the relief rally city, thein europe anda warnine french president says london will suffer from brexit and merkel says there is no backing out now. state made anamic attack at the istanbul airport that killed at least 40 people. this is bloomberg i am francine"

lacqua in london with tom keene in new york. theave to talk about sadness of international terrorism and then we look at the referendum and the fallout. tom: we will go to is been bill -- istanbul later and speak to an expert. if you did not know it was about brexit and the eu, you would think it is about someone arguing about the summerhouse. francine: we talked about metaphors with the divorce but there has been quite a bit of anger especially in london where 70% of the people voted to stay in. emotions are changing and we saw an emotional david cameron yesterday. let's get to the bloomberg first word news. blaming islamic state for the suicide bombing at the airport and istanbul. three bombers opened fire and blew themselves up after police

started -- saw them. 40 people wounded -- killed, 200 wounded. recent months, islamic and kurdish militants carried out bomb attacks in turkey. david cameron used his final european union summit to express regret over the brexit vote, telling final desk telling leaders you could have won the referendum if they have not refused to reduce immigration to the u.k.. the eu leaders said there could be no turning back for the u.k. get ready for a recession in the u.k. according to a bloomberg survey three quarters of economists polled say the british economy will fall into a recession since -- for the first time since 2009 and they believe the bank of england will add more stimulus and cut interest rates in the third quarter.

believe money market derivatives we are a long way off from the next fed interest rate hike. there is a greater probability the fed will cut rates. they do not have more than a 50% chance of a rate increase until 2018. in a speech in pennsylvania, donald trump ripped the pending transpacific trade agreement and --vowed to renegotiate deals with canada and mexico. global news 24 hours a day powered by more than 20 600 journalists and analysts in more than 120 countries. tom: let me get to the data. a new wants -- a nuance in the market, lower euro.

the vix showing an odd 17.81 in the volume list. sterling stronger, yen does not know where to go, and there is the headline. odd curve flattening off of without questioning safe haven moves into paper worldwide. francine: when you look at stocks we see the relief rally that was started yesterday continuing. the european stocks gaining. banks are gaining some 2.5%. let me get specific onto the banks. cut barclays, hsbc and others after the brexit vote but they fell by so much they are regaining a little bit of ground. tom: let's go to the bloomberg. surface of famed ovd sterling. what this shows on busy axis is

axis isty and time -- z volatility and time. there is a massive bet toward weaker sterling. it is rare to see this much of a curve, a smile, or a smirk right here on this bet. the message here is a huge bet, a one-way bet toward weaker sterling. francine: interesting because i chose something similar. basically this is the correlation. britain is grappling with its exit from the eu and the 30 day correlation between the pound-euro exchange and the europe stock 60 has reached the strongest since before the introduction of the single currency in 1999. tom: we have done too much mathematics in the last minute and a half. can we all go home? francine: let's, we have not had

enough sleep. is -- when you look at these currencies and the easingity that they are a little bit on the expectation how uglyl-bank policy ?s it going to get vasileios: i am not sure this easing is coming on the back of the central bank policy because there is a gradual easing. u.k.is much more a specific idiosyncratic event rather than an event that is happening, ramifications on a global scale. to see we are going gradually some normalization in risk assets. as far as sterling, i expect volatility pressure will

increase. francine: are the markets completely getting it wrong? certainly we are not expecting ,nything for almost 2018 now from the fed. >> you are referring to a situation where it has to do with monetary policy being on hold compared to being a big tighten where it is now. , i doot really believe not buy to the argument that the market is expecting a lot. tom: to summarize all of this mumbo-jumbo, there is a thing called epsilon. you arepsilon so great under the table doing nothing until things settle down, or can investors be opportunistic here given all the systemic risks and oddities? sony: it is a very binary that.

depending on how much confidence your understanding and reading of what is essentially a political risk situation, you can enter the market or not. given how leave and -- how little even insiders know and what the timeline is going to be, the safest assumption is to be on the sidelines. also going back to the earlier point that you were making about the markets normalizing slightly, i think that is partly due to the fact that the realization has dawned that nothing is going to happen really soon and that there is a reasonable chance, i would say even as high as 50%, that we may not actually see a brexit. the market is digesting that information that there is no particular prime minister candidate in the united kingdom.

not david cameron and possibly not yours johnson, who will likely pull the plug on article 50 and trigger a brexit, knowing certainly that it will trigger a , financial market turmoil, and a breakup of the united kingdom. tom: when you take the oddities of the market right now, how do you express a believe in sterling? do you use cable, do you use euro sterling, or do you have to use a basket trade if you are going to bet strong or weak sterling? vasileios: going back to what i have heard and then i will elaborate on that. the only issue i see with whether or not the article 50 will be triggered, regardless of what happens down the road, this injects a lot of uncertainty into the market and postpones

investment plans and consumer spending. the argument for a u.k. recession, even if the article 50 is not invoked, is not disappearing. from that respect i remain quite bearish on sterling. i think euro-sterling has plenty of upside largely because we are going to see a lot of reversal of this safe haven flow that we have seen during the eurozone debt crisis years. francine: thank you so much. both stay with us. we have a special interview later on bloomberg markets, erik schatzker speaks to blackrock ceo larry fink. and live from the aspen ideas forum. ♪

francine: welcome back to bloomberg "surveillance." francine lacqua in london, tom keene in new york. what's get straight to the bloomberg business flash. inra: economic confidence the euro area fell slightly on the eve of the brexit vote. economists had forecasted that consumer sentiment would remain -- same and conference confidence improved in the industrial sector. verizon will sell bonds backed by customer payments for mobile phones. bank of america is the lead underwriter for the $1.2 billion bond offering.

fidelio investors want to inject more money into passive investment so they are cutting fees on 26 index funds. their average ratio will go from about 11 and a half basis points to 10. investors are putting money into passive funds. that is the bloomberg business flash. francine: in brussels last night, david cameron used his last eu summit to express regret as european leaders said there was no turning back from brexit. >> britain should seek and europe should seek the closest possible relations over trade, over cooperation, over security. while britain is leaving the european union it will not and should not, and in my view it will not turn its back on europe. francine: there was renewed pressure to maintain article 50 and cameron maintains that is a

job for his successor. is the first time they talk without david cameron and the room. sony: that is exactly -- ryan: that is exactly correct. doing, theyhey are are sorting out what the role of the european commission, the executive arm of the eu that carries out the collective will of the 27 liters is going to be in the negotiations with the u.k.. that sounds technical but it is political. what the u.k. wants to say is this is a political matter and the politicians, not the bureaucrats will handle it. they are having a big think about the future of their own union and how to keep it together. tom: the cliche is everybody is on the same page. i do not buy it. how many pages are there to ?tand by

how many divisions are there within the continental eu? ryan: i think there are at least a few. there are some countries that would like to see the eu expand, some that think it is too big, some that would like to see deeper financial integration. who seem to germans be pushing for more of a political club. you have the eastern european countries that are more anderned about federalism they want to restrict the power of people so there is a lot of division. francine: ryan chilcote in brussels. he will be there throughout the day to bring us any updates. we are back with our guests. when you look at the eu, what kind of message, what kind of political leader -- and i'm thinking of angela merkel --

what could she do to make sure the u.k. comes back in? sony: what she has done so far is played her cards really well. she made it clear there would be no access to the single market, no u.k. being part of the single market without free movement of people. what it has essentially done is underneathed the rug the leave campaign because their promise of essentially was that we would be able to cherry pick, keep all of the good parts and the city will not be harmed while stopping immigration from the continent. a new prime need minister because nothing will happen before. i know there are rules and regulations. why can it not be accelerated? i think within the candidacy of the tory party they need to figure out, one thing

that became very clear after the leave campaign one was that there was no plan. to the extent they have been removed from the website, or absolutely pod in the sky. they need time to figure out what they want and there is a division where the conservative party within the parliament is pro-remain that membership is maybe more skeptical. there is a conflict that needs to be resolved and they need to figure out a position. tom: i know when you were in the london school of economics you took an introduction to the game of thrones. nicola sturgeon does not have three dragons. what is the lead bridge she had that leverage she has to advocate for scotland and brussels? i do not see it. ofy: the vision, the optics

her having meetings in brussels and starting preliminary negotiations whether they have any legal authority or not, is more than enough to essentially send the signal to the whole of the u.k. that a brexit is equivalent to a breakup of the united kingdom, and i think that is the best thing she can be doing for scotland as well as the u.k., and she will continue to press with ever greater urgency. hopefully this more than anything else will be the one thing that will still likely keep the u.k. in the eu because no prime minister, no british prime minister wants to press the red button when he or she knows that they will go down in history as the prime minister who elected the breakup of the united kingdom. tom: maybe it is a blue and white button in honor of scotland.

we move forward this morning on investments after this political and during this political crisis. david harrell will join us on ownership of european bank shares. this is bloomberg "surveillance." ♪

francine: i am francine lacqua in london with tom keene in new york. we have been focusing a lot on the banks so i picked out as my morning must-read the moody's

letter we all got yesterday. the managing director talked about the downgrade on the outlook for the 12 u.k. banks, writing, we expect lower economic growth and heightened insecurity over the uk's future trade relationship with the eu to lead to reduced demand for credit, higher credit losses, and more volatile wholesale funding conditions for u.k. financial institutions. when you look at the city of , i'm not sure if he is pitching his own and trying to get the business to go to france but he said the clearinghouses will be in trouble and financial transport is also in jeopardy. there is very little doubt in my mind the european union will play hardball with the u.k. in every conceivable dimension. as far as the clearinghouses,

that has been there for quite some time. the ecb has complained about some clearinghouses doing heavy work. vote do get the article 50 , that is going to give a lot of leverage to the ecb to say basically you guys are out of merger restrictions so i cannot allow you to do that. francine: what is attractive for a banker? with a move to frankfurt or paris? vasileios: i do not think it is an easy answer. think itget a brexit i is a process that will likely take a significant number of years. it could be split evenly or unevenly between all of these major cities, dublin, frankfurt, and paris. one thing to remember is that where we stand right now london still has significant competitive edge. tom: mervyn king was with us

yesterday. are you telling me erik nielsen is going to move to some place back on the continent? that is not going to happen, right? vasileios: that depends if there is a cafe nero. tom: i do not buy it. vasileios: about cafe nero? erik moving back to the comp does continent. -- continent. francine: we will be back in a couple of minutes talking about the stock market, and these are the banks year to date. ♪

tom: good morning, everyone. "surveillance" from new york and london. difficult news from istanbul.

nejra: authorities in turkey are pointing the finger at the islamic state for an airport suicide bombing that killed at least 40 and wounded 200. officials say three suicide bombers blew themselves near the entrance to the arrivals hall. in recent months, islamic and kurdish militants have carried out bomb attacks in turkey. the race to replace david as leader and prime minister shifts into another gear today. contenders are likely to make themselves known before the deadline tomorrow. may kept a low profile during the brexit campaign and supported the remain camp. the italian navy has uncovered the migrant ship that sank last year with an estimated 700 people on board, one of the

worst known tragedies of the mediterranean migrant crisis. on capitol hill, senate republican and democrat leaders are promising to finish the rescue package for puerto rico by friday, when they must come up with a $2 billion debt payment. the house passed legislation to greet a coal dust control board to oversee the puerto rican debt. democrats say a bill that would take away funding for birth ebola, and battling while the republican say democrats are playing games with public health. global news 24 hours a day, powered by our 2600 journalists and analysts in more than 120 countries. this is bloomberg. tom: it is a gateway to europe and asia. the airport in istanbul is far larger and more dynamic than many of us in the west perceive.

isobel finkel joins us now. there have been many tragedies in turkey. changing event for the country? the first is not error attack. there was a bombing in ankara that killed 500 people. death toll has risen to 40 at the latest announcement, 13 for nationals. biggestistanbul's airport and tourism is an industry that accounts for almost 10% of the economy. it is going to have devastating effects. we know that islamic

state is losing ground in parts of the middle east. is there a correlation train what seems to be more and more attacks abroad and then losing ground? although you could situate this attack on a continue on with things that have been going on in turkey, it bears a resemblance to the tragic events of brussels earlier this year where in a similar fashion isis militants detonated suicide vests. the difference is that the istanbul airport has extremely there are checks going into the airport and another set after that. these attacks court made it, so it, --court made coordinated. tom: will this spring the nation together? is turkey so divided that an event like this cannot bring them together, or will it

actually coalesce political support in turkey? right: you are absolutely . one of the many sad things about this spate of terror attacks is they have only increased division in what has already -- is already a divided nation. in the wake of h-bomb, you will note that twitter and facebook gets locked as is the case at the moment, leading to a climate where it is a lack of information that breeds mistrust . that seems to be the case here, although there is some degree of consensus about who is responsible, which has not been the case before. there was finger-pointing at isis, the islamic state, and homegrown kurdish militants. francine: thank you so much for

the update. of the to update you tragic loss of human life. we have to try to get through it and see the implications for global terrorist threats around the world. let's get back to our guests in london. are very good at is trying to understand what implications this would have on not only the relationship between turkey and the eu but the turkish economy. --were looking at forest foreign tourist arrivals to turkey fell 30% in may. sony: even before the attack what has been going on is the president having consolidated his power base and realized his legitimacy comes from a increasing legitimacy in the turkish middle class, has started sending out feelers to make peace with neighbors. rapprochement with israel

and russia was a sign of this. as much as he has been trying to play a strong hand and sometimes being obstreperous in relation with neighbors, i think this will further consolidate his decision to try and make amends in a way that tourism, investment, and other forms of economic benefit that turkey can enjoy from partnerships will increase. that inudes also dealing with the eu. i think his willingness to compromise to get the deal going would actually have increased following the attacks. francine: i know you also look at security within the eurozone and eu. is there anything we can do? this looks like a copycat attack of brussels. this happened outside security and i have flown through istanbul many times. it is really like the airport of

new delhi, one of the most secure airports. having grown up in india when njabjob was subjected -- pu was subjected to terror attacks, there is only so much you can do. this is not the last attack. tom: within the financial world, is turkey part of europe? what is the vector of turkey being part of european finance? vasileios: i think there is a lot to be said. the main issues i currently have and itsspects in turkey financial integration with the rest of the world, turkey has been dealt a blow as far as central bank independence is concerned. this is what really concerns me. 'sd that part of erdogan

attempt to consolidate his power i think he has made a lot of investors question how independent the central bank is going to be a couple of years down the road. from a financial perspective, that puts me quite concerned about developments for the lira as well as financial assets in general in turkey. francine: thank you so much. ,oming up on bloomberg markets a conversation with david rubenstein, cofounder of the carlyle group talking with erik schatzker at 1:00 p.m. in new york. this is bloomberg. ♪

tom: good morning, everyone.

dark and gloomy, a little muggy in new york city. we welcome all of you worldwide. michaemckee with us right now and we look at stress tests in the united kingdom, in europe, and of course in washington as well. are our stress tests radically different than theirs? michael: they are much tougher in the united states, particularly for the ecb. we get part two of the fed stress test today. it is all about capital banks need more. the bank of england and ecb all do their stress test to find out whether that banks have enough. how far equityed capital and leverage capital would fall in a severe recession. tom: are re-becoming more swiss like? michael: know, we are becoming

more american like. francine: it is it a surprise wellforeign banks did so and we do not know if they stress test for brexit. but takethey did not, a look at the chart we have of the foreign banks. the banks are not all tested but the number they did test came out reasonably well. bank of montreal problems but look at deutsche bank, much better than last year. are tested against the assets of the home country banks and that will change in 2018. they have to have subsidiaries in place and if they do not pass they will not be able to send profits back home. 2018, the same year that brexit is supposed to take affect. francine: what do we know about the ecb and bank of england's stress test? banks,: the ecb test, 51

seven for the prudential regulation authority and england. their results will be released for the ecb in the third quarter and the bank of england in the fourth quarter, but mark carney said he is confident all of the british banks can withstand the brexit vote. diamond stressed about american stress tests or his he living the big life? michael: i think he is probably a little bit stressed but let's look at the losses that could occur and you will see why fortress diamond needs a fortress. you can see how much each of these banks is projected by the fed to lose. it is an enormous amount of money. the good news is they have enough capital. if you take a look at what the capital ratios are, they have met them all.

morgan -- only morgan stanley is close to the limit, the rest in pretty good shape. this is under a scenario where they do not change their dividends or buybacks. today we find out if they change them as they want to, will the fed let them go forward and we will still have enough capital. we know that any bank going under would not be systemic, right? they are stress tested individually so we do not understand the correlation between banks, or do we? sony: we do not really. the office for financial research in the united states has been looking at second order effects and third order affects. , a so far as i understand lot of the second and third order effects have not been incorporated into stress tests

which remain for the most part first order shocks. the shock in the system is something that is extremely hard to model. also the fact that many of these shocks might happen simultaneously, those are really hard to test for. political risk might just come out of the blue. tom: michael mckee, can anybody for today michael:? michael:yes. last year sent him there and deutsche bank came up short -- santander and deutsche bank came up short. tom: we will advance this conversation with michael mayo of cl essay, all wound up about .overnance at bank of america on television and radio later today. this is bloomberg. ♪

>> this is bloomberg surveillance. this week bloomberg is exploring the business of pharmaceuticals and biotechnology across all

platforms. allergan is hunting for smaller acquisitions now that it's planned merger with pfizer has fallen through. the ceo tells bloomberg they are looking at smaller scale deals that would complement their strategy of being a growth leader in pharma. >> allergan is in a very strong position. days of oure final deal with teva and when that is closed, the proceeds will be spent, about $10 billion on a stock repurchase program, $10 billion on debt repayment, and that will leave us with cash flow of about $20 billion to invest for growth. nejra: in april allergan and pfizer and it plans to merge. germany has overtaken france as the biggest buyer of cancer drugs in europe. researchers swedish

european company -- countries spent $20 billion for cancer drugs. germany, france, italy, the u.k., and spain are the top five. hopes a vaccine for the zika virus can be developed. fullaccines gave mice protection against a brazilian strain of zika according to researchers in brazil. they say it would be difficult to estimate when a vaccine could become ready to use for people. that is your pharma focus on the business flash. francine: thank you so much. this is a picture for yen. it had some quite big movements as it is considered a haven. i want to show you my chart of the day.

what are the odds of a 2016 fed hike? that went all the way down and in blue the dollar-yen spot rate. our guests are still here. when you look at this chart it seems that yen is taking all the brunt and there has been so much money going into it as a haven. that has been our view all along that the yen is going to bear the brunt of the safe haven. demand, the safe haven largely on the back of rex it fears and now the u.k. referendum result. let's not forget that we are coming out of a period with a sizable yen undervaluation. at the same time, a dollar overvaluation across

the board. part of the depreciation in the thats coming from the fact investors realize the dollar is overvalued and part of it has to do with the safe haven, especially when swiss is no longer a safe haven. francine: because they intervened. historicallythink what is happened for safe haven to band for the swiss franc, what has driven it and the is -- a-- in the past lot of it has to do with the fact that we are talking with sizable he different real yields in switzerland. tom: i am really glad you bring this up. can japan unilaterally respond to a 95 or 100 yen? what is the likelihood given a massive floating world that japan unilaterally acts? vasileios: i think i agree with

you in the following sense. we are now entering a phase where more and more people are calling for coordinated actions. in that kind of environment for a central bank to act unilaterally, it would put them at a difficult spot. unless we wake up tomorrow morning and see dollar-yen at 90 or 85, i think it is unlikely that they will intervene in the markets. seasi look at the adjacent -- adjacentcies. japankorea adapting to and adapting to brexit. you see that was stronger yen compared to the korean won. what iss: -- sony:

really interesting is that we were having a chat off-line, the cdvement one sees in oe country currencies are at par with the stuff that one expected to use in emerging markets. it is the combination of rising political risk, post crisis fallout which has not been resolved. given that everybody has been trying to push the string at the this means that if you are trying to have this complicated supply chain network where small changes to exchange rates have a big difference on profitability, life is becoming more and more hard for you be it within the country or across the country as in southeast asia where your whole supply chain has floating exchanges across each other. rallying the pound is but we see the yen advancing. to'sneeds to happen for us

-- to call the end of the brexit shot -- shock? sony: i think even if one calls the end of the shock, my central scenario is that the yen still grind a bit higher largely because it corrects so many years of undervaluation. as far as sterling, i'm quite confident we are going to see a lot of short squeezes. it is pretty much what tom said before, that the market is really overwhelmingly of the view that selling is going down and personally i agree. that means we are susceptible to short squeezes. what youok said, we are losing sight of the vector. where is it? vasileios: i think it is more.

there are many ways you can actually approach this. what we have tried to do is put the following question under the the by asking, what is largest pack of portfolio flows that we have seen during the last four or five years reverse and go into pre-2012 levels? this has been an important driver of financing the current account deficit in the u.k. up with cable around 130 and it is likely you are going to go lower than that. tom: gentlemen, thank you so much. coming up, peter hooper of deutsche bank. this is bloomberg. ♪

many: this morning, the strands of brexit. minister insists on migration

limits. markets seek stability as safe haven debt is priced beyond perfection. and terror in istanbul. state is likely responsible. good morning, everyone. this is "bloomberg surveillance ," live from a world headquarters on wednesday, june 29. francine lacqua is in london. what is the distinction of the debate in london this morning? francine: most of the debate is in brussels at the moment. the political system in the u.k. is still in turmoil, but in brussels, they are drawing lines. they are talking about no renegotiation, and angela merkel was pretty tough on the u.k. last night. tom: let's get an important update without first word news. here is nejra cehic. is blaming islamic

state for the suicide bombing at the airport in istanbul. the three bombers opened fire and blew themselves up after police spotted them. at least 40 people were killed and 200 wounded. a turkish official says none of the attackers got past security controls. in recent months, both islamic have carried out attacks in turkey. the british prime minister told fellow leaders at dinner in brussels he could have one bank the referendum if they had not refused to reduce immigration to the u.k., according to a british official. the eu leaders said there could be no turning back for the u.k. meanwhile, get ready for a recession in the u.k. of thethree quarters economists polled after the brexit vote say the british economy will fall into a recession for the first time 2009. a majority say the bank of

england will add more stimulus. they picked an interest rate cut in the third quarter. turning to the u.s., if you believe money market derivatives , we are a long way off in the next fed interest rate hike. traders are pricing a greater probability that the fed will cut rates. they do not give more than a 50% chance of a rate increase until the beginning of 2018. donald trump has made a clear break with the republican party on trade. at a speech in pennsylvania, he ripped the pending transpacific trade agreement and vowed to renegotiate the u.s.'s long-standing deal with canada and mexico. he said free-trade is a deliberate attempt to boost growth outside the u.s. global news 24 hours a day, powered by our 2600 journalists and analysts in more than 120 i am nejra cehic. this is bloomberg. equities, go now to

bonds, currencies, commodities. futures up 12, doing better. euro churning. i want to get to the next screen quickly. the vix away from britain. flattening.ead francine? francine: this is my data board. you can see the vix index, down 6%. on relief rally with a focus central banks. moody's downgraded, putting their outlook on negative, especially for the u.k. banks. deutsche bank is gaining a touch, but overall, the valuation for deutsche bank is the way it was before the financial crisis. tom: let's go to the bloomberg y,ht now and go to the x, z space. this is sterling and the

currency surface of volatility over here. this shows a massive one-way that on weaker sterling. something every house is talking about, deutsche bank with a view onarly weak sterling per you can see the acute smile or smirk in the present tense. a one-way bet on a weaker sterling. francine? francine: this is the correlation between the euro stoxx 50 and the pound rate. the euro pound rate. this is what it shows us. it has been jumping significantly. it means the 30-day correlation haseen these two things been the strongest since the introduction of single currency in 1999. an: peter hooper has eclectic and most interesting career in economics, including terms of duty with the fed. he is chief economist for deutsche bank. i just mentioned the weak sterling call from your team,

alan ruskin and your colleagues in crime at foreign exchange. give us the why. is there a domestic story, or is there more going on? peter: clearly the british economy is taking a hit. how big a hit, very uncertain at this point. many people are expecting recession. there is a case that there could be a smaller decline. given this uncertainty and the the bank of england is getting into action here later this year, this is a clear negative for sterling. tom: is the bank of england independent, or is governor carney going to burn up the phone lines with chair yellen? peter: chair yellen has made it -- she has not spoken on this yet. the governor spoke last night and made it clear that the fed is concerned.

like theovish, sounded fed will not be doing anything for quite a while. margaret expectation of 2018 may be a bit far. to no question the fed waits see what is happening here. will the fed act on behalf of the u.k.? no third will the fed hold off because of uncertainty -- no. will the fed hold off because of uncertainty? yes. francine: when you look at a lot of the market movements, are we just -- are we relying on central banks too much? there was a huge selloff on friday and monday, but it seems the relief is continuing because we are saying the central banks are here. what are they running out of tools? good: you make a very point. central banks do not have a whole lot left at this point. we really do need more on the physical side. i think that eventually will be coming. a is clear that with this for

even into negative interest rates, which has had very mixed results at this point, there is not much less there. francine: are you concerned that central banks will fail? peter: will fail in terms of -- francine: if we see a recession, let's see their -- let's say there is a recession brought on by brexit -- do they have the means to deal with it? peter: certainly not at the level they had before the last recession began. way below that. there is a little bit left, but clearly this is going to be a crisis that will have to be dealt with by legislatures, by fiscal policy. tom: you have a weak sterling call. i want to go back to your work at princeton a billion years ago as an undergraduate. on the current account deficit of the united kingdom, purple line, goods and services. then you add investment income dynamics.

this is an ugly line that the gloom crew put out there. how does a current account adjust, and does it adjust only through currency? peter: if there is anybody smiling right now, it has to be u.k. exporters. this drop in the town is going to pay off in terms of shifting the u.k. external balance back toward surplus eventually. it is obviously painful in terms of standard of living for the average u.k. citizen, but we are going to get the account moving the other way. tom: you and i learned that our oftbook currency is a form weaker destruction for the united nations. the queen is watching. peter: certainly in dollar terms, no question. tom: these are big adjustments. francine: the problem is that when you look at manufacturing, i would struggle to tell you what huge big manufacturers the u.k. has. it is only 20% of the national

economy. it is services they need to focus on. even with the lower pound, i am not sure how much that adds to gdp. any majort is true of developed economy at this point. services have become more important. more than., it is 80%. but there is clearly leverage in the manufacturing sector, in the goods sector, when you get this big of a shift in the currency. if it is going to adjust the external balance, it may not be enough to cool an economy if it goes seriously into recession. it may not be enough to pull it out. tom: let's come back on the u.s. economy. peter hooper with us for the entire hour, from deutsche bank. also coming up, michael mail will join us -- michael mayo will join us.

on the distinction between the u.s. and the eu banks. from london and new york this morning, this is bloomberg. ♪

francine: i am francine lacqua in london. tom keene is in new york. let's get straight to the "bloomberg business flash." nejra: economic confidence in the euro area fell slightly on the eve of the brexit vote. that was a forecast -- utive a major worldwide recall by toyota up in japanese automaker is recalling about 3.4 million vehicles for defects involving leaky fuel tanks and airbags

whose inflator's may crack. the airbags were not made by takata. competitors may be nipping at the heels of the world's largest sports brand, nike. shares fell after nike's so-called futures orders fell less than expected. under rom a is making waves. plus id this has been revived and is cutting desperate adidas is being revived. tom: it was my book of the year two years ago. henry kissinger's "world order." how good was it? the former secretary of state rights in "the wall street journal." i highly recommend this essay, whatever your thoughts.

tom: we have peter hooper of deutsche bank with us today. what a complex, nuanced essay by dr. kissinger. i know in each of his conversations he goes back to generaln, refugees, and immigration economics. tell us about the shocks to germany and the shocks to u.k. over the last 20 years of immigration. peter: no question immigration has been central to the recent shock. tom: prime minister cameron mentioned it yesterday. peter: obviously. there is no going back. the u.k. population has spoken. it was 52-48, but that was a clear indication this was issue

number one. i think cameron's message that had there been more flexibility on this we might not have had this outcome -- pretty clearly, a long sequence, but particularly in recent years, and very recently with what is happening in the middle east, etc. -- but this is issue number one. tom: and point number one on education in immigration, it helps potential gdp. is the united kingdom on a relative basis doing better because of marginal immigration into the nation? peter: the u.k. has been one of the stars of economic performance in europe, more broadly, and i think the growth of labor force due to immigration has been a factor there. certainly, yes, the u.k. does depend on immigration for part of its growth, so that side of things cannot be discarded either. francine: peter, can you see any

you that will benefit from -- an eu that will benefit? peter: it has been argued that the u.k. has been throwing sand in the gears here and there, but the u.k. has been a force for innovation, it has been one of the economic leaders in that sense. so this is a loss for the eu. francine: will angela merkel survive this? she seems to be the only leader with any kind of leadership sills -- with any kind of leadership skills? peter: i am not expecting any negative outcome on that side. but no question -- she said to herself, this is a loss for europe. tom: how would you mark down your estimates? what have you done, tweaks within the american economy? brexit,exit, brexit,

and yet have you tweaked your u.s. model? peter: we would love to be able to give you a number, but any number you come up with is going to be pick it and it will be changed anyway. people are calling for recession in the u.k. yesterday,om draghi half a percent of gdp over there. so our sense is this is counted in tenths of a percent of gdp for the u.s. it is not a major deal at this point. yes, there are risks. anything could happen in europe at this point. there are reasons for wanting to wait to see a little bit more. tom: there you go, francine. heater hooper dropping the crystal ball -- peter hooper dropping the rest of all this morning. peter: to give you a qualitative answer, it is going to be on the downside. francine: peter hooper there from deutsche bank.

stay with us. coming up later today on "bloomberg markets," erik schatzker speaks to blackrock ceo larry fink. that is live from aspen. this is bloomberg. ♪

francine: tom, we have breaking news on the private sector, certainly in terms of corporate stores. see idc to buy private bank or for $3.8 million -- to buy bancorp.ank or --

now to the terrible suicide istanbul airport, which killed at least 40 people. from theto our guests london school of economics. he covers the middle east and terror groups. thank you for joining us. it is a terrible story. are we going to see many more attacks like this? this seems to be a copycat of what we saw in brussels a couple of months ago. brusselsah, it is plus. this is the most skilled and ambitious to take place. not just in turkey but almost everywhere here? this particular operation targeted one of the most important commercial and also symbolic targets in turkey. bombers.cide they basically attacked the nerve center of the security forces.

you might say this is the special operation forces of isis, and they are trying to send a message near and far that theyan do a great deal of harm, and particularly to soft targets. they are learning, adjusting, adapting, and this tells you this will not be the first attack or the last attack, sadly , for turkey and for the international community as well. francine: will turkey have to step up border security and counterterrorism cooperation with the u.s.? fawaz: it has. this is why you are seeing more bloody attacks in turkey. in the past six months, turkey has actively joined the u.s.-led coalition in syria, the fight is hurtingia in isis isis. turkey has been a way station -- a weigh station for isis fighters all over the world for supplies and for money, and

turkey's tightening the noose against isis, particularly on the turkey-syrian borders. for isis,istential and that is why you are see more devastating, spectacular attacks in istanbul, and now at the istanbul airport last night. tom: many talk about this. you have lived it. you are part of the lebanese war generation of, i believe, the middle 1970's. your brother was killed in violence. what is your prescription for the west to finally get a handle on these terror attacks? fawaz: i mean, it is easy -- remember, this is not an easy phenomenon. it is very complex and it will be with us for quite a long time. this is one of the most dangerous moments in the modern history of the middle east. collapse,nstitutional you have the possibility of state collapse. you have sectarianism and you

have a security vacuum, institutional vacuum, and you have these all trying to fill the vacuum's in the middle east. big moment, and it is spreading near and far, not just in syria and iraq, but in egypt, in yemen, in libya. it is very complex, and i think this particular battle must be won by the people in the region with the support of the united states and the international community. tom: professor, thank you so much. we greatly appreciate it. again. get him back on francine, just absolutely extraordinary. with we wanted to go that, to the point of mideast turmoil, you wonder where do we begin with this initiative to dampen these attacks. francine: and this once again

puts the spotlight really on the turkish tourism, which is a huge contributor to gdp. target onlatest airports and the aviation industry. we also need to look at that industry more closely. tom: in helping with this, i think you know better than i do that is stumbled is not a smaller -- that istanbul is not a smaller airport. this is a major byway for europe and asia. francine: it is a big airport. it is an international airport. there are huge flights and also ataturk. going through you can see pictures there. this is bloomberg. ♪

tom: in the markets this morning, francine and i are watching markets advance. dow futures up 1.09. an improvement to the tape this

morning. with first word news, here is nejra cehic. nejra: authorities in turkey are pointing the finger at islamic state for an airport suicide bombing that killed at least 40 people. another 200 were wounded in the attack at the airport in istanbul. officials say three suicide bombers blew themselves up new the entrance to the arrival hall. the race to replace david cameron as british conservative party leader and prime minister shifts into another gear today. contenders need to make themselves known before tomorrow's deadline. bookmakers have made home secretary theresa may the favorite over boris johnson. she kept a low profile during the campaign and supported the remain camp. francois hollande is taking aim of london as the

financial center of europe. negotiations will determine the country's future financial relationship with the eu. global news 24 hours a day, powered by our 2600 journalists and analysts in more than 120 countries, i am nejra cehic. this is bloomberg. francine, you have more on clearing operations. toncine: i would like welcome the finance team. this is a huge market for the city of london and their banks. but also with these andringhouses, protests derivatives deals -- if they were to move this, it would be a huge blow to the city of london. and this is, something they have fought for from ebbers ofen the eu. it will become a fight. it is key to the financial services industry here. london being the center of fx trading. it has a lot to do with that.

it all ties into this issue of pass porting and whether london can remain part of the single market. that will determine how many .obs are moved to the continent that is why the banks are taking approach because a lot of it is not in their hands. it comes down to negotiation. francine: should they not move quickly? francois hollande was the last one saying that it would be unfair for london to keep this right. we heard from a german regulator, and i spoke to a german lawmaker early on saying this will not be a free lunch for the u.k. europe does seem to be taking a hard line here. that factors into the calculus if you are a banker of, what is the cost of waiting, what are the implications for passporting if rex it does happen. moving partsot of here. what is the demand and the

supply for office space and people in those cities? how easy is it going to be to move people? that is why i think even though some of the banks had contingency plans, it can be challenging to follow through with them. ofncine: there are plenty moving parts, but for the moment it is not looking great. for some of those passporting rights. michael moore, our head of finance in the u.k. tom: ira jersery of oppenheimer funds. many moons ago -- we like to start conversations with ira jersery sort of in a folk way. many moons ago, he looked for you lower -- for lower yields per he has gotten them. what does a distinguished by side firm do when full faith in credit is priced to perfection? ira: i do not know if it is necessarily priced to perfection. i think the low yield you're seeing in u.s. treasuries are a

byproduct of what is going on in europe. there was a concern by some that as you got to ever lower yields that u.s. treasury securities would no longer have the ability to be that safe haven in times of market turmoil. clearly, that is not the case. now with central banks likely not to hike, you said earlier in the show that they were priced to january of 2018, if memory serves, for the first funds hike. you are going to wind up with low yields, and 10-year treasuries are back to the lowest yields you have seen ever. tom: push against the gloom crew that say the world is coming to an end. we break through 100 basis points on the two-stem -- i call it the thin villa spread. ira calls it -- it screams doom and gloom. ira: the curve flattening is

seen as gloom and doom, but we have to know the context of that. when curves get flat, it is usually because central banks are hiking because interest rates are selling off. that is what we call a bear flatten her. you wind up with a -- a bear flattener. oftentimes a recession because of policy mistake. there is low yield because of already slow growth. an inflation outlook that is deteriorating now and we had been hoping for higher inflation and a more stable economy. that is perhaps not going to happen because of slowing growth globally. tom: dr. hooper, please, a comment. i was -- peter: i was going to add to ira's good summary, lower rates abroad are close to zero. negative in some cases, but out almostapan going

50 years, the government bonds, six, eight basis points, germany with maybe 40 basis points -- this is a shift to a country where there is still some slow -- tom: there is a pulse, at least. francine, jump in here. francine: i have a chart looking at global yields. the u.k. yields, below 1% for the first time ever. germany, the rate is the same. japan, we know the story there. it keeps going ever lower. my question for ira -- who knows how low they can go, or is it just a guessing game? ira: the limit ends up being whatever the monetary policy rate is. in places like japan and germany and europe as a whole, where policy rates are negative, i think long-term rates like 10-year rates may be bounded by that. that still means it can go lower. if they are really concerned about growth in europe, and

growth -- and growth in places like japan, there is no reason central banks cannot lower rates even further. tom: do you see negative rates transmitting through to the public, or are they still an institutional effect? peter: i think it is backfiring. look at the personal savings rate in the u.s. it has been going up in the face of an increase in wealth. this is because the average baby boomer looking ahead to retirement is saying, oh, my gosh, i was counting on 2%, 3%, maybe 4% on my investment now what is it going to be? i have to save more. so negative interest rates not only are creating uncertainty, but also i think backfiring in terms of going the wrong way. tom: peter hooper and ira jersey with us on a most interestingly gige of finance to economics. we are going to take it over to banking. joining us next, mike mayo. we will talk with him about the

american banks and this image differential with the european banks. from new york and london, this is bloomberg. ♪

your huge you for response to our conversations with alan, madeleine albright, and of course mervyn king yesterday. i thought lord king was yesterday -- was amazing yesterday on his vigilant stance with, "everybody calm down." francine: very measured, very on the ball. tom: now joining us, we're thrilled to bring you michael , who has created a storm of debate on the governance of american banks.

i love your comment, "i love you, i hate you, i love you, i hate you." michael mayo, the u.s. banks -- are they going to lose jobs because of this crisis in london? michael: the u.s. banks have the worst revenue growth in 80 years before brexit, so there is no question banks need to control costs. you are going to be reducing jobs, compensation, and the fallout from brexit for the large u.s. banks would be the cost of doing business goes up, there are capital market headwinds, increased complexity, currency risk, and lastly, central banks for longer interest rates. tom: you're the only one i know who actually understands the derivation of the modern bank of america. 85 mergers since 1910. within that is the idea in the u.s. we can do m&a activity in banking. would you suggest europe is going to learn how to do that? michael: u.s. banks have taken

their medicine, after the financial crisis raising hundreds of billions of dollars of common equity. thehad the stress tests entire decade, so in comparison the european banks did not take their full medicine and now they have this issue. with me, "i love you, i hate you." we get the part 2 results tonight. that shows the banks have the wherewithal to absorb many brexits. francine: it seems here in europe that we are not ready to consolidate, not because there is no appetite for it, but because of one regulator that will not allow for it because it becomes a bigger risk. the fed stress tests their banks individually. should they not do it as a whole? michael: the fed aggregated the stress test data last week.

last week you had part one of the stress test, if you will. on that asus, the aggregate data --icated that banks, after a on that basis, the aggregate data indicated that banks, after a severe recession with 10% on appointment, -6% gdp, stock prices declined by half. that is severe. after that the u.s. banks collectively would still have $400 billion of excess capital left over. that is resiliency. tom: ira jersery, give a briefing to -- ira jersey, give a briefing to michael mayo and peter hooper. will michael mayo's banks make any money? that because of the stress test and the regulatory environment, they cannot take as much risk as they used to it because they cannot take as much risk, they wind up with lower margins and lower

profits. message that it is a resilient bank of europe. if they go out and do a cash call under duress, can deutsche bank raise capital? michael: these are tough times for global banks, but the resiliency of the global financial system is better than it was a decade ago. does that mean everybody is safe? does that mean everybody made it? we are getting to the end of a quarter. we do not know where the damage lies yet. for the big global banks, we will find out at the end of the month. so far things seem ok. tom: francine, jump in here. francine: michael, what does that mean? where do you see deutsche bank? i know we need to wait and see and we need to say that about everything. but what kind of deutsche bank would you like to see?

not specifically covered deutsche bank. i have covered global banks for a few decades. these are jittery markets. there are a lot of unknowns out there right now. the moral is, raise capital when you can do it more easily. for goldman sachs -- goldman sachs had that fantastic year in 2009 after other banks were pulling back, and we thought the european banks would follow suit and raise capital when they could. storm,the heat of the raising capital, anything is possible for a price. overall, you are absolutely certain given the stress test that there is no severe, perverse linkage between the banks? that if something were to happen with one bank that we do not for see, it would not take the sector of the industry down with it? billion excess capital for u.s. banks after a

situation like the global financial crisis. as part of the fed stress test, they do assume the failure of a very large counterparty, so that is the model. the other thing for u.s. banks, the situation in europe is not a new one. the u.s. banks have been having fire drills the last five years, so they had better be prepared. if any u.s. bank really blows up, it becomes not just in earnings event, but it becomes a major balance sheet event. when the banks disclose that information, they sure the ceo submits his resignation at the same time. , peter hooper,s is the view from 35,000 feet. all of this discussion revolves around tepid nominal gdp. i do not know the conversation you have had with john cryan, but to a broader audience, do you just assume the animal spirit comes down with all we have seen in the last nine days, and makes it harder?

peter: no question we are in an uncertain period. tom: i just heard that from him, i do not need to hear it from you. peter: let's look beyond the near term for a little bit. let's look at what is happening in the u.s. economy. we are concerned because of a employment,down in but the labor market is doing pretty well. underlying growth is picking up. 2%,consensus seems to be 2.5% growth in the second quarter, and fundamentals say absent a surprising major problem in europe, we are going to continue to see growth in the u.s., improving labor market. we are already close to full employment. we are seeing signs of wage inflation beginning to pick up. price inflation is not too far away. the fed is on hold for now, but not until the end of 2017, early

2018. i think you will start to see movement in the curve, and that will be a better environment for banks going forward. aboutne: we were talking sub linkage between gdp and brexit, but i want to go back to mike. what does it mean for banks that are based in london, being a broad, or u.k. banks that may be affected by this financing passport system? michael: well, i could not catch the first part, but u.s. banks headquartered in the u.s. that do business in london will be moving jobs to other cities. you have seen that 4000 jobs might leave jpmorgan in london to other places, whether that is frank for or paris. -- whether that is frankfurt or paris. this will certainly be a loss. tom: let's come back. let me tell you, folks, this is

what it is about. adding to the conversation later today on bloomberg radio, on big bank investment in europe, he has decades of experience. from chicago, david haro will join us. this is bloomberg. ♪

tom: most nuanced markets this morning. the yen weaker, 102.70. francine: coming up shortly, "bloomberg ." jon, you will talk about brexit and the markets. you say brexit is contagious. jon: brexit is contagious. i have a cold, so it truly is. every week here in london, in westminster, the prime minister's questions on a wednesday. we will take some of that today. it is expected to be very heated, so look out for that at the top of "bloomberg ." and tom keene, for you, look at this for a line -- rbs, investable for

months," post brexit. tom: michael moynihan has many challenges. i saw a chart that literally puts bank of america in with the european banks. michael: i am proud to be the biggest critic of bank of america and their lack of adequate governance, lack of time frame, the lack of having to plan big, but they are not european bank like based on the resiliency of the balance sheet. they have record capital, record liquidity, for -- record liquidity, $400 billion of liquidity. they are the rock of gibraltar right now. can the 10-year grind ever lower? is it possible we could get under 1? ira: it is possible. ,rancine: when you look at this

rbs barclays on investable, it seems dividends will take a hit. again, i will contrast the european banks with u.s. banks. u.s. banks, even through a recession and these tough times, they will not add capital raises, and they will not cut dividends. newsurs from now, we get from the federal reserve on part 2 of the stress test. you will see dividends should be going higher at the u.s. banks we think the cashback that is returned, dividends and by banks, -- and buybacks, go up 20% per year. tom: peter hooper, the final thought from you on our central bank, janet yellen, some would say the central banker to the united states. is she working in any way with orthodox macro economics, or is it so new that she is making it

up as it goes? peter: most of the models that we have grown up with over the last three or four decades have changed. the bell curve is flatter. growth is much lower than we are used to. tom: to the rules still work? peter: it is a very rough guide. janet yellen having to do seat-of-the-pants, as well as some modeled input, but for these reasons, and given what is happening in europe, the fed is being very cautious. it is go slow for the rest of this year probably. but not for next year. tom: this has been a wonderful summit of three bright minds. ira jersey, michael moore, -- michael mayo, and peter hooper. speaking in the united kingdom today? is david beckham speaking? francine: it is usually quite feisty. today i really expect to see

sparks fly. david cameron will probably try to beat up on his opposition leader, jeremy corbyn, who yesterday lost the confidence vote. they are british. they know how to debate. it will be quite a spectacle. tom: is chancellor speaking as well? and scotland will chime in as well. it is like the game of risk when we were kids. i could barely keep up with it. let me do a little data check here. going into the break. i will move on to radio, and of course stay with us on "bloomberg " and "bloomberg surveillance." futures up 12. dow futures up 97. look at the yields, coming in even with risk on. david herro will join us on radio. stay with us. this is bloomberg. ♪

david: no way back. angela merkel says there is no time for wishful thinking after the brexit. francois hollande says britain will have to face the consequences. jon: forget december and next

year. , 2018.january 31 that is the soonest the fed will see the next rate hike. alix: policymakers will mitigate damage from brexit. to our viewers worldwide, a very welcome to "bloomberg ." alongsidehan ferro david westin and alix steel from new york. another day of gains. risk: it looks like it is on once again. sorting through these up and we will get a forecast from the rest of the year and moving from stocks to debt. we will talk with suzy