First of all, we have a great show aligned up. Joining us for the hour is allia nz chief Investment Officer and ceo. It will be great to get an update. First thing first. Lets check on the markets. We also have a little bit of breaking news from south africa. This is what european stocks are doing, down 0. 5 . Dollar strengthening against all thets major perrs oers on prospect of a u. S. Interest rate hike. Japanese shares, weighing whether better than expected Economic Growth reduces the need for stimulus. Then we had the cpi figure in south africa rising. In line with what economists were expecting. The finance minister, that may be putting pressure on the rand, 15. 81 against the dollar. Lets get to first neword news. In governments and Consumer Spending compensated for slighted Business Investment. Gdp expanded by 1. 7 to the end of march, exceeding all forecasts. Meanwhile, the october to december quarter was revised to 1. 7 contraction, worse than previous estimates. Suzuki motorhead said it has no need to correct the fuel efficiency values of its cars. The company says it also thinks the issue would not affect earnings. 10 automaker shares close lower in tokyo after it said it had used an improper method to test its vehicles. In most chinese cities in more than two years in april. Gains in second tier cities passed advances in larger hurbs. Sales jumped to 122 billion. Bernie sanders has won the democratic president ial primary in oregon. Hillary clinton claims victory in kentucky. Donald trump one organ, though he has clinched the gop nomination is the only contender in the race. Ted cruz and john kasich remained on the ballot in the state. Day,l news 24 hours a powered by 150 news bureaus around the world. You can find more stories on a bloomberg. Francine thank you. Between donald trump and brexit, there are no risks out there. Revising june next monday is live next months is live. Lockhart talked up the first half hike. I think it certainly could be a meeting in which action can be taken. All meetings are live. I think it is a little early in looking at Second Quarter data to draw a conclusion. So, im sort of inconclusive on how im going to be thinking about june, but i would not take it off the table. Francine that was the atlanta gefed president saying it increases on the table. The San Francisco fed counterpart john lames said that markets were too optimistic on june. Will both official c2 moves before 2017 . See two moves before 2017 . I think it is reasonable given the job growth we are seeing. The inflation data we are seeing. Francine lets welcome our guest for the whole show today. The global chief Investment Officer and ceo of allianz global investors. It manages 442 billion euros. Day in, day out, we talk about fed, will they hike . Does it matter whether they hike in june . The world is not ready for a hike. The u. S. Maybe but they could wait a little. I guess they could. Unemployment is at low levels. There are risks on the tray de side. The dollar has been weakening. Overall, the fed would much rather have rates higher. So would we, by the way. We need higher rates. I think, yes, absolutely. The market is anticipating putting on a 50 probability of one increase this year. The fed would like to her three. The truth is somewhere in the middle. The fed would like to or three. Two or three. Francine you would welcome an Interest Rate hike because of the returns. The world is waiting for a normalization of Monetary Policy . And that is what we need. Ern is you look at risks you look at brexit. We do not know if it is systemic. We do not know if this country would vote outside you look at the u. S. Election. China, the risks. Why the hurry . You have to ask yourself the question, if you dont do it . The impact on Financial Markets is likely to be transient. There are plenty of people out there, like there were in fedemberoctober when the or threatened too high. Then the markets were sold off. It is not clear at all in my mind whether or not doing anything with the the markets to the more stable than doing something. The signal effect of having lower rates for a long, long time, it signals what you just explain which is everybody is worried about uncertainty. Signal thatu rates are going up, the economy is strong. Francine every days there is news from the fed saying we are market dependent, data dependent. Fedhere a danger that the hikes with markets not being it . Y for that is possible if Market Expectations stay where they are. I do not quite by that. If there is a negative impact on the markets, it will be transient. Francine how do you read the fed, the dot plot . We only care when janet yellen says. The fed does not want to disappoint the markets. Ay lower forst longer. That is why it needs to be signaling more rate rises, more quickly. But the market has been to dovish. The truth is somewhere in between. Francine i made the utermann chart. This is treasuries. Look at that. I also have have a chart. Im having technical difficulties. It feels like monday morning. This is basically the 10year treasury. It has flattened since 2007. Amid these rate beds. This makes it difficult to price risk. Andreas it does. It is telling us inflation is never going to come back despite low on appointment rate and high employment. It is telling us that the buying of treasuries and other estimates will continue forever. And its telling you you youre not going to make much money out of owning benchmark bonds. So, i would read into that to years,t over next 10 youre not going to make money. You are going to lose money in real terms. Francine but inflation in the u. S. May actually overshoot. Wage growth has been increasing. Why is it difficult to get inflation up in the rest of the world . because we still have a lack of underlying to man. That is why i think the policymakers around the world will be looking at redistribution we still have a lack of underlying demand. That is why they may be looking at the Corporate Tax rate. A higher marginal propensity to consume which the uber on the lower andhe people on middle incomes. That will propel demand and provided we do not get a global trade war, which is out there , we willit and trump see a pickup in demand and ultimately the prices should pick up. Francine we will talk more about trade. We will talk more about inflation. The global chief Investment Officer at allianz global investors. He stays with us for the hour. Plenty coming up, including japan dodging a recession. How long can the world Third Largest economy cope with the rising currency . We look at u. K. Unemployment. With five weeks until the brexit vote, we will analyze key Economic Data and go live to new york for the latest on the u. S. Interest rate conversation. Francine welcome back. Lets get to the Bloomberg Business flash. Caroline reported a second state drop in annual earnings and plans to save 100 Million Pounds a year. Urberry reported a second drop in annual earnings. Are trading lower this morning. As the brewer that assumed to be bought by ab inbev was settled with charges werrelated to South African and cost related to the takeover. As chinas surged biggest maker of Home Appliance has offered 150 per share. Provide has agreed to kit for chelsea football club. Nike will pay 60 Million Pounds a season over a decade. Chelsea first had to get out of a 10year deal with adidas that had seven years left to run. Francine thank you so much. Should the world be concerned by chinas rising debt . We are speaking to larry fink, all have to be worried about chinas debt and slowing growth. E. U. Commissioners meet today to discuss taking action after spain breached its countries budget limit for a fourth year. The country is preparing for its second election in six months. With me now is the global chief Investment Officer and ceo of global caret we are talking about china, spain. We could show you a number of risks that you look at on a daily if not hourly basis. The problem is Monetary Policy as were talking about during the break. Monetary policy has done what exactly . Has it helped us not be in a recession . Should we change course . Andreas we dont know yet. , we willin 25 years have better analytical tools to explain what worked and did not work. What is certain is that the move towards quantitative easing and lower Interest Rates in the midst of the financial crisis eight years ago averted a collapse. Big tick there. That was years ago. Now we happen mired in a low growth environment for the past seven years. Frankly, it is not clear that quantitative easing in aggregate has achieved the aim that it has set out to do. Higherto get us to a growth trajectory with inflation at least a target if not ahead of target levels which is to percent. 2 . There is a big question over that. You wonder whether the signaling zero Interest Rates does not do more harm than good. What it tells people is it is very uncertainty policymakers are not clear that we are mending our problems and therefore people are sitting on the sidelines with their spending. Corporations are reluctant to invest in longterm capital projects. Francine i do not really understand undei understand it does not spur politicians to do more because Interest Rates are low. I do not wear the risk aversion comes from. You have to be certain that in five or 10 years time, the demand is going to be there. You have to be able to determine what your cost of capital is. With the Interest Rate being zero, very difficult. Do you discount your capital knows. . At 2 , who most corporation have not adjusted the cost of capital to the low Interest Rates we currently have. In a low growth environment, therefore and the high cost of capital, you are stuck. Francine what worries you . How do you make money in this kind of environment . One of the things we talk about is the concern about lack of liquidity in the markets and the impact that could have on investment. Andreas that is a significant risk although i think for Management Companies Asset Managers have taken steps to mitigate those risks by having higher cash balance. Holdingopportunity of cash and portfolios whether you look at bonds or look at equities is pretty low. I think liquidity buffers have been built up in most portfolios. The risk has been well signaled, and probably is not a cigna begin as people fear. Nt as not as significa people fear. The markets have been ignoring politics for the last 25 year spirit Central Banks know best. That is changing. Brexit it a huge risk is a huge risk. You cannot model appear you have got to understand that the negative implications of an out vote, could be very serious. You plan for that. You have to take it as it comes. But the uncertainty for the u. K. Is for europe and global trade would be very significant. Vote,k a probrexit leaving the eu, would increase the likelihood of trump getting elected and trade wars which which linked global output relative to free trade. So, i think these are very significant risks which would probably make the markets more concerned than they currently are. Francine buy gold . Andreas i dont like gold. Francine we have people coming on the program saying buy gold. Thank you so much for now. Hell stay with us. We will about, how do you trade in this environment . This is the picture for commodities. In terms of what we are seeing, overall, a lot of these european stocks are down. Crude is touching 48. Brent at 49. We talked to the technical level at 50. What it means for the future depends on whether shale producers in the states decide to come online. Kau currency. 1271. Can itd be a currency, be a currency of the future . That is what we are discussing next. Francine welcome to the pulse. Japan has sidestepped a recession. At one point 7 with gains in government and Consumer Spending compensating for a slide in Business Investment. Japans finance minister says the yens strength may be discussed when the country hosts a g7 meeting this week. Heres a currency since abe ca me to power. Lets get more with Andreas Utermann, global chief Investment Officer and ceo of allianz. The powerless japan is everything that they do is scuppered by yen strength. That puts pressure on inflation. Is abenomics going to work . Working so is not far. At what point do they need to reverse course because clearly they have been most aggressive with their quantitative easing policies and it has produced the opposite effect of what they wanted on the currency, which is putting a huge break onto the whole program brake on to the whole program. Never reallyow was working. They will have to revert back to fiscal policy. Francine do negative rates hurt more than governor kuroda says. Know how much this is investor psychology, that people freak out because of negative rates and the impact it has on banks. Andreas it is a lot of that. The longer it goes on, the more harmful it becomes. The germans are correct there. Those investors in japan who , ik at that and freak out think they are correct. I think it is a matter of time as to when they have to reverse that. What that does to the yen, who knows . Francine if you had to pick three top lplays, do you hedge everything . Andreas i think you need to be active, for starters. Because the beta return from equities are bonds are going to be flat very volatile. In that environment with very volatile individual sectors, individual securities, one needs to be active. Vieweeds to take a sometimes in the shortterm. I think currencies are playing a more Important Role than they did in the past. We have said that before on the program. There is a lot of juice in the currency markets. Ignoring the currency is not good enough. We have said this before. Counter cyclical investment behavior in this market will be one of the key ways to generate alpha. When the markets could overly market is, and if the very bearish which we have seen several times in the last six months, that is the time to buy. Francine for the currencies, is the dollar rally going to resume . Andreas i think the big risk for the world is that the euro does what the yen did, which is start strengthening against the dollar and the renminbi. That will suit the u. S. , that will suit the chinese. Theyll get the renminbi value down, but it will be tough for japan and zurich. Francine what can mario draghi due to counter that . By equities . Buy equities . How much firepower does he need to put behind it to play on currencies. Andreas i think they have run out of power, to be on this, the Central Banks. It will be less effective whatever they do. Both in terms of market psychology and in terms of real economic impact. Francine where do you see the most value in terms of regions . Do you look at it like that . Andreas no. Spread product. It is liquidity premium, for example. Term premia. It is currency. It is not where the market was. Francine thank you so much for now. He stays with us. Well talk a little bit about brexit and the u. K. And sterling next. The u. K. Is not hiring. That is the forecast for this mornings unemployment figures. We break those down next. We look at the applications of brexit. This is the cloud like you can see over st. Pauls. Francine welcome to francine the pulse at bloomberg headquarters. U. K. Unemployment. A low Unemployment Rate in line with expectations, Weekly Earnings a touch weaker than expected, 2. 1 for the month of march. Minus twoaims change 400. Lets check in quickly on the pound. Overall a touch lower. S had tok the economy did manage avoid a recession, games and Consumer Spending balancing the slide. Estimates of economists we have surveyed at bloomberg, the october to december quarter was revised to detraction. The decline in Capital Spending suggests companies to remain reluctant to deploy their stock piles of cash and underscores the problem that japan has a long way to go before pulling three of this cycle of expansion just pulling free pulling free from this cycle of expansion. Zero. D dotted line is you can see very clearly from this chart that japan has fluctuated between acceleration and contraction for the best part of that period. Stories,one of the big reporting its second straight drop in annual earnings and announced its plan to save 100 Million Pounds a year. Int savings will be achieved 2019. 2017 earnings are likely to be near the bottom of the range of estimates. Sales in hong kong have fallen with 20 for three straight quarters. Tourists are spending less in europe because of terrorist attacks, and demand remains uneven in the united states. For europeanig Luxury Goods Companies in 2016. Burberry is the lag or, shares down 24 . Lower. An dior, 12 s shares are the best performers, up 25 . Estimates missing related to some charges and costs associated with its takeover by a. B. Beverage. Europe,four brewers in differing fortunes. Sab miller is the best performer, up 18 followed by heineken, 11 . Very quickly a big mover today, madea is a chinese company. Media is offering to raise its kuka. Hookah sending shares in the German Company up by 31 today. What a gain. Francine we are just getting some breaking news about mitsubishi. This is the automaker engulfed in scandal over the possible rigging, allegedly rigging of the fuel economy tests. We have a couple of people at the top including the president deciding to step down. There is an ongoing press conference as we speak. I believe from tokyo, japan where he has announced he will step down from june 24. This also goes back to cultural from did understand earlier reports from local press that the president may have decided to take the blame because of his roots in the Product Development unit where we understand the falsified field testing actually originated. The nikkei, weto literally had news in the last couple seconds or so that the mitsubishi president has decided to step down effective june 24. Economics, aacro busy day for the u. K. The countrys inflation rate came in below estimates. Murray and undress determine Andreas Utermann. All, jamie, what can we say about the impact that the brexit concerns have had on unemployment for at least hiring . There is always the decision to delay things until after the referendum. Despite the fact that the u. K. , justways going to slow as we cannot keep booming as we have been, there is obviously some effect from brexit there is well. Francine you have also done modeling. How do you model it and how real are the modeling exercises . Jamie what we have done with brexit, no one knows with the exact answer is going to be, what the magnitude of the shock will be that we know some features of it. ,e think the currency will move we think a loss of confidence. We think there could be some dislocation in Financial Markets. We put those in our model and see how that translates. Francine so that is why you are arguing the fed will probably stay on hold in june . Jamie u. S. Economists assure me they will not hike in june, so the question is will they move in july . With the referendum happening just before on june 23, the uncertainty around that outcome, obviously we will know what is happened. If britain does decide to leave, that affects things a little bit beyond july. Francine we are talking about volatility and currency, and i have a chart showing the spike up. Markets are now pricing up a no seeing only a 24 chance. How do you view it . How do you hedge . Market,re active in the do you go short u. K. , do you buy Something Else in case brexit happens . Andreas sterling will need to weaken whether we stay in or we. Eave the eu it is just a question of the magnitude of it so i think if we want to stay in, we will have potentially a very shortlived relief rally and then it will drop. If we were to leave i think it would be a precipitous decline of sterling. You need to position yourself with respect to brexit, preposition yourself. I think the markets are too sanguine about us staying in. I think the risks of probability adjusters, given it is a black swan events, 25 is not something to be looking down at. I think it is very risky. Francine why do you think the pound is overvalued . A stronger economy than many economies and what the possible divergence of industry, what is the optimal level . Jamie if you compare the last 25 years, inflation has been slightly higher in the u. K. , and productivity has been very, very weak so that means in currency terms we have lost competitiveness. Sterling has been relatively flat against the dollar and the euro over the past 20 years and i think it is due for a major correction. I think the currency count numbers tell us that is what is necessary. Francine is that similar to your models . We have been running the current account deficit since 1983. It has become a lot wider lately. In the mediumterm, i agree, i think that will be the only way. Boe,ine when you look at they probably have one of the most difficult jobs because depending on brexit, either hike or cut. Is that fair or is that too simplistic . Jamie what the modeling exercises show is that on june think thetay in, we rate will raise up quite sharply and if we leave, the bank will have to provide more stimulus. Mean,ne what does that when you are looking for value, what does that mean for a lambda British Company . If they are big exporters and we do not know what trade deals will look like, would you rather sell them off until june 24 . Andreas on the margin you would rather stand the sidelines. The renegotiation of trade deals is going to take much longer than people think. Years. , 5 i think the terms will not be as good as the current terms. They are going to be worse so that is not good news. Companies could relocate. Definitelyt would inevitably happen and you would see some of the manufacturing sector, which is already week, probably relocate. On the margin you would want to be staying away from that. Francine a weaker pound would benefit a lot of the exporters in the u. K. Andreas it would. Francine enough to give it a left . Andreas it is a difficult question. In many instances you would argue not quite. Is there something the markets are mispricing when it comes to brexit . It systemic, do we know if the markets will freeze up . Do we know what will happen to the overall credit market . Jamie putting a probability on this is really difficult or impossible. We have the polls very tight which would lead you in the direction of the risk being high. Looking at the telephone poles ,hich i think are more reliable the biggest risk is that the turnout does not actually happen and is lower than people expect. That would happen if the polls remain very close. People might get out there. Is the pollsisk stay close and you do not get that turnout. Francine jamie murray, thank you so much. Eliansd determine from germaness undress the Andreas Utermann stays with us. Pulse. it is the lets get to caroline hyde. Caroline gains in government and Consumer Spending compensated for a slide in Business Investment in japan. Exceeding all forecasts. The october to december quarter was revised to a 1. 7 contraction, worse to the previous estimate. Suzuki motor has said it has no need to correct the fuel efficiency values of its cars and it does not think it will affect earnings. Their shares closed almost 12 lower in tokyo after they said they were said to have used an improper method for evaluating fuel efficiency. New prices client and 65 cities compared to 62 in march, and sales jumped to 152 billion. The chances of a brexit have fallen to 24 according to a survey and its panel of super forecasters. Suggesting there is less uncertainty over opinion polls undershoot the probabilities forecasted by banks. News 24 hours a day powered by our 2400 journalists in more than 150 news bureaus around the world. Francine burberry shares lower the company, after reported a drop in earnings for the second year in a row. By andrea. Ed german entree us Andreas Utermann. Ea things have been quite tough for burberry for while. It is not enough to tackle the fundamental problem which is a bit of a tired brand and it needs a refresh. Francine how do you refresh such a big brand . You have a ceo which is the only one in industry that has a mandate of ceo. Andrea i think you need to bring in some fresh talent. At gadfly, we argue that is the wrong way around. You need some new, Creative Force to get customer shopping again and not just relying on the chinese travelers. Francine they bring it down to a tough environment, a tough year. You think a gadfly that has much more to do with the kind of products they are selling. Andrea exactly. Francine a complete revival in six months . Andrea exactly. You cannot just rely on the market, you need a great Digital Strategy or a hot new design. Andreas, how do you view luxury . Consumer appetite move so quickly. Andreas certainly there has been a lot of investment in the space, a lot of brands have expanded significantly and there has been a lot of advertising. Relative to consumer demand which has been falling away for quite a bit. If you look at gucci, burberry, and others, creative talent is key but it is very rare. Is one that we are facing in Many Industries and what are they doing instead, bringing in consultants. That is not going to help with the creative angle and will probably make the problem worse. They have issues with their geographic splits. They have too much business in the u. S. And too much exposure in japan in china, not enough in japan. I dont think it is a question of being a tired brand. It is a lot of different challenges. Francine do he have any idea of the overhaul burberry is thinking of . Andrea it is going to start with bags and cut the number of individual products. It feels it is too crowded and it really needs to where it does get the fashion right, to showcase that to shoppers. Francine is there someone who was getting that right . We talked about the profits they company is owned by french conglomerates or the swiss. Andreas clearly the ones that were more broadly diversified were clearly doing better because you are always going to have cycles in brands. If you are just a one Brand Company like burberry you are going to feel it in the share price. If you have a broader portfolio, you will whether these cycles more easily. Francine are you expecting consolidation . Andreas i would definitely think so. Francine this is already a consolidated industry. What comes next, the chinese buyers looking at European Companies . Andrea burberry has always been a takeover candidate. Although it is big, it is not so big for the really giant companies. Its earnings and the share price continues to fall. Francine Pricing Power is difficult. Luxuryficult is it in when a lot of these companies have huge valuations . Andreas clearly it is very difficult at the moment. The Chinese Shoppers are staying away more than i have. Real incomes of not really risen for much of the western world to this is a very tricky environment. If you couple that with more and more out there in terms of offer, most every brand has got bad range. It is getting more and more difficult. Francine especially social media being so prominent. Global chief investor and officer of italians. Alianza. Elians we once again look ahead. Francine lets talk fed minutes of the april meeting will be introduced later. Michael mckee joins us from new york. The minutes appeared to have taken a new relevance. Michael a little more import after yesterdays numbers and there is a feeling from wall street that maybe they should be listening to some of those fed officials who say a rate increase might be coming in june. Old bute three weeks even at the time of that meeting, some fed Officials Say they were surprised the market took the results so benignly. Be something in there that they do see a rebound in progress, they do see inflation rising, and that gives people some help that maybe there is going to be a repricing of risk in the markets, and people will begin to take seriously the idea be. June could francine they are showing a 12 chance. Given the fact that all banks have more reserves than they need, they do not need fed funds at this point. It is better to look at Something Like the twoyear note yield which broke through the higher range of a rate increase yesterday. It has priced in a move in february. It may even move higher. That might give you a better clue as to what the market is really thinking. Mckee, ourichael u. S. Editor. Tom keene will be joining us from new york to kick off the conversation with stephanie flanders. We will talk about boj and a little more about the fed. These are what the markets are doing in terms of pressure around the world, markets overall not as lower as they were about an hour ago but we are still seeing a little bit of pressure, the dollar strengthening, watch out for the yen. Trying to weigh the need for stimulus after Economic Growth in japan beating. This is what it looks like. Francine two for two, a fed rise in june is still possible. Hike 2016. T to recession,ing a Consumer Spending leads to growth in japan. Super forecasters say a 24 chance of brexit. Not all banks in great agree. This is bloomberg surveillance
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