g-20 leaders brace for conversations about economic policy. the u.k. drops a rex of bravado. -- a brexit bravado. -- eurozoneprise manufacturing expanded at the strongest pace in over six years. from new york city, good morning. a break.loomberg -- this is bloomberg daybreak. let's get you up to speed. futures are firmer upper a third of 1%. gain forst quarterly the single quarterly since 2010. treasury yields continue to grind higher. we are up a single basis point. david: it is time now for the morning break. u.s. markets are closing early today at 1 p.m. eastern time for the july 4 holiday.

a big week is ahead on economic data. coming up at 10 a.m. eastern time, construction spending, tuesday, u.s. markets will be closed for the fourth of july. then wednesday at 2 p.m. we get the fomc minutes from their june meeting and thursday at 815 in the morning eastern time it is employment data. that is ahead of the jobs report in the united states. forecasts,for -- data will be out on friday. leadersfriday, the g-20 will be meeting in hamburg. at the top of the agenda will be havingith angela merkel a pre-meeting with president trump on the eve of the summit. she is urging everyone to seek a win-win as she puts it. with us is bloomberg international economic and policy correspondent mike mckee. what are the chances? >> low. as long as they can play to a draw, maybe they would be happy.

they will have an enormous amount of problems there. it is not just the agenda. a big problem obviously because of the united states and what has been going on. it is not just the u.s. take a look at the chart of the german trade surplus. there are a lot of people that are not happy with what has happened in germany. skyrocketing, that puts others at a disadvantage. trump has allies against germany here. it will be difficult to come to any kind of agreement on that. climate change, the other big one. we all know about how the world feels about u.s. pulling out of the paris accords. david: so it is not just president trump? , hasrack record at best been to make a nice face-to-face. >> so far. when he went to nato, he insulted them and did not reaffirm article five. we don't know exactly how he will behave.

this will not be just about trump. for the first time in many years there are members of the g-20 that are not happy with each other. saudi arabia is there as part of the g-20 and this comes a few days after the deadline with qatar expires. no one knows what will be happening in the middle east. you have shinzo abe in trouble in japan. the u.s. is not happy with china or south korea over trade. there is a lot going on. jonathan: let's talk about the relationship between china and the u.s. taiwan, sanctions on a chinese bank -- then we have a ship get very close to a chinese controlled island in the south china sea. a bit of tensions building between the two leaders. where is that going? >> it is hard to say exactly because trump being a wildcard -- ordinarily this would be diplomatic.

the u.s. has a law that we have to sell arms to taiwan. trump is in his right to do so. he is forced to do that anyway. the north korea thing -- no one knows -- china not expected to lean too hard on north korea. we are probably where we would have been under any president, it is difficult. the reports coming out of d.c. is that we are close to finding out whether we will get tariffs put on steel. what we learned over the weekend? >> not a whole lot. they are keeping close to the vest but they are still talking about doing something strong on trade which would lead us probably to a steel decision. which would be difficult for the rest of the g 22 except -- if we say on national security grounds that we will impose tariffs on steel which comes from all over the place, not just china, that will create tensions as well. we are not even mention the

vladimir putin. donald trump will sit down with him for the first time. this will be a newsworthy meeting. the whitecifically house aides, said don't sit down with him. that will look to formal. tell them that, he will probably pull up a chair. ubs head -- we have our guests here today. that fear talk about has not paid. you can get nervous about international politics but it is em that has delivered the upside surprise. you can get nervous about political theories but the euro has delivered the positive surprise in 2017. as an investor should you be concerned about g-20 on the horizon and rising tension? >> let me say you are correct. we have been on the long side of

the race for a few months now. the reality is we have had a lot of significant policy initiatives that have driven this which are a lot more important from the short-term and from a medium perspective. monetary policy and underlying issues as well. when it comes to trade, typically these things take a long time and already the backdrop has been -- the rate has been tapering in terms of its global gdp. moving away from trading. the short-term impact of these things, even a few months, is typically less important. into 2000 17ing number concerns about protectionism and what it would mean for emerging markets, specifically mexico, but the peso has one big time. the g-20 is there

any reason to think this will change? >> i don't think so. i think one of the biggest surprises coming into this g-20 is the weakness of the u.s. dollar. i have to think trump is excited about that. i don't see that changing. there could be back channel discussions trying to keep the dollar week and certainly that would appease trump. as you pointed out, em, it has been crowded trade in the short run, but we are looking at the next several years from that standpoint. i think there is compelling value in those markets. what accounts for that continuing weakness in the u.s. dollar? it doesn't help that when news comes in. do the markets believe what the fed tells them about raising rates? >> it is not necessarily fed policy outright that is driving the u.s. dollar, there are two primary influences. there is better growth outside of the u.s. right now. you're seeing capital gravitate

towards that. secondarily, i alluded to earlier, you have an administration that clearly does not want a strong dollar. what is interesting is that the lines of communication with the business community are very engaged. if they talk about dollar strength, putting pressure on their businesses, that will resonate with trump. i think you have a few to few -- forces to continue with the dollar weakening. really abouts is other currencies been stronger? >> two things i would add. i think that was well said. the one thing is that, if you are moving your policy the market will try to figure out the extent to which you have space to move. the economics and the data and growth, matters a lot more for the long-term sustainability. the u.s. cycle relative to the european cycle has started to converge quite swiftly.

that is one thing. the second thing is that the u.s., not when you look at the next six months but the next are a lot more about normalization than other places like europe. go.h still have some way to the third thing is that, even if there was a bigger discussion -- remember when we talked about border adjustment, a lot of these things as we have shown in research, don't work as a function of a stronger dollar. they don't work as a driver of a stronger dollar. they lead to the opposite result. long story short, the dollar is expensive and it is moving closer to fair value. jonathan: the president of the u.s. entering that he will be meeting with leaders this morning. affect china and japan and germany. how does that trade relationship take a change in the back half of the year? thehere has been talk that

president put off the decision until he could talk about the sanctions with the rest of the g-20. they will press him to not do that. all over theteal world and depresses the world price so even the steel we import from germany and japan and south korea and canada costs less. it will be a global issue for everybody. part of this larger trade tension. >> mike mckee, thank you for being here. our other guests will be staying with us. coming up later, we will be joined by another guest with a piece about what equity holders can expect from their investments in the second half of 2017. live from new york, this is bloomberg. ♪

>> sterling fell for the first time in nine days after the u.k. manufacturing expanded. doubts about the outlook for the u.k. economy and brexit. weitics in westminster, learn that maybe the government is dropping brexit bravado and chancellor hammond will be talking to businesses about their concerns with europe. simon kennedy from london. let's talk about chancellor hammond and what he has to say today. >> there are two parts. one is that the government is listening. businesses in the past complained they were not getting enough opportunity to outline their issues with brexit and suggestions on how it could be made to work for them.

since the election we have seen a changing tone especially from the chancellor, talking about making brexit work for business. message.with a he would use the speech tonight to suggest they don't use brexit as an excuse and they keep investing and finding ways to increase productivity, investing workers. a lot of times you see the suggestion that brexit is the reason to hold back for a few years. to pushage is that ahead and to make a success of brexit. jonathan: when i heard of this news this morning as i woke up, i found it quite bizarre and fascinating. somehow business and what they wanted was not already at the forefront of the government's mind going into negotiations. not partieve -- was it of a negotiation tactic to begin with when they went over to europe? >> i think it was, obviously businesses had a chance to speak

to the government. philip hammond is not new to this theme that he is laying out. what has changed is that he has emerged from the election with his job more secure then it was going into it. opinion a shift in the of what that election told us last month. people are worried about jobs and job security. in that message, if you take that from the election, you have to start talking to that. messageas very much a based on sovereignty and reclaiming control of immigration, lawmaking. you could also said that was a message from the referendum. a less absolutist position from the government. thatll have to see if actually forms the plan they are seeking in those talks with brussels. as you say, there is been a shift in tone from theresa may about negotiations. are there forces in england that

would prevent her from continuing to make that turn? right after brexit people thought she would be in trouble if she was not strident did --. >> that has come from her team. it is perhaps now a team of rivals to quote from abraham lincoln. poorly in theso election, the cabinet that was once united behind her vision, feels increasingly able to go out on the tv shows and stake out their own positions on brexit and austerity and the seven-year pay cut for the public service. officials stick with the documents produced before the election, the lancaster house, but the rest of the team are out there and willing to talk about their vision for brexit. you have seen that from philip hammond. that will be a challenge for her at some point to decide whether or not she wants to put a stamp on that. jonathan: simon kennedy, thank

you for joining us. and fromon, if i talked to at the politics at the start of the year and i said it would get uglier, would you have said by the halfway point? >> you make a good point in the sense that stirling has been more resistant. stronger but euro-stirling has been more resilient. to do with the global firms that are based in the u.k. have had an exceptionally strong set of orders in terms of the global economic recovery. benefiting them and bringing money into the u.k. and that has helped the economy. to go back to politics as you put it, keeping the businesses

front and center of the discussions is important in an economy that is slowing them up. jonathan: and monetary policy, why is the bank of england edging towards the ceiling? important. they are. we have argued that the reaction function has shifted over the last year our view is that this seen the- you haven't in an- they're putting amount of stimulus and there are risks with the global economy picking up that they are following through with. the level of rates are normally .ow based on past experience having said that, we don't think they will actually tighten policy because the data will not allow them. if you look at expectations of

future business spending into investment, they are soft. if you are looking at the impact of easing, into pmi's, it is fading. if you look at savings rates of household, it is quite low. if you look at current accountability, particularly at brexit, that implies significant damage. for thees it difficult bank of england to solve. it prevents them from being overly hawkish in the next few quarters. heard that, we just we will hear a speech from mr. hammond later today. calling on businesses to invest in the u.k. make the best case for why businesses should invest their given the uncertainty? up to thelevated 40,000 foot level and take a look at the global economy. you have synchronized growth globally right now. that growth is not inflationary. i don't want to say goldilocks

scenario but it is pretty close to that. that is a favorable backdrop. certainly with the u.k. economy, that would be a major influence on that and will benefit from it. i would look also at across the channel to europe. the economy is doing fairly well. that leads me to the fact that i don't believe they will have to pursue a hard brexit. election, theay's u.k. coming from a point of weakness -- i can get to a brexit without the hard variety. that might actually be sort of favorable from a u.k. economy isndpoint and also stirling undervalued. david: you guys will both be staying with us. we will talk about nicholas -- we will talk with nicholas burns about what the trump

administration means for trade and global politics. live from new york, this is bloomberg. ♪

>> this is bloomberg daybreak. i'm emma chandra. goldman sachs is taking a second look at its commodities business. according to people with knowledge of the matter, goldman's or results in the first quarter continued in the second three months of the year. goldman has stuck with commodities while competitors have cut back. in japan it is a setback for shinzo abe. his liberal democratic party won only 23 seats in an election for tokyo's assembly. its worst performance ever. the tokyo first party one more. -- won more. in overnightre developments, our guests are

still with us. jack, let me start with you. what do you make of this news from japan overnight. does it give you second thoughts? >> it does. you can push back any sort of resurgence in inflation may be in 2023 or down the road. what we need to see now and should see his focus on a weaker yen, fiscal stimulus, maybe pushback on raising the sales tax. they still have that structural -- it makes japanese assets look less attractive. weaker yen, how does this express itself on the foreign-exchange markets? >> i think that is a reasonable backdrop but i don't think necessarily that we agree with the line of thought. data in the economy doing better, you have the bank of

japan within this backdrop that will stay focused on keeping a long-term yields low. you have some pressures on items of inflation. i'm not talking about high inflation but wages are pushing up following through from a tight labor market. all of that means slightly higher inflation expectations against the latter -- flatter yields. the forecasts around 2.40 are also helping. jonathan: the five-year term is up at the boj next year. needing to think about a change in leadership in the bank of japan? isimportant discussion happening with a number of clients for us. i do have to say, this is not the doj -- the boj that it used to be. there is more consensus around the policy approach then there was before when the boj was more

hawkish in the fate of low inflation. >> you will be sticking with us. from philadelphia, jack mcintyre. thank you for joining us. coming up next, bank of america merrill lynch joins us. let's whip through the market action. futures up a little firmer a third of 1% on the dow. 500, -- a tone for the risk in europe. if you switch up the board, treasuries -- yields up by a basis point. dollar strength captured and the euro-dollar as well. is how we trade on the single currency. this is bloomberg. ♪

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firmer up about 4/10 on the dow. diary,nd dates for your -- the market opens as normal on 930 -- 9:30 a.m. eastern time. the boardtch up quickly, here is the story on the bond market. yields up a basis point and sitting right on is the 100 day moving average for the u.s. 10 year. dollar weakness against space. -- we moved down on euro-dollar as well. weaker by a half of 1%. that is your story across asset. here are deadlines across the business world. says heesident trump will be making phone calls to the leaders of germany and france today. yesterday he spoke with xi jinping and shinzo abe.

the focus were north korea. the trump administration has said that china needs to do more to rein in north korea. 18 people were killed when a bus rammed into a truck and burst into flames. the accident happened in bavaria near the border with the czech republic. bravado is dropping its over brexit. theresa may's government is making a conciliatory gesture to an audience that has sometimes been overlooked. how business leaders event their concerns will not be dismissed. hammond has been a cheerleader within the government for a business friendly brexit. global news 24 hours a day, powered by more than 2600 journalists and analysts in more than 120 countries. i'm emma chandra. this is bloomberg. emma. thank you, markets started out the year with high hopes about what a new administration could mean for investors.

as those hopes diminished over the next few months, the question now is, could a turnaround? return to kevin cirilli now. anything coming out of washington in the next six months that will make a difference in the markets? >> maybe health care reform. congress 57 days for to remain in session after they get back next week. everyone wants to know whether the senate will be able to reach a health care deal once they return. they're all home for fourth of july recess. they will be facing pressure. cruz, very conservative, he is up for reelection in 2018. he has been emerging over the past week and several days as someone who is bringing the these through negotiations with the senate majority leader. he wants to expand's help -- expand health savings accounts. you have this huge amount of money that they have to play around with on things like

opioid addiction funding and planned parenthood. whether or not they are able to reach a deal remains to be seen. if you are looking for what they can get done by the year's and, -- the year's end, it is health care. david: every day brings more uncertainty. republican governors are out against it. constituents are crying foul because they will lose coverage. are they moving toward a resolution or are they moving farther away? >> your point about the governors is excellent. when you talk to capitol hill members, when you talk to their staff, they feel that the white house has not been is engaged as they would have liked on the issue of health care reform. that we have seen in the past. in the past, you have the white house, especially if it is their own party, working directly to , withate with the states lawmakers, but in this situation governors are organizing on their own. it congress versus

governors. david: thank you kevin, we will be checking in with you later. with the bankned of america merrill lynch head of u.s. strategy. welcome to the program. >> thank you. >> give us your take on what we should look forward to in the next six months? >> our view for the next six months? can i tell you argue for the next six days? >> sure. >> area. right now, today is the first quarter.e each quarter, being crowded and overweight by investors, today that would be high-growth tech. whatever ends up being crowded by the end of the quarter tends to get slammed in the beginning

of the next quarter. for the near term, stay away from high-growth tech. that is where we see the largest positioning risk. for the next six months, where i see a big opportunity, where a lot of the positives have not been priced in, are two sectors, financials and health care. speaking of health care reform, whatever we get, to replace obamacare will probably look something like obamacare to begin with. we think the risks within the health care sector from simply reform are probably overstated in the multiples. if you look at health care now, it is trading in the lowest multiples we have ever seen relative to the s&p 500. is a great growth sector. you can get great secular growth from health care stocks, from biotech, and investors have basically shunned health care in favor of other secular growth laces -- growth laces.

we think health care is a much cheaper, less crowded area to get your idiosyncratic growth. the other secular you like -- jonathan: we've seen a big bit in health care and financials. he talked about positioning. talk to me in the same way about financials? we ripped through june. >> what is interesting about financials, you think about this with the trends, the good news overly discounted into the sector at the beginning of the year has been all but washed out her out the year and is just starting to work. think about a long-term opportunities for financials today. it is not just a rate play. there is a lightning of regulatory reform. i'm not saying we need to see even thek repealed but fact that the regulatory environment will not get higher -- heider from here -- tighter

from year, is good news for the bigger banks in the sector. 25% of the cost burden of the biggest banks is made up of compliance and regulatory risk. if that does not get any bigger that is a big source of cost-cutting. the big driver for financials actuateld take years to is cash return. we are just starting to see this with jpmorgan, other banks -- that is one area where you could start to see a real multiple expansion for some of these companies based on the fact that they are starting to return past to shareholders through dividends and buybacks. that has not happened for a long time in the financial sector. this oneot worry about month run. i think it is a longer-term story that has legs. jonathan: mentioning at the start of this conversation, crowded positioning.

maybe at the beginning of q3 that is not where you want to be. what about crowded positioning in fx? euro long in 2017. is that not as crowded as people might think? >> when i hear about positioning i remember in the beginning of my career when i had some lost opportunities in brazil. whether the lot macro lines up with the positioning. the macro is favorable for the euro. i don't think we will have a quick move up from here. we may move around here for a while. mostly because there is some short-term positioning to be done. frombecause a big move up here in terms of the euro-dollar would affect inflation. in a concentrated. of time. that may affect the language.

the market is playing pause for what is right the u.s. and that may prove to be a little too dovish in expectations. at least when it comes to the next one or two years in the tightening expected. it is a risk by for the dollar against the euro. having said that, the long term trend is different. talking about the president and the administration, is there anything that can be done which would change the path of the weakening u.s. dollar? there is a lot that could be done. but whether it is desirable, if you look at for instance, the impact of the dollar, the strong dollar on the low inflation late -- the low inflation rate that we have seen for many years.

in some sectors of the economy this has not been conducive in terms of desired outcomes. to support normalization. jonathan: bank of america does a phenomenal job of analyzing flow data. some of that data shows how much money has been piling into europe over the last several months. when you look at that emerging story, money going into europe, the flow story and the united dates, does the bullish call face a headwind in the face of a bullish call in europe? about positioning, about the macro, i agree that macro needs to line up with what you are seeing in the world. -- the u.s. has been the source of funds for the last six months. is interesting is if you look at earnings for europe and u.s., the ratio, which we track, has seen a huge uptick in

the u.s.. in other regions of the world it is monitor -- it is moderating. you see massive inflows into europe and you see fundamental drivers like earnings trends in the u.s. strengthening better than for other reasons. maybe it is time to think about more domestic u.s. focus stocks. in particular. i think that has been neglected throughout the year relative to other regions of the world. david: thank you so much for joining us today. a quick programming note, tune into to bloomberg tomorrow, july 4 at 8 p.m. where our own alix steel and matt miller will cohost the boston pops spectacular live from the esplanade in boston. this is bloomberg. ♪

♪ >> this is bloomberg a break. i'm emma chandra. this is a hewlett-packard enterprise green room. to the bloomberg business flash. sales higher than expected last after a five-month streak of industry decline. auto sales in the u.s. have been falling every month this year. the pace usually picks up in the second half of the year. elon musk says a new tesla model three passes all regulatory requirements weeks early. tesla'sl three will be

cheapest vehicle and the base price will be around $35,000. deal a milestone energy for iran. they have signed a deal of china national petroleum to develop its share of the biggest national gas field. that is your bloomberg business flash. jonathan: emma, thank you. let's get up to speed on the markets. the shortened holiday week in the united states. futures up 4/10 of 1% on the dow. a quarter on the s&p 500. as we crossed over the halfway line in 2017 some positive surprises. one of them was not u.s. equities. the benchmark s&p 500 over a percent through 2017 so far. times and dates for your diaries, close tomorrow for the job i fourth holiday.

closing at 1 -- for the july 4 holiday. closing at 1 p.m. today. the bond market closes at 2 p.m. today. look at the board -- treasury points are up by a single basis point. that 100 day moving average for the 10 year yield. the fx market through 2017, the story is dollar weakness. at the top we are now in the monday session. the dollar is now stronger against the euro and the pound as well. that is the story of the markets. in the middle east, the saudi led coalition that has cut ties with qatar has agreed to a two day extension for its deadline of demands. this includes shutting down out to zero television network and cutting back ties with iran. the stock index in qatar has the sanctions.

let's talk about the significance of an extension. how significant is that? >> i think it is significant because it suggests that talks are continuing. two days before the saudi and the qatari foreign minister's were exchanging hard-line statements. one side saying we're not budging and the other side saying there is nothing to negotiate. is fact that an extension being asked for an informal letter has now been delivered to emir, andof the president trump has made some phone calls to key leaders in all of this. suggests there might be movement. jonathan: the president of the united states says he spoke yesterday to the president of saudi arabia about these in the middle east. interesting things are happening.

is it more than a coincidence that a lot of this escalated after the president's visit to the middle east? >> there has been a lot of speculation about that. it depends if you believe in coincidence. also if you take in the comments that president trump made after his visit and after the saudi's and the uv took the lead -- the tookresident trump ownership of this and said look what i've done. there is a sense that when he brought all saudi's the muslim leaders over to saudi arabia and there was supposed to be this united front especially against iran, there was a sense that qatar was not playing to it felt tune and empowered to move ahead more forcefully against qatar, which has been around for some time. thed: we have a tendency in

u.s. to focus on the president as well as terrorism issues. could business be a part of this? there is a natural gas field that is shared between iran and qatar -- is it possible that is a driving force? >> the issue of the field is one of the reasons why qatar is hesitant to break up ties or reduce ties with iran. they do need to cooperate with this huge gas field. ,hat is part of that equation them saying, we don't want to go the way the saudi's have gone to cut ties completely with iran because we have common interest. appreciate your time. always good to have you with us. joining us from london, we have taken a halfway point in 2017.

another significant surprise has been the escalation in the middle east. through the year so far, has that caught you guys off guard as well? >> these things are hard to predict. we did not explicitly predict that but we have been positioned for low inflation and enforce that trend further. performances of during the do well softness of the dollar. that has been kind to us. the market as it links to the previous discussion, oil has taken a big hit particularly since the tensions have emerged. it is now hovering in a wide range but very close to a level it was pre-opec deal. to some extent, there is sensitivity to positive news here that may play out in the

short term. as we have discussed. that is why we like, instead we have shifted away from long-duration to being more flat. one of the reasons has been oil. component of the inflation, isof the impact it has on e.m. it is helped long fixed income positions in emerging markets. david: he will be staying with us. if you have a bloomberg terminal , check out tv , you can watch us online, on charts and graphics, interact with us and send us messages. go to tv on your terminal. live from new york with all of our viewers worldwide, this is bloomberg. ♪

♪ jonathan: the time now for the

trading diary now for the week ahead. we will have plenty of news. , the minutes, isn of the june meeting at 2 p.m. thursday we will get the employment report. big one, payrolls friday. that will drop at 8:30 a.m. eastern time. set us up for friday, what is the best case from ubs? themos: we think we are not too far from consensus here. we think the labor market is continuing to grow at a decent pace and that should affect the fed as well. do we get elusive wage growth or do is tell the story that unemployment will grind lower and then it will come or the inflection point is around the corner? is that the story

for ubs? themos: not necessarily. -- we haved that found that it has declined. wages typically respond to inflation rather than lead to it. wages will probably mostly reflect trends. we expect decent growth and a rebound from the lower realizations of the first quarter. we don't expect a tremendous surge of inflation. higher than the current trends but not a huge amount. jonathan: for investors and market participants looking to get bullish on the dollar, do anything in the data that would enable them to become constructive and get back on the dollar-bull market bandwagon once more? themos: short term.

that may play out the sense that , the euro is already reasonably high, to expect some of the infant -- the inflation from the ecb. two hikesking about next year from the fed as well as the risk premium. jonathan: thank you so much. appreciate your insights. the dollar showing a little strength on the session. david: coming up next we will have nicholas burns of the kennedy school. he will be joining us to talk about president trump's meeting this friday with the other g-20 leaders in the middle of growing tension over trade and geopolitics. this is bloomberg. ♪

♪ jonathan: g-20 leaders brace for

attention over trade and policy. the u.k. drops brexit bravado. business executive concerns will not be dismissed. eurozone manufacturing expanded at the strongest pace in over six years. for our viewers worldwide, good morning. this is "bloomberg daybreak." i am jonathan ferro. alix steel is getting ready for the fireworks and fourth of july holiday. here is the story of the market so far. futures are firmer on the session. where up about one third of 1%. the biggest quarterly gain for the currency since 2010. yields unchanged on the 10-year. david: u.s. markets are closing

early today for the july 4 holiday. a big week ahead for economic data. coming up later today, the isn manufacturing data. markets will be closed for the fourth of july tomorrow. wednesday we get the fomc meeting minutes from june. this is a leading up to the date friday jobs report -- to the big friday jobs report coming out. something else happening on friday, the g-20 leaders are all getting together in hamburg, germany. german chancellor angela merkel will be meeting one-on-one the day before with president trump, urging that they all seek a win-win as she calls it for economic growth. joining us now is michael mckee. meeting will be

happening here, and that is vladimir putin and president trump. that is going to get a lot of focus. the two have been in a row romance nine since donald trump is that elected. president has been very forceful in condemning some of russia's actions. the u.s. has stayed with sanctions. the economy in russia taking another downturn because oil prices are falling. the recipe is therefore a really tense and -- is there for a really tense and interesting meeting. we are not sure if they will sit down for a lengthy one-on-one meeting or if the president will pull him aside during the regular conference. david: there is not really an agenda for the present. what would be a win for

president trump coming out of this? michael: cannot make any mistakes and be seen as firm in his dealings with vladimir putin. it is hard to say what the president wants out of this. he does want a good visual. he wants the world to see that he can hold his own with vladimir putin because much of the dialogue has been about how smart and crafty putin and how he will manipulate donald trump. jonathan: financial regulation and international trade will be interesting topics at this g-20 meeting. threatfatigue poses the to crisis response. crisis is inside of the g-20 and stays firm. is that a message to the president of the u.s.? michael: international banking

regulations have been toughened significantly since the recession. the u.s. should make it some regulation. what has really happened is there has been a set of international regulations that the u.s. has toughened within its own regulatory regime. if u.s. backs off from that, it will not send a good signal. investor now bring an nicholas burns, that ambassador -- we now bring in ambassador nicholas burns, under secretary of state under george w. bush. he is now at the harvard kennedy school. he is coming to us from providence, rhode island. thank you for being with us. you have been an observer and commentator on president trump and his role in foreign relations.

it is difficult to see a straight path he is present. what have should he be pursuing on friday? he is going to have to have a reset in his relations with angela merkel because the first few meetings did not go well. the true meeting this week that will test his leadership is with vladimir putin. the european union has recently reaffirmed economic sanctions against russia for its invasion and annexation of crimea. i think it is important president trump reaffirm american sanctions. there have been doubts about that over the next year or so. community isnce 100% sure russia launched a major cyber attack, trying to get into the databases of 21 american states. our president needs to push back and tell putin that is

unacceptable. there is a bill in the senate, 97-2 voted for additional sanctions against russia and the white house is trying to water that down or stop it altogether. if the president is not strong on these two issues of ukraine and american elections, that is a bad way to start. david: one of the hallmarks of effective foreign policy is consistency over time. this man as candidate and present has been -- president has been consistent in not going after the russians. nicholas: the problem is he is boxed in on russia. senate republicans do not support lifting of sanctions. senate republicans do support additional sanctions on russia

over interference in our election. he has lost his own party on capitol hill. he has no support from democrats. if you look at public opinion polls, the american people want a serious policy towards russia. i don't think the president can afford to be consistently week on russia -- weak on russia. that is what he has been as candidate and president. jonathan: we have had a series of successful meetings with counterparts in the middle east. what have we actually learned about policy, trade relationships, economic relationships with any of those countries he has spoken to already throughout the first six months? nicholas: that is a good question. we have learned president trump prioritizes economic and trade issues over military and political issues. he has been dismissive of the european union and germany

because he sees germany as an economic competitor. he talks about the trade imbalance. he did the same thing with the south korean president. that is what makes this summit meeting in hamburg interesting. he has not signaled a strategy entree. we know he is against multilateral trade frameworks like the proposed trade agreement president obama was negotiating, but europeans are expecting a plan for the next year or two on how he is been to approach them entree. angela merkel reminds him continually that the european union conducts trade agreements as a whole. the idea you have bilateral trade agreements, that is not going to happen. is that what we see

, aying out here on rise contest for global economic leadership in some ways? nicholas: you have american us about that competition because in the past despite competition from time to time, it have the north atlantic community, europe and the u.s. relatively together on big issues. that is not true now. that leaves room for someone like president xi. he has his own problems in east asia. for seven decades we have become accustomed to thinking of the american president has the leader of the west. now a lot of people think angela merkel is the leader of the west. she is hosting this summit. she is setting the agenda. president trump is almost an outlier. that worries me as an american. who hadt is not just xi

difficulties at home. prime minister may had a setback in elections. abe had a setback overnight. what does that do when you have leaders coming in who have their own problems at home? nicholas: most of the leaders, not all, but most of them come from democracies. domestic politics sometimes trumps foreign policy. your ability to project global directly related to your strength at home. prime minister may is reeling from this very poor performance in the recent british elections. in london early last week, i was struck by how many people thought there is maybe a slim possibility that brexit won't happen at all. maybe the majority possibility is it will go forward, but not hard, some sort of softer

arrangement where britain retains customs relationships with the european union. she is on the political tightrope. she may not remain later for long. she does not have a lot of confidence in the eyes of the other leaders. jonathan: the political situation in the u.k. making the u.s. seem very stable. david: that is not easy. jonathan: michael mckee staying with us. a conversation you do not want to miss, mohamed el-erian on his latest bloomberg view piece. that is coming up. you are watching bloomberg tv. ♪

jonathan: sterling fell for the first time in nine days, raising forecast for their logo the u.k. economy. their concerns on the split will be heard and will be addressed. turning us to discuss exit is nicholas burns and david kohl, head of research. you talked about the prospect on the margin, tiny but bigger than it was a couple months ago of brexit being reversed. talk to us about your visit. >> i do want to say that i think most of the people with whom i spoke believe brexit is good to happen in 2019, but they were interested is a a small window has opened up that there might be a small possibility depending

on politics where that is a possibility. there is a lot of regret in the country over what has happened. there is also sense that britain needs to have some sort of relationship with the european union, whether it is the norway model or something way. a complete sundering of ties does not make sense for britain. the prime minister is severely weakened by this. there is ongoing talk within the conservative party of how long she is going to last. this conversation in. it's the -- conversation infuriates the proportion of people who voted to leave. it is hard to see a political path to remain actually happening. the labor party does not seem to be stepping up any sort of

rhetoric for us in the market. >> no. you have jeremy corbyn who did well in the last election, but he has not put forward a plan for britain that you expect the opposition leader to put forward. i agree with you. brexit is likely to happen. the debate about hard brexit or soft brexit has shifted to the soft brexit side. a lot of its are thinking through a customs union, which is where i think this debate is going to go now. david: david kohl, let's turn to you. it is been over a year since the brexit vote. what do we know today about what is going to happen with exit that we did not know -- brexit that we did not know a year ago? >> i think it is important to take both things together, the

brexit and the vote, which theresa may lost. when you look through that, you see that the brits did not vote for the brexit in terms of we want more nationalism, we don't want to be involved in trade anymore. it is a vote for most of the people that have been losers of globalization. the u.k. is moving more towards a socialist model, where these people that did not profit from globalization get their share. possibility, and the other is moving more in the left-wing socialist camp. as a bottom line, both tendencies are not very good for investors as they weaken the investment environment in the u.k. as you lean more left on the socialist sense, and as you

move towards brexit, it will reduce foreign investment in the u.k., in london. when you don't offer the same return on equity, the same profitability, it may be difficult for the currency. david: do you agree with that, that it looks less attractive than it did right after brexit? >> i do agree because of the uncertainty of what is going to happen politically and the ship of these negotiations. it is going to depend on negotiators. philip hammond is someone who has very high marks for professionalism, discipline, clear strategic thinking. you do not attach those words to boris johnson as much. if it is clear theresa may is

not going to be prime minister for several years to come, that there will be some change in the party leadership, it will depend on who the conservatives choose. ran a strong campaign, he tapped into the youth vote. is the mostat impressive diplomatic slap down i have ever heard of boris johnson on television. i want to move over to david kohl. for the cable rate, i was told it was all about politics. it is not all about politics anymore. >> it is not about politics for the at least not politicians, it is much more about central-bank policy. we have these number of hawkish comments not only from the u.k. but also the ecb and bank of canada, and in this context we

have to focus much more on what monetary policy wants to do then brexitppened with software hard or not. this is something that is back in the game. we have to watch that. david: professor nicholas burns and david kohl of stay with us. turn into bloomberg tomorrow at 8:00 p.m. when alix steel is cohost here, they will the boston fireworks spectacular live from boston's esplanade. this is bloomberg. ♪

jonathan: the saudi led coalition that has cut links with qatar has added a two day

demands thattheir include shutting down the al jazeera network and ties to iran. this is according to al jazeera, the network at the epicenter of the debate. joining us now is nicholas burns of harvard university. are we edging towards a deal here? >> well, that is the big question. if you just looked at the rhetoric coming out of both sides over the past few days and weeks, it is difficult seeing a solution being reached. we had the foreign minister of guitar saying -- qatar saying it would not give in to any demands that would chip away at it national sovereignty. that is what a lot of these demands on this list seem to do. they have said -- saudi arabia

has said all along that the list of demands is not up for negotiation. it is important to note that an agreement by saudi and its gcc kuwaitat the behest of as a mediator in this debate. this has been a fast-moving story. saying thatport qatar has responded to the demands. the question is whether they said yes or no. we are waiting to hear on that. jonathan: the fascinating part of this conversation is the role of the u.s. in all of this. from where you are sitting, what itshe role of the u.s. and current tension between these countries?

stateas: secretary of tillerson has been the most active intermediary. the u.s. clearly wants to see this crisis end. think, -- e need, i jonathan: i believe we just lost nick burns.mak the involvement of the u.s. from the presidential side and from the role of secretary tillerson, what is the role of the u.s. at this point? >> i think your previous guest spot on. there is a little bifurcation from the u.s. on the one hand you have donald trump who has os behindy thrown support

saudi arabia. and rex tillerson has been much more radical of the dispute. demandsaid the list of given to qatar would be difficult for the country to comply with. you have senators such as bob over saying the u.s. -- bob corker saying the u.s. should do more such as halting arms sales until the disagreement can be resolved. jonathan: always appreciate your time. think you very much. two nicholas burns of harvard university, we apologize for the technical problems. coming up, mohamed el-erian from new york. this is bloomberg. ♪

♪ julie: from new york city -- jonathan: from new york city, you are watching bloomberg daybreak.

quarter with the the seventh consecutive quarterly game on the dow and s&p 500. we do open as usual at 9:30 1:00rn and will close at ahead of the holiday tomorrow. lower by four basis points. the dollararket, shown weakness on the year so far. what a move we had to the upside. we pulled back. the dollar stronger against everything at the moment. let's get you the headlines outside the business world. >> let's get you caught up. president trump says he will be making phone calls today.

yesterday, he spoke with china's president in japan's prime minister. the focus of both calls was north korea's nuclear weapons. least 18 were killed when a bus carrying a senior citizens group round into a truck and burst into flames. another 30 were injured. the accident happened new the border with the czech republic. the u.k. is dropping its bravado over brexit. theresa may is making a conciliar duty -- conciliar gesture to group sometimes overlooked and tell them concerns will not be dismissed. cheerleaderged as a for a global friendly brexit. bloomberg news. i am emma chandra. this is "bloomberg daybreak."

seems as of today, it president trump for spending a good deal of time on foreign relations in advance of the g-20 meetings. president is very busy on this eve of the fourth of july. >> a flurry of tweets. last night, the president talking with the prime minister of japan and the president of china. today he will have phone calls with the leaders of italy and germany. they will be part of the summit this week. the backdrop to this second foreign trip is very different from the first when global leaders were still willing to go along with the white house in their meetings. now you have a situation where there is not any guarantee the president will be meeting with

this leaders at the g-20. angela merkel is frustrated with the fact the president has withdrawn from the paris climate agreement. everybody wants to know whether moscow, and forth with whether there will be any meeting between president putin and president trump. david: he will talk to italy. push.making a big he also says he is talked to the you mayor of qatar -- emir of qatar. >> it comes just days after the treasury secretary put new sanctions on the bank in china. thishite house is saying is not sanctions on the chinese or a result of what is going on

with north korea. isy are trying to say this an isolated incident with regards to one financial institution. there is no question the white house is trying to increase pressure on the chinese to try to influence them in their dealings with north korea. david: let's get back to the economic policy which is why the president said he wanted to be elected. chancellor merkel said she wanted the g-20 summit to be about trade and international economic growth. is there a chance we will get back to that agenda by friday? >> there is a chance. from the white house perspective, they want to talk about trade and bilateral agreements. first international decisionsident trump's to remove the united states from the paris agreement is going to europeaning counterparts will have to deal

with. there are several prominent business leaders and politicians in the united states who are going ahead as if the united states is still in the agreement. david: thank you. jonathan: to give you an idea of how news works behind the scenes, you get an instant messenger of headlines as they come through. i spoke to the king of saudi arabia and and something else came through. david: we are just getting started. jonathan: the morning has just started in the united states. the president will be speaking to bring much every leader on the planet if he keeps this up by the end of the day. the big surprise has got to be dollar weakness out of everything. what do you make of the dollar weakness we have seen and how significant was it to you? , it caughtirst place

my attention on president trump is talking to every leader of the world on dollar weakness. their skepticism in the markets the fed can continue with the hikes. two this year. there is huge skepticism in the market they can continue with that. they also want to shrink the balance sheet. has been alicy factor at the beginning of the year with dollar strength. .t has completely disappeared from an economic policy perspective on the dollar, there is too much pessimism as there was too much optimism at the beginning of the year. it is hugely pessimistic on the policy and fiscal side.

there is a lot of skepticism. you have the feeling this could continue longer. at the end, we will probably see a turnaround. not so much a turnaround in from donaldicies trump at much more from the economy itself read the pessimism is getting excessive. a turnaround would indeed help the dollar again. jonathan: do we have a situation where there is more upside risk given the pessimism? >> slowly we are moving there. not today or in the next week, but we expect when july comes to the end probably pessimism will be excessive. of positioning data and the situation of the market, pessimism can run further in

terms of timing. david: after the election, the talk was a handoff for monetary and fiscal policy and what that would mean for the economy. it appears that handoff is not happening as quickly as we thought. what are the risks that handoff never occurs? how much of what we are seeing is liquidity being injected into the marketplace? >> i would not be so pessimistic, particularly on u.s. growth. we think the u.s. economy can withoutte momentum even tax cuts. this would be helpful. look what happened in the last half year. the weaker dollar is already helpful for economic growth. it is a build up in private wealth. this is supported for private , a segment that had

been weak in the last half year. the conditions for growth are there. when the tightness of the labor market shows in higher wages this would be a push for private so demand growth would surprise most observers. you do not monetary or fiscal policy for that. there is some momentum in the u.s. economy overlooked now. david: if there is fundamental underlying growth, where is it coming from? typically we say it is from in the graphics, more people working, or more productivity. we don't see that in the united states or europe. >> this is the structural growth path. this has not changed. cyclicalchanged is the

outlook. what matters there is private , it matters if you have a wealth effect for consumption. this did not happen last year. it is definitely in place this year when the whole equity and this isup definitely helpful for private consumption. david: there is a very special program tomorrow. tomorrowo bloomberg where carol massar and matt miller will be cohosting the boston fireworks spectacular live. this is bloomberg. ♪

>> this is "bloomberg daybreak." i am emma chandra. in the next hour, mohamed el-erian at 9:00 eastern. it has been quite a run for emerging markets. everyave recorded gains month this year for the first time since 1993. we are on a seven-month winning streak. still with us, david kohl of julius baer. what a year it has been. we talked about the surprise being dollar weakness. do you see reason to believe the beentions that have supported in the first half will be there in the second half as well? you can see some chance this will continue.

bet on whether the dollar weakness continues. marketpessimistic sentiment is on the dollar. it will be difficult for emerging markets to continue this further. the attractiveness in terms of interest rate advantage is gone in a number of emerging markets. just look at russia. the road word -- reward for the investor is smaller and the risk has not disappeared. we think the risk backdrop is not as attractive as it had been at the beginning of the year. jonathan: there are several different stories playing out. i just want this up on the bloomberg. the dollar is the base currency. i just brought this up on the bloomberg. in the mix are the european proxies.

you seeottom, underperformance from latin america. there are three or four different stories playing out for 2017. out of those stories, what are you more constructive on? >> that is correct. some differentiation is in place. markets are indian probably the most attractive. there have been tax reforms. this goes in the right direction with a strong underlying growth dimension. eastern europe looks very attractive from a currency perspective. these countries are very close to the german market and are important inflationary pressure from germany. the labor market is very tight in the czech republic and poland and hungary. why?

because the german labor market is tight and there is some export of labor in these countries. the big difference between germany and these countries is they have their own monetary policy. they can act. they don't have to wait as long as the e.c.b. this is the main attractiveness in the small eastern european countries where the currency could profit from this development. as you mentioned, mexico had a good run. that was the starting point that matters the most. we lost pessimism in the mexican hapeso because of politics. it appears this could come again. india and the eastern european countries close to the german market might profit the most going forward. is thato what extent differentiation explained on whether you are a country that

imports or exports commodities? the people doing well with the exception of mexico are buying imports, led by india. >> can make the differentiation. unfortunately, then he would put turkey in this camp which has profited the past few months surprisingly. volatility is sensitive to what the fed will do in terms of foreign investment. here we would be much more skeptical than for india. we think the differentiation does not play out moving forward. we are positive on india and negative on turkey. david: david kohl, thank you for being with us today. if you have a bloomberg terminal, you want to check out tv . you can watch us online and interact with us by sending bloomberg messages. it is lifer viewers worldwide --

it is live for viewers worldwide. this is bloomberg. ♪

emma: this is "bloomberg daybreak" and i'm emma chandra. elon musk says the electric car passed regulatory requirements two weeks early. the model 3 is tesla's cheapest vehicle. the base price is around $35,000. it is a milestone energy deal with china national petroleum to develop its share of the world's biggest natural gas fields. ridesh airways hopes to out the strike with help from its largest shareholder. qatar airways owns 20% of the

parent company. david: china has taken a step forward in its plans to liberalize financial markets as it opens domestic bond markets to foreign investment. to take us through what this move could mean for china, we are joined over skype by the managing partner. good to have you here. significance of this move in your judgment? >> the chinese government has been clear they want to have full financial market liberalization. i think opening up the bond market is one of these steps leading to the full liberalization. if you think about the chinese government, they have strong ambitions to turn the chinese currency into a global reserve currency. if you have a very close bond market, that ambition will not be realized.

if you think about the chinese bond markets, the foreign ownership is about 2% to 3%. the rest of asian emerging foreign ownership of the bond market is about 40%. is restricted for foreign participation in the domestic bond market. they have to do something about it. david: play out what you anticipate would happen as a result. let's talk about bond yields. what is likely to happen with domestic chinese bond yields as this liberalization moves forward? >> i have to make two quick points. the first thing is don't be carried away right now because it is a big story in the news media, but this is a limited opening. if you read carefully, the chinese government allows foreign capital to move in but they are not allowing domestic capital to move out. in other words, the foreign institutional investor can buy whatever i'm not a chinese bonds

they want to buy to bring capital into china. chinese institutions cannot buy foreign bonds. this is very consistent with the chinese way of financial liberalization which is incrementalism. they are very careful about capital outflow. this is the first point you have to bear in mind. the second thing is i do not think there will be an avalanche of foreign buying of chinese bonds. government bond yields in particular are already very compressed. yields are very low. korea is 2.2%. the chinese tenure is about 3.7%. i do not think there is a lot of value. i do think the chinese government wants offer -- bonds offer that are value than other asian bond markets, for example korea. chinese inflation is about 1.5%.

korean inflation is about 2.2%. the bond yields in korea are up 2%. chinese bonds yields are better than 2.5%. -- 3.5%. i think there's a relative value but i do not think there is no absolute value. it is a lot of concern about the chinese currency, especially if you buy chinese bonds. i think that concern will dissipate. is theson i say that danger of the chinese currency was during the end of 2015 and early 2016 when the chinese economic growth was tanking. right now, it looks like everything is on the upswing. most importantly, the u.s. dollar has already reached a broad pop. if that is the right judgment, i atnk the chinese currency

3.5% yields offers an interesting alternative for most bond managers around the world. david: the question about china has been doing no what i am investing in. how will they know what they are investing in? how do western agencies rate these bonds? >> if you open up your bond market, you have to let rating agencies go in. not, you do not know what you are buying. the key point is this. we are talking about government bonds right now. but very soon, they will probably open the corporate bond market. that is when foreign rating agencies become critical because that is the only way to tell objectively whether a bond is worth its while or not. the chinese government reaching agencies -- ratings agencies, i

have reservations about them. david: is this going to help the chinese government with respect to capital flows? >> i do think so. this is one way of opening up. you're talking about attracting foreign capital. it is still very close in terms of capital outflow. david: thank you so much. jonathan: coming up next, we give you a preview of the second half with the forecast from mohamed el-erian. counting you down to the market open. about 34 minutes away. equity markets pushed higher in the united states. you are watching bloomberg tv. ♪

♪ jonathan: g-20 leaders brace for

tengion overtrained and foreign policy. many heads of state received presummit phone calls from the u.s. president. iteurope, there's confidence will outperform at the strongest rate in six. sales u.s. auto sales are set to come in throughout the morning. honda is expected to kick things off with better-than-expected sales. welcome to "bloomberg daybreak." i'm jonathan ferro alongside david westin, during that for boston pops tomorrow. we continue to count you down to the opening bell in new york city. futures with a decent town this morning .4%. risk outperforming on the continent as well. european equity markets grind higher. treasury yields are lower by a single point. on the equity market and 2:00 close on the

bond market ahead of the fourth of july holiday. fears abigail doolittle. >> we have tesla trading up more than 2% in the premarket after elon musk did say the model 3 would be more affordable at $35,000. to did pass the regulatory requirements for production two weeks early and the company is expecting the first car to be produced friday. it is important to note shares are trading higher. the stock is now about 70% year to date. turning to stocks faring less well but off the lows, las vegas ynnds and when resorts -- w resorts are trading lower after gaming revenue for june disappointed at 26%. the street was looking for 30%.

a little disappointment despite gains in 11 months in a row. perhaps priced to perfection but now flat. personalhe online website soaring on news red ventures is buying the company for $1.4 billion. i will toss it back to you for auto sales. jonathan: honda kicks things off with an upside surprise. toyota june on the sales coming up 2.1%. the estimate was 1.2%. issan- thines comes in 2%. other automakers will be delivering throughout the morning. .lobal markets the story

stocks in asia according to best start to a year since 2009. in europe, i just snapped a four-month winning streak the longest in four years. best first-half performance since 2014. mohamed el-erian joins us now. he came out with a preview piece of what stock investors need to know throughout the rest of the year. he joins us from california. always great to catch up with you. let's begin with the importance of liquidity. talk about the liquidity trade and how it underpins much of the action for the year so far. >> liquidity has been critical. we entered the year hoping policies and global reflation take is higher on risk assets. policies have generally disappointed due to what is happening on the political side. the global reflation is not as strong as hoped.

again it has been about liquidity. investment hasd given up too much being invested in bonds. liquidity continues to be the main driver of markets around the world. jonathan: big picture, market drivers have changed but the critical sustainability handoff has remained elusive. talk about what you mean by that and how critical it is. >> liquidity can take you higher for a while but you need continual influx of liquidity and that is hard to achieve, especially if central banks have been the main determinant of liquidity injection. what investors need long-term to make their gains sustainable is validation. where does the validation come from? economic and corporate fundamentals. look for how the fundamentals are doing.

unless we get the policy response on progress measures -- progrowth measures, that will be hard to achieve. focus on fundamentals. ultimately, that is what validates asset prices, not liquidity. david: one of the sources of liquidity are the increased profits of corporations used for buybacks and dividends. companies make money by selling things and making profit off of them. isn't that an indication there is positive growth going on? although there is a lot of , weidity in the marketplace have been getting more liberal we haveetary policy -- not been getting more liberal with monetary policy. it has tightened and yet companies are making more money. >> that speaks to the phenomenon of profit as a share of gdp going up to record levels. there is a limit on how much you can squeeze the labor share. we started to see the political

consequences of squeezing the labor share too much. the big question is can profits continue at this level of gdp. if they can, companies will continue to generate cash. some of that will make it back into the marketplace through share buybacks and higher dividends. politics a very high profits is starting to get -- the politics of very high profits is starting to get complicated. david: doesn't that mean you have to pay the workers more and they have more money to spend and you are better off because of consumer spending? >> yes. that is what you want to see. that is what improves fundamentals. there is a lot of leakage from spending on the consumer side. when companies do more buybacks, higher dividends, that immediately goes into the marketplace. to transmission channel higher wages is better long-term, but there is more leakage short-term. jonathan: way from the economic and policy fundamentals, let's talk about market signals.

it can be confusing for many people. if you were long risk and saw what is happening in the bond market, typically historically that would not have made a lot of sense. but that has become what you have called the new normal. the bonds and equities can both outperform. that is confusing for many people. make sense of it. >> what matters for investors is how much money they will make, path, andle of the the correlation of different asset classes. we have had high returns, low volatility, and unusual correlations. one of the unusual correlations is what you mentioned. equities did really well and bond yields came down during the first six months. we started the year at 244 on the 10 year and into that -- ended at 230. why did it happen? it is liquidity and not fundamentals that have driven

markets. there has been a lot of liquidity in the bond market from the bank of japan and the e.c.b. jonathan: over the last week, we heard from several center -- central bankers who want to introduce risk into financial markets. do you anticipate that will evolve and we can break down the new normal in the markets, the counterintuitive move of bonds higher in the correlation can break down? wethe have had signals -- have had signals that point to central banks getting more worried about future financial stability. i don't think it is orchestrated or coordinated. i prefer the word i learned from my former pimco colleague "correlated" because they are seeing the same thing. i think investors are underestimating the evolution of the central bank policy response. they will not remain the market's best friends forever.

they are evolving to something different, but they are doing it in a very careful way. david: those of us who have children say it is "parallel play." you have been on the program before. you have a book that talks about fundamental structural reform and the need for that to get growth going. do. cranny green shoots -- you see any green shoots around the world or in the efforts of the trump administration? >> yes on deregulation. not enough on tax reform, labor market reform. you know me. recognition of the need. the answer is yes. is there design of appropriate measures? that is ongoing. the third step is political implementation. that is where the headwinds are.

we see it in congress, in europe, france being the one exception now. but it is hard to be overly optimistic. it is wonderful you have recognition and are getting progress on design, but we need to see policy implementation. david: can france lead the way? not.kely this brings us to a much bigger issue which is global leadership. we have the g-20 coming up. who is the global leader? i don't think step can -- france can step into that role. france and germany could step into that role. the u.s. is still by far the most important global player. david: mohamed el-erian will be staying with us. 4,e into bloomberg on july tomorrow, at 8:00 when alix steel, carol massar, and matt miller will coast -- co-host the boston pops fireworks

spectacular live. this is bloomberg. ♪

20 world leaders will gather in germany friday. the u.s. president has been busy with phone calls ahead of the summit. speaking with china and japan about tensions with north korea and his plans to speak to italy, france, and germany later today. angela merkel said there is of difficultyevel in the g-20 about the president's policies. we are joined by michael mckee. mohamed el-erian is still with us. how much to we know about the content of the phone calls made

today and during the last 24 hours? >> we don't know a lot about this round of calls. we know in the past the leaders talk about the agenda they hope to achieve when they get to the meetings. this is going to be a very broad agenda. the idea was to focus on trade and climate change which leads you to believe the u.s. will be somewhat isolated on this. there is a lot of other stuff going on. china, the u.s., north korea, all the tensions. abe is coming weekend by elections in tokyo. jonathan: the risk was global trade wars. the story of the market has been very different. when you look at the us dollar, fiscal stimulus, what played out was a weaker dollar store. when you look at the relationship between the president and global leaders,

how does it shape your action on global policy that will shape markets? >> we see the u.s. being more active. calls in the last 24 hours made or planned. the u.s. is reaching out to the main players in the g-20. i think that is important. i think mike is right. the two items on the agenda are tricky, trade and climate change. i think the u.s. will want to put north korea there, africa is also on the agenda. i suspect this is a highly needed g-20 summit. but what we are going to get will not go beyond a carefully worded communiqué. don't expect anything major out of this meeting. auto sales continued

to come out with an upside surprise. this time from ford. it is negative five, the estimate was negative six. estimate forthe you but there have been a series of upside surprises from toyota, honda, and nissan. decent auto sales coming through if you do count ford being down 5%. david: instead of 6%. jonathan: it has been a positive surprise across the board. david: we were talking about the g-20 and the leadership question, who will be a leader there. historically, the u.s. has had a leadership position. that is in question now. between president xi and angela merkel, who has the stronger position? >> in theory, chancellor merkel has but germany is very hesitant. the problem is there is no natural leader of the g-20 if

the u.s. does not step up to that role. add to that there is no g-20 secretariat, so what you get is discontinuity. the next g-20 chair is argentina. there is a question how much argentina will pursuit of germany's agenda. i think that speaks to a fundamental design issue in the g-20. it is really needed but not designed in a way that allows it to be consistent in making global prosperity something more attainable. from what weckee, know of president trump that this point, he tends to be a bilateral kind of guy. the likes transactions -- he likes transactions. he likes dealing with one person instead of 20. >> he likes america first. the g-20 was designed as a group to try to work for a global solution to problems rather than

put any one country first. this is not an organization that solve problems but it is a chance for the leaders to talk about it. g3 fork to a g-7 or coordinated efforts around the world. even this will not produce a lot if we go in with the attitude to only look out for ourselves. angela merkel said this week she sharply disagrees with that view of the world. jonathan: you need international cooperation to solve big issues, that is her words. as we said earlier, the story markets.merging is that still the story despite the fractious relationship on the international stage? >> yes, because of valuations. emerging markets still have a significant valuation advantage but you should be prepared for more volatility.

a principal investors may want to think about is put fewer dollars at risk investing in equity markets but apply them increasingly to sectors that have lagged. em is a standout in that context. jonathan: mike mckee alongside mohamed el-erian. 2017 for onerough of the more prominent banks. the selloff in crude surprising the markets and goldman sachs. from new york city, you are watching bloomberg tv. ♪

david: bloomberg reported islier today goldman sachs undertake a review of its commodities business after disappointing result in the first half of the year. they are reconsidering whether the difficulties are cyclical or reflect a more fundamental change time alone will not cure.

recent columnan's discussed how technology has disrupted the market for one important commodity and that is oil. what about the question of cyclical versus structural? is something going on beyond the normal side? >> will absolutely yes -- absolutely yes. industryhe underestimated the extent to which shale can cut production costs and operate at lower levels of oil prices. $45 to $55 to hold as an industry because opec was doing a few things. not only was it agreeing on production ceilings but bringing in nonmembers including russia and making allowance within opec for specific members. it turns out even at $45 to $55, shale can come onscreen more than people expected.

now we are looking at a lower oil price and this continuous disruptive technology coming in, so people have to understand what is happening on shale much more and incorporate it more in their analysis. david: there is no question shale has fundamentally transformed the oil industry. what is goldman looking at that other banks may have seen already because other big banks have cut back on the commodities trade? what are they looking at to say we should fundamentally change how we engage in it? >> i don't know. that question is best directed at goldman. i don't know what they are thinking. i do know there are structural changes on the supply side and demand-side, changes in the commodity intensity of production. there are lots of structural changes going on which means you need more of an open mindset. your question is best directed at goldman. i do not know what they are thinking internally. jonathan: you have run sony

funds in the past. if you saw what you are seeing on the commodity screen right now, what would it mean for your fixed income portfolio currently short-term and high-yielding credit as well? >> i would try to understand a lot more of the market technicals. this is not a fundamentally driven market. even though inflation has disappointed, even though growth is not breaking out of the 2% annual rate, it still does not validate what we are seeing in terms of rates. this is a technically driven market. this is the liquidity driven market. so i would spend a lot of my resources better understand technicals, how people are positioned, because that is what has been driving the market. jonathan: would you be worried? >> i would. i think when you look at energy, we are in a secular decline. opec can maintain certain ranges

for a while. successfully maintained $45 to $55 for a while. but that is within the context of a secular decline. you have got to be very careful on where you invest in the energy sector to make sure you are protected either through balance sheet or something else from what is likely to be a secular decline in energy prices. david: is there a chance we are seeing a fundamental change in the overall economy? if you look at percentage of gdp for tech, could that be shifting the commodities business? >> yes. that is why i said there is a change in commodity intensity of gdp. you speak to an important element of that. but it is beyond that. there are a lot of innovations going on. yes, there are changes.

tech is the most visible but not the only one. jonathan: mohamed el-erian is sticking with us. the opening bell coming up next on "bloomberg daybreak." the opening bell about four minutes away. the dow up about .3% on the session so far. .4%, up500 positive around 10 points. time atopen at normal 9:30 and close at 1:00 ahead of the holiday tomorrow. the bond market looks like this. treasury yields unchanged. this monday morning, you are watching bloomberg tv. ♪

jonathan: from new york city for our viewers worldwide, i'm jonathan ferro. moments away from the opening bell. this is how we are set up ahead

of the open. the dow up by a third of 1%. s&p 500 up by .4%. seven consecutive quarterly gains for the s&p 500. the best half performance since 2013, a gain of over 8% on the s&p 500. here is the story in the bond market. onasuries, yields at 2.30 the 10-year. the dollar index positive, half of 1%. auto market, sales coming down 4.7%. the estimate was down 3.4% for gm. that is a negative surprise for gm, when we had positive surprises for ford, nissan, and honda. let's set you up for the market

open. abigail doolittle. the gm miss does not seem to be affecting the risk for appetite. the dow, s&p, and nasdaq all higher. a pretty decent risk appetite going on, especially for the nasdaq. this after weekly declines were all three major averages last week, especially for the nasdaq, down 2%, its worst week on the year over that mysterious tech selloff that everyone is talking about. on the year, a different story, up 16%. right now on pays for its best year since 2014. not surprisingly, being helped by the big tech names. apple getting a huge bid on the iphone 8 cycle. 2cebook last week said it had billion daily average users.

lots of strength for technology helping the big rally on the year. as for what is holding the s&p 500 back, actually up on the year by 9%. its best year since 2013. but we have weakness in energy and retail, energy being dragged 14% on supply glut fears. department stores in turmoil as investors are going away from department store companies for the likes of amazon. that is a look at what is dragging this year, even though we have that rally. the question is what is coming for the second half of the year. have s&p strategist forecasts. in the blue, we have the s&p 500 itself. the forecast right around 2440.

this may suggest there is not a lot for stocks. maybe we saw the best of 2017 in the first half of the year. stocks moving to the upside to kick up the week. positive half of 1% on the s&p 500. what a week we have had over the last seven days with many central bankers coming out with caution about valuations and asset prices. let's take a listen to what the fed chair had to say. >> asset valuations are somewhat rich if you use some traditional metrics like price-earnings ratios, but i would not try to comment on appropriate valuations and those ratios. they depend on long-term and there is some uncertainty about that. jonathan: still with us is mohamed el-erian.

what a week we had. they all had in common the and may be the willingness to rein in risk. do we care what the fed chair thinks about valuations? we should listen carefully and it is not just the fed chair. you heard the same thing from the bank of england and ecb. they are starting to worry more about future financial stability. the problem with the liquidity we have had so far, it results in two things. on the one hand, it conditions investors to buy the tip. that has been a successful strategy. we are seeing that again in tech. on the other hand, it results in crowded trades. if you don't validate it, you can get a downdraft. if you do, you can start to impact fundamentals. that is why central banks are aboutng about -- to talk stability.

the pmi numbers out of europe today, with the u.k., were better than expected. some positive fundamentals but you need them to be turbocharged by policy. you'll remember in july 2014 when the federal reserve commented on asset prices. that time it was about social media stocks. maybe this is unfair to the federal reserve because twitter has done dreadful since those calls came out, but the likes of facebook doubled, and more, up 123%. that is why i wonder if we should care what the fed thinks about valuations when the caution against social media stocks, and you have made a fortune in a company like facebook. why doesn't matter so much more this time around? central bankers should not comment about specific segments and certainly not about specific companies. but when they have contributed to the overall stock market

rally by injecting liquidity, by pushing people to take more risk , that's been the transmission mechanism. asset prices has been a transmission mechanism. they are part of the phenomenon. another thing that i think they are worried about is this overpromising of liquidity by new products. we have seen a proliferation of etf's in liquidity challenged sectors traditionally that overpromise liquidity to investors. that is the second thing that is on the internal radar screens. david: you are a careful student of these things. when the fed talks, you listen carefully. is janet yellen expressing a concern about asset values as such, the danger of bubbles, or is it possible, going back to her mandate of inflation, some people say if you are paying close attention, it is one of

many indicators to see if inflation is coming down the pike. mohamed: it is one of many data points are the worst thing for the fed is to have asset price inflation not price to the real economy. the hope has always been that asset price inflation would pull up fundamentals, quantity and prices. that hasn't happened. so you get a decoupling of financial risk-taking, high, versus economic risk-taking, low. that is what's troubling central banks. risk-taking has not responded by financial risk-taking has. how concerned are they about a nonlinear function with the phillips curve? they have not seen it yet. inflation data has been disappointing, if anything, but how concerned are they that maybe something may happen and it will kick in, and it's too late? that may be a concern,

but the bigger concern is what's happening in the u.k., stagflation. a failure of growth picking up and you start to see inflation pick up. that is a nightmare for central bankers and policymakers in general. that is the concern. right now, away from the u.k., inflation is not a number one burning issue. the more burning issue is what do you do with financial risk-taking that has been so decoupled from fundamentals. jonathan: i think it is a difficult question to answer given so much is counterintuitive given how much central-bank action we have had. i asked last friday, where is more risky, bunds or high-yield? groupspletely different of security but they were so split on the question. when you look at the fixed income market, the various pockets of risk, what is looking vulnerable as far as you are concerned? mohamed: that's a great question

in terms of comparing bunds to high yields. you would not expect well-informed investors that he spoke to on friday to be torn on this because they are completely different risks. one is in interest-rate risk, the other is credit. normally they don't move together to an extent. i think that speaks to the extent markets have been influenced, to use the last -- less polite word, influence by central banks. we don't know when central banks step back from influencing asset prices directly. itare going to find out, and will be really important for investors to have both agility and resilience in their portfolio because this is uncharted waters. took from your peas an interesting point about how the liquidity is the street it. insofar as the money is going into the hands of the more wealthy, that tends to inflate

financial asset prices and leads to the phenomenon you describe with risk-taking is heading in the wrong place. i have not connected it before with inequality. mohamed: that is the third source of it liquidity injection into the markets. it is simple to understand. the wealthy spend less of their incremental dollars on consumption and investment of it in the marketplace. so it income inequality worsens, more of the incremental dollar and set up in the stock market. that's what's been happening for the last few years. jonathan: we appreciate your time, getting your insight on so many different. always great to catch up with you, sir. 10 then a half minutes into the session. up.res in the european

equity markets as well. from new york city on this shortened trading week, you are watching bloomberg tv. ♪

emma: this is bloomberg daybreak. a quick programming note for tomorrow. the bostonjuly 4 or pops fireworks spectacular at 8:00 eastern. david: this is bloomberg. i'm david westin. u.s. sales of sedans have been down every month this year, but ford and toyota just came in with a jew numbers that top estimates. , which thisis gm month disappointed, down 4.7% in

sales, which is more than predicted. here to give us the report card is david welch. what is the report card? far, everyone has been estimates except for gm. gm and ford are down about 5%. ford is better than expected. the market like this because we are seeing a pullback in rental sales by ford and gm, which means they are selling less of the lower margin stuff. the big sales are in the pickup trucks and suvs. in a market like this, that spells a lot of profitability. gm has been up 1%. fiat chrysler, which is not reported, looks to be up about 3%. not bad, but continuation of a theme. are still seeing sales of the things that make real money.

david: it is softer, which is the headline, but on the other hand, i saw a report that they are on track to have the fourth highest year of sales in history. so it is not bad. is a: no it's not, this solid sales level, everyone can make money at this level of sales. the issue that has been hitting auto stocks all year long is the market looks at this and says we have seen the big growth, we've seen the big profits, maybe those best days are behind us. today you are seeing a little bit of a bounce because it looks like the car companies are not chasing market share, not chasing gains with heavy discounts, dumping cars into rental fleets, just kind of playing demand for what is out there, the cup trucks and suvs in which means money. down: fiat chrysler is 7.4%, the estimate was down

7.9%. so a little bit better than the estimates. now it looks like gm is the only one that missed estimates. david: you are seeing the same thing. if fiat chrysler is down but not as much as people thought, but the numbers are pretty close, you are seeing the same market here, which is overall softer but still strong sales of things like g, pickup trucks. david: what does this have to do with profitability? we were talking about units sold. that does not necessarily mean down and profitability if the shift is away from smaller cars and sedans into the light trucks and suvs. david: there are two types of buyers who no longer want passenger cars, family sedans and compacts. not only the consumer but rental car companies have been buying fewer of them. that is because they had too many cars in their fleet the past year, and even at the rental car counter, they want

suvs, the same thing they are buying on the lot. rental car companies are not buying the vehicles. rtz have been getting their business in line and they tend to have lower margin vehicles bought in bulk, so the sales you are seeing out there are decent retail sales that turn a profit. david: what do we know about how auto companies are managing their cost? will keepport that gm their lines down for a longer time in august. david: you've seen a lot of production cuts from automakers. you will see more of that as the summer goes on. usually right about now there is a two-week summer shutdown when they do a lot of maintenance. workers go on vacation in northern michigan. you are seeing that but some of the plants have shut down for five weeks instead of two, because the vehicle they make are not in demand.

that has really cut costs, even as they are cutting back on production. david: thank you so much, david welch. jonathan: breaking news from barclays. -- for senior. executives charged in the case. it is accused they paid side fundraising from qatari investors at the height of the financial crisis. four senior u.k. banking executives were charged. they went to court today. we understand the former ceo john farley and others indicate not guilty pleas at the hearing. that has just begun. we understand of those for executives, including former ceo john mack late, they have given not guilty pleas.

the hearing will take place july 17. let's get you up to speed on the pmi coming out of the united states. decent manufacturing numbers coming out of europe. here is the u.s., 52.0. previous rate, 52.1. that is the final rating for june u.s. manufacturing. if you have a bloomberg terminal, you want to check out tv . watch us online, and interact with us through the in the messaging service. live from new york, our world headquarters, this is bloomberg. ♪

jonathan: plenty of economic news ahead of this holiday shortened week including today,

we just had manufacturing pmi. we will be getting june manufacturing ism at 10:00. wednesday, the minutes of the fomc meeting will,. data.ay, the june adp friday, it is payrolls friday. those numbers will be coming at 8:30 eastern time. joining us for the rest of those data points to watch, matthew basel her. let's start with the fed minutes. typically it's a platform for the hawks. you get a dovish statement and a hawkish set of minutes. hawkishe it is a statement and a platform for the doves? >> they are raising rates, so that is the default mode. the minutes will be interesting because we got shockingly weak inflation data on the day of the june fomc meeting a few weeks ago. it's not clear how much time officials had to do just that.

press conference where janet yellen was dismissive of the week inflation data. that came across as hawkish to people. it'll be interesting to see what the conversation was like on the day of, how the people are thinking about the weakness of inflation and whether that means more caution on the right path. jonathan: are we started to hear more dissent from regional fed presidents? we know neel kashkari is formalizing his dissent. starting tors crack? >> jim bullard had some statements about the path being too aggressive. that is not usually the type of thing that you hear the return of evans has been more cautious but has been saying, going forward, we need higher inflation to justify continuing raising rates. david: willie reed in the minutes about concerns about valuations? >> that is definitely the other thing.

if you don't have an inflation justification for raising rates, you start thinking, is there a reason to raise rates because of an excess and financial markets? it's not clear how were they really are. janet yellen's down and more dismissive of it when she spoke last week but certainly others like eric rosengren have been sounding the alarm bells on that. that discussion is probably getting more intense. jonathan: and raises another question, what is more important, pe valuation, pc, or wage growth? out of those three things, what is shining bright for the fed right now? >> inflation has been getting all of the billing, which has been the news, the change that has presented itself. the jobs report will be interesting because if we continue to get the strong jobs numbers, especially at 4.3 unemployment rate, this fed will be very probably culpable

pushing ahead despite the inflation weakness. importantly, we have three more job supports before the september meeting. the probability of a september fed rate hike are starting to creep up a little bit, which is interesting. if we continue to get the strong job reports, we could get more rate hikes this year. jonathan: how close are we to where they get there is another own models? if you can have on appointment down in the low 4's carrying on wage growth, do they need to rethink the way they look at the world? >> we are on the leading edge of things started to percolate a little bit. probably not there yet in terms of the overall strategy. it really is so central to what they do. abandoning it at this point is kind of a tough sell. it's very possible we could continue to get strong jobs numbers. maybe labor force participation

continues to go up, and that heighten the debate about whether the old models are broken. jonathan: is september more of a meeting for the balance sheet that a rate hike? >> that is the base case now. that could change if we get some crazy jobs report in the meantime. jonathan: matthew boesler, thank you. 26 minutes into the session. thank you for joining us. alix steel will be hosting you tomorrow. 8:00 eastern for the boston pops. an early close for the market today. a holiday in the united states tomorrow. coverage continues here on bloomberg tv. from new york, you are watching bloomberg. ♪

york, 3:00:00 in new in london, 10:00 in hong kong. >> live from london, i'm mark martin. welcome to bloomberg markets.

fewl also cover the next hours. for some breaking economic data. let's go to abigail doolittle. aigail: we are looking at pretty nice beat for the month of june, the index came in at 57.8 versus the survey at 55.3. above the month of may at 54.9. anything above 50 tells us the economy is growing, so this is a pretty good print for the month of june. on the average, not too much of an influence. we were looking at gains ahead of that number. the dow and s&p up half a percent. the nasdaq have been up about .6%. the other averages less. now we have the nasdaq trading lower