Bloomberg Markets Full Show (06/09/2022)

Bloomberg Markets Full Show (06/09/2022)

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From the financial centers of the world. This is Bloomberg Markets with Alix Steel and Guy Johnson. It is 30 minutes into the US trading day Thursday June 9th. Here are the top markets stories that we're following for you at this hour. LEGARDE We will deliver. The ECB president says a central bank will make sure inflation returns to its 2 percent target

and leaves the door open with 50 basis point hike in September. Spreads blow out. Equities sell off. Bond yields spike higher off the highs of the session though Italian German bond spread it blows out to the highest in two years is the aftermath of the ECB and Freeport LNG. Fire lights up natural gas. The company shuts down an export terminal in Texas adding more stress to a tight global LNG market. We're going to speak to Francisco Blanch Bank of America Securities head of global commodities and

derivatives research from New York. I'm Alix Steel my host in London Guy Johnson. Welcome to Bloomberg Markets. Guy Christine Lagarde must be very happy at this press conference was over. She really didn't go with whatever it takes. Stay with gradual but really try to say we're going to deliver guys. Don't worry we're going to deliver. Yeah I as a lot of vagueness a lot of uncertainty around exactly what comes next. I was listening to Mohamed El-Erian talking just a moment ago talking about the idea that this was a paradigm shift. I don't think we quite know yet the details of what the new paradigm is going to look like. Clearly fragmentation is a concern. Lots of questions on that during the

press conference. But the ECB economists are really struggling to get a handle on this aren't they. Growth downgrades inflation upgrades. It's a bit of a one two punch that we're getting here Alex isn't it. We're getting Christine Lagarde today and we get U.S. CPI tomorrow. I think Friday afternoon. It's going to be an interesting point of reflection. Spoiler it's going to be hot.

Inflation will be hot. Let's get more to the ECB here. The bank committing to a quarter point increase in interest rates next month. Also leaving the door open to a bigger hike in the autumn. Here's Christine Lagarde at today's press conference. We expect to raise the key ECB interest rates again in September. The calibration of this rate increase will depend on the updated

medium term inflation outlook. If the medium term inflation outlook persists or deteriorates a larger increment will be appropriate at our September meeting. Let's get more now from our Europe correspondent Rana. Today I was in Amsterdam for that meeting. Maria OK it's September. Looks like a done deal. Do we have an idea though of it's going to be 25 or 50. Yeah and Alex had a lot of this press conference she repeated essentially would have been very well guarded calibrated. You know we put the asset purchase program to an end and then of course you hike in July it's 25 basis points. So that's pretty committed. That's in there. But again to me what was interesting

is where you go forward. She did say and repeated the European Central Bank is on a journey that this is not step by step measures. But this all form a path. Now when she was asked about September you know to me she didn't really push back against a narrative that 50 basis points could in fact happen. I think essentially that's going to be the narrative from the next three

months particularly we see inflation the way it is right now with print set and times triple quadruple the objective from the European Central Bank. So that's for the inflation rate. I think the other important thing to come out of this press conference perhaps not as clear however was how does a European Central Bank deal with the market volatility that will come with the rate hike. So you're seeing already that reaction in the bond market particularly in the B2B moves that we are seeing over the past hour to me is ironic nonetheless. This marks the end of an era perhaps a mania era coming to an end. But we're back again talking about Beatty's piece when Mario Draghi now in office. Okay let's talk about that fragmentation risk. Maria do we have any idea about the tools that are on offer really to deal with that fragmentation risk. I was listening again to Mohamed El-Erian. He thinks they've got it. He thinks they do have the tools to be able to deal with this. But this is so critical if

fragmentation occurs and we've all lived through what fragmentation looks like if that occurs again. Transmission doesn't work. Does the ECB really have the tools here to be able to tackle this if it was to emerge once again. Well she repeated that the European Central Bank of course will want to avoid that she said we've done it in the past we will do it in the future and we can adjust our tools if they have specific one. They clearly did not reveal that and it was underwhelming for a lot of investors. I think that they really wanted to find out not just in the abstract but like clear hints in terms of the shape and the form that this tool would take. Also the pain threshold potentially that the European Central

Bank would take. And I think to me the fact that she was asked four times I counted what about fragmentation. What about fragmentation but did not go into detail is magnified this idea that the ECB if they have a tool they don't want to reveal it. So perhaps that's jittery for the market. And if they don't talk about it because they don't have yet or they don't have concerns around it they'll that's more of a problem. That's more problematic definitely in the short term. Yeah that was really the game changing moment for the markets where yields really pushed higher where the euro went up rolling over et cetera. There were also some questions basically on credibility. I mean if I pass through the language many reporters said why should we

believe you. Did she give a good enough answer to beef up UCD credibility. Well look she repeated. Right now European Central Bank has committed of course to bring him back inflation to target the European Central Bank. We do the job. She also conceded at this point it's not a desirable level. She said that a number of

times. But when it comes to the forecast which persistently of course have been off the mark today we've got new projections both for growth and GDP. Again you see big revisions happening there. She did say the mistakes are coming due to unpredictable factors that are not easy to model. So again referred to the war in Ukraine the impact that it has on Europe. And at times it's

worth reminding ourselves that the impact that this has on the European economy is much bigger than it has in the UK and is much bigger than it would have in the United States. She also said there's elements of energy is difficult to predict the way forward when you have errors around the pricing of such things. So overall yes she's trying to defend the credibility of the bank. But I guess as always when it comes to central banks it's about the data.

Is going to be about the numbers isn't it. And there's a lot still to go. Are we going to get significantly further significant further revisions both on the upside for inflation the downside for growth. Great work today. Maria looks lovely in Amsterdam. Thank you very much indeed for joining us. Bloomberg's Maria today. Coming up we're gonna get market reaction to the ECB. Bridgewater is Karen. Karen Tambo is going to be joining us. That conversation is next. This is Bloomberg

Daybreak. Started by being a somewhat more hawkish outcome and then the more I listened to President God the more I realized that he was signaling this consequential change in the policy regime. This is a big deal. What went on in Europe. And I think the market reaction is indicative that the market is starting to understand that we've exited one regime and entered another regime. That was the opinion columnist Mohamed El-Erian earlier on Bloomberg Television. Welcome to Bloomberg Daybreak America. Nope that's the wrong show. Welcome Bloomberg Markets. Wow that happens when you're suffering from brain bug allergies waking up about four years ago. Yep. I was at a performance and I woke up four years ago. OK where I'm Bloomberg Markets. Now let's get to

the question of the day. Can central banks actually get inflation to 2 percent. Karen Carnell Kim Board Co CIO of sustainability at Bridgewater Associates. She joins us now. And she's one of Bridgewater is foremost experts on macro economics and effects markets. Karen the way Mohamed El-Erian was talking about it this was you know a seminal moment is a huge game changer for the ECB and then for central banks. And I'm wondering if you believe that we can actually get to 2 percent inflation. Hi. Great to be here. I don't think with the amount of tightening that is currently priced in we can get to 2 percent inflation. And so markets are starting to process. The

tightening is going to be necessary. Europe is finally getting the same type of market action that we got in the United States as the Fed was tightening which is all assets are falling bonds and stocks fall at the same time. You don't get any diversification across the two of them because inflation and the need to tighten is the driver. And when that happens you are trying to slow what is a very strong economy to cool inflation. But if you look at actually the amount of tightening that is

currently expected it is still not that significant relative to the strength and economies relative to the self-sustaining momentum and inflation. So will it slow the economy. Yes. But will it be sufficient to get central banks back to their goal. No. Carol isn't this the compromise we're going to have to live with though. Nobody wants a recession. Nobody wants a significant slowdown. That probably would be required to get inflation back to target. So we accept inflation in the 3 to 4 percent range but we don't get the aggressive recession that would come with 2 percent. Isn't that the compromise we're now dealing with. I think you're exactly right guy. This is why it's really not easy to be in the shoes of policymakers right now. They're gonna have to choose whether to make that tradeoff. And it's really

not an easy tradeoff to make because you don't want to let inflation get out of control. And at the same time it is painful to have the economy slow because of tightening. It is especially painful if you're Europe. And part of the reason you're getting inflation are things like energy and food prices that you don't produce. And so is this inflation that's particularly painful

and you have to slow your economy if you literally just can't get enough energy to power it. And so we know from the 70s that central banks facing that situation really prefer not to over tighten because it's painful. And the more it's external the more geopolitical the more it's you're not the producer making money from the inflation the more painful it is. But we also know from the 70s that they can be behind for many many years and it can get out of control. I think reasonable policymakers are going to disagree about what to do here but the risk is that they fall behind and they're so scared to crack the economy which is right now it's such strong levels that they just go too slow. So Karen when you take a look at what happened a spreads we talked about this a bit earlier with Maria that the game changing moment really happened when he's like we don't have a plan for spreads yet but we're going to work on it kind of thing. Is there any plan that they can do to help tamp down

spreads that would in essence then help support the economy in different countries while also being able to tackle that 2 percent inflation. I believe there's a tremendous amount the ECB could do. They've already shown us time and time again that if they think this is important there is a lot they can do to handle periphery spreads. The main thing when I look at the market action is look look what's happened to credit spreads globally. It makes sense for all risky assets to be selling off into this environment. This is just a tougher environment. And so I'm not sure if the ECB I'd be jumping ahead and making lots of plans for spreads just because the market move so far I'm sure they have many plans in their back pocket and they can control it if it gets out of control. I read Greg's piece in the FTSE talking about how you guys are positioning around all of this. Karen in the kind of environment of three to four percent inflation and slower growth how do you navigate it. Just kind of walk me through what you think the

building blocks of a portfolio in that kind of environment look like. Well a challenging thing in that environment is that most people most of the risk is in beta and being long assets and holding assets and hoping to make a risk premium and most risky assets frankly look terrible in the near-term. So yes over time you believe that folding bonds holding stocks holding credit spreads you will make a risk premium. But in an environment of rising inflation and a need to tie into that you get terrible performance sort of across the board. And so one consideration

is how much can you move towards more tactical positioning. Alpha actually make money off of shorts. And the other big consideration if you have to hold assets is how much inflation protection can you get. If you're holding stocks and bonds and you've gotten used the idea is that they're really diversify. That's because growth was the dominant issue. And every time growth fell. Know bonds could do well and vice versa. And today that's not the case. And so inflation protection is really what most investors are missing. And adding that in at least helps the circumstances. But it's just a bad environment for risky

assets and that's the reality for most investors. What where might a central bank put be. I feel like we know it's not in the equity market. Is it in the bond market. Is it going to be in the private market. I'm trying to get a sense of where the biggest financial risk is that the Fed needs. So you're going to have to then respond to. I think if you're the Fed and the ECB you would not be that worried today about a peak in financial assets financial assets have outperformed the real economy for a decade plus that's been engineered. DAX has been working. That's been the desire. And now I think it's completely within their desires to have financial assets underperformed the real economy to a material extent. And you're seeing that for example ISE tax practice crypto has cracked. There's been an understanding that this is not that significant. It is not a significant risk of a failure. They need to slow the economy to a degree and it's healthy for

it to start in areas where there are bubbles of overvaluation and pockets where a lot of money went when a lot of money was printed. And so it's pretty healthy for financial assets to do very poorly relative to the real economy. For some time now in this environment it's painful for investors though because we just lived with a decade plus where constantly financial assets did significantly better than the economy. So an investor could do great. Even as the economy was kind of mediocre at times it's just come back to what I want to own at this point. You talk about the underrepresentation of inflation based products in most people's portfolios. Commodity funds have come up a long way already Karen. Are they going to go further. Lakers have done relatively well. Tips that their relatively well. Are they going to continue to outperform. When I look at the inflation.

Options that I have what looks like what still looks like good value within that basket. You're right it's not great because what's happening in commodities is you do have inflation protection but you also have significant idiosyncratic risk in every commodity that you hold especially oil. You know small changes in geopolitics can make a big difference and obviously growth matters a lot. And so for example in any in any commodity that's not oil. China is a huge part of the demand. And you can only imagine how much Chinese demand has slowed because of the zero Covid policy. And so commodities don't look nearly as well as they did when you just looked at generally high nominal growth high nominal real growth high nominal high real growth and high inflation. Once you kind of have high inflation but weakening real growth commodities don't look as attractive as it did a few months ago. And while I still hold some not nearly as good as it was a few

months ago and then same with Lincoln's. I think you're in a situation where if you have to hold bonds I would completely pick lingers over a nominal bond. If I had that choice if I had to hold a bond I'd rather just get paid whatever CPI is and just receive it. And you know if it comes up above expectations it's not expected to be that high. I mean you asked the beginning how likely is inflation going back to 2 blinkers are basically pricing that they'll go back to you know something like two two and a half. So I want to get paid anything. They are above that. If I had I have to hold a bond I'd rather change it to a linker

rather than hold a regular bond. Turn to that point. We got a question from a viewer in this kind of ties into a guy which is asking what are your thoughts on emerging markets. If you have developed markets central banks are really in kind of a bind. What about the higher yielding apps. I really like some of the stock markets especially because you're in the situation where just so much outperformance has been priced into the United States. And so you're already expecting that U.S. companies will keep taking market share from everyone for another decade to come. It's pretty hard to do that

decade after decade after decade. And it means it's already in the pricing whereas a lot of pricing the emerging markets is frankly pretty terrible. And other pieces that we just lived through this period where people had so much money. Right. Consumers all got literally checks of their homes. So you saw a lot of money being printed going into many assets. And it actually didn't go into emerging markets. Typically those early popular risky assets when you have these boom periods and

instead it went to crypto to tech. So emerging markets are not nearly as vulnerable as they typically are in this part of the cycle. Where money starting to come out now doesn't mean I'm gonna roll at all. But as I said they're not great options today. Some of the emerging market equity markets certainly look more attractive to me than being in the US which is already priced to perfection. Just in terms of what you do want to be in right now you talked about big short. How do I what do I want to be short of. Karen. I still do not like nominal bonds very much and increasingly I don't like U.S. stocks very much because if you basically look

at how much U.S. stocks have fallen and you say a stock is just a series of cash flows discounted back to today you can attribute the entire decline in stocks just to higher bond yields just a higher discount rate back to today. Actually almost nothing has been priced in terms of a slowing in the economy. Actually fewer cash flows rather than just ISE discount rate. Almost none of that's been priced. And if you look at the Fed raising rates at the rate that it is and now the ECB raising

rates if you look at how much asset prices have fallen it does not look very likely to me that you're not going to get a slowdown in the cash flows that companies are getting. In addition to that you've got ISE the 70s and you had a very significant rise in risk premiums. Investors didn't want to hold stocks because you were in a situation that was just trickier to manage the economy because inflation was so volatile. That could happen today too. So I think the decline in stocks can confuse

people. And it might not be hard. It might be hard to not see with the naked eye that all that's happened is slightly higher rates. A lot more can get priced into U.S. stocks in terms of an actually weaker economic outcome and volatile inflation. But it's going to be your time before that. We could engineer an economy that's OK. Softest landing in the economy and a hard

landing within the markets. Just before you go in there. And this goes back to that FTSE piece. Also what what what part of corporate credit is more vulnerable if cash flows are vulnerable and yields are rising. Well I think if you're looking at individual companies you have to basically ask what is the chance that bacon flows through the inflation that's coming back to their customers. And so probably the best case study of this as you look back at the 1970s and there's huge differences

between companies where they were actually able to flow back to their customers what that inflation was or they had to take it and basically had terrible profit margins as a result. Now in the 1970s 30 percent of the U.S. stock market was resources. So we had a lot of companies and same in the corporate credit markets that they could benefit from inflation and clearly pass it on. Today there are a lot fewer companies like that. Resource companies are 3 percent of the stock market or something. And so you're in a situation where you really have to be looking at you know people like retailers a much harder time. So you want to

look at basically how likely do you think the company is either for an equity or debt perspective to be able to handle a higher inflation environment. What you think default rates go to in that kind of environment. Karen. I don't know if I can call a number but really I think a lot of the pricing will not necessarily be about defaults. Like a lot of the corporate debt that people own is companies that are not close to default and you are dealing with how much risk cream you're putting on the volatility of inflation and how likely they are real to manage through that situation not on sort of actual default rates there. There's a force of tail that will

actually default. But right now a lot of pricing is basically a shift in the environment. Things may be a harder environment to navigate rather than you know true to form probabilities. Coming up. Hey Karen thanks a lot. We really appreciate it. We think you're great. We love talking to you. Karen Cornell Tombaugh a Bridgewater. Thank you very much for your time. This is Bloomberg. It's time for the Bloomberg Businessweek to look at some of the biggest business stories in the news right now I'm could get to Target has raised its quarterly dividend by 20 percent and you pay out implies a yield of about 2.8 percent. That is a full

percentage point above Wal-Mart's yields. The move comes after Target lowered its profit outlook for the second time in less than a month. Does that staged a remarkable comeback in terms of its production over in China. The electric vehicle maker tripled its output in May from the month before producing more than 33000 cause. That is despite only recently getting its Shanghai factory back up to speed after the city's lockdowns. And Bloomberg's learned that a consortium of Apollo Global Management and Reliance Industries has made a binding offer for the international unit of Walgreens Boots Alliance. The proposal

puts a value of about six point three billion dollars on the business which runs more than twenty two hundred boot drugstores across the UK. A rival group Britain's ISE Brothers and TTR Capital has considered dropping out. And that is your latest business flash guy. But do you you much D. Another UK company being bought up seems to be plenty of that around. Alex I keep thinking about what we've got going on in here in Europe

and Christine Lagarde like he put it together with the story we got in in the natural gas market. We don't know where the energy story is going in Europe. Every time we get the results of the latest stuff projection from the ECB they're way off where they were before. I don't know as a central bank how you make policy in such a volatile environment and make accurate predictions as to where economies are going where a fire in a fire in the United States and an energy plot can completely knock you off course. Well I think the problem is is that in theory those things should be transitory because they're gas food et cetera.

But if we're also dealing with a structural shift away from Russian energy and also away from fossil fuels in general that's not structural. That's been a multi-year cyclical process. ISE with me that that's a structural multi-year process. And I think that that is a serious problem that that may be underestimated that you can't fix by any amount of hikes that you do. And that's the problem. Some of the stuff is out of the control of these central banks. Anyway we're going to talk energy next. Francisco Blanch is going to be joining us from Bank of America. This is Bloomberg. I worked words about an hour into the US trading session stocks trading a little bit heavy. But now we're waiting for that CPI

number in the US tomorrow to mix. Abigail Doolittle is tracking some of those moves. Abigail Alex It really is all about that CPI number because this is a week to date chart and you can see it's going to come down right to the wire. We've had a big up moves a down move up moves down moves. Right now we're slightly higher in the week but a moment ago we were slightly lower. So again it's going to be a really right down to the wire relative to that CPI print. And where is inflation. Of course we have

reports right now of massive food inflation. We're seeing something for the first time that we've seen since 1981. That is double digit increases for both food and for energy. And here's back to 20 October of 20 21 food up just three point two percent. We'll take a look at this. Now in May up nearly 12 percent. It's just incredible how much we have seen. Food

absolutely rising. We're also seeing something unusual relative to the 2 10. Now it is narrowing or tightening I should say in sharply over the last year or so. But the two year right now at its highest level I think at two eighty one the last time I looked at the highest level since 2018 that 10 year yield at 3 0 3. So it's going to be interesting to see whether or not we tighten more and maybe go back toward the inversion we saw in early April. As for some of the top stocks on the day. Let's take a look at what we have going on here. And XP semiconductors up eight point two percent on speculation from a blog that there could be some MFA action there. A possible buyout. Tesla a 5.5 percent on news that its output in China in the month of May

tripled despite the lockdown. We also have an upgrade from UBS to an outperform. And then finally rounding it out. Costco up two point four percent. A piece of that inflationary story Alex. All right. Thanks so much Abigail. And to that point U.S. natural gas by stockpiles actually rose ninety seven billion cubic feet last week. That was actually a bit more than the week

before. So we're getting little bit stockpile. That's probably only going to get worse now that you have an LNG export terminal shut down for a couple of weeks. So part of this energy story that guy and I were just talking about it's so bad now that President Biden went on Jimmy Kimmel last night and talked about many things but in particular the gas crisis.

Inflation is this is this is the bane of our existence. Inflation is mostly in food and in gasoline at the pump for companies instead of everybody says Biden won't let them drill. They have 9000 drilling sites that they've already own that are there. They're not doing it. You know why. Because they make more money not trillion in buying back their own stock. You know when a president goes on a late night talk show like it's getting serious. That approval rating is pretty grim. Let's get more insight now. What happens to commodities. Francesco Blanch his global head of commodities derivatives research over

at Bank of America. Great to see you in person. Nice to see you. Good to see Alex. Great to be here. So help us. You've had 120 target on Brent for a while. What's going to be the top here. Well I think the first thing I'd say is that the the crisis in the oil markets hasn't arrived yet.

And I don't say unlikely. Likely because I think we've been in a massive global gas and power crisis for the last 18 months or so with prices of natural gas in Europe being close to 500 dollars per barrel of oil equivalent. Right. And we've also seen recently because of all those Russians created with with Russia thermal coal prices rising to one hundred dollars a barrel of oil equivalent. So when essentially sand or dirt when I'm on a

barge is trading at one hundred dollars a barrel you've got oil at 120. Doesn't seem that expensive. So I think we are not at the peak yet. The pressure is going to continue. But the one thing I'll say is that despite all the pain that we're seeing at the pump in this country the U.S. is so much better off than everybody else because

remember we have record record dollar values meaning we have an incredibly strong dollar with strong commodity prices which means the pain at the pump in Europe and Asia. And where else is way way worse. So that's that's a big issue. So I think I think we're gonna get some demand destruction we're against. We're going to some demand this step. But but but again prices have to do a lot of work because we don't have the supply. What use the word crisis just a moment ago. We're not we're not

there yet. What does the crisis look like in your mind. Well we think depending on how the sanctions go in Europe we could see the European sanctions on Russian energy. We could see maybe one hundred and fifty dollars a barrel maybe a little higher. But I don't think that is going to be a three month issue a six month issue. We need to fix the supply side. And it's very very hard thing to do. It's not just about returns. Remember the energy sector has had terrible returns for the last few years. We've had three bear markets in energy in 16 18 and 20. So it's not just about buying back stock.

The history is pretty bad for energy investors. Let's just just say you don't think this is what you say. It's not a three month or a six month problem is the implication that it is a more than three or six month problem. Yes. I mean I think we're moving into into a probably a multi-year issue. If the Russia Ukraine situation doesn't solve itself out and we start to see flows from Russia normalizing over the course of the next 12 18 months.

And really the big challenge here is that to fix the supply side we also need to provide industry with some guidance as to how we're going to accomplish the energy transition because we did stop investing in thermal fuels partly because of the poor returns but also because we were supposed to be driving electric vehicles by the end of the year. And and and at the same time we kind of forgot to invest in metals. Yeah right. And that's in essence I think you can blame an oil company for buybacks or whatever. But why are they going to invest in something that everyone wants to phase out. That's a really hard thing to kind of wrap your mind around. So does

that mean that at one that we could see one spike to 150 or is this a sustainable spike to 150. Because even if we get a resolution of the Russian invasion of Ukraine I mean I can imagine all of a sudden Europe's going to go great and go buy at market value Russian oil anymore. Well yes that's a great point. We definitely need to up our our investment in the energy sector. And one of the challenges again I mentioned five hundred dollars a barrel gas in Europe. But before 400 dollars a barrel guys we had a spike to 350. And before that we had a spike to 250. Now well that's known to European demand for gas is is knocked it down three times over the course of the last nine months.

So I guess what I'm trying to tell you. And another way to think about this is we were looking for three and a half million barrels a day of oil demand growth globally this year. In 2022 we're looking to get back to one hundred dollars a barrel. 100 dollars 100 million barrels a day. The challenges we don't have the supply. So therefore we can only grow our demand by 2 million barrels a day as opposed to three and a half. So to slow down the rate of demand growth we

just need a higher price. Now you're saying confidence because we have no inventories. We have this tons of money in the economy. If people want to spend buying we don't have the supply. Therefore in order to bring demand down we just need a higher price. And that's exactly what's going on. You can call it speculation. I call it we have no supply. We have no inventories. And therefore prices have to lower for us. That's it. It's still a bit about the the actual mechanics of getting molecules around the world. Europe desperately is in need of gas from around the world. Not Russia in the in the scenario you're painting.

How at the limits is the current supply chain for gas. We've just seen a big fire. It's had a significant impact in terms of pricing. Are we trying to squeeze every single molecule we possibly can through liquefaction plants right now. And if so how volatile could the environment be. How easy is it going to be to knock that supply chain story off course. Well guy I mean I'll just say summer of 2020 European ETF gas

was a dollar. March 20 22. European ETF was eighty dollars spread maybe to you. We've gone from one to 80. I mean we get more volatile than that. I mean it almost feels like a cryptocurrency at this point. Yeah. It's an incredibly volatile environment because we have a very messed up supply system. We need to expand not just LNG export capacity. We also need to expand storage infrastructure in the US in Europe and Asia more pipeline capacity. I mean just the

border into context. The amount of gas that Europe buys from Russia equates the amount of gas that China and Japan buy from the global LNG markets every year. Now do we have the ability to create to Qatar's overnight to essentially cut Russian gas from the European supply system is going to be pretty hard to do. So look I'm not I'm not kind of giving you a lot of good answers here but I think prices are. And to your point the volatility of the commodity markets is going to stay incredible. Because again what I'm saying here is we're going to see more inflation more volatility more basis risks. And again basis risks mean risk.

The term structure of commodity markets risks through the different prices across different regions the prices of different commodities corn versus wheat gasoline versus oil well all of that's gonna be very volatile. Well I'm glad you brought that up because this is so m life is doing a big commodity theme this week. And the question they have is what's gonna be the best performing commodity in the back half of the year. And then the worst and it's hard to pick right

because there's so many that have so many supply issues right. That's right. And I think I think the the the big issue here is going to be I think how do you how do you address. I think on the on the energy side. Look coal prices are so expensive and we are I think eventually gonna get some response on the coal side potentially although we've had an election in Australia that may tilt the supply of the world's second largest exporter. So maybe we can get some relief there. U.S. natural gas. We have a warm winter wind up being the worst performing commodity because remember even though we're eight nine laws burning me to you warm weather into the winter will bring us natural gas down to three bucks and OMB to you. So that could be one thing on the energy side where we get a lot of relief. But again we need the weather. And until

you know we are right now you ask the question are we on the edge. Yes we are on the edge. I mean energy supplies are limited. Growth this is still very robust. And China is in lockdown. I think the best performing commerce of the year if China comes how to lock down could be commodities could be jet fuel could be some of the metals that have been depressed because China was scaling back the man. So that that's how I think about it. And

then of course there is the food issue which now want to a lot more difficult to forecast because of what Russia is doing to the Ukrainian agricultural sectors. So so so I don't think that issues are going to go away. And I even think a recession will not be a fix. I think we'll see some recessions in different parts of world. I don't think going with the threats that we're hoping for because there is no not much substitution across the complex and because everything is so tight. So even if the man

comes down a bit a little bit that that's not necessarily going to resolve the multi-year problem that we have ahead of us here. Francisco great catch up great see you in the studio. Thank you very much indeed. Alex always lost to me and tells me kind of that I'm an Englishman watching the weather. I think she'll watch the weather. I think it's going to be really. You talk about it all the time and. What we do. But it's important as you just heard. I've just been backed up by Francisco Francisco Blanch of Bank of America. Thank you very much indeed. Coming up Wall Street's top regulator is setting up for a fight over stock market rules with some of the biggest names in equity trading. We're going to talk about that story next. Nokia fundamental global investors

chairman and former CEO T.D. Ameritrade joining us next. This is Bloomberg. This is Bloomberg Markets can get to. You're looking at a live shot of the principal room coming up. Liz Ann Sonders the Charles Schwab chief investment strategist joining Bloomberg Television 330 PM New York time. This is Bloomberg.

FCC Chair Gary Gensler proposing a set of sweeping changes aimed at making the U.S. equity market more transparent and fair for retail investors. Let's break that down for Bloomberg's Sonali Basak. We have him in Florida flow versus an auction process. Walk me through what we have now and what could change. Yeah. So right now it's exactly what it sounds like. Market makers will pay a brokerage for order flow. The idea here being that they share some of the profits made from the spreads when it comes to trading. That's what keeps retail trading prices zero in many cases. Robin Hood though makes about 80 percent of its revenue just from process. He's tied to just and equities and options markets. So that's paying for order flow. The worry for Chair

Gensler here is that he's worried that it may not be the best things in all cases for retail trading clients. So what is he considering. He's considering an auction process which is exactly what that sounds like auctioning for the best execution here and auctioning for those trades. Remember there is a third option here which is internalization and it's when brokerages handle their own order flow as well. The challenge here guys is going to be incentives. Jill you talk to a lot of people. Is the consensus to pay for the flow is probably on its way out here. Something that's interesting about this guy is the data market makers are really asking for more data behind what is really best when it comes to payment for order flow. We have some data in terms of what is being paid from the brokerages for its from market makers to the

brokerages. But what is getting the retail investor the best price. Bloomberg Intelligence is Larry Tabb has done some work on this already and he's found that when you're paying for order flow retail investors are capturing 47 percent of the spread. What does that mean. That's thirty nine percent from market makers and 13 percent for brokerages. So you are seeing the retail investor get the most of that price improvement. Can the S.E.C. show which model is best in a data driven way. We haven't

seen a full analysis of what that could look like at. I would be really interesting and maybe answer the question that we're trying to figure out here. You know I thank you very much indeed for the look Sonali Basak. Let's carry on the conversation so we'll get fundamental global investors and capital wealth advisors check. He's the former CEO of course of T.D. Ameritrade. Joe does the system be changing. Do you think Gary Gensler is on the right track here or are we good as we are. Well we actually had a conversation about this when the whole thing at GameStop and Robin Covid Satya Nadella at Super Bowl prices were not high rankings that I seen recently with some super funds out there more. Somebody sees them get something wrong. That's one of the orphans or something like that. If something goes wrong there's no proof

Robin Hood when you haven't haven't suffer everything for. Well there's city city government should not have been for a long time. Another Kathleen Hays Dow Jones which I think very good job and important for us. I think it might make sense. What were some of the best advice that made sense. Yeah. Hey Joe. Joe we're having a little bit of problem with your audio if there's

a way we can maybe tweak it. It's really hard to hear what you're saying while we focus on that. Joe let's go back to the finale for a moment on its finale. What part of the system is actually broken that we do need to fix. That's an I'm kind of struggling with. Well what's interesting is people don't understand. There is a lot of disclosure around payment for order flow. This happens at least quarterly where you see exactly how much every market maker is paying every brokerage.

But what you don't get as much clarity into is is the retail investor getting the best deal at the end of the day. So we'll probably turn to Sophia. What's the retail investor gets. What happened after the GameStop saga. I think a lot of retail investors didn't even know that their order flow was being paid for. That that that was the business model. But you know we would've to come back to what you were saying just a moment ago. We need to see the data that tells us that the consumer is getting a bad deal here. Until we see that data always certain that the consumer is getting a bad deal and that things need fixing. Yeah. I think one really interesting question is internalization and

the difference in the models. If the FCC is looking at one model. Are they looking at any other models as well. And are those models at risk at all. Is the consumer getting a lesser deal anywhere in the picture here. Another interesting thing that we haven't talked about at all that many people haven't talked about yet is what this will look like in the future for crypto exchanges because right now crypto exchanges are able to make a lot more money for trade. And there's a sense that that will also go to zero one day similar to how stocks do as well. So the implications that we're seeing in the equity markets

could have a lot further reaching consequences. Also I was reading a piece out that talked about how if you did an auction model that's OK for high end liquid stocks but for smaller smaller traded equities. There's just not you can't do it. So in some way that's going to actually funnel out certain assets that people can trade. You know something that's interesting that hasn't been discussed a lot is Citadel Securities. Ken Griffin when he went to Congress one of the proposals he made was to make markets clearer more transparent. Fair was to decrease the tick sizes from for less than a penny here. That is something

we've heard a lot of the big exchanges also talk about. So are we going to get to a place where there is tension consistently between the market makers and the S&P or is there going to be working together here to get a system that works fairly for everybody. Surely we didn't have painful to fly over here. Presumably it must be fairly easy therefore to compare and contrast the different models. Europe doesn't do it. Therefore if we look at what is happening to consumers over here shouldn't we be able to get a good idea of what could happen to consumers over there. Or is the market fundamentally different. That's a

great question. You know in the heat of the GameStop kind of blow up I don't wanna call it a blow up but it worked well for a while. Right. If the saga. Yes. So remember we spoke to said it all securities. You spoke to John McCain and he said around that time retail trading accounted for about 25 percent on the greatest days of U.S. equity trading. It could be a lot less

than that some days. But remember is it a good thing that there is a marginal buyer in this market. A payment for order flow has helped facilitate that. Now if the auction process goes on remember Citadel Securities is paying Robinhood. Right. So that is a cost to them. The question to here is can they maintain those volumes. Once the model changes from paying for the order flow to an auction process should I be really really appreciate it. Thank you so much for jumping in and staying with us. Sonali Basak joining us from Bloomberg. Hopefully we'll get deal Muglia back former at T.D. Ameritrade Securities working as audio. Now this is Bloomberg.

So we've been trying to fix the sound for our conversation with Joe Muglia. He's back now. We think we've done it. Technology is a wonderful thing Joe. We hope this is going to work. So let's give it a go. I hope so. Joe helps all day. You sound perfect. There we go. Look. That sounds great Joe. Is there a problem that needs fixing here.

What do you think Gary Gensler is up to. Well I don't I don't think there is a real problem now. When will this happen. No it's happened originally and everything was blowing up. Not a word about Robin Wright said about melting capital. I recommended then that yes he's definitely going to borrow from somebody with something warm to support local time. And while

you don't through my prices in 2014 great for the FTSE jobs that to trying protect individual. So my suggestion is don't pay rent to Hitler. Why don't we walk through exactly what happens with the individual investor and see to what extent is a problem that makes sense. Do it. Go ahead. OK. All right. Try the individual investor. It's a trade and fair go that goes through the brokerage firm. Once you've gone to market what can make ISE a Federal Express. That's a little bit of a spend review revising itself and a creative price which has to be the best price in the market down with the best price for the property. They keep a piece of that for themselves. Market maker. Now the brokerage firm then decides

how much of that that payment. That's the thing for default. How much that payment is they want action to give to the client and actually improve their client's price. How much you want to keep himself. Most of the time they get the biggest chunk to the individual investors because Schwab 95 percent of all the trade price on food and this happens. It's the payments not the

individual budget. Why don't I just get I got instantaneous execution. I've got a guarantee they got the best price in the marketplace. And by the way I got Fischer promotion. And this is for free. This is for free. That sounds like an incredible deal to me. All right. Now let's look behind the scenes. You get all this done. There's incredible symbolism about technology that isn't without regulatory us with that plus a tremendous amount of money for all of that. And that allows them from that to to charge zero commission for the individual investor.

The individual investor is in good shape. If they screw around payment order flow then there's a possibility that way to offset that performance that spot stuff to try to be able to be energetic right now. What could be the next best model. This model works pretty well. Now I know John Tucker better watch your mouth. Well depending on what they look at and how

that works and what he says that's worth looking at the audience and looking. Yeah but there's so many things going on I think from the Wall Street onwards DAX that the S.E.C. be borrowing more time and energy on this individual investor. That's what they're trying to think. There has never had it better in the history of Wall Street. That's not to fool around with that because that part's not broken. Joe what do you think that there's something to be said for the fact that the FCC doesn't want mom and pop traders in the market that they don't want that to happen because of the risk then that individuals can take. Well I don't know if that's their prerogative though. No so individuals have the freedom to be

able to do what they want with both right now. I don't think would be a bad idea to make sure that better education provider would invest. If you go back to the lead trades on. To what extent were the Wall Street helping investors understand the risks. What. GameStop. Can you sell it at 20. You sell it for it. You started to read it. You shall have to walk through our

stuff that you actually have leverage. And Bob. So these are the things that individual residents understand. I don't think it would be a bad idea for the S.E.C. to acquire Better Ridge where individual investors in essence for the best. They want to be able fragrance out. Right. With right.

I don't think that's a bad idea at all. That's good enough Annmarie Horden. That's a good idea. That would be good. What does what does your gut tell you. Does your gut tell you that the S.E.C. is going to take action here. Does your gut tell you the payment for order flow is on its way out. Now that's when I began Ameritrade. 2001 it was the first time I really became familiar with water flow and I thought when microwave then I realized that possibly it never never ever was really comes up or five bodies. Never a. I think we were gusty

but now it's making us making it so public they're going to have to do something. Otherwise it looks silly. But if they tamper with a water flow they are fooling around with something that that that was not an issue for the individual investor. And they are creating far greater expenses for food broken from the moon. There's no good reason. Increasing stress is a. If you do that

you watch that. And for upset that they now come back and not not not try to finish. So I worry that what they're trying take care of the rest easily have adverse adverse circumstance adverse impact. Hey Joe last question here. If I'm Morgan Stanley and I own a trade what am I thinking right now. Well I think all along I think James Gorman and the people that actually run E-Trade as well as all the other firms they recognize that there may be an issue here. And this is something that we talk about every year when it went off knowing that their strategic plan and what we don't know what's going to happen. So I don't think if I'm running a trade I will spend too much time worrying about something that I don't know which way

it's going to go but I have to already created a system. Well from a strategic perspective and a technology perspective. And I've got the ability to be able to get from just the fringes as they pop up. So if I get hit with something that's what it is today. I should be able to do that. And just. Hey Joe. We really appreciate it we appreciate your patience. We'll definitely make sure the idea's good next time we have you on. We get to follow up. I do. MUGLIA Fundamental global investors chairman and former RTS Ameritrade CEO. Thank you very much. Where are you from. Architect. Yeah. 30 minutes to go until the end of trading here in Europe. Wow. Christine Lagarde said he had an effect on these markets. Let me talk you through

the price action and show you what's going on. I'm gonna spend the next 30 minutes or so definitely talking about what comes next for the ECB. What's happening right now. Stocks down with down by around one point two percent twenty four thirty five. But I think the action is actually by a large concentrated elsewhere. And I think it's here and here. The Italian 10 year yield is up by 21 basis points today spreads widening out. Christine Lagarde with a lot of the ECB press conference talking

about fragmentation and the risk of it and how the ECB would deal with it. The problem with the answer to the last bit is that generally have one incredibly vague. So what we got was pitiful yields blowing out and we got the currency going down. And that's probably not the combination as she was looking for. So we're treading euro dollar what I 647. We're down by around six tenths of one percent. BGP as I say are up by a whopping 21 basis points. Now I covered the eurozone debt crisis but that's

nothing. Obviously it could go significantly further than this. And certainly people are gonna be watching very carefully what happens here. Spreads are widening out. What tools could be used. Alex if we were to see them going even further. Yes. You really punted that to the next meeting here in the US. We're just kind of along for the ride today. I think it's about U.S.

CPI tomorrow. Just what kind of rate handle are we going to get. However within the market we are seeing the S&P a little softer five tenths of one percent yield selling up in sympathy but like barely anything compared to be yields is up 3 percent to idiosyncratic things. One carnival down by about 7 percent yet again today. Yesterday the whole cruise line industry got some downgrades over at Morgan Stanley. We're having some follow through selling again today that had been really with the action around the reopening trades. Now firmly to the downside flip side and XP set me up 7 percent. I find this interesting guy because you had Intel warning earlier this week on demand basically in a tough macro environment that raised the question are are chips still cyclical. And if that's the case will prices mind up coming down. And are we seeing that demand destruction. And XP though says something very different. And a bit of a conference is the senior vice president of the company I spoke

earlier are saying the demand is really strong. Demand is in excess of supply. So maybe we're having to use some Craddick issue with Intel. But I think that the state of the semi industry is definitely one to watch in terms of determining where certain prices can come down. Different ships different markets maybe we'll keep an eye out one certainly what we're focusing on right now is what happened today with the ECB. So the ECB on the road today remember does that twice a year. Today in Amsterdam committing to a quarter point increase in interest rates next month. Apparently the whole idea that we never pretty commit you know we throw that one out of the window. Then there's the potential idea that we could get a 25 hike in

September. We could also potentially get a 50 basis point hike in September. Here is President Legarde at today's news conference. The new staff projections foresee annual inflation at six point eight percent in 22 before it is projected to decline to three point five percent in twenty three and two point one percent in 24. Higher than in the March projections. This means that headline inflation at the end of the projection horizon is projected to be slightly above our target. So let's get to Amsterdam. Let's join our European correspondent

Maria today who is there with Christine Legarde in Amsterdam. Maria we know we're gonna get 25 basis points at the next meeting. My question is how much clarity do we have. Beyond that. Well Guy I mean you heard it there she said we're doing 25 basis points because that was the guidance to the market and we want to stick with that of course repeating. By the way something we all knew was going to happen to the asset purchase program

coming to an end within the next few weeks. And this marks a new era for the European Central Bank where we go from there. Well they've also put on paper but she also said it verbally in that press conference that there will be another hike in September. I think the focus now is do they stick with the guidance up until a few weeks ago that that could be 25 basis points or actually you will bigger than that particularly in light and the inflation data that we have over the past two weeks across the euro area. To me was striking that of course that question came up time and time and again. She did not push back on the 50

basis points narrative. And I think from now until September essentially that's going to be the debate. Marcus just how hard will it go in September. Maria. Thanks a lot. Really appreciate it. Bloomberg's Maria Tadeo joining us there. Joining us for a deeper look is Peter Pratt former ECB chief economist. Peter you're one the best guest to talk to you about the situation the ECB today. I think the real question is 20. We're looking at inflation above the central bank's 2 percent target. When and how can they actually get inflation down to 2 percent. In the projections you see a figure of two point to one percent.

So I think it's very trivial when you think of the the range of forecasting errors. I mean it's really you are in the objective now when this stuff does their projections they use basically the market you know interest rates the projected or the future rates. And so you could you could argue that what Christine basically announced today is that she endorses basically market prices for the risk free curve. So that means a hike you know a series of hikes

2022-06-13 22:38

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