A daunting proposition when the weather is going to turn to 97 degrees later this week. To the day,his is, the anniversary of when it happened in 1997. Questions. A lot of in the meantime, it is a quiet morning ahead of the u. S. Open. Some muted price action. Brent crude reaching the highest level since may. German three year yield dipping a basis point. On theg market currency heels of a less bad that expected gdp report from china. David today we mark the beginning of a big week for bank earnings. At 8 00,with citi tomorrow. Y jp morgan we also get retail sales and Industrial Production numbers. Companies Tech Companies face questions on capitol hill. Netflixy, we get earnings. Thursday, gm unveils its own new made engine corvette. In british open begins northern ireland. That is all coming up this week. We are joined today by Gina Martin Adams and damian sassower. Lets start with those china numbers. I will put up a chart that basically shows what happened. It was the lowest on record going back to 1992. Then in june, it started to bounce back. Gina there are a lot of questions as to how sustainable that bounce back is. So much of it was this boom in commodities production. Is gettings reflected in the stocks. Asian equities have been a big laggard all year. Nobody is really expecting a whole lot out of china expect for the hope that there will be some stabilization, and that is the risk, that we dont see any stabilization and this is sort of a false dawn, and that is going to create a bigger drag on equities. Lisa meanwhile, President Trump keeping very close tabs on what is happening with china gdp. China gdp growth is the slowest it has been in more than 27 years. Tariffs are having a major affect on companies wanting to leave china for nontariff countries. Thousands of companies are leaving. This is why china wants to make a deal. This goes on, just basically talking about how the tariffs are being paid by china, not the u. S. You comment on the degree to which the chinese slow is due to the tariffs . Damian it is all about credit extension and whether or not they can reinflate their economy. We saw Industrial Production betterthanexpected. How long cannot last . Can they really get the domestic economy turning on all cylinders to sustain itself without any negative impacts from trump and the trade war . The verdict is still out of then the margins, all trade data coming in is getting progressively weaker, and it is going to be that much more challenging for them. David but are they playing by different rules than we are playing by . A lot of the borrowing comes from chinese domestic. They are savers, unlike in the United States. They have more flexibility to reinflate . Damian absolutely. Basicallyment is making it easier to invest in infrastructure to make what he in infrastructure to mystically. They are taking a fiscal caret out of their bag in order to basically reinflate their economy, and doing a good job of it. They have a lot more tools than the fed at this stage. Lisa meanwhile, the fed is still expecting to lower Interest Rates. How will this affect the banks . This brings us to the second point we are going to talk about, earnings kicking off with citigroup today. What are we expecting . Gina i think the bank may banksn i think the more broadly are expecting lower earnings. Ipos are down 20 yearoveryear. That is dragging on the overall landscape for the companies. We are going to talk a lot about top line. As much as we want to talk about the fed and what is one to happen with Interest Rate spreads and how margins are going to be compressed, the reality of the Banking Sector and financials at large is this suppression of topline growth that has held back growth for this space. It is bout revenue, loan growth, fees, m a, equity trading, fixed income trading. It is much less about margins because sales are driving sector performance. Citi as itk about is differentiated from these other banks. The the market damian market is looking at anything to paint the picture of International Currency trading. Is it going to be the top line that really drives it, and is it going to be trade . The verdict is still out on whether citigroup is going to meet the bar on that one. Lisa if we are at the point where the Federal Reserve is playing lower Interest Rates, we are seeing easing in credit conditions, the fact that we have not seen an increase in ipo activity, a meaningful increase in bond underwriting, what does that say for the prospects for the banks at a time when the fed is going to stimulate the economy . Gina i think your expectation is a little bit robust. The fed hasnt actually reduced rates yet. We started to try to price this into Financial Market assets, but we didnt even start pricing that in until june. How are we going to see that activity show up in the Second Quarter yet . I think going forward, we have to start to see this come to fruition. That is a really big question going into 2020. If the fed does reduce Interest Rates, how much will that manifest itself in better Economic Conditions . That is when we need to start to see this, third quarter, Fourth Quarter growth. If we are not seeing a pickup in topline growth, we could be in for a bit of an awakening in financial asset prices. But we are not yet there, and i think the market can give a little bit on secondquarter earnings because expectations are already so low. We are hoping better earnings will come, but we are not expecting a lot out of Second Quarter. David lets come at that question from a slightly different angle. Let me put a chart up here. Bond yields have gone down and down, the s p up and up. The s p actually at a record level on friday. Can this continue . This is what i am seeing more and more in the berm group more and more in the bloomberg come of people debating whether or not they have to converge again. Onlyn abigail damian recently have they begun to sort of take back. It is really more at the long end of the curve. If you look at the 30 year auction last week in the u. S. , terrible auction. Maybe it is not about inflation anymore. Maybe is about growth expectations. Lisa i have to wonder, are we in a new normal . There is some believability to that because if the fed is going to cut rates and they are having , thatal reflation increase asset prices to be at a higher place and they have historically . Gina theres a really tight relationship between equity market valuation multiples and bond yields. The question is how much can valuation multiples rise without seeing that subsequent earnings recovery to support that lower rate environment . This is the question we have been in for 10 years running. This is nothing new. It has been 10 years of global bond yields remaining somewhat suppressed and elevating market multiples. Everyone questioning, when are the earnings going to come through to support these higher multiples . It is really a big question in a lot of investors minds as to when this manifests as higher growth. Lower rates mean higher pe multiples. You dont fight the fed for a reason. This is of the stock prices move. At some point maybe we hit recession, but i think people have been suggesting for what for years running that this is four yearsesting for that this is the end of the cycle. David one of the things i had not focused on enough, when we heard jay powell last week saying the curve may well be broken. If it really where broken commode does that change the rules of the game . In this if it really were broken, does that change the rules of the game . Stuff reallyf that brings together unemployment or employment, rather, and inflation. Maybe they are two completely different things. Can the fed have different mandates and live up to them . The short answer is well see, but the right answer is that is going to be a real challenge for them. Lisa the right answer is no, damian. [laughter] lisa both of you, thank you so much for being with us. You can find all of the charts we just used, as well as more great information, by running gtv on your terminal. You can browse all of the charts, dig in, save them. Coming up, banking giants start the earnings phase, leading with citigroup. Founder ofves, advisors, capital joins us next. This is bloomberg. This is bloomberg daybreak. Gilead finances boosting its stake in belgian Biotech Company galapagos. Gilead will pay 5. 1 billion to increase research into inflammatory diseases and other disorders. That raises its stake in galapagos to 22 . Gilead has been hurt by increased competition for its hepatitis c drug. And all stec an all Stock Transaction represent an 80 premium to carusos trading. The boeing 737 max 8 reportedly grounded months longer than expected. American airlines already saying it will keep the plane off its schedule until november. That is your Bloomberg Business flash. Outd this week, we find how the major banks are faring, with citibank Getting Started with its earning report less than an hour from now, followed by golden followed by goldman, but jp morgan, and bike of america tomorrow. We welcome now Michael Purves, founding ceo it is new company just today, Tallbacken Capital Advisors. Congratulations. We are also joined by alison williams, bloombergs banking analyst. Give us the top line of what we are expecting out of these banks. Alison we are expecting a pretty solid quarter, and the bottom line is going to be net interest margins. That is the one margin everyone is focused on. Weve seen the environment worsen and estimates come down over the last quarter. We are expecting contraction this quarter, but of course, the question is the forward look. Lisa citigroup shares, i did not realize this, they have gained almost 40 year to date. This is not a minor rally. Michael, i do have to wonder how much this has baked in a recovery from underperformance for years, and how much this is baking and growth at a time baking in growth at a time of relatively rough Economic Conditions. Xlfael if you look at the is a broad proxy for the sector, look at the tech sector versus the xlf. It is at 2000 extreme levels. It has been soaring. Tech stocks, which are not drunk on optimism as they were in 1999, have been performing. But bank stocks have been so massively underperformed as a sector. The question is, if you are trading back, how do you contextualized this kind of a trap . How do you think about it in the context of what is probably going to be a much less robust, but perhaps recently but perhaps a stable, earnings stream . David what about the stability part . You might make less in interest, but have more loan generation, and that may benefit the banks. Alison the banks are up very strongly, but they had a very sharp selloff in december. Perhaps a little overdone as people were anticipating a recession, which we know was someday,come but might be several quarters out. We recently had the stress test and everyone announcing these big capital payouts. To your point about stability, we saw dividend increases. The Biggest Surprise was from goldman, a sharp increase from their dividend under new management. They are aiming to become more recurring income like, more like a traditional bank, and providing that sort of dividend yield. The other thing is you made the point about financials versus tech. Keep in mind the substantial outperformance weve had, growth versus value. Obviously that is going to impact where investors are looking. That has been a pretty sniff it can trend over the last couple of years pretty significant trend over the last couple of years. Lisa this chart shows trading at the Biggest Discount for banks in years. Steadily coming down. The key question here, is this the correct valuation of banks at a time when Growth Prospects are somewhat dimmer, and really are becoming more utilities that are well regulated . Safer perhaps, but not going to return the same kind of revenues in the past. Michael with the whole year to date rally, you have actual utilities, and then the banks. Utilities have been extraordinarily pushed on their valuations upwards, and banks have been pushed six ordinarily low. So much of this get back to interest. If the 10 year yield fines up to 2. 5 , 3 , a lot of Bank Analysts going to be very constructive on their bank earnings. The rationale for owning utilities is going to come down quite substantially. When you think about the 30 year history of bank stocks, that earnings story is going through a structural change here going forward. You were just talking about the goldman earnings discovery. Think about some of the other more classically commercial banks. David is there at least one bank that might benefit from lower Interest Rates, and that is wells fargo because of mortgages . If rates come down, you might have more mortgage origination. Alison that is one of the things we are looking at this quarter. Theyve brought down estimates a couple of times. Bank of america brought down estimates when an a half times. Part of that is reinvestment related to the long end. However, wells fargo earns relatively more from mortgage banking. They get this offset. We thought it was sort of interesting that the revenue estimates were drifting up going into the quarter versus other banks coming down. Lisa i think it is going to be interesting to hear whether any of these banks talk about getting business from a big european lender. David who would that be . Who are you thinking of . [laughter] lisa im curious. Alison alison i think today is one of the most important ones. A few years ago we had both citi and Deutsche Bank saying we know we have to invest. Fast forward a few years later, citigroup has made progress moving up the absolute relative revenue ranks, Deutsche Bank with this big exit. Is it a bigger opportunity for citi and other peers to gain some share . Michael it will be interesting to see how fixed business does this quarter. We had some volatility in equities in may. How those banks are processing and working through that will be interesting. Alison i think that is a good preview going into the citi report out shortly. You have the banks talking down estimates in late may, early june. But exiting the quarter, we had a big move in treasury volatility. We had credit trading pick up well. Does that set us up for being a lobar . Low bar . Ng a williams,avid alison thank you so much. Michael purves will be staying with us. Sit atup, bond yields multiyear lows. We discuss that next. This is bloomberg. Lisa the divergence between stocks and bonds is continuing to play out in the markets as equities hit fresh records, while bond yields still sit at multiyear lows. Can the stock market continue to eke out new gains, and is there still too much pessimism baked in . With us still is uncle purvis founder ofpurves, Tallbacken Capital Advisors. Are investors too pessimistic . Michael on earnings . No, not necessarily. As au look at it longerterm, multiyear flat aberration in 20 thanks to the acceleration due 2018e tax stimulus in thanks to the acceleration due , that is nowimulus behind us, so we are going back to that more static, less dynamic cycle which is going to generate mid Single DigitsEarnings Growth, not 10 Earnings Growth. I think the markets have been sort of processing this come about yearoveryear, we are going to see some negative growth this quarter. I think that is a little bit of a so what, given how strong q2 of 2018 was in terms of earnings. Right, is the is fed overly concerned . If thats right, maybe they shouldnt be that worried about cutting because we have to prolong the cycle. Michael exactly. One of the fascinating things about how the money markets have been guessing where the fed is going to come to with this very aggressive bid for rates and how that is reflected in the bond market is really fascinating. Lets talk about the 10 year, for example. When i look at the 10 year yield, i cant look at it in a vacuum, when bund yields hit 40 basis points just a week ago. Istainly the bund bid bringing down treasury yields on the backend taylor . Then think about on the backend. Then think about powell. s dovish messaging comes with, well then there is all this bad stuff overseas. It is insurance messaging, if you will. Is that bad stuff overseas already being reflected in the bund bid, which is dragging down the treasury yield. I think the risk here on treasuries is really asymmetric. Ofa Michael PurvesTallbacken Capital Advisors is sticking with us. Coming up, we take a look at the data out of china with brian ma of vontobel. This is bloomberg. Lisa this is bloomberg daybreak. Kind of a quiet morning here. In europe, returning to gains after being down earlier. Some positives out of the automakers, but theres been a decline in telecommunications and banking shares in that region. The u. S. Poised for a slight open that is higher. If you flip up the boards, across assets youve got oil getting a bid at the highest since may. The euro gaining a little bit against the dollar. Gold also getting a bid. Hard to say whether this is risk on or risk off. David it is too soon to tell, its fair to say. We will wait and see what happens with the bank earnings. In the meantime, Viviana Hurtado is here with first word news. Viviana President Donald Trump reportedly may replace commerce secretary over ross commerce secretary wilbur ross, prodded by the administrations loss in the Supreme Court