tom: testing times. north korea conducts its fifth nuclear test. bond investors should prepare for rising interest rates and higher inflation. china's inflation slows. is the outlook stabilizing? this is "bloomberg surveillance." i'm francine lacqua. michael mckee is in new york.

there is quite a lot going on on the bond markets. mike: you are wearing a fall-like sweater. maybe we are past the end of summer and there is a seasonal adjustment problem. sudden, there is a lot of news affecting the markets. does it last, does it change direction? as i knock into my microphone there. francine: it still feels quite binary. let's get to the bloomberg first word news. here is sebastian. north korea says it has the ability to make nuclear weapons that will fit onto rockets. regime conducted its fifth nuclear test.

the president of south korea called it an act of maniacal recklessness. in france, police have arrested three women who were plotting imminent terrorist attacks. earlier this week, a car containing gas canisters was founded notre dame cathedral in paris. the u.s. secretary of state john again.s back in russia earlier this week, the united states complains that russia has backtracked on agreements to end the syrian civil war. may is allowing the creation of new grammar schools. the schools were popular in the and are moree -- selective. the u.s. navy is looking to

streamline its troubled ship program. been criticized for reliability flaws and uncertain ability to survive in combat. this is bloomberg. francine, michael. mike: let's get you set up for the day in the markets. it is a global selloff. you see that reflected in u.s. futures. concern over whether central banks are questioning the efficacy of additional stimulus. the u.s. curve a little bit higher this morning. we will talk about a possible september move by the fed. the biggest drop in oil inventory since 1999 yesterday sent prices soaring. a bit of a pullback today as

that is seen as a one-off. the vix is higher. people are talking about a global selloff. big story on global bonds, japan, germany, yields moving higher, gold dropping on the ecb. francine: mike, i have a very similar data board. you are seeing a selloff of global stocks and bonds. i wonder why. there are signs that central banks in europe, basically the boe and ecb, but also japan, are starting to question the benefits of further monetary easing or are they just waiting for a brexit effect to happen? i'm not sure. this is on the back of that nuclear testing in north korea. you see a little bit of a flight to safety. mike: we were talking yesterday about the offshore yuan and whether that is going to continue to fall. we have a way of looking at that

on the bloomberg. we show a trend reversal graphic. i've got to call up the thing before i actually show this. here we go. it shows the high resistance points and support levels. it shows which way it has been going. buyers are looking at dollars. you look at the top resistance point. the red line suggests that the dollar is probably not going to break through that, it will stay about where it is. maybe we see the dollar start to pull back a little bit. francine: mike, this is my plane, vanilla -- plain vanilla bonds chart. in white is the 10-year japanese bond yield. it is kind of comfortable around the negative range of about 0.05.

you can see today we may get above trend, we may get a number above zero. that is significant. i think it is psychological. it may have an impact on how ceo's view their investments. we have seen a selloff in global bonds, we have seen a selloff in bonds that has been deepening after signs of central banks questioning the benefits of further monetary easing. let's discuss this with stephen major from hsbc. what a day to have you. we are seeing a repricing. are we jumping the gun? our markets saying that is it for monetary easing? >> i think it is probably too early to call an inflection point. it is fair to say we have a

decent correction. that chart is excellent. it shows how japan was way out of line with the eurozone. germany and japan are sharing that flaw. i think that the ecb is being completely pragmatic. why not have a review? if japan is having one, why not wait to announce until you see what they are going to do? francine: what is the review for? i was wondering whether it was a political weapon for mario draghi or whether it is an elegant way of getting out of something that is not working. steven: it could also be a third one. it could be looking at the technicalities. francine: about what they are buying. steven: yes. they are running out of things to buy. there are ways of changing the

modalities, in terms of the rates and the flaws and the credit qualities and the sectors. that requires work. there is a need to look at reinvestment in the portfolio, as well. very interesting papers about the operational side, as well. they are looking not just at the assets in the portfolio, but how to reconfigure the liabilities. tohink it would be dangerous say that this is the inflection point, the turning point. it has been clear that monetary policy has been pretty exhausted for most of the last year and nobody seriously believes that monetary policy creates jobs anyway. we are having a good shakeout and it started with what japan said and has been continued by the ecb. francine: i'm wondering -- mike:

i'm wondering how much role psychology plays. people have been saying that it is the beginning of the end for years. if we get some sort of news event, is everybody going to stampede to the exit because everybody is in the same train? steven: somebody is going to get it right and might get lucky. guess is that we are going to be in a tight range for quite some time. i would not be surprised if we are still at these levels in a year's time. i'm not going to call a turning point. what i think the opportunity here is is to accept that we have very low rates for a very long time. i'm talking about years here. invest in something else. clearly, emerging markets and credit are the ones that are winning from this. i think being more tactical with the curve views and looking at relative value will be the way

forward for the next few months. there is no turning point for me. mike: if there is no turning point, what happens if we do see an economic downturn, the data turning soft in the united states? if you have the fed funds rate at 50 basis points, we are trading at about 38 basis points, how do central banks counteracted downturn without ammunition? steven: the official information out of jackson hole was quite incredulous. they said they would use forward guidance and more qe if there is one more downturn. bearing in mind that this cycle is quite long-running already, most people would guess that the next downturn is much closer than the end of the previous cycle. , those are not enough. by 5% or you cut rates

6%. the idea that former -- forward guidance and qe can do the job seems like nonsense to me. the markets are sensing that may be central banks have not got a lot more they can do with the processes they have announced. whether they go into unconventional policies. [laughter] us fromephen major with hsbc. we will speak with ellen zentner. she says the fed is not going to be raising rates anytime soon. what is your view on a potential recession and having to cut the rates? this is bloomberg. ♪

francine: this is "bloomberg surveillance." i'm francine lacqua in london. michael mckee in new york. tom keene is on holiday. looking to get rid of as it isbusinesses trying to take over monsanto. --y are looking to take over sell their dermatology business. softbank has raised its biggest yen bond sale ever. the deal was valued at about $32 billion. the federal reserve wants to keep goldman sachs and other banks from investing in companies. banking regulators have come out with a number of recommendations.

the fed also wants to limit banks' ownership of physical commodities. goldman has been accused of seizing unfair vantage is in the metals and energy markets. north korea has confirmed it has carried out a nuclear test and now says it has the ability to mount warheads onto rockets. south korea has condemned the move. china is urging the secretive nation to stop action that could destabilize the region. chief is withau us. steven major is also still with us. we woke up this morning, we found out the news, we wonder how much is an actual danger and how much is saber rattling from north korea. >> let me preface what i say by noting how in 2003, north korea said the same thing.

january, they claimed they had developed a hydrogen bomb. none of those have been verified. this time, though, the south korean military have to texted that the explosion was 10 kilotons. we spoke to are taking this very seriously. francine: they are taking it seriously and so what is the next step? is there something that the u.s., japan, and other countries can do to deter north korea from going forward? peter: i think, again, they are going to continue to step up pressure. it means increasing sanctions. the sanctions that have been in place so far have not worked. , think that if china particularly in their relations with north korea, china was able

to put additional pressure, things could change. however, china has up to now basically been sitting back, lodging somewhat some complaints, but not doing very korea'smitigate north nuclear ambitions. mike: we heard from president obama calling yesterday on president xi to do more to put pressure on north korea. what are analysts saying north korea's endgame is? are they just trying to put pressure on the south or is there thought that they would use the weapons? peter: i'm not sure about them ever using them, but they have publicly stated that their endgame is to develop a nuclear weapon to be on par with u.s. nations. nuclear-armed that is their endgame. as to whether they are going to

use it, nobody would know that. , for north korea to be able to say they are one of the handful of countries that has a nuclear weapon and is able to use that would be a significant support for the regime there. peter, thank you for the update. steven major, when you look at the high-yielding currencies, if you are the south korean yuan, 80% of what your currency anders look at is the yen then you have something like this that cannot be ignored. steven: a very good point. this would matter to the risky asset classes. i think the sources of some of the volatility have been china over the last year. in fact, the chinese rates and the currency have been behaving in quite a benign fashion. this kind of thing is worrying

for those loading up on high-yielding bonds. if you look at india or indonesia and brazil, these are the ones that everyone is in because they have good fundamentals and they have a nice carry and that benefit from a benign outlook from the fed and others. but if you get this, you wonder what you have done. it is very hard to read what is going on. mike: do you ever read on what china, in terms of its markets, is trying to do? there are questions about how the want to weaken currency. are we going to see the january effect this year? that nothingess is is going to happen for another month or so. we have the very key event in october when china joins the sdr officially. there is nothing that is really going to happen for a month or so. i look at this and i think that

there is a lot of focus on china, but ultimately, if you look at things like the rates in china and the chinese bond market and the currency, it has been moving in quite a benign fashion for quite a while now and it seems to me that the concerns are what it means to everybody else. yes, china is slowing down and they have a debt problem and the debt is in the private sector, particularly in construction. all of that is known. the idea that we are going to get some sudden explosion where you get a big currency move i think is way, way off. mike: we will continue with steven major. coming up in the next hour, citigroup's cohead with us. 6:30 a.m. in new york. 11:30 a.m. in london. this is bloomberg. ♪

francine: this is "bloomberg surveillance." i'm francine lacqua in london with michael mckee in new york. it is friday. acht unlock -- jeff gundl spoke. here is what he said. >> we have some of the hawkish members of the fed talking about so some rates should be raised twice before the year end. the kind of want to distance themselves from the work. is the people that

believe that even if the markets don't price it in, the fed will act? rate isthe risk-free actually lower than the fees they are charging their customers. does not work. yes, they need higher yields. just because they need them does not make it happen. the fed needs to get to a more balanced volatility, otherwise there is no point in meeting. , theey did want to hike last thing they want is a huge market shock. being usedeches are to manipulate the probabilities a bit higher. i reckon that nothing will happen. mike: i was out in jackson hole and they said the markets focused on the wrong thing. if we get a trade, does the

market overreact? they manage to hike once a year for eight years, they will get to 2%. if they manage to hike. the terminal values is what everyone should be looking at. it seems to me that the point of hiking is that they have something to cut rates on. but that does not seem reasonable for a hike. mike: we will have to leave it right there. coming up, inside the fed conversations. the former minneapolis fed president. this is bloomberg. ♪

a

mike: good morning, new york. you can see just the slivers of dawn on the horizon. it is going to be 91 today in

new york city. i'm michael mckee in new york city. francine lacqua in london with a lovely fall-like sweater. francine: i'm googling. how much is that in celsius? a lot. mike: things are heating up in the markets, as well. that is raising volatility in the u.s.. the vix is up. curves start to steep in. japan and germany looking toward a positive yield on their 10-year notes so far. -- the ecbng the ecb having an impact. let's get to bloomberg first word news. good morning. sebastian: good morning, michael, francine. north korea has tested its most powerful north -- nuclear weapon yet. kim jong-un says they have the ability to mount atomic weapons

on rockets. the president of south korea condemned the test. calling it an action of maniacal recklessness. britain's second-largest insurer says there needs to be a brexit timetable. financial firms need more certainty about when the two-year process will be triggered to leave the european union. they are worried the eu will try to punish the u.k. during negotiations. a house committee will meet next week in the u.s. to consider the republican plan to roll back the dodd-frank financial reform law. the bill would impose counter sanctions on those who commit fraud and bailouts of big banks. trump says that russian interference with the u.s. election is probably unlikely. he spoke to russia's international news at work --

news network. he has been criticized for his praise of russian president vladimir putin. investors are warning that the samsung galaxy note smartphone should not be charged in airports. -- airplanes. it should not be put in checked luggage. global news powered by 2600 journalists. this is bloomberg. michael, francine. francine: i'm cautious by nature. if you have one of those phones, go to the shop and ask what you want to do with it. don't bring it on the airplane or keep it in your luggage. let's talk about china. factory deflation has improved a little bit. it is a little bit better than what economists had forecast. steven major is still with us. we will get an update on the china data on the ground. overall, there was a clear

problem of deflationary pressures around the world. how much of it comes from china? steven: china is one of those sources. we could be moving through that. you have heard people talk about globalization. if globalization was about to end and reverse, presumably, the deflation would reverse as well. we need to be very careful when we talk about these long-term, multi-decade themes. there are several themes. debt overhang, income inequality, all of these. icebergs different moving at different paces. we need to be careful when we focus in on one situation about chinese deflation and it is starting to reverse a little bit. it does not have to mean that bond yields go up, for example. is it a factor we should take into account? it seems to be fairly good news. there are so many other long-term thematic ideas that we have to work through.

i'm just unconvinced that we are on some kind of inflection point. francine: hold that thought. let's get to bloomberg's chief asia correspondent. we are just hearing from steven major that this may not be an expression -- inflection point. talk us through the data that we are looking at today. we are starting to see a trend on the ppi side of things that we might be heading back toward positive territory. that is a potentially significant development when you consider the record streak of deflation that factories have been suffering in china. it has been one of the big drivers in the economy. it has been dragging on profit margins, on expansion plans, and on the like. is notrovement in ppi altogether being driven by china's internal dynamics.

they are taking some steps, but i think the improvement is really to do more with external factors like commodity prices and the price of oil. meanes not necessarily that forward stimulus does not need to be added over the near term. mike: we are not seeing the rise in factory gain prices translate into higher prices for consumers. enda: no, what we saw on the consumer side is a correction on the food side. that is what brought overall products down. on the one hand, you can say will the consumer prices ar take pressure off having to cut interest rates in the near term. it does not mean stimulus will not be added in the credit lending channels. it does not mean money will not

be poured into the economy. means moreggy demand stimulus on the way. mike: the chinese central bank, do they focus on inflation as much as central banks elsewhere? or are they more concerned with stimulating growth? the government has a target of 3% inflation. it is not an inflation mandate in the way we might understand it in the west, it is more about promoting growth and the like. inflation targeting is getting more and more negative. the reserve bank of india agreed that the inflation mandate for the first time. it is part of the policymaking process. francine: thank you so much for all of that. steven major from hsbc. we will have plenty more coming up. we will talk about deflationary pressures.

we will talk about the treasury market at the moment. what is the most significant thing people misunderstand about china? you say that this will take time and the trends will be over 5-10 years. steven: people underestimate the policy flexibility. in a very strong position because it has so many letters it can pull -- levers it can pull. the stimulus focusing on the physical side is not something a eurozone country can do, apart from germany. this is the mistake people make, looking at china through western a similarxpecting kind of outcome. having watched this for a while, i think we do get the shocks and it is mainly down to the fact that we don't understand. i think this will continue. 0.1fact that we have had a

surprise on that inflation number, that deflation numbers still by the way -- it does not signal that things are turning around. the stimulus will probably be stepped up. i think it is really important for everyone to understand that. yes, there are things happening. we are into the second week of september after this strange period of august. i don't think we should be getting overexcited about some of these developments. mike: here is the bottom line question. seven years on, can central banks generate inflation? all the deflation moves we have seen have been commodity-based. steven: right from the very beginning, the quantitative easing was never going to be inflationary because, as we know , and we knew at the time, it was a swap between two kinds of assets, reserves for bonds. it put a big tax on to the banking system from the start. the qe has been dis-inflationary

in many ways. --has pumped up asset slices prices, but it has been disinflation or a. nobody believes that monetary policy is going to create inflation like this. inside the central banks, they know they can create inflation, but they have to genuinely print money and that is completely different to what is happening so far. that is why you get the talk about helicopter money and the need for easier fiscal policy to make the easy money policy work. that is where it is that at the moment. francine: thank you so much, steven. coming up, polaroid shakes up more than just pictures. their latest venture that promises a new way to relive your favorite moments. we speak to the cofounder of polaroid swing. this is bloomberg. ♪

francine: this is "bloomberg surveillance." i'm francine lacqua with michael mckee in new york. brexit, one of the worst and cedced errors -- enfor3 recent history. that is according to our next guest, tommy stadlen. he is the head of polaroid swing. does brexit impact london as a tech have -- hub? tommy: we are headquartered in the states, but myself and my cofounder are british. we are very much aware of the issues with brexit. in my view, it is a real shame.

it is a major unforced error, one of the biggest in british history, recent british history. francine: does it really impact tech? we're worried about the bankers. we don't know if steven major will have to move to frankfurt or not. there is a clear angst in the city of london. then you look at the tech companies. they are less than a kilometer from here. is it going to force the tech scene in london to move out? tommy: i think the big thing of technology is the freedom of movement for talent. you look at the top 50 or top 100 high potential tech of thems in london, 50% were started by at least one immigrant founder. that is something you see all over the world. half of the unicorn tech companies in silicon valley were founded by immigrants. important we continue to attract the best people in the world for technology in london. there is a major threat posed by

brexit to that. i hope we can make the best of what is not an ideal situation for the technology industry. mike: you are headquartered in new york and san francisco, which is the standard place to put a tech company. how big is london's opportunity in the tech business? tommy: i think the opportunity is very large. i think london is really well-placed. we have some of the best universities in the world in london. we have access to industries like finance, advertising, which are ripe for disruption by the best technology companies. idle don't think london will ever necessarily be the heart of hard technology, the way that silicon valley is, but i think that there is a great opportunity for london to emerge, alongside new york, as one of the major tech hubs. mike: let's talk about polaroid swing. i've got it up on my board, as

well. basically, it looks like you take a picture and you can animate it. i'm using my mouse, but i'm assuming you would use your finger on a smart phone. there is riley from "bloomberg ." is this -- are people going to make the effort to make these things move? --areit something that they better off animating? tommy: polaroid swing allows you to capture one second moments and then bring them to life by reaching into your smartphone by touching it or swinging your phone backwards or forwards. was to reimagine photography. that is what polaroid did in its heyday. we want to do do something equally ambitious in the mobile era. this allows you to capture more of life. we looked at the idea of how long does a memory last?

the human brain does not necessarily see the world instills or long videos. we see the world in these vignettes. this is the first time you will be able to capture these moments more faithfully using a regular smartphone and it is as easy to take as a regular photo. francine: thank you. we will go to check it out. we will have to get you back in to see how many investors attach themselves to the product. polaroid swing cofounder tommy stadlen. steven major of hsbc. this is the picture across the boards. there is quite a lot of movement across bond yields. does it really warrant a repricing? that is a major money question two steven major. this is bloomberg. ♪

mike: good morning from a very warm new york city. i'm michael mckee. with francine lacqua, in what i hope is a very cool london. francine: it is. mike: let's get to the first word news. sebastian: european antitrust regulators have stopped there look into dupont and dow

chemical. the deal is the largest ever in the chemical industry. $185 million will be paid to end claims at wells fargo. south korean exporters hurt by the collapse of the shipping line are getting a break. the country's second largest will send a vessel to los angeles today, filled with goods from companies such as samsung and lg. bloomberg's business flash. francine: thank you so much. much for fiscal

policy to be the cure-all. that is the view of steven major. yields have been dropping. since we had the new qe from the boe. what happens to gilt? started thisve recent move from an overextended position. guilt yields got way too low. they were down to 0.5%. we are now on the way back to 1%. we have not changed it up on the yield forecast. it has proven to be quite durable. at the start of the year, the yields were much higher and then they went through our target and now we think they are going to go back toward it. the key story's fiscal loosening that is probably going to come through. data has been better than expected. admittedly, it is survey data. it does seem that the valuations on the gilt do not reflect the data.

francine: why? steven: it is just taking a wild for it to come through. verye, combined with the small amount of issuance, means that there is not much less in the way of -- left in the way of bonds to go around. the net issuance is negative after you take account of the qe. policy see, if the changes and fiscal policy is loosened in some way, so something is coming, then there will be more gilt. to me, these levels at the moment are probably too low. while there is a bit of focus on japan and the eurozone recently, i think quietly in the background, you are seeing gilt yields sliding up from the overextended position. yes, the federal bank might be easy-going, but there might be a fiscal policy loosening. the data, so far, has not been so bad.

gloom it is all doom and and everybody is talking about how bad it is going to be, but so far, we do not know and what data we got is not that bad. if you are going to go out on the curve, how much confidence can you have in the forecast you have given all of the gifts for the british economy -- if's for the british economy? steven: that goes for all of the forecasting. to me, you don't change your forecast very often if you have any credibility. we set our forecast a year ago and we have not moved any of them. to me, it is very difficult to forecast anything. nobody thinks you if you get it right. everybody is ready to tell you if you get it wrong. often, you get it right for the wrong reasons. view on this.ke a that is the reality. i would say, looking through all of that noise, that a fair value gilt yields is newer to

numeral 1% than 0.5%. mike: how do you model what is going to happen to gilts when we have no idea what is going to happen on the brexit timeline? steven: you look at scenarios. there is not a simple model. if there was, i probably would not be sitting here. the reality is that you need to look at all of the scenarios and accordingly. i guess that is one of the failings of the fed. they seem to think there will be a mean reversion on the level they have seen in the past. that does not look particularly rigorous to me. our way of looking at things has been different for many, many years and i'm going to stay with the process. mike: you had the famous call of the 10 year note yield going to 1.50. where do you see u.s. treasuries over the next six months to a year? steven: again, the yields went in the u.s., japan, germany, and

u.k. below where we expected. rather than change our forecast, we left them where they were. i think brexit was the reason you got those treasuries down to 1.30. our forecast remains at 1.50. on the back of the ecb, you had quite a big move on treasury. steven: less than 10 basis points. it is a big move if you are on the wrong end of it. i don't think these g4 markets are going to move out of the 30-40 basis point range they are settling in. in the meantime, we are going to get all of this excitement over every policy move. mike: very quickly, does a fed the next couple of months change your forecast? steven: absolutely not. one, i think they will do

nothing. two, i'm much more interested in the balance -- balance sheets of the g4 banks. it is quite possible that that can move without any shift. i'm not interested in the fed funds rate. mike: steven major, thank you for joining us for this hour on "bloomberg surveillance." coming up in the next hour, we will take the measure of the bond market from the perspective data.. this is bloomberg. ♪

francine: north korea conducts a

fifth nuclear test along south korea's kospi slide. the double-blind cio says it is time for bond investors to prepare for higher inflation and rising interest rate. -- they selloff governor's upcoming speech is a chance for the fed to boost expectations of a hike. i am francine lacqua in london, with michael mckee in new york. the markets again are repricing in what seems a binary mood. mike: this is not a question of what is the central bank going to do, it is what is the central bank not going to do. the dogma did not bark yesterday. francine: there is nothing like a central bank disappointing to get markets going. let's get to "bloomberg first word news." >> north korea says it has the ability to make nuclear weapons that will fit onto rockets.

kim jong-un's regime conducted its fifth nuclear test. the north korean government says it conducted a nuclear warhead an activealled recklessness. in france, police have arrested three women who say they were planning imminent terror attacks. a car containing gas canisters was found near notre dame cathedral in paris. the car belongs to one of the fathers of one of the suspects. -- to the father of one of the suspects or john kerry is meeting with his russian counterpart, sergei lavrov, earlier this week. -- as a complaint that rish prime minister theresa may will announce the first expansion of selective state schools. the schools were popular in the 1960's but they fell out of

favor of government because of the negative effect with students who did not qualify. tourists were trapped overnight cablese cars -- the tangled that announcement to of almost 12,000 feet. global news 24 hours a day, powered by more than 2600 journalists and analysts in more than 120 countries, i am sebastian salek. mike: that does not look like a fun way to spend the night. the ecb non-decision is roiling markets worldwide, and we see futures continue to deteriorate, s&p futures down a little more than a 10th of a percent. seeing the euro yet stronger today. if they drop in crude oil inventories. the biggest since 1999. prices went way up. they are pulling back. you can see the impact of the ecb is volatility rises in equity markets, as well as

around the world and in the bond markets. you see the japanese and german government bond yields. they are almost back to positive , at least two euro. they are, and i think it will be a significant psychological level. when you look at the security bonds, they seem to be bearing the brunt of most of the losses after the ecb downplayed the need for more stimulus. i want to show you the asia-pacific index on the back nuclear korea testing weapons. that means south korean assets, together with the south korean 1.98.rops to mike: here is my bloomberg terminal screen this morning. i'm going to channel tom keene and do some technical analysis. we talked yesterday about the offshore yuan and how it continues to weaken. we put up a double chart. the top chart shows resistance

at the top and support at the bottom. the support line is green, the resistance lines are red. on the bottom you can see the green bars indicate the dollar has been in the market. the line at the top suggests they may have gotten the dollar as strong as it is going to get. we may see it at least stabilize if not go the other way. it goes back to some of the deflationary pressure we saw in china, easing a touch today. i want to show you that bond yields are almost out of negative territory. this would be a psychological level. let's watch out for this in the next 12 hours. mike: we will keep an eye on that because it reflects the people thinking about central banks and economies around the world. we do have perhaps the most dovish of the fed board of governors now speaking on monday.

and certainly conspiracy theorists are already out with the idea that this means the fed is planting a message to the markets, and that she will come out and suggest a september rate cut is here. ellen zentner is a long time no rate cut coming advocate. do you think this is an effort by janet yellen and company to send the message? ellen: i want to put out first of all that you said "rate cut," and i think that might be a subliminal mistake there, mike. mike: do not put me on a trading desk. policiesel brainard's do not change. brexit is not on the front burner, but she does see the adjustments that need to be made as a risk. none of that has changed interview, and it is highly unlikely that she is a plant, so

to speak, for the fed to give the markets a sense that they might hike in september. you do not do it the day before the blackout period, and you do not do that with lael brainard. she is going to continue to be lael brainard, and she will send the same message that she has. some of my other colleagues may feel we are closer to rate hikes, but that is not the way that i see it. i would expect that to be her message. in jackson yellin, hole, suggested we are getting close to a rate hike. stanley fischer reinforced that, say we might get two. since then, the data seems to have disappointed, and the markets have priced out a september move. even if they wanted to, can they raise rates now because the markets are telling them we are not ready for that? say the always like to fed takes the path of least resistance. they only push back if they think the markets have it wrong. so the markets have taken down the probability of a september

hike, starting with auto sales rolling over last week, both isn's falling sharply, and the beige book overall was just meh on the economy. the markets read the at incoming read that incoming data, and the fed says the incoming data has not confirmed their outlook, and therefore it is not time to hike rates again. so i would say the fed not putting back against that is telling the markets you are reading the data right. mike: target alert, fran. "meh." you have to have a doctorate in economics to be able to use that word. francine: it is a great technical term that i know mario draghi uses a lot. mario draghi is saying we may not need extra stimulus for the moment. that seems to be making the fed's job easier because it does not put so much pressure on dollar. ellen: i think that is the way

that markets read it as well. the ecb has not going down the further path of easing, so it takes pressure off the fed. we saw that in pricing yesterday. mario draghi and crew want to be data dependent just like the fed, and they clearly send a message of this does not mean more easing is not coming, but we do not think that today's meeting was appropriate. francine: it is all very well and good to be data dependent, but what data are they actually looking at? also going to is have to downgrade their forecast at the september meeting, just as a simple mark to market exercise. by the december meeting, you are meeting expectations, so i do not know if there is another message except that, like other central banks, like all central banks practically, they are overly optimistic coming into

the year, and the ecb revises lower throughout just like the fed. by the end of the year, everything is meeting expectations. francine: ellen zentner, thank you so much. coming up, testing time. north korea tests a nuclear bomb. we are live with market reaction. this is bloomberg. ♪

francine: it is not 32 degrees celsius here, but we are right at 25 degrees. not too bad. we had some warming figures in terms of the u.k. building industry, doing better than expected with construction unchanged in july, despite brexit. there you go.

1.3304. it is time for you guys to do some shopping in london. mike: i am ready. i will come over and help out the u.k. economy her. francine: i don't know exactly what the u.k. exports. kashmir, a lot of scotch whiskey. sebastian: they are is looking -- bayer is trying to take over monsanto. the german drugmaker is exploring the sale of its dermatology business, working with jpmorgan on a possible deal. the unit could bring with them $1.1 billion. softbank has raised 4.6 billion dollars in its biggest yen bond sale ever. this comes after softbank completed its acquisition of a british semiconductor. the federal reserve wants to keep goldman sachs and other

banks from investing in companies. banking regulators have come up with recommendations, one that would prohibit merchant banking. if it wants to limit bank ownership of physical commodities. goldman and others have been accused of seizing unfair in the metals market. north korea has carried out a nuclear test and says it has the ability to mount warheads onto rockets. the bomb was detonated in the north of the country. south korea has condemned the move, and china is urging the secretive nation to stop action that could destabilize the region. seoul bureau chief joins us. peter, do we believe north korea? been: in the past it has hard to verify their claims. for instance, in 2013, they did

claim they had a nuclear missile . in january, they claimed that they had detonated a hydrogen bomb. none of those were verified. so, yes, it is kind of tough to see if they are telling the truth. ,owever, there are indications with today's test, that the bomb, whatever was detonated, was significant. they measured it at 10 kilotons, significantly higher than the estimated six kiloton explosion that was registered in january. it is a significant development, we spokenalysts that to believe this is a pretty serious step forward for the nuclear ambitions. serious step forward that can significantly destabilize the region, or is tension under control? no, it is pretty

destabilizing. the tensions were already at a very high level. this is definitely going to push it further. the southome of korean hawkish lawmakers are calling for south korea to develop nuclear weapons, and some of the diplomatic analysts, political analysts, are saying, -- theys., korea, japan will have to rethink where they have done so far, because clearly they have not worked. mike: do we think the markets are going to take this very seriously? sotloff -- the one sold it couldthe news, but come back. will the market take it in stride? has been the history. every time there has been a problem get it action such as -- every time there has been a provocative action, the markets

would take and temporary dip and then it would write itself. -- and then it would right itself. it went down, then it kind of moderated, and there was a feeling that by monday it would go back up. again, we will have to see the what determination is made of the tests and have serious that is. that will probably come over the weekend. mike: thank you very much. eoul bureau chief, peter pae. do low rates distort investment decisions? that is at 6:30 a.m. in new york, 11:30 a.m. in london. this is bloomberg. ♪

mike: good morning. washington, d.c., dawn beginning to break over the u.s. capitol. we are also seeing a warm day in washington, as we are in new york. the temperature is rising on politics as we get to the presidential election homestretch. time for the "morning must-read." the idea that the present election may be fixed -- that is trump ishat donald echoing.

mike: joining us now to discuss this and the latest development in politics is megan murphy, our washington bureau chief. is quoting seth in the context that we are looking at an election that whoever wins it will probably not get a majority, but will get a plurality in the low 40's. how do you govern under that situation? do you think the idea that the election could be stolen or there might not be a lot of legitimacy to the winning candidate is something that is going to resonate with the public? megan: what is so

interesting about this is that it cuts both ways on the right and the left. it is a theme donald trump has used, that in fact there is a way to rig the election and not trust the numbers. it is also a theory that crops up on the left. some still have not made that move, although hillary clinton -- bernie sanders sort of was denied his opportunity as the crown of the democratic party. it is an unusual theme for american politics, not something that we have heard at the national level in many decades. it is something that people think could destabilize in terms of facing an electoral process. overall, what does that mean long-term in terms of the process going forward. when it goes back to 1964 the message with barry goldwater was much the same. lyndon johnson was already the president. in this case, does hillary clinton have to bear, you know,

the weight of being a flawed candidate? humans of new york, a website, put out a bunch of anecdotal interviews with hillary talking about her being a more human kind of person. not view myself as cold or unemotional, and neither do my friends or my family, but that sometimes is the perception i create. i cannot blame people for thinking that." she is not lyndon johnson. megan: lyndon johnson had a very rough night in the forum with donald trump. it was one of her worst in the debate cycle. that this isting someone who has been in the public eye for so long, yet so many people feel like they do not know the person behind the gaze. she talked about how she was

how canth this theme of you take away a man's spot? have run athey may slightly too negative campaign, attacking and taking down donald trump, and they have not laid out effectively neither their positive reflection of the country and where they would take it, nor who she stands for. that is one of their main focus is going forward. francine: i understand humans of new york is a very popular blog. is it a liberal blog? does it help in people perceiving her as not being cold and being likable? megan: it is liberal in the --se that it has been very people have looked at it and thought that is an interesting move by her. she is not known for taking risks, and it is something they wanted to get out there. let's make no mistake, this is

not a good week for her campaign. she has sought since wednesday night to say let's pare back and look at what donald trump actually said and talk about how his embrace of vladimir putin is really a peril in modern , withcs, a bromance donald trump speaking about vladimir putin. thanks to megan murphy. i want to bring in ellen zentner of morgan stanley. there is talk that we are starting to see an election effect on the economy, that many businesses -- that maybe businesses are holding back on investment. ellen: i think that probably is the case. it is also very hard to quantify that. we know in various surveys businesses are saying we are delaying investment plans because of unusual uncertainty surrounding the election. oftentimes that happens in every election cycle. but trying to quantify it,

moving it from the soft data to the real data can be difficult. but i can tell you that the decline in the isam manufacturing -- the ism manufacturing survey, that they were more domestically requited -- domestically related, those declines -- does that mean we will get a postelection bounce? when the uncertainty is resolved? typically where approval ratings are very high, you can get that. , candidate. yay i am not sure that we are yay about either candidate at this time. respect." all due this is bloomberg. ♪

francine: this is "bloomberg surveillance." let's get straight to bloomberg

first word news with sebastian salek. hasstian: north korea tested its most powerful nuclear weapons yet. kim jong-un says it has the ability to mount atomic weapons on rockets. the president of south korea condemned the test, calling it an act of maniacal recklessness. the ceo of britain's second-largest insurer says there needs to be a brexit timetable. that the government must divide more certainty about when it will trigger the process to leave the european union. banking leaders are worried that the eu will try to punish the industry. on capitol hill, a house committee will meet next week to consider a republican plan to roll back the dodd-frank financial reform law. the committee says the bill would impose tougher sections on those who would commit fraud and end the bailout of big banks. says russian

interference with the u.s. is probably unlikely. the republican presidential candidate said that democrats are putting out stories of russian interference. u.s. regulators are warning that samsung's smartphone should not be charged or turned on on airplanes. they may catch fire and exploded. it should be put in checked luggage. global news 24 hours a day, powered by more than 2600 journalists and analysts in more i am120 countries, sebastian salek and this is bloomberg. francine? michael? mike: yesterday on the program we had the ceo of come part a join us. he likes the idea that cheap cash would help them buy more companies are joining us now is

peter tague. is it all about central banks thatng cash so cheap people like this ceo can put the money into investments that would raise productivity and organic growth? peter: there is no question that the cheap money environment is going to be helpful and help drive the m&a environment. there is no question about it. low rates, low cost of capital absolutely makes it easier for companies to pursue an inorganic strategy. mike: the fed is telling us at some point in the near future they are going to raise rates. is that going to have an impact on m&a, given how low rates are he echo peter? peter: a quarter point raised by the fed is not making a very big difference. rates in a at historical context, they still sit at staggeringly low levels.

the cost to capital remains quite low in a historical context. francine: where i am confused is that there are very cheap interest rates out there, so you would think that would spur a lot of ceo's to more m&a. they are feeling uncomfortable overall about the prospects for their companies. what needs to change so they start deploying some of that cash? uncertainty makes m&a .ore difficult when a ceo and board of directors is not sure what direction we are going to go -- whether that is north korea testing nuclear weapons or whether it is a challenging or surprising eu rate decision -- that environment absolutely contributes to conservatism on the part of financial markets. the crisis we went through years ago ads to that, that i need to make sure that my balance sheet

is safe if things get worse. iancine: one of the things have been trying to explore it is, if interest rates went up quickly, with that give confidence to ceo's? are ceo's looking at company revenue, or a review of when they feel confident or not? peter: if i have that answer, i would be happy to give it to you. confidence is ultimately an emotion. it is driven by any number of factors. when we turn to look at the markets, we think about our own planning for the m&a business. we consider the outward confidence indexes in terms of where is the stock market trading, what direction is the vix traveling. that is easy to look at and quantify. confidence in the boardroom tends to be more company specific. each ceo is working hard to create more value for their shoulder orders -- value for

their shareholders. francine: we're seeing a lot more amongst pharmaceuticals, drink makers, and mike brought up campare. what interest she will be the next to be hit? peter: there are only three sectors that look at positive increases compared to last year. industrials have seen a nice bounce. technology is up slightly. the power and utilities sector, which has moved away from a conservative history to pursuing an inorganic growth strategy more often. setting those three sectors aside, we are down year on year in terms of overall m&a volume. where is the future? iselieve the tech sector going to continue to see a great deal of consolidation. and industrials, which is a catchall for not elsewhere classified, is a huge sector and will continue to be in organically driven. mike: let me bring in ellen

zentner now. is low central-bank policy distorting investment decisions? not know if we can call it distorting investment decisions, but it is certainly driving it. cyclical, andis this is lasting a lot longer than we normally would because the incentives are great. i do not know that this is anything other than companies making wise decisions. when you are presented with low rates, the opportunity cost is low for taking on debt and doing m&a activity. what is difficult for clients i talked to is, when does it end? peter: a big chunk around this -- a big chunk about this revolves around growth imperatives. to the extent that you have uncertainty or limitations around and organic strategy, pursuing inorganic growth -- there is an argument that

return on capital is so low because interest rates are so low that you do not invest properly. would it help if you raise rates? peter: i think the confidence signal to the extent that the fed feels good about the overall , to the extent that that confidence is reflected in a gradual rate rise, i think it would be very healthy for markets. what tends to upset markets is surprises, and it is certainly true for the m&a business. ellen: a september rate hike would be a big surprise. i agree. not tonee that you are deaf, that you get it, that this muchy gradual path -- to a more normal rate than in the past. it is shallow and slow getting to a lower -- francine: the problem is that no

one likes surprises. if you are a market and you are a ceo, if the advisors are reading things wrong and it might be good to -- then it might be good to shape things -- then it might be good to shake things up a touch? there is no faster way out of a ceo job than a really bad, large acquisition. you are right. how this ultimately translates into the future is a very difficult thing for us to call. but the combination of factors you are referring to is spot on. mike: one of the stories in the news over the last 14 hours is twitter's everts to find a dance partner. is that unique to this -- is twitter's efforts to find a dance partner. is that unique to this company,

or is tech falling out of favor a little bit? peter: you saw intel with its it seems like a smart transaction. there have been rumors today about another data-centered transaction that is in the works. i think the tech space is going to see activity. twitter is a specific company. i have to be careful about commenting about specifics. that was in the news in february, june, and it is in the news now. it is a story about what challenges that specific company is facing, and can management of that company make it work? mike: tech valuations are not stretched at this point. francine: i think there are stash -- peter: -- --e: peter: take with us peter tagalong with us.

8:30 a.m. in new york, 1:30 p.m. in london. this is bloomberg. ♪

francine: this is "bloomberg surveillance." i am francine lacqua in london. michael mckee is in new york. here sebastian salek. sebastian: the european union antitrust regulators have stopped the clock on their review of the $60 that the $60 billion -- the $60 million merger. the dow and dupont has not commented. the deal is the largest ever in the chemical industry.

the bank will pay $185 million to resolve claims that those workers opened deposit and credit card accounts without customers knowing about it. fargo says-- wells it will be compensated. according to people familiar with the matter, amazon is pursuing video rights to a wide range of sports, including the french open tennis tournament and professional rugby. live sports would give amazon an edge over streaming rivals such as netflix. coming up shortly is "bloomberg " with david westin and jonathan ferro. jon, i know you will be talking , and there is all this central-bank talk. jon: a real shakeout in the global bond market. a record-setting rally so far in 2016. speculation over central banks, steeper yield curves.

jeff gundlach takes on the work function on the bloomberg terminal. we will get some insight from former minneapolis fed president gary stern. my question is, why, key, did code daysneed does off just because he went to yankee stadium? -- this tom keene need two days off just because he went to yankee stadium? mike: i guess so. francine: this is a holiday because tom keene is not here. i have given him my days off. mike: so generous. francine: we will talk about steve major in the next hour. the world is oldest bank -- the world's oldest bank -- investors are seeking a change in leadership to back the italian lend' around plan and avoid a bailout. ellen zentner from morgan

stanley and peter take from citigroup -- -- and peter tague from citigroup or they are ousting the ceo at exactly a time where investors want stability and a plan. what exactly is going on? it has been a mess from day one, almost. >> absolutely. the bank is at a critical juncture to try to turn itself around. the issue is credibility and confidence. it looks like this came from the potential investors themselves, and investors say, look, we need someone to carry out this hugely risky increase that they are trying to pull off. but now it is a catch because the risk is increased. -- given thek of feeding confidence in this deal being pulled off -- francine: there are a couple of names, and we hope and think they may appoint someone by

sunday when the board meets. what kind of a person could lead this bank? if you compare it to is aer bank, i think this bit different. there is a real crisis issue here, really urgent. you need somebody with good connections politically, experience dealing with a big investor base and juggling immediate issues. it is not just experience, it is someone who is a good operator and will generate a lot of faith in investors over the next several months. has twiddled to about $1 billion in capital. why is it so important -- the bank has dwindled to about $1 billion in capital. is it so important as opposed to just letting a bad bank fail? ofnel: i think about a 10th

its balance sheet -- there is a huge discount on the big company, it does not show you how important the bank is. i think the government is doing everything it can to avoid soaking bondholders who could be normal italian households. so really you have a systemic issue that has crystallized in this one bank. if you fix it, i think you get a good halo effect. , thank youl laurent very much. he writes about the european banking system. -- whyi want to ask you is it so difficult to solve the europe,problems in where during the united states financial crisis, the fed said this bank is going to buy this bank, and we are done? peter: i am certainly not the one who can solve the european banking prices -- the european banking crisis. u.s. and the the

uniformity of the market makes it much easier for policy measures to be put into effect and for action to be taken that would help sustain or potentially restructure an entire sector like that. mike: are we seeing any interest in people making bids for not just italian banks, but for european banks in general, given that the sector is still not out of the woods? peter: the financial institution sector represents a significant chunk in the merger and acquisitions business today, both in the u.s. and in europe. we are seeing a significant level of activity in the financial institution space. , thank you.tague ellen zentner, thank you. we will check the markets as we take a quick break and find that it is much different than in the last couple of hours. we are looking at stocks selling off around the world. bond yields raising questions about whether central banks are

rethinking the idea of extraordinary stimulus. oil prices backing off after yesterday's big game. -- big gain. this is bloomberg. ♪

mike: good morning. i michael mckee in new york with francine lacqua and london. look at the euro strengthening after the ecb yesterday. north korean nuclear test knocking down the korean want. also having an impact on the japanese yen, which is also buffeted by the ecb. look at the mexican peso. it fell one point 5% yesterday, they worst-performing emerging market currency really getting hammered. analysts said that was an overreaction to the ecb, so the peso is coming back a little bit today. the ecb is in the rearview mirror. now it is the fed ahead, and it is a big day for fed officials. boston fed president eric rosengren saying -- speaking robert kaplan takes place in a moderated question-and-answer session. we are back with ellen zentner and peter tague.

eric rosengren has been in the dove cap, so you might not need -- we were talking about the dove on the board. you may not need to get to her if you want to make the case. he has also said he thinks rates might need to rise because we are may be seeing some distortions in capital markets because of fed policy. ellen: eric rosengren is a good example of a swing voter on the fed but usually on the dove or side that has also ramped up rhetoric around the need to hike rates further. being careful like janet yellen was at jackson hole. but you are seeing the shift on the fed, and clearly before the data last week, the voices were all making a concerted effort to talk about, yes, lower for longer, but that does not mean that we don't hike rates today. toare getting very itchy

move. they do not like sitting on their heels for one full year without another rate hike. markets start to become too complacent and assume that you are never going to hike rates, and they do not want that. they want some risk priced in that they could go at any time. mike: are you getting stir crazy? do you think we have distortions? your call is nothing until at least 2017. ellen: this summer we just moved the feds to the sidelines. when we see evidence that they will raise rates further, we will let you know. evidence.t seen that i cannot get stir crazy because i do not think i sit for a moment during the day. i am constantly running around. this is the longest i have sat in one spot in quite some time. i think we are definitely in the camp of this is not an overheating economy. , inflations very low expectations are falling.

there is nothing here that tells atrates need to be higher this point. but i understand the policymakers also do not want markets to be too complacent. markets get complacent the longer the gap is between rate hikes. francine: peter, we were talking about politics before. do you have a feeling that the world is becoming less anbalized, and how much of impact does that have on protectionism when it comes to across the border m&a? peter: there is no question nation states are becoming more involved in the m&a process. that is not just a u.s. or european phenomenon, it is an overall phenomenon. policy andfor economic policy, nationalistic agenda is to be moved forward on the back of an m&a transaction has become quite strong. we have seen that taking place in various versions in china.

europe.titrust in there are any numbers of ways these national actors could be active participants in the m&a process. , citigroup'sague global head of m&a. we will continue our conversation with peter and with ellen zentner on bloomberg radio. "bloomberg " is up next on television. zentner will walk over to the studio with me in a few minutes, coming up on bloomberg radio. also, gary stern, the former minneapolis fed bank president. this is bloomberg. ♪

jeff gundlach says get

ready for high interest rates, the return of volatility, and rising inflation. david: the european central bank stopped short of extending quantitative easing. has north korea says it now the capability to mount a nuclear warhead on a rocket. welcome to "bloomberg ." alix steel is getting the last of her vacation days for the year, missing out on a bit of a shakeout in the global bond market rally. david: you really wonder whether mario draghi's tepid performance yesterday triggered this. do not count on us always being there. you cannot always count on more and more. jon: the central bank rumor mill around the bank of japan is in overdrive, and we will be digging through that. david: besides the