Driverless cars are hitting the highway. Audisgoing to check out autonomous a7 that is paving the way for driving handsfree. And, lufthansa shares slide on weak results. We are live with the carriers cfo earlier eight are in the program. In the meantime, lets get straight into our top company story. Adidas shares are under pressure. The company slashing its profit forecast. This among other things, russian unrest. Lets find out what is going on. Hans nichols is in berlin with the details. Good morning. There are two things at play here. One, russian unrest. That is a weakening ruble. So much of their sales are in russia. Anthe last quarter, they saw 18 decline in sales. Whether it is golf or russia, stock is down more than 10 this morning. Here are the numbers on their profit warning. For 2014, they expect 650 Million Euros for profit. That was before estimates of 890 Million Euros. H, a is almost 25 slas remarkable move. When we get to the russia story, when are we going to see an Economic Impact for German Companies when it comes to sanctions or even a slowdown in russia . It looks like it is finally hitting. They are going to be closing stores. They are going to slow future openings of stores. One other note on this, when you look at their secondquarter sales, they are up. They had a pretty good quarter. They came in pretty much in line with estimates. 3. 48. Were about 3. 47 to. Ome of that was the world cup they had two teams in the finals. They spent a lot of marketing, may have gotten a boost their. We will get more on these numbers august 7 when they give us full numbers and a little more detail. Not the only German Company talking about what is happening in russia and ukraine. We also have siemens speaking about it this morning as well. Talking about this representing a serious threat to the european economy. It is really a remarkable turnaround for joe as well. For some time, he has been talking about, it rolled really have that much of an impact on siemens. He did have that comment on july 2 where he talked about the need for putin to deescalate and some Strong Language he said he used when he was speaking to mr. Putin. This seems to be a different tone. We will see more when this Conference Call gets going, what sort of numbers we have. Situation has certainly changed. Thanks very much indeed. Hans nichols joining us from berlin. Another company with exposure to russia is shall. Shell. It pushed up its secondquarter profit by 33 but it is heavily invested in russia. Is there a risk of reprisals from russia . Ryan chilcote joins us. Just the headline numbers first off, profit beating 6 billion. Up by 33 . They are pushing ahead with a restructuring program. There has been a problem in the United States that they are sorting out. They took down close to 2 billion. Russia is interesting. I am is interesting. I am stunned that they said nothing. I think it is really interesting. Companies really have to think about how they approach disclosure when it comes to russia. We have seen a few Companies Say very little in their Earnings Statement and wait for Conference Calls. Siemens has done the same thing this morning. A will probably be asked a lot about that. Maybe the analysts will ask less tendentious questions than the journalists would have. That is all speculation. Real links in terms of exposure. 7 billion worth of assets. They work with gazprom. The idea, for the last several years, has been to up capacity by about 50 . There is a question, will they want to do that . The other exposure they have is they are working with gazp romneft which produces oil in siberia. They are getting into some more unconventional stuff and would like to do more of that. They need the technology to do that as well. There is a question mark about that. Also, i have to say, i read a couple of articles talking about the fact that we should watch for retribution from moscow. Big Oil Companies could be in the firing line for that. That is sort of defcon 5. If russia goes to the Oil Companies and starts seizing assets, logic would dictate that they wouldnt want to do that. They recognize that the sanctions are politically motivated. The last thing that exxon or are the bp wants sanctions. They provide expertise that is critical to get this off the ground. You need these companies on board for nationalizing. I think there is a couple quick points to make. What is more likely in the short term is to see the kremlin, because it does control the oil and gas industry, would be to cherry pick using geopolitical priorities. Oil companies, based on their countries and how their countries deal with the kremlin. That is. 1. Is, in the big expanse of the last 25 years of russian history, shell has been here before. They had big problems of a different nature with another project. Hey had a tsa agreement what they have done with the yeltsin administration, it was a real sweetheart deal. The russians came along and as the country got wealthier, the Putin Administration said, we are not a banana republic. We should never have agreed to that deal. They rewrote the terms of the deal. Ll took it on the chin and stuck around. They know geoPolitical Risk in russia. Perhaps the poster child of having to deal with trouble from the kremlin. Their exposure to russia has been very good thus far. Lets go from what is happening in the Energy Sector to the telecom sector. Megaphone reported this morning, the secondbiggest mobilephone provider in russia. Say. Uick things to if you are looking for a barometer of the russian economy in terms of consumer confidence, it is pretty good. They beat estimates. Actually, volumes are growing. People are using their phones more. The more interesting thing is, the cfo this morning saying that they are keeping 40 of their working capital in large chinese banks. In hong kong dollars. They have 60 of their working capital in rubles. Dcf put out a note saying, very interesting. First company they have heard of that switched out of dollars into an asian currency at the operating level because of this crisis. Just shows the funny thing is, megaphone is not sanctioned. Russias richest man could be seen as a crony and sanctioned in the future. An awful lot of money. People are saying that it is going to take an awful lot of he iso do, maybe because already ahead of the pack. It is certainly the first time we have seen this. These are early days. Bcs here saying it was an elegant choice. The hong kong dollar is paying to the dollar. It allows them to keep things the European Court, cant get details on this yet, saying that russia needs to pay 1. 8 7 billion for the seizure by january, or they pay penalties. I bet the russians will opt to let that penalties accrue. Biggestl hidre the lawyers out there. Yukos owners saying and will take them another decade to collect. Is theey say is likely russian government is never going to hand the money over. , they have shell this project with gazprom that the yukos owners will go after. Wherre shell is gazprom, youh could grab them. We will see how that one plays out. Thank you very much indeed. Coming up, we continue the conversation. We will discuss which companies are going to feel the most pain as sanctions pile up on putin. See you in a moment. Welcome back. You are watching the pulse. Oil and gas giants have billions at risk as tough sanctions threatened to shut them off from Russias Energy frontier. At stake,n what is lets talk to alexander. He is a Senior Analyst for oil and gas at out the bank. He joins us from moscow. Good morning to you. L ceo has just started a Conference Call. He is watching the situation in russia. How worried should he be . Good morning. I think we dont really think do have anyctions immediate impact. I think the oil sector in russia mushrooms ch assumes the relatively high oil price. Therefore, the ban on technologies related to the deep oil drilling, the arctic veryore development, has longterm implications for russian oil. In the meantime, i dont think we should be worried about that. Do you think the situation improves from here or do you think the situation stabilizes or gets worse from here . The european sanctions are going to become an evil thing story and the Energy Sector is in the firing line. Money to be putting work if you were one of these oil giants . I would definitely stay cautious in terms of the future eve all meant of the set evolvement of the sanctions. The gas sector has not been touched yet, which means that the Energy Producers in russia could be under threat. If the u. S. Were implicating the sanctions on the gas sector, that is dependent on foreign technologies. I guess that would imply significant risk of delay from those projects. Is goingst of capital to rise for Russian Energy companies. What does that mean . Given that we have already some motivations toward the Banking Sector in russia, i would imagine that the cost of loans for the russian Oil Companies will increase going forward. Rosneft, which enjoyed low cost of debt around likely needany will some refinancing going forward. The cost for the company will increase. Do you think that means the projects that were previously viable at ae not higher cost of financing . Depends one, so much the rates applied by the Oil Companies themselves. Certainly, the higher the cost, the lower the revenue. It is so much dependent on tax concessions which have been provided to a number of projects. If the government does not change those tax concessions, it would not be so harmful as the higher cost of debt. Element of all this. As you indicated, russia Needs Technology to develop many of the prospect that exist. Is it inconceivable that russia will retaliate when it comes to sanctions in the form of nationalization of certain projects . Probablyk it would be the least likely scenario of the new round of economic war against the western world. I do hold that it will never happen. At the same time, dependence on western technology is pretty obvious, especially in the case of arctic offshore drilling. Willis why i think russia take initiatives and we are going to see some delays in a number of projects related to that. Couple ofsk you a quick questions related to ukraine . We still dont have a deal when it comes to ukrainian gas pricing. The weather is fantastic, it is not a problem. Give it two or three months and may be that starts to change their how big a problem could this be . That is certainly a point of prom inern regarding gaz particular. Ukraine is currently free from russian gas. They have a significant amount of gas reserves in underground storage facilities. Onceituation will change we approach of the winter season. There is a risk that potentially if russia and ukraine cant agree on a price, that we will see the increasing risk of repetition of the gas war when russia stopped flowing gas to ukraine. You, ukraine is an important corridor for transporting gas to european customers. Russia passes through ukraine over half of its gas exports. That is a pretty significant amount. One final question. Yukos, what are people saying in moscow about whether or not we could see assets held by rosneft or gazprom being seized as a result of this court ruling . It is such a complicated issue. Probably this question should be addressed by legal experts. My understanding is that ros neft and the corporate are saying they have nothing to do with that particular case. That is why we dont see much ft sorn regarding rosne far. The situation with western technologies and sanctions is by far more important. That is my understanding. That is what i was looking for. Alexander, thank you for your analysis. Alexander kornilov joining us from moscow. Still to come, bnps record loss. The worst ever Second Quarter results. We will hear from the cfo when we come back. Welcome back. You are watching the pulse. We are streaming on your tablet, on your phone, on bloomberg. Com and we have some great pictures for you today. Check out this. This is a Mountain Bike competition in the french alps. The pictures are so much better when you slow them down. Want to do this on your bike . Not sure i could. Goes to ae goldmedal probiker aged 18. No fear. Talking of things you definitely dont want to do, dont try this at home. A pretty scary jump. The guy landed the jump. All caught on camera. No safety net, no anything. Yeah. An awfully long way down. Things that are falling today, European Equity markets. Lets find out what is going on. Jon ferro. I think you put it quite well. If a picture told a story, there is your picture. The dax down 0. 8 . 0. 4 on the cac. We talk so much about sanctions on russia and what it means for the markets. We have a real Business Impact now. One company says it has been affected by what is going on in russia. It is adidas. Down the most in five years. We are talking about guidance for this year and targets for next year. Forget all of that. They are citing weakness in the gulf division. Is that going to be the new excuse du jour in this earnings season . Russia, can you throw that in with the weather . Is russia that significant . We will talk about that through the morning. Eurodollar, just off the lowest of the year. The fed, the decision nobody was talking about, everybody talking about that statement. They are still dovish. They are talking about underutilization of labor markets. That is fed speak for plenty of slack. That risk is diminished. Someone has dissented. He thinks the economy has improved much more than that. He wants to see more from the fed. 1. 3394, we get data in a few minutes. Eurozone inflation data expected to be confirmed at 0. 5 . Guy johnson and i will bring you that. Looking forward to it. You have been talking to diageo this morning. Distillers biggest suffering from a sales slowdown. Jon spoke to the ceo. You will hear from him next. As we head into break, it is time for todays pulse number. 1. 6 million. That is how much can kardashians smartphone game generated on the app store. The game challenges users to navigate the hollywood celebrity world. 50 game maker has seen a revenue rise in the last two quarters. The morning. Welcome back. You are watching the pulse. The show Conference Call is underway. There talking about the situation in russia and ukraine. Show was badly hurt by the shocking Malaysian Air crash. The co is trying to downplay the exposure. A gamee crash was changer for business with russia. Exploration and ukraine has been put on hold. Ell. Is the latest on sh bancshares have slumped or than 40 this month. The eu is freezing the assets of two russian oligarchs, the latest attempt to pressure vladimir putin. Standard poors has declared argentina in default after the. Ation missed the deadline two full days of negotiations in new york failed to produce results. Investors are focused whether bondholders will demand immediate repayment. Lets get more on this story. It is being covered by hans nichols. What is next . Next i suspect i suspect we will have more defiance from argentina. They are making the case that they have paid their debt and they are technically not in default. Standard poors have said they are in a technical default. Listen to the tone of an argentine official. The president said it, the note, this government is going to sign anything or consent to anything despite the pressure being exerted. Ruling fromit for a the International Derivatives committee. They will decide whether or not there was a technical default and whether or not all of those cds is have to be paid out. One thing that is pretty clear, the argentine economy will be hurt. Theyready cap date have already technically slept into negative territory slipped into negative territory. Argentina will have a more difficult time raising funds. They are not on the open market yet. It will take them longer to get there. Deale prospects of a side to get around the mechanics of all of this, what are they . The problem with the side deal, argentine banks would buy the debt from the debt holders. They need to get all of the holders to agree to this. The banks could hold onto that until the end of the year and they could get payment. Expire, evenauses if you did except the haircut in 2010. Are the current holders of the foreign debt, 30 billion out there, are they going to demand immediate repayment . Will they just wait and see . It looks like there is a waitandsee approach going on. Thank you very much. Hans nichols covering the situation in argentina. Frances largest bank has posted a record Second Quarter loss. They took a hit from that in arm is 9 billion fine they took. Hit from doing business we saw it coming, but it is still painful. That is right. It is the biggest ever loss for bnp paribas since the bank was created. Earnings,k at the five point seven 5 billion euros charge in the Second Quarter. Take the side amount and you look at the profit take this item out and you look at the profit, they posted 1. 9 billion euros. In the longterm, it is damaging the reputation of bnp paribas. Something the bank has been it should not have happened. The bank has regretted it and has taken action for it not to happen again. We have reached out to the clients to see if there is an explanation needed. Supportive have been of the bank. This bodes well and we thank them for their trust. The client may have some more questions in the coming months, especially when the band comes into play in january. Client will have to go to another bank to pay their transactions in dollars. That is what you have that is what happens when you break sanctions. I guess they are watching the situation in russia very carefully. Exactly. They do not have a very big exposure to russia. They did not have a big retail presence there. Of course, theyre watching developments closely. Hasceo said the bank learned the lessons. Aftermpliance this time the fine, not respecting u. S. Sanctions against iran and cuba. Team in new york to abide by the u. S. Sanctions. Much. Nk you very lets stay with the earnings seem. Astrazenecas numbers show continued growth. Lets find out some more from caroline hyde. It is all trying to be the fanfare that we are better off alone. That was their key argument. This is what theyre trying to paint with these earnings. The pipeline is one of the most exciting pipelines in the industry. They have huge targets. Sales by aiming to aim 75 . They might just get there because theyre raising their forecast. We will not see a slip off in sales. Competition was fading away. They are saying emergingmarket growth. Every company out there has been warning us about emerging markets. Is important for them. The chief executive trying to paint this rosy picture. When he took over, he needed to rebuild the pipeline. He is still going to have to bolster the story. Mergers and acquisitions is a big theme running through the pharma sector. Respiratory drugs, a big focus on respiratory drugs. Million top out 900 get their hands on the rights to certain respiratory drugs from the spanish company. He is making tentative acquisitions. He has little bit of money from rights toy sold some nexium. The interesting thing is, does make pfizerin sales want to come back again . If astrazeneca shareholders allow it, they could come back to the table as early as next month. Interesting stuff, thank you very much. Lackluster numbers, sales slowed in emerging markets. Impacts ofout the russia on the business. The foreign currency was quite substantial. We had an 800 million and i on. Impact on sales when you get to be individual markets like russia, and russia, businesses strong. We are building market share and whiskey and in round. And in rum. We see the trade up in that environment. Walker, theyohnny are doing very well. I am confident that brown spirits in russia will do well. We are wellpositioned and whiskey. Question,asked the given the political environment, will you reassess your operations in the country . We are relatively small. We are largely an importer of scotch whiskey in the marketplace. We do not have large investigate we do not have large operations on the ground. I expect us to stay the course, elder brand and reputation build our brand and reputation. I am confident about the future of russia. Out. An, you need to let me there is a market whisper that d iageo might be interested in sab miller. I will not respond to whispers. If you look at our track record, we have grown this company through a combination of organic and organic growth inorganic growth. Weve spent about 4 billion pounds building businesses and expanding our emergingmarket footprint. We have the majority ownership of the Market Leader in india. My intention is to fully extend our leadership position. Organic growth is the ticket to a great Balance Sheet and your ability to keep expanding both what we have and growing through acquisition. The ceo of diageo. Live with the cfo to continent ale. That. L talk about that is coming up here on the pulse. Good morning, everybody. Welcome back. You are watching the pulse. Continental has raised its 2014 profitability good morning, everybody. Welcome back. You are forecast. It is the second time this year that it has done so. Does this German Company face a sanctions risk question mark the companys sanctions risk . The companies cfo Wolfgang Schaefer joins us now. Theceo of siemens said german Auto Industry has peaked. Do you agree with him . Yes, it has peaked in the first half of the year. This is correct. This is true for the western european car markets. It is not so true if you take russia and turkey in these numbers. Russia was weak and turkey is flat. We do expect the european car market to be on the level of the previous year. Ok. Lets talk about russia. The effects that russia might have these iv the western a vis the vis western european car market. Could it slow the recovery down . The russian market is less than 10 of the european car market. If you see in such a market, as we do expect about 10 decline to share, this has already some affect on the European Market overall. It is still below 10 share of the market, so it has a limited impact, but it will have an impact on the european car market overall. Do you think Consumer Sentiment in western europe will be affected as well . Evidence showing the German Economy is slowing as a result of this. There might be some impact on german exports in this region. Hard to predict how much this impact will be. , ourtalk about continental sales to russia is less than one percent of our total sales in the country in the company. You can only speak for continental, but you are a big part of the German Economy. His german business broadly on board with Angela Merkel and the line she is taking with russia . Think broadly it is fully accepted and supported by the industry. Youve indicated your concerns about the market. We may see some stabilization. Have less, you do not you do have a significant footprint in the country. As it becomes harder to trade with russia, will you be having increasing problems fully harnessing the investment youve made in the country . Of course, depending on how it is developing, i cannot exclude this. What we have done is our biggest investment in the last year. This factory is mostly built to replace imports, which we are doing for other fact trees in europe factories in europe to russia. Ok. Lets move away from russia. Would you like to see a weaker euros . Yes and no. Our topline growth will be stronger with a weaker euros, no doubt about it. Side, will weand have a translation affect, we have the same translation affect the margin is not affected by the Exchange Rate fluctuations. This, market understands typesrket accepts those of the just is numbers adjusted numbers. We are growing faster than the markets are growing. He was telling me he felt that the euro was overvalued. Is that youre feeling as well . Is that your feeling as well . We do expect to see a somewhat weaker euros in the second half of the year. Even stronger in 2015, yes. Acquisitions, it is getting busy in the space you occupy right now. Were watching very carefully to see if others come through. Possibility of more mergers and acquisitions. You have indicated that you want to do deals. What progress are you making . We are still on the way to close the acquisition, which is quite an addition to our topline. 1. 4 billion additional sales. Officends on antitrust decisions. We did not announce that we wanted to participate in automotivein the supply industry. Business outside the direct business. Last question. How will confidence continental benefit from what is going to happen in the automotive sector, which is Driverless Cars . We are one of those companies driving the train towards Driverless Cars. We are developing and we do have already in our company and we will be one of those companies which can will profit from this trend. Wolfgang, it has been a pleasure. Qa for your time. Thank you for your time. The bank shares have slumped more than 40 this month as three Parent Companies requested protection from creditors. The ceo of lloyds call the action of the individuals involved shocking and totally unacceptable. Bnp paribas faces its biggest ever loss. It amounted into 4. 3 billion euros, which was bigger than analysts had estimated. It it is thers, second hour of the pulse. Says be talking to left on ceo. Ufthansas see e that. The implications of the struggle the company is facing with middle east carriers. A lot to talk about. Eurozone inflation is going to be breaking in about 3. 5 minutes time. We will talk about the argentinian situation and what is happening in russia. A lot of good analysis coming up. You can follow me on twitter. We will take a short break. He second hour of the pulse will be up in 3. 5 minutes time. We will see you then. Getting a kicking. Shares follow most for five years as that shares fall the most for five years, slashing forecasts. Siemens says russia poses a risk to european growth. Argentina in default as the government misses a debt deadline. Good morning to our viewers in europe, good evening to those in asia, and a very warm welcome to those just waking up in the u. S. I am guy johnson. This is the pulse, live from bloombergs European Headquarters in london. Shares under pressure, down on weak results. Live with the carrier ceo later. On employment and inflation data breaking out of the eurozone. Up 11. 5 . Yment miss, lower, bad pressure on the ecb. Even though they have unveiled measures. Where arnabion das will be talking about this a growingspain has economy but an inflation rate that is lenegative. One guest yesterday said this is good, structural reform. Of europe, germany and elsewhere, nothing to counterbalance that. That is what the ecb is fighting. Theyve talked about the strength of the euro. Mario draghi said 80 of the fall since 2011 two now in inflation has been food and energy prices. The bulk of that is the strength of the euro. He might be comforted at a euro at 1. 3390. A market that is pricing in lower inflation and even deflation has been the bond market. Yields lower all morning, record low in germany. Anyone thinking this is a crisis, it is not. Spain and italy, record low yields. It is a concern, the bond markets are doing the talking. You look at the german fiveyear break even, you look at that chart. It is telling you that inflation is dropping. Now. Nk we are at 0. 64 the ship is pointing down. On the ecb front, theres going to be a policy lag. Target tros have not taken effect. It is going to take time. Next weeks meeting is interesting. The ecb would like to say we have done our best, lets take a fax. When you see inflation coming down month on month, 2 or just below, substantially low. By a number of standard deviations. On data out of europe. Adidas shares under pressure. The company slashing its profit forecast amid russian unrest. Hans nichols is covering the story. Hans . Two conflicting stories. We have adidas, which is clearly talking about cutting their profit warnings to 650 Million Euros from 820 Million Euros. Theyre blaming golf sales and russia. And then you have siemens talking about not seeing any sort of impact or a minimal impact on a russian sanctions on the 2014 year. And then for 2015, being unable to predict it. Adidas is the bigger story, they are being hurt by the currency and russia and the ability to open new stores. They are heard by golf, golf sales in the Second Quarter were down 18 . Stock is under pressure, down 10 or 11 earlier today. The question moving forward, is this a oneoff russia currency thing or a longer russia play . They are shutting down stores, they are closing and making openings less likely. One final note on adidas, they had a pretty decent quarter when you look at their total revenues. They came in pretty much online. That may be because they had a good world cup. Looking forward looks worse. Lets talk about siemens, you kaeser. D downplaying the risk in the near term. Is saying that the ukraine sanctions posed a serious risk for the european economy. Crux of it. E the is it because of the Political Risk in ukraine, you have Slower Growth throughout all of europe. Actual companies, especially German Companies, do not see that much of a sales slowdown in russia. We will have to see when we finally get quarter three members from siemens if that is true. They had about 1. 6 trillion in sales in russia in 2013. Adidas excuse me, 1. 6 billion. Adidas was in the billion range. Hard to see how adidas is going to be affected that siemens is not. Unless it is a consumer play having to do with russian Consumer Sentiment. A lot to think about. Thank you very much indeed. Hans nichols joining us on what is happening with siemens and adidas. Lets add another company, shall. Shell. A big footprint in russia. The boss has some interesting lines on what has been happening visavis russia. Lets bring in ryan chilcote. They are not as exposed as bp, but they are pretty exposed. The big bombshell comment was that the downing of flight mh17 game changer for business and russia. Yesterday, we heard the cfo of day mh17eer say the was down, they stopped buying shares. They are working with gazprom on sahalin in the russian far east. You can see their exposure, the problems. Banned Technology Necessary to access the tight oil. The cost of money goes up and the project become less economically viable. Yukos. Ights visavis this is the European Court of human rights. S o warning a separate case awarding the former owners of yukos. They gotfrom the award from the hagues arbitration court, 50 billion. 52 billion now. The European Court for human rights, it is more difficult not to pay. The hague, theyre supposed to pay some of that as early as january and then the penalties began. They can appeal all of this stuff and argue on the finer points. We have heard the former owners say this is a slow burner. It took them 10 years to get the award, it could take 10 years to collect. If they do collect, it is unlikely to be a collection that the russians just hand over. They will have to go for seizing assets outside russia. Story,ortance of this 50 billion, 52 billion is a big pile of money. This is happening against the backdrop of a huge fallout in russianwestern relations. The russians are saying the decision on yukos is not fair and unbiased. The russians have felt at the European Court for human rights is a very biased body and had seized their participation with them for some time. Energy too from telecoms. With the big stories right now, acces to finance and access to the dollar system. Companies are beginning to switch. The secondbiggest mobilephone Services Provider in russia, listed in london and russia, beat earnings this morning. As a barometer of the economy. They are showing a good picture. People using the internet more and more on their mobile phones. The most interesting thing was the cfo on the company call saying we have taken some of our working capital, 40 , and put it in hong kong dollars. The first russian company, bcs is pointing this out, moving their money out of dollar assets out of western markets and into the hong kong dollar, asian currencies to protect it from sanctions. The private company has not been sanctioned, is not in any of the sanctions list. ,t does have an oligarch owner alisher usmanov. The sanctions have been limited to the energy, finance, defense sector. Here you have a Telecom Company moving to protect themselves ohould the mission expand th telecoms. We keep the focus on the russian unrest. Canalk about how sanctions turn into an investment opportunity. When we come back. Back, you are watching the pulse. Lets talk about the currency markets. A look and see what is happening visavis euro dollar. 4. Ere expecting. 5, we got a bit of choppiness, not a great deal. Weeks meeting more interesting. You have a target of close to 2 euro zone inflation. We are significantly away from that im getting very close to zero. The trend is that. If you look at the break even, even in germany, they point you in a negative direction. A story that continues to develop, we will talk about that in a few minutes time. As the u. S. And eu imposed sanctions on a russia, the ripple effects from russia, ukraine, etc. , need to be thought through. Hearing from Many Companies talking about this. Siemens talking about the risk to the european economy visavis tension in ukraine. Lets talk about how arnab das situation. Managing director of trusted sources. Ceos raising their concerns inut what is happening russia and ukraine. And the impact that will have in western europe. A significant threat, according to joe kaser at siemens. It is quite significant in the sense that there is some very Important Companies and inout the eurozone the u. K. That do business with russia. It is asymmetric. Russia has a lot more to lose from this that the European Union as a whole. That is the direction that things are going in. We are quite concerned about what this implies, the whole geopolitical issue and the western response and the future of russia. The danger here is more moves towards isolating russia if things do not change. That is where we are heading. You said the russian economy is in big trouble. What does that mean jacob we are already close to zero growth, how much worse does it get . In the levelre now of sanctions, we are pushing towards a recession. Wrote aner granville excellent oped the other day. He makes a very good point that if you tighten the noose around the russian economys neck with financial sanctions, you will take it over. There will be Collateral Damage in western europe but russia will pay a higher price than it is paying. Here is that so far none of the western response has really had any kind of deterrence effect. In fact, there has been a widening chasm between what russia has said and what the west is alleging it has done. In ukraine on the ground. One of the facts on the ground have changed, they have just worsened. The underlying problem here, which is that ukraine is a very important geopolitical and domestic political interest of russia. Much more so than for the west. The russians are clearly willing to pay a higher price than the west is in a position to impose. Longhaulsed to winters in russia. Maybe that gives them a little bit more fiber. This morning we have had shell talking about mh17 being a game changer. Talking aboutmens a risk. If you were a boss of one of those businesses, how would you view investment in russia right now . Would you be willing to invest further money, would you be looking to get money out . How significant a threat is there going to be . For an economic point of view and a retaliatory part of the point of view. It is an issue for firms and Investment Funds. We are in a state of flux. The dynamics and the calculus is changing from a matter of price ause of all the risks expropriation, governance, operating environment, etc. To a much less calculable kind of tail risk for an Investment Fund and certainly and even more plants and with equipment on the ground. The entire dynamics could change. Be notuld be it could just about something going wrong inside russia, relations with the russian government or the les or enforcement of those. But the relationship between western europe, the u. S. , and russia. To investmentin in western europe, something we are concerned about. We have seen data that shows us once again that inflation is trending down. Expecting. 5 and got. 4, getting close to zero. We have concerns surrounding , droppingrito santo significantly again this morning. We are in a situation where some of the risks are beginning to resurface. What is the ecb going to do . How does it play this story . We have a bank in portugal, right under the noses of the troika, causing problems. And inflation number trending in the wrong direction. Growth in amex out of italy and france growth dynamics out of italy and france that are concerning. How close are we to qe . Closer and closer, i am not sure we are there yet. 1 ore need. 2 or. Something. Part of the challenge for the ecb is the nature of the eurozonet mechanism be has chosen for itself as this inflationary or deflationary. The idea of internal devaluation. That is a euphemism for deflation. If you going to keep the Exchange Rate of the periphery locked with the quark, you will have to reduce the real Exchange Rate to regain competitiveness by decreasing the price level. If that is what is happening, you need an offsetting symmetric response that his reflection a in the courre. This is not a new issue. Weve been dancing around this for four years. Happen, the ecb is going to be dragged, maybe not kicking and screaming, but gradually dragged further and further towards qe. It will delay as long as it can in the hope that the fed will build out by tightening. Closerheading closer and ad the fed is probably still year or more away from actually the first rate hike. Even when it comes, despite the strength of the data yesterday, the headline numbers were strong but the underlying numbers in the u. S. Were not so strong. Even when that first hike comes in the u. S. , it is not going to be that dollar bullish. It is not going to bail the ecb out for a big tightening in the u. S. That causes a divergence in policy between the two major Central Banks and a shift in the twocar relationships. To change theing underlying dynamics. It is going to mitigate the problem in the eurozone. Eventually the ecb will have to move towards fullblown qe. Thatckon that the fact that is a very gradual move means that it is reasonably supportive for Central Europe when it comes to emerging markets. People have that trade on, and that is going to continue. Maybe it is not going to be all that bad for the dollar link emergingmarket countries in asia and monomeric that because we are not going to have that huge dollar surge. That is what we saw earlier this year. , joining us from trusted sources. Has justirito santo opened. It was down by 41. 5 . Ecb has a lot to think about. Welcome back. Offer only come breaking news on Banco Espirito santo. Stock is down. Jon ferro . Right now, 70 on the month. The open down 41 point 5 . A record loss at three point 6 billion euros at the bank. You see the reaction. Theres the bad news. The bank sector on the stoxx 600 down 1. 8 . Element canervisory have seen ayou move of three basis points of over three years. Arnab das was saying were going to see these events, but theyre not systemic anywhere. I think what is interesting, as we go into the stress test and the aqr results, of course youre going to see more failures. You are starting to see the failures come to life. There is criticism about the moneyus pots of allocated. Private way of raising the capital. The troika still in portugal. Good morning. Welcome back, you are watching the pulse. Live from bloombergs European Headquarters in london. Top headlines euro area inflation slowed in july to the weakest in almost five years. Just 0. 4 . Concernring investor that the euro zone economy is too feeble to drive growth. An internal dehydration, this is the effect. Banco Espirito Santo shares are plunging by nearly 50 . The bank needs to raise capital after posting a first half net loss of 3. 6 billion euros. Standard poors has declared argentina in default after the nation missed a deadline yesterday to pay 539 million in interest. Negotiations in new york failed to produce an accord for the last default in 2001. Investors are focusing on whether bondholders will demand immediate repayment. Lets find out the latest on this story. Hans nichols has been following it. Credit suisse is that with a note this morning that says the likely be triggered. We are going to get some movement. Waiting for official word in the coming days. The bondholders and the argentine government failed to come to an occlusion, come to a conclusion, the worst for the argentine economy. Last night, a lot of hot rhetoric from the argentine side. Saying they will not negotiate. The president said it. This government is not going to sign anything, nor consent to anything, despite the pressure being exerted. Time, when he was directly asked on whether or not they would be open to a private settlement, a settlement between a group of argentine banks and he bond holders, he said was open. The challenge and the risk for argentina is, they come out too much in favor of supporting this it might private deal, make it more complicated for. Hem to avoid paying those give me the time element, the rules change as we work our way through. The big timeline, the end of the year they expire. It would have adverse Economic Impact. Theres a report that they ofect to shave off 1 argentinas growth. The longer this goes on, the worse it is for argentina. Thank you very much indeed. The story from our international correspondent. Minutes until surveillance in new york. Tom keene joins us from the big apple. And lets talk about right now. Wasans nichols report outstanding. As Axel Kicillof goes back to argentina, we will continue to follow that. Weead of level economics, will talk about the fed and udp. Directly to argentina with even harris. We have Vincent Reinhart from morgan stanley, after fed meeting and after charles plossers dissent. A 4 american economy. Formally with craft international, this guy resurrected oreos in china. One of the great brand managers in the world. Looking forward to it. Hans, thanks. Tom andmixing up hans. Looking forward to the show. Group fell. Est we just sat down with the companys chief executive, this is what he had to say about the default situation in argentina. We expected this, i am sorry to say. Our operations have been fully depreciated. Theyre basically written off. It is a sad situation in argentina. We believe this is going to go on for some time. Contained, argentinian base. Are completely self sustained in argentina. It is now i totally regulated system. We do not see a particular impact on us. Weis time for argentina, have physically taken our measures a year ago. We also asked about the impacts of what is happening and rash on his business. Russia on his business. We do notsian assets, see an related issue on operations. These are things we monitor closely. We are very concerned things will deteriorate. As far as the european situation, today, europe is in quite a large and abundant gas supply. Certainly, a huge interruption from russia would be disastrous. Not a good idea and probably he scenario today does not foresee. I hope this matter gets resolved peacefully over the next months so that when winter comes we do not have to worry again about gas. Starace, enels chief executive in rome earlier. Weston with energy, new energy is an independent solar developer. With the help of Deutsche Bank create aworking to Renewable Energy corridor between europe and north africa. Joining us for more is kevin, the ceo. This sounds like a great idea. You link north africa with europe. Where the problems in making that happen . Good morning. Thank you for having me. You are starting with a tough question. It is because it is a new idea. To change the energy system. It is so ingrained. We are trying to open a new Energy Corridor between north africa and europe. Forle energy, not for Renewable Energy, not financial skills. Lets talk in more detail. What is the potential here . We completely decarbonized the european grid using a small piece of the Sahara Desert with existing technology at competitive prices. Grid parity, this is competitive . It depends on how you define grid parity. We are competitive with offshore wind. We are asking the u. K. Government for contracts for a 20 discount to offshore wind. We can deliver power to the u. K. Cheaper than offshore wind projects that are currently is going to get more cost efficient . Using pd, we are using a different kind of solar technology, solar thermal. Andeploy mirrors concentrate sun to create steam. We can deliver electricity at night. The opportunity is substantial. There are some issues with making this happen. Presumably, there is an issue with investment in terms of putting a big pipe that runs from north africa into europe. And then distributing it around europe, which does not have a great vc network dc network. We are working on the power plants in the desert him in the interconnector between north africa and europe. Ofis cheap, you use 3 electricity over 5000 kilometers. This needs to be financed. It does go deep. One of the other challenges is the security of energy. Something we are focusing on with russia. Re various conflicts taking place in north africa. It has not been the most likely stable part of the world. Secure for the energy the how secure it with the energy be . We are already Getting Energy to this region. Parallel to a gas pipeline that already zest from algeria underneath tunisia and up to italy under the mediterranean. Parallelying a cable to that. The risk profile is the same as the existing risk profile for north africa. In terms of the gas from algeria to the european grid. If you are a european politician, with happy something to rely on . Even with the revolution in tunisia, the gas supplies were not disrupted for a day. Same thing happening in russia, we are nervous. Tunisia is not russia. Would you conflate the two . Absolutely not. Kevin sara. I want to check in on the markets. Jon ferro joins us. Check out the equity markets. Lower. Dax lower by over 1 . Adidas, down 15 . Go back five years. Cut their outlook for this year and their target for next year. Golfng golf blaming and russia. Biggest industry losses, financial. Banco Espirito Santo, 3. 6 billion euro loss. Stock down 50 . Picks up that bill . A big debate about the feedback loop in the eurozone. When a bank gets into trouble, it is the sovereign that has to pick up the bill. The interesting move is in portuguese debt. The 10 year is three point 6 . When this came to light a number of weeks ago, this was up 30 basis points. It is up now three basis points. That tells us what investors think. Elsewhere in the bond markets,. Ecord low yields euro zone inflation, zero. 4 . The ecb meeting next week gets very interesting. The euro dollar near the lowest of the year at 1. 3389. Dollar rally on the back of the dissent by charles plosser. He wants the considerable amount dropped. You have september, october then qe ends. It will join the euro and a lot of people one day lower. Want it lower. Trying to look up what the debt ininated Banco Espirito santo is. Bail ins is something we could be talking about more. Other corporate stories, lufthansa has reported weak numbers. We will talk to the cfo, coming up next. We will talk more about Banco Espirito santo. Shares are down but equity holders may be at risk. The junior debtholders, subordinated debt holders could be feeling the most pain. That is what the stock is doing. We will talk about that coming up later. See you in a moment. Welcome back. Lufthansa shares under pressure. Second order profit fell. Joined by cfo simone menne from frankfurt. Good morning. Lets talk about capacity. Seems to be a problem on a number of fronts for the airline. Shorthaul, how tough is this winter going to be . We heard from brianair rya nair, putting more capacity into the european space. Overall, lufthansa results have improved. Our unit costs are in line with our plans. All this is not reason for. Apacity growth someone off and a general week market environment. There was bad news from some of our competitors impacted in the same way, especially in the Second Quarter. In this regard, i would not put it to overcapacity in either shorthaul or longhaul. We are reacting fast. We cut capacity in the winter. We have midterm plans to also go on shorthaul direct traffic faster than before. Back to thee question, how tough is it going to be . You are cutting capacity, others are putting capacity back on. Lowcost carriers are going to be more aggressive over this winter. How tough is it going to be . Are you potentially underestimating how tough it is going to be . Look at the German Market with our german program. We have our own local carrier, germany is the market where the local costers like ryanair and least successful. In several enter destinations. In destinations like hamburg, we are also adding capacity and making good results with our german wings product. Butill be tough competition we are wellprepared for the shortfall, especially in germany. Longhaul can i talked about longhaul, you talked about a low cost long haul model in the past. I am curious how that is going to happen in the relationship with turkish air and the sun express joint venture youve got there. Can you explain how that is going to work . Under the wings, sun . What is the operational story . Our direct traffic and low under thes will be wings concept. The construction with sun express is one of the scenarios we are exploring. It could also be that people use in house construction. Owned company with lower costs than the legacy models in our group. And for certain destinations, tackling the fast growing, middleclass private segment of customers. How difficult is it to build that internally . Weve seen others by operations for the lcc model. Willie walsh at iag. How difficult is it to build internally. Have you ever looked at buying an lcc off the shelf . We are exploring. You are right. You have to separate the model. As we do with german wings, they have a different quarter and different buildings. Want them to build up on overhead. That is the same for the new brand and for the new concept. It is not built internally. It is one additional brand and company group. Legacy the love sounds a outside the lufthansa legacy. We do not see that there is a low cost that will bring as a result, but we looked into it. Did you look at easyjet . [laughter] names. Nt tell you the i have got to ask you the question. 340s . Do this with would work better with a 330 . We are exploring the fleet, y es. A 340 would not be the right model, i agree. Were looking into a possibility of 330. There are other scenarios, no 340s. Interesting. Safety is a story right now, postmh17. Simone, do you think we need strict rules in terms of flying ever conflict zones . Tim clark at emirates has talked about this. Do you think we need rules across the board . Group witha Global Airlines to have common rules. With ukraine, it was the first time Something Like that happened. Icao and airlines are working fast to come to a global rule. Pleasure speaking with you, simone menne from lufthansa. Cfo of lufthansa. Back in the couple minutes. You are watching the pulse. Sharesspirito santo taking a beating. Coming back a little bit. That might not be the real story, could be that the subordinated debt holders will face the real pain. Lets get the latest. Down 40 . A 3. 6 billion euros loss in the first half. The question is, you have got to raise some money, where does it come from . Traditionally we would have been talking about the sovereign. The yield is up three basis points. The question is to find a private sector solution. How do they raise capital . Do you see a theyll a bail in with subordinated debt . They might have to raise 4 billion euros, a lot of money. Likely to be a mix of different options they will go for, share the pain. Politicians have talked about the fact that bail ins are the preferred route. And say were german have to raise money for a bank in portugal. If you take a position in debt at one of these banks, you are at risk. If that plays out, maybe that is a little bit more healthy for the banking system. Arnab das said there is no Systemic Risk from a bank like this anymore. I asked him how many Banco Espirito santo there were, he said how many banks are there. That gives you a sign of concern. You are seeing regulatory and supervisory failures come to life. Aqrs have stress tests, coming up from interesting to see how they cannot. How they pan out. Yes, we have raised a lot of money, but banks will still feel tests. For the pulse, surveillance in a few minute time. Live with tom keene and the rest. Hope you have a great afternoon. A lot of news to talk about. If you want to follow me on twitter, guyjohnsontv. Have a great afternoon. This is bloomberg surveillance. A deadline. Misses confronting default with no plans for further discussions with creditors. The Federal Reserve discount americas economic rebound. With noolt scores inflation inside. The secret formula does not matter. A sugarfreefronts america. Good morning, this is bloomberg surveillance. Live from new york. The final day of july, 20 14. I am tom keene. Joining me is scarlet fu and adam johnson. Our morning brief. European inflation slows overnight to its lowest since 2009. You want a little inflation, that is part of the problem. Portugals Banco Espirito santo, day two. Halted, posting a huge loss and told to raise capital. Abouts down, concerns europe. In the u. S. , initial jobless chicago pmi as well as the Bloomberg Consumer comfort index at 9 45. Colgate and cargo