francine: sterling holds its decline. the pound steadies as european stocks rebound post-brexit. draghi takes the stage. the ecb president is a speech in portugal. we bring you those remarks live. eu leaders meet in brussels. cameron crosses the channel for his first encounter with his old allies to will we see standoff or conciliation? -- old allies. will we see standoff or conciliation? ♪ francine: welcome to "the pulse." live from bloomberg's european headquarters. i am francine lacqua.

the pound rising for the first time since the uk's decision to leave the european union. we have seen recovery of investor appetite for higher yielding assets. .urrency markets zapping demand you can see the volatility index dropping down 9.8%. when you look at the underlying compass for this slightly entrenchment -- slight entrenchment, monetary policy and the central banks to stay firm. will get one that. we will bring you mario draghi's speech live from portugal. the skip to the bloomberg first word news with nejra cehic. nejra: david cameron is set to face his european leaders for the first time since the brexit results. the prime minister will endure an awkward dinner with his cohorts later after his efforts to calm britain's -- failed to stop the pound from slumping

again yesterday. george osborne has made it clear that the u.k. will be poor in the wake of the brexit vote. the u.k. chancellor added that the country is a certain to need hikes and further spending cuts. he ruled himself out of the race to proceed david cameron as prime minister. the rating agencies have had their say on the referendum decision. s&p has stripped the u.k. of its aa.rating to fitch also cut jumping its rating from aa to aa plus it equips we no longer think that institutional -- plus. >> we no longer think that the institutional -- this regard the disability, disability -- , we thinkstability,

the funding risks for u.k. and funding risk -- the u.k. is extremely dependent on capital flows. bill gross has said the odds of a u.s. recession may be as high as 50% following the brexit decision. the fund manager thinks the yields on 10 year u.s. treasury .onds may fall to 1.25% they could drive up the valley of the dollar and increase the odds of the recession. while britain represents a small part of the global economy, and brexit will slow trade, immigration and growth. this brexit was not shocking enough, england's soccer team is also out of europe. they were beaten at the championships by iceland. just 330,000 people, iceland is the smallest nation to qualify for a national tournament.

global news, 24 hours a day, powered by 2600 journalists in more than 120 countries. i am nejra cehic, this is bloomberg. francine. francine: mario draghi will speak any moment now. we'll go to it. let's bring in our guest, here's eugene what -- he is guillemot -- gillis mark. expectinghat they are the fed, the ecb to do more. case, the ecb would have to do more. --is fairly easy for them to at this stage, it is a wait and see moment because honestly so far the reactions has been quite

muted. there is no sense of emergency. making it clear that the ecb will respond to a negative shock of growth. francine: what we expect from mario draghi is he is going to buy more corporate bonds. does that have the impact that we need in this kind of brexit shock. gilles: bailey thing you can do really the thing you can do today is -- it is true the rate of return has not been superhighway lee. if we get a negative growth shock, the response will have to be fiscal. this is what will offset the lack of demand in the uncertainty shock. it will make this physical relaxation possible. [indiscernible] and directly it allows to keep

things together. we probably need to see more physical relaxation in countries like italy. is thereng we learned might be a prodigal cost to pay. at this stage, we know we are going to have another referendum in italy in october. it would make sense to get some kind of growth in the run-up to this referendum. austerity ist extremely mediocre. only fiscal policy can do it. with the support of the ecb. francine: you worry more of the the recession hitting the u.k. and hitting european and would put it into a recession. do you worry more about the factitious politicians? jill: -- gilles: it is bad for u.k. and the area.

our analysis would suggest the u.k. we are seeing the fragmentation that we could see back in 2012, that is a reason to be hopeful. the u.k. is facing massive uncertainty. the rest of europe is facing uncertainty. we are not in the political conditions where governments could come out and say we have a plan b. francine: we heard from the commissioner and the european leader insiders saying they did not want a plan b. gilles: i think it is more that's mental than that. -- it is more detrimental than that. there is a no such appetite. charlotte has made the point in week before the referendum. the kind of nonresponse we're getting in my view reflects the state of politics in europe.

francine: from your perspective, as a chief economist, is it best to invoke article 50 right away? wait in the hope that something can be -- i don't know if it is going back to a second referendum, but damage can be limited. gilles: there is a lot of denial watching here. come upe europeans will with another deal and the u.k. can accept it. let's face the reality we have to take what is on the table. the british people voted to be out. there is probably no reason to go to article 50 in the next few days, few weeks. from that point of view, the market was quite open. the more we wait, the longer the uncertainty. hence the more negative the shock on growth. from theand why

british government's point of view it makes sense to wait as much as possible. the minute you trigger, your leverage falls. if people's start understanding what is going to be the deal. francine: we're getting pictures from portugal. that is the chief spokesperson for mario draghi. he is due to part at any moment. he is giving a speech and then he arrives with david cameron and brussels. what kind of reception to get from his old allies? gracious.e is no one -- it is in no one's interest to make it too tough. a high level of frustration. it is a big thing. it might be a big difference between the u.k. and the rest of europe even if that feeling has diminished in the last few years.

they have some sort of emotional attachment. the idea that one of the countries is leaving clearly is badly received. francine: mario draghi taken to the podium after an introduction. let's go live to portugal. mr. draghi: the economies have been engaged in the same task, mainly inflation and expectations. possibility. each has faced conditions particular to his own jurisdiction. each has deployed managers appropriate to its own context. each has acted to fill the mandate laid down in its own constitution. , the fact that all central banks have faced a common challenge of low inflation is not coincidental. there are global factors at

play. this begs the question, what is the best way for us to deal with them? extreme central banks can take global donations as entirely -- and said their policies accordingly. at the other extreme is explicit coordination among trade policies. in between is a range of informal solutions. whatever one's views on these is that what is clear the question of the international dimension of monetary policy is becoming more apparent since the common factors affecting central banks are increasing. indeed, a growing literature suggests that globalization has created a common factor in inflation development which goes

beyond fluctuations in energy or commodity prices. higher volumes have increased the importance of international price and wages relative to domestic ones. making the global outlook more relevant. in that context, there are two types of factors that are significant for the global low-inflation environment we face today. more cyclical factors that have put downward pressure on prices and more structure factors that have lowered the equilibrium grade and slow down the response of the economy to monetary policy. the first type of factors include the large dish generated by the financial crisis which still average 1% in most g-7 economies today. this global slack has dampened

the particular the producer price inflation, both of which have been week for several years among advanced economies. prices set by producers in the and trading partner companies are indeed highly qualified -- highly coordinated. -- slump in demand for energies linked to the slowdown in the emerging markets. not only into lower headline inflation but into lower underlying inflation. indeed, if one decomposes inflation for the average advanced economy, one finds since may 2014, there's been a notable rise in the global component linked largely to oil

and commodity price. these various factors may originate only in parts of the global economy. some original in emerging markets. in an integrated world, they have global effects. overcal weakness has bent from various channels -- challenge for all. the second sex of factors -- the second sex of factors is more global in nature. -- the second set of factors is more global in nature. more complicated from monetary policy everywhere to provide the appropriate boost given the effective lower bound on nominal interest rates. in particular, this has led many central banks to engage in

large-scale unconventional policies. that low interest rate environment is a consequence of global excess of savings over planned investment which results from rising -- as populations plan for retirement. from increased demand and lower supplies of safehouses. from relatively less public capital expenditure in the context of lowering population growth in advanced economies. from the secular shift from industries and physical capital to those more interested in human capital. from a slowdown in productivity growth that reduces three terms of investment. again, those factors may not be the stupid it on the jet -- homogenous leap across economies. they propagate through global financial markets.

with internationally mobile capital, clearly interest rates that balance savings and --ancement is more a global then a global one. accordingly, estimates of the equilibrium interest rates suggest it is very low, possibly even negative in the euro area, u.s. and other advanced economies. none of this means the central banks should give up of pursuing mandates.stic pricing we have demonstrated with our conventional tools that it is possible to engineer financial conditions even when the equilibrium interest rate is low. we have shown this can be effective in supporting domestic demand and stocking domestic price pressures even when headwinds are blowing from the global economy.

the global nature of low-inflation doesn't have two important -- does have two important implications. the first is operations gains persistent headwinds arriving from abroad have kforce central banks to deploy monetary policy with more intensity to deliver their mandates. then in turn results in higher financial stability rates. the spills over to economic conditions in other jurisdictions. [indiscernible] contrary, by securing economic and financial stability in their own jurisdictions, advanced economies have also stabilized other economies through trade and financial linkages. empirical evidence exists -- evidence suggests that the

measures taken to -- have been positive, especially at times such as after the lehman crash when countries that faced, and global shocks. at the same time, monetary policy has inevitably created destabilizing spillovers as well . especially when business cycles have been less aligned. the large exchange rates for tuitions between major currencies and the pressures some emerging economies have experienced from capital flows are testament to that. this is not so much a result of the measures central banks have employed but rather the intensity with which they have had to be used. these negative spillovers have led to a revival of interest in the topic of monetary policy.

formal monetary policy coordination is complex for known reasons. central banks -- not global ones and are accountable to their domestic parliament. thatdoes not mean however we cannot achieve a better global solution than we have today. we have seen how divergent monetary policy among major central banks can create uncertainty about future policy intentions. which in turn leads to higher exchange rate volatility and risk premium that then has to be countered with more expenditure that's more expansionary monetary policy, increasing spillover effects. we also know that compared to -- since they,

lead to greater market volatility to which other central banks are then forced to react. benefit from an enhanced understanding among central banks. that comes down to improve communications over our reaction functions and policy frameworks. the global economy could also benefit from corporations among spillover initiation on how to mitigate it unwanted side effects. one aspect we need to understand better is how domestic monetary regimes affect the transmission of foreign monetary policy shocks. there has been a debate in recent years as to whether the famous trilemma of international

micro has collapsed into dial-in lemma --apsed into the dilemma. -- but there is also evidence that the exchange rate regime still matters. to atge rates flexible least some degree of insulation from global shocks. another aspect is understanding the role of the missing policies in mitigating negative spillovers. a large body of empirical work in recent years has shown that physical, macro prudential, regulatory and supervisory policies could help regulate the adverse effects of foreign monetary policy.

indeed, the recent experience with the paper tantrum in 2015 showed how differences in domestic policy frameworks shaped how severely different economies were affected by financial spillovers. in other words, it has become clearer since the crisis the famous pemberton principal which we apply at a domestic level also needs to be applied at the global level. policymakers need to have sufficient -- to deliver on their objectives. and whendo have them they do have them, they must use them. the second implication of the global nature of low-inflation is there is a common responsibility for addressing its sources.

whatever and whenever. indeed, to the extent that the environment to which we operate is more affected by the global saving and investment balance. the speed at which monetary policy can achieve the mystic goals becomes more dependent on others on the success of authorities and other jurisdictions to also close their domestic gaps. --our collective ability to? ability to tackle. in a recent speech, i made a similar point regarding interaction between monetary policy and other policies at the domestic level, such as physical and structural policies. there are maintained that such a banks could benefit -- could best be described as

independents and interdependence since monetary policy can also test can always achieve its objective eventually, but it will do so -- can always achieve its objective eventually, but it -- also do faster if it is what i am saying is the same applies at a global level. we may not need a formal coordination policies, but we can benefit from alignment to policies. what i mean by alignment is a shared diagnosis of the root causes of the challenges that affect us all. and shared commitment to found our domestic policies on that diagnosis. the way in which domestic policy response to a shortage of demand globally will very in some cases, the emphasis may be on increasing public investment.

in others, supporting private demand through more growth friendly tax and regulatory policy. of course through monetary policy. the relative stance of stabilization will differ across countries, depending on cyclical positions. the sign of the effect on global demands is to be positive. , structural policies that aim at raising participation and productivity may take different forms and different places. they need to achieve the same outcome which is to increase long-term growth rates every equilibrium interest rates. can playh as the g-20 essential role in bringing about the appropriate alignment of policies. it is key what is agreed is

translated into policy actions. for example, there is a point in the g-20 commitment to raise goebel growth by 2% with structural measures. one example of how intentions and actions can diverge. in contracts that's it contrasts with the more successful example provided by the court needed mobile fiscal expansion in 2008, 2009. bind countries into specific actions but mutual recognition of the common interests can add to the form of coordination device. today ison interest the faster closing of the global gap, more stable global inflation, higher growth and greater global financial stability. makesn improved policy

will help reduce unwanted side effects of monetary policy. since the burden of stabilization will be better shared across policies. for instance, in the current alignment of global sex, the international spillovers from just -- are likely to be wholly positive since they primarily boost domestic demand in their own countries. that is true within regions like the euro area where there are upshot islocal -- the ,hat in a globalized world [indiscernible] will likely matter more as our economies become more integrated. we had to think not just about whether our domestic monetary policy is appropriate but whether they are properly aligned across jurisdictions.

we have to think, not just about the composition policies within our jurisdiction, but about the global composition that can maximize the effects of monetary policy so that our respective mandates can best be delivered furtheroverburdening monetary policy. so as to limit any destabilizing spillovers. this is not a preference or a choice. it is the new reality we face. thank you. [applause] francine: we were hoping for a possible q&a session, but mr. draghi decided not to do it. it wasn't the program so he is sticking to the script, the speech he had prepared. we know he is leaving that form

early. leaders ineu brussels for a crucial meeting of the first time. david cameron after that brexit vote. .et's get reaction we were hoping to find out more about brexit. we're hoping to find out if they have a plan. he stayed well away from that. gilles: i was hoping to be that specific when he was asked about brexit earlier this morning. he said it was sad. he did not elaborate. it is not exactly the right forum for him to do this. there is going to be this european meeting tonight which is interesting to him. francine: we are getting live pictures.

i don't know about relax but her demeanor -- angela merkel talking to shop the -- addressing the parliament. if you look at such a banks, the scottish representatives seem to have dominated in the u.k. with decisiveness. who is the leader in europe? gilles: at this stage it remains angela merkel. on howarly set the tone we would handle collectively the discussion. she sounded fairly gracious, willing to allow some time. she was very clear that it is the divorce proceeding, not the beginning of a patch up attempt. she is still setting the tone as far as central banks go. it is quite clear they have the arsenal ready if things turn

absolutely sour from the rates point of view in the eurozone. it did not. the reason we are not seeing this spread widening, which was widely expected, because the ecd is trying to go for a big spread widening at this juncture, knowing or assuming the ecb would come and enforce. is first and foremost a political decision so the first response lies with other politicians. angela merkel is the first. has --hn carter younger is speaking to the european parliament. >> i think what we are seeing is global. it shows what is happening. i would like the united kingdom to clarify its position and i would like the idea to become

common currency that there could be some kind of secret negotiations behind closed doors between representatives of the united kingdom, national governments, some commissioners, and some directors general. ban, aplaced a presidential ban, on commissioners engaging in discussions with the british government, regardless whether it was leave or remain. they can have no preliminary discussions with representatives of the united kingdom, no notification, no negotiation. >> we lost as a result of the british vote. we lost something very important. founding fathers do not have

any more rights than other member states. but launched the project are the only countries behind the project. the other countries' so-called new member states are fully fledged member states. i welcome and celebrate the reunification of europe, welcome new member states. vote has cut off one of our wings but we are still flying because our flight towards the future, toward new horizons continues and these new horizons await us. the horizon that is important for europe. those who look at us from afar concerned. other world leaders

are very concerned because they are worried about the past the european union -- the past the thepean -- the path european union will head down. so our flight continues. towards a clear objective, a predetermined objective as laid down by the treaties and by the will of many europeans. powered flight, -- our flight, our journey continues. we have slowed down a bit. we must progress to achieve our shared objectives and we must do so with renewed ambition. imagine, just imagine, that the european commission had not come forward with the 10 priorities and the majority of parliament endorsed these, what response would be be giving to our

british friends? it would be the commissions program following on the british votes. andwe going to just stop not continue with the effort to put an end to flourishing democracy? of course we are not. we are going to keep fighting against what british people call red tape. we need less bureaucracy and we are working on that. that is not stopping. in the commission we said that social europe is going to find its noble and deserved place in europe. a broad ranging consultation on social right. tom: that is the president of the commission giving a speech to the european parliament saying he has basically banned

any of his commissioner to speak with the u.k. counterparts to see what kind of negotiations they could have. he wants the u.k. to invoke article 50 said that negotiations can start. he is talking about an evermore integrated europe. the other politician everyone is watching for is angela merkel and she is speaking to her own parliament in germany. that, veryn saying much what we heard yesterday. she does not want any proposal that boosts centrifugal forces. what she means as she does not want a motion to get in the way of actually accelerating the process of the u.k. being extracted with the eu. we have spoken to a lot of shownrs saying she has leadership, she seems to be the adult in the room. the have been many diverging ideas. she is also saying the brexit

ine is a watershed moment that germany except the vote with great regret. , also mario draghi who we were hearing about in the last couple of minutes, will join in brussels. it will be their first face time with david cameron who will join them in brussels in his first overseas trip since the brexit referendum last thursday. markets gaining this morning. let's head to the bloomberg for your asset check. nejra: we are certainly seeing risk on today. equity markets, gains of 2% on the ftse 100 and the stoxx 600. they are trapped the ftse against sterling because we are seeing both rise for the first time since brexit, sterling up after an elect -- 11% drop.

up about one half 1%. we are still pretty close to that 30 year low that hit once we got the news of brexit. is this a sign of a further rally or is it just a pause for breath question mark if you look at sterling, we can look at the relative strength index. .ou saw this actually drop it is a signal that an asset has been oversold. i guess the question is, can the rally continue for sterling looking at the relative strengths index. we have been seeing a lot of risk appetite but one way that has not played out so much is in the bond market because we have been seeing money move into a number of bonds globally, pushing 10 year yields to lowe's. this is the 10 year yield month to date for japan and the aussie. in japan, benchmark yields have

all dipped below 0.1%. for the first percent -- for the first time more than 80% of the jgb market has yields below .1%. some six basis points today. we are just below 1% and i guess ,he question with u.k. guilt is this is one part of the u.k. market that we have seen money move into, where is the tipping point? we are seeing yelled move higher but do they have further to fall? francine: thank you so much. let's talk about the sector which has been the hardest hit in the post brexit selloff. the stoxx 600 bank index. after friday's slump investors with theing bankshares sector down another 7.7%. at one point yesterday trading was suspended at barclays and

ubs due to volatility. the particular problems facing italian banks, a little bit later on in the show. welcomeverview, let's nicolas auto. i want to bring our viewers to the fact that angela merkel is still talking for she goes over to brussels. she said the last couple of minutes, some things that ju ncker has been saying, there is no preliminary talks between the u.k. and eu. that makes it difficult for the banks because we do not know if they will have this passport right. colas: one of the questions is whether they can still do business, barclays i think is one of the u.k. banks, is particularly affected by that. meanso means, could

meaningful change for some of the european banks. if you think about deutsche bank are some of the french banks with sizable investment banking operations in the u.k., those would certainly be affected. francine: what was your first reaction? we saw the banks slump on friday. they were down 20% to 30%. yesterday, this plunge continued . our people worried about solvency? otto: i do not think at this point it is a worry about solvency. it seems to me it is in many cases more a reflection now of the surprise in outcome, which i think most people would expect to read to lower economic -- lead to lower economic growth going forward. it reflects more the expectations of the lower .rofitability to come

if you have a recession coming in the u.k., you would expect lower revenues, higher risk charges. francine: does it justify the 30% fall? is there something the markets are worried about that we are not seeing? is there something more sinister like people thinking actually if the u.k. does not renegotiate, they still have to follow the eu rules but could have the past porting right? they are all uncertainties that nobody can really answer at this stage. followsnecessarily it 30%, 40%, 50%, only time will tell. colleagues think my , financials and equity bank research, they have done some calculations on this and basically they have come to the conclusion that it reflects a reduction of maybe 5% in revenue

going forward. futurelly a catastrophic that is reflected in the share prices, it is just basically you are discounting a long, weaker economically worse future all in one go because basically into the brexit vote, it was not really expected. up sone: shares have gone maybe it is just a little bit of a correction. wilbanks have to restructure more because of brexit and will we see a lot more job losses? otto: i would expect that both will happen to some extent. if you have weaker economic development then one way of reacting to that is of course a focus on cost, which usually means cost cuts among other things, and restructuring.

yes, again, the investment banking we have already touched on. other things could also be affected, all kinds of arrangements that the eu has for payment flows, for security settlement, clearing, all these kinds of things which of course require adjustments at the banks . much, he thank you so stays with us. i want to bring your attention to the exclusive interview with mervyn king who joins us on "surveillance." restore -- ♪

francine: welcome back. angela merkel talking to her bundestag, telling the parliament terriers -- parliamentarians she regrets the decision to leave eu and she also says they will not make cherry picking concessions to the u.k. we were just talking about the fact they may lose their passporting writes. merkel also saying the u.k. will not have eu privileges without accepting duties.

as we heard earlier on, she reiterated that there will be no informal preliminary u.k. talks with the eu until they actually invoke article 50. that we know will not happen until this country has a new prime minister. italy is considering ways to inject funds into it banks following the brexit vote. it sparked a sash -- a selloff in italian lenders. let's get to our banking correspondent in milan, danley spring. what are the measures be considered by the government? we saw some comments from the prime minister this morning as well as the incoming eu commissioner for financial and he is saying that basically everything is on the table in the sense that italy is

talking to the eu about essentially getting around the problem of state aid, avoiding another bail in situation. they need to provide capital, some liquidity to help banks deal with upcoming capital increases and getting their ratios in shape. they could do it in several different ways, direct injection of capital by the government, offering state guarantees by a state lender, all of this is being discussed right now with the hopes of finding a solution quickly. they have to do it quickly because of this tremendous amount of bad loans that italian banks have on their books. francine: thank you so much. otto, every three weeks we talk about italian banks.

say, wek at brexit and understand they may have to put 40 billion. is this an excuse or what brexit does, put a highlight on the extremely weak spots already? otto: the trigger i think is the brexit and the market reaction to that. clearly shares of italian banks have been hit hard so it highlights the challenges they have. having said that, i think i would side more with you touched on this is maybe an excuse or an thertunity maybe for italian government to do more than they have been able to so far. because essentially it is an attempt to get around the normal rules within the eu and within the financial market and competition roles, i would expect this will run into some opposition and difficulty at

some point. francine: what is it, eight years off the financial crisis. why do we seem to be in an even bigger mess? otto: i am not sure i would necessarily describe to that. francine: if you look at the share price, most of the european banks have lost 50% since january. ,tto: the share price discounts the future expectations, and clearly there are challenges but not necessarily life-threatening challenges in many cases. there are more challenges of low economic growth, a negative or inverted yield curve, competition pressure on margins, all these kinds of things is more the issue rather than a concern about solvency. italy, the banks still have us peschel problem -- a special problem with nonperforming loans and that will take time. francine: thank you for joining

us. -- merkel, europe cameron, what could be an awkward reunion in the belgian capital. ♪

are holding leaders crisis talks in the wake of the brexit vote. angela merkel speaking to her parliament. they all convene in brussels.

ryan chilcote is in brussels. it is a difficult day for the eu who will face leaders after the vote for the first time. ryan: it will be very awkward. the u.k. called the eu and said, we intend to move out of the house and file for divorce. what is going to happen this evening is the two parties are going to get together over dinner and discuss what that is going to look like in the future. you know the british prime minister is not going to be able to save whole lot about the specifics because he has made it very clear he is going to leave that to the next prime minister. and we do not know who that will be or when they will be in office. on the eu side, they have been clear they are not going to enter into any negotiations so

this is just going to be an airing of use. francine: you talked to willie walsh about brexit. ryan: yes, i did. i believe we have an excerpt from that interview. stageis unknown at this whether the pound will stabilize against the dollar but on friday we believed it would take a significant hit. the pound closed a little bit stronger on friday than we expected but it weakened yesterday and we will watch what it does today. it is going to be structurally weaker against the euro and the dollar. ryan: let me give you 15 seconds of headlines from that interview. he said iag is not cutting capacity or fares and sees no reason to. the reason we got that reduction on friday and their forecast for operating profit growth is because of fx translation alone.

francine: thank you so much, ryan chilcote in brussels. for anllance" is up next exclusive interview with mervyn king on brexit. ♪

francine: sterling halts its decline, europeand. leaders meet in brussels. cameron has his first brexit encounter with his old allies. kang and brexit will sit down with mervyn king -- we will sit down with mervyn king. i am francine lacqua in london with tom keene in new york. he