these numbers, what do you think the market should be going on if it is supposed to be anticipating higher inflation down the road . Maximilian maybe lets first start with europe. This year we are seeing an uptick in inflation, which is something the ecb was hoping for, on the one hand because we are improving fundamentals, but largely driven by food and Energy Prices. This year we shouldnt see much further acceleration. It should probably become much more of a topic next year when in germany you have most of the larger trade unions renegotiating deals which they last did in 2016. With regards to the United States, clearly the recent plateauing of growth data, the hard data that had not followed the soft data, had led to the reduction in inflation expectations. We actually think that hard data is going to converge with soft data by accelerating further from here and that should lead to an uptick inflation which we forecast at 2. 3 . Nejra what do you see driving that . Some people have said that in the u. S. We might get inflation but it is going to be the wrong sort due to protectionism. It is two elements. You have the element you indicated, wage growth. It really appears that the right seems to be lower than what most people thought in the first place. We clearly need a further drop in the Unemployment Rate to see further wage gains above current estimates. On the other hand, what we are seeing as well is, due to the normalization in terms of price levels, most of the companies in the recent Earnings Report increased revenue expectations, but also increased price levels. We would see a mix of the two here leading to higher inflation but still relatively low inflation. All that, hown are you advising clients to position . Ofit april a question moving out of bonds, or Something Else . Maximilian definitely within the fixed income element, something where we had been in beforeesting tactically the u. S. Elections. We saw that most of the tactical opportunity had already been materialized. Structurally it is still a very good point to make particularly in the United States. With regards to the overall asset allocation, it is clearly something much more fundamental, which is trying to shift out of a relatively large allocation, to deflation hedges such as cash bonds into aity more diversified approach, including equities as well as return of investment. Nejra great. Next, more with Maximilian Kunkel from ubs switzerland. This is bloomberg. Nejra you are watching bloomberg surveillance. Im nejra cehic. Heres taylor riggs. Taylor 200 a la tally a flights were grounded yesterday. The government to nationalize the airline, which was put into administration earlier this month. The government has ruled out the option and is looking for a buyer. Ietjet is in talks to become the countrys First Company to list shares abroad. The company says it will meet with officials in new york later this week. Hanoi recently eased rules on investment and vietjet boosted its ownership limit. Weve been approached by some foreign stock exchanges including london, hong kong, and singapore, which expressed their interest in our stock. We dont want to hide our hope to become the first Vietnamese Company to lift list shares overseas. Taylor saudi arabia could attract billions of dollars in Foreign Investment if the market is added to the msci emerging markets indexed. Banks Research Anticipates up to 35 billion of inflows. The Largest Oil Exporter is pushing to diversify its economy away from fossil fuel. Nejra thanks so much. Lets get more with my guest, Maximilian Kunkel, Net Worth Investment strategist at ubs switzerland. I want to talk to you about the euro. Leveraged funds are close to pulling the plug on what had been there longest lived short some of the euro, as the currency rebounds. Im showing you on a chart here, 895. V it is showing hedge funds close to exiting their bets against the euro. In your view, is this about improving fundamentals in europe versus the u. S. . Is it about the Political Risk pendulum swinging from the europe to the u. S. , or a bit of both . Maximilian probably a bit of both. It is a matter of valuation. One of the things many people forget with regards to currencies and forecasts about Currency Pairs is that there is the one way that we use and we think continues to be a relatively good way to look at fundamental values of currencies is purchasing power parity. We see that the euro against the dollar continues to be undervalued. Calculations, purchasing power parity should be at 1. 25. There are reasons why the dollar is not there. We think that due to the euromentals indicated, the should become less undervalued against the dollar. Nejra if we look at the dollar more broadly, at other crosses, as a basket, the bloomberg dollar index, how are you positioning around that, given the Political Risks in the u. S. We the constant roadblocks seem to be coming up against in terms of moving the reflation trade forward. Maximilian our view has been now for a few months that the allar is peaking against broadbased basket of currencies. Weve seen over the last few years a very good reason for that performance. They are earlier in the cycle. The fed has been earlier in the cycle. Theres been a more sustainable path to improvement. As we are going along in this year of global synchronized growth upticks and Central Banks starting to moderate their monetary policies, we should be seeing that this Dollar Strength should start to fade. Nejra that is one positive thing people have been pointing to, the synchronization of global growth. When you look at developed markets. If we look elsewhere, is china still a concern for you . Maximilian definitely a longerterm concern. Looking at last week with regards to the downgrade, that wasnt big news because everybody knew china has a debt problem. If we are doing channel checks, most of the investors that are investing in asia have been underweight china. Still, it is a longerterm. Shortterm, we think china has the ability and means to put a floor under its growth for this particular year. We think 6. 7 is what were going to see. Nejra so that is china. Im running you through all the various risks. How are you positioning around brexit . Is this something you feel confident positioning around now given all the uncertainty and with the u. K. Election we have yet to get through . Maximilian two elements there. The first one is we just went underweight u. K. Equities against european equities. Second, we wouldnt chase the rally we have recently seen and forecasted from the pound against other currencies. With regards to the Overall Economic situation in the u. K. , we were very surprised that the u. K. Economy did so well. If you are looking underneath the surface, much of it was private consumption continuing to hold up well, and that was driven by saving rates coming down to the lowest level since the financial crisis. With the upcoming negotiations with the European Union as well as inflation picking up markedly , and we are forecasting 2. 6 for this year, we should see the u. K. Grow below trend, forecasting 1. 4 this year and 0. 7 next year. Nejra what does that mean for gilts . Maximilian it probably means that due to the International Nature of flows with regards to suffer and bond yields that gilts will stay pretty much where they are now. This might sound a little bit odd because you are seeing increase in inflation rate, but it is a very similar story from what we are seeing in the United States. Benchmark yields are likely built bycontinue to be International Investors seeking to diversify. Nejra Maximilian Kunkel, investment strategist at ubs switzerland, thanks for joining us. Bloomberg surveillance continues in the next hour. Mark barton will be in this seat. Mark drifting apart. German chancellor Angela Merkel says relationships forged since the end of world war ii far to some extent over. North korea conducts its ninth the listed missile test this year. Japan says it may have reached its exclusive economic zone. Says many ofirways its Computer Systems are running again after a power supply issue caused chaos over the weekend. This is bloomberg surveillance. Im mark barton. Lets get the bloomberg first word news. Heres taylor riggs. Taylor german chancellor Angela Merkel is signaling that it is a new era for europe when it comes to ties with the u. S. She told a Campaign Rally that forged since world war ii are to some extent over. During president trumps overseas trip, he called germanys trade surplus very bad and blasted nato allies for not spending enough on defense. A member of trumps cabinet is downplaying reports that Jared Kushner was seeking secret communications with russia. John kelly called it no big deal. Reports say that before the inauguration, kushner proposed a back channel between the Trump Transition Team and the kremlin. North korea has testfired another Ballistic Missile. It is the ninth rocket test this year by kim jonguns regime. South korea says it flew towards japan and may have reached waters in japans economic zone. This came after the group of seven pledged measures to halt its Nuclear Missile tests. In south africa, president jacob zuma has survived an attempt to order him removed from office. According to members of they executive committee, the panel decided not to vote on a noconfidence measure. Theres been more pressure on zuma to quit since march, when he fired the finance minister. That cost south africa its Investment Grade credit rating. Global news 24 hours a day powered by more than 2600 journalists and analysts in more than 120 countries. Im taylor riggs. This is bloomberg. Mark thanks very much indeed. Lets check out markets. London, holiday here, holiday in the United States, holiday in china. Stoxx 600 europe is trading, down 0. 6 . The yield on the italian 10year is up three basis points today. Former Prime Minister matteo renzi telling one of the newspapers and election in autumn, around the same time as the general election, would reduce market uncertainty. The election is slated for at latest spring next year. Dollarrand is one currency were looking at. Dollar is up 0. 75 . By toprviving this bid leadership to order his removal from office. That is according to three members of the ruling party. We will be talking lots about oil with one of our guests. Lower asde, 0. 4 investors mull over that big opec meeting in vienna. The chart im going to show you wonderfulmy right, funds showing leveraged are close to pulling the plug on the longest lived short, the currency rebounding from three years of declines. Those are those red bars in the top line. The funds have been betting against the euro since may 2014. That is the longest such stretch for any major currency. This cut their bearish position as Economic Data in the u. S. Starts to consistently miss analyst estimates. That is our first chart of the day. 8925 on the bloomberg. North korea has conducted another Ballistic Missile test, its ninth this year, just days after World Leaders urged kim jongun to abandon his Nuclear Weapons program. According to japans chief cabinet secretary, the missile may have reached waters in the nations exclusive economic zone. Paribasus now, b. N. P. Head of commodities, thank you very much for coming in today. Is this a bit of a slap in the face to the g7 . Just a couple of days ago, the g7 pledging to strengthen measures aimed at prompting north korea to cease its nuclear and Ballistic Missile tests. It is absolutely a slap in the face. It is heating up in asia. There are three Aircraft Carriers now. The third Aircraft Carrier is headed towards the western pacific, the first time that has happened since 2006 when the last exercise happened. This has not been officially announced in advance. It is a more serious event than in 2006. It is pushing putting a lot of pressure on china and north korea to mend their ways. Mark and south korea has a different approach under the new president. Trump and japan have slightly different tone. Which measure, which approach, is going to win the day . What is the sensible approach . Delegated arump has lot of the decisionmaking probably too mad dog menace, who is attempting to strongarm china and north korea into decreasing their Nuclear Weapons proliferation. I think that is the u. S. Approach. Im not sure to what extent the u. S. Has sought the council of south korea and japan on this, but i think they are pushing ahead. Up in the area. In the the spillover commodities spectrum from this one type of geoPolitical Risk . It really depends. If you start looking at commodities like oil, geoPolitical Risk tends to manifest itself more when you are looking at producing countries or countries that have significant shares of world production. In terms of other commodities, the classic one is gold. Now, weve seen gold picking up. Theres a number of reasons for that. Obviously developments in asia are important, but some of the recent declarations by Angela Merkel must have investors thinking. Mark are you surprised that gold has held onto its gains, harry, given the likely imminent hike in u. S. Interest rates . It has been remarkably stable. Harry 4s at b. N. P. Paribas, gold is always in investor demand. The question is, what is the opportunity cost for holding it . The more rates go up and the cost of holding gold is going to be higher, investors are less likely to buy into it. However, we had elections in europe. Gold is retrenched a little bit. Now we have these new tensions. We have to see how that impacts investor sentiment. We are negative on gold because the fed is hiking rates, the cause it might taper its Balance Sheet. However, it doesnt mean gold could not define this general trend. Mark vendors, trump has said military force is an option to deal with north korea. Obviously that is the last option. Do you look at scenarios . Is the probability of a military option increasing or not . Anders i think it is, but before you would ever see military options, you would see economic sanctions. Even manus has been clear that economic sanctions would happen first. That would probably be economic sanctions against china, whether individuals or companies that are seen to enable north korea, including potentially rank of china, which is mentioned frequently. Mark stay there. Harry both staying with us. On thursday, we are live at the st. Petersburg economic forum. Erik schatzker joined by the finance minister. We will bring that to you live. That Panel Discussion on thursday. Thursday seems like a week away. Only a few days away. This is bloomberg. This is bloomberg surveillance. Lets go to taylor riggs. Taylor ill take it from here. Many of British Airways problems have ended, but chaos is lingering. The airline is trying to recover from a Technology Failure that disrupted hundreds of flights and stranded thousands of passengers. B. A. Says the problem was caused by a power supply issue. Saudi gulf has agreed to buy 16 boeing 777s. Saudi gulf began operations in october 2016 with four airbus jets. The oil market is pessimistic over the opec deal to extend production cuts. Crude slipped below 50 a barrel. Opec agreed to extend the output curves by nine months, a move seen as the most predictable outcome. That is your Bloomberg Business flash. Mark german chancellor Angela Merkel has given the strongest indication yet that the u. S. And europe are drifting apart. Speaking at a munich Campaign Rally, merkel suggested that reliable relationships forged since the end of world war ii are coming to an end. Which weare times in can fully count on others are somewhat over, as we have experienced in the past few days. That is why i can only say we take our must destiny into our own hands, of course in french it with the United States, in friendship , also withbritain russia and other countries. Harry. Nders here, and im going to pose a question to our man about that specific address. It comes on the back of trumps nineday trip. Grade trumps trip for me. And explain why. Anders c . Say he has created some conflict in the middle east in terms of going to saudi arabia specifically and not approaching the muslim world as a whole, including iran. In terms of europe, hes had a flail. Hes been rejected by merkel, macron, and he has done one attemptingh, he is to push europe to spend the 2 of its gdp on defense, that is something that is very important from a u. S. Perspective, and a to fully backusal nato is an attempt to hit a hard bargaining position that is going to enforce or encourage europe to strengthen its defense spending. That is a plus. Mark he said it was a home run. He went obviously talk is on book in that. Because he stood up in the new nato building and he is outspoken on his fellow partners defense commitments. As we approach the end of the trip, it seems like the beginning part was the easier. Look at the climate accord. Lets get to a man who is an expert in commodities. What sort of disaster will it be, harry, and were going to hear this week because trump didnt want to commit himself, what sort of disaster would it be if the u. S. Pulled out of the climate accord . Harry i guess theres a lot of changes and implications in terms of energy use and development. In essence, one would have thought moving towards a more carbon light future. In the u. S. , there probably would have been something oriented towards natural gas. Andently, if they pull out decide to support the coal industry, in terms of what we are expecting, that is a big change. Mark stay there. Just going to get over to andrew in madrid. We listened to Angela Merkel speaking yesterday. The essence of her speech was, the u. S. And europe are drifting apart. It seems europe has to plot its own course. Is this a watershed . Was this a big moment . Certainly at was moment whichever way you look at it. There was the nato meeting. We were just in sicily and we had the g7. Merkel, she is been studying trump for months now. Having had this opportunity to spend three days behind closed doors with him, she certainly came away and made those carefully considered comments about the alliance possibly reaching a watershed moment. I think it is safe to say that she was disappointed. For me the one anecdote that stands is gentility revving up the meeting saying, we have no idea what trump will do on climate change. Before he spoke, trump tweeted to the world, im going to announce it a week from now. After three days with g7 leaders and nato partners, he told them nothing and then tweets it, somewhat embarrassing for summarizing how there is a disconnect, they are not talking to each other, whether it is nato, climate, or trade. The cracks are appearing to run quite deep. Mark how would you characterize the relationship between germany and the u. S. . Do we go back to 2002, 2003, when schroeder refused to support the u. S. Invasion of iraq . That is cited as an era in which relations were near a recent low. Are we at those levels . I would distinguish those. Rupture, butrious that was very specific to the war. What were seeing now is much broader than that. It runs much deeper. It is on the issue of climate. Where do we want to go . Western liberal democracies want to go on trade . You are beginning to see a bit of a shift. Were seeing china pickup that mantle with the famous davos talked about the need to Work Together and now we are in this situation where we may see china leading. Was on the iraq war, but on all these issues, it makes it a more serious divergence. You the trump presidency, dont see signs that is going to change. Mark thanks, andrew. Harry both staying with us. We are going to speak to marcel fratzscher. Look out for that. 11 30 a. M. Here in london. This is bloomberg. Mark im mark barton in london. Crude oil looking for direction today after opec underwhelmed investors with its projection. Net long positions on wti have risen the most this year. Chart, 41s is that 79, hedge funds resuming bets on the oil rally. You said to me, there is a better chart. Your favorite chart right now is . Harry i like looking at the december spreads. Really, if you think about where opec would like to be, to get that backwardation moving to the front of the curve, it is going to achieve that when it reduces Oil Inventories somewhere toward that fiveyear average. Int is when investors come and buy into that backwardation. As they roll forward their positions, they are making a gain. Marketost opec, the commentary was disappointing. No exit strategy, could have gone deeper, oil sank 4 . Harry what is our assessment now . Harry we had to struggle given how well telegraphed the outcome of this meeting was. The commentary on disappointment, while opec delivered what it said it would deliver, a ninemonth extension, russia and saudi arabia recently putting it out there, everyone else agreeing i suppose the disappointment could come because opec borrowed some language from mario draghi. Maybe there was some positioning, hoping for a positive twist. Right now were at the point where opec is going to continue to extend. Assuming they maintain compliance with production cuts, were looking at inventories declining over the course of a year. Down, that heading is when investors will start buying into the fact that the market is rebalancing. We have to see it in the data. Before the market was acting on faith. Last year when they bought in, the price rallied. It was expectation. Now they are more data dependent. They want to see the decline the for the push this price higher. Mark harry, great to see you. Anders stays with us. Coming up on the show, we speak to michael. This is bloomberg. Im mark barton in london. Lets get the bloomberg first word news. Taylor german chancellor Angela Merkel is signaling that in the donald trump era europe must shape its own destiny. Merkel told a Campaign Rally that the recent g7 meeting showed the old reliance is arent so reliable anymore. Trump called germanys trade surplus very bad and blasted nato allies are not spending enough on defense. President trump says he will decide this week whether to pull the u. S. Out of the landmark Harris Climate accord. He took the unprecedented step of raking with the other six nations at the g7 summit, saying that america is reviewing its climate policy. Isitaly, matteo renzi raising speculation about the prospect of early elections. Renzi tells an italian newspaper that voting in the fall around the same time as germany would. Educe market uncertainty elections are currently set for next year. Securityk. , national is dominating the election campaign. Thererudd tells the bbc are potentially more suspects atlarge in the manchester terror attack. So far 11 people have been arrested. Polls have shown that voters trust Prime Ministers Theresa Conservative Party more on defense. Global news 24 hours a day powered by more than 2600 journalists and analysts in more than 120 countries. Im taylor riggs. This is bloomberg. Mark John Williams says three u. S. Rate increases this year after last weeks fed minutes, that it would soon be appropriate to raise rates again. Sat down with the nonvoting fomc member and asked about his views for inflation . I am watching to make sure we see signs the inflation trends are moving back to 2 . Im committed to seeing inflation reached our 2 goal. Mark joining us now, michael purvis, global strategist, and still with us, anders corr. If i can start with you, given those comments from williams, it is looking pretty certain the fed is going to hike rates in june. The futures market is reflecting that. I think the only surprise would be if they didnt. When you take williams comments, this hike and another hike later this year, still in the dovish hike construct that the fed has been working with we get the june hike. I think it is going to be sort thiswards and upwards from rate hike trajectory right now. Fact some point to the that inflation is easing. We have that that weak period. Are you troubled by those factors . The inflation story here is more nuanced than it was looking after the election in the u. S. In early november and january. You can see inflation metrics of various types around the world softening over the last two months. I think it is a much more nuanced story. Surging back up to the mid50s and it is at a technically weaker pastor right now. Comments,to williams the fed is still the structurally data dependent mode. I do think they want to hike as much as they can while they can for theup dry powder next potential event down the road. I certainly see that particularly against the narrative coming out of the white house and so forth. But i dont think that is necessarily a view i dont know if you can interpret that to be, inflation is absolutely here. I think it is a very nuanced story. Mark lets talk about politics. Which has metry the president on his arrival back from his foreign trip is his soninlaw, Jared Kushner. He considered setting up a secret back channel to russia. It sort of goes from one event to the next, most of it linked to russia. How is this going to unfold . How is this going to damage the president s agenda, his tax agenda, his Health Care Agenda . Anders it is dividing his attention and the attention of the republicans. Hes now setting up a second war room in the white house just to deal with his legal and other issues coming out of this investigation. Jaredct that it is now kushner and these new revelations is getting closer and closer to trump himself. Is within his family circle. People who are defending him, like h. R. Mcmaster, the National Security adviser, john kelly, the Homeland Security secretary, are risking their political reputations. Mark they said they werent concerned by kushners actions. Anders exactly. They said it is fine that kushner would set up a secret back channel to russia. Most experts see it is ludicrous. Mark at what junction does trump lose the support of the Republican Party . Through thick or thin, some have been outspoken to some things that have happened, but the party does seem to be holding. At what point does he lose his own party . Anders it is holding on the surface but i think now that you see some of the republicans supporting a subpoena of some of the documents, i think that is where you see a question coming wherehe Republican Party now the rubber is hitting the road and they want to see the documents. Those documents could bring trump down. The fact that they are supporting a subpoena is a big deal. Mark michael, how are you reading it . We talk about it from an economics market perspective. We pose questions like, is the trump trade dead . The economy is moving on besides that. How does politics play into economics and markets . Elected,ince trump was youve been trading more Political Risk in the United States. Equities and other Asset Classes in the u. S. It, wevecharacterize been working with this fed put for several years. Now we have this trump call. If you get some of the stuff done, tax reform, that will boost earnings. It is sort of a call option. The call option has been steadily falling. You can almost quantify it. I think the retreat of that call option, or that call option falling further, is very different than the fed put in terms of a volatility perspective. I dont think that has to be a volatility event. There can be reasons to revalue your u. S. Equity basket and think about how much earnings do you really count on to grow into these elevated pes, but the retreat, if we increased valuation by 1. 5 multiple points when the trump trade was going full blast, and we give that 1. 5 multiple points back over a period of time, i dont think that is necessarily a folder committee event. But it doesnt mean you are going to be making a ton of money in u. S. Small caps. Mark volatility is your thing. We know how low volatility is. Vix did spike that wednesday around the comey crisis. Does low volatility, is it a forewarning of something, or not . A lot of people like to think the vix is some wonderful crystal ball that other Asset Classes dont have. Im not sure it is. The vix had been very low for a while and needs to have one of these quick thunderstorms. It sort of came and went into days and disappeared. Now we are back to this right around 10 regime. Weve got another one of these thunderstorms probably in the next three or four weeks. The question is, does the floor go from this 10, 11, 12 place, up to something in the midteens . All this political noise in d. C. Doesnt necessarily have to mean you get sustained higher volatility. Mark michael, stay there. Michael purves, chief global strategist. Anders corr, analytics founder. Stay with us. Coming up thursday, glencores chief executive will be joining Erik Schatzker in a Panel Discussion live from the st. Petersburg international forum. This is bloomberg. Mark breaking news out of germany. A says that merkel is convinced atlanticist. These comments come after Angela Merkel yesterday in munich suggested the u. S. And europe is drifting apart. She said that europe must plot its own course. Andrew barton said this is a watershed comment from the german chancellor. Merkels spokesman speaking to reporters in berlin. Merkel considers it necessary to address the g7 differences. There clearly were differences, usually six versus one, the one being president trump. Other comments are from the ecbs ewald nowotny. He is speaking to reporters in vienna. He says we are seeing positive news on growth and he says he expects more wage dynamics once the upswing is consolidated. It comes ahead of the ecbs meeting next thursday. He says we shouldnt speculate about the outcome of the june meeting. Great things are expected next thursday. Maybe a change in the rhetoric from the central bank. Gold is holding near threeweek highs, growing uncertainty over the looming u. K. Election after a poll shows the conservatives lead narrowed. Lets get back to michael purves. Nders corr michael, you wont be able to see this chart, but it is a wonderful chart by our wonderful queen of charts, hillary clark. Michael, it is the conservative in five majority. Looking at polls, looking at online, we have measured what the projected majority is of the conservative party. It is down to 12. A month ago, it was 200. It is a massive moves. Polls on friday suggested the lead between the tories and the labour party have come down to five percentage points. This has big market implications. Michael for the last 12 months, weve the entire political discussion for developed markets has been focused on populism. Interesting,is this resurgence of the far left part of this discussion, youve had melenchon come out of nowhere in france. Obviously he didnt win, but he came out of nowhere. I couldnt see your chart, but is it suggesting that corbyn is pulling much better . Mark exactly. Basically the majority the conservatives might win, this chart tells us, is going to be a lot smaller than people were assuming a month ago. As we know, sterling last week had its worst week since november. Investors are maybe beginning to price in that weve got a race on here. Even as you look forwards in the u. S. To our midterms in 2020, i dont know that the markets are necessarily considering the risk that you could have a Bernie Sanders type candidate ultimately being president in the next election. That is going to be one of these discussions you are going to see more and more. Populism came out of dissatisfaction by a lot of voters, and you are starting to see real wages continue to weaken in the u. K. , that is a recipe for all sorts of election surprises. I think we have to not just it,ider populism as we know the trump, brexit sort of thing, it can be expressed in many different ways which are not market positive. Mark fascinating. We must look almost beyond populism. Merkel said today, im making a pitch for european unity. Shes got her election in september. Very interesting point. Anders i think that merkels push for the e. U. Is consistent with the past. Germany and france has historically pushed the e. U. I dont think our comments are outside normal for germany. I think the fact that the spokesperson, the other german, recently walked it back and further atlanticism, suggested theres continuity in the german leadership. Mark we are just hearing germany and the u. S. Are to discuss trade. The spokesman for Angela Merkel said the u. S. And germany are to discuss trade issues bilaterally. Can you see a Common Ground . Anders im sure there is a Common Ground. Trump has been very tough, as is his normal hes very tough in advance of bargaining and once bargaining actually happens, he becomes a bit softer. Mark thanks very much. Michael purves, thank you. Corr analytics founder, stays with us as well. Tv , wonderful function. Go on it. Theres so much on it to play with. Do play with it if youve got a bloomberg. Tv tells you everything you need to know. Time in london is 10 40. A bank holiday. Holiday in the United States. We are here to bring you all the latest action. This is bloomberg. Taylor this is bloomberg surveillance. Im taylor riggs. Arm holdings has unveiled a new microchi design into design a new microchip designed to crack intel hold on the market. Arm is a division of softbank. The first private airline in vietnam is in talks to become the countrys First Company to list shares overseas. Vietjet says it has been approached by exchanges in london, hong kong, and singapore. The official will meet exchanges in new york this week. Vietjet controls vietnams Domestic Airline market. A macau gaming billionaire says when it comes to building in japan, he chooses osaka over tokyo. Ho is among the industry heavyweights seeking entry into japan after lawmakers voted to open the country to casino gambling. Ho says there are more opportunities to develop osaka. That is your Bloomberg Business flash. Mark British Airways says many of its Computer Systems are up and running again following a weekend of chaos caused by Technology Failure. Hundreds of flights were hit, passengers, thousands of them left stranded. Lets get over to bloombergs managing editor for global business, benedict. Whats the latest . Latest isrlin, the that systems appear to be back to normal. We have a couple of disruptions still working through the system, a couple cancellations, but nowhere near the epic meltdown we saw over the weekend. Thousands of people, if not hundreds of thousands, stranded and affected. The scenes in heathrow, weve seen them on social media, tv. It looked like depictions of hell from the middle ages. Bags, looking for their looking for their flights. We have ceo alex cruz on tv and social media apologizing for what has been going on in the last 48 hours. Here is a company trying to come to terms with how this happened, what happened. We know it was some kind of a power outage. Mark do we have an idea what it is going to cost . Theres reputational cost and theres actual financial cost. Wille reputational damage be far more difficult to assess. This is an industry that has a slightly bad reputation. People feel they are getting the short end of the stick. We remember those scenes from the United Airlines flight. Weve seen the report that maybe the laptop ban might be expanded. People are jittery about airlines and what they are doing for them. In terms of financial fallout, we saw the stock this morning take a dip in madrid. People are clearly concerned about this. If we are talking about north of 100,000 people who want some sort of compensation in the hundreds of euros, if not pounds, that is a rather hefty bill that will come roaring down the pipeline. Will have to absolve that. They cant claim force majeure. That will feed through to their bottom line. People looking at the stock are nervous about this. Mark thanks for joining us. Lets get final thoughts from anders corr. What is on your mind . What is your primary worry . What is consuming the most of your thinking . Anders i think the biggest issues politically are what is going on with trump in the u. S. In terms of the crisis, whether impeachment would eventually increase in terms of probability, and the other big issue is asia and the Political Risk you see their from increasing buildup of north koreas military. Mark what is the probability of trump getting impeached . Anders im saying 5050. I dont know. Mark quite high. Anders i would say the number of things that are coming around in terms of many russia connections that we see, i think are quite worrisome. Eventually it is going to be bad for the Republican Party and when it is they are going to act. Mark anders corr. Coming up in the next hour, going to speak with marcel fratzscher. Look at that. 6 30 new york, 11 30 in london. This is bloomberg. Mark drifting apart. German chancellor Angela Merkel says relationships forged since the end of world war ii are to some extent over. More provocations. North korea conducts its ninth Ballistic Missile test this year. Japan says it may have reached its exclusive economic zone. San francisco fed president John Williams says hes optimistic about the u. S. Economy. Will fridays jobs report keep the positive momentum going . This is bloomberg surveillance. Im mark barton. Tom keene and Francine Lacqua have the morning off. Lets get the bloomberg first word news. Taylor good morning, mark. German chancellor Angela Merkel is signaling it is a new era for europe when it comes to ties with the u. S. Thatold a Campaign Rally relations forged since the end of world war ii are to some taket over in europe must its destiny into its own hands. Trump called germanys trade y bad ander blasted nato allies are not spending enough on defense. North korea has fired another missile, its ninth test this year. South korea says it flew about 280 miles towards japan. The test came two days after the group of seven pledged to strengthen measures aimed at forcing north korea to halt nuclear and missile tests. President trump says he will decide this week whether to pull the u. S. Out of the landmark paris climate accord. The u. S. Took unprecedented steps, breaking with other nations at the summit, saying that america is reviewing its climate policies. San francisco fed president John Williams expects the central bank to have a much smaller Balance Sheet in five years. Williams spoke to bloomberg tv in singapore. Given my own view of the economy, i expect it to start normalization, the baby step, later this year. Tot will take several years take place. It wont be selling assets. We will allow the assets we have to mature and decline organically. Taylor policymakers are coming up with a fan a plan to reduce the feds assets. President jacob zuma has survived an attempt by some African Congress leaders to order him removed from office. The panel decided not to vote on a noconfidence measure. Theres been more pressure on zuma to quit since march when he fired the finance minister. That cost south africa its investment credit rating. Global news 24 hours a day powered by more than 2600 journalists and analysts in more than 120 countries. Im taylor riggs. This is bloomberg. Mark thats check out what is happening to european equities. It is a holiday. We are still here. A Little Movement for the stoxx 600. Interesting move for the italian 10year. Former Prime Minister renzi suggesting there could be maybe autumnal elections. The time of the next election has to be at least before spring next year. Taylor telling, you about that story, and crude oil as well. A quick peek at the chart on my right. This is a great chart. , close tofunds pulling their blog on the longest short, the euro. This is the smallest net short position in years. Funds have been betting against the euro since may 2014. We will ask our guest about that. U. S. Homeland security secretary john kelly says reports of senior white house adviser Jared Kushner seeking a backdoor Communications Channel with russia is no big deal. President trump returns to washington and his cabinet faces ongoing questions about possible russian interference. Trump lasted the Fake News Media in a series of tweets after never holding a press conference during that nineday trip. We are joined by our white house shannon. In washington, how is this story playing out there now that trump has returned to the United States . I dont expect the president to remove or sideline kushner unless hes forced to. There are few people in the white house who are as loyal and know the president as long as kushner. Actually theres no one in the white house i guess aside from his daughter, who has an official but not as high profile role as kushner. Hes very valuable to the president. He does play a big role in the white house. The eyes and ears and the voice of the president , and sometimes the honest broker. He is valuable. Hes trusted. Hes loyal. I suspect trump will defend him to the end and if theres going to be any change in his role, it is because hes forced to because the investigation has become such a distraction or a liability to the administration. Mark the big geopolitical story is north korea launching this Ballistic Missile. Any reaction from the white house . Clearly this is an action from a country that is defying the pledge made by g7 ministers in sicily. Shannon it has been interesting to watch the u. S. Try and figure out what its relationship and policy is going to be to north korea. Know, theyve sort of tried a hostile tactic. Remarks,dent made some kim jongun, a lot of power, open to talking to him. I dont think they figured out what their policy or their stance towards north korea is going to be. It is just one of those reminders that they were in the middle east, trying to focus on issues in the middle east, but north korea is not going away. Not to downplay the seriousness of the middle east, but north korea poses a much bigger threat to them. I think kim jongun is demanding their attention. Mark shannon pettypiece, our white house reporter. With us, erik norland, cme group senior economist. Thanks for joining us. Read the geopolitics, the goingson in washington . From your macro standpoint, how much does it bother you . Erik i think the economy itself doesnt respond closely to these news events. The economy is composed of billions of people making transactional decisions. I do think it could have longterm consequences. The iraq war had longterm consequences. When you compare the sort of discussions that are going on now between trump and merkel or macron and Vladimir Putin soon, i dont think theres anything on the scale that is going to move markets in the short term. Mark there was a moment wednesday last week when the trump comey story was getting very heated and there was quite a big market reaction. Time for a spillover from d. C. To wall street. Are we going to have to get used to that . Erik there are risks. After the election, the s p rose about 12 . When that story broke, the s p dropped 2 , 3 . It seemed like a big move, but in context of low volatility. What i do think is interesting is this. If you look at our past administrations, normally theyve only been able to accomplish a small number of things. Lyndon johnson got civil rights ton. Obama, health care and a few other measures. That took enormous focus and enormously controlled messaging. It seems like the Current Administration is being pulled in a lot of directions and has a lot of distractions. I think that did contribute to upset in the markets. Youve had this story that the markets rallied because of trumps victory. People seem to have amnesia where they forget the market was up 196 under president obama. Maybe the reason is not closely related to politics, but more related to easy Monetary Policy around the world. That could be keeping volatility levels extremely low. Mark and that leads to the fed meeting in june. John williams says three this year. Are you a threeman for 2017 . Erik theyve already done one. Our fed funds futures are giving us 75 probability for another move in june. To get one more further move later this year is not a big stretch of the imagination. Mark stay there. Back to you in just a second. Erik norland stays with us. Thursday we all live at the st. Petersburg economic forum. Bloombergs Erik Schatzker joined by Russias Central Bank governor. We will bring you that live discussion on bloomberg on thursday. This is bloomberg. Taylor this is bloomberg surveillance. Im taylor riggs. Many of the British Airways computer problems have ended but the chaos is lingering. The airline is trying to recover from a Technology Failure that disrupted hundreds of flights and stranded thousands of passengers. Says the problem was caused by a power supply issue. Saudi gulf has agreed to buy 16 , in line with plans to expand outside of saudi arabia. Saudi gulf began operations in 2014 with four airbus jets. The oil market is pessimistic over the opec deal. Crude trading below 50 a barrel. Opec agreed to extend the output curve by nine months, a move seen as the most predictable outcome. That is your Bloomberg Business flash. Mark german chancellor angela sman today said germany in the u. S. One discuss trade bilaterally. Merkel gave a strong indication that germany and the u. S. Are drifting apart. The chancellor suggested reliable relations forged since the end of world war ii are coming to an end. The times in which we can fully count on others are somewhat over, as we have experienced in the past few days. That is why i can only say, we europeans must take our destiny into our own hands. Of course in friendship with the United States, in friendship with great britain, with good neighborly relations whenever possible, also with russia and other countries. Mark joining us from russells, carsten nickel. Still with us, erik norland. Kirsten, thanks for joining us. Is this a watershed moment . Is this a sea change, hearing from german chancellor Angela Merkel in her comments about relations between the e. U. And the u. S. Following the g7 summit . Carsten no, i would say lets look at this from two perspectives. One is, germany is going to elections in september. This was a comment made during a Campaign Rally. I think that merkel is rediscovering leadership strength on the european and global scale as a key asset. That is. 1. The other point is, these are reactive comments. This is not germany deciding to wrap it up when it comes to relations with the u. S. The real story is from a europeans perspective, there are urgent issues that need to be faced, migration, climate change. I think theres a great sense of puzzlement on the european side as to where the u. S. Is heading. This is not merkel on her own deciding that shes steering away from the u. S. It is her sending the signal that if the u. S. Decides not to join, then europe will have to find its own solutions. Mark are we seeing a more unified europe . Yesterday Angela Merkel made a pitch for European Union, she cited those victories in the netherlands, in france. Does brexit, does trumps rhetoric hardin the stance within the e. U. , this unified stance . For the european project, are these uprising these opposing forces good for the e. U. . Carsten i think it reminds decisionmakers and voters of the risks of populism, political fragmentation. If anything, leaders like Angela Merkel or Emmanuel Macron have been reminded that it is crucial to deliver on these key challenges facing europe. And of course the question of Economic Cooperation in europe, specifically the eurozone. Against this backdrop, the europeans are figuring out it is much more important than before to Work Together. Mark that is more your thing. It is one thing talking about it. Macron and merkel, they are coming from slightly different starting positions when it comes to the economic approach, the financial approach, the budget approach. Erik they are coming from different places. Germany has a healthy fiscal situation. They have a balanced budget or a small surplus. France is still running deficits. The main difference is that germany undertook a reform of its labor market over a decade ago. That has helped them to lower their Unemployment Rate down to levels that are common in scandinavia, the u. S. , and britain. France has a flexible labor market with unemployment stuck at around 10 . The real key for their Economic Cooperation will be whether his party can win a majority in his upcoming legislative elections. If they dont win a majority, he cant make the reforms he would like to make. Mark and it is game over for his agenda. Erik he would have to go into coalition with the standard centerright party. You would have to form a coalition, which is something not typical in french politics. It is a country that normally has majority rule, unlike germany which normally has coalitions. The macron government would like to pressure Angela Merkel to boost fiscal spending, to grow the european economy. Mark will that work or not . Erik i think it is difficult to say. The germans have to get through their own elections. After we got through the French Election and german election, maybe around october they can begin having that discussion. Mark erik norland. Stay with us. Coming up tomorrow, conversation with charles of columbia business. Look for that. 6 00 a. M. New york, 11 00 a. M. London. This is bloomberg. Highsgold holding near amid growing uncertainty over the looming u. K. Elections after a poll showed the conservative leaders narrowed to just 5 , a reading which led to some weakness in sterling. Lets get back to erik norland. Carsten, one of the more interesting meetings at the g7 was merkel and macron. Macron spoke in english but it seems he peddled the hard antibrexit line which may continues to pedal. It shows, regardless of the outcome of the u. K. Election, how difficult brexit negotiations are going to be, doesnt it . Absolutely. I think Emmanuel Macron faces a strategic but very simple choice. Making concessions to the u. K. , leading a soft brexit camp among the e. U. 27, and the other option is trying to stay close to germany, to Angela Merkel, steering in the other direction, if you compare this to brexit. Closer integration on the european continent when it comes to military cooperation and eurozone reform, i think it is very clear, it was very clear during his campaign, and now after the g7 summit, weve seen clearly that macron is choosing relations with berlin over a softer approach to brexit. Mark weve got a chart that i showed earlier. Great function on the bloomberg is e. U. Go. It has all the latest polling. On friday we had that cold. The polls have narrowed. Extent, if theresa may wins, a small majority, maybe even smaller, what does that mean when it comes to reading the brexit negotiations . Domesticanizing consent around deals that you strike in brussels, that is the key variable to keep in mind when you look at negotiations on the european level. From a brussels perspective, there is some consensus that it would be a good thing for theresa may to win a strong majority. At the end of the day, lets keep in mind that almost a year ago voters in the u. K. Made up their mind in a referendum. In a public debate in the u. K. , if you look at the labour party, in the public debate, the brexit train has left the station. I dont think that a narrow majority would somehow force a rethink. The negotiations are about to start. Selling this at home will remain difficult is in levels of societal polarization in the u. K. The exact outcome is much less interesting. Mark thanks for joining us, carsten nickel. Erik norland, cme group senior economist. Coming up, we speak with the berlin president , marcel fratzscher. It is a bank holiday today, a holiday in the u. S. , a holiday in china. We continue bringing you everything you need to know. This is bloomberg. So new touch screens. And biometrics. In 574 branches. All done by. Yesterday. Banks arent just undergoing a face lift. Theyre undergoing a transformation. A data fueled, security driven shift in applications and customer experience. Which is why comcast business delivers Consistent Network Performance and speed across all your locations. Hello, mr. Deets. Every Branch Running like headquarters. Thats how you outmaneuver. Tthats why at comcast,t to be connected 24 7. Were always working to make our services more reliable. With technology that can update itself. And advanced Fiber Network infrastructure. 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. Getting news from the russian minister. He said Oil Companies didnt ask for additional rebates after the opec pack last week which caused cuts. 7 output expecting 54 million tons. Lets get the bloomberg first word news, heres taylor. Taylor good morning, mark. Starting in the u. S. , a member of president trumps cabinet is downplaying reports of jarred kushner seeking communications with russia. Homeland security secretary jon kelley called it no big deal. Reports say before the inauguration kushner spoke to russias ambassador and proposed a back channel between the Trump Transition Team and the kremlin. In italy, the former Prime Minister is raising speculation about the prospect of early elections. Voting in the fall around the same time as germany would reduce market uncertainty about italy, not increase it. Elections are currently set for next year. And in vietnam, the government is confident it can hit its Economic Growth target without adding to inflation. Bloomberg tv spoke to vietnams Prime Minister in hanoi. We have a detailed strategy to achieve growth of 6. 7 . Ill give you a hipt of some very good news, data in april and may shows a strong pickup in exports and also agriculture production and that will lay the groundwork for growth in the third and Fourth Quarter of this year. Taylor the vietnamese leader flies to washington this week to meet with president trump. In the u. K. , National Security is still dominating the election campaign. Home secretary amber rudd tells the bbc there are potentially more suspects at large in the manchester terror attack. So far 11 people have been arrested. Polls show they trust theresa may on security and defense policy. Global news 24 hours a day powered by 2600 journalists in and analysts in more than 120 countries. Im taylor riggeds. Mark . Mark Angela Merkels spokesman said its necessary to address g7 differences and he said germany and the u. S. Will discuss trade issues bilaterally. The comments come after merkel gave the strongest indication yet europe and the u. S. Are drifting apart. Speaking at a Campaign Rally after the g7 summit the chancellor suggested that relations forged since the end of world war ii are coming to an end. Lets bring in our next guest, thes of the German Institute of Economic Research and he speaks to us from berlin. Youll hear from the c. M. E. Group. Thanks for joining us today. Is this election nearing by Angela Merkel and spoke today, the intelligence, a few moments ago. Is this election earing or is this significant in the message that Angela Merkel was giving yesterday to her supporters . Guest i think theres a big shift currently in germany to the u. S. And also whats europe. What the German Government has been pursuing the past five years is very much more and more isolation. The perception in germany has been look, weve helped other european countries, greece, spain, and so on with big loans but germany has taken on the biggest share. There was a lot of suspicion to europes no interest in deepening integration in europe and now we have a new french president who came to germany do said look we have to more on europe and create a European Finance minister and european budget. Now with the threat of donald trump and brexit. With all these three events, theres do more on europe a shift of think among german politicians, look, we cant ignore europe and the Global Economy anymore, we have to get engaged. Mark its one thing saying weve got to get engaged. What will merkel do to maybe not give in but show some leniency, show some compromise when it comes to the german position on some of these key ssues. Guest germany has a tough stance including the trade surplus because its not trump, only trump and his advisors who criticized germany for its excessive trade surplus, the french government has been doing that and the i. M. C. And the european commission. So germany is isolated on that issue so it will need to find European Partners to say trade is not a german issue or National Issue but really a European Union issue. Thats one strategy the government is pursuing and bilaterally with the United States saying please dont push us too hard because our surplus with you, our german surplus with the United States, were hardly investing in companies and the Foreign Direct Investment in the United States so youre benefiting from that as well. Thats a strategy, getting a stronger europe and getting europe to back germany and appease the United States. Mark a europe backed germany. Eric . Eric this whole issue of the german trade surplus is an interesting one when you look at the euro zone as a whole, its relatively balanced account. Germany has a huge surplus but all the other companies are running deficits and that gets down to the sort of heart of make mack ron macrons argument s. You cant have someone who run as large surplus and lend money to someone else to buy their products but complains later on they cant pay the money back. It would be to europes benefit if they want to have a common currency, they need a common fiscal policy because one cant work over the long run without the other. Mark are we in any way, marcelle, coming to a common fiscal policy . I feel ive been asking that question for 10 years but lets ask it again. Marcel you get different answers to whom you ask. The perception the wish in germany is yes, common fiscal policy but that fiscal policy should mainly mean having common rules in every National Member state sticking to those common rules. The view in france and other countries is it also needs to include a common budget. I think thats where the grand bargaining could lie. Of course to have a fiscal union function properly, you need to have common rules and a mechanism where Companies Really obey these rules. At the same time, you need to have a financing capacity to help countries in weaker times to get through recessions or crisis. Thats where the great bargain is. But clearly to make Monetary Union work in europe we need to have more fiscal cooperation, call it a fiscal union. Whats really clear at the moment is the status quo is not sustained. Mark what is clear also, erik, is the Economic Bank drop is improving, daily data wherever you look. To use draghis words, broad and solid. Its a good starting block. Erik thats right. To my mind thats purely a function of monetary policies. When you look at the u. S. And u. K. , we got our Interest Rates down close to zero in 2009 and began doing aggressive q. E. And our economies have been recovering. During that early period the e. C. B. Was trying to raise rates in 2011 and they created a massive crisis in 2011 and 2012 and did not get their rates down towards zero until 2013 but have for the past three years been in a recovery and that recovery shows every sign of continuing in large part because of the easy Monetary Policy. Mark which may come to an end. Is june pivotal in the communication strategy of the e. C. B. . Erik the most important aspect of the Monetary Policy is keeping Interest Rates low at the short end of the curve. Im not sure q. E. Is all that helpful and gets a bit helpful. Though they taper the q. E. It wont derail their recovery. The u. S. And u. K. Ended q. E. Years ago and our economy is continuing to recover. The u. S. Economy is becoming more of a risk now the fed is tightening policy and eventually may tighten too much. At rates at 1 in the u. S. And around zero in the u. K. And slightly negative in the euro zone, that should set the stage for a strong recovery. Mark stay there. Well continue to focus on the e. C. B. Marcel and erik stays with us. Coming up tomorrow, a conversation with a c. E. O. Of hearas, 1 00 p. M. London. This is bloomberg. Taylor this is bloomberg surveillance. Lets get to Bloomberg Business flash. A. R. M. Holding has revealed a microchip design aimed at cracking a strong hold on the server market. The company says the new chip will increase performance by 50 . Its predecessor is at the heart of many of the worlds smart phones. A. R. M. Is a division of softbank. The first private airline in vietnam is in talks to become the countrys First Company to list shares overseas. They say theyve been approached by exchanging in london, hong kong and singapore. The airline will meet with officials in new york this week. Viet jet controls 40 of the vietnam Domestic Airline market. Lauren host says when it comes to building a casino in japan hed choose osaka. He is one of the heavyweights seeking entry after lawmakers voted to open the country to casino gambling. Im not so sure. Ive been to tokyo probably 200 times in my life. Im not sure tokyo needs an integrated resort. Tokyo by itself is amazing. Its like when people ask me, do you think new york or london needs an integrated resort. No, you dont need an integrated resort. But the places where you do build integrated resorts are like places like las vegas, macau, places where you go there to have fun. Taylor others competing for japanese gambling licenses includes las vegas sand and m. G. M. Resorts international. Thats your Bloomberg Business news. Mark . Mark taylor, e. C. B. President mario draghi will be grilled at 2 00 p. M. Eastern time and will be the scheduled appearance before next weeks monetary decision. While the area is strengthling, draghi could point to low core inflation as he makes the case for keeping policy on hold. With erik norland and the president of the German Institute for Economic Research, marcel. We approach the pivotal e. C. B. Meeting in june. So much has been talked about, so many expecting so much, some not expecting so much at all. What sort of message is draghi going to want to pursue today in front of the European Parliament . Hes essentially a little bit more dovish than some of his companionens companions on the e. C. B. Marcel i expect him to give the message the e. C. B. Is on the right path and q. E. Was effective and that the e. C. B. Will full fill the mandate on the medium term and can think of an exit and must be his message and we cant forget have different views in europe. In germany theres a strong criticism of draghi himself, even strong personal criticism and particularly the government has been arguing the e. C. B. Should have ended q. E. Much earlier and should have ended actually now and germany doesnt want to see more or continued easing. In Southern Europe theres the worry the economy is massively under potential so Monetary Policy recommendation is needed for longer. These clashes, its very difficult for him to square that circle and provide a message everyone can live with. Mark you say inflation is moving in the right direction but this week well get ennation data showing headline inflation. Look at the chart to my right. This is headline versus core. Last month it was 1. 9 versus 1. 2. It probably will be 1. 5 versus one core inflation, its been stuck as we know around. 6. Its going to move to 1. But is inflation moving in a satisfactory manner toward the target . Bloomberg intelligence says its going to accelerate to 1. 8 . By 2021, marcel, draghi would have left the e. C. B. By then. Are you comfortable with the part of inflation and does it warrant a changing in the e. C. B. Stance . Marcel first of all, talking about a change in the stance, talking about the q. E. Program ending the end of this year and gradually the e. C. B. Will taper and reduce the purchase. The first step on Interest Rates most likely will take place in 2019. In two years out. Now, what the e. C. B. Needs to look at is not headline inflation but inflation expectations, both market based and Service Based market expectation figures are improving and core inflation. That one is looking up lately as well, slightly. Definitely, youre right, there is a big concern about inflation in particular, the e. C. B. And many other forecasters have been persistently too optimistic on inflation over the last five years. So there is a big risk that the e. C. B. Might not achieve that objective of close to 2 and why the e. C. B. Needs to be very careful not to taper too quickly and not to end monetary commendation too quickly, as by the way, they tried to do 2008 and 2011 when it raised Interest Rates much too early. It has to balance those risks and its much better to be careful on the downside saying lets by the way, they rather have mo recommendation for longer to really make sure that inflation comes back up and is consistent with price stability mandates. Mark lets look a fiveyear forward inflation, what we like to call draghis preferred inflation gauge, well off those record lows of last summer but were up to highs of early 2017. This is telling us in the fiveyear period from five years hence, inflation will be at 1. 6 . Thats not 2 , thats not just below 2 , is it . Erik no, its a clear sign the market doesnt believe theyll get inflation up to 2 even given their current Monetary Policy. I think theres still so much slack in the labor markets in Southern Europe. But that does feed through elsewhere in european in the countries of low Unemployment Rates, labor does not have a lot of pricing power. They cannot go to ask for higher wages, when theres a threat those jobs could be moved to Southern Europe or somewhere else in the world. Mark even on wages, marcel, when will we see a pickup in inflation and wages and thats the missing element in the e. C. B. Inflation mix. We have falling unemployment in germany but even in countries like germany where joblessness is at a record low, were not witnessing, are we, across the euro zone this traction in wages. Its the missing ingredient as it is, of course, in many countries. Marcel absolutely. And the big puzzle is germany. Germany has a record low Unemployment Rate and real wage increases this year are likely between. 5 and 1 . Extremely low. Thats the big puzzle. But i think where it really points to is that in the euro area, the output gap is still negative and there are huge unused potential so the worry about overheating and Monetary Policy has been too acom dative too long and its unwarranted and no good reason to be worried about that. So wages need to improve and that will still take some time including in germany and germany doing so well should actually have very high wage increase and also have very high inflation above 2 to rebound its competitiveness within the euro area. So it clearly shows all of that we are still far away from a situation where the e. C. B. Can be very comfortable saying were ending our zero Interest Rate policy and ending q. E. And moving towards modernization. Mark thanks for joining us today. President of the German Institute for Economic Research. Erik is here still, senior economist at c. M. E. Group and stays with us. Tv go, wonderful function, lets plug it and promote it. Ayouve got a bloomberg, please use it. Everything you need to know about whats on Bloomberg Television and a lot, lot more. This isberg. Mark this is bloomberg daybreak. I think the data has been very good and adding 180,000 jobs a month in the u. S. And twice what we need to do to be on a sustainable level. Unemployment is 4 and i see it i see it going lower. The economy is doing well with momentum. We have a little wait to go in the inflation goal. I am optimistic in the economy. We need to continue the process we started of getting Interest Rates back to a more normal level. Mark John Williams speaking to haslinda in singapore and says the economy is as close as its ever been, the central bank in singapore to deliver a speech. He says its time for the fed to work towards a goldilocks economy and doesnt run too hot or too cold. Hes a nonvoting member. What does that mean for the part of Interest Rates . Whats the normal end game here, eric . Erik he clearly stated what the path of Interest Rates will be so if were creates twice as many jobs we need to create to keep the Unemployment Rate stable that means theres room to continue tightening and thats clear with the Market Pricing and clear with the fed in their own dot plot where they claim theyll have Interest Rates up to 3 . I think it will be a hard thing to put Interest Rates up that high because one thing thats very interesting about not just the u. S. But about the peers in developed countries around the world there is no deleveraging after the financial crisis. If you look at the total level of private and Public Sector debt after the crisis, its still 250 of g. D. P. If you put Interest Rates too high, that automatically begins to expand the federal budget deficit as the federal government has to finance itself in a more costly manner and it will also mean a lot of private borrowers will have more and more trouble paying those loans back as Interest Rates move higher. One to d moves from 125 or above 2 , it will become a very big issue. Mark how will they manage raising rates with reducing the Balance Sheet . Erik i think the idea the fed will reduce the Balance Sheet is a little bit of a pipe dream. Before the crisis, their Balance Sheet was 900 billion, now its 4. 5 trillion. The idea they substantially can reduce this or put it back towards 900 billion is not realistic. My guess is to keep it somewhere near its current level and allow it to shrink as a appearance of g. D. P. As the economy grows in a denominator if you will. Mark you dont think theyll manage to reduce it on an absolute basis . Erik i think it would be very difficult. At the beginning they probably can do it a bit. As they do it, it would drain liquidity from the markets and as liquidity drains you see the market shift to a structurally higher level of volatility. One thing weve seen from the fed is as soon as the market corrects in a big way you start getting 5 to 10 , they immediately back off and Interest Rate increases or any other tightening including reducing Balance Sheets. Mark great talking to you, rik norland of c. M. E. Group. From petersburg economic forum, Bloomberg Eric shasker is joined by the finance minister in germany and well bring you the live panel on bloomberg. European stocks a mix today. Its a holiday in london. Were here always. Holiday in the u. S. As well. Hope youre enjoying yourself. Its 7 00 a. M. In new york. Ive from london. Matt im matt miller. Welcome to bloomberg markets. Myra a lot of stories to follow. Matt a lot of stories to follow. Were covering from bloomberg and around the world the fed, unwinding the Balance Sheets. A hint at the feds next move saying it could start as early as this year with an exclusive interview with John Williams. Draghis dilemma. Will the e. C. B. President be able to answer the riddle, where is the inflation when he speaks before the European Parliament. Well bring you his comments live