♪ risk aversion smashes records, global stocks sink with the pound fund to save its financial system. financial system. property goes cold as three of the uk's largest property funds halt exits. life after cameron as theresa may takes a clear lead in the race, but an eventual victory is far from guaranteed. this is bloomberg

"surveillance," francine the clot in london, tom keene in new york. -- francine lacqua in london, tom keene in new york. tom: what a movable feast this morning. tick by tic as we went into this opening, francine and i were going back-and-forth over the dynamics, and i have to say this, we do note -- we do not know why deutsche bank is south but it is south. francine: i think there are concerns that the brexit shows investors are very nervous and it goes into the weak spots so i think we will see many more spots like this. there may be something more underlying. let's get straight to the bloomberg first word news. nejra: the field is down to three and the race to become the next british prime minister. theresa may took the lead in the battle to succeed david cameron, winning 165 votes in the first

round. she was followed by andrea leadsom and michael gove. stephen crabb has dropped out and liam fox desk liam fox was eliminated. the next vote is tomorrow. report is likely to revive recriminations over the iraq war. it will probably pile criticism on politicians, officials, and the military. led to thet political downfall of prime minister tony blair. in south africa, oscar pistorius has been sentenced to six years in prison, convicted of murdering his girlfriend three years ago. prosecutors had asked for 15 years but oscar pistorius' lawyer argued he was only guilty of being irrational when he killed her. in australia, the prime

minister's coalition has taken a slight lead over the opposition labor party. it is not clear whether he will win enough seats. has declaredma that hillary clinton is overwhelmingly qualified to succeed him. he made his first campaign trip with the likely democratic nominee. the stop in north carolina came deskong before the fbi after the fbi found she was extremely careless with her e-mail but they do not recommend filing criminal charges. global news 24 hours a day, powered by our 2600 journalists and analysts in more than 120 countries. this is bloomberg. tom: let's do a data check right now. i want francine to spend more time on the eu banks. seven, nowe negative they are -80 and we are seeing huge dynamics. the u.s. 10 year to a record low. bloomberg.2 off the

oil has been soggy. on to the next screen. the vix showing the odd volatility of the equity markets. au are getting a 99 handle on yen, 100.71 shows the immediate attention. sterling has been ugly all day. the german 10 year confirms what we said yesterday and if you go to the european banks, what do you have? francine: i want to show you specifically the banks because they are down more than .4%. we spoke to lorenzo smoggy previously of the european bank and they he said they could avoid a systemic banking crisis. 4.3% but a lotot of the european banks are down. royal bank of scotland down

three and a half percent so for the first time in three days, the italian banks are rising because they have been absolutely awful in the last few days. it is the term that more of the central banks that are taking slightly lower. we do not understand what is going on apart from investor fear focusing on the banks. thecine: the eye -- tom: idea of deutsche bank down a greater percent than ubs and rbs shows across the 10 year challenges that we see. over to the bloomberg right now, just to give you the snapshot of deutsche bank, this is the main rally, the brexit moment, and then over we go with this new leg down. i want to make clear, this leg down is really on that -- all neverthelesst, but it just compresses down more and more as maybe they become more

like italian banks. francine: you know what is crucial? i want to focus on your terminal because i think the story is the banks. there is a smart article and bloomberg gadfly talking about these three names and property that could not liquidate their holdings for the time being. basically the piece is very simple. as property funds hunker down, some lessons from 2008 investors have long menu -- memories, and slamming the gates shut should only be a last resort. out tollar-yen making it new strength. we saw yen really crack yesterday as well. why don't you bring in our wonderful esteemed guest? well i would say has aged over the last three weeks. francine: i would say he is looking younger than ever. tom: he looks like he plays in

the nhl. and hee: he is european does not know what hockey is. of -- global head of strategy at bnp paribas. is this like 2000 eight, something the market is seeing that we have not quite caught up with that they are faring, or is this just the market having the spotlight because of brexit? steven: i think it is probably markets going too far. our view is in reality this should be more of a u.k.-centric outlook. the point is, the pound is taking the brunt of this and i think that is right, the concern of the sterling is something that is there. the central banks are really helping out. tom made a great point highlighting what is happening to 10 year yields in the u.s..

that is pricing the fact the fed is not likely to do anything so i think that assistance we are getting from the fed, i think we will get more from other central banks. on thed not jump bandwagon that this is something that is going to lead to systemic risk particularly beyond the united kingdom. francine: so there is not a problem that goes beyond property funds at the moment? steven: i do not think so. the problem we have is with written and that we have huge uncertainty because of the brexit vote. britain starts with a huge current account deficit and it needs to attract funds in to balance its books. when the market becomes nervous, those flows dry up and we think that is what is driving sterling , and this is what is making investors nervous about some of the funds in the u.k. tom: help me with a court knowledge idea -- core knowledge idea. what is the difference a between

liquidity and solvency fears? tell me about solvency versus liquidity. steven: i think i would probably focus on liquidity here. i think liquidity is the best one to focus on because when you have dramatic moves and markets like we have seen in dollar-yen and in sterling, less so i would say outside of the foreign exchange markets. you get a whole lot of investors going one way and that leads to markets drying up. people talk about a lack of liquidity particularly with sterling so it is more to do with a short-term phenomenon in the market that is putting everyone in the same direction. tom: whether that is a banking crisis, you work for bnp paribas, you say i need to focus on just the united kingdom. everything else is moving as well. unitedll decouple the

kingdom from the challenges of europe? steven: europe is an interesting one because clearly with the uk's decision to leave the eu there is a? i -- there is a question mark on how that you -- the eu response. the euro is probably stronger than you would anticipate it being but our view is that it is likely to fall going forward. i wouldn't knowledge there is an issue with what this means for europe more broadly, but as far as a global outlook is concerned, we do not think this is likely to lead to contagion. i get back to the fed, we think the outlook for the dollar has changed. we do not think the fed is likely to hike rates this year or next year. that is very likely although i must stress -- so that injection of liquidity or not taking it away with the fed remaining on hold, should help calm arc it's.

-- markets. tom: we see the german 10 year yield break down to new negatives, -0.25. in our next hour of bloomberg "surveillance," we are honored to bring you david folkers landau of deutsche bank. in our next hour, this is bloomberg "surveillance." ♪

tom: good morning. breaking news, francine the clot in london, tom keene in new york -- francine lacqua in london, tom keene in new york. yield, 131.97ar

-- 1.3197 on a 10 year. the basic idea of the dollar-yen, here is the yen on brexit, strong yen, down we go, and here's the recent rollover in yen strength. stronger yen and is absolutely con founds. the jgb: if you look at yield it went into negative territory and record lows for the 10 year gilt. a quick comment on this, is abe-nomics dead? steven: i do not think at the moment but i think you guys are right, this 10 year yield is very important in the u.s.. i would argue that the biggest driver has been the falling u.s. yield so the fact that the u.s. 10 year is hitting new lows is consistent with dollar-yen

challenging 100 and i think the fed will determine the direction, not the japanese. and it is a big problem michael mckee joining us later in the hour. to our bloomberg business flash in london. britain's melrose industries has agreed to buy nor tech, a company that makes ventilation fans for 2.8 billion dollars including debt, a 38% premium over the closing price yesterday. melrose wants to benefit from the growing u.s. construction industry. it was a big month for renaissance technology, the hedge fund run by jim simon. fund a quantitive hedge that is up almost 14% in the last six months. they only trade u.s. listed equities. in london, former barclays

traders convicted of rigging benchmark rates will be sentenced this week. ubs trader, the first man convicted of rigging libor is serving a prison term. were saying,we three of britain's biggest property funds have frozen assets after the uk's shop vote to leave the eu sparked a flurry of investments. they halted withdrawals because they did not have enough cash to repay clients. anding us is sarah jones with us is stephen stay well -- steven saywell. this is a problem with the economy and with real estate in the u.k., which means that people wanted their money back and there is a not enough liquidity. sarah: the first thing you see

is retail investors wanting their money back and they are wanting it back in funds that are quite liquid. they only hold a certain amount of cash on their funds to deal with redemption. this is what happens when everyone rushes to the door. francine: have we seen this kind of thing before? we were trying to figure out if this felt like a few months before lehman or if this is contained because of the market i thinkidity? sarah: the rush is very similar but people saying this is not a lehman event because there is not nearly as much leverage in the system. this is specific to u.k. property funds, u.k. commercial property funds. tom: i say to myself, what is the scope and scale? how big are these funds compared to these very large insurance companies? is it an afterthought or is it part of the mix of their portfolio? that: the three funds

suspended trading are owned by insurance companies. they are a big investor in real estate so i guess it is not surprising that these funds went first. some of the biggest funds in the u.k., i have not looked the on the u.k. at the moment. tom: it feels like a run on the bank. reporting, our people calling this a run on the bank even though that is inflammatory? sarah: not at all, this is investors pulling cash firm retail property funds which are not liquid. it is not as if banks are pulling the leverage that support these assets, it is just investors want their money back because they do not understand what is going to happen next. francine: is transparency and communication really the key? do they have to come out and say, this is what we see so there was no concern? steven: yes and no.

i think we are a long way from not. i would not jump to that conclusion and i would stand by the point, this is very sterling specific and u.k. specific, and different to what we saw in 2008. it gets back to the point, the u.k. is particularly vulnerable because of the large current account deficit. it needs to attract funds and stay afloat. francine: the deficit is currently tom keene's chart of the hour. sara, thank you so much for joining us, steven saywell stays with us. rights your market check before we go to break, including we have to look at the banks. deutsche bank up .7%. we are seeing a lot of shift and focus on the banks and it seems that what brexit has done is put the spotlight on some already weak markets. ♪

francine: i am francine lacqua in london, tom keene in new york. let's talk about u.k. politics or shakespeare. my morning must-read comes from the financial times. forget winning elections, all that matters to the labor grassroots is that mr. corban believes in things on which he will not budge. the conservative party could be about to make the same mistake. he is talking about the fact

that there is a leadership contest and you have number one theresa may in the lead and then andrea leadsom number two who is pro-brexit. that they will choose someone for brexit just for the sake of it, even a she may not be the best person to negotiate with the eu. i do not know how do you look at this political risk. it seems like italian politics and politics in countries which do not make it to the nci index. steven: i think it is pretty clear what the curis the response has been, it is terrible, and it is this uncertainty -- currency response has been, it is terrible and it is this uncertainty. is a keyhe leadership point, because what the conservatives need in our view is someone who can bring the party back together, control both aspects of the party.

what we have been saying for quite some time is it is quite likely that somebody comes to lead the party who is relatively neutral. is probably always going to play against boris johnson and into the hands of theresa may. going back to your open question, someone who is pro-brexit who would lead the negotiation, we think that is not what is required but what is is unity in the party. tom: what will these politicians face in the short-term? two-year or five-year process. how do politicians get to september? steven: this is going to be quite a tricky question for them. the keyword or factor that is required is stability to try and calm down the uncertainty of the markets. i think helping them will be the bank of england as we have already said. we think we will get easing on a

policy, maybe to rate cuts by september, and qa may be a little bit later. i think it is the combination of stability politically at the bank of england coming to the party as well. tom: steven saywell with us, bnp perrigo. -- bnp paribas. clipou have to see is this , massive deterioration in deutsche bank right now this morning. we will continue from london and from new york, this is bloomberg "surveillance." ♪

francine: i am francine lacqua in london, tom keene in new york. we have to look at some of the yields in the government bond

yields falling below zero for the first time ever, and some of the italian banks. i have a price-to-book ratio. the italian banks on the right are the ones that are under pressure. let's get straight to the bloomberg first word news. nejra: donald trump had some surprising words of praise for saddam hussein. at a rally in north carolina he called him a really bad guy who did a good job of killing terrorists. the likely presidential nominee said he killed terrorists, he did that so good, they did not read them their right, it was over. campaign iston's portraying an fbi decision as a victory. james comey recommended she not be charged. still he criticized clinton and her aides for being extremely careless. the president of argentina says that rex it may be an

opportunity for south america. he spoke to bloomberg tv -- brexit may be an opportunity for south america. he spoke to bloomberg tv. is ana sense this opportunity because the european union can expand its capabilities towards the region and which they have lots of links, because we are all sons of europeans mainly. i think it is natural. we should work together. cri has been pushing for a trade deal with the you key -- with the eu since september. france has sent love letters to british businesses, outlining the advantages of doing business in the french capital, taking the case for moving operations and the job. 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: european banks are under pressure today, deutsche bank hit especially hard. we also are looking at some price-to-book ratios, deutsche bank down 5.8%. we do understand that both deutsche bank and credit suisse could leave the stocks europe 50 so we will bring you more on that story. we will bring you more on the italian banks and the tamil that we -- to malt that we have seen. thank you for joining us. the banks, i do not know if the story moves on to deutsche bank and credit suisse, or if we stay with the italian banks and the markets are nervous. brexit has no doubt turned out to be a nightmare for european banks, hitting them harder than the u.k. banks.

italy is the pressing crisis. there is a problem for all global investment banks, how do you clean up your balance sheets , but italy is the urgency. it is incredible. it is a penny stock. you cannot let it fall like this. francine: are we going to see losses, will creditors have to take losses? something needs to be done urgently. it has not moved in two weeks yet the share price has collapsed. lionel: i think it depends on politics. it is about negotiating and not letting a crisis like this go to waste in renzi's eyes. how do you get the right compromise to do a proper rescue, maybe even a nationalization of a bank like .onte patchy

tom: i want to congratulate you on your bloomberg gadfly work. cannot say enough about it. to luigi zynga alice yesterday and he is adamant that the banks have to do a workout now. why can't we see mergers, acquisitions, and consolidation of these troubled banks? lionel: right now it is in the state hands, especially in italy. it has got to start with monte paschi. if you go near there was any sizable check to clean up the balance sheet you could end up the whole -- owning the whole thing. it could be a mergers and acquisitions vehicle but it has got to start with the state and some kind of compromised decision now. tom: as francine mentioned,

there may be some index issues here. , who do you turn to institutionally in europe to begin to assist all of these banks, not just the italian banks? we have a clear view of that in america. you, sir paul davies and paul minor. where is that banking institution in europe, does it exist? the ecb ands called any unified solution is going to need the ecb as a central bank and regulator. it has had trouble unifying those roles because on one hand it wants to be lenient and the other hand wants to be strict. that is where the devil is in this final agreement. , smagi wasarlier on

intimating that germany and italy have too many banks that are not profitable and it needs to be a european solution. profitable soot if you put more capital it does because ithe problem will not be sufficient to generate good returns so you need a restriction -- restructuring. it becomes more profitable, attracts capital, and this requires some political determination. francine: do we need a u.s. style tarp fund for the eu and why have we not had it? lionel: there are plenty of rules on state aid. europe has tried to build the banking union that tries to really break the link between the sovereign and the banks to essentially avoid a massive taxpayer bailout that we have seen in the past. the comment there was quite smart because we are trying to present the situation to germany

which is ultimately the final decision-maker. we are saying if you relax on the roles it will be good for germany as well as italy and good for europe as well. tom: i want to make clear as we we have been to certain markets off of what we saw 30 and 40 minutes. the big exception are they banking stocks, with the tape looking a little bit better. tell me about the u.k. banks. italy, andsche bank, for others i cannot remember. how are the u.k. banks doing? lionel: they got hit but what is interesting is that politically and what the policymakers have announced, mark carney promising lower rates longer, a cut in corporation tax, and a backtracking on capital as well. basically we are seeing

countries break ranks and try to support their own systems. maybe the u.k. banks will end up being in better shape because they have been given all the brakes. ultimately banking is about interest rates and interest rates are just creating -- cratering across the world and europe. francine: thank you so much. coming up with speak with the swedish central bank governor about negative rates and the strength in certain currencies. ♪

tom: good morning, everyone. i am in new york. francine lacqua is in london and we are watching the markets.

we are watching banking stocks. deutsche bank capturing a modest bid off the bloomberg terminal. in the next hour, david fogarty landau will join us. michael mckee is going down to washington today to look at the non-minutes but before he has looked carefully at this idea kers-landau helped is the and the punchline u.k. cares about europe. michael: the idea that they would be able to retain favorables trade status because they are such an important export destination for the eu. tom: call it bmws in london. gap,el: call it the export the u.k. needs the eu more than the other way around. here's what i called the

negotiation cap. -- gap. exports go to the other 27 eu -- tom: i am going to start crying. ying this up and explain the axis. michael: that is the percentage of exports that go to other countries and the u.k. is a far smaller market for the eu than the other way around. if they want to get this norway model, there are not very many countries with high export numbers to the u.k. the netherlands is the highest at 9% and you could go all the way down to the u.s., 3.9%. tom: that means that amsterdam really likes its stilton cheese. francine: if you look at tutti , it basically gives

access, the americans have access to the single market in europe so if you are germany why would you not give access to the u.k. unless you were very emotional about the breakup? your chart shows the u.k. has more to lose but also germany has to lose unless you are emotional about it and say we want to teach the other countries a lesson. michael: the real issue is under what terms does the u.k. get access and the eu has been very firm so far in saying they have to abide by rules, which includes the freedom of movement they will probably get some sort of offer for access but under what terms? francine: and we hear all of this fighting talk from donald tusk, saying the u.k. cannot have anything all a cart. fighting talk until

we have a new prime minister in place or is it going to be acrimonious? make.: two points i would nothing is going to start until we get a new leadership and that is when things will start to and the, particularly, best outcome would be someone who is quite balanced who is not so biased. i would agree with your comments going back to the charts, if you look at the netherlands and germany these are countries where britain is very important, but i would go a step further and say a country like germany, they have a lot of investment in the u.k. they are manufacturing a lot here to. i would argue the impact on these countries is actually larger than just that very low number from the eu. tom: sir james dyson writing and leave,es in support of the idea that we will make up

our trade with europe if we do trade with the rest of the world. any optimism the u.k. could do more with china and america and brazil? michael: not unless they could renegotiate trade agreements. over the long run it is possible, depending on what happens politically with the eu but going into it, through the negotiations the eu probably has more -- has the upper hand. steven saywell, it is a complex idea in waiting the back-and-forth of exports and imports. isn't that subsumed by the flow of money and financials within the investment income? steven: i would say they are both important because we have already highlighted the u.k. starts with a current account deficit and needs to fund that. that is the financial flows that we spoke of.

a second one is this investment in capital stock. what i mean by that, there is a loss of manufacturing in the u.k. that is funded from abroad such as in the car industry, which is very focused on exporting to the eu. and whaty interlinked that is going to mean is that there are interest groups in many different countries who would like to see the u.k. have a strong deal because they have invested in manufacturing in the u.k. with a strong eye on exporting those products to the eu. going to be quite inflammatory, and i have to say i love that chart. what exactly does the u.k. make? if trying to figure out, pounds are off by 20%, that is great for exporters. germany seeing exports, italy seeing exports. i am not sure what this country makes that is its own.

steven: the four big industries in the u.k. that are affected are financial services, the car defense, aerospace and aerospace engines are a huge export, and pharmaceuticals. these are for big industries that drive the u.k. exports. francine: does it not make a difference if they are not u.k. owned? steven: i do not think so. the vast majority of the car exports are foreign-owned but designed and manufactured in the u.k., and count as u.k. exports and support jobs. continue, michael mckee, thank you so much. he will migrate to washington and look at the fed minutes today, pre-brexit fed minutes. you will have a little asterix and his report. look for that at 2:00 p.m. this afternoon. ♪

morning, us this francine lacqua in london, tom keene in new york.

two things have settled down a little bit but we are watching particularly european and italian banks very carefully. that's get to our bloomberg business flash. nejra: sam has revised its smartphone business and now the company may boost capital spending for its display and semiconductor units. shares are up 17% following the success of the galaxy phone. attracted $148 billion in new client money during the first half of the year, beating the record they set a year ago. vanguard is known for its low-cost funds attract indexes. billionaire silvio berlusconi is he says selling his --

a condition of the sale is that the buyers invest at least $444 million. they have not won any titles and five years. that is the bloomberg business flash. francine: here is what we are watching for the rest of the week. later today we get the latest services output data from june. mr. kuroda speaks today and tomorrow president obama travels to poland to attend the 2016 nato summit and will meet with the president of the european council and european commission. its focus on the fx, the unregistered the biggest gain against the u.s. dollar among 15 other currencies. let me bring you over to my chart. when you look at what yen has been doing, it is close to 100

and you say this is driven by what we are seeing an dollar. what is the endgame? if it goes below 100 does that mean kuroda has to intervene? steven: i think it is a difficult situation because we know that yen is the ultimate safe haven in times of stress. the yen has bid up. the point i would highlight is that move, reticular lay this year if you look at your chart from january above 120 two this level, is very consistent. the latest moves this week as well with the fall in u.s. yields so it is the market readjusting its view on the fed and it is highly correlated with the 10 year yield. tom has been talking about the new low in the 10 year yield, very much matched i this move in dollar-yen. it is very hard for the japanese to influence that. stress, andg about

dollar-yen will go with it no matter what the japanese do. janet yellen holds the key for dollar-yen moving higher as rates and yields move higher. tom: i have been talking to a lot of folks about the adjacency , and it is not just japan but say south korea. here is the yen, this is ancient history. this is a boj meeting at the end of january which seems like eight years ago. this is what they wanted, and all we have seen, this is a five standard deviation move off trend. we have moved from weak yen, three standard deviations down to two standard deviations, strong yen. these are brutal moves. japan must react to this. what tool do they have? steven: this is a good question.

i like your use of the term "brutal" we have heard from the ecb. they have two choices. we think the bank of japan will ease further at its meeting this month, probably by taking the more negative. , in japan the decision to intervene as with the ministry of finance and the bank of japan just act as an agent. they will probably intervene or try to slow things if we get below 100. the question i would ask is whether that will be successful. if the bank of japan intervenes but the u.s. 10 year yield falls below 130, what does dollar-yen do? i would argue that it would probably still fall. tom: you wonder if july is a dead meeting for janet yellen.

steven saywell, thank you. he is with bnp paribas. we have a wonderful hour for you next, ian bremmer will join us from eurasian group, and david landau on capital flow, money flow, and current account surpluses. let me do a data board going out. moves,al banking deutsche bank having a sporting day along with other european banks. this is bloomberg. ♪

tom: this morning, markets continue to deteriorate.

sterling and the german 10-year to new lows. united kingdom commercial real estate faces crisis. , the exit, italian banks are broke. hour, ian bremmer and david folkerts-landau. and china watches the west. this is "bloomberg surveillance." , ande live from new york eventful wednesday, july 6. i am tom with francine in london. opening, ae a 5:00 little bit of market stability in the last 40 minutes. francine: you are an optimist. i would look at the banks, a lot of the italian banks as we are looking for resolution, and i would look at the political landscape. here in the u k we are expecting the iraq war reports. it will probably deepen divisions within a very fragile u.k. labour party. tom: let's get to our bloomberg first word news with nejra

cehic. nejra: the field is down to three in the race to become the next british prime minister. home secretary theresa may took the lead. she won 165 votes from conservative party lawmakers in the first round of balloting. she was followed by energy mnister andrea leadsom. secretary liam fox was eliminated. the next round of voting is tomorrow. friday, nato holds its first meeting since the u.k. voted to leave the european union. it is a chance for the military alliance to show unity in the face of a more aggressive russia. nato plans to announce troop deployment to reassure members in eastern europe it is committed to defend them. analysts say the moves will be too little to deter a potential russian assault. hillary clinton's campaign is portraying a decision by the fbi as vindication. he would notays

recommend that clinton be charged in the investigation of her e-mail practices as secretary of state. he criticized clinton and her aides with being externally charis -- extremely careless with how they handled sensitive information. 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. a data check 60 minutes ago, but after yesterday afternoon, nothing is calm. -13. negative nine on futures. dow futures, -67. the 10-year bid, record low, 1.34%. the idea of yen, stronger, stronger. it waited, waited yesterday afternoon. 100.46. , 1.28 is in the vicinity. francine: european stocks are

slipping for a third day. we are can see -- we are seeing concerns about italian banks, , and itfrom the brexit is putting pressure on banks overall, down 1.4%. it is also putting money into havens. you can see the yen and 100.46. 2958 -- ate point 1.2958. brexit is putting the spotlight on already weaker spots. italian banks recouping some of their losses today. tom: i want to make clear, it is inappropriate to talk to david folkerts-landau about his bank. down, deutsche bank, and the recent rollover here. last hour you say it is

about italian banks with some real contagion across the eu system as well. we are thrilled with the current account flows front and center for the united kingdom, to bring you david folkerts-landau of deutsche bank. in the next section we will get to his research with michael dooley and peter garber about how money moves around our international system, but we must speak now with david folkerts-landau of deutsche bank on these markets. there a rhyme or reason, a correlation to these markets, or can you go with the idea that it is just about brexit? there is always an underlying course that is driving this nothing is purely accidental. , andis particular case your next guest will probably have more to say about that, there is a fundamental dislike, inefficiency in the way division

-- in the way decisions are being made. if you take a step back and look at the u.k., for instance, you see that we should have seen this coming a long time ago. in some sense, the benefits from globalization over the last 20 years have been enormous. we have listed 100 million-plus people out of poverty. lots of countries that were subpar have come out of poverty. but the problem is, we have not succeeded in redistributing those gains evenly, so you see there is progress emerging in the world and the u.s. and in europe and in the u.k. as well. that is kind of at the bottom of all of this at the very macro level. tom: david, you mentioned the swedish central bank. to adjacent nations being buffeted by these crises,

whether it is south korea or sweden, as adjacent to a crisis. help us here with how those adjacent nations should react to what we see with italian banks or what we see with the united kingdom. adjacencies are the eu and the u.k. that, both blocks are worse off because of brexit. but if you look at the relativity of that, the u.k. is not in that bad of a position. i was listening to your previous commentators, and i disagree somewhat, that fundamentally the u.k. does not look that bad. youthis 10%, 20% unemployment. long way to go. from 1980 to 1984, sterling fell by 50%, which led to the boom

first five years of thatcher's tenure. precise,ing was very professional, quick to adjust and react, unlike what you see with europe, where the decision-making process was very slow. looking at the intermediate runs over the next two or three years, i see a u.k. emerging relatively better than the eu, because the eu is very fragile. refreshing,at is but if you look at a lot of manufacturers, they are owned by germany, or by the chinese, and if they do not get access to single markets, they relocate, and therefore there is not much left to export out of this country. so a week bank -- so a weak sterling is not good for anyone. david: you have to think that an

exchange rate move of 1%, maybe 30%, would bring about -- of 20%, maybe 30%, would bring systematic changes in what the u.k. produces and how it produces. then saying what it is going to look like over the next two years. you have to see that some of it will be emphasized, some of it will be deemphasized. francine: over 10 years? david: more like five. economies it just much more quickly now with the technological advancement we have seen then 10 or 15 years ago. not to beses tend worth very much because the economies react much faster than they did 10 years ago. i believe we are probably underestimating the profound that a strong devaluation of the sterling will have. whereas in europe, it is the

other way around in the sense that you have one exchange rate for 19 countries, and for some it is appropriate and for some it is not. you are going to get a much more spotty adjustment to this. from that point of view, the u.k. is in a relative a good position. francine: that is why we get david folkerts-landau on. ourng up, we speak with next guest. this is bloomberg. ♪

francine: these are live pictures of a former civil servant who is announcing his findings in london, seven years

after the inquiry of what happened in iraq. a looks to me like it is at the 2003 iraq war, which may revive the divisions in the labour party. under those presented word and with unjustified uncertainty. "go."an watch that on live the sweden central bank, the benchmark interest rate at a record low, saying the uncertainty over you k's brexit has future rate hikes. ingves joins us from stockholm. thank you. how do you view brexit?

how much of the thinking on brexit actually swayed you in your interest rate setting? it has increased uncertainty, but on the other hand in terms of the basic picture of where the swedish economy is moving, it has not changed things all that much. this is something we will have to watch and see what happens in the u.k. and in europe. we are basically talking about indirect for us. francine: it has not impacted your forecast for growth or inflation at the moment? moved down our forecast a bit for 2017. we probably would have done that a bit anyway. part of it has increased uncertainty, certainly under increased uncertainty coming out of the brexit debate. francine: what does it mean for krone? stefan: so far in the past few

weeks the krone has weakened, which is sometimes what happens when there is a lot of uncertainty in the global markets. expect theless, we krone to appreciate slowly over time. you understated our single best chart today, comparing sweden to a beleaguered italy. this is the animal spirit, nominal gdp of sweden over the last 14 years versus italy in green. governor, congratulations on a successful sweden. within the collapse of the european experiment, argue the next switzerland? is the ultimate fear that you have that we will be talking about the gnomes of stockholm? stefan: certainly it would be a problem for us, if too much money were to come our way, because we need to get the inflation target up 2%, and for

that reason we clearly stated that it is important that the krone does not appreciate too quickly. tom: within that is the international trilemma of managing your currency. can you act in a unilateral manner, or do you need a more coordinated currency response when you see ever stronger yen, when you see sterling imploding and even the challenges of euro parity eventually? do you need a coordinated response among central-bank leaders? stefan: well, one can have many different views on that, but coming from a small, very open economy, then you learn that ultimately an economy of this size, you are going to live with whatever happens around you and do your best. tempere: governor, to krone strength, do you need to match ecb action, which we expect will be quite significant in the autumn?

well, it is up to the ecb to do what they feel is good for them. if they can get inflation up, that will be good for us as well, but of course given that geographically we are where we are, we need to keep a close eye on what is going on around us. if that requires some kind of action on our side, we certainly would be ready to do so in order to get our inflation up to 2%. francine: stefan ingves, thank you for joining us today. that is the swedish central bank governor. let's get back to david folkerts-landau to get reaction to the governor's condiments -- to the governor's comments. this is probably the first time since the 1950's that the traditional macro policies, as implemented by central banks, have reached their effective limits.

particularly in europe, they cannot go any further. qe is at the end as well. tools are notl there anymore, so the next will be more trying to directly , andt the credit channel instruments like that, the same in the u.k. but, yes, this is a very difficult time for central banks. tom: we heard the governor talked twice about getting back to 2% inflation. it begs the question -- and i think of chairman bernanke as governor bernanke in tokyo some 14 years ago -- can a central bank actually reflate an economy? is there proof that they can be successful at that? david: if you were to put that question on the brexit exam, the answer would be yes.

by supply, lowering rates, low afterhold, after a while, frequent lag, you see productivity pick up. that just has not worked and it is not working anymore. anybody 15 years ago, you probably should not read. do: wait a minute, i read oley/garber/folkerts-landa u this morning. i probably should not have. look at the 10-year yield. extraordinary. this is bloomberg. good morning. ♪

francine: i am francine lacqua with tom keene. banking shares have tumbled since the u.k. voted to leave the eu. it is pretty brutal. the third largest bank in the .orld fell some 20% yesterday today it is recouping some of the losses. itis trading up now because stopped short. it is the third bailout since the financial crisis, according to a person familiar with the plan. david folkerts-landau is still with us, the deutsche bank chief economist. i do not understand why it is so difficult to fix the italian

banking system. is it a problem that they do not understand the nonperforming loans there? this is a very precarious situation that requires lots of attention and flexibility in approaching this. that has not always been there in the last couple of weeks. the italian banks are sitting on anywhere between 300 billion or 400 billion of nonperforming loans. they desperately need the capital inflows should -- the capital infusion of about 40 billion. the bailout clause does not allow the italian government to as atly capitalize banks competitive directive. calls to suspend allowindirectly, and to recapitalization. my view strongly is that the

regulatory policy has to be countercyclical, not pro cyclical. by tightening up on the regulatory regime and for and forcing it, it is just making things worse. that is the difficulty of making decisions within a european context. you cannot quite react as quickly as you would like. the eu commission has now come out and said that it cannot directly recapitalize it. you have a set of rules coming from the center that makes it difficult for the country to respond flexibly to a local problem, and this problem could spin out of control. control, spin out of that it is systemic and could be a lehman type moment? david: banks are in a difficult position because the hit coming from negative interest-rate has been severe, so the ability to organically generate capital has not been there. at the same time, bankshares

have been depressed and keep on getting hit further, so the rate capital -- you cannot do that either. so that means you are flooding the banking system with undercapitalized, and that is exposing them to tremendous risk. inflation is very limited, so all you need is one additional shock, and we have three or four lined up -- french elections, the italian senate referendum -- coming up, and you could have a very situation -- you could have a very serious situation on your hands. tom: does angela merkel hold a veto over the italian banks? is she really the senior officer of regulation of italian banks? is a: no, i think that slightly unfair characterization. germany is the last country, and merkel has shown an incredible

ability to be pragmatic. i do not think that is right. on the other hand, financial crisis -- for a long time, nothing happens and then all of a sudden it breaks. it is not clear that if you are not really close to it, you feel how dangerous something like that is. so there is a temptation to stick to the rules, make it work, and you will find your way through it. my spirits over the past 30 years is that, that's my experience over the past 30 years is that, no, you can't. tom: we will talk about the issue of the moment for britain, and also ian bremmer on a g0 world. this is bloomberg. ♪ get ready for the rio olympic games

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x1 will change the way you experience nbcuniversal's coverage of the rio olympic games. call or go online today to switch to x1. you guy's be good[ bark ] i'll [ bark ]later bye. see ya pal. ever wonder what your pets do when you leave home? [ laughing ] aw you cutie pie. aw. aw. aw. aw. [ barking ] [ washing machine running ] party's on! know what your pets are up to with xfinity home. xfinity. the future of awesome. see the secret life of pets, in theaters july 8th. tom: good morning, everyone. not like 5:00 a.m. for francine and myself when markets were quite something, but some

deterioration. yen with new strength right now. 1.3820.ear yield, that bears watching as well. let's get to first word news. hasa: president obama declared that hillary clinton is overwhelmingly qualified to succeed him. --made his first came train he made his first campaign trip with her. the fbi found that she was extremely careless while handling e-mail as secretary of state. the fbi director said he would not recommend filing criminal charges. donald trump has surprising words of praise for saddam hussein. after a rally in north carolina, he called the late iraqi dictator a really bad guy who did a good job of killing terrorists. terrorists --led he did that so good. american consumers may be standing between a slowdown in

the economy and brexit. jp chief u.s. economist at morgan calls brexit a risk but not a major headwind. for consumers. a british inquiry calls the country possible in the u.s.-led invasion of iraq a failure. you are looking at live pictures from the iraq inquiry. the report says the u.k. chose to take part in the invasion before options -- peaceful options -- had been exhausted. may be on thepact reputation of former prime minister tony blair, who was responsible for britain's involvement. global news 24 hours a day, powered by our 2600 journalists and analysts in more than 120 i am nejra cehic. this is bloomberg. tom: thank you so much. we are about our guests. we love the idea of bringing you the smartest people we can find.

ian bremmer has parachuted in with eurasia group. london, david folkerts-landau is with us from deutsche bank or long ago and far away there was a body of folkerts-landau, michael dooley, and peter garber , on the idea of bretton woods and the system changing and involving -- changing and evolving. now it is about control of monetary policy in the eurozone because overall mario draghi's thecy effectively kept exchange rate undervalued for germany, given its labor market reforms. ofre is one of the summaries 10 years on. everyone is focused on the current account balance of a troubled united kingdom. ambrose evans pritchard feature this yesterday in "the

telegraph." explain to the queen and explain to the next prime minister y caret account dynamics are not all that important -- why current account dynamics are not all that important. david: it depends on what country you are talking about. in the u.k. it is not that important. the exchange rate will adjust in order to generate the financing for that size current account. so that is not so much of an issue. it is much more of an issue in the eurozone, where you have countries that are quite diverse. you have a very conservative run, and then the periphery. the exchange rate that is appropriate for germany would be significantly higher than that of a periphery, and that is why you get a large export balance in germany and you have enormous difficulties generating exports in the periphery. what was true 10 years ago is still very much true today, but

as i said, in an arrangement of currency when you have multiple countries, it gets to be very difficult because countries are -- tom: we just saw the governor of the swedish bank have to adapt and adjust to a unique europe. what would be your prescription for mario draghi? how should he marriage the -- how should he manage the euro? should they go through parity? david: i do not think he manages the euro, he manages monetary policy that leads to the euro. i believe that this is the wrong direction. the negative rates and further isative rates -- all it does undermine and take the profitability out of the banking system, and it is counterproductive in the sense that it leads to a raising of rates for loans rather than loaning -- rather than a lowering of rates. margins to somehow have

that keep you in play. as the rest of the policies are concerned, qe as well has reached its limits. so his ability to affect aggregate demand is now very limited. that is why also coming back to the retirement situation, this is kind of the underlying instability you have, this ineffectiveness of policy. on top of that, you have a banking crisis. put all of that together, and you are in a precarious situation. francine: how difficult is it to see what the world would look like now had the central banks not put qe in place? let's say they say, now it is time for the government to do more, what kind of world would it be? david: the ecb stepping in when there is a crisis has been destructive to the incentive to put in place reforms.

so you look at italian, spanish right now, they are low because of risk. it is kind of inimical to the governments to implement reforms that make them more sedative at the level of -- that make them more competitive at the level of germany. and you are sitting on a basket of risk that is only held in check by the ecb. tom: i like the idea of a basket of risk. we like the surveillance conversation with david folkerts-landau. of eurasia group joins us. angela merkel is in the crosshairs. what does she need to do? ian: i do not think there is a win for her with brexit because ultimately everything she wants

is going to be subverted by the politics both working inside the u.k., the difficulties of actually getting any opening on immigration that would allow for a deal for remaining in the common market. and also within her own country, where she is dealing with more populism, a desire to punish and to ensure that the core eu remains together, as well as all the other europeans going through the electoral cycle. i think angela merkel's game is no longer a short game, it is a long game. it is what do you do to ensure there is a core europe which subscribes to not only economic integration, but strongly shared political values. she cannot be thinking about the next hungarian referendum that will subvert the rule of law, or the austrian elections coming up in october. she has to think about what remains in 10 years time.

let's orient toward that. whatine: it is clear from david was saying a couple of minutes ago that we thought maybe until a couple of months ago that what would really test angela merkel would be a political crisis, refugee crisis, and immigration. if only there were just one crisis that would test merkel. the challenge that we have is that these crises do not happen in isolation. there is going to be another greek crisis coming. there will be a crisis of rule of law. all these historical moments -- and david is completely on top of the central banking issue. i wish i could say it was just one. i am a political scientist. every geopolitical risk in the world right now of size is pointed directly at the heart of europe, and that means angela merkel. it is refugees, terrorism, the

diminution of the most important experiment in democracy that has been taken in world war ii. -- that has been taken since world war ii. i wish it was just the financial crisis. francine: how is the region holding together? if you were truly dealing with them, probably just one, but of course they are not truly dealing with them. they are avoiding them and kicking them down the road. if there was one turn of phrase that we used to describe europe, it is kicking the can. them, certainly not resolving them. merkel has done that .uccessfully until she hasn't i would argue that increasingly the number of crises that are facing her, as well as her reduced popularity, is making the h-old response of the europe -- the age-old response of the europeans to crisis. tom: whatever we will do with

pound and euro and the rest, what will happen to the u.s. dollar? when you talk to alan ruskin, what is the deutsche bank dollar bet right now? david: if you go around the world and look at the various regions and how well they do, you come to the conclusion that the u.s. is the one region where we focus our hopes. u.s. economic performance, relatively speaking, is significantly better than that of japan and europe and the asian countries. also in terms of looking forward, the ability to resolve the issues that ian just greater, is a lot despite the upcoming election. view, you haveal to believe in a strong dollar position. years, it is few very difficult to see how the

european situation is going to get resolved. that makes me very uncomfortable. down to one,ay go but you can sort of deal with that because you have a flexible central bank. the u.s. tends to come together in times of crisis. wasou go back, the top instrumental in doing exactly what the europeans should have done and what they need to do now, instead of waiting and hoping that it salsa itself by itself. itself.solves itself by tom: david folkerts-landau, thank you so much. we will continue with ian bremmer here in new york. francine lacqua in london. lots going on, looking at yen right now, with a strong yen getting near 100.00. this afternoon, michael mckee in washington at 2:00 p.m. "bloomberg

surveillance." this is bloomberg. ♪

tom: good morning. it is an eventful morning. " fromberg surveillance new york and london. the banks had their moment again, like at 5:00 a.m. this morning. an extraordinary pricing of deutsche bank, down, down, down. it was 4%, now down 7%. it is not just about deutsche bank. all of them are challenged. , we arelkerts-landau really focused on the italian banks. there is nejra cehic. nejra: melrose industries has agreed to buy nor tech, an american company that makes

ventilation fans. 38% premium over nor tech's price yesterday. revised its smartphone business. now the south korean company may boost capital spending for its display and semiconductor units. samsung reports earnings tomorrow. shares were up 17% this year following the success of the galaxy s7 phone. the time high minister has agreed to a deal with a chinese group. berlusconi says the condition is that the buyers invest $444 million. that is the bloomberg business flash. thank you so much. american politics -- ian bremmer

is with us on the latest follies. we all were riveted by james comey yesterday with the federal bureau of investigation with secretary clinton. does this derail a presumptive president? does it derail hillary clinton? it she probably would were running against a well and normal republican candidate. it probably does not against donald trump. if you do not like hillary because you find her in authentic, untrustworthy, he does you believe the political establishment in the united states is out to screw you, everything that came from yesterday is a deeper manifestation of that. she lied. she lied a lot. she responded very badly. tom: it is almost new orleans politics. take us back to your graduate work in two lane a few years ago. tulane.lane -- in

what do you propose we will see at these conventions? ian: wrapping this inquiry up from the perspective of the fbi and the attorney general is a much clearer pathway for bernie sanders p she will have to tackle a lot more to the left to ensure that his supporters are enthusiastic about it. that means the transpacific partnership and trade, has a great chance of dying during a hillary clinton presidency. tom: you are avoiding cleveland. ian: no, i am going to be there. it will be the most dangerous thing i have done all year. tom: what do you expect to see in cleveland? far morepect to see trump supporters than you and i come across in our daily lives. everyone talking about brexit, talking about how stupid all

these people are, like turkey voting for their own thanksgiving, they did not believe the establishment was ever going to do anything whether the economy improved or not that help to them. the trump vote is fundamentally a protest vote. it is not what he can a cop was, it is the fact that it will be the biggest -- it is not what he can accomplish, it will be the fact that it will be the biggest it is only way you handle to vote against these guys. bremmer is fired up. francine: what does brexit tell us about the u.s. presidential election? you are saying that brexit means that people wake up and i want to protest and maybe i do not want to go as far as electing donald trump, or does it tell us anything can happen? ian: there is no question brexit tells us something about why trump is the nominee.

the difference between brexit and the u.s. is that for brexit it was the entirety of the antiestablishment vote that went for brexit. it was left and right. you had the head of the labour party and the head of the conservative party saying we must remain, and everyone else, the downtrodden in an overwhelmingly white british electorate, by the way -- and in the united states, that works on the republican side, to a degree on the independent side, but not on the democratic side. trump has the same dynamics at are, but the demographics much harder for him to get the election. so i do not think rex it tells us that you are going to see trump as the next president, -- so i do not think brexit tells us that you are going to see trump as the next president. but there is a serious problem they refused to a dress, and if they continue to refuse to address it, there will ultimately be hell to pay. francine: thank you.

we will learn more about the political system in the u.k., who will become the next prime minister. this is a picture for your assets, a lot of the u.k. stocks, and european stocks slipping for a third day. germany and spain following by the most. -- germany and spain falling by the most. this is bloomberg. ♪

tom: yen, yen, yen. sterling front and center. the yen extraordinary. 100.33. remarkable strength in the japanese yen. there is a clear flight to safety. coming up shortly, it is "bloomberg ." i know you will be looking at yields and currencies, jon. jon: bonds in negative territory on global bond index. we will talk about the yield, deeply negative, and then connect the dots between a search for yield coming from the bond market and going to real estate funds in the u.k. and then finding out that the assets may not be as liquid as you thought they were. we will talk about the funds and how they have been gated and how

significant that is. francine: there is a greenpeace piece on that. jonathan ferro there. the field is down to three in the race to become the next british prime minister. this is what we found out yesterday. theresa may has taken the lead. she is followed by energy mnister andrea leadsom. ian bremmer, who is the best person to lead negotiations in which the u.k. comes out on top? ian: not michael gove. his role in his personal and political ambitions, as well as his strident ideological views on brexit, will make him much more challenging on the european side. between leadsom and may, it is much of a muchness. you want strong u.k. leadership. that is not going to happen.

the u.k. will be more marginalized, more irrelevant as a global player. it is clear that is what economists are bracing -- are embracing. i think both may and leadsom will be capable. one was pro-brexit, the other one was pro-remain. does that make a difference? ian: not really, in the sense that may was nominally pro-remain, but she was quite strong in her anti-immigration sentiments. most of the u.k., at least public right now, even those leaning against leave, are now quite confused about where they are heading. so the fact that your prime minister reflects that tension, on balance you could say that would make it easy for her to reach out, but the conservative party is in disarray. there are enormous cleavages inside of it. the fact that you saw nigel farage resign makes them more

relevant. he was going to be very limiting as a one-issue leader. you are now going to have someone who will be more capable of taking votes away from the right wing of the conservative already. the tories have to guard against that. tom: we will continue this discussion with ian bremmer on radio in a bit. francine, what a morning it has been just extraordinary. i love the idea that you and david folkerts-landau said focus on the italian banks. this is extraordinary. are you on radio with me today? francine: i am not. michael mckee is back. tom: why don't you come on radio anyway? -- francine lacqua in london, getting a break. we will continue. futures -14. this is bloomberg. ♪

>> sterling pound it. the currency market adjusts to life after brexit. jonathan: three of the u.k.

as it's real estate funds hits property investors. >> and global bond yields plunging at again. u.s., u.k., germany, plus, the 20-year yield turns negative for the first time. >> from the beautiful city of london, a warm welcome to "bloomberg ," i am jonathan ferro alongside david westin and alix steel. the pound at its lowest level since 1985. david: in a few minutes, we will be joined by stephen gallo, head of european currency strategies. he will talk about strategies in the fx markets. alix:d