draghi's dovish words are encouraging traders. the special counsel will expand his russian investigation into transactions involving the president . -- businesses. microsoft is showing its turnaround plan is to act on track. good morning, good morning. daybreak." omberg futures are in change. the euro is still big. we have another point percent. bonds are big over in europe as well. the yield is down 49 basis points. the out performer is what today's bonds. -- portuguese bonds. and theel had yesterday vix hits a new record, under 10

for the fifth day and arose -- a row. anna chandra is here. multiple reports that president lawyers are trying to undercut robert mueller, who is investigating russia. according to the washington post, they are saying he has conflicts of interest. the president has been asking about pardoning aids, family members, even himself. had anican student imprisoned in north korea. he was in a coma when he was released from eight north korean prison. the imf is ended two years of speculation and agreed it to another bailout of greece. ilionw loan was 1.8 dollars. that is contingent on debt

relief. global news 24 hours a day powered by more than 2600 journalists and analysts in more than 120 countries, this is bloomberg. jonathan: that's a you get the euro down. i don't know if investors are by that. my own draghi brought the doves out. the euro is not buying it. the table andd the stimulus program. he delivered a hawkish message to the ecb. highestthe euro to the in almost two years. join this is richard jones. he is trying to make sense of its happening in the fx market. richard: i think we see an extension of what we saw yesterday. it strikes me that the key thing

for the euro to move higher is the mayor draghi did not push back vigorously. i think he is probably keeping his powder dry. scream, heesn't keeps grinding higher. they may choose to push back on it. he did not push back yesterday. message, wend that got some financial conditions. how do you define a tight you know financial conditions when the euro is rallying? wellrd: equities are doing in addition to that. notistically, they are uncomfortable with where the euro is now. they don't want a lot higher. i think we will probably get some pushback.

he seemed very relaxed yesterday. the move that was interesting was the move in the bond market. if investors were nervous about ecb cutting back, i don't think it would be rallying strong as it did yesterday. spain and germany are some 100. in, thereare piling is not a lot of anxiety out there. alix: i'm glad you brought that up. we may be reverting back to the world where you are moving together. does that play out? richard: i think it will. if you look at it from taking a step back and that whole scenario, it is based in the euro project. if you look at the political

hurdles this year, it looks like the german election is going to come out very smoothly and investor positive. is goingmic data reasonably well. ecb is going to remain accommodative. it's a compelling story. this could have some legs. alix: it's great to have you on the program. joanathan: let's continue the theme. we have the asset management manager. let's begin with you. that dynamic that alex mentioned , it made a bit of a come back yesterday as far as the bond market and the fx market is concerned. >> morning. lookond market message different.

about the bond market looked confused, it did not know what to do. sees inflation lacking with inflationary pressures. that is quite different than what we are hearing from central banks. market reacted strongly to the fact that he christian directly about the euro strength and made no effort to push back on that. there is no level that they target. that's a good opportunity that he did not take. relationship is a good one. and equity market with revenues outside the domestic region reacts well to strengthening the currency. even if people have bad growth forecasts, we have seen euro stocks taking lower the last few

weeks. -- is joanathan: is that what we needed yesterday? did we need draghi to come out and say he did not like it? >> would've worked? 115 and 116 was an important level. they push the currency lower. things are very different now. they're not easing policy. role.eally don't have a if anything we have learned watching central banks, it's difficult to push a fact in one direction when it's moving in the opposite direction. i think it has been said before. he wants to keep his powder dry a little bit. at the language we get more

explicit. them, it'standing going to be hard to keep the currency. alix: i want to pick up of what you said before about european stocks. blue line is the euro. line is thend white world index. you can see that divergence where european equities of not kept up with global equities because of the euro. you haveme time, relative strength in the valuations following. there is a huge amount of inflow coming in. how does that dynamic shift in play out? james: that's a good question. i am looking at this top down. aboutument there would be the signal we are getting from

markets generally the last eight years. i think it's reasonable that we see this changing direction and we start this dislocation of things which means valuation and that could lead to a conflicting signal. the reality is i know we are seeing interim growth in the eurozone, which is fantastic. reality of the long-term structural issues are there. the political risks are still there. i don't see the fundamental support the euro zone economy u.s., andobust as the that is not particularly attractive. alix: we talked about this being a carry trade a long time ago. where does that leave us now? a carry the year was trade thunder.

that's why it was week. negativeof the reasons rates work. i think that position is largely been unbowed. think it's probably going to start restraining the euro a little bit. the rhetoric is important. the fundamentals are important. maybe the market is getting too long in the euro. i think this will continue. it's not that much more. thank you for speaking with us. el-erian willamed be joining us. opinions about the ecb. we will dive into that. this is bloomberg. ♪

alix: robert mueller will be expanding his probe by investigating the president's business dealings. joining us is kevin cirilli. it's good to see you. are we in terms of how the russian investigation is impacting? then: they are expanding scope of the investigation to look at the president's business dealings. they do not want to have that happen. shakeup on the legal team. a spokesman for the legal team resigned. attorneys are

coming and going. jared kushner will testify behind closed doors to the senate intelligence committee on monday. paul manafort and donald trump jr. have been invited to testify on wednesday. no word on if they have in but -- accepted the invitation. investors, this is great headline news for parties. joanathan: that doesn't come up. alix: maybe some people. joanathan: right. two that point, how does this impact is implementation of anything? that. i've been asking they want mueller to handle that and focus on tax reform.

her committee has a wonky process known as reconciliation. dodd-franke some regulatory relief. this is what she told me. togetherall working and we have a plan that is revealed to the public. we will be in concert. specificallyd her how this would be different from health care. i hear there will be a tax plan sometime in august. falling to aust is low. equities are unfazed i that dysfunction. the nasdaq is closing at a record high. this is the same question i had

tuesday. the health-care bill was dead in the water and markets did nothing. i don't understand what is going on in the fx market. vassili: who would've thought this would been washed out a long time ago. i think yesterday was a good example. there was reaction to some of those trump headlines. direction -- direction in late could be better. skeptical.y are joanathan: basis cases nothing gets done. that removes the outside rest of the dollar even more. does that open the door? vassili: the dollar has been a number of things. tax reform is being delayed. the fed is sending x messages about inflation.

economic data is ok but not great. thee are so me things that dollar, it will require one or more those things to come up. reform willax appear on the horizon. the markets will get confidence from the fed. for the dollar to do better, it will take quite a bit. what kind of tax plan we do need to see in august to reassess the agenda in d.c.? james: the problem we have seen with the legislation coming and going is none of it has been agreed upon in the republican party. they have a tax plan with the iron.

magnitudes of that are very important in terms of the market move. feelingcally, to get more confident that we have positive change coming, there needs to be a plan that satisfies of republicans to get the votes it needs to pass. alix: it's always priced out of the market. with financials making a big comeback. what is priced in for what it comes to u.s. equities? james: that's a good question. i think there is a lot priced in at the moment. there is a lot of expectation about trump policies. we tend to see when bond yields ride there will be deregulation expectation. that sectoree

rotate back-and-forth. think that is about a solid economy with a sluggish fed in the system. alix: good stuff. you are sticking with us. americap, the bank of will head up derivatives research. we will talk about opec. libya is invited. the oil market may not care. this is bloomberg. ♪

the s&p 500 tax index went to a record high thursday. joanathan: the nasdaq is on a 10 day winning streak. will tech remain on top? theosoft is showing that turnaround plan is back on

track. james, we are creating some monster winners the tech sector at the moment. james: that's true. there have been a lot of impacts and there are productivity issues receipt. it does mean that you get these whichtive is this models we don't have any way of valuing. that whenen implemented successfully, they can be hugely accessible. that means the profitability of the company is less of a concern than the potential profitability of the future. traditional valuations can it be quite wild. there is a fear of missing a. you don't want this to turn out to be the big winner. you would not have wanted to miss out on alibaba.

if anyone is powered into this, they've got to think about the dynamics from 35,008. end more timeay's looking at the fx market? james: that's a good question. certainly, those are large spaces in the u.s. and global companies and they are forcing a decent proportion of revenue benefiting because the dollar generally. is closingity market equities globally, when we see the dollar strength in again, it comes back into play. alix: we talked about the relative value trade. james: you do see that. when we look at credit between

europe and the u.s. in marketsld spaces, those can appear to behave quite differently on the surface. obviously a huge tech presence. ,he most successful companies the european story is less about the fact that 10 countries. if we wind up having more that make aes, does headwind? is there a correlation? with $300see apple billion on its balance sheet. certainly, but the more mature

companies in the tech sector, i don't think there's going to be any problem whatsoever. when you get into the smaller there are a forward-looking businesses. i'm sure they're going to be some who are swimming without their short. alix: tech has momentum. that is potentially dangerous area joanathan: the dax is getting hammered again this morning. whether the euro in the dax cannot perform. james: i don't take so. not for any amount of time. they can't tighten policy and expect everything to be a garden of roses. this is potentially dragging on the economy. this is strange given the policy they are worried about.

this is all about tightening to some degree. justax index is not reflective of germany. areas ofas huge revenue growth. that is definitely the case. joanathan: thank you very much. day, the headhis of m&a will be joining us. there about two hours in catch the dax is getting hammered. euro is nearing to your high. this is bloomberg. ♪

so we need tablets installed... with the menu app ready to roll. in 12 weeks. yeah. ♪ ♪ the world of fast food is being changed by faster networks. ♪ ♪ data, applications, customer experience. ♪ ♪ which is why comcast business delivers consistent network performance and speed across all your locations. fast connections everywhere. that's how you outmaneuver. that market action. we had the third straight week of gains on the s&p 500.

futures this morning are doing pretty much nothing. in europe, it's about the euro strength on some of these big wrench marks in the eurozone. the dax is down by 100 points. the euro is up. it's about .1%. it's a two-year high of a single current the. up one third of 1%. treasuries are up by two basis points. venture story. let's get you some headlines. emma: there are reports that the white house lawyers are trying to disk read it robert mueller's investigation into the trump campaign in russia and according to the new york times, they are looking at conflicts of interest. this could be used to fire

mueller or recuse members of the team. opec began in russia. cuts since the beginning of the year have not helped. is a morere aggressive stance. an earthquake with a 6.5 magnitude struck overnight, killing at least two people. werethan 120 others injured. people left their hotel rooms and when outdoors. global news 24 hours a day powered by more than 2700 journalists and analysts in more than 120 countries, this is bloomberg. joanathan: is that my second appearance in 24 hours? to do emerging europe. i apologize. alix: we are going to talk about venezuela. the emerging market trade is

huge. now, certain bonds are starting to roll over. this venezuela bond is at a 13 month low. there a lot of negative headlines coming up, a potential oil band and sanctions. the government is in turmoil. it's great to see you. how do you distinguish between areas like venezuela versus actual value in the risk-taking you want to take? have a reading on the fundamentals. the problem is is extremely difficult to get a handle on what's going on. i am trying to figure out the politics. this is a moment of crisis. thesituation going on, political crisis, how does it play out? i have no idea.

there is an ability to stay in power. it is remarkable. with them running out of resources to pay the debt, at what point do they stop servicing their that? to fornt down by 50% now, they seem to be able to figure out a way to find the dollars to pay the debt and i don't know how much longer. alix: when you add on potential u.s. sanctions, that's going to be devastating for the country. where are we on that western mark amer: the sanctions, the complete relapse and economic activity, we can't be far from. that has country enormous amounts of debt. joanathan: when we talk about much talking spend

about eastern europe. when we look at what happening market, it shows pretty clearly the performance from the mexican peso. there is all of this stuff in here, the euro trade, what is going on in eastern europe? this is where money is being made big-time. amer: there is a shift. trade.e european it is everything from a positive side. it is very powerful. linked toxtremely northern europe. the currency is a huge tailwind as well. we don't traded against the dollar.

much. hasn't move that joanathan: what is the debt doing in those countries? amer: it has done very little. they have always traded quite high. they have very powerful fundamentals. it has also been brought down with the threat. since march, they have done very little. hand havehe other arrived with the bonds. you are thinking about derivative trades. joanathan: it seems the rest of the complex is a big trade on what happening in the united states, or hasn't happened in the united states. is that going to continue to be supportive? a protectionist u.s. with

mexico has removed it. there are a lot of other reasons. they keep on doing well. that's a very different story. year, role has been the single biggest shift. policy, lowonetary inflation. is what matters. alix: also relative growth when it comes to develop markets. take a look at the bloomberg this is dealing with spreads. the blue line is u.s. high-yield spreads. it's is impressive. i relative isis, it's going to get less appealing.

you can take some risk. in a sense, at the end of the day, it's proper balance sheet quality. we -- despite that, we are not at those city levels yet. you can point to particular opportunities. especially local markets and local rates. joanathan: robert joins us from our european headquarters. what do you say? not at there previous level. , you might say these

are far less fundamental reasons. for me, there is this disconnection to global policy making. the withdrawal of liquidity, what that means for emerging markets. there are somewhere the shine has come off and markets of not really adjusted to reflect that. joanathan: you said the predominant story is the local story. if you get that headwind coming from the united states, is that enough to hold off? amer: at the end of the day, we are in debt to global growth. cyclical headwind, we don't expect that.

.e are comfortable it is sustained. if we are wrong, that would be good. alix: we have china pumping more liquidity into the system. amer: that's very large. one of the biggest surprises for me has been the resilience of the chinese economy. for financialer conditions. conservative you on the markets. i've remain in the high-quality local markets. i think there are lots of opportunities there. james: if you think about the trade, the trade is practically nonexistent at this point. the yield has been squeeze it

theya very small market are looking to carry someplace else. the only reason we have had carry trade is the commodity cycle. when that is over, you've got to go to high-growth and high return markets. liquidity, they are putting their money into mexico and the european currencies. that's where we get the returns. alix: thanks very much. it was great to see you on set. it's great to talk to all of you this morning. coming up, the city global head of m&a will be joining us. there is a divergence and we are going to try to break it down. this is bloomberg. ♪

,: coming up later in the show, mohamed el-erian. we just want to get you up to speed. the dax is getting hammered in germany. there is a story that involves the automakers. the german newspaper is reporting that these out of companies colluded on autodetect elegy. story dates back to the 1990's. they gathered to coordinate

activities related to their vehicle technology and strategy as well as emissions control. that is not something we can verify here and bloomberg. we waited see if they have anything to say about it. that in the german newspaper. we don't know how much this is about the euro coming through in the last 24 hours. 2017, m&a,ay through there is more money on the sideline. take a look at this chart. this is ceo confidence. us is how much confidence they have in the economy one year from now. the blue line is m&a transaction value. they track each other pretty well. when the confidence line is going up, the m&a line goes up as well.

joining us now is the citigroup had of m&a. it's great to see you. a lot of ceo confidence, not much action. peter: that's a good question. i think we're going to see some rising levels of activity. one of the dynamics is a look at the chart, there is a lag effect. ceo confidence takes a while to manifest it self in transactional activity you alix: what's going to make a difference? is a global growth? peter: the d.c. environment or the legal environment is had a big impact on the transactional environment, whether that's china cracking down on capital for the u.s. regulatory environment. all of that stuff manifest itself in a more subdued

activity. do we need to see of the change? we have seen a lot of emanate activity with enormous volatility from a geopolitical standpoint. there been plenty of things to worry about. joanathan: from the people you speak to, do they wait and see what happens with those before they make a move them selves? peter: there are two different kinds of emanate. wind in close to the terms of the antitrust issues. dupont, they get a transaction done. we can see was going on with time warner. what i think is difficult about that is we haven't uncertainty about how it particular administration is doing antitrust or how they will apply their logic did it gets more

difficult to translate. those deals are pushing the limits toward the guard rail. we can see those be curtailed or put on hold around policy. joanathan: some of the deals we did see were about tax evasion in ireland where you get a cheaper tax rate. that's a story we've got to wait for. peoplere a lot of sitting on their hands. is that discussion you are having when you speak to ceos about sitting on their hands? peter: that may be true. ,n the smaller transactions that's the bulk of m&a activity. it may not be. that's that continues to

progress. lag the hind in m&a for the last two years. uppeter: we saw europe pick the first half of this year. it's been nice to see them coming back a bit. overall, the volumes of the flat. continues.that trend it's good for everybody. china without been money coming in? is it european companies? peter: most of the european heavy is the u.s. into europe. patient into europe which dominated the first half of last year curtailed massively. can affect timing. just in terms of volume, how are

they thinking about the u.s. dollar the moment western mark peter: and most dialogue we haven't ceos, the specific rate in justlatively low impact. joanathan: you don't think will change the picture at all? sustained environment like that, sure. the vote has thrown that market into relative turmoil. transaction,he box a casualty of the vote in terms of the delay, that is having an impact. when we talk about conversations we are having, i look at it as regular emanate. -- m&a. alix: you are sticking with us. good stuff.

check out the bloomberg terminal. -- can look at our checks charts and graphics. this is bloomberg. ♪

emma: general electric is shoring up its cash position. they are tackling one of the most pointed concerns, industrial operating cash. it rose in the second quarter. they expect cash flow to improve throughout the year. honeywell's assets for revenue growth is paying off. that rose the most in two years. that would give them ammunition desire to break up the company. . let's get some more results. joanathan: she is bloomberg

intelligence covering industrials. it's great to see you. what do we see? karen: ge was the big surprise. a number people thought. rose.c it was only about 2%. they did that are below the line. they are getting pressured to cap. that's not a surprise. power was up organically. that was a topline surprise. are they going to see more of what they would like to see? will that be accelerated? karen: it's going to be do more of the same. it it will happen quicker. there are a lot of programs in place. it was slogging.

you could not see the results. i don't think there is going to be big news. that's my opinion. anyathan: are going to get clarity on the call today? karen: the ceo will answer questions. i think jeff is going to. it's his last one. i don't think he is going to show his cards. up,: talking about breaking that is the jam right now. they are trying to get in on that make up. did they do anything to push back? karen: the new ceo is being receptive to any possibility. they are looking into that. they will make their recommendations. he is working with them. that was surprised. honeywell is doing a great job.

i don't see why that -- there is push. a total role reversal from 10 years ago. karen: there was the break up in the 80's. alix: great stuff. thanks very much she has great analysis on the industrial. take a look at the m&a winners and losers. industrials come out on top in some respects. around 1100ing in emanate transactions. you have financials and 200 and put about the next 12 months? peter is the with us. : that is an interesting charge that talks about the numbers. we have seen the industrial sector come off the rails little

bit in terms of totally delete. largestr and away the because it's the largest market cap. joanathan: if you have the ability to sit at the table with what sector would that be right now? peter: if you think of the sectors that have seen dynamic change and whether continues to alterations,cific you have to look at tech and energy. you have to look at financial institutions. there needs to be some systemic change to the industry. retail is a relatively small sector. when you think about the dynamic that is , it is a remarkable space. economy/newold

economy combination turned on its head. now you see the technology company buying. it's an interesting inversion. alix: financials in tech have had the most transactions so far this year. value, but it the is the macro fundamentals. does that take up western mark i've heard that the energy m&a is going to pick up. sector is energy difficult to make a transaction happened. divergent inns are the energy space, the big problem is they can't agree on the commodity price. alix: no one can. peter: it's been relatively stable. sector may not like the price.

it is been relatively stable. there is not a lot of optimism. allows us to start clearing a trade. alix: where? will it be oil majors? is it going to be oil services western mark where is that transaction taking place? peter: i think it's in the upstream space. that's a place we have not seen a lot of activity. a good example of companies coming together in the gap space, gas has been traditionally struggling. and you start to see the opportunity for stock transactions. togethernies can come and take advantage? out,than: as you pointed that's been really wide.

where is it narrowing? are they willing to say we were asking too much? peter: they are starting to realize that depressed price, it was easy when $100 oil was just around the corner. it's easy to be nostalgic for that. i think sellers will come around. we are not going back there. joanathan: it's great to have you with us. it's a privilege and a presser -- pleasure. be the size. futures looking soft on the dow. we go nowhere on the s&p 500. from new york, you are watching bloomberg tv. ♪ the euro surges to a two-year high.

words are noth enough to reload trading. robert mueller is set to expand his russia investigation into transactions involving the president's businesses. and microsoft shows its turnaround plan is back on track. from new york city, good morning. a warm welcome to "bloomberg daybreak." i am jonathan ferro, alongside alix steel. david westin is off this morning. futures go nowhere on the s&p 500. we head towards a third straight week of gains. the euro, a two-year high. alix: look at how that is doing in the bond market. the german 10-year blinged -- 10-year bund down to basis points. the loser is the dax.

now off by 1%. it little off the lows of the session. it was down to its lowest level since the end of april. the vix still under 10. get an update to what is making headlines. here is emma chandra. emma: thank you. is makinggal team headlines. according to the "washington post," some of his legal team is trying to undercut special -- special counsel robert mueller. a spokesperson for the president's legal team has designed. the u.s. will ban citizens from traveling to north korea in the wake of the death of an american student who had been imprisoned there. otto warmbier was in a coma when he was released and flown back to the u.s. and up for discussion in st. withsburg, opec is meeting

russia. oil is in a bear market. inventories are still high. there is little chance they will come up with a more aggressive stance. global news 24 hours a day, powered by more than 2700 journalists and analysts in more than 120 countries. i'm emma chandra. this is bloomberg. alix: those opec headlines will kill my weekend. jonathan: spend the whole weekend reading opec research. alix: a little bit. [laughter] two washington correspondent kevin cirilli, who is with us. tell us where we are with the mueller investigation. talkedall of the folks i with, they are really trying to get on offense. you saw this in the "washington post" report that came out about how they are trying to build this case of conflict of interest. that is why you continuously see

not only from the president's twitter but associates the push solidify robert mueller. we should know that potentially there is a big vote in the house next week. a budgetary measure from the house budget committee, which sets up for this big fight in the fall that has everything to do with if we are going to have a partial government shutdown. alix: isn't that an incrementally good thing, that we are not talking as much about russia, but they are actually moving forward with something? that is not getting any press. kevin: that is interesting, because you have all of this being dominated by jared kushner's appearance on the hill and folks like manna for's and

trump -- like manafort's and trump jr.'s potential appearance. groundwork is being laid on the policy standpoint. if you are not going to have comprehensive tax reform -- very unlikely -- you could have some type of legislation to lower some type of cap breaks. jonathan: you guys are going to have a great weekend. joining us now for a look at what this means for market is jed laskowitz. he will not be reading opec research or looking at trump tweets. does any of this matter? jed: i do not think so. the market has continued to look through the headlines into fundamentals. you see that in equity prices. doing around the world. i do not think it has any impact. jonathan: is it ok that these guys are not doing anything in d.c.?

i think the markets are focused on the help of the economy. employment is good. stuck, butbeen a bit when you look at the backdrop of global growth and earnings, and the solid earnings season, inflation has been a bit of a sticking point. overall, the economy is in good shape. headlines have not mattered. in your point, mohamed el-erian said that the markets has an overall sense of goldilocks. much about policy fundamentals. ilocks scenario has nothing to do with central banks. if we get some kind of boost in d.c., do we wind up playing catch-up? jed: it is definitely one of those scenarios -- the old

saying, greg sky at night, sailor -- red sky at night, sailor's delight. the bottom line is we do not see a recession until at least 2019. the overall backdrop of the economy is strong. if you look at stock prices, stocks are still cheap. we are not concerned about the political environment. jonathan: big story on the bloomberg terminal the last way for hours is about the rotation that may well begin in the united states out of bonds into equities. everyone is sick of talking about that, because we have done that for years and it has not happen. what is the evidence it will happen this time around? jed: i do not think it happens. a lot of roomhave to run in a later cycle economy. i will not argue that the economy is in the early stages in the u.s. that is why we like the rest of

the world more than the u.s. a lot of stocks can be made later in the economy. jonathan: where do you like the u.s.? jed: emerging markets, we like the u.k., japan. the economic earnings story is more mid-stage there. alix: what sectors? jed: we do not really think about the sector point of view. we think bottom-up. sectors, if you look at what happened last year with all of the bond proxies rallying and investors ignoring growth, you have seen that rotation happen this year. investors are again paying for growth. you are seeing that in stock prices. i say that because you can have yields and equities move higher because of the value trade. global growth, is

that higher yield, is that a guy you play -- is that a value play? yield, you see higher udc rotation in bond proxies. that is -- if you see higher yield, you do see rotation in bond proxies. i think that investors will continue to pay for growth. jonathan: we will talk about europe in a moment. on the screen today, blanket equities and a year that continues to go up. can you continue if the euro continues to climb? jed: i think so. we are more focused on the medium and long term. we still like european stocks. alix: what makes you get bearish? nexti think the possession. you need to look at the indicators of next cycle and what makes the economy rollover. if you rewind the clock to the

first quarter of 2016, everyone was worried about the next recession, china hard landing, brexit, the u.s. election. look where we are with u.s. equity markets now. we do not see signs of warning now. jed laskowitz of jpmorgan will stick with us. coming up, francisco blanch, head of global commodities research at merrill lynch. from new york, you are watching bloomberg tv. ♪

♪ fxathan: big move in the market the last 24 hours. the hero climbing to a two-year euro climbing to a

two-year high. mario draghi said the currency sewing, even though he avoided sending an overly hawkish message. he did communicate that they will soon unveil a plan for the qe program. >> we only have to wait for wages and prices to follow course to our objective to move towards our objective. the last thing that the anerning council may want is unwanted tightening of the financial conditions. if either slows down this process or may even jeopardize it. jonathan: joining us is richard jones to make says of what is happening in the currency market. 1.1640. is that an unwarranted tightening of financial conditions? richard: if we look at what

mario draghi said, he did not push too hard. he is probably less comfortable here then when it was 1.10, but not uncomfortable enough to verbally start jawboning it down. feels like the year of has some momentum. we are making headway against the pound. we are still probably a few levels away from the where mario draghi starts to get nervous. jonathan: we have a clean shot to jackson hole about a month away. then we have the september meeting and october meeting. according to sources we have spoken to, team coverage suggests maybe you have to wait until october for the qe plan. if it is october and we have not met the full criteria for inflation, how do they suggest pulling back on qe? richard: one thing they might do is start to talk about the

effect of the currency. they will never talk about levels or where they think it should be. if we do get that push higher, that is maybe doing some tightening for the ecb already. point toprobably broader economic growth in the general economy in europe is improving, but it does mean that they might just taper very slightly, the monthly purchases, so they could still be continuing at a rapid pace throughout 2018. i think this is more of an evolutionary change rather than something revolutionary. alix: we talked to george in rochester -- short in rochester -- jordan rochester, and he says that the central bank story is talked about less. richard: i think the move now is

largely political. the fact that the french elections came out with an investor-friendly result, that is when the euro started to push higher. i do not think interest rate differentials have been a massive part of it. it is more the fact that a lot of the political hurdles the euro was facing this year have been cleared with relative ease. it looks like the german election will probably be an investor-friendly outcome as well. has not primarily been about interest rate differentials. jonathan: richard jones joining us from london to try to make sense of what is happening. joining us around the table, jed laskowitz. point, doesn alix's the structural story pick up again?

the underweight we have had globally as well. does that start to shift and is that likely to influence the exchange rate more than rate differentials have? some greatd made points. you will see the acceleration of wages and prices. you see this currency appreciation and how that will be counteracted global growth. overly worried about the short-term impacts of euro appreciation on the equity market when, structurally, it is happening for the right reasons. are runningterm, we into issues. look at the dax today. euro stocks is this yellow line, the euro is the blue line. you can see the divergence. they are starting to separate. how strong does that wind up getting? i am not sure when i see these now back, but that is one of the -- i am not sure when i

see the snap back, but that is why divergence is important. that is across global equities, u.s., europe, and emerging markets. does not really matter and it is more about the medium and longer-term. jonathan: if you are a big international player based in europe, you will get hurt -- that is the bottom line. so you have to differentiate between the domestic story within europe that does not rely on the currency and the international proxy everyone thought europe could be. do you need to make that distinction more clearly? the biggerght, but story is the global growth backdrop, the health of the economy, and the direction of prices and, eventually, wages, and that having a bigger impact and counterbalancing any short-term currency movements. alix: do you have a view on

peripheral europe? jed: we do not have a particular view on peripherals. alix: you are ok with european stocks, despite italian stocks? jed: italy can handle the euro below 1.20. in the political backdrop europe has been supportive for investors. that gives us confidence in the broadening out of this equity story and where europe is. if you look at earnings and revision and companies being top lines through this last quarter, the earnings picture is where we are focused. that is still a positive in europe. jonathan: jed laskowitz of jpmorgan. we need to talk about tech. alix: another record high, despite the dow and the s&p not closing at a record high. we will talk about that, coming up.

and mohamed el-erian will join us, bloomberg view columnist and allianz chief economic advisor. this is bloomberg. ♪

emma: this is "bloomberg daybreak." general electric is showing up its cast position as ceo jeffrey immelt prepares to leave. industrial operating cash flow rose in the second quarter. immelt says ge expects cash flow to improve. flagstone group is offering to buy british payment service things. there has been more consolidation in the payment sector recently. and a battle involving two of cabinetmost prominent

members. exxon mobil is challenging a 2 million dollar fine imposed by the treasury department for violating russian sanctions. it happened while rex tillerson was ceo. that is your bloomberg business flash. jonathan: i am just trying to make sense of that. alix: that is a dicey headline combo. tech on an absolute tear. the smb close -- but the s&p closed on a record high as the nasdaq reached another record, a 10 day winning streak. and higher.d higher microsoft numbers showing that turnaround plan is back on track. pre-marketn their softer. down at about 7/10 of 1%. still with us is jed laskowitz of j.p. morgan asset management.

this is a mere image of -- a mirror image of what happened last year, when investors were paying up bond proxies. the market has broken up to fundamentals, and that has played out in tech. to correlations in the s&p 500. that is why you have the majority of active managers outperforming. it is that to being about growth and less about macro and idiosyncratic factors. jonathan: does it make you nervous that so many of these gains are made by so few companies? or is that something we have gotten used to? jed: it is not as dramatic as we might have seen if you go back and look at prior periods. there are all these stats about the narrowness, and if you look at history, it is not that far

from where it was before. you have some great tech leadership. investors are paying for growth and fundamentals. alix: do you do sub industry analysis? semi's are only 10%, but they have not kept up as much. thoseur equity team plays types of trades, but we are mostly focused on the bottom up. what does the technology pipeline look like, what does the earnings picture look like. that is where we are focused. if you think about where markets have come in the last year, it has been a complete reversal. jonathan: explained the valuation gap. we had a guest that talked about europe being a valued trap -- a value trap. companies do have a higher

multiple. in the stock 600, tech weighting is about 4%. does that explain some of the difference between the p.e. multiple on something like the s&p 500 and the euro stoxx 600? that the member weighting is so different? sector ratings can create distortion and a lot of risk at different times in different sectors as they become different constituent parts. that is one of the reasons why diversification is so important, both regional and within markets. that is another reason why active management plays a role. ownou own the index, you the entire sector and the entire weight to that sector, which can rise and fall within volatility,

versus taking an active view on your over and underweight in that sector. alix: can earnings live up to that sentiment? jed: they can. you have seen earnings solid across the board. outstanding in tech. stocks hold up well. jonathan: jed laskowitz, thank you for joining us. coming up next, francisco blanch, head of global commodities research of merrill lynch. he will do what alix steel is doing this weekend -- looking at opec. from new york, you are watching bloomberg tv. ♪

♪ jonathan: from new york city, this is "bloomberg daybreak." i am jonathan ferro. one hour away from the cash open. features doing nothing. 1%. 1% -- 1/10 of

we grind towards a third straight week of gains. german be long on the benchmark and on the euro and expect them to outperform? the answer is no at the moment. down 9/10 of 1%. 1.1636, just off the session high. the dollar making a little bit of a comeback. dollar weakness starting to emerge. still positive on the day, up by 2/10 of 1%. a basis point in the treasury. that is how we set up this friday. let's get some headlines outside the business world. here is emma chandra. emma: there is a report that trump has been asking his lawyers about pardons in connection with the russia investigation.

the president asked about his power to pardon aides, family members, and even himself. at the same time, there are multiple reports that some of the president's lawyers are looking for ways to undercut special counsel robert mueller investigation. -- has agreed, in principle, a loan. that is contingent on companies providing debt relief. the u.k. has agreed to free movement of e.u. citizens up to four years after brexit. that would be a shift in tone from prime minister theresa may. she has made regaining control over immigration policy a redline in her global -- in her brexit approach. global news 24 hours a day, powered by more than 2700 journalists and analysts in more than 120 countries. i'm emma chandra. this is bloomberg. alix: thank you.

brent oil prices and the bti taking a -- and wti taking a dip. opec supply in july will be the highest so far this year. supply from opec members will exceed 33 million barrels a year. joining us from london is stuart wallace, the executive editor for our commodities coverage. opec meetingformal saturday. libya is supposed to attend. monday, we get the russia and opec meeting. what are we looking for? >> i do not think it will be the fireworks you would expect in a vienna meeting, but this is more important than most -- libya and nigeria are producing more than anyone expected. we are not sure what they will be asked, but there are suggestions that they are now thinking about agreeing to a supply cap. giving thetly about

markets uncertainty, but also bringing everyone back in the fold. psychologically, it is hugely important. we could see a dip in the price on the back of that. alix: this is a chart telling that story. the wti price is the blue line line. the white line is libya oil reduction. the rumor is it is up to 1.1 million barrels a day. 840t now, it is forecast at million -- a hundred 40,000 barrels a day -- it is forecast at 840,000 barrels a day. do the actual technicalities matter or is it sentiment? stuart: sentiment, at this stage. the libyan and nigerian production bounces all over the place. that is a lot to do with the infrastructure and the kind of environment these countries are operating in.

you also have to feel some sympathy. if you think about libya and the lack of money, what they need to rebuild, it seems unfair to say you cannot be a full per cap -- full capacity cuts everyone price. higher it sort of such as up for the rest of the week and the months leading to the next opec meeting proper. alix: thanks. blanch, global head of commodities research at merrill lynch. do you expect no fireworks but the details to be significant? francisco: maybe. it is hard to say. opec does not have good options here. and nigeria will give a little bit of comfort, but certainly in the fact that ecuador has pulled out of the deal already, the fact that iraq is planning to increase production, all of these issues

will weigh heavily on members. alix: the rumor was perhaps the barrels told cut offset what they are getting from libya. are they ready to sacrifice that kind of market share in order to beef up revenue? francisco: here is opec's biggest challenge. for the cartel to impact prices, it takes them three to five quarters. meanwhile, for sale supply to respond to prices, it is about three to five quarters. so to your point, if you cap reallyion here, you are affecting market shares and about six months. you can try it, but what will happen to your supplies? going toeeper is only be sending money from the middle east out to texas, to west texas. jonathan: that is the

fundamentals. talk to me about the collapse in sentiment yet most mornings, we have woken up to another bank with a bullish view, then capitulating. now we have this average view of about $64 year and on the bti. -- on wti. is it important that the bullish sentiment has come out on the south side? does that change anything? francisco: absolutely. the point of maximum bullishness was february. why february? because you are looking at the data, and it dropped i more than 100 million barrels. we saw the trend and said if opec delivers what they said they will deliver, then we will have normalized inventories by the end of the year. interest rates have not run anywhere to the extent that those expected. now, we are finding growth in

the u.s., but it is sort of too little, too late. now we have this discordant opec and shall supply dwindling. she also part in the u.s. is very sensitive to prices. even a single dollar barrel, you will have more supply. of sentiment, what i have found is you can look at some spreads, and we can look at the heavy-light spread. brentwood would be considered light, dubai heavy. -- brent would be considered light, dubai heavy. this was actually pretty constructive. heavy prices ticked up, because they are cutting heavy. so in individual areas of the market, there was constructive bullishness that the market ignored. francisco: there was some signals, but inventory failed to drop. bottom, this bread is

because with prices below $50 a barrel, we think u.s. supply will slow down next year. meanwhile, we think opec supply starts to come back. the fact that you rock is ramping up, despite the fact members on were seeing lower compliance, all of that starts to lead to more medium, so the price bottoms, but that is not necessarily a bullish sign. my single biggest issue with this market is in between 40 and $60 a barrel, you have a $2 million barrel in u.s. supply. so what can opec do? opec can choose its own death, but other than that, there are not a lot of options. jonathan: so what is the scene for crude? francisco: it depends on geopolitics. we have seen it get nasty in the middle east with the qatari-saudi diplomatic

breakdown. the venezuelan situation deteriorating. there are apparently some measures being considered from the trump administration on venezuela. there are a lot of things that could take us higher. thathan: do you think there may be a flaw or ceiling, so when crude flows over at a certain by point, shale goes up. you think in those terms? francisco: absolutely. the range is narrowing. we saw it in natural gas in the u.s. the last 6, 7 years. this is shale part two. we know what shale part one looks like a. increasingly, we are realizing that there is a central prize about $50. it could go down, it could go up. most likely, it goes up. opec will be dancing around that. but having less of a marginal

impact on prices. this is the time to take a huge amount of supply out, but that could possibly have deep consequences down the line, particularly for saudi. alix: so you see the marginal price is $50? where you it depends are. we have seen places in the u.s. as low as high $30. below $45 a barrel, we start to lose supply. about $45, we start again. it is roughly where we think the market needs. get that if you get close to $60 a barrel. that is the challenge. there could be an event that takes venezuelan production out, or we could see the iranian deal not falling apart. jonathan: the base case is this

will be boring in range? francisco: it will be born -- as an analyst, it is tough to say. , hethan: francisco blanch will stick with us. there is more to talk about in commodities than just crude pay later today, we get the bond market with this man here. mike swell, goldman sachs asset management. he will be joining me on "bloomberg real yield." we will replay it through the weekend for you. from new york, you are watching bloomberg. ♪

♪ emma: this is "bloomberg

daybreak." i am emma chandra in the hewlett-packard enterprise greenroom. coming up, mohamed el-erian's, bloomberg view columnist and al lianz chief economic advisor. this is bloomberg. ♪ focus inded and washington. wilbur ross scolding china over its trade surplus. now, trump is way in whether to restrict imports of chinese steel. it could prompt retaliation from the chinese president. , we are joined by francisco blanch of bank of america merrill lynch and also our economics international correspondent michael mckee. is this more likely now? >> maybe not. the two sides at least talked about in their discussions.

sides framed it, they made some progress. not enough -- the statements were terrorists, but they made progress. the idea that they are still talking suggests you do not want to interrupt that. but if the u.s. feels it will not get anywhere or if donald trump feels a political imperative to appeal to the former steelworkers in pennsylvania, say, then we could see something. the problem is how to craft this to have any kind of effect. it is not a question of u.s. steel imports from china, it is chinese dumping all over the world. you can see in the graphic i brought how the price of steel, one of the benchmarks for chinese steel prices, has been going down. in 2015, the obama administration put on sanctions. it went up a little bit, and we saw a change. up havingou wind china pare back production, it will help out the likes of

turkey and brazil, not european and u.s. steel producers. achael: it might help them little bit, because it will raise prices. alix: like it has, and they are still struggling to make a profit. michael: there might be a short-term jump in prices, but if prices go up for steelmakers, prices go up for steel users. money.ll cost more anything that uses steel will be more expensive. the number of steel users far outweighs the number of steelmakers. in the long run, this could rebound for the u.s. economy. they are getting a lot of pressure in the white house. francisco blanch still with us. steel out from china is at a record high. you have to look at demand -- it is picking up in china. how do you gauge demand in china at the moment? pmi'ssco: i still think

and a solemn industrial figures are important to look at. frankly, just general consumer demand overall. at individual units, car sales. china is not in a very good spot. there was concern a couple months ago with crate wars, which is still there, but the arkets have really dismissed trade war with china. six months ago, emerging markets were not the place to be. the mexican peso was at 22. there is a lot of concern are the trump impact of administration on emerging markets. since the beginning of the year, the best performing assets were equity and debt, doing pretty well. markets realized that the u.s. is much more about negotiation than outright breaking trade

deals left, right, and center. is emerging-market commodities bullish? bearish? is a littlet difficult a factor in. it is very specific to the market. for example, in aluminum, it is arguably bullish. it ise markets, it possible. but it is very specific to the market and to the spread. you see the differential between prices and locations starting to widen. it is very nuanced, because we are not living in a world of high inflation, high growth. a world ofin relatively weak inflation and growth. it is not the 1970's, where this would lead to a ripple effect of faster and higher commodity prices across the board. what johnting off of

was talking about, the production versus export reality. you brought along a chart, looking at china's steel production versus shipment. is that a weak global growth demand story for deal? userel: it is a china and story. in the emerging markets, there is demand for steel, but china is absorbing more of it, because they are goosing the economy ahead of a party congress in the fall. there is a lot of talk about china slowing down significantly in 2018. i was talking to some folks this week to said watch out. but through the fall, you will see demand strong there. they are picking up a lot of excess steel, which does take a little pressure off, but we get most of our steel from canada, south korea, japan. alix: thanks very much.

we appreciate it to bloomberg's michael mckee and francis go blanche. if you have a number terminal, check us out online. interact with us directly. go to tv and click on this button here. it says "watch now live." you can check out tv . go on and click through it. this is bloomberg. ♪

♪ jonathan: from new york city, this is bloomberg tv. i am jonathan ferro. a busy way for u.s. eco-data. existing home sales monday. then the s&p case report tuesday. wednesday, the latest rate this is an from the fomc. --

friday, we get the latest read on u.s. gdp. joining us now is bloomberg's matt basel are -- matt boesler. what do we need to look out for? >> one, do they change the language on inflation and acknowledge weakness we have seen with low inflation numbers? the other thing is what do they say about the balance sheet? is that coming as soon as september? jonathan: try to get a read on whether the balance sheet is data dependent or independent. you have a handle on that now? matt: it seems less aided dependent. they have been talking about how they want to get this process started. once they get it started, there will probably be a high bar to turn a backup. if they need to make adjustments, they will continue to.

sheetms like the balance policy going forward, that normalization will not be as data dependent as what we have come to think about as fed policy. jonathan: the market movement is to push the rate hike back to possibly december. the rate -- the federal reserve would like to have it set up for three rate hikes next year. when the guys are communicating their message, and be not before the people in charge. matt: they have kind of been backing off of giving guidance that far in advance to begin with two they do not really know what is going -- what it is going to be like next year. so to the extent that they can get this balance sheet process in motion, they can get that out of the way. in terms of inflation data, a way to think about it, they are thinking about it

almost exclusively from the demand side of the equation. that is the way they think. are they going to start thinking about it from the supply side of the equation in the united states? matt: is a lot of what we are seeing is supply-side phenomenon. not a lot of demand driven inflation. the components of inflation you would expect to be more demand driven, like autos, are actually quite week. -- quite weak. to the extent that there is demand driven inflation going on, it is quite low. why we another reason will be watching all of that housing data next week closely. , thankn: matt boesler you. a lot of people following matt tennessee with the federal reserve is up to. alix: reading the tea leaves? coming up, we will try to read

the tea leaves with mohamed el-erian. having arkets, the dax problem. down almost 1.5% as the euro gets stronger. let's take a look at what is happening in the fx market. what is driving the downside on the dax. up 1/10 of 1%.16, -- euro-dollar, 1.16, up 1/10 of 1%. you are buying all across the bond complex as oil continues to roll over. this is bloomberg. ♪

♪ jonathan: the euro searches to a

two-year high. mario draghi's words are not enough to discourage traders. robert mueller is to expand his russia investigation to transactions involving the president's businesses. the drama and d.c. does not dent the bullish attitude on wall street. microsoft shows its turnaround plan is back on track. from new york city, good morning . friday, july 21. david westin is off today. the opening bell is still 30 minutes away. futures looking a little soft, down 1/10 of 1%. no drama here. we are driving towards a third straight week of gains. 30 minutes away from the final day of training. ing.rad euro looking strong i guess they weak u.s. dollar.

alix: here are some of the earnings reports we want to pay attention to. ge down almost 4% in premarket. was up over 1% but now lower. a continuing trend with g.,e. cash flow is key. it actually rose $1.5 billion. that was a key point for activists in the stock. that was a big number on the positive side for g.e. it did fall when i pointed out pricing pressure. that is a worry spot going forward. they are backed by about 2%. staying with earnings, flat on the morning. it was a really interesting quarter. citi had a note out saying they get the group back. it is one of the biggest oil service companies in the world. they had some good growth. the international revenue was up by 1%. international is where they have

gotten hit before. i'm sure, here in the u.s. -- onshore, here in the u.s. doing better. visa up by 4/10 of 1%. spent $1.86 trillion on credit cards. $247 for every human on the earth. i love that stat. payments up by 38%. people like using cash, obviously. maybe the libertarians out there. said to beler is expanding the proto-possible ties between the president's campaign and russia by investigating the president's business dealings. more on that is kevin cirilli. kevin, does this change the nature of the investigation and what is the president going to think about it? the president telling the

new york times before the release of the bloombergtechtv use -- bloomberg exclusive blazon robert mueller should not be investigating him. there is a new strategy that has emerged on behalf of the white house which is to try to detect all the investigators is having conflicts of interests, political conflicts of interests. what does it mean for policy? jared kushner set to testify behind closed doors on monday before the senate intelligence committee, and then on wednesday paul manafort, the president's previous campaign manager are set to testify. no word if they are, of lawmakers very much trying to address tax reform, budget reform, antiregulatory policies. the votes are all scheduled for the next week as well. jonathan: there is a slow humming noise and in the bargain gets cranked up for about an hour, markets react, and then he goes right down. the people not following this y, whatay -- day to da

are we going to get an outcome? kevin: several months. you have seen the dollar start to weaken on a result of this news flow. in terms of policy with health care likely to fail next week, lawmakers are very much turning the page trying to pivot towards a policy battle fight in the fall that will include the debt limit, partial government shutdown, but all trying to get some kind of tax cut. maybe not conference of tax reform, but tax cuts by the end of the year. jonathan: thank you very much for joining us. as kevin just mentioned, the dollar fell to a june 2016 low. some of that news from d.c. equities seem to be unfazed by the dysfunction in washington. nasdaq closed at a record high yesterday on a 10 day winning streak. for more on what this means for

markets, we can turn to the next 40 minutes to mohamed el-erian, bloomberg's chief columnist and economic advisor. i want to get to the quote in the bloomberg piece this morning. goldilockssense of explains the buoyant stock indexes and lagging fundamentals. how long will they go on for? . mohamed: you can go on for a while. at least it is stable and predicable. goldilocks vis-a-vis central banks, what you and i have discussed is the loosest tightening. gradual tightening. goldilocks vis-a-vis policies. at least it will not get anything bad like protectionism that result in a trade war. markets are comfortable that despite everything going on in washington, it is goldilocks for them. it is a journey, not a

destination. jonathan: what does that journey look like? describe the ultimate destination because definitely this is a journey for the last couple of years. it continues. is it a scarier place in your mind for the longer he continues? mohamed: the destination is more uncertain. the journey has been enjoyable and long. becauseeen comforting it had low volatility and it's been rewarding because of that high returns. the problem is a journey has to lead to a destination, and a destination has to be validated by fundamentals. right now the fundamentals are not certain, both in terms of economic growth and therefore ultimately corporate profitability, but also in terms of policies. enjoy the journey, but remember this destination is uncertain as of now. alix: the metaphors. jonathan: put us straight. alix: a few months ago the conversation would've been the

divergence between hard and soft data. hard data would catch up. what is the conversation between that hard and soft data? mohamed: the soft data has data, to lift up the hard and the concern is the soft data itself may come down. give it does, we will unwind another element of the postelection environment. remember, we have already seen yields come down. nd come down.e budn the dollar has weakened significantly. we guessing unwinding of the postelection phenomenon. the question is, is the soft data the next shoe to drop? alix: why do you think we have seen the majority of the reaction in the dollar? we have not seen a lot of dramatic moves in the bond market. what is your understanding of that? mohamed: we have seen some dramatic moves.

if you have looked at the differential between the u.s. and germany, that has moved in a huge way and consistent with what we have seen on the current the as people have repriced their expectations of relative growth and relative central-bank policies. we are seeing significant portfolio flows into europe. there are changes going on that underpin that, the we have not seen volatility because markets are confident central banks will continue to be willing and able to repress volatility. that is what they have a doing for years. jonathan: the federal reserve really let the market -- led the market. anything from the federal reserve, the market is really faded. any potential for fiscal policy coming through. what is the most important policy variable that may be the market is still underestimating? mohamed: i think the most important variable is that the

market is looking at the fed through traditional eyes. traditional eyes means only two policy. employment and inflation. if you look at the fed in that somewhereyment is between tightening, and inflation is between a yellow traffic light and a red. the third factor is concern about future financial stability. this may be a tighter fed than what the markets believe right now. inathan: with that in mind, have not spoken to anyone who is given the indecent idea of what phasing out of the central bank will mean for u.s. equity markets. what will it mean for u.s. equity markets? a more volatile market? a market that needs to move further to the downside? mohamed: it would mean a less comfortable market. i think we have been conditions

to expect central banks to step in whenever there is volatility. why? the active channel as part of their policy approach. if they step back, and i think they will setback gradually, we should expect volatility to go up. you need a major shock. investors are very comfortable right now with the notion you should bet on the central banks as her best friends. you really do need a big shock to get us out of this conditioning. jonathan: great to have you with us. we will talk about the ecb in just a moment. mohamed el-erian will be sticking with us. later today with myself, goldman sachs cohead of global portfolio management and fixed income. you can catch him with me on bloomberg real yield. 30 minutes dedicated to fixed income. 12:00 p.m. new york. another interesting week for the bond market. a big focus on europe. from new york, you are watching

bloomberg tv. ♪

♪ jonathan: mario draghi setting a dovish tone yesterday, emphasizing the economy isn't doing a robust recovery. the last thing they wanted is unwanted tightening of the financial conditions. >> we only have to wait for wages and prices to fall of course to our objective, to move towards our objective. the last thing a governing council may want is actually an unwanted tightening of the financing conditions. it either slows down this

process or may even jeopardize it. jonathan: still with us of mohamed el-erian. .40 and on what and tightening of financial conditions? mohamed: not as he said, unwarranted or unwanted, many he wants to avoid a tantrum that followed his statements and portugal. the last thing they want is a mini tantrum during the summer when liquidity is less ample and markets. this is an ecb that is very cautious, that has reasons to hike but is hasn't to do so -- hesitant to do so. the currency market will push them harder than expected. jonathan: what you think they buy point is for the ecb? they have said as the economy improves to maintain current level of accommodation we need to tweak the parameters of the

program. is there a way to get away from that? mohamed: i don't think so. they have a bit of a sequencing than women. they have forward guided that sequencing dilemma. they have forward guided all the way to december. they don't attain that schedule because impacts the credibility of the forward guidance. they can't raise -- the same time they have qe. that is like driving a car with the accelerator and the break at the same time. they have got themselves in a bit of a difficult situation. they just wait. the risk of waiting is the collateral damage and unintended consequences, but they want that optionality. alix: did they miss their window of opportunity? was there a chance with the boe years back for them to raise and now they missed it. is there a similar chance right now for draghi? mohamed: we saw that with the boe and the fed a couple of times. i think they missed a window and

now they have to buy some time until they get to the autumn and it will get action out of the ecb. the fx market understands and anticipates that. alix: how long the u.s. is a victim staying loose -- how long do you anticipate them being loose? dax is getting hit because exports are important for germany. as the euro strengthens, german competitiveness declines. that is a rational behavior. it happens in japan also depending on what the yen is doing. that is a very rational behavior for next for oriented economy. jonathan: many investors, i'm sure you have these conversations. they want to buy europe. i've been asking this question. can we get back to a situation

like we have in years gone by andyou can be long for euro long german equities in a spectrum to outperform? mohamed: i saw your tweet. i almost voted, but you already had 90 votes. alix: you had a vote on twitter? jonathan: we have got to do this now. the choice is between by everything or behave. behave was like right out here. mohammed, which will you have voted? mohamed:. behave. i think that is the bottom line because of the structure of the german economy. we are already seeing significant portfolio flows in the europe. if you look at the flow data, people are starting to invest more in europe. that is just the tip of the iceberg. people have been underexposed to europe in recent years for understandable reasons. be careful of how much the currency can move if you get this huge portfolio of fact. bank of america says $26

billion worth of inflow and the european equities. the story was the outperformance of the peripherals over the last 48 hours. will not hold up? mohamed: it does for now. you have a very supportive central-bank. yes, did holds for now. this is all part of a wonderful journey, but at some point we will have to focus on the destination. once you focus on the destination, things get a lot more uncertain. alix: mohamed el-erian, you are sticking with us. coming up next week, the fed decides. stay with bloomberg for the latest. when it happens wednesday, 2:00 p.m. in new york. any talk about balance sheet and details extremely interesting for the market, and what their view of current inflation. this is bloomberg. ♪

♪ alix: all the big u.s. banks

have reported this week. it was a dicey quarter in the individuals, but the last time they made this much money the financial world was heading towards the brink of collapse. that turns the focus on regulation. lender's may top $30 billion last quarter, just a few hundred million short of the record we saw back in 2007. washington crossing advisor's manager and mohamed el-erian. i asked this question to my oil guys. they made all this money this fight regulation, or does it make the case for rolling it back harder to make? soundness, not one of profitability. have they done enough internally that they need fewer external constraints on their behavior? i think this is actually a very complex issue. there is no simple answer.

you have to look at what the situation is on the ground. more generally in terms of banks, they are benefiting from a pickup in global economic activity. that is the better environment for banks, even though the net interest margins are being squeezed. alix: chad, let's talk to the three catalysts for banks. we have got through the first two. how does the regulation play as a catalyst? chad: we believe there will be a moderate amount of deregulation over the next three to four years. we think that is priced into the valuation of banks. the key critical driver is actual global growth as the real driver, as well as the shape of the yield curve. the shape of the yield curve believes to be a compression on the long end, not only in the u.s., but overseas with the

eurozone market. we believe.you will not get up and go jonathan: a lot of concern about the u.s. banking regulation. the banks are keen to point out the u.s. regulation is also plus. maybe they can strip things back and still be at the international standard. mohamed: i think they have a point. the general concern outside the u.s. is that the u.s. is the leader, and if the u.s. goes in a certain direction, even if others have lagged, it's difficult for the others not to accompany for the u.s. is going. unique global leadership. in europe the bank supervision and regulation process is not as advanced in the u.s. it speaks to a bigger issue, john. g-0re heading towards the world because the u.s. is no

longer viewed as the natural leader. jonathan: what does it mean for financial stability? mohamed: i think it is problematic for the global economy and financial stability. we live in a multilateral system that places the u.s. at the core of the system. the u.s. is given huge villages in terms of reserve currency and people outsourcing savings to manage, but i guess that the u.s. is expected to play a leadership role. if you change that equation, privileges, responsibility, if you change that equation, you have fragmentation. that is what people outside the u.s. are worried about. alix: if you bring that a little bit, part of the rhetoric is perhaps big banks don't want massive deregulation. that will make competition pick up. they want to keep some kind of sensible regulation. big oil very similar when it comes to energy. ad: i think they want deregulation, moderate

deregulation so they can hold less capital on their balance sheet overall. nonetheless, the banks have enjoyed over the course of the last six months a rise due in part because they believe they are eventually going to get moderate deregulation. alix: after bank season and setting up where we are going, what is your favorite pick? chad: i would say jpmorgan overall. you want to stay with the largest, cleanest one, the one with a disability to benefit if the shape of the yield curve starts to steepen. that would be the one i would choose. jonathan: that is a massive bank in some people said you want to play the. regulatory u.s. story, go to smaller players. chad: that will benefit smaller players from and m&a perspective. you will see the gap get higher if it does take effect in the next 18 months. chad and mohammed

el-erian will be sticking with us. the opening bell just a couple of minutes away. a slight moved to the downside. things a little soft on the dow. 1/3 of 1% down -- down. dax is down big-time. that's what are the reasons. that is a two-year high. the weaker dollar story. the cable rate just south of 130. treasuries down 2 basis points. from new york, you are watching bloomberg tv. ♪

jonathan: from new york city, you are watching "bloomberg daybreak." moments away from the opening bell. theory is the dow

down about five points on the s&p 500. not much drama. we still had to a third week of gains on the nasdaq. we were on a 10-day winning streak. a little bit of softness going into the cash open. here is the scene for you. two basiser by points. the dollar weakness a function of euro strength. 94.11 on the dollar index. that is your cross-acid picture. let's get the cash open with alix steel. alix: the little bit of weakness across the board. i should point out we are just basically like five points away from an all-time record for the s&p. ge is going to be aware of this downside on the dow.

watch that stock, as well. oil is a little softer, as well. a mushy market. let's take a look at the names. the car guys. ford and general motors down by almost 1%. honda is about 10%. the cut organic revenue growth estimates in half, negative estimates for growth. bmw, daimler, there is accusation that perhaps they colluded. they may have colluded on technology, pricing, and recalls , perhaps going back as far as 20 years. the great rotation. i feel it we talked about that the last five years. it is coming back into play.

here is why. this is a look at equity returns and bond returns. the bond returns are the orange line. the equity returns are the white line. equity returns have outpaced bond returns for the first time since probably 2015. is that sustainable? is it the real rotation? have seend funds about $1.3 trillion of net inflows over the past eight years, where equities have seen $600 billion. if we see the rotation, are we going to see $600 billion come out of bonds into stocks or is there so much liquidity out there that you can have both at the same time? jonathan: such a nice story to tell. acrylic we have been saying it for years. , the truth is,n

bonds outperformed and stocks outperformed. anytime -- any reason that should change anytime soon? >> only if the free outflows of liquidity were to change. also that the incremental income has gone to be better off segments of the population. than the restre of the population. also, corporate have been very profitable in terms of share to gdp. you had a lot of liquidity coming in. that depresses yields. bond prices go up. and it boosts equity prices. it is all a liquidity. this is a massive liquidity trade. we go back to the days of old where equities perform and bonds underperform? >> yes, we could.

is eitherould need growth picking up in a major way and that would reprice the bond market or the fed deciding it is really worried about financial stability and hiking despite inflation being low, but you could. i think the biggest difficulty for investors right now is that you could face the possibility -- i say could -- you could face the possibility of losses on both equities and bond markets. risk mitigation has become much more complicated. was: to that point, citi out with a note that equity risk premium was higher than it used to be and that could withstand any kind of rising yields. can't or do of that you agree -- camp or do you agree that the could be immaterial shakeout? >> i absolutely agree there could be a fracturing, and

unhinge ring of the system -- unhinging of the system as you see the fed withdraw liquidity. the main job of the central banks has been to drive down volatility and also drive down financial stress within the parem as they start to that back you are going to get volatility in the currency markets and on the long end of the yield curve. i don't agree that the long end of the yield curve will drift higher under those circumstances. i think you will start to see a rush to the door. they are going to go into the sovereigns, in particular, the 10-year and the 20-year in the united states. alix: are you portfolio managing yourself for that? >> we just went within an overweight within equities to a neutral based on the soft data

we are seeing on the course of the last three months. with that said, we are not expecting this type of un-hinging within the system as of yet. we think they're going to be very slow. when china to normalize the situation. a couple of months ago, you talked about de-risking a couple of months ago. what are your thoughts on doing that now? >> if you have been benefiting you normally from -- enormously from this rally, it is time to reduce dollars at risk and allocate them to sectors around the world that are better valued and emerging markets are one of these sectors. chad put it really well, there are two types of normalization. to borrow the phrase from ray dalio, there is the beautiful normalization. the banks handoff policies to other entities. you get deregulation, all sorts

of stuff that promotes growth. therefore, you get a beautiful normalization. alternatively, you get a disorderly normalization. that is a political code. that is what makes this period of the market so hard. when you look at the destination, you will have to make a political call and not an economic call. jonathan: let's try to make one. you have written about it in the past. juncture is not a beautiful place. but we are pretty much at the t junction now, aren't we? we are getting closer. >> you see this from everything we have talked about. all of the improbable's that have become a reality. we are getting closer. the system is telling you that it is unstable and it is likely other. one way or the i think that on the politics, unfortunately, it speaks more to the left turn than the right

turn. the combination of gridlock and distraction is delaying the implementation of the social policies you need for the right the turn toward higher, more inclusive glow -- growth and financial stability. alix: how do you protect yourself? it was like seven closes under 10 on the vix. is that the right trade? or will it continue to struggle? ,> from a domestic perspective it will certainly be sector rotation. overall, how do you protect yourself? you start to bring down the risk within one's portfolio and balance yourself up. i would certainly start to move up the quality spectrum on the equity side, but also within the credit side. i would shy away from the em side due in part to the fact that we believe credit growth in

china has affected global growth, especially within the eurozone. going to have massive wash back within the overall financial system. jonathan: before we let you go, i want to ask a question that a bloomberg user sent to me over the bloomberg terminal. have we given up on the argument raise slowerbanks sooner rather than quicker later, the risk being that inflation breaks down? is that a view that still resonates with the federal reserve? >> that is a really complicated question and a very good one. the inflation dynamics are really tricky. i don't think we understand inflation dynamics like we used to. it is a very hard question. fundamentally, the central banks are in a very tough position. what are they going to do? they are going to go really slow. on the qe side, it is going to

be like watching paint dry. they are going to make it so boring people are going to stop talking about it. alix: never. [laughter] >> on the interest rate side, you may get another hike this year. but they are going to be really gradual because they themselves don't fully understand productivity, inflation, or weight determination. alix: it has been great to spend this 40 minutes with you. and chad morganlander, you will be sticking with us. ge is getting hit pretty hard. the cfo is saying that earnings will trend to the low end of their profit forecast for this of the part because ongoing challenges it faces in the oil and gas market. ge is subtracting eight points from the dow industrial average today. the s&p is having its worst day in more than two weeks as the industrials weigh on the index.

we will get you more insight on the call coming up. jonathan: this is how things are shaping up. ge is shaving some off the dow. in the united states on the s&p 0.2 5%.are about the story in the bond market, yields are lower by about 2 basis points. the headline in the fx market, over the last 24 hours, significant euro strength and dollar weakness kicking in. we still hold in on the cable rate. our viewersk to worldwide, this is bloomberg tv. ♪

emma: this is bloomberg "daybreak." the goldman sachs asset management of global portfolio management coming up. don't miss it. ge getting hit after reporting earnings. the third-biggest point drag on the dow. its lowest level since october 2015. an ugly day for ge. our bloomberg intelligence senior analyst covering industrial is joining us. what happened? >> they set expectations at the lower end, they talked about power, oil, and gas being worse than they expected, so they will have to make it up and cost and other action. i don't want to say they warned on the dividend. they said three or four times, the dividend is ok, but that

almost creates concern. alix: like the more you talk about it, the worse it gets? >> yes. they said they will probably back off on the buyback. they also pushed out to november when they are going to talk about plans. now it is like late fall. he is basically saying it is a big company, it is taking longer. alix: that provides anxiety lt,ause you have jeff ime people were worried that things would change for ge with his early retirement, and not for the better. it does not seem like there was anything to allay those fears. >> know, but i do think it is impatience. a freshfaced, but do it fast. people don't really want to give them the time they are going to need to decide what they are going to do and to do it. this push-pull could continue. jonathan: a couple of quarters ago, we would have had a discussion about d.c., president

donald trump, infrastructure policy, what it could mean for the u.s. policy. >> not one question on the call this time around. everybody pushed that out. they have not been able to get much done. they are going to try to do tax policy, but they cannot pay for it. jonathan: fascinating. alix: what kind of goals do we need to hear from flannery to see the market reassured? >> i think people want to see himself something. alix: but they spend so much money trying to build it. they offloaded ge capital. then they tried to become an industrial company, oil and gas. with a realistically offload something at this point? >> i don't think so. i think he would have to execute faster, take bigger cuts in corporate, he hinted at that. almost doing a lot of the same, but faster. jonathan: there is a difference between the analysts out there, saying sell something, sell

something, this is what would happen if you broke up the company. what is the investor base saying? are they talking about the same thing the analyst are? >> i think people do want some simplification and they are looking at oil and gas and health care because they are little bit less related. management has said no to that a number of times. it does not mean something can't happen given additional pressure. to sell oil and gas now? that would not make any sense. the guy who was running it now came from health care and he is in the process of fixing that. i don't think a big change is going to happen fast. alix: yes. the same kind of pressure on some businesses. really appreciate it. moving to another sector of the earnings world, microsoft. the stock slightly down despite the fact that it had killer earnings yesterday. the whole sector sitting at record highs. microsoft earnings, the stock

getting dragged down. joining us is chad morganlander. we also have a stanford bernstein analyst with us with outperform rating on the stock. it was a really good quarter anyway you place it. >> it was a lovely quarter. even if you exclude the one-time tax effect, they beat the street by four cents. they beat across the board on every metric. they delivered almost $15 billion in commercial revenue. delivered $18.9 billion in commercial cloud arr. everything is hitting on all cylinders. alix: in terms of cloud business, they may have to fend off amazon web services, google, how are they doing in terms of that? >> i would argue they don't have to, they have a differentiated set. they compete on the commodity side of the business against

amazon and arguably against google, but there are a lot of differences. microsoft is in 40 locations in the world. amazon is in half that. google is in 11. outside the u.s., the use of these systems is left -- less. every enterprise is built on microsoft technology, so the reality is that they are going to continue to grow, and were amazon has been slowing recently, microsoft has not. it is a smaller revenue base, but it has been growing year-over-year. i would argue that there is not going to be a war between microsoft and amazon. google is still to be seen. these are the company strategy points. i just wonder about the blanket bids that have gone into technology through this year. as an analyst, how do you formulate a price target and take consideration and the

amount of enthusiasm around it? >> we have seen a big change over the last couple years. specifically as a relates to microsoft, a company most people did not like, to a company that is highly owned across the street. to blend that within it. this is a value company that has growth within it. you have a commercial cloud business growing 50% year-over-year. it is going to be north of 20. you have a dividend, a share repurchase. you have both values within it. you've got to look at all of those within the mix, but it is a large cap value stock and that does have some impact on it. whereoft really is gap the rest of the street is pro forma. i would argue that microsoft is one of the cheapest names in my coverage when it comes to free cash flow.

alix: thanks so much, guys. chad and mark. ahead to the bloomberg terminal, check out tv go. interact with us directly. go to tv go directly on your terminal. this is bloomberg. ♪

jonathan: a big week ahead. on wednesday, we get the fomc rate decision and the donald trump jr. and paul manafort testimony to the senate committee. we look ahead now. let's begin with kevin. what do we need to look for? what is important and what is just noise that contributes to the theater we have seen? kevin: let's talk about the theater first. the politics of this shape next week when jared kushner will meet behind closed doors with

the senate intelligence committee. we have beene that told on the terminal right now that the lead attorney now for the president's administration efforts on this announced himself and expressed confidence in special counsel robert mueller. robert --ort and donald trump jr. could testify on thursday. whether or not they plead the fifth or take questions and engage with lawmakers, all of that is unknown. in terms of policy, your developments in terms of taxes, the reconciliation process, setting the stage for tax reform by the end of the year, as well ok atpotential re-lo dodd-frank. jonathan: on wednesday, when we get the testimonies, is that just for the enjoyment of people or is that just going to have a fundamental impact on this

investigation? will it generate any real, hard news? every time there is one of these testimonies, yes the viewers go through the roof, but they have not moved anything, have they? kevin: we have seen the dollar's often a little bit -- dollar soften a little bit. i think wall street is having a much different view than cable news. in terms of the theater of all this, this could present, it could drive headlines should paul manafort and donald trump jr. accept the invitation to testify. big if. aders will turn off the sound, watch the hearings, then keep an eye on what the federal reserve is going to do? >> the fed is going to be far less interesting. no statement, no press conference. we are not expecting many changes. jonathan: great to have you with us, matt.

he will be joining us on wednesday when we get the fed decision. kevin cirilli has to run back to d.c. great to have you with us. what is he doing? looking at president trump's twitter feed? [laughter] jonathan: give me a break. let's get him out of here and wrap things up. stocks going into the session on the nasdaq on an all-time high. a drop back on the s&p 500, ending the weekend little bit lower. a third grind toward straight week of gains. the dow off by about 0.4%. in the bond market, the bit hangs in. yields are lower. the dollar is weaker. euro strength is the story for the week. this is bloomberg. ♪

vonnie:'s 10 a.m. in new york 3 p.m. in london and 10 p.m. in hong kong. ra: welcome to bloomberg

markets. vonnie: here are the top stories mario draghi fails to talk the euro down and we will look at what's next for stocks and currencies next. striking the right balance is about to get harder. rising on president donald trump as the robert mueller probe expands. with his legal team followed. what a dear fire has central prosecutor? the burning question of the day. julie hyman is here with more burning questions. why the selloff? julie: