'Bloomberg Surveillance: Early Edition' Full (06/14/2022)

'Bloomberg Surveillance: Early Edition' Full (06/14/2022)

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They've already said you know 50 in June 50 in July. From our perspective the markets are performing incredibly well. There's a ton of liquidity in the market. When we go into recession obviously probably 50 50 or so. But that's okay. Even though there might be an initial sell off on a 100 basis point I think there'd be a subsequent rally because the Fed is finally getting hold of the narrative. This is Bloomberg Surveillance early edition with Francine Lacqua.

Good morning everyone and welcome to Bloomberg Surveillance Early Edition on this Tuesday the 14th of June. I'm Francine Lacqua here in London. And here's what's coming up on today's program. Stocks rebounding. Europe along with U.S. equity futures as a sell off takes a breather. Markets await the next data point. BPI drops at 130 U.K. time. The 100 basis point question our markets start pricing and even more dramatic hikes by the Fed. J.P. Morgan sees 75 basis points

but describes a full point hike as a non-trivial risk. And debt buyers rush back into crypto bitcoin pairs a punt of 10 percent but still trades lower than at any point since December 2020. So let's get straight to the markets. Yesterday's market moves were so extreme that for some traders it actually evoked memories of the Lehman Brothers blow up. Now first Asian stocks markets sold off but that negativity really rolled on around the world sending the S&P 500 into a bear market and wiping one point three trillion dollars off equities. Now other risky assets sold off with crypto currencies for example plummeting so violently that a popular lending platform froze withdrawals to prevent a very modern kind of bank run. Meanwhile the dollar index roared to the highest level in almost two decades. Now a short ended or short dated US yields jumped by so much that the two 10 spreads of course the curve inverted for the second time this year. The last time yields

moved so fast in two days was back in 2000 and 8. And here sells some of the guests on Bloomberg TV. We acted to that sell off. This week is fraught with peril. Inflation is really the Achilles heel of risk markets. Markets are reacting the way they are because they believe the Fed is going to be forced to get more aggressive than they had expected. I certainly don't think that a 75 basis point hike is out of the question even though there might be an initial sell off on a 100 basis point. I think there'd be a subsequent rally because the Fed is finally getting hold of the narrative which it certainly has lost over the last year. This is a time to be selective but I wouldn't sit on my hands. There are opportunities in the areas where one can

position pockets of stocks that have been proven. Europe looks good to us. China looks good to us. The credit space in the US looks good to US equities in general specifically in the US. I'm still pretty cautious here. It doesn't have to be all about the US because I us think we've got some wood to chop with respect to the macro and policy outlook. Well joining us now to break down the action is our EMEA equities editor senior Gold Co Xenia. So yesterday was really a crazy day. What are markets now pricing in. Well yesterday it was totally crazy with the S&P 500 finally closing in a bear

market. And then today we were expecting a rebound but it has been very fragile. So European markets open higher. We were expecting finally the recovery to start but he did not last. We just shows you that the caution is out there. Everyone is looking forward to the Fed. And that is the big surprise of this week. Are they going to go with a 75 basis point hike or their strategists floating the idea of 100 basis points. That will be a real shocker. So the problem is that also it hurts their credibility on why they haven't acted earlier and seen this right back saying you no recession at the moment is priced in so we could fall even further. That's right. Yeah. Earnings have held up pretty well. I was looking at the city earnings

revisions index just this morning and is showing rising earnings expectations in Europe and a slight drop in the US and global profit expectations. So analysts have yet to catch up with this doom and gloom in the markets. We have the Bank of America Monthly Fund managers survey out today and it's showing that actually month fund managers and investors the global profit expectations either 2008 low and that is pretty significant. So there's this discrepancy between analysts and investors out there saying overall I mean I guess commodities kind of held up okay which points to possibly no recession. But then we have this huge fragmentation debate and eat Italian yields really moving. Absolutely. And commodities are actually very interesting story because yesterday they were truly a haven out there. And commodities are moving on. Very different factors.

It's not the Fed that's moving them. It's obviously the war in Ukraine. It's the supply crunch issues right around Russia. So it's a very different story actually. What's interesting in the Bank of America fund manager survey in commodities today is that it's one of the longest positions among investor portfolios. So investors are very bullish commodities at the moment. And mining and energy stocks. So they remain positioned in that department. Kenya thanks so much our EMEA equities editor Xenia. Good to go with the very latest on the markets and the midst of the market action. Traders also boosted bets of a more aggressive path for Fed rate hikes. A 75 basis point increase this week is now being priced in by markets with a terminal rate of 4 percent by May

2023. Now economists at major Wall Street firms were quick to change their calls. Goldman Sachs the Nomura both shifted on Monday to forecast 75 basis point hikes this week and at the Fed's meeting in late July. Well J.P. Morgan also went to 75 basis points at this week's meeting. Joining Barclays and Jefferies who modified their calls Friday to the biggest increase. But even 75 basis points isn't large enough for some. With mounting talk of an even bigger rate increase you've already said no. 50 in June 50 in July. Given how bad the announcement was Friday I think what Chairman Powell can do is bring that 50 forward even though there might be an initial sell off on a 100 basis point. I think there'd be a subsequent rally

because the Fed is finally getting hold of the narrative which it certainly has lost over the last year. Well we're joined by Paul Donovan UBS global chief economist. Paul. Great to speak to you. Right now I've noticed him. You're around. You weren't you were kind of saying there's inflation but we're seeing also signs that some dude. Yeah. Have you changed your mind. No. I mean if you look at the detail of what we got on Friday and remember core CPI is not the Fed's target measure for inflation. About a quarter of the index is in disinflation or outright deflation. You got falling prices in

the detail. Now what's happening of course is that the bits of inflation the Fed can control. You're seeing disinflation and deflation. The bits of the inflation the Fed can't control. You've got strong inflation. So you've got this balance. And the question is how much deflation is the Fed going to cause in the areas it can control to offset the bits it can't control. But it needs to hike rates quite aggressively. Right. So it's 75 basis points now a done deal. So I think the biggest inflation. We

face at the moment is pundits inflating their Fed forecasts and competing frantically to get up at the highest possible number. The Fed is looking at a measure it doesn't particularly rely on. It is saying well it was a bit higher than expected but actually we've got a mixed picture and I think it's going to be fairly sensible in its approach. So 75 I don't think it's a done deal. It's possible but I don't think it's a done deal. But is there no runaway inflation and what's changed in the last six weeks. So nothing has changed in the last six weeks. I mean this is the key thing that when we look at the inflation

picture we are seeing where demand is weakening. Prices are slowing or outright falling. So you're actually seeing that happen. We're not seeing out of control wage price pressures. So the wage cost price spiral just doesn't exist is why you got negative real incomes which is which is unfortunate. We're running out of cushions for certain groups. So lower income Americans have spent their savings. They're now forced to borrow on credit card for day to day living expenses. That's not a sign of something which is going to sustain. And again it's a disinflation force in the economy. Is this like a

nightmare scenario that we're dealing with because the Fed didn't see it coming. Well I think the the the problem for the Fed of course is that most of what they saw coming the transitory inflation that happened the transitory bits of inflation have proved to be transitory. What they then had is this commodity shock which is a combination of Ukraine and climate because it's a long junior year. We know that always pushes up food prices. So that's created a real problem for them which was frankly impossible to forecast so well. I mean the long linear effect is always difficult to know how big an impact you have in terms of pricing. Once you've had the war in Ukraine the problem there was not so much the oil price of course but

the refinery capacity in the refined oil price. And that's been quite difficult to get a handle on. We've also got a lot of complications in terms of shifting demand patterns so consumers aren't behaving the way they normally do. We've seen more dramatic cuts in driving but people being a lot more resilient about no we absolutely are going on holiday regardless of FTSE. I know I know. Bowser like five people actually asked me whether their mortgage rate will go up. And these are people in good jobs because they're worried because they're over leveraged and inflation is also going you know their energy costs of living are going up. Yeah. So I mean there all constraints coming through. And so certainly

absolutely. In countries like the UK where rates are sort of semi variable that that is a concern for people. If you've got a variable rate mortgage cost of mortgages going up in the US of course the overwhelming majority are on fixed rate mortgages. And this is of course one of the quirks that according to CPI the cost of owning a home has been rising. And of course it's collapsed in the last two years. And so that does give a sort of a bulwark against a recession risk because you've got more spending firepower for middle income home owning consumers than the headline inflation number suggests. So we have traders

coming on saying this reminds me of 2008. It's not something that you see economically. This is nothing like 2008. I mean the parallels. Not really. I mean the problem in 2008 was you've got balance sheets which are extraordinarily stretched and households had been leveraging themselves up. And of course we got quite the reverse this time. We've got stockpiles of savings now. As I said lower income households are now starting to borrow on credit card. That's not a problem. Now the trend could be problematic and that might

start to echo 2008 parallels. But again for the higher income households the top 50 percent of households in the states they've got a stockpile of cash. They've got more savings than they've ever had before. And they are to a certain extent sort of insured against some of the problems we saw sitting. So where do you see the interest rate actually going in the US. Does it go much higher maybe 5 percent and then come down as they start cutting in 2024. So now I think 5 percent is too far because

we've got a situation where either we we're going to have very high inflation in which case 5 percent isn't going to do it. Or more likely we're going to get an abrupt drop in inflation coming through because I mean if you look at what's happening with wages and so forth inflation is not being driven by labor costs. It's being driven by profit margins. You cannot continue this indefinitely that at some point the consumer is going to say actually we're just not spending. And look at what Target was saying with their results in the second quarter. Yet they're basically saying consumers are cutting back. We've got excess

inventory and we're now going to have to get on a price discounting splurge to try and get rid of this excess inventory that on an economy wide scale is I think the more likely scenario. And that stops a 5 percent number. All right. Paul thanks so much. We'll talk lot about the UK next. Paul Donovan UBS global chief economist stays with us. Now coming up 50/50. Morgan Stanley's James Gorman says there's an even chance of a recession in the US. Myron markets and the economy next to this is Bloomberg Daybreak. And likely at this stage to going to be people at the top. When we go into recession obviously. But I was at Morgan Stanley Chief Executive Officer James Gorman saying he sees a 50 percent risk of a US recession. Still with us is Paul Donovan UBS global

chief economist. What what are the chances of a US recession right now. Well I mean if we're talking about a prolonged period of of negative economic growth it's inevitable. At some point you'll always get a period of below trend economic growth at some point this year. I think we've got quite a lot of cushions. I mean

remember the middle income consumer with their stockpile of savings. Corporate balance sheets are okay. The there's job security. So you're not getting real wage growth but you've got job security. And that's quite important because it's when people are nervous about their jobs that they really change their spending behavior. Ultimately the US economy is all about the consumer and they are there to provide support. So what do you do with the inverted yield curve. Well the inverted yield curve is never a great predictor of recessions particularly in the current environment. It just doesn't really work because you're manipulating bond markets. I mean the U.K. guilt curve has been inverted for most of my career. The U.K. has not been in recession for the last

three decades. Know it's not a great indicator overall. I have a million questions. One from Valerie or Queen of Charge basically saying why would the Fed upset markets and not hike 75 basis points given it's priced in. Because the market I think has only suddenly come to this conclusion. And the Fed is here to run Main Street not Wall Street. That's ultimately its its goal. I

think it could as I said raise seventy five. But I think that they're going to want to give a fairly measured signal about their tightening that the market is sort of fed on itself. In the last 48 hours. Know 48 hours ago the market wasn't here. The market was perfectly happy with 50 basis points. We get one number. The Fed doesn't monitor going up and all of a sudden the market is feeding on its own panic. And as I said you know this this year I need to be the highest forecast in the street. Is

this competitive race to forecast the Fed up. That's not necessarily going to influence economists at the Fed just destroyed like all of your competitors accusing them of click bait right. Well you know we're all guilty of click bait but please follow me. Pete Donovan underscore econ on Twitter. But I think that there is there is a sense of of panic here where the Fed is taking a step back and looking at things a little bit more rationally because it is dealing with Main Street. It's

going to be looking at what we've had from the Beige Book. And of course a lot of members of the Fed are going to have gone into this meeting with their minds pretty much made up on the basis of the evidence of the last months not the evidence of the last 48 hours. OK I have two quick questions. First of all how Neils will the ECB have to come up with the flight plan to convince the markets that they will allow fragmentation. I think they do need to come up with a plan to avoid Frank. Give

them some time. As always the ECB is late. I mean they never never on time with anything. Everything in Europe is always done at five minutes to midnight or actually generally five minutes after midnight. I mean it's always very very last minute. But yes obviously they need to reiterate the integrity of the euro et cetera. But I mean do remember the Italian government has an awful lot of experience of selling debt. So I wouldn't necessarily panic about Italian yields at this stage. Yeah I keep on hearing that from from Rome. You know it's the drug effect very quickly on Brexit. And of course these UK real wages

posting their biggest drop in two decades. Will cable ever trade above pre Brexit level of one point four or five again. Absolutely. It will at some point obviously at the moment. The UK is in a different cyclical position to other countries. We've got the biggest tax grab in almost 70 years from the Johnson government that's having a depressing effect on the economy. The real wage effects bear in mind the bonus payments bonuses are being used to sort of top things up a little bit. It's not quite as bad as wages alone would suggest but one one four or five at some point somewhat. Well not this year not probably not next year. But the UK economy does have underlying resilience.

There is competitiveness. It's it's it's a longer term view. All right Paul as always thank you so much. Paul Allen from there UBS global chief economist. Now let's get straight to the Bloomberg First World News. Here's the angel Felicia Angel. Hi. France in the U.K. has unveiled legislation to override parts of its Brexit deal with the European Union. The move risks a trade

war with the EU which has threatened to take legal action. If passed the bill would give the UK the power to unilaterally rewrite the bulk of the Northern Ireland protocol which CAC the region and the EU single market. After Brexit Hong Kong's lobby group for fund managers is urging incoming chief executive John Lee to scrap quarantine rules for travellers. Hong Kong Investment Funds Association says the city needs to restore its status as an international financial centre. The body represents firms with more than fifty two trillion dollars in assets under management. And emergency crews from California to New Mexico

have been battling wildfires that have forced hundreds of people to leave their homes. The fire such as this one in Arizona have been driven by high winds that have grounded aircraft that would have been used to fight the blazes. The number of square miles burned so far this year is more than double the 10 year U.S. national average. Global news 24 hours a day on air and on Bloomberg Quicktake powered by more than twenty seven hundred journalists and analysts of more than 120 countries. This is Bloomberg Francine Angels. Thank you so much. Angel Feliciano in London. Now coming up. But despite the tightest labor market in living memory high inflation the UK is reducing the spending power of households. He discussed what this could mean for the

Bank of England next. This is Bloomberg. Economics finance politics. This is Bloomberg Surveillance Early Edition and Francine Lacqua. You're in London now. The U.K. cost of living squeeze is intensifying with the spending power of households falling by the most and at least 21 years. Now this backdrop of course created a major challenge for the big three as they tried to curb inflation without pushing the economy into a recession. For more on this we're joined by Bloomberg's EMEA economics and government correspondent Lizzie Borden. Lizzie so what does this exactly mean for the Bank of England. This is a tough environment for households but it's also a tough

environment for companies that have to pay wages more. Exactly. So you've got something for the hawks and the doves in this data because on the one hand it underscores the pain of the cost of living crisis because inflation is swallowing up real wage growth. But on the other hand it shows how tight the labour market is but that it's easing. So unemployment rate unexpectedly rose. But that was driven by the rise in the drop in economic activity. So our economists think that this doesn't change the calculus for the Bank of England. On Thursday they still see 25

basis points and that I'll take the key rate to one point thirty five percent. I mean what are we expecting U.K. consumers to do. Because if you're a real wage I mean you have to spend less at some you know in certain items. Yeah you've got low consumer confidence in the U.K. But interestingly in the GDP figures yesterday you didn't see that translating into a hit to demand because you still saw people going out shopping. And so that hasn't happened yet. But it's not to say that it won't happen

down the line. All right Lizzie thanks so much. Lizzie Borden there with the very latest on the UK data. Now stocks in Europe pretty much steady if you look at U.S. futures also say certainly more stable than they were yesterday where we had this crazy volatile day. They rebounded after a market rout driven by expectations of sharper Federal Reserve interest rate hikes to fight inflation. I'm looking for example at the stocks Europe 600 now. They're now one chain. So they did pair an earlier gain to hover at around to a one year low. Banks outperformed HSBC for example climbing some 3 percent amid speculation that may

spinoff its Asian unit. And then the one thing we need to watch out for is also Italian yields. The 10 year above 4 percent. When does the ECB. If the ECB steps in to show the markets what tools it has to deal with fragmentation. Coming up later this morning we'll speak exclusively to the Hong Kong chief executive Carrie Lam. That's an interview you don't want to miss. This is Bloomberg. Stocks rebound in Europe along with U.S. equities futures as a sell off takes a breather. Markets await the next data point.

CPI drops at 130 UK the 100 basis point question will markets start pricing in even more dramatic hikes by the Fed. J.P. Morgan sees 75 basis points but describes a full point hike as a non trivial risk and debt buyers rush back into crypto bitcoin. Here's a point of 10 percent but still trades lower than at any point since December 2012. Well good morning everyone and welcome to Bloomberg Surveillance Early Edition on Francine Lacqua here in London. Now all but five stocks in the S&P 500 tumbled yesterday. The benchmark posted a more than 20 percent loss since its January peak. Crossing it into a bear market. Asian stocks extended the sell off this morning as investors

continued to process the possibility of a more rapid. Fed tightening. Now it's been enough for some to resurface scary memories of the global financial crisis. More than a decade ago. Here are some of the reactions from our guests to the broad market sell off. This week is fraught with peril. Inflation is really the Achilles heel of risk markets. Markets are reacting the way they are because they believe the Fed is going to be forced to get more aggressive than they had expected. I certainly don't think that a 75 basis point hike is out of the question even though there might be an initial sell

off on a 100 basis point. I think there'd be a subsequent rally because the Fed is finally getting hold of the narrative which it certainly has lost over the last year. This is a time to be selective but I wouldn't sit on my hands. There are opportunities in the areas where one can position pockets of stocks that have been proven. Europe looks good to us. China looks good to us. The credit space in the US looks good to US equities in general specifically in the US. I'm still pretty

cautious here. It doesn't have to be all about the US because I still think we've got some wood to chop with respect to the macro and policy outlook. Now more on the markets with Christian Will The Greaseman. He's Golden Sachs International managing director for Portfolio Estrogen Asset Allocation and he joins us now. Christian always

great to speak to you. Thanks so much for coming on. I don't know how many traders were hiding under their desk yesterday but I'm sure a large part of course suffered some huge losses because of this huge repricing. What happens to markets from now. Yeah listen I think you heard it in the comments earlier. There was a hope that we are getting closer to peak inflation but I think inflation risk is still dominating and inflation risk matters from two perspectives for markets right now. On the one hand we are kind of reversing a valuation equilibrium equilibrium we built over the last 20 years where this low flash and as low inflation has allowed equities to trade at higher multiples especially longer duration equities. So that's coming a bit out of the market. But at the same time the monetary policy tightening process which is accelerating now and our

economists are expecting a 75 basis point hike at the meeting. And I think the market has shifted that very quickly. I think that that date also triggers recession risk. So markets have to deal with both of those issues. And that also means that multifaceted portfolios like 60 40. This type of balanced portfolios they kind of feeling it on both sides known. And you have like big drawdowns. Yes. Chris you actually were speaking to BlackRock at Scottsdale

a bit earlier on. He said there has not been a worse time to engage in that 60 40 portfolio. Let's have a listen to what he said. It's also the worst year for a 60 40 or 50 50 portfolio of know the last 30 years. And so that obviously is going to move people into a more defensive position. So you agree with that

Christine. Well you know it. I mean we've written a research note called the Balanced Bear end of last year where we kind of made exactly that point that these portfolios are carrying much more risk when there is inflation. Bonds cannot buffer equities and that is negative feedback loops of from bonds to equities where I always say like in the last 20 years it was primarily growth volatility that drove rates volatility whereas this reaction chain has now reversed. Now rates volatility is driving growth volatility. So to fix that problem what we've been advocating is that you focus on more short duration assets both within asset classes but also across assets and you focus more on real asset allocations like infrastructure commodities real estate gold and anything that kind of can protect you from this high inflation.

Kristen how would you describe yesterday and there is this market rout. You know we've been speaking to traders all day and they were saying in some parts of the markets rally the bond rout. What we saw for example crypto going haywire in terms of market function held up. But a lot of the moves reminded them of what happened in 08. Listen. I mean if you have such a large decline in equities you definitely are reminded of the worst of times in equities. No

but I would say that the type of VIX spying the type of kind of capitulation metrics we are tracking is not really at the kind of crisis levels where you could say that we have complete capitulation. And I think our risk appetite indicator as well which kind of tracks how foolish or bearish investors are across assets. I think that was roughly neutral going into this and has shifted negative. But it's far from these kind of bond levels where we would really say that market functioning and capitulation is an incredibly extreme. So I think I wouldn't necessarily say that what we've seen yesterday now creates a huge asymmetry where we can say that markets cannot fall from here because that's clearly always what what people are hoping for that you now have seen that capitulation and you can move on. I think until the fundamental picture improves you're likely

to see those stay in a bit of a volatile period. How much you worry about liquidity. This is I mean we look at a few metrics like the top of book depth in the futures markets has been pretty low year to date. And and I think generally like if you look at kind of liquidity metrics and fixed income space I think all of them have been a bit lower. But that also reflects the uncertainty and the volatility. So I think like liquidity to some extent exacerbates

fundamental moves but it doesn't create always and necessarily like new fundamentals if that makes sense. So my sense is yes the liquidity might exacerbate moves right now. But but I think it's not that unusual to see lower liquidity if you have so much uncertainty. Currently I mean you have to consider rates volatility and the swaps market is priced to all time highs and the front end nearly. I think you're dealing with a lot of uncertainty. So I'm not surprised that market makers are kind of

a bit more cautious. Christian how do you see that the interest rate hikes actually evolving. First of all why would the Fed take the chance of disappointing or not going for a 75 basis points this week given its already priced in. Get it was a weird kind of communication time line but I think our economists now think that with the kind of newspaper articles you had yesterday that the highest probability is that you do get that 75 basis point hike at the next meeting and another 75 basis point hike after that. And I agree with you. I

think that the Fed has gone a bit with that shock and awe kind of technique. You had that CPI print. You have the University of Michigan inflation expectations as the likely trigger. So I think you know obviously the market reaction has been aggressive. And the question now is if that changes the fats outlook for kind of the effectiveness of what they're trying or want to have to do. But at the margin you could argue that it's not been that extreme in terms of like the broader picture the tightening of financial conditions. All right Christian thanks so much. Christian Miller Greaseman Goldman Sachs International managing director for portfolio strategy and asset allocation stays with us. We'll

talk about European bonds. We'll also talk about currencies around the world. Coming up the Bank of Japan has accelerated its planned bond purchase operations and included longer maturities where yields are stiffening amid a global debt round. We have more on that story next. And this is goodbye. Economics finance politics this is Bloomberg Surveillance Early Edition and Francine Lacqua here in London. Now the Bank of Japan accelerated its planned bond purchase operations that included longer maturities where yields are steepening amid a global debt rout. The central bank bought two point two trillion yen worth of government notes through its fixed rate operation.

For more on all of this we're joined by Bloomberg's senior Asia economy reporter Michelle Roscoe. Michelle thank you for joining us. So first of all what makes the big decisions so complicated. Well Francine this is Japan is one of the countries that we've been looking at as one of the big ones alongside China. That's just going against the grain right now is increasingly

complicated in terms of their central bank decision. Of course as you mentioned they they announced this afternoon the scheduled operation they boosted five to 10 year debt purchases as well as that unscheduled operation on longer term maturities. What we're seeing now is investors you know perhaps seeing this as as a modicum of stability in an already wild week but something that's increasingly seen as untenable especially in the longer end. I mean what we're seeing here in a world where

you know the Fed is poised to perhaps surprise the hawkish side it's only going to put Japan further out in the cold. But it's increasingly complicated. I mean we look at the history here of course of decades long deflation and secular deflation. You know of course the VHA is going to want to see a little bit of inflation here and there but increasingly untenable path of the way the consumers and businesses are responding right now. They can't they can't all be the perspective that your neighbors have right now in terms of having seen the worst inflation behind us. Yeah it's pretty incredible. You know it keeps you busy. VOA Holding. Of course it's a widening policy gap that's roading. Yes. Michel. Thank you Michel from Moscow there. Joining us from Japan now still with us is Christian Miller Greaseman Goldman Sachs International managing director for portfolio strategy and Asset Allocation Allocation. Christian if you're. Yeah I mean the currencies at the moment are extremely volatile. So is it

like catching a falling knife. Well I mean we know the only currency that has really decoupled as a bit of a safe haven and has essentially a central bank behind it that is fighting inflation in a somewhat credible way has been the dollar. And and I think we have to acknowledge that the type of increase in real yields yesterday in the US has been remarkable. I mean the tips yield has Canales now kind of 60 70 basis points I think on a global basis. There's no other kind of longer dated bond that offers you that type of real yield in at least in developed markets. So it feels to me that you know the

dollar has been the key safe haven and it's very tough for any other effects to stabilize against that right now. Christine where do you see the market actually how do you see the market pricing in the risk of a recession. Is it something that they're completely discounting when it comes to U.S. markets right now. Yeah I mean it's always difficult to disentangle the pricing especially right now because if you look at equity drawdowns they're both reflecting as I mentioned earlier a bit of a valuation D rating because of this higher inflation volatility does high inflation level. But then at the same time they're discounting a bit of recession risk. So so it's not so easy to

two to necessarily extract the pricing. We're looking at the yield curve of course which has inverted again. So that sends you a signal that recession risk pricing has picked up. We're looking at cyclicals versus defensives when that with an equities death and pricing a bit of an elevated probability of a recession or a sharp roll slowdown. And of course what we are starting to see is that credit and the VIX as metrics have started to to kind of describe this called higher recession risk again. So I think we're moving closer again to the recession scare which we've had a few weeks ago in terms of the pricing. I don't think you're past that yet in the sense that markets are pricing more resets of recession risk than a few weeks ago but we're getting there. I think markets are definitely getting more nervous maybe than than when we were

last having a recession scare. So Kristin what's the terminal rate for actually interest rate hikes in the ISE. Listen I think all economists have been at three and a half and I think with that down they'll be low or where market pricing is shifting to which is closer to 4. And they've been writing that yesterday as well. They feel like now we're getting to a point where market pricing is actually moving beyond what is needed to slow down the economy. So to your point I think you should probably be worried a bit more about recession risk compared to a month or so ago. I think at least all economists would be based on based on that statement. What do you do with some of the periphery bonds that we saw a pretty big move. I guess you call it a big test when it comes to Italian beauty please. Trying to you know I guess the market

wants to know the ECB is resolve and dealing with fragmentation. That's right. I think like the big difference you kind of have right now is that the ECB has already said that they're planning to introduce a sovereign backstop to deal with fragmentation risks. But we don't have the details. And without the details the market needs to price some type of probability off of something with that backstop going wrong. The backstop having some conditionality having something attached to it that that might not be as market friendly. So so so I think that means that the the volatility of BGP spreads

is likely to remain a bit high until we have those details. Having said that one has to say compared to previous stress episodes in an EU euro area sovereigns it's pretty limited. Distress. And you also have to look at the spillovers. If you look at banks I think of course in aggregate they've done very poorly and as a bigger concern on bank's loan loss provisions et cetera with regards to recession risk as well not just sovereign risk. But what's really interesting is Italian banks for example

have not necessarily underperformed euro area banks a lot. So it doesn't seem to be only related to to Italy and sovereign risk that you've seen that sell off and banks. So Christian what would you. Is there anything that you would buy either in the equity space or elsewhere in Europe right now. Yeah. I mean to me as I said earlier on the asset allocation we're currently overweight commodities overweight cash and and in the kind of risky assets space we would really focus on real assets and shorter duration assets. I think in Europe that means to me a big opportunity in infrastructure. I think there's a lot of interesting infrastructure equity that have proven to be quite defensive year to date and what we're dealing with. Because if you think about it a real asset doesn't necessarily have to de rate on the valuation. If you have high inflation

risk because the cash flows are real. So the valuations are less at risk. If you own an infrastructure stock and we've seen that yet today that really decoupled and generally a focus on these areas high dividend yield stocks a bit more quality which is short duration a bit less exposed to recession risk. That's kind of where we would look at in Europe right now. Christian as always thank you so much for joining us. Christian Miller Greaseman Goldman Sachs International managing director for portfolio strategy and Asset Allocation. Now let's get straight to a Bloomberg business flash. Here's Angel Feliciano. Hi Angel. Hi Francine. Two giant Wall Street banks are said to be withdrawing from

handling traits of Russian debt. That's in response to the Biden administration's surprise announcement last week that it's banning U.S. investors from scooping up such assets. Bloomberg has learned that JP Morgan Chase and Goldman Sachs were still matching sellers who wanted out of the DAX with interested buyers. This month the U.S. Treasury is Office of Foreign Assets Control has said investors in the U.S. aren't allowed to acquire them. Sources tell us a joint venture between Paramount Global and Reliance Industries has snatched online streaming rights to the Indian Premier League cricket. The result is a blow to disease streaming ambitions with the sport seen as a big contributor to global

growth. After a bidding war Disney did secure broadcast rights for TV. Each deal is said to be worth up to three billion dollars according to media reports. And the biggest operator of London's commuter trains an iconic double decker buses has accepted a six hundred forty eight million pound takeover bid from an investor group backed by Australian rival Kinetic shareholders. Go ahead. Will receive a total of one thousand five hundred pounds per share in cash. That represents a 24 percent premium to go ahead closing price on Friday. A pause in withdrawals from crypto lender Celsius is sending fresh shockwaves across the digital asset market. The key player in decentralised finance halted withdrawals swaps and transfers after weeks of speculation over its ability to deliver yields as high as 17 percent. Cryptos are still reeling after the recent implosion of the terrorists. They coin and that's

your Bloomberg slash Francine Angel. Thank you so much. Angel Felicia I know they're in London with me now. Coming up digital drive. We take a closer look at the crypto sell off triggered by that surprise inflation reading which hit before your high. We also look at Italian yields. The biggest concern out there is of course this lack of clarity on how the European Central Bank will deal with rising borrowing costs amongst all the region's riskiest. That of course has seen for example Italy's benchmark yield rising a shade above 4 percent for the first time since January 2000 and 14. Now it's just below that price point. This

is a Bloomberg. Economics finance politics this is Bloomberg Surveillance Early Edition and Francine Lacqua here in London. Now the value of the global crypto market has slipped below one trillion dollars. Bitcoin dropped to an 18 month low in the NAFTA index after 23 percent decline. Popular and hefty collections have been hit hard as inflation proves to be even trickier opponent to beat than expected. Now let's get straight to our crypto reporter Emily Nicole in Zurich. Emily you're an expert in this. So what's going on in crypto right now.

So as you mentioned we've definitely see a large market rout over the last day or two. Crypto prices have been plummeting. Bitcoin values those 20000 that its day. But it's also stabilized somewhat pared back those gains this morning too. And it's not just Bitcoin as usual. It's all of the assets we're going at once. So theorem is also falling. Some of the old coins were struggling too and you mentioned entities. So we're definitely feeling the pain for investors across the board right

now. So how is this different to the crashes we've seen in the last couple of months. So what we saw last month was a crypto crash that was sustained by the collapse of a project called Terror. That was a staple claim project that was upheld as one of the biggest experiments in decentralized finance and that came tumbling down. And this month the thing that we think is triggering is not just the overall concerns that every investor is feeling in prostitution or finance about interest rates and things going on with the Federal Reserve but also some impact from stuff happening in crypto too. Over the weekend there is a project called Celsius that uses a staked version of a theorem to prop up its its activities and that suspended withdrawals for investors. We've

sent some panic spirals going through traders because you know if you think about what would be the early warning signs for the previous collapse that's kind of what they're hoping. They think they're seeing here. And that definitely cause some contagion across crypto assets. Is there an end in sight for this. You know how should we look at what could happen next. So if we look ahead to what we think might be coming for crypto prices in the next few days there's some element of stability returning this morning but it's definitely extremely volatile and we're not too sure you know where the market pain will end. However what we are looking for at least from that crypto project I mentioned Celsius is a little bit of confidence from them as to whether or not they might go to restart activity. And

also looking ahead to this broader thing that's happening within crypto called the merge. It's an upgrade for their theory of network. That's sort of what's compounding the problems for sources at the moment. And if we see any signals that that upgrade is going well that might also help boost investment investor confidence in the market. Emily thanks so much. Emily NIKKEI there from Bloomberg Crypto. Now let's also go back to the markets. We did start the day on a

higher note when it comes to European stocks a lot of that enthusiasm or that stability starting to fade away. If you look at U.S. equity futures they did rebound. Treasuries still snapping a four day sell off after this market rout driven by expectations of sharper Federal Reserve interest rate hikes to fight inflation. But the opening bounce in Europe stocks six hundred then quickly faded. In fact I'm looking at the gauge. It's hovering around a one year low suggesting that concerns about aggressive monetary tightening have not completely eased off. And bond yields also in most of Europe were steady gilt gains after data showed in the U.K. that spending power of households plunged as inflation eroded wage increases. Bloomberg

Surveillance EARLY EDITION continues. In the next hour with Matt CAC and Anna. This is Bloomberg. This week is fraught with peril. Despite all of these leading indicators we have not seen the central banks blink. The Fed doesn't have much reason at this point to slow the pace of rate hikes. If they're going to do 75 it's better to do it sooner than later. We can start to sort of look for areas of the market now that have been de risk. The markets are performing incredibly well. There's a ton of liquidity in the market. There is a lot of

transparency in the market. This is Bloomberg Surveillance early edition with Anna Edwards Matt Miller and Kailey Leinz ISE. It's 10:00 a.m. in London 5:00 a.m. in New York and 5:00 p.m. in Hong Kong on this Tuesday June 14th. Our top stories today. European stocks and U.S. futures breathing a little easier following yesterday's mayhem. Investors seeing a pocket of calm after the S&P 500 plunge into bear market territory. Did markets

say one. Hundreds markets start pricing in even more dramatic hikes by the Fed. J.P. Morgan sees 75 basis points but describes a full point hike as a non trivial race. And the crypto chaos shows no sign of letting up. The market sank below one trillion dollars. Bitcoin continues its descent while the fortunes of crypto billionaires vanishing as quickly as they were made. Welcome to Bloomberg Surveillance Edition. I'm Ana Edwards in London with Matt Miller and Kailey Leinz in New York. And Kelly the conversation continues over just how big the hike from the Fed is going to be. Then tomorrow that feels like the big question hanging over the markets. And in that context you have to wonder how quick how soon will

the turbulence return. Yeah. Have we seen a bottom yet Anna. Is that what we saw yesterday full capitulation or does this sell off have further to go. These are all questions that we're still looking for answers to. Of course it wasn't just US stocks that fell into a bear market yesterday. It was global equities. And you saw a little bit of that continuing in Asia. Overnight though Asian equities were able to close off of session lows. You still have the MSCI Asia Pacific index down by nearly a full percentage point. And of course it hasn't just been equities selling off as we reassess not just Fed expectations but global central bank expectations. We've seen massive selling pressure in bond markets around the world and that definitely continued

in a massive way in Australia overnight where the five year yield was up. Thirty one and a half basis points three point sixty five percent is where we traded the moment. That is the highest going back a decade to March of 2012. You also are seeing the Japanese JCB yield falling below 25 basis points because the Bank of Japan is maintaining yield curve control buying more bonds keeping policy easy trying to maintain that upper bound no matter what the cost is apparently of the Japanese yen because the Japanese yen right around those 1998 weak levels against the dollar amount we're trading right around 130 for 21. Yeah. Continues to be a fascinating story out of Japan here in the U.S.. We officially entered a bear market

yesterday. We're down twenty one point three percent year to date. Right now you see futures bouncing a bit after that big move down really three big 2% plus 3 percent plus down days in a row. So maybe we get a little bit of a recovery today. We also look like we're going to see a little bit of a recovery. We are seeing a little bit of recovery in yields. We were up to 337 at the highest level and that is a record the most since two thousand eleven. Right now we're back down to 330 still at 2011 highs and I'm crude up just about 88 cents right now 120 180 barrel. Remember yesterday we started the session off with crude

down on Covid locked down concerns out of China and then it turned around and rose today at the end of the day really exacerbating the market pain bitcoin. Speaking of market pain you know it dropped yesterday to twenty one thousand. Right now it's at twenty two 617 but getting very close at Evander Volpe points out. We're gonna talk to him a little bit later to the highs that it reached during the last housing. And if it falls below those highs it's going to be something new for Bitcoin. OK. It's only 10 years old but very interesting stuff. We'll talk to you about that later. Yeah. More from Andy on that subject later on. Let's get to the European equity markets. And this is the picture we have for you right now that European equity markets

fairly flat. A little bit of respite a little bit of a digesting really what's happened over the last 24 hours or so. Such has been the pace of the rethinking of expectations of hikes from the Fed and to some extent other central banks around the world. So we've got a pretty mixed picture up makes flats slightly negative actually increasingly so. Perhaps the CAC is down half a percent now. The DAX down one tenth of a percent. We just got the steady W investor sentiment data out from Germany. It was in negative territory. It didn't seem as if it was say much of a game changing number. But we'll keep an eye on that of course

given sentiment as fragile as it is perhaps. We did see some gains in some sectors today though and energy stocks to match points about a higher energy and oil price oil price. That's a sector this benefiting. We also see banks rebounding a little bit from the lows of yesterday. So just as we saw Italian banks beaten up by concerns around fragmentation some of these Italian names gaining today and well up by one point four percent. That's also in focus as we look at what's going on with the euro dollar. Interesting that the euro seems to have detached itself from the global interest rate narrative over the past few days

post the ECB. There was a lot of talk about ECB rate hikes of course to come and more hawkish policy. And what that would do to the periphery of Europe. But that did that's into that seemed to weigh that peripheral fear would seem to weigh on the euro rather than expectations of types of policy support. The euro today we see a little bit of a rebound from those recent lows. And certainly a rebound from the strong dollar that we saw in yesterday's session. Italian TV yields a little bit calmer than they were yesterday. We still see action in the two year parts of the curve of course and we still see a lot of focus on this. We're going to hear from Isabelle Schnabel of the ECB a little bit later on. What will she have to say about fragmentation

risk. And that's what this is a French tech business. I put this in here and they're talking today about restructuring of the business and they've announced that the CEO is going to depart. That comes as a surprise to investors in the stock was down a lot more than this now down by 16 percent. Yeah. Still a massive move. We'll continue to pay attention to that throughout the day and ask for what else is ahead on this Tuesday. Biden is traveling to Philadelphia Pennsylvania to deliver remarks at the

twenty ninth AFL CIO quadrennial convention. He's going to be talking about the power of the American worker. Then in terms of politics U.S. primaries are held in Maine Nevada North Dakota and South Carolina today. And then on the economic data front we'll be getting us PPA data at eight thirty a.m. New York time. And several economists might say this is the one to pay attention to. It may be even more important than last week's CPI. All right. We'll be paying very close attention to that actually. Neil Dutta wrote a note about that. We'll talk about it a little bit later. Right now pockets of Wall Street are

raising the possibility that the Fed could consider the biggest interest rate increase since 1994 when it meets this week with some predicting a 100 basis point hike including Wharton School finance professor Jeremy SIEGEL. He spoke on Bloomberg yesterday even though there might be an unusual sell off on a 100 basis point. I think there'd be a subsequent rally because the Fed is finally getting hold of the narrative which it certainly has lost over the last year. SIEGEL also spent some time running the shadow Fed. Now economists at major Wall Street firms have been quick to change their calls. Critic Gupta Bloomberg Markets correspondent joins us now to tell us about you know everybody's seemingly trying to

go higher and higher. Everybody I mean remember we've been here before where the market is getting ahead of the Federal Reserve to some extent. The fear here is that that's going to happen again. Take a look. In just the last 24 hours you had JP Morgan Goldman Sachs Evercore all come out say 75 basis points. Is their new base case scenario of course is following a report

from The Wall Street Journal saying that this actually could very actively be considered in the meeting. And of course we know Nomura and Barclays and Jefferies had already made that call for 75 basis points as well. But what's important here is the read through because we know the market has already been pricing it aggressively since Friday a CPI report that was extremely high. Consumer sentiment at record lows once again. But the read through here is recession risk. At the end of the

day can the economy really digest a 75 basis point hike. And that's really going to be the concern. Look into the markets beyond Fed swap spreads and you're actually seeing that the Treasury curves the twos tends to fives 30 the ones that we like to look for recession risk. Well it's flashing that signal once again. It tells you you can't. Well there is worries actively in the market. Can get economy actually digest that. Well you mentioned that J.P. Morgan. Michael Crowley is one of those calling for 75 basis points tomorrow. But he said the risk is non-trivial that they actually move 100 basis points would be which would be in line with Professor SIEGEL. Interestingly though in a strategist over J.P. Morgan very

closely followed pretty much always bullish Michael Barr was out saying that we think it's going to move 50 basis points. And he's basically went on to say that the rates market have is overdone this pricing that the Fed is going to raise rates delicately and well maybe that is true as well. He says that the Fed will surprise devilishly relative to how what is now priced into the curve so greedy. If the market has overdone this and given the moves yesterday not just in the bond market and the equity market as well where only five stocks in the S&P 500 were positive yesterday. Have we seen capitulation. Was that the big washout cathartic puke as some call it. Now we're done. Well cathartic CAC. That's quite the statement. This is interesting when you when you talk about the different ways it could play out because the assumption here

the consensus is that if you do get a 75 basis points or 100 as it is starting to seep into the conversation is that that would basically be the straw that breaks the camel's back. That would be your signal capitulation. But there is an argument in the market that you'll see the opposite and there'll be a sigh of relief in the market off the back of say 75 basis points or 100 front loaded. Basically all the pain goes out in one go. And essentially I think there's a phrase Mary Poppins phrase a spoonful of sugar helps the medicine go down. Something like that is Anna knows it well. That is correct Chris. Yes. I can't confirm the correctness of that segment. Thanks very much Peter Pace. Chris. So whether we've seen capitulation in these markets have we seen any capitulation on Bitcoin. Let's talk about crypto. Bitcoin delivered another white knuckle ride to say dropping 10 percent before paring much of that slide. Still down 2 percent. Some

change that says speculators struggle to price in the prospects of even bigger Fed hikes and even develops a property that monkey's like team has been following the action. And he's with me. I mean it's a wild ride isn't it. Tin hat kind of stuff I suppose that some people might call it. Twenty two thousand is the handle on Bitcoin now Eddie. Well we got to one they said. How much further does. Yeah absolutely. I think you know the real capitulation here started with that CPI reading which which just shows us that Bitcoin at the moment is a very much a risk on asset and is liquidity driven. And as the liquidity drains out of the market you know I just the headwinds for crypto keep growing. Hey Eddie thanks so much for joining us. We're gonna be

talking about this obviously all day long and I'm going to be using your chart as well. Later on Bloomberg Crypto. That's at 1:00 p.m. New York time 6:00 p.m. London. For more on the crypto chaos Caylee and I do it every week. We'll speak today to an investor who's been sounding the alarm on Celsius as well as one of the first Wall Street crypto analysts Nick Carter of course. Now of Castle Island Ventures. Let's get back to the DOJ ramping up the defense of its policy framework after yields came under renewed pressure upward pressure. Our chief Asia economics correspondent Enda Curran has the latest on the Bank of Japan

ENDA. A very aggressive intervention in the bond market today but it was on schedule as it came in to buy five and 10 year dated bonds and what this underscores is how committed Japan's central bank is to supporting its economy to keeping bond yields low. And that's a very stark divergence from where the Fed is out for example. And even though inflation in Japan is increasing the authorities there are pinnin

2022-06-16 12:18

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