'Bloomberg Surveillance: Early Edition' Full (10/12/22)

'Bloomberg Surveillance: Early Edition' Full (10/12/22)

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This is Bloomberg Surveillance early edition with Francine Lacqua. Well, good morning, everyone, and welcome to Bloomberg Surveillance Early Edition and Francine Lacqua here in London. Here's what's coming up on today's program.

Standing firm is the Bank of England rich rates plan send its emergency intervention on the bond markets on Friday. That follows uncertainty in the markets after conflicting reports over whether Governor Andrew Bailey would extend the emergency deadline. We'll speak to the NatWest Group chairman, Sir Howard Davies, later this hour. Plus, recession risk.

President Biden admits a downturn is possible. The president also says Saudi Arabia will face consequences for the OPEC output cuts. Now, first thing is first, it's all happening on the markets and certainly all happening in the U.K.. Now, we did have confirmation about 20 minutes ago that the Bank of England will go ahead and stop bond purchases on Friday. A lot of people saying this is a mistake. It's a gaffe because we're not 100 percent sure where the market can handle it. Others saying, look, maybe they see

something out there and it's the right time for them to work through it. The pound actually swinging to a gain one. We had that financial report. Also, Billy, officials saying that they could be a lot more flexible. So for the moment, Sterling actually at 1 0 9 18, the U.K. 30 year yield. Remember, this is the reason why we had quite a lot of movement and worries about margin calls on pension funds. Curly up 4 8 7 8 dollar index.

It is also dollar strength story. And when you look at European, stocks are pretty much unchanged. Maybe a little bit on the lower side. S&P 500 futures gaining some four tenths of a percent. But I would really watch these two things very, very closely when it comes to European map. We're seeing quite a lot of red on the

screen. I was looking at the industry groups that make up the 19, S&P 600 and there is almost losses across the board with, for example, the footsie down two tenths of a percent. So the Bank of England has confirmed an end to the bond buying program on Friday. In an emailed statement that's after the

FTSE reported this morning that the central bank was privately signaling to bankers that it may extend buying gilts. Now, the governor, Andrew Bailey, spoke in Washington yesterday. We've announced that we will be out by the end of this week. We think the rebalancing must be done. My message to the funds involved and all the firms involved in March, those funds. You've got three days left now.

You've got to get this done. Because, again, part of the essence of a financial stability intervention is that it is clearly temporary. Joining us now is Dan Hanson. He's senior, you take on this that Bloomberg Economics and Christine Aquino from our markets team. So thank you both for joining us Christine. I mean, the markets were really whipsawed as we try to understand what the Bank of England is trying to tell us.

And it's clear that now they want the program to end on Friday. Is that a mistake or do they actually think the market can work through this? Well, Francine, I think as we spoken about before, the mistake here is probably delivering that absolute message that they are definitively ending it, because, as you mentioned, we don't know the market can handle it. And what happens if, in fact, they need to U-turn back on themselves and say, actually, hang on, we're going to have to do another round of intervention or maybe extend this current one? And you know, that all really just goes back to the question of killing markets, trust the beauty to ease at least the acute and imminent pressures that we're seeing in the market with this sort of development recently. It seems like more and more the answer is maybe no. And this is a market perspective, but then from a purely economics perspective. So it's also Bank of England saying, look, we've become now very political because this this bond rout was basically started by the mini budget.

And it's philosophically difficult to keep on buying bonds when you're raising interest rates. Is that the message they're trying to get? I mean, that's absolutely right. So I think what the bank is trying to steer clear of is linking what it's doing to this fiscal statement that we've got on the thirty first of October in particular. And we've got that date as well as key investors, investors minds, because that's when the bank has said it's going to start Kutty active gilt sales as well. So there's a lot going on at the moment. And I think, Bailey, one thing that is

on his mind is to is to this idea that monetary fiscal interaction, fiscal dominance, but also the fact that we do. He's doing this in the Bank of England is doing this QE, and it's pushing against the idea of reining in inflation. They're doing QE, but they want to raise interest rates as well. And that's really just within the bank,

forgetting the fiscal side. That's a big tension that he's trying to step away from. If we take a step back, what's the role of central banks? I know again, this is called a gaffe. And it kind of brings us back to Christine Lagarde, you know, made that gaffe and saying we're not here to close bond spreads, but is they look at financial stability that look at that 2 percent inflation target. Should they be really worried about the bond market right now and keep the option open because it doesn't focus the mind of bond traders? Yeah, I think that really is it kind of like focusing the markets on whatever it is that they're trying to achieve at this particular point in time.

I mean, as Dan was saying, the overall trajectory and the ultimate goal of the Beazley was meant to be fighting inflation and they were on that path with the multiple rate rises that we're seeing and probably are about to see. But then there's this sudden kind of shift toward the financial stability issue, which is more kind of in your face and more acute, but that's also part of their responsibility to address. But again, Governor Bailey was very insistent this is temporary. And the support that they're providing

is the matter of whether bond markets are kind of, you know, do they have the same definition of temporary? I suppose the big question then, at the end of the day, are they there to kind of help out bond markets no matter what? Well, I mean, if nothing else, that is yes and no. I mean, in the sense of the financial stability intervention that they've done, it's very specific. It's meant to be very targeted. And he's tried. He's come out and said they were looking

to come up with a targeted measure, but they just couldn't have gone with this blanket approach. But ultimately, the bank is trying to transmit its policy through the bond market to the real economy. So there is a big they've obviously got massive skin in the game with this. I just think what Bailey has said is that he's trying to draw this very fine line between monetary policy intervention through QE, which is blanket buying bonds to get to a big target of bonds and this very specific intervention that he he deems necessary, but also thinks needs to end sooner rather than later and they need to get out of the market.

I mean, you said something that really struck me last time, and maybe they're seeing something that we don't. Maybe they do think because they have their finger on the pulse, we hope on what bond traders are doing. They think that the pension funds can handle this. Yeah. I mean, I think if you look at the press notice yesterday, they made a point that the liquidity position of pension funds and all ISE in particular has improved. And I think they feel or they may have been seeing this improvement there, that they feel that Friday is okay for them to step out. I mean, the big the big thing and

Christine mentioned the big thing here is that it may not be able to ISE that blow. Up next, it may be some other pocket of instability that breaks out. So I think there is something to be said for them on Friday, giving a calming message saying, look, we're exiting, but we're here. If something blows up again, we're going to be here. And I think that's that's probably the

path of least resistance, at least the markets. I mean, the other story is actually going to threadneedle. Halting these withdrawals from a UK property funds about 450 million pounds. Is that significant? Well, I suppose. It's significant in the sense of this is the spiral effect that we're seeing right as an effect of the initial LTI crunch that we saw a couple weeks ago. And you know, the lines from our asset management reporter very much ringing true. Now we're seeing kind of this ripple

effect of various asset sales are rippling across the UK market. And what is that going to do? A damage? Again, it may not be specifically one pension fund blowing up, but then what is that going to look like in other ways? You know, we could see mass just declines in various asset prices, whether it's in public markets or as you mentioned, you know, some of these like property funds, very specific assets or alternative asset funds. We just don't know at this point. But there is that danger of the ripple effect that could once again put the focus back on financial stability and the bank thing that's getting so much flak today really from everyone around. I think Governor Brown is also the front page of The Guardian saying like kind of what are you doing? What are you thinking right now? You know, they were the first central bank to come out and saying, you know, five quarters of protracted recession is possible. They were very upfront about the risks in the markets.

And certainly they kind of warned the government of what we could be facing. When do we know whether this was a good or bad thing? You need to let it play out first or on Friday. Do we say actually this was a mistake? No. I mean, I think I think the real interaction here was with the government and what they say on the fiscal side. So it might be that it looks like a stroke of genius come the thirty first of October if the government manages and it's a tall loss to set out a credible fiscal plan.

But I think what people have really worried about, markets in particular worried about is that two week period that we've got between the 14th and the 30 first. And that's where I think there's just this this desire to have a bit more of a backstop from the bank rather than just exiting stage left and saying that's the end of it. So I think this this will could look like a success. It really could. But it really hangs just as much on the government as it does on the Bank of England.

And that's really where the buck stops, because all of this remember, it stems from the mini budget and that's what needs to do. The fiscal the fiscal plan and the path of fiscal policy and a sustainable fiscal plan needs to be set out. And if that comes, then things shoot, shoot Tom down. Such a good point to thank you both for joining us. Dan Hanson, senior UK economist at Bloomberg Economics, and Christine Aquino from the markets.

Now, coming up, we're taking a deep dive at the private equity sector. I'll be speaking at Pfizer, the co head of European private equity at KKR, about why he's still optimistic about the sector. This is Bloomberg. Economics, finance, politics. This is Bloomberg Surveillance Early Edition and Francine Lacqua here in London.

Now let's talk about the private equity space investment from KKR reports 491 billion assets under management. Now the US company says its European Private Equity Division has deployed 5.5 billion dollars so far this year. Well, my next guest does not believe this is the worst time for private equity, as some have claimed. I'm very pleased to be joined by Philip

Pizer, the co head of European Private Equity at KKR. Philip, what a day to come on. I was going to like having you on UK investments and actually whether you have a very clear strategic plan or what you want to buy, a lot of it is family owned partnerships across Europe with all of this mess in the UK. Does it make you more likely or less likely to invest here? No. First of all, good morning, France. Morning. Great to see you on a tumultuous day like this.

It is instructive to have invested for 21 years, including great financial crisis, because what we do is not look for the short term, but to really think about five to 10 year horizons. And as Warren Buffett says at times like this of disruption, you can grade, you can find great opportunities. So we are we are constructive at this time.

I mean, would you like this to the financial crisis? I guess what we don't know is that in a fairly part boring parts of the markets, something like pension funds, 30 years. I mean, it's meant to be boring. Philip, I don't exactly 100 percent know what happened last two weeks, but you have these pockets of risks coming up where we least expect it. Well, what's interesting is since the great financial crisis, we have had one period of accommodating monetary and fiscal policy. That's changing now and that will not be reversed.

What we saw, this is a new era where accommodation is withdrawn at the same time. We have a significant event like Ukraine. So we are in unchartered territory in that sense. So what does it mean for your investments? If you look at the U.K., again, there's a crossover of living crisis. I don't know whether it means that

certain companies will be distressed and it means that you could come in and and restructure or consolidate or whether you just need to see this play out first. So this is a time of maximum uncertainty for many businesses in Europe. What we have done over the last 15 years in 80 percent of all of our transactions, we have actually partnered with either family companies or corporates or entrepreneurs to help them navigate through that uncertainty with a truly global platform that KKR has in the toolkit that helps them become more international, in fact, cope with this energy transition crisis and become more technologically orientated, which is a big focus in Europe. So this is the time to partner with us and do this. But when you speak to some of the founders or chief executives, what's their number one works? I've been speaking to a couple of people and they say, look, yes, it's a constantly increasing its inflation supply chains, but actually they don't have enough staff. It's difficult to employ people for the

roles are looking for. Well, that's an excellent point. If you think about what Elon Musk says, the largest issue we all have is demographic change. So if you think about the fact that in 2050, one sixth of the world's population will be order than 65 years old. And in Germany, by 2030, we lose 5 million jobs because of that demographic shift. It means we are through this secular change which KKR is investing behind. So ageing societies opens many opportunities in healthcare, but also in technology. If you look at step stone, which is also

bring us largest division. That's exactly what we are investing behind. How much money do you have to spend in the next two years? Where is it from? Globally, we have 115 billion dollars of dry powder, as you have noted here in Europe. We really leaned in doing Covid where we invested 6 billion to anyone. We retrenched a bit because we saw the markets getting very expensive, 3 billion so far this year we've invested 5 billion and you know, we continue looking for opportunities.

I mean, strong dollar help you. Actually, we have these quirky stories about, you know, Americans buying luxury apartments in Paris. Does it help you if you're, you know, can bring money over here? So as a macro point, Europe has never been more attractive. In our view. Now's the time to call. But it's not because of the currencies. We are long term investors.

We're not currency speculators, but it's because of that disruption I described. Now is the time to partner with families and transform their companies. And of course, valuations have come down. What's the biggest mistake of family owned company is which I'd like to remind all of our international viewers. I mean, they can be quite big in Europe. I mean, these are sizable conglomerates. Is it that they're under invested?

Is it that they're not expanding enough? Is that their international strategy or some they are sort of all that the bedrock of the European economy. If you think about Germany, for instance, submitter what exactly? We have three times small family, large family companies relative to GDP than the US and there are long term investors. So in many respects they are like what we do. We think about investments over five to 10 year horizons. What you cannot expect from them, given they have been here for centuries, is to really be at the height of what's happening in the world.

Technology, you know, life sciences, energy transition. So the knowledge that we have globally is something we can help bring to these. European family companies. Do you think there'll be more companies

like that looking to private equity because interest rates are going up and so the cost of funding is more expensive? Well, this is a big trend. If you think about private equity today, it's not buying companies necessarily. It's really helping them solve problems. In addition to that secular trend, yes, the current market environment means that capital, especially in the capital markets, is much harder to trace. So as a result of that, private equity plays a larger role in this regard.

Yes. We're just getting some breaking news out of Haskell of the Bank of England. We were expecting actually quite a lot of Bank of England officials to speak to the answer. Give us a bit more clues. But he's saying that he will not speak about monetary policy today. You're a huge opera fan.

So, I mean, if you look at the U.K., what kind of opera does it remind you of? That's a trick question. On a Wednesday. First of all, it's important as an investor to have balance. I really encourage everybody who does

this job to have something that creates passion in their lives. For me, that has always been music. I mean, I think that Buckner says imagination creates reality. You think about investing is imagining the future. So I get lots of inspiration from that.

In terms of the current situation. Rheingold It's a good comparison. I like that we are going to sell it until the Bank of England. Yes, OK. That's fabulous. Phil, thanks so much for joining us. Philip Fraser there. Go ahead. Of European private equity at KKR.

Coming up, NATO defense ministers are meeting in Brussels as Ukraine continues to suffer at the hands of Russia. So we'll be hearing from the Latvian defense minister, Yanis Gadson. That's coming up next. And this is Burbank. Economics, finance, politics. This is Bloomberg Surveillance, the additional Francine Lacqua here in London now NATO defense ministers are gathering in Brussels for a two day meeting as Ukraine calls for more military equipment. Following a series of deadly missile strikes for Russia, meanwhile, NATO Secretary General Stoltenberg warned this is a crucial time for transatlantic security and reiterated the alliance stands by Ukraine. For more, we go to our reporter, Maria

Tadeo, who is, of course, following the meeting at NATO. He's also joined by Minister Maria. Over to you. Yes, Francine, good morning. And of course, the word here had the

NATO headquarters is escalation after a very terrible week for Ukraine. And to talk about this, we're joined by Yannis Garrison, who is the state secretary for defense for Latvia. And, sir, if we look at the choreography here. You've had the Nordstrom explosions.

Then you have a Black Monday for Ukraine. 84 missile elsewhere were launched against this country on Monday. And today, the Polish say we've detected a leak in an oil pipeline.

In your view? Are we now in a form of hybrid war, even here in the West? Well, I would say on that day when President Putin announced mobilization and he's all started, gee, from that point of view, it's escalation strategy. And I think it's we have to call that there will be even more escalation. And therefore, I would certainly see all actions taken by Russia on that kind of escalation. It's clear that a truck, therefore, also certain in nuclear weapons. So the use of nuclear weapons is part of that.

But it's not this probably is the ultimate, ultimate tool. What Mr. Putin can use and he's been blackmailing. I would put these nuclear doomsday nuclear bookman in for quite the time. Therefore, before he gets to the nuclear

issue, I would say we will see most likely NASDAQ escalations and they would be most likely in hybrid terms. And we have to look very carefully on our critical infrastructure. And you mentioned escalation and potentially attacks on critical infrastructure. So that means, well, the pipelines and anything that has to do potential with Internet, telecoms, communications. But I wonder, just to make it very clear

if that were to happen and you look at Article 5 of need to have a response, how does need to respond to this? Because Article 5 doesn't Islamic a reference to infrastructure? Well, I think this Article 5 is political, a political issue and that the decision will be taken on a case by case basis. And we've seen the evolution of Article 5 specifically, for example, it's this time better. NATO stated theoretically that there might be cases. One cyber attack is viewed as Article 5. And therefore, I certainly would see also that there might be cases when vital interests of states are certain NATO states are threatened and NATO can step in in protecting interests.

And therefore, I would look also very carefully on resilience, how we can strengthen resilience on our critical infrastructure and also as the winter is coming. It's very clear that Putin's strategy is actually to harm Europe as much as possible when it comes to energy. And energy is probably used to his last option to change European views on Ukraine. And that's a very good point as we head into the winter, the idea that pressure is going up.

But just to make it very clear, what you see is you would not be surprised to see if from now to the winter there's pipelines that no longer work. There's perhaps explosions that nobody knows where they come from. That's essentially what you mean. Yes. Because as I said, it's from our own perspective, that is the only way Mr. Putin can affect the situation and turn it into his own favor, because we don't think that he might change the views of Ukrainians because they are already determined and he can't change. Most likely the situation in France also

is a big mobilization because he sees that troops are not trained and. Exactly. Therefore, the only way actually how he can change the station is cut off Western supplies. And how you can do it actually to effect the public mood and I think we're coming into is probably like mustard sauce. Sorto for a night or Europeans. And can I ask you a lot of the words here or the word that gets repeated the most is that Russia has now chosen escalation on Ukraine. He's gone down the path of escalation. That means Ukraine needs more weapons to

defend itself. But I wonder, do you fear that perversely that is going to make things worse or is this the right thing to do? Ukraine needs more weapons even if the fight gets tougher. I think generally we should not probably that it's important to discuss our strategy here at this NATO ministerial. What we will be our strategy towards Russia and also towards Ukraine. Because that if we have any doubts about our determination to help, you can end the problem in Russia over the run, at least partially. And I would say it's been traditional

Russian strategy to escalate and use this escalated set and NATO's effort in the Western countries societies. And if you decide to step back and, you know, give up our principles, then it means that of have one order and therefore, you know that we'll be on the amount of time when you can, you know, one day we'll ask something else. That is Covid, you're not putting started your works. And just as a final question. He has talked about nuclear saying we're not bluffing. If there is damage done to our territorial integrity to Russia, I'm not bluffing. This is not a joke.

Your view, treating this very carefully is as a real manners. And I guess the real question is, do you have the terrors from a need to perspective to stop this from happening? No, I think NATO has a good policy. And also the latest NATO statements and the US statements made it very clear that determined to work with the ISE looking what happened daughter before, probably this will be his last chance. And probably it's a very low possibility that he will turn to a nuclear reference. But still, I would not exclude probably understand that it might not happen because we also did not expect that he might go for a full scale war, that he wouldn't work for mobilization and many other things. But I think, therefore, it's important to have a very strong deterrence strategy. And of course, the war did happen and

unfortunately, it continues. Sir, thank you so much for joining us on Bloomberg. Good to see you. Appreciate your time. That was Yannis Garrison, the state secretary for defense for Latvia. Francine, thanks so much.

Today. They're live at NATO headquarters with, of course, a great interview. Talk about Ukraine and Russia. Now let's get back to our top story. The extreme volatility in the pound and U.K. bond market has put the country's mortgage industry under immense pressure. Now, the average five year mortgage on a fixed rate actually soared to more than 6 percent following the chancellor's fiscal plans.

Now, that's the highest level in around 14 years. Well, my next guest is Sir Howard Davies, chairman of one of the UK's biggest lenders out west. He's also former deputy governor at the Bank of England. So, Sir Howard, thank you for joining us. I mean, I have a million questions. First of on the Bank of England, because frankly, the markets are a little bit all over the place. Many operators saying this is a huge communication blunder from the Bank of England, but also insight they can't.

And these purchases on Friday. What is going on at the bank? Gosh, that's a question surprising me. I thought you'd ask me on to talk about AC Milan's latest defeat. But if that's what you meant to do, I love Chelsea. So we could also talk about football.

But if that's what if the Bank of England concerns you more? Yeah. What is going on? Well, they introduced this facility, which they always said was time limit. And they wanted to allow this pension funds to readjust their portfolio with these liability driven investment strategies. And I think what they are concerned about is giving the impression that they have one foot on the accelerator and another foot on the brake for an extended period of time, because on the one hand, the monetary policy committee at one end of the corridor in the bank has said we are going to go for Q T quantitative tightening, withdrawing support for the market.

And at the other end of the corridor, the Financial Policy Committee, also chaired by the governor, of course, has said, well, we actually are prepared to do some buying. But they clearly define that as being related to particular market turbulence and instability. So I think what Andrew Bailey was saying last night was simply that particular scheme comes to an end and that's what it is for now. Of course, if we have renewed turbulence, who knows? And the central bank will never say never.

We will never intervene. But that's what I think as I read what they're saying at the moment. Are you expecting the markets just to test this and test this and test this until the Bank of England does more? Well, let's try to on public unbundle what you mean by the markets. I mean, this is a fairly specific intervention designed for particular pension funds. Now, that's what he is talking about, bringing to an end. And he's saying those people who are short of liquidity should use this scheme quickly.

There is, incidentally, another scheme that has been announced which is called the temporary expanded collateral repay facility. TCR If they're not got great marketing people in the Bank of England, I think that so the tech for us is open to people to post collateral with banks and the banks in turn to post collateral at. The central bank in order to get cash of all various routes. Now, of course, there are other market

participants who are not directly affected by this, who are just looking at this and saying, look, we don't like sterling assets or we don't like the pound. And therefore I can't rule out and nobody can rule out the fact that there will be sort of knock on consequences in other markets. So how effectively this tool that you're mentioning without the great marketing skills is it's not really a backstop. Is it a backstop on that when the current backstop and for in it on Friday runs out? But it's not necessarily for pensions. It's just for banks to be able to trying to Dani Burger.

No, but it's for perhaps four clients of banks. Right. So we don't need it ourselves, but it's for our clients, for their pension funds. We're not big in this market as it happens, but we do have some clients at that that sort who could deposit collateral with us.

We internal deposit at the Bank of England and we can provide liquidity for them. Not been used so far, but it could be. So is there a danger in the markets over the next two weeks until we also understand what the government's plans fiscally are? And could this be a stroke of genius of the bank saying, look, we stop on Friday because as you say, it's fairly difficult to take away with one hand and give it the other? Well, I doubt if even the governor would say this was a stroke of genius at this point, because nobody knows what will happen over the next couple of weeks. I mean, you're right to point to the fact that the key thing is some certainty about the government's fiscal policy, and we're not going to get that until the end of the month. So I fear that the next couple of weeks is going to be a bit of a rocky ride. Maybe people can hope that everybody gets to the IMF.

The government is already there. I'm off this afternoon. You know that people will start to focus on global economy and big issues in the U.K. will participate in the background that be nice to hope. But do you think they will? Or do investors shy away from the U.K. for almost years to come because of what we've lived through in the last month and a half? Well, we'll see. You know, investors are driven by the possibility of making some profits at the moment.

They say many of them UK is too uncertain. I've heard people bandied around. U.K. is on investable at the moment or words that investors like to use.

But, you know, they will look at. But it looks as if we're having a sort of repricing of U.K. assets via the fall in the exchange rate. At some point they'll be attractive to

people again. But at the moment, it's a bit difficult to taste people into U.K. assets and we're seeing that in the fall in the equity market. When do you think the U.K.

will be attractive again? I mean, I've heard investors say, well, this is behaving like an emerging market, getting the hell out. Well, I think the key thing is whether the fiscal strategy that is produced at the end of the month is one that is credible. And then what happens to the U.K. economy?

I mean, at the moment, we're the only one who hasn't got back to pre crisis levels, which is unusual. Some of that's Brexit, I would think. So I think there'll be two things. One, in the short run, there'll be there's the fiscal strategy credible. And then secondly, as you know, in the impending recession, I think everybody now pretty much expects is the UK hit worse than other people or do we just sort of ride down with the crowd? Do you think the credibility of the Bank of England is really at play now or again? They've been dragged into this political mayhem and it's difficult to see a way out. The bank has been played into a very difficult position, I think, as a result of this hiatus, if you like, in policy making.

And so, you know, they're left holding the baby, so to speak. And so I have quite a lot of sympathy with the bank. Maybe I as an ex deputy governor, you'd expect me to say that, but I do, because I think they are trying to hold things together as best they can in a in something of a policy vacuum. And that's never a great place to be for a central bank. Where do you see the UK headed

economically? So you have very recent data at NatWest trying to understand how it how consumers are spending, what mortgages are doing. Yes. Worry about the most. Well, you know, one of the things that does concern me is that I think we have been talking ourselves into a worse state of mind than perhaps we are. You know, if you look at the good side, you've still got rather full employment. Some of that to do with what's going on in the labour markets is tricky. But we are still seeing people with a lot of deposits. Deposits in our bank went up last week.

I mean, strangely enough, we're still seeing strong spending on holidays and leisure spend. This is strong. We're not seeing very much in the way of distress among consumer borrowers. Mortgages are still available. They're at a different price, which obviously is not welcome to people, but they're still available.

So I think we're at risk of talking ourselves into a worse position than we than we are. You know, this is not yet looking to me like a very steep and deep recession. It's looking like an adjustment to a an unfavorable development in the terms of trade, because energy prices have gone up significantly and we are having to adjust to that. Sir Howard, thank you so much. We'll have plenty more from Sir Howard Davies, chairman of NatWest Group. That's coming up shortly.

Bloomberg. Economics, finance, politics, this is Bloomberg Surveillance early edition of Francine Lacqua here in London. Let's get straight to your Bloomberg business flash. Here's the Hungarians highly on Hi, Francine, LVMH. SALES have jumped despite fears of a

global recession with the world's biggest luxury group benefiting from wealthy American tourists shopping in Europe. The owner of Louis Vuitton and Christian Dior reported third quarter sales of fashion and leather goods up 22 percent on an organic basis. Now, Intel is said to be planning job cuts, possibly in the thousands as it looks to lower costs and cope with weakening demand for personal computers. Greenberg understands the layoffs could be announced as early as this month.

Around the same time as the company's third quarter earnings. Now the U.S. Justice Department is investigating whether Credit Suisse continue to help clients evade taxes years after it pledged to actually tackle the issue. The latest probe comes eight years after the bank paid a two point six billion dollar settlement in the US. Credit Suisse denies any improper conduct and says it is cooperating with authorities. And that's your Bloomberg business flash. Francine.

Leon, thanks so much. Gillian Gibbons there with the First World News now. Let's get straight to Sir Howard Davies. He's chairman of NatWest Group to talk about mortgages, the U.K., the Bank of England and of course, the gilt markets are. Howard, thanks so much for staying with us. We were talking a little bit about some of the refunding while refinancing plans of the FBI and pension funds. Do you worry about, first of all, of

money going into even more into shadow banking? You know, a space which is unregulated? And is that where the next crisis is coming from? Yes. It's not totally unregulated because the Financial Stability Board has done a lot of work on trying to get out the shadow banking sector via funding from regulated entities, the banks, et cetera. But undoubtedly, there is a lot of maturity transformation that goes on inside the shadow banking sector. That's inherently risky. The squeeze on banks via ever increasing capital ratios gives people an incentive to go to shadow banks for credit because it can be cheaper.

But of course, they fund themselves frequently in relatively short term markets. So yeah, if I were at the central bank today, I would be casting a BDA on those areas of the shadow banking sector that do maturity transformation and where they are dependent on short term funding. And I think you're going to see, just as you've seen some marginal players in the mortgage markets pulling out because their wholesale funding is not available. I think you're going to see that in other parts of shadow banking, but something actually blowing up. We have also liquidity concerns in other parts of the Michael Barr blowing up. I suspect it's more a slow puncture.

Probably that people will just be withdrawing their from the from the market. But I think any time you get a relatively sharp rise in interest rates, which is what we're having at the moment, then where you have to look is those people who are leveraged, where the leverage was comfortable when interest rates were 1 percent, but where it's not comfortable when interest rates of 5 percent. And that is I think shadow banking is part of that. But that's where I'd be looking as if I were the overseer of financial stability at the moment. So, Howard, going back to what you're seeing and at worst with so many of your customers and mortgages. Are you seeing any signs of distress? Not no, not very much.

But then what's important to note, I think and it's not been discussed so much is the mortgage market is a very different shape today than it was the last time we had a sharp rise in interest rates, which is goes back way before the financial crisis. Now, for us, 92 percent of our mortgages are on fixed rate, 8 percent a standard variable standard variable mortgage holder mortgage get rate goes up half a point. You know, you see it at the end of every month for the 92 percent to a fixed. They're fixed at various different lengths.

On average, I think it's about two years and nine months. So if you up about a third of them roll off every year, those people will face a very sharp increase in their interest rates because they will move off the fixed rate. That might be based on one and a half percent to one. That might be based on 5 percent at the moment. So the incidence of distress will be very uneven across the market. There'll be plenty of people who for the

next two or three years say crisis. What crisis? You know, my mortgage payments have stayed the same because I fixed last year. But so I think it's going to be very, very unusual. And we will see some signs of

individuals in distress because of these jumps in the mortgage rate. But the many parts of the market will remain very calm. At what point do interest rates peak? Are we looking at 5 6 percent? Could they go higher? And so what's the biggest danger point for the economy? Is that 18 months from now or is it? Well, interestingly, in the case of mortgages, what it seems that the turmoil has done is bring forward the rise in the long end of the curve.

So we're in the unusual position where the short end, you know, the bank base rates still quite low and yet the curve is steeper. Sharply so that at 10 years you are talking at nearly at 5 percent on the gilt market. And of course, people will price off that. So what you've seen is a very sharp rise and therefore now fixed rates are very up, significantly repriced. The question I don't think anyone can answer is, well, what happens as the Bank of England raises rates, which we expect the yield curve looks like that at the moment as the bank raises rates. Does it go like that or does it go like that as the rate short rate rises? But the term premium doesn't go up very much. What do you think it will do?

Well, I think it will be a bit more like flat. I think it does, because I think it's very steep at the moment. But I think if you look at real rates, you know, for the 10 year, they're now above 1 percent. A month ago, they were still minus 1 percent. Yes.

So undoubtedly, they you know, the long end of the curve has been has been repriced. And that's partly because of the turmoil in the field. This also, however, will depend on how the government issues its own debt. We know they're going to issue a lot. Will they issue continuing very long rates or will they sort of take advantage of the fact that the curve is the way it is an issue, more short gilts? I think personally, I would say that might be quite a smart move at the moment. So if you're a mortgage holder today and actually I do get that question quite a lot from social media or people that will WhatsApp first time buyers. Do you have any practical advice on what you should be looking at? I mean, you know, people that don't look at finance first time about looking at my regulator, with whom I always think over my shoulder here, I'm not registered to give financial advice there. But I mean, I think what people have got

to weigh up very carefully now is affordability at a different level. I mean, we stress our mortgages, obviously, at rates that are higher than the current rates, you know. So when you come to us and ask for a mortgage, you know, we would say, well, okay. Francine, how does this look if rates are five or six percent? How would your person, your finances look? And we don't lend to you unless it looks as if you can carry on paying at that at that rate. So most of our mortgage portfolio is

stressed at these levels of interest rates. People won't like it. You know, you will have to spend a bit less on designer dresses when this happens. But I know you will. In our view, if we give you a mortgage, we would have given it on the basis that you could afford it. You'd have to adjust your spending a bit.

But you could afford it. So we hope that given that we've been pretty prudent and most of the big banks, I think would be the saying that this won't create too much consumer distress, but it will create some problems for people who've got their spending out of balance. But some of the banks actually had to pull mortgages. Yes. When we had this discrepancy in the markets, NatWest did it. Is it because you're hedged and and, you know, stress test at a higher level? Yes.

Well, we do two things when we are quite deposit rich at the moment. And secondly, we did hedge and we were able to stay in the market. We thought that was the right thing to do because, you know, there were people who were in chains and, you know, transactions that needed to take place.

And it was better for them even at a higher rate to do that than to lose the transaction. So we felt we should stick with our customers in that way. And we had hedged in such a way that we still wrote that business down at roughly acceptable margin. We're also preparing for blackouts to manage blackouts front from the government, possibly over the winter months. How does that w manage that? Well, that's a bit difficult for us because we don't have any real ability as a normal financial business to sort of hedge against against blackouts. I mean, we would have some issues. You know, we have backup generators for our core systems, et cetera.

I hope. Touch wood that we are reasonably well prepared for that. But I mean, I don't think a bank can really insulate itself to that degree. Sir Howard, thanks so much, as always.

Sir Howard Days are chairman of NatWest Group, of course, talking about housing, mortgages, GDP and the Bank of England. Now, coming up, more on our top story this hour. Governor Bailey says the emergency support will end on Friday. We'll talk to guilt expert next.

This is. Paul has now endorsed the notion that there is going to be some pain, but this is an environment where the bond market vigilantes are back. You probably don't want to be the one neato validating market expectations of the recession. You probably don't want to add to the

general bleakness in the system. I think there's worse to come for the market, unfortunately. The biggest concern in the dollar is what is requiring other central banks to do in terms of tightening when they're their own economies are looking to head into potentially severe recessions and then a financial accident. 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. Our top stories today, more intervention. The Bank of England as inflation linked bonds to its purchases to stabilize the market and avoid what it calls fire sale dynamics brought gilt yields have been dropping after yesterday's climb. Two hundred and forty billion dollar

wiped out. Chip makers stocks slumped in Asia by continued fallout from the fresh U.S. curbs on China's access to technology and a Bloomberg. Germany's chancellor left shoulder makes a shift. He's now supporting joint EU debt

issuance with conditions to cushion the blow of the energy crisis. Welcome to Bloomberg Surveillance Early Edition. I'm on Edwards in London with Matt Miller and CAC lines in New York and Katie. Another day, another intervention from the Bank of England. And risk aversion to the foyer seems here in Europe. Yeah.

And that was definitely the case in Asia overnight. And a lot of it driven from that semiconductor story you were just mentioning and a lot of pain for the chip stocks out there. And as you had markets like Taiwan, South Korea and Japan opening up after holidays on Monday, they were catching up to some of those real losses we have seen over the last day or so. Taiwan's benchmark stock index down about four point four percent, the worst day since March of 20 20, now at its lowest level since November of that year. And of course, a lot of that had to do with Taiwan Semiconductor down a record eight point three percent overnight really speaks to the chip pin that is out there and that's filtering through to foreign exchange as well. Both the Taiwanese dollar in Asia as well as the South Korean one, as you had the likes of Samsung liking on the day to hour under pressure.

The South Korean want actually one at fourteen thirty five to the dollar that is relatively weak, not quite at the weakest levels we have seen so far this year, but still we're getting close back up to that point. And of course, in the bond market, we have seen a lot of selling pressure in global bonds around the world. And that definitely was true in the Asia Pacific region, including in Australia, where that 10 year yield rose 17 basis points to four point 0 3 percent. All right. Overseeing big yields here as well in the U.S. First off, futures are down another eight tenths of one percent. So it looks like we could come back under thirty six hundred this morning.

And then we're seeing the 10 year yield up at almost 4 percent to 3 9 4 0 9 right now. But pushing up against that level, the two year yield at its highest level since 2007 at more than four thirty one right now makes crude trading tie at eighty eight seventy four a barrel. So it's come off a little bit on concerns that demand will drop in a recession and bitcoin is down seven tenths of a percent, but still hanging around the same trading band where we've seen in nineteen thousand one hundred and eight. Can anything knock bitcoin off of this out of this range? It doesn't seem like anything has over the last few weeks at least. And what do you see in Europe?

Yeah, we'll get to another Bitcoin conversation, other crypto wide, a crypto conversation later in the program when we might in Europe. I see red plenty of red negativity across European equity markets. The London market weighed down by its emphasis on energy stocks and basic resources. And with that in mind, I'll show you what I've picked out to talk about here on the European space right now.

There is a concern around growth today. And as a result, basic resource stocks down by two and a half percent is the same concern around growth weighing on Brent crude. Ninety three. Eighty three, despite the fact we saw OPEC, of course, decided to cut back on production. That was last week's story today.

The growth concerns seem to be dominating, at least today. Now, here is where a lot of the interest is, a lot of the action is. And I mean, broadly in the UK, gilt market at what we have seen today is the Bank of England's widening. What he's going to do this week in terms of buying up gilt assets, adding inflation linked gilts. We'll get more detail on this from Dani Burger in just a moment. But I just wanted to flag what's going on with the crucial 30 year gilt yield because we talked about this yesterday being just about 4.5.

We then saw all across the UK. We saw those gilt yields rise yesterday. At today, the action from the Bank of England did seem to be enough to bring the gilt yields down in the very short term, but not now at the 30. That's where we're seeing the Fed here behave a little bit differently.

And just trying to move in the other direction. Now, Credit Suisse also in focus today, up by one point seven percent. Goldman Sachs analyst than Matt tried to put a figure, a number on the amount of capital that this business needs to raise.

We wait to October 27 to get the full restructuring and organization of the business. But in the meantime, Goldman Sachs saying they need eight billion Swiss francs. That's around 8 billion U.S. dollars. Yeah. And we're hearing other analysts as well say they need that much or even more. Right.

Nine billion has been called at another shop. So watch closely. Credit Suisse shares today. Let's get more, though, on the BNP as it expanded its emergency measures to tackle chaos in the bond market, broadened out the scope with Lincoln now, added Alan Higgins, CIO at Cootes. Spoke earlier on Bloomberg. I worry they haven't done enough. Quite frankly, I mean, what we saw yesterday was an extraordinary move in guilts and ridiculous move an index linked gilts. And yeah, you've got a real spiral here.

I worry that this is not enough and I think they're gonna have to come up with their version of whatever it takes. Bloomberg's Dani Burger joins us now for more. So make or break for the Bank of England, says Allan Higgins. Yeah, I mean, it's just a Bank of

England here whose purpose, sole purpose at this moment at least, is making sure this is not a dysfunctional market. It is monetary policy for the sake of stability. And here's the ridiculous move, as Alan Higgins put it, for radio listening audience. It's the daily moves in those links. This 10 year UK inflation linked bonds moving 64 basis points yesterday, a record move. That is not something that can be explained by fundamentals.

This is a market that is extremely tense considering the Bank of England didn't have blinkers in its purchase programme previously. So the market is testing it. And of course, those infamous now infamous LDA ISE, they hold a lot of these links. So the deleveraging continues and through while the Bank of England's statement and the note attached to this statement, it keeps saying stability over and over again. They wrote dysfunction in this market and the prospect of self reinforcing fire sale dynamics pose a material risk to UK financial stability. But this brings it back around to Alan Hagan's point. Is it enough?

Look, the bond market is calm today in the UK, but it is noteworthy that we are seeing the long end to the curve. Some of those gains are starting to peter out. We're not even down 1 basis point. Yes, belly of the curve is seeing some bids. The fundamental problem remains Caley. It is a market concerns whether these pensions pensions have deleveraged enough considering they didn't take the beat up on many of their purchases. And a market that is testing the central

bank considering these moves are really against what their aim is to bring inflation down. Dare we say vigilantes limericks? Dani Burger. Thank you so much. Now let's turn to the chip space. A whopping two hundred and forty billion dollars has been wiped off the market value of the global semiconductor sector. Chip related stocks in Asia have plunged after the Biden administration imposed curbs on China's access to semiconductor technology. Bloomberg's Tom Mackenzie is joining us

now with more. Tom, this is absolutely brutal. And of course, it's not just a matter of the Biden administration's moves. The earnings picture and demand picture for these companies is also not looking good. It's looking bleak, isn't it, Kelly? Look, you touched on some of the key points, the top of the show. Well, some of these markets, as you say, waking up after national holidays.

And so you see that rout as they digest the news from the U.S., of course, is more than one hundred page document that came out of Washington on Friday. So you saw that impacts on the likes of TSMC over in Taiwan. You saw that impacts on Samsung, TSMC ending the session down by more than 8 percent. And, of course, across the industry, 240 billion. And then you mentioned this as well, the ripple across to the currencies, because the importance of the chip making industry and that sector to the economies of Taiwan and Korea in particular. There was a read across all sorts of

chip makers and the producers of some of these ultra viral ultra violet lithography machines, particularly SNL here in Europe, that is lower. The last time I checked SD Micro over in France and Infineon, Germany, also taking a hit, Morningstar. The analysts, they're saying, look, there are going to be more on sentences for this sector, to your point. It's not just the restrictions put in place by the big demonstrations. It's also the fact that there is now very weak demand for consumer electronics. So that's a further drag.

China's response is also something we're watching for. All right, Tom, thanks very much for that. Bloomberg's Tom Mackenzie there talking to us about what's going on in China with chip stocks. Really, it's a global issue. President Biden on another issue has condemned what he calls the utter brutality of Russian missile strikes across Ukraine as Vladimir Putin warns of more attacks. In a call with Ukrainian President Vladimir Zelinsky, Biden says the US would continue providing Ukraine the support it needs, including advanced air defense systems. Meanwhile, on the energy front, Germany is coming back around to the idea of backing a joint EU debt issuance to help cushion the blow of the energy crisis.

This is as long as the money is dispersed to other countries as loans, not as grants or giveaways, according to a Bloomberg News scoop. While details have not been ironed out just yet, the topic will likely come up in the discussions as EU leaders meet in Brussels next week. Let's get to our European correspondent Maria Tadeo in Brussels for more. So, Maria, what what are we talking about here? More E.U. shared debt. Yeah, but mad. This is critical to get the nuance here,

and in fact, it has been in the public debate now for a week. Last week on the Monday, Tuesday, when the Eurogroup was meeting in Luxembourg and I covered that meeting. To me, it became obvious that something behind the scenes was cooking. And what you have here is potentially

now at noon an opening that would see joint debt. But this is not a replay of the Recovery Fund 2.0. This is not going to be the same thing. Remember at the time. This was the pandemic and this was a huge mega fund that was funded by the EU. It had grants and loans. The idea here is facing this energy crisis as it has become obvious that member states of the EU will need additional funding and additional resources. And the key is at what rate?

Now, some countries are suggesting it's better to do it. As EU 27, you will get a better rate in the market, especially if you compare it to pressure from countries that may find it difficult to do that by themselves. Now, what the Germans are suggesting is that this is something they could explore. But I would note also one thing, if Germany opens up, you get political momentum going into this, but you also need to factor. This is a decision that will have to greed or be agreed unanimously by the EU 27 as it always gets done.

And yesterday when I spoke to the Dutch finance minister, she frankly wasn't so keen. So this is still a story that has to be played. Okay. So different to the the fund that we saw put in place during Covid, a bit more similar to the shuttle program that that predated it than Maria. So a change of heart, some evidence of a change of heart in Germany that does seem important. But is there enough consensus around

that? Yes, and it's another recovery fund as the shore I was trying to avoid the dining realities. But but you've been good to me and yes, that's exactly what it is. This was a program that preceded the recovery funding, which was in many ways eclipsed by the magnitude of this fund. But, you know, in terms of the choreography going forward, to answer your question, I think things will have to move in the next two weeks. The commission has been given a deadline to come up with a plan to deal with the escalating cost of the energy crisis.

Energy ministers are meeting today. At one point, this plan will have to be presented to the different nations of the EU. And they were expecting. Remember, this is what we heard from the French president last week. Come October 20th and 21st. This is decision time. There has got to be something on the

2022-10-15 23:24

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