francine: party like it is 1999. the s&p, down, and nasdaq hit record highs. stocks over gilts. u.k. equity returns near an all-time high. the doe purchases crushed yields. we break down the referendum fallout. and created heads for its biggest weekly advance as speculation that saudi talks may include action to stabilize the market mounts. watch for currencies of crude exporting nations. welcome to "the pulse" live from

bloomberg's european headquarters in london. we have a great show for you. we start talking about the markets. at 9:30, we launched "brexit: what's next," our new show. today we speak exclusively to the former italian prime minister, mario monti, and labor mp chuka umunna. let's check on these markets. it was a spectacular, seeing all the movement. over in the u.s., we had record highs on all three indices. economyning, the german slowing less than forecast. stoxx 600, pretty much flat. this is the main picture we are looking for. crude oil, for 3.63. so much speculation on what opec will do. we do kick off our brexit show later on.

euro might be important as we take stock on what the price of oil means. let's get to the bloomberg first word news with nejra cehic. german -- nejra: german growth slowed less than analysts predicted, 0.4% in june, twice the rate forecast. that signals the region's largest economy may be robust enough to handle the fallout from britain's decision to leave the european union. china's stabilization faltered in july. factory output, retail sales, and investment all slowed. bloomberg's monthly gdp tracker slipped below 7%. the yuan isn't anywhere close to being a fully convertible currency, even as it prepares to enter the imf reserve basket. that is the view of every economist interviewed by bloomberg. the yuan top forecasters said a true free float is as far as a

decade away. j.p. morgan chase has produced a list that includes the need to ease capital controls and cut back on intervention. hillary clinton has ripped into donald trump's economic plan, saying it will only benefit the wealthiest. clinton didn't lay out any new policies in her speech, trying instead to undermine trump's claim that his business experience gives him the edge. >> when it comes to creating jobs, i would argue it is not even close. even conservative experts say trend's agenda will pull our economy back into recession. nejra: american swimmer michael phelps has become the most successful olympian ever, surpassing eight 2000-year-old record. his victory in the 200 meter individual medley earned him his 22nd overall and that colton one

i had of -- and that puts him when i head of an athlete who won events including shield carrying. global news 24 hours a day. i'm nejra cehic and this is bloomberg. francine: thank you so much. we just got some breaking news out of italy. germany showed that we had better than expected gdp figures. another story for the italian economy, stagnating in the second quarter. we have the overall reading of the eurozone in about 55 minutes. the economy is saying one thing. equities are doing another. let's turn to the markets. nasdaq, the s&p, and the all hit a record high, not seen since the late 1990's. for more on the market moves, let's introduce our guest, j.p.

morgan asset management global head of strategy, john bilton. great to have you on the program. we are mispricing risk because of all the central-bank action, but how crazy is it that we are seeing record highs for equities almost worldwide and low growth to know growth, anemic growth? john: but it is growth. roll back to the beginning of the year. we had the concern that -- francine: but record high on equities. john: but following a very lengthy expansion, nearly eight years of expansion. we've got a slow and steady grind better. look at the performance of the s&p and the doubt yesterday, the retail sector. we had some department stores beating modestly on estimates. it is underground. francine: what i can't matchup is the fact that equities are at a record and i understand they

are under loved, but still, they are at a record high. and yet the fed has an hike yet. in termsecord high of prices. in terms of valuations, they are the middle of the park. what we are beginning to see is some of the concerns over earnings from previous years beginning to stabilize. earnings growth expectations are muted. as we begin to see oil stabilize, a better pick up in the u.s. consumer, we still have low rates and a stimulus to the economy. then the forward expectations are modestly picking up. the prospect of mid-single-digit growth certainly beats the yields available in bond markets. francine: but the way you see equities and bond markets behaving, they are now in sync. how are we pricing risk? francine: if you look at the

correlation between stocks and bonds, on a daily return basis, it is still very much in negative territory. in our view, it would take a major hawkish surprise from the fed order that we get a re-correlation in terms of stocks and bonds. stocks and bonds are still behaving as internal hedge to one another. thus far, we've not seen any evidence from the fed that they are moving in a hawkish direction despite a blowout payrolls number. francine: what does that tell us about how they view the world? should we not be more worried about it? john: i think they view the world on the basis that, steady as she goes, low but positive growth is a good outcome. eight years ago, we flirted with a 1930's style depression. negative rates, extraordinarily easing monetary policy probably avoided that.

i think central bankers live by the mantra today of, first do no harm. we've seen the fed change their language to really recognize their role in global stability. francine: are they not doing any harm by creating fictitious markets? if you keep rates so low for so long and provide so much money out there, you have companies that should be zombie companies that are still operating. john: this has been an issue for a long period. case of working how you want to deal with that scenario. there's an argument that the level of default in the 2008 crisis was lower than we could have expected given the economic damage that was caused. there is a school of thought that there are zombie companies and there's some misallocation of capital. that seems to be folding through into the economy. it is important not to double

count it. if we are already saying growth is someone lower and earnings expectations are somewhat impaired, we shouldn't double counted by saying there are also these zombie companies to be concerned about. francine: i'm concerned but we will see. bilton stays with us and we will talk more about possibly some of the zombie companies. plenty coming up, including negative rates for the people, subzero deposit rates in germany. then, hillary clinton files to be tough on trade. are her policies enough to shore up growth in the usa? and, we kick off our new show on the consequences of the leave vote. we speak to mario monti and chuka umunna in a bloomberg exclusive interview. ♪

francine: let's get straight to the bloomberg business flash with nejra cehic. nejra: merck has reported a drop in second-quarter profits that underlines the figure that missed analyst estimates. denmark's biggest company has been suffering from falling prices in its oil and container divisions. jpmorgan's investment unit said it will liquidate a japan focused fund after a surge of investor withdrawals. the japan market neutral fund

will liquidate after assets dipped to about $70 million this month. 15% since itlost was launched. jack ma's decision to diversify alibaba has started to pay off. shares jumped in new york. revenue increased 59% in the first quarter. net income and sales also beat expectations. alibaba confirmed its target of 48% growth in full-year revenue. francine? francine: thank you so much. breaking news out of china about 5, 6 minutes ago. china's new local currency loans, 463 billion yuan. i know they don't mean anything per se, but it is a lot less than economists we had spoken to were expecting. this goes back to basically how much lending the chinese

authorities are willing to accommodate. this is china's broadest measure of new credit. because it increased less than estimated, it is suggesting that monetary authorities are concerned about the swelling financial risks, the fact that they want to make sure there's not some kind of credit crunch like we saw in the states in 2008. they seem to be putting a little bit more of the old growth engines and cutting back on some of this credit expansion. on to europe and negative rates. bankweek a bavarian retail says it will start charging customers to hold their cash. mario draghi has said negative rates were a policy for the banks, not the people. for more, we are joined by jeff black. until now, we've never seen banks pass on the cost to retail clients. we haven't had it in the eu or germany. have negative rates just

filtered into the real world? >> good morning, francine. yes they have. this is a small but significant step that this small bank has taken. it is only charging about 140 of its clients, the more well-to-do of those clients, but this was not supposed to happen when negative rates were introduced. banks could dot this, but this is really something meant to stimulate investment and risk-taking. that is not what is happening here. francine: what exactly is happening? could this happen more and more? what does it mean for the european person on the street that has a bank account with a bank yielding negative? >> i think that we are not going to be seeing a rush of big handing onbanks

negative traits to their customers anytime soon, but an important taboo has fallen. ecb means something for the because the worst-case scenario is that negative rates get passed on to ordinary people and they obviously won't like that. at the same time, the european economy is still lacking in investment. bank lending is picking up slowly. that wouldn't be a good outcome for mario draghi. francine: jeff, thank you for all the explanation. what was interesting is also mark carney about 10 days ago morning that the banks should be very careful. he doesn't want the boe to go into negative territory. he's warning banks not to pass on negative rates to customers. let's bring back john bilton. rates, just a reminder, you believe central

banks can get us out of this mess. is negative rates, are negative rates art of the solution? john: i think they are part of the experimental toolkit. central banks, much like many economic actors today, are in the experimental drug phase of monetary policy. we don't have a counterfactual to tell us how successful central banks have been. the fact that we have positive growth around the globe, we have avoided a major crisis, we've significantly shored up the western banking system, suggests they should at least be given a b minus for their efforts. whether negative rates are the right and only tool is unlikely to be the case. i think we're seeing the limits of it because of the impact on the banking system. the appetite of effectively charging for deposits or banking services across the border, the

broader population, you have between one third and one half of net interest is typically earned on the liability side. if you've got negative rates, that is taken away. while it is clear that central bankers want to control the banking system, what they don't want is a lossmaking banking system. then you wind up in the situation we have across the eurozone. which is crazy because they are the ones that have to start lending. is there concern that negative rates -- if you look at japan and the way they crazy because they are the ones that have to start lending. rates, they were meant to shelter structured negative banks and it seems that in japan, they were taken as almost a lender of last resort. it is the thing before desperation, before helicopter money. john: the push effect of

negative rates has been seen as relatively small. effectively you are creating a very easy backdrop, doing very little to stimulate investment. that has been the big issue across the globe. either int manifest terms of investors chasing assets or companies choosing to buy back stock rather than invest in new capital and equipment. this is a broader problem. i think it is more tied up with the fact that we have an aging demographic. negative rates are something you can get away with when you have a savings block. it doesn't necessarily do what is needed, which is stimulated. that is where the debate begins to come in. francine: quick question on china. i have made up a chart for you. they've, the broadest measure of new credit was smaller than expected, does

it mean they are worried about a credit crunch? john: i think china are working on the basis, per what we mentioned just now, the first do no harm a thesis, you have to assume a similar attitude in china. china had time on their hands and reserve assets to deploy. what they don't want to do is drop themselves unwittingly into a hard landing. would be a good way to arrive at that. better to accept a lower trajectory of growth. i think that is the effort chinese authorities are going to make. we probably will see a slower second half for china. we shouldn't throw the baby out with the bathwater. francine: hold that. john bilton there. up next, more hope, let's change. we also breakdown hillary clinton's reply to trumps economic plan. is it what the u.s. economy

needs? we find out next. this is bloomberg. ♪

clinton hasllary ripped into donald trump's economic plan, saying it will only benefit the wealthy. she challenged claims that his business experience gives him the edge on boosting jobs and wages. >> when it comes to creating jobs, i would argue it is not

even close. even conservative experts say trump's agenda will pull our economy back into recession. francine: right now, we are back with john bilton to have a look at what the dollar goes from here. does the dollar follow fed or does the dollar also follow the u.s. presidential race? john: i think it is a bit too soon to say whether the dollar will follow the presidential race. typically, currency markets begin to discount the uncertainty a little more in the month to six weeks ahead of the event. we saw that in the run-up to the scottish election and the brexit vote. typically it is the options. in the beginning of october, you start to see the way in which the dollar is beginning to price risk. francine: let's have a look at my terminal. this is confidence in question in china. the blue line is independent

confidence research analysis. you can see where it is going. the official confidence december reading, the official reading in white. that is sharply up. can we trust china? john: as with any set of statistics, you put confidence around it. you hear economists watching china, looking at official figures, and assuming below that because of difficulties in measurement. even in developed nations, we have multiple reruns and revisions to data. look at where the central tendency and the direction is going rather than the absolute headline data itself and apply a confidence band. francine: what is the biggest risk? is it china? we have italian banks, brexit. john: i worry the most about another misstep from the fed. francine: which way?

john: in terms of being overly hawkish. we've got about 60% probability of another rate hike this year. if that were to jump off to a couple, you could see a rerun of tightening. francine: so you don't want a rate hike this year. john: i think we will see one and that is appropriate. francine: december? john: probably december. the fed is the world central-bank as well as america central-bank. that is incredibly important. it is important that as we hear from fed speakers through september, recognition that the u.s. economy is doing well, appreciation that the global economy is fragile, is the reinsurance that markets want to see. francine: thank you so much for all your insight. john bilton there from j.p. morgan asset management. new brexit show.

mario monti and chuka umunna. exit, what is next? this is bloomberg. ♪ [ hip hop beat throughout ] [ fans cheering ]

♪ olympics 2016, let me get you on my level. ♪ ♪ so you never miss a moment, ♪ ♪ miss a minute, miss a medal. ♪ why settle when you can have it all? ♪ ♪ soccer to wrestling. track and field to basketball. ♪ ♪ fencing to cycling. diving to balance beam. ♪ ♪ all you have to say is, ♪ "show me," and boom it's on the screen. ♪ ♪ from the bottom of the mat, ♪ ♪ to the couch where you at? ♪ ♪ "show me the latest medal count?" ♪ ♪ xfinity's where it's at. ♪ welcome to it all. comcast nbcuniversal is proud to bring you coverage of the rio olympic games. [ clock titime. ] you only have so much. that's why we want to make sure you won't have to wait on hold. and you won't have to guess when we'll turn up. because after all

we should fit into your life. not the other way around. francine: welcome to our new weekly brexit show. i'm francine lacqua. every friday, we wrap up the news and conversations that will make you smarter about what is next for europe and britain. this is "brexit: what's next." for a roundup of the brexit stories that matter, let's get to nejra cehic. nejra: the boe has expanded quantitative easing. the bank could not find enough sellers of longer data bonds to meet its targets. was thereversal trim first time the bank has seen a shortfall since it started qe in 2009.

increased stimulus has crushed u.k. government bond yields. guilds rallied, sending yields sliding to records. concerns that the bank of england will find enough bonds to satisfy targets are overdone say goldman sachs and the royal bank of canada. european stocks erased their post brexit declines. the stoxx 600 has lagged u.s. and asian benchmarks. undermining the near-term outlook for the u.k. property market with both demand and sales dropping in july according to the real institution of sales. sales declined the most since 2008. hong kong's richest man, one of the biggest investors in the u.k., has warned that the fallout will last for years. li ka-shing says the move will bring with it considerable challenge to the u.k. and

europe. li has much riding on britain, the biggest profit generator of his business empire. uk prime minister theresa may is shunning the european union in her vacation choices, opting to take our august break in switzerland. her crowns will buy her fewer swiss francs. sterling has fallen 11% since the june 23 referendum. global news 24 hours a day covered by 2600 journalists in more than 120 countries. francine? francine: thank you so much. let's discuss the impact on europe and how difficult it will be to negotiate the u.k. departure from the union. italy's former prime minister, mario monti, joins us on the phone from switzerland. always a pleasure to speak to you. you have been on both sides of the coin as a politician and commissioner. how do you think the final model of brexit will go?

beio: it was always going to a difficult negotiation because the 27, i'm sure, will want to help the u.k. establish a sound and confidence based relations with the rest of the eu. i think the british people must understand that if the 27 go to much out of their way to the kind to the u.k., they will undermine the very fabric of their own integration, which is the single market. on the single market, do you think the u.k. will have access to the single market, or is there no chance unless the u.k. backs down on free movement

of people and immigration? u.k.: i do not believe the will be able to unbundle the freedoms of the single market and get the ones it likes, like goods and services, capital, and leave aside the ones it does not like. benefit that, but to from the single market membership, a country has to transpose into its domestic growth all the rules for the single market that are decided in brussels. the example of norway is there. norway pays the fee for participation in the single on board all takes eu legislation. francine: something that some u.k. politicians have said they don't want because it means you are subject to eu laws without

being at the table. in which position would you be more lenient with the u.k., if you were still at the commission or if you were still head of state of a periphery country? cases i think in both see clear limits in what can be vis-a-vis the u.k. and the european union cannot delude itself to lose value to its please ajust to country which has decided not to stay in the european union. as you can understand, this would perhaps help the u.k., but set in motion a precedent of other countries wanting to renegotiate their memberships. become awould then major factor of the you disintegration. i think both the european

commission, and if they are responsible, the heads of states and governments of the 27, should not go down that way. francine: why are the markets so calm on brexit? will the impact be limited on growth or is it a fictitious rally? mario: the markets, i think, were pretty excited before the vote and after the vote, but now they have rightly understood that the effects of brexit will be mainly on the real economy. they will take time to why they're and so probably will be very serious economic consequences for both the u.k. and the 27, it is not a short-term process. i believe the markets do well now to focus more on other

problems. maybe we can live for a long time with negative interest rates, the problems of the banks, and so on. francine: speaking of the italian financial system, does the italian financial system remain too big to fail and too big to save? mario: the italian financial system and the banking system do have their problems. they come out of a number of years in which they had considerably less problems than other banking systems like germany or spain. , of course monte dei paschi was the big problem. which mythe case in government in 2011-2013, the

state did intervene. for the rest, there was not really need to do so. i have impression that italy's banking system is a problem, but i also frankly have the impression that in the anglo-saxon world, that problem is being slightly exaggerated, maybe also to inadvertently seek to divert the attention from brexit and other major problems. francine: i'm really glad you brought it up. when i speak to international investors, they think it is the end of the world, that the italian banking system is on its knees, that we could see something fail and that would be systemic. italian politicians say this is blown completely out of the water. you seem to agree more with the politicians in italy. what do international investors not understand?

mario: the end of the world might have come because of italy four years ago when there was a systemic problem with the eurozone, but there was also a specific italian problem, namely the fairly high probability of a default for the italian treasury. that, whenat context i was in government, my government decided that there was no need. there were not even requests by the banks to be assisted, and we focused all our efforts avoiding theon explosion of the treasury debt. now there are indeed problems. i don't want to deny that. problem isructural

, sometimes perverse interaction between politics and the banking system. this is a problem not exclusive to italy. for example, this is still a problem in germany. it was a very major problem in germany when there were fully fledged guarantees by the governments of the regions to their banks. those were taken away. but the interaction between banking and politics is always a potentially very delicate point. it is italy. believe they problem of the banks in italy now is a fairly small fraction of the problem that was in italy a few years ago with the

treasury bonds. francine: we have covered it extensively, the fact that you say it was the right decision not to take the bailout program offered by the eu. a quick final point. do you think the eu and germany will definitely have to be flexible on the bail in of the italian banks if this is going to be resolved? mario: now that i am not in government, i don't have enough information, frankly. i know the rules of the european commission concerning state aid. i believe that as a whole, the movement away from bailout and in was a sound move. i believe that italy was in 2014 taken a bit toos

much by surprise by a move that was negotiated in brussels and accepted by italy, but there can be a flexible handling of the transition in these initial phases of the bail in world. i'm confident that the negotiations between the european commission and rome, the italian political authorities, will be finally successful. and let's not always put germany on the front line. it is really the european union with its rules and germany does better. francine: very fair comment. as ever, the ultimate diplomat. thank you, mario monti. stay with bloomberg. plenty coming up including what brexit means for britain. we speak to labor mp chuka umunna. then, gilts stole the headlines.

we also look at commodities. those currencies leading gains as oil extends its rebounds. we break down the fx moves. this is bloomberg. ♪

francine: uk prime minister theresa may has repeatedly said xit and thes bre

u.k. pay will be leaving the european union. the issue has divided the country and was raised during a debate between contenders vying for the leadership of labor. >> there's no ignoring the fact that whether we like it or not, the decision of the referendum was to leave. when i said article 50, article 50 is going to be invoked, it will be invoked. we have a strategy which is about protection of what we've , about the trading relationship in the future with the rest of europe. fundamentallyieve that we should be in europe and i want us to argue hard over the next two years in favor of retaining all those rights. if what is on the table for the british people is a worse deal than they were anticipating, a worse deal than this country can put up with, if it is recession, cutbacks, more austerity, we

should say no. themould put it back to either in the general election or -- francine: chuka umunna is a u.k. labor member of parliament. he joins us now from westminster. great to have you on the program. does brexit mean brexit? will this country really leave or is there a chance we go through general elections or something that means we could backtrack? chuka: the british people gave their verdict on the 23rd of june. although it wasn't a resounding verdict, 52% voted to leave, we've got to accept the results. what i would like to see is the most progressive exit package we can negotiate. i would like us to have the closest relationship possible with the european union while addressing those things that british people are concerned about.

the big challenge for prime minister theresa may is going to be how to ensure that in some way we can remain a member of the european single market, to which 44% of our exports go. it is our biggest customer. while at the same time reconciling that with the british people's desire for an end to free movement. i say that while also arguing for very much the same things in this specific respect of those who are arguing for us to leave during the campaign, which is that for those eu citizens who are already here in the u k, when we made this decision, they should certainly be given the right to stay here after we have left the european union. statementsvery firm given. boris johnson after the referendum voted in the house of

commons to guarantee the rights of eu citizens living here. francine: thank you. i'm a european foreigner in this country. chuka: we don't want you to be kicked out. francine: maybe some people do. it also depends on how the rest of the european union actually deal with you hey nationals living there. for tat? ti foit chuka: i don't think we should allow this to become a tit for tat thing. i don't think people should be used as pawns. you can't aggregate the interests of those citizens and many british citizens. many british citizens' parents are eu citizens, neighbors, family, friends, people that we work with are eu citizens. there is a moralist view here and an issue of respecting peoples right to a family life. that is the moral case for

ensuring that eu citizens have the right to stay here. we've got over 100,000 european citizens working in our public services, helping keep our national health service going. we've got 1.5 million british people currently working in eu citizen owned businesses in the u.k. if we started getting into this tit for tat and using people as pawns, we will be massively shooting ourselves in the foot, but also running counter to our values. francine: do you think these are negotiating tactics? for the moment, if you look at the political landscape in the u k, it is only nicola sturgeon who says we want to guarantee those rights to europeans living in scotland. she would probably want it for gb at large, but no other politician has said that. is it just because they are trying to negotiate? i'm not sure it is the

only bargaining chip because i think there was huge disappointment around europe that the u.k. should leave the european union. there is so much that we bring to the european union. we lead within the european union. francine: but you voted to leave. the country did vote to leave. chuka: the country did vote to leave, so we need to find the best brexit package. that not only helps our economy to thrive in the future, which is why we want the closest trading relationship with the european union, but one that means we continue to be outward and open looking to the world and we don't close ourselves off which would be bad for british industry and jobs. but there's no getting away from it. in this referendum, immigration predominated. we have got to find a way of addressing the immigration issue in a way in the labour party

that remains true to our values. i don't sit in that place that says immigration hasn't posed any challenges. i don't agree with that. there are also issues of national identity. on the other hand, to completely cut ourselves off from the rest of the world would be a hugely retrograde step. and to blame everything wrong in our country on eu citizens is totally unfair. we have to find a progressive exit package which enables us to build a fairer and more prosperous britain. we should not be using people as pawns in that negotiation process. theus not forget that leading vote leave campaigners, people like boris johnson, they promised during the eu referendum campaign that eu citizens currently living here would be guaranteed the right to stay here and they should keep that promise. francine: thank you so much.

we have to get you in the studio. chuka umunna there. u.k. labor member of parliament and chair of vote leave watch. up next, what brexit means for the markets. we look at this week's big moves. this is bloomberg. ♪

francine: it has been a busy

week of u.k. markets. let's head to the bloomberg with nejra cehic. nejra: we have seen the stoxx 600 recover its post brexit losses. it is the line in white. it has been lagging asian and u.s. equities. it is pretty much unchanged since june 23, where is the msci s&p 500,fic index, the the ftse 100, have shown gains. funds tracking the equities have seen outflows for 26 straight weeks. traders are pricing a jump in volatility. it seemed bearish options increasing. the stoxx 600 still attractive on bond rates. that brings me on to the ftse dividend yields versus 10 year gilts. that is near an all-time high. this where we've seen bond yields on the 10 and 30-year hit record lows this week.

the bank of england extending quantitative easing. sterling is the worst g 10 currency over five days. francine: thank you so much. stay with us. "surveillance" next. we will be talking currencies and bonds. ♪ [ clock ticking ]

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♪ awesome internet that's super whoa... ♪ ♪ everything is awesome xfinity. the future of awesome. francine: party like it's 1999. we take stock of the world economy. stocks over yields. the doe purchases crush yields. heads to its biggest weekly advance. this is "bloomberg surveillance." tom keene is in new york. we have a most interti