President trump doesnt rule out military action against pyongyang. Hopefully we dont have to use it against north korea if we do use it on north korea it will be a sad day for north korea. Good morning its friday, unfortunately were dealing with a lot of national catastrophes on this morning mexicos been struck by a strong earthquake the 8. 1 magnitude quake was felt in the capital city forcing people to evacuate shaking buildings. At least five people have died the epicenter is located off the west coast of mexico with tsunami Warnings Issued along the coast of mexico and other Central American shores. The Pacific Tsunami Warning Center said tsunami waves have been observed. We are joined by Frank Jack Daniel can you tell me what you have observed the quake struck here before midnight it wuas felt strongly i mexico city. It shook me and me family out of bed. The same for millions of other people in the city who took to the streets very quickly and stayed there until the tremors were over. The real strength of the quake was in the south of the country. Most of the damage that has been seen has been in rural towns in the Southern States of chiapas mexico is no stranger to earthquakes. We saw that destructive one back in 1985. I guess it has not seen, you know, huge tsunamis. What kind of precautions are in place at this point . Some people have been evacuated from the coast i should emphasize that at this stage at night, it looks like this is a lucky escape for mexico from such a powerful earthquake the tsunami waves have been quite small, they didnt believe there was a major tsunami risk even in coastal areas. For a quake of this size, which is which seems to have been larger than the 1985 quake, which also happened at sea, the lack of damage so far in mexico city has been striking well have to leave it here thank you very much for your time Frank Jack Daniel from reuters lets get back to more mundane things like the equity markets. Stocks is off by 0. 2 after yesterday we did see a rise of 0. 3 banks did suffer once again as the markets seemed to be pricing in a dover taish tapering i do want to show you the equity indices one by one were seeing quite a bit of selling. Ftse 100 off 0. 3 . I would say the selling at this point is moderate. But the xetra dax is off by 0. 1 cac 40 off by 0. 3 now i want to take you back to the sectors, what youll see is banks have now reversed some of their havenrecent losses, on thk of tapering being delayed due to the euro strength. Food and beverages up by 0. 3 . Autos continued to ride high, up by 0. 1 . Travel and leisure underperforming. Lets get back to the ecb. The ecb held policy steady in the latest meeting and said the recovery in europe is dependent on its stimulus program. President mario draghi said decisions on any change to qe would likely be made at its october meeting. Draghi refused to comment on specific levels of the euro as he usually does, but says the recent strength was the cause for the downward revision of inflation forecasts. He also added there would be consequences to trade from the high euro and it would take close monitoring the Exchange Rate is not a policy target. Its very its important and very important for growth and inflation. And its so important that the medium term outlook for inflation was revised downward in the staffs projections, mainly due to the upward position of the Exchange Rate. So we will have to take into account this element in our Information Set in our future policy decisions joining me now for further discussion, nick nelson head of European Equity structure and Michael Kelly from pine bridge michael, lets kick things off with you Market Reaction was a bit of a strange one. We saw yields moving lower the euro shot up how do you explain that . Well, i think, you know, its interesting times. The most interesting thing that came out of yesterday frankly is the language, whatever it takes was code for changing the rules. It was enabled by crisis conditions we heard yesterday that there will be no changing the rules. Were sticking within the capital key, sticking with all that the most interesting reaction as weve seen in the last couple years, most of the action comes to the currency markets, not the debt markets the debt markets have almost been lobotomyized by this legal y deluge of quantitative easing. We cant change the rules, we cant bend the rules again so i think the only uncertainty left is the last wave of qe by the ecb, when it stopped, did not lead to a plateauing of the balance sheet. Led to a trillion dollar runoff in 2014. We know thats within the rules. We dont know whether plateauing is well find that out in six weeks. I guess we will nick, i guess mario draghi tried to talk down the euro. He wasnt quite successful t shot up to the tune of he was trying to jawbone it lower, no availability there, no success there. How damaging is the strong euro for the economy . For the economy, not just real growth but specifically inflation. The eurozone is 2. 2 last print thats good. Running fast in the uk and parts of the uk. Thats not too bad its more the inflation side when you come to the equity market, clearly 60 of the revenues for European Companies come from outside europe we have a big exposure to emerging markets, the u. S. , the rest of the world and the currency translation is a problem when you translate that back from dollars into euros, yen into euros so a drag for earnings for companies, not disastrous but a drag michael, are you worried about that euro strength what it does to European Companies yes so far europe has been has become a consensus favorite, earnings revisions are cresting. And theres no doubt that the very strong euro will, with time, be a headwind. The question is how much the strength here is broadening to domestically focused. Thats a nice thing to have it will slow down that process. But you dont want to be a consensus overweight and favorite with a peaking of momentum thats centsly what were looking at Going Forward he said t were seeing a peak when it comes to earnings. You said earnings have peaked in may. Do you think european earnings can continue to drive higher yes in may you had the best earnings upgrades for seven years for europe and the q1 reporting season was the best in seven years. The best is its tough to keep beating your beats we did lose momentum in july we saw downgrades. August has seen downgrades, not too dramatic that momentum in the pmis, the pmis in august were up from july we had that fade europe is off about 5 since that peak may 10th i would argue thats allowing for that cresting of momentum. We think the consensus number this year, 13 , very stable. Next year, 9 . So maybe three Percentage Points coming off because of the euro theres been a pause in momentum, but the underlying growth rate we should not forget this is the first year in seven years that europe is giving earnings growth. What sector do we want to be exposed to in this environment banks have had a tough time, even though the yeartodate performance is impressive. Now that were pricing in a delayed tapering, how much does that really hurt the banks sure. The banks wanted higher Interest Rates clearly, theyre key beneficiaries of the stronger euro theyre not exporters. They are a domestic sector with 10 of revenues coming from outside of europe. In contrast drug companies, half the revenues come from the u. S. , or industrials, theyre much more domestically exposed. Thats a good place to be. One reason the euro is strong is because the data in europe has been strong. If you can get exposure to domestic and sicyclicality, thee a healing process going on, improvement northwestern i mmen banks. You downgraded pharma because of euro concerns michael, do you agree this view . I do. I think financials are the most misunderstood sector because everyone is looking at them too much as a play on Interest Rates. They are, but the bigger story is we at pine bridge believe we have gone through an important regime change. Weve been in a postcrisis private sector deleveraging phase for seven, eight years thats ended in the United States and europe. It is segueing into releveraging its a low process, but the banks suffer greatly on the top line while going through the deleveraging process a on the bottom line, costs were jammed on to the income statement by a regulatory backlash that was quite severe thats gradually tapering. Both sides of that are fearing off. Revenue is picking up, costs are getting in shape they have a great beat in the Second Quarter its the First Quarter of a very long run i agree completely michael, help me make sense of the market overall. This year has been an easy year to make money, whether invested in treasuries, in gold, or even in equities. Why did all of them go up in tandem great question. Again, in this regime change argument many people say its very late in the game, seven, eight years into an expansion. Its been seven or eight years at the starting gates. Weve been statistically growing. But so slowly it was just waiting to start we have now begun a sin expansi, the first the imf has seen in ten years. Earnings around the world are accelerating as a result, because were in a global savings glut, the yield curve cannot back up at the speed earnings are accelerating. Its a bullish back drop then theres the valuation police yes, above historic averages of high inflation and low inflation. Its high. But if you actually look at when inflation has been in a 1 to 2 band, pes are typically even higher than they are now if you go from 0 to 1, 1 to 2, pes go up. 2 to 3, they go up even more thats the sweet spot. Thats the direction were going. Michael, thank you very much for your thoughts. Michael kelly from pine bridge back to Corporate News akzo nobel is out with a profit warning. The cfo is taking a leave for Health Reasons to return in a different position the coo quit in july also for Health Reasons following a fight over a takeover bid by ppg which akzo nobel ultimately rejected akzo off by more than 2 this morning. And stmicro will replace nokia in the cac 40. The move will become effective on the 18th of september a bit of buying in the run up to that change. Were seeing shares up by 0. 9 and volkswagen is seeking to sell noncore assets comprising as much as 20 of the groups revenue. Speaking to the wall street journal, the chief executive said a dedicated team was working to shed assets no longer deemed critical. He also commented on media reports that volkswagen is considering a tie up with Fiat Chrysler calling it speculation. Email the show. The address is streetsignseurope cnbc. Com i love seeing your tweets. You can also follow us on twitter, streetsignseurope cnbc and tweet me at carolincnbc. We will go for a quick break, coming up on the show, an explosive situation with no solution in sight. Well bring you the latest on north korea as the region braces for another potential Missile Launch who knew that phones would start doing everything . Entertaining us, getting us back on track, and finding us dates. Phones really have changed. So why hasnt the way we pay for them . Introducing xfinity mobile. You only pay for data and can easily switch between pay per gig and unlimited. No one else lets you do that. See how much you can save. Choose by the gig or unlimited. Xfinity mobile. A new kind of network designed to save you money. Call, visit or go to xfinitymobile. Com. Welcome back to the show want to bring you the latest comments from the Irish Foreign minister, he says ireland cannot accept a hard border with britain after brexit that would threaten the peace process. He goes ton say thon to say bri proposals have been uncon vikoin so far it will be a very sad day for north korea if america has to take military action. Thats the message from President Trump who refused to rule out using force at a White House PressConference Take a listen. Military action would certainly be an option is it inevitable nothing is inevitable. It would be great if Something Else could be worked out he would have to look at all of the details, all of the facts. Weve had president s for ta yeayear years 25 years talking and talking, a day after an agreement is reached, nuclear work begins in ppyongyang. Lets go out to chery kang. How much worry is there as we head into founders day over the weekend . Thats right. Ill be on a north korea watch this coming weekend, of course, potentially an icbm launching. Thats what many media reports are speculating at the same time thats actually based on the Defense Ministry as well as intelligence services, intel that was shared right after sundays nuclear test by north korea. In the meantime what were getting, at least here in south korea, this growing dilemma for the south korean president yes, he just finished his russia trip in the meantime during his trip overseas, the thaad deployment was completed. There was a need for that because there was concerns in south korea but the closest country to north korea, because of north koreas missile as well as nuclear threat. Since the nuclear test, and hes been coming off a little stronger than his initial stance so calling for sanctions and pressure in order to engage with north korea. Domestically hes facing resistance im sure you saw some of the video footage of residents of the thaad site calling saying no to the thaad deployment and also hes saying hes getting a lot of criticism coming from the left leaning population in south korea who actually cast a lot of votes for him. Of course theres a china factor, which is a country very much unhappy over this decision. In the meantime, the president ial office in south korea came out with a Statement Today saying the thaad decision was a necessary one in order to bring back north korea back to dialogue certainly hes feeling that squeeze coming from so many directions at this point the north korea threat that has kept the safe haven plays in demand over the course of the week may be much longer than previous episodes because that hbomb test last sunday that was really quite severe. Lets look at the swiss. The swiss is at the highest level against the u. S. Dollar since august 2015. This is the euro swiss, and the yen has had a good week once again. Lets move on to the yen if we could. The yen, there you go, 1 107. 69 lets get back to nick nelson head of European Equity strategy at ubs how much anxiety are you seeing on the part of your clients when it comes to the north korea situation . I think people find it difficult to price that risk lets be honest, theres a load of unknown factors there its geopolitics, its complex, its not like you can put an economic model or evaluation model to it. I would say volatility, be it the vix in the u. S. Has been very, very low so whenever you see these shocks, you see a spike up there. We are pro risk in the sense that we have a cyclical position one of the safe havens, the actual equity market was attractive the dividend yields for switzerland relative to the rest of europe is at a decade high. Maybe if youre nervous in the short because of this politics, because of issues, risks around the macro, then thats the place to look. In general we prefer a strong pro cyclical position. Wouldnt a strong swiss hurt the equity market . It could. You have a load of International Exposure there, you have some banks as well. Credit suisse and what have you. But youre right, the International Exposure will have an impact from the currency. We would not hedge the position. Wanted to return to the european story that youre bullish about, and you said before earnings can continue go higher yes, they peaked in may. Were still seeing strong momentum i want to tie back in the euro strength are we not at risk for major portfolio reversals when it comes to the european story . There was so much fanfare about this when pop ligs wulism was rd whats the risk . In the flows, the u. S. Flows peaked back in may all that did was unwind all the selling we had last year we had 11 months in a row of net selling of european equities last year. I would argue this is just reversing the selling from last year we dont have a huge euphoria in europe now do you think the portfolio flows into europe can continue because there are no other alternatives right now very few people want to continue to invest in the u. S. Equity markets because they seem to be overvalued. Em may be tricky once the fed starts reducing its balance sheet. Is europe the only place to go in a way europe seems the value place it has not performed, the valuations are attractive. The problem is the strong currency if the dollar starts to stabilize, emerging markets, which have had an amazing run, we would expect them to start to pull back and people may look at europe rather than emerging markets. Thats the pivot, should you be in emerging markets or europe when you look outside of the u. S. Nick, thank you very much for those thoughts nick nelson who likes banks in europe and downgrades pharma to neutral. Nick nelson from ubs. Coming up on the show, Insurance Company prepared for irmas impact. We have the latest on the deadly disaster hitting the caribbean coming up on street signs. Thankfully, the breakthrough in prevagen helps your brain and actually improves memory. The secret is an ingredient originally discovered. In jellyfish. In clinical trials, prevagen has been shown to improve shortterm memory. Prevagen. The name to remember. Chances are, the last time yoyou got robbed. An, i know i got a loan 20 years ago, and i got robbed. Thats why i started lendingtree the only place you can compare up to 5 real offers side by side, for free.