We are live at bloomberg headquarters in london. I am guy johnson. And i am olivia sterns. We are going to get into our top story. It is a big tobacco deal. Imperial tobacco confirmed that it is in talks to buy some major u. S. Cigarette brands. Could spend 7 billion on the acquisitions. Lets find out. Caroline hyde has been tracking the story. We have a merger taking place in the states. The regulators are going to want them to spend some out. They have some interest. Exactly. Have speculated on since the initial share sale of logista. Today, they will raise about 4 Million Pounds. Everyone wondered what they would do with this money. Will they invest it or pay down some debt . Could be could they be putting some of this money into these American Assets . They said yes, they are eyeing certain brands that would likely have to be disposed of between reynolds and lorillard. They are looking to form the secondbiggest player in the united states. It will be the biggest m a deal ever in the tobacco industry. It would bring together the newport brands, camel brands, both of these stocks have risen more than 20 so far this year on the excitement surrounding those talks that have been going on. It has been taking them months because of the regulatory hurdles they are likely to face. Could sellrands it which would increase the market share of Imperial Tobacco. Maybe they could snap up the likes of cool, winston. That is about 5 of the u. S. Market, the brands that would have to be disposed of by reynolds. What Imperial Tobacco already have. Already, Imperial Tobacco has 3 of the u. S. Market. But it wants scale. This is what the chief executive has been telling us. We have positive momentum going on in the united states. They are looking to build on that. They want bigger scale and more brands. To 7 billion is what the actual value of these brands could be. Biggestuld be the tobacco deal, the second and third biggest players in america. Even if they do combine, they are still much smaller than the biggestltria, player in the field. It is interesting. Longterm trends, cigarettes and smoking, in a state of structural decline. Why are they trying to build up this business . You are exactly right. They are trying to get synergies, scale, and have money to be a will to put towards development and research into ecigarettes or new ways of taking in nicotine without having the negative side effects of tobacco. The dealderstand why would work for Imperial Tobacco. They want to build up in the united states. They see positive growth momentum and they want to get profitability. . Hy reynolds and lorillard it is about pricing power. Together, they would be the number two player. 13 billion worth of sales. They would have more costcutting initiatives, resources to drive road. To drive growth. As you say, it is in a state of decline. We are going to see consolidation within the worldwide area. Interesting that china is going slightly slower than the rest of the world. Likely will fall about two. 4 , more so in the rest of the world. It is all about consolidation. Also look out for British American tobacco. They hold a 42 stake in reynolds and they could win out he win out. M a. Kes sense, a lot of now it is time for a bloomberg exclusive. Jonathan ferro sat down with Ecb Governing Council member nowotny and asked about the strength of the euro. I think the markets understood the message. At least the appreciation of the euro has stopped. In that sense, this rogue rim has already proved to be successful. This program has already proved to be successful. We have looked at influencing the us change rate. The Exchange Rate. There is no prospect of intervening. On the other hand, i think there are a number of economic tend, inves that would a way, of a certain devaluation of the euro versus the dollar. Jonathan ferro joins us in the studio with more. A great interview. He does not speak to us often. What were some of your other big takeaways . Bond qe. Told me that they were overweight euro because qe might be coming. I asked him if qe was coming and he said not right now. That is where the ecb is that. On the issue of the currency, i found this interesting. Ecb, if they said they could not drive the euro down much more and they could define the notures because they were appreciating it anymore, and that is where they were. There are some deeprooted problems in europe and todays market events remind us us of that. I am fascinated by this. What i am really fascinated by was how cautious he was. Tough to get things to happen. Very much on message. If you are not familiar with mr. Nowotny, he has been very outspoken throughout this financial crisis. Touching, 15 minutes on every single base and towing the party line on pretty much everything. Me never giving me his view, his personal opinion, and that is very unlike him. I think the ecb is being very cautious and are very sensitive to the measures they have unveiled. Later, talking about budget flex ability and the like. Bondi asked him about yields at 3 in italy and spain, of course he is not going to say this is a big problem. Because when you get him saying things like do not worry what do you make of it . Why is he towing the party line . Is he about to support qe . Is he going to change his tune . I do not think it is on qe. A terrifically read amount into it. It is just an observation. Veryis a man who has been outspoken. The main man is mario draghi and he has a message. He is going to be the one that you listen to. And the question that i pose is, what can they do about the euro . It is not a lot. Just look at the flow. You cannot stop the flow. You can have low yields or a low euro. The mechanism does not work. On top of that, the euro weakening is not going to solve anything. Have got to reform the likes of france. You have to be more competitive against the likes of germany. You have got to do something about that within the euro zone. Best of luck. Thank you so much. Relations with germany have taken a turn for the worst after Angela Merkels government kicked out a double agent who was discovered spying for the united states. They are kicking out a u. S. Official who was potentially trying to turn german officials. Hans nichols has more from berlin. What we know about the individual that they are asking to leave german soil is the head Intelligence Officer at the u. S. Embassy. Cia reports have him as the station chief. We have not confirmed that here. Is angela is thing showing her outrage and trying to get the u. S. Attention on how upset she is. Not only the fact that her cell obamawas cap tapped, tried to make amends on that, but that the activity is ongoing , the spying on friends. A 31yearold individual set off these cases. He was apparently a double agent. He worked for the German Security agency and was selling secrets to the u. S. There is a debate internally in germany about how sensitive the documents were. It is a massive diplomatic issue. It is unclear how you wind down from it. It is going to be challenging. Tracks, we have to ask you about the football. A lot of excitement in germany now that they are headed to the final versus argentina. Productive, efficient, these are only we do not use to talk about germanys economy, but also the team. The team has been remarkably productive. Take a look at gdp correlation between goals scored. Germany clearly, you can see a correlation there. Their gdp blows its per capita gdp for argentina out of the water. You look at some sort of metric for efficiency. Labor productivity and argentina is around 13. 8. 57. 6 four germany. Goal, 62 us shots on of german shots are on goal. That is a productive team. Indeed. You very much hans nichols covering all the angles for us out of germany. The germans are fairly imagine it imaginative. They have found ways to beat teams and overwhelm them. My money is on germany. Really . Mine is on argentina. Well we will see. Maybe we can put some money on this. Very interesting. Moving on to israel, World Leaders are trying to persuade israel not to it invade gaza. Israel is staging more soldiers at the border. Elliott gotkine is live in tel aviv. Give us the latest. A number of developments today. First of all, israel has called another 30,000 reserve soldiers greeted the total is 30 3000 now. Three infantry brigades have been deployed around gaza. At the same time, a few minutes ago, before i came to sit here and read to you, the sirens sounded again here in tel aviv. Thatrmy spokesman tweeted three rockets were launched over central israel. All three were intercepted by the Missile Defense system. We also had our first injury here in israel after a rocket fired from gaza hit a petrol station, setting it on fire. One serious injury there. The death toll in gaza keeps rising. We are at about the 100 mark so far. Many of them women and children. In the talk about possible Ground Invasion, which these reserves are being called up for in the event that it happens, i do not think it is a move that president netanyahu will take lightly. Last time it happened, or than 1000 palestinians were killed. Frightening escalation, it looks like. We do hope you stay safe and thank you for continuing to upthe story for us. Next, more from our exclusive interview with nowotny. His thoughts on risk and growth in europe. We will be hearing from him when we come back. Welcome back. You are watching the pulse. You have been hearing from our exclusive interview with Ecb Governing Council member nowotny. He spoke about the limits of centralbank action and what Central Banks can do with her and see growth and risk in the region. Yesterday, the Parent Company of Espirito Santo missed a few debt payments. Of marketshead research at the bank of tokyo. Good morning to you. What lesson do i learn from yesterday . Well, fairly that there are still risks out there. My guess is that this could pass relatively quickly and one of the lessons is that relative to win this would have happened a couple of years ago, we do have a structure to deal with the failure of a bank and the fact that there has been worked on to put in place a structure for a failed bank. Good enough . Well, it is definitely progress from where we were two years ago. Given what we have gone through, i think the other lesson is that there is a huge amount of determination to ensure that whatever happens, the politicians will do whatever it takes to maintain the single block. That has reassured investors to some degree. The too big to fail problem is still a much bigger concern. A major were a story of European Financial Institution in trouble, like we had yesterday, then i think the story is different. Place,ucture in investors are assuming there is a credible structure to deal like whathing that happened yesterday. The structure itself is so confusing. People did not know how to price the risk. Gotten better. So much of the focus was to break that link between sovereign Balance Sheets and the bank Balance Sheets. You said there is progress being made. Your you think that if one of these banks fail, that could tip us into another contagion crisis . Over the shorter term, there is still the link between the Banking Sector and the sovereign. Primarily because the sovereign starts being created as a potential source of finance for recapitalization. It will take many years for that capital to be built up. There is still that link between the sovereign. Since the lows up point in june. There is certainly risk that still exists. The stoxx 600 over the last month, if you look at the charts was justes, yesterday an extrapolation of a trend that has already been in place for quite some time. You are starting to see european equities maybe tailing a little bit. There is a big flow out of the eurodollar. If you start to see that extending, where does that leave the euro western mark equities extending higher still . Extending lower. I think the parts of my forecast in terms of looking for the euro to be lower, a big part of why the euro has been so resilient has been flow from portfolios and the improved confidence stemming from that. Days, but werly have a very significant net outflow on the money market side onthe portfolio flows and the bond and note side in the month of april. It was a record outflow, the two of those combined. The equities are still fairly resilient. ,e do think that valuationswise, the idea that we will see substantial further equity inflows over the next tix months is certainly a lot more tenuous. I think the capital flow story is beginning to change and that could be crucial for seeing the euro finally moved to the downside. The market move was all reaction in portugal. Do you think that was really the case . Some say there was a lot of other weak Economic Data out there and some bad numbers out of france. The message from janet yellen was you are not pricing risk appropriately. Think novotny touched on some of those concerns. What the ecb did in june was more about buying time. In your interview, you mentioned that what they have done was stopped zero the euro from moving higher. That is all they can hope for at the moment. And the fact that the irony of aboutxpressing concerns the markets being complacent when it has been driven by their rhetoric is somewhat amusing. But i do think that the big change for the markets is coming in the rhetoric that we have is going to change. Semiannual next week is a little bit too early, but in september, when we have the new projections, i think there is going to have to be a more explicit acknowledgment that we are much closer to raising the rates. Where is eurodollar on the day of the first u. S. Rate hike . If we are correct and if that comes in q2 of next year, then i think we are high 1. 20s, perhaps. If the euro moves lower, we are probably done. We are not getting wanted native easing. The story is not going to flip. Some people think this 1 trillion injection of lt ros i think that is a bit optimistic. If anything, the Balance Sheet will remain stable. If the euro starts to move lower, the Market Expectations are going to shift. I think that brings in some degree of support for the euro. 1. 20s. Uld suspect high nice to see you. Have a great weekend. We are going to take a break. Back in a couple of minutes. Welcome back to the pulse. Time for a quick markets check. Equity markets are reviving. A little bit of a reprieve. Five Straight Days where equities dropped. A little bit of m a talk in the u. K. Stoxx 600 still losing over 3 of its value this week. To that end, it has been about the banks. There in burbank have written a note saying they should not be overly concerned about what happened in portugal yesterday. Wellbehaved country in portugal and if they needed any help at all, i mentioned some some of the m a theme. Markets moving higher as we hear confirmations about potentially getting some u. S. Brands. Relief coming in the form of the banks. A lot of the financials under pressure yesterday. That is dissipating. The initial shock. It does show you this. We still have got this big tie up between sovereign Government Bonds and banks. The slightest hints out there and that is what causes markets to move. Portuguese Government Bonds, as you can see today, rising just over 4 . After the break, we are going to get all foodie. It is 9 30 in london. Welcome back. You are watching the pulse. I am guy johnson. I am olivia sterns. Here are the Bloomberg Top headlines. Ewald nowotny tells bloomberg he sees no need for further ecb action in the near future. But the ecb governing body member did not rule out quantitative easing. Aspects ishe main the general economic development. What we see in europe is that we do have a recovery but it is not a very strong recovery. Banks,ing with central mike mckee calls up the chicago president , charles evans. He asked him about u. S. Unemployment and what rate may be sustainable. I think it is more like the normal rate we used to think of before the crisis, something in the 5 unemployment rate. That is what i take to be the sustainable rate. At six point 1 , we still have quite a ways to go. You see a lot of slack. I do. I think the low wage growth is indicative of that as well, plus the lower inflation. Some record labels are said to be nearing a deal for a stake in sound cloud. The german Digital Music company is negotiating with universal, sony and warner. This would be an exchange for not selling sound cloud for copyright violations according to people familiar with the plan. More on sound cloud. Thats had to hans nichols in berlin who knows a thing or two about this business. Guy, this is a relatively simple and elegant solution to soundoblem challenge cloud has if it faces legal action. The record labels have decided to treat sample out to a radio station. To treat sound cloud like a radio station. They will get equity in a company that hasnt popped yet. They will get a 3 to 5 stake for the licenses. That values the company in the someo 6 million range valuations have been as high as 700 million. Sam clout is this Massive Company where people upload songs. You look at how many users they have, 10 million by 2012 and 30 million by 2013. They register 70,000 people a day. Right now, up to 250 million users. They are backed by institutional investors. They have some big money behind them. If i were to upload say a favorite dylan song that i bootlegged somewhere, if dylan is covered under the license agreement, that can stay up there and other people can use it. The record label would get a cut of that. For the first few years before soundcloud is profitable, they get a flat rate. After a while, they get a cut of the profits. This is a great deal for the record labels but it also allows soundcloud to be viable. They could really take off. It is basically legalizing napster. Is this a model, something that others could use . Is this such a neat and elegant solution and so simple that we could see this re