>> north korea abruptly cancels talks with the south, throwing next month summit into drought. u.s. treasury yields hit their could it rate and expectations cause a deeper route? and, we see a report that suggests partisan parties may have trouble. ♪ good morning everyone, and

welcome to bloomberg surveillance. markets, you can see european stocks edging higher and higher, after what was a hectic session in asia. many of the asian stocks were actually down. we are just after getting some iea forecasts, cutting their 2018 oil demand growth forecast due to rising prices. we are looking at italian bonds under pressure. let's get that board up. speculation.t of there is a lot of talk about a possible debt write-off, one of the things they are thinking of, and also suggesting that the two premieres are kind of thinking of a rotation of the premiership. you can see, they are at 1.99% for the yield.

coming up, we talk dollars, we talk risk. a little later, we get a look at the 10 year as the yield hits. the big interview to watch for is james bullard. that exclusive interview is at 6 p.m. u.k. time. in italy, the leader of the anti-migrant lead has had a top antiestablishment five-star movement and they have entered their final stretch. but they also say the parties are still trying to find the right balance between their platform. reportingpers are that the two leaders could take turns serving as premier. japan's economy shrank for the first time in two years. the contraption was more than expected on a surprise call in business spending and flat private consumption.

china's holding of u.s. treasuries have risen to a five-month high. u.s. bonds held by beijing increased by 11 billion dollars to $1.9 trillion. however, japan, the second-largest foreign creditors holdings dropped to their lowest levels since october 2011. tesla's energy unit has lost two leaders, adding two departures orders ausk reorganization of the energy team. this is according -- this is as top executives have left the country -- the company. they have declined to comment further.

and apple's ceo says he spoke out against tariffs on chinese imports in a recent meeting. bloombergold television that his message focused on how cooperation can boost the economy more than nations acting alone. >> i talked about trade and the and how i of trade, felt that two countries trading together make the pie larger. truehat it is undoubtedly that not everybody has been advantage by that in either country, and we have got to work on that. terrorists were not the right approach -- terrorists -- tarriffs werer not the right approach.

day inal news 24 hours a more than 120 countries. thanks so much, let's get right to our top story. between heralded summit president trump and kim jong-un has been thrown into doubt after north korea has abruptly spent in talks with south korea. walkegimes that they would away from talks if the u.s. makes one-sided demand. first of all, what happened? it started early in the morning when the state media for north korea issued a statement that they were canceling a meeting between north and south korea, basically a ministerial level meeting, following this historic summit. canceled, basically because of the joint military

drills between south korea and the united states, which they described as a precursor to a preemptive strike. then, it was followed up by another statement from their foreign minister, saying that the upcoming summit between trump and kim jong-un could be scuttled because of their feeling that the u.s. is seeking unilateral you -- nuclear abandonment. meeting that they would have north korea completely get rid of their weapons. this has been something that has been on the negotiating table, something that has been disputed over, that the u.s. has called for what they call complete, verifiable, irreversible denuclearization. comeas north korea has back and has agreed to complete denuclearization, but as to what that means is still up to debate.

like korea has clearly not the way the united states has characterized the summit, and it almost seems as though today north korea is in their second round in a boxing match, coming back and say they will not be put into the corner. francine: thanks so much. now joining us for more on the situation is political analyst at robert kelly and joins us now from skype. problem --y was the i mean, this is a threat. was it a warning, a threat? what are they expected? >> i think your correspondent was correct. i think it is because of how president trump has framed the summit. i think the north koreans are really concerned that this thing looks like north korean

capitulation, that they are .oming forward on their knees and that is just not how the north koreans see it. they see this as a meeting of peers, head of state to head of state. that their nuclear weapons have helped to push the americans the table, rather than american sanctions driving north koreans the table. that's what's going on, trying to reframe this. francine: it seems that the north korea also rejected a model in which they give away their nuclear weapons. is there another way of framing this? my guess is that the actual final deal will be some sort of half step for halfstep, where you will see small things building confidence up towards something more substantial. anybody believes the north koreans will go completely toward zero. developing40 years the weapons, it would be amazing for them to give them away and the concessions would be.

a smaller deal, like a missile count or a stockpile inventory. that is the kind of things we are probably looking for. i would be amazed if they gave away a lot of missiles or something. professor, there is -- if there is no summit, how big of a setback with their be? a postponement would not be. i would actually argue for a postponement, because the americans have only had a few weeks to prepare, and it is clear that donald trump not going to read or prepare. it is kind of risky because of donald trump's lack of preparation. overboard, this would be pretty bad, because it would allow the hawks to dominate the conversation. then i think we will slide back towards the language we had last

year, fire and theory and all that. what role does china have in all of this? remember that important friday where we saw leaders of the united states and north korea signing the agreement, that there was a lot of speculation that this would not end well and that it would be easy for them to turn around and say the u.s. was asking too much. >> i think the chinese are sort of a silent partner. obviously, they have a lot of interest, but i think they are rather pleased with the way this is going. we know the chinese don't like --when americans try to port push north korea on to them. i think they would like to see the americans give up something in exchange for some kind of north korean denuclearization. chinese don't like north korea would nuclear weapons any more than anybody else, so i think they are happy to go along.

writes, but if the u.s. gives away any of their bases in asia, is that what north korea wants? in the long-term, i think they would like to see a reduction of forces, but there is a sneaking suspicion that they are concerned about too much chinese influence and see the united states as a counterbalance. i don't know if the americans would give that, that would be a massive concession and we should ask for an awful lot. you should ask for a lot of concessions. francine: professor, final question. if the summit does not happen, who has the most to lose? >> that's a good question. probably the north koreans.

there is so much light on this, there is such a big deal. if the north koreans pull out at the last minute, like i said, i think hawks and conservatives are going to dominate conversation. they will come forward and say they told you we could not trust the north korean. think kim jong-un has raise this to such a big level, that it could be a disaster for the north. francine: all right, professor. at the meantime, we also have some corporate news, burberry out with new figures. clear that the ceo is trying to enlist investor support, and what he is doing is giving them a hundred 50 million pounds in share buybacks. withhad a lot of concerns the creative director said he would step down. now we have a new person at the top, and he is set to show his first collection in september.

burberry is also closing hundreds of retail stores, opening new ones in better sites. 2.4%, and what i have up is the longer-term share price. stay with us, a lot is coming up. pimco sees a cap at three and a half percent, but can inflation anxiety push it? turkish currency has lowered for a fourth day, striking another record. we look at the latest trends next. this is bloomberg. ♪

♪ finance, economics, politics, this is bloomberg surveillance. back to 2011 for u.s. bond markets. 3%. morning, it holds about the sudden move has the attention of investors who look to the fed for guidance. we see the 10 year topping out at 3.5%. we think over the balance of 2018, yields are going to be somewhere between three and maybe three and a half percent. we don't think that 4% target is

realistic, and we think that for a range of reasons. already all, it was quite well advanced, six hikes already. well, where is the 10 year end u.s. dollar had -- headed. thank you both for joining us. jeremy, what happens to the 10 year yield? look atnk you need to the data and if you can't justify further increases on the basis of data. if you look at yesterday, and asked whether it justified an explosion of yields. it implied activity was a little further than we assumed, but does not necessarily mean we turn the dial. don't know if we should be thinking that the fed is behind the curve, in inflation or

policy direction. it begs the question as to what will be the catalyst. francine: first of all, let's look at that move, and thank you for all of you viewers and listeners sending us your question. i have a great question, which is i want to know what the 10 year will do. will it rise further? let me bring you over to my chart. please keep those questions and you can see the 10 rate is 1% higher than global yields. peter, what do you think? can justifyure you yields at current levels given where we have been. obviously, they have helped the short end of the curve down for a long time they are beginning to take away that support. also, the fed has widened out there balance sheet. but it is a grind, a slow process. three fourths me

of a percent by the end of the year, i would not disagree. and what happens after that? >> after that, i think you will more or less talk about. because it will depend on what the fed does, and what the economy does. that we arerget already experiencing the second longest upswing in the recorded history of the united dates. can the economy maintain its momentum? that will be the decisive factor for bond investors. >> absolutely. in the context of the growth cycle, we have seen growth theght forward in terms of fiscal changes, the question is if the consumer can maintain that degree of expenditure into 2019, or if we will see national deceleration.

i agree entirely in terms of the length of the economic cycle, that we are likely to see moderation in 2019. and if we see the fed put it another to hikes this year, three next year, that is the scenario that will get us about neutral and will likely encourage markets unless we see inflationary pressures built. francine: where would inflation pick up? do you assume it just naturally picks up, or happy dynamics changed? >> the dynamics have clearly changed, no doubt about that. the old phillips curve relationship is still holding. clearly, the structure of the economy has changed. but nonetheless, given the pressures on the labor market, the pressures on the global

cycle seems to be more synchronized than it has been for the last 10 years, i do think there is a little more upside pressure on inflation, 2% overs set to hover the course of the next 18 months. peaked?: has growth i think in terms of the synchronization, that is one element that has changed in the post crisis world. if we are considering the rolling back of monetary policy stimulus, whether it be injections of liquidity from central banks, i think there will be a degree of moderation in the economic cycles. in a situation where 2017 was the high water mark, and over the next few years we will see global growth decelerate. course, the chinese component

is going to moderate as the economy reoriented. so i think that will take some steam out of the global economy and alleviate some of the but i agreeessures, that there are key structural changes which have changed the inflation dynamics. francine: i want to get onto the but i do need to bring everybody up-to-date with what is happening between the 10-year, yuki's -- and you please-- up's. i know this is not political news, but what is the asset class in the next 6-8 months. is it owns, periphery bonds, is equities? >> well, we have had such a good run. we just discussed the potential for slow down, and we know equity prices are elevated.

the trouble is, of course, you have got to get a softening of the equity market at the same time as they begin to swing back into bonds, so you have that interesting dynamic. given that we just discussed interest rates are being held at a low level. investors face a difficult time at a time when the outlook for the asset classes have done so well. let's move onto the turkish lira, plunging to a new record after president erdogan said he will tighten his grip on the country's economy. has moved investor concerns about his distaste for higher interest rates, but will lira pains be contagious for emerging markets? well, i think in the context

of inflation there are two issues. theis talking about prospect of higher interest rates and higher bond yields in the u.s., and that obviously has an impact as we will be seeing increasing dollar borrowing in the post crisis world. particular, i think investors will continue to look at e.m. in a discreet way, saying let's look at those that have particular structural issues in relation to political dynamics. in that context, a lira falls very squarely. if investors are mindful of increasing their degree of political interference, then his comments will not be helpful. francine: so this is depreciation of the lira. what happens for you to have more confidence? >> the politicians stepping away from the currency, and really causing market instability. we are almost in a parabolic.

of lira weakness, and that is only amplified by the presumption of politicians or the president taking greater control. do you like emerging markets? from an equity perspective, yeah. i have always been bullish because of the ground dynamics, but as he pointed out, there are significant divergences across various parts of that em space. politics is key amongst them. i think we have seen a sea change in the way many governments have begun to where the economy operates and the way in which a central banks, in particular, are operating. feet,nvestors have cold although we are not seeing response at the moment. but just as money has flowed in quite quickly, it could reverse very rapidly if investors decide

that there are better alternatives. francine: thank you both for staying. stay with us, and we will bring you an exclusive interview later on the st. louis president. up next, the home stretch. government forming talks in italy, can they avoid another election? and then we are looking at oil prices. cutting intoreport 2018 oil demand forecasts as $70 crude begins to take its toll. this is bloomberg. ♪

francine: economics, finance, and politics, this is bloomberg surveillance. north korea threatens to walk

away from their meeting with president donald trump if the u.s. makes one-sided demand's for the regime to surrender their weapons. earlier, pyongyang abruptly canceled talks with south korea, and warned americans to think twice. move undercuts the optimism after kim agreed to discuss his program in a first of its kind meeting. is a freepolitician man after three years in jail in the wake of his coalition's election win. he left a hospital where he had been receiving treatment, and was pardoned shortly afterwards by the king. still, it is unlikely he will take over as the prime minister will first need to contest a parliamentary seat. tesla's energy unit has lost two leaders, as elon musk reorganizes the top management team.

according to people familiar with the matter, the product developer and the north american commercial utility sales leader have both left the company. tesla did not immediately and they have declined to comment further. the royal bank of and saudi arabia have reached an initial agreement on the terms of a merger. really -- reached a preliminary nonbinding agreement. and apple's ceo says he spoke out against tariffs on chinese imports in a recent white house meeting. tim cook told bloomberg television his message to the president focused on how cooperation can boost the economy more than nations acting alone. the talked about trade and

importance of trade and how i felt that two countries trading to gather make the pie larger. and that it is true, undoubtedly has beent not everyone advantaged from that in either country, and we have to work on that. tariffs were not the right approach their. fullu can watch the version of that interview with apple ceo tim cook in new season --the david and slideshow david rubenstein show coming only on bloomberg television. this is bloomberg. francine: thank you so much. italian 10 year yields are moving higher.

the league leader says the two populist parties are close to reaching a deal, but haven't yet found a balance between their policy platforms. ours get more with correspondent. there is also a new report saying that the league and the rethink oflso urge a the eu government. it seems like a lot of things are all over the place. what do we know is in this common platform so far? well, as you say, it is all over the place. the thing worrying the markets is that some of these factors of the past are coming back. there is a concern that they may be going back to renegotiating treaties. they have said it all along, but it is worrying it is coming out again. we are not exactly sure what is

in the program. they have said that it is going to be what they promised voters, so pension reform, citizens income of some type, help for some poor, flat tax. it's all in there, but what is beginning to look strange is things coming back from the past that may split -- spook the market. francine: could it fall apart? i don't what to put you on the spot, but is it 50-50? if this populist government gets formed, a 7030 chance? >> i am beginning to think it might fall apart. one liter has been very strange, he has come out twice saying that if things don't work out, we are ready to go back. , we will ben't go able to tell our people that we tried our best. they wererange when

making different kinds of noises. like they wered preparing voters for perhaps backing away, so we may see a government of the president or who knows, elections after all. theit's really all up in air and we are covering it minute by minute. francine: thank you so much. newhat does this potential government in italy mean for the markets? we are back with jeremy and peter. we are seeing a bit of market movement which i will get in a second if we look at the 10 year spread. what would it take for the euro to move on the back of it, something ugly, or are italian markets just volatile? all beenk we have around long enough to remember that italian politics are febrile at the best of times.

when you think about italian politics, where bullis tony was a long leader, that puts it into context. low fear factor for the dynamics of italy, and in the context of these negotiations, we will see an awful lot of headline risk. how much of that will translate into actual policy is a debatable point, so that is why we are seeing a move writer -- wider in spreads, not a real blowout scenario. i think that is the reality. until we see something really definitive, maybe putting the euro back on the table, i think .arkets will be relaxed francine: we are not seeing a blowout because mario draghi has said he will do whatever it takes. that is true.

when we consider the rollback of policy, that may cause some degree of stress in terms of peripheral markets, because that support will be withdrawn. there is argue that need for a push wider in terms of spread anyway, because the market is underplayed those risks. what i will see an extreme blowout to the crisis era in the context of some of the comments. francine: peter, should there be some more angst out there? the debt write-off has not been confirmed, but it is kind of within the narrative, right? obviously, italy has a lot of issues. used tohave become political unrest, brexit and trump to name but two examples.

the markets increasingly discount politics until something really concrete comes up, but when you talk about things like banks, that is something that worries investors. obviously, we just sitting on a k and we are not sure if it is about to go off. investors remain cautious on some of the bigger economic and i think that could be something that starts to have an impact on the italian spread. getting some news from the national broadcaster saying that the five-star spokesperson says the government deal with the league will be today. at this point, is it better to have a deal, a government that may not hold for that long then to go to fresh elections? >> i think a deal is better than no deal, because it takes away

some of the immediate pressure. one less thing for us to worry about, basically. obviously, the italians themselves would not be keen to go back to the polls, it is an expensive time. so yeah, a deal is better for everyone. francine: do you agree? >> generally, yes. in the markets will ask how long it will last, and how tight the relationship can be and how much agreement there will be on and whether the two parties will be pulling in opposite directions. in the context of business investments, that is something that has significantly impacted politics, so it would be helpful. francine: jeremy, it seems like everything is at hand with communications clear, that they are not going to raise interest rates. what is the next stress point, haggling over president? is one of thehat

elements as mario draghi's 10 year comes to an end, there will be further jockeying for position. that has been a source of contention going all the way the to the ecb in terms of location of their headquarters and the president. will be ak there fascinating dynamic in terms of the ecb trying to underline their process of policy reversal. that reference to keeping rates beyond the bond buying strategy, that will be the issue contested by the market if we do see inflationary expectations remaining near percent -- 2%. francine: is there anything that can form a schism in asset classes? that is athe things concern is the extent the economy has slowed. to whether orthat flu impacts in germany, whatever it is.

we are looking for that to normalize and then we could talk about the fundamentals, and then the ecb has to talk about the money in september, do they continue to purchase more assets until the end of the year, or do they just quit the process in a temper -- in september. the next few months will be crucial in determining how they operate. francine: thank you both. up next, japan's a speed bump. world's third biggest economy shrinks for the first time in two years, but is it just a blip, or a sign of problems ahead? this is bloomberg. ♪

♪ japan, theet's talk world's third-largest economy shrank for the first time in two years. this was due to a surprise fall in business spending and flat private consumption, but economists expected growth in the second quarter. was this just a blip, and what is the outlook? peter, what is your take on japan? this economics, but also the scandal that involves the prime minister. >> probably, yes. but i think he has had his day anyway. admittedly, the economy does appear to have performed pretty well until fairly recently, and like many parts of the world, had a weak first-quarter. the simple fact is that the economy suffers from major problems like demographics, and

it is being hollowed out by the emergence of china as the huge block offshore which is beginning to erode their manufacturing capacity. as a consequence, the economy is struggling to generate this momentum. living standards are high, but it is not generating the momentum he had used to in most industrialized economies. i cannot see the inflation target being reached any time in the foreseeable future, as i have been saying for the past three years. no change in that sense, grinding slowly forward. nothing really seems to be happening. francine: i know we are all on italy watch, so here is the latest headline, and officials say the contract is 90% done. we understand the leaders of the two parties are set to meet to make the final deal. should have 100% agreement on the contract by the end of the day. that's a japan, it slow down a

bit. is it a speed bump, or something more sinister? >> i'm not convinced it's more sinister. if you look at the underlying dynamics, it looks constructive. we have seen the bank of japan increasing their media run growth start. while this targets will be more challenging, because of this force quarter -- first quarter, we will see wage upticks and a strong labor market and we will see the economy performing relatively well. is it enough to turn the dial in terms of the boj, well i expect the market will look for an adjustment in their field targets, and that will be hugely important because we have seen turkish spreads pulling out. that has been consistent with the under performance of the yet -- yen. we start to see an impact on the curve control targets, and i

think that will encourage a stronger yen. francine: you start treatment outside the box. >> he is, to be honest. they have been massively expanding their balance sheet and have a big upside. it hasn't quite reached swiss levels, so they could continue by. -- buying. i think part of a problem is we are looking at japan through the wrong lens. if we look at growth per cap a, the performance has been ok. part of the problem is we tend andook at average growth say it is not doing particularly well, but it is doing ok. it's coping with these massive demographic challenges, and that is the big thing that will keep policymakers on their toes for decades. francine: thanks so much. both stay with us.

on bloomberg surveillance, $.10 roller coaster ride. giant stock fluctuates ahead of earnings and we will talk about that and tesla next. this is bloomberg.

♪ francine: economics, finance, and politics, this is bloomberg surveillance. tesla has lost two leaders in their energy unit, increasing the recent high-profile departures. the stoxx sailed for the fourth day in the face of bad news, another company on the move is $.10 -- tencents. joining us is our asia bloomberg technology reporter, and our guests are still with us. what can we expect from them? >> well, there are really two major things at play. one is that things are people concerned about the compression which has been happening. the company is expanding into

all of these new sectors like cloud computing and online entertainment. the other thing is that their pc gaming slow down has really dragged down revenue growth, and mobile revenue growth from gaming is not there to offset these slowdowns and potentially even the decline. so people will be looking at these figures very closely when their earnings hit today. francine: what has been driving the share selloff? well, as a company individual factor, but also cap wide, there has been a selloff including for alibaba and if you look at the company is that came to the market in the past 12 months, more than two thirds are down by an average 20%. , ther the spectacular rise profits we saw last year and -- and stockop

trading, that is unlikely to repeat and investors are sensing that there is a change in the expectnt and market and -- and investing so much and compressing their margins is something investors will take into account. francine: let's also bring alex wed in here. i was reading a peace on this billionaire investor your -- investor. it is hard to use things like facebook and google in china. if you are going to really capitalize on the growth and increasing penetration into the middle classes with internet, you have to be going into these chinese stocks. francine: talk to me about tesla. today's story is that they are losing some of their energy leaders. >> it is really curious.

elon says he is going to make the management more flexible, but it looks like there's nobody in management anymore. when he comes out and says i'm sleeping on the factory floor, as though that is a good thing. interfering ineo your factory? it looks like you don't need him interfering. francine: i'm not exactly sure where you would categorize tesla, but in general, do you like some of these stocks. you know, it is really getting back to where we were in mid-march. run, obviously, some of the numbers have been up and down, but tesla in particular has not warmed up particularly. because the company has a bad

habit of overpromising. they are struggling with the manufacturing side of things to meet their numbers. if i'm getting out of any stock at all, tesla would be one. came on theu program to talk to us before, how big a deal will be ipo be xaomei. >> people were expecting this to be a billion-dollar ipo, but now the numbers we are getting are closer to the 60-70,000,000,000 dollars range. that is still a significant amount of growth. you still have to take into consideration that there are 23 chinese tech companies waiting to ipo as soon as this giants, alling tech looking for a premium on their valuation. all right, team

coverage. and thanks to our guests. bloomberg surveillance continues over the next hour and we will be talking to geoffrey yu. quite athink they have big position when it comes to italian bonds. this is bloomberg. ♪

mom, dad, can we talk? sure. what's up, son? i can't be your it guy anymore. what? you guys have xfinity. you can do this. what's a good wifi password, mom? you still have to visit us. i will. no. make that the password: "you_stillóhave_toóvisit_us." that's a good one.

seems a bit long, but okay... set a memorable wifi password with xfinity my account. one more way comcast is working to fit into your life, not the other way around. north korea abruptly

cancels talks over la salle and tells the u.s. to think twice -- test --month cancels talks with the south until the u.s. to think twice about next month's meeting good countdown.al populists are close to negotiating a final deal. good morning. this is "bloomberg surveillance." i saw a lot of market movement when it comes to italian btps. we still understand the two parties have to figure out exactly how to work together. theyve a statement saying are 90% of the way there. tom: what is going to be the strategy? are they going to be more

conservative or liberal? francine: they kind of walked down on debt relief, but they want to give more to the poorest. two parties that are very giverent, but both want to 150 euros to those in need. we are sticking with that story in italy. the league's negotiations with the five-star leagues are in the final stages. the two parties may demands that the ecb right off almost $3 million in debt. north korea threatening to walk away from next month's summit with president trump. kim jong-un's regime criticizing the u.s. for a one-sided demand to give up north korea's nuclear weapon. earlier, north korea canceled

talks with south korea. japan's economy has hit a speed bump. the country's gdp contracted for the first time in two years. fell andnvestment private consumption was slashed. the forecast calls for growth to resume. japanese exports are expected to regain traction. more executive departures at tesla, where elon musk has promised and reorganization. that is according to people familiar with the matter. global news 24 hours a day on air and on tictoc on twitter, powered by more than 2700 journalists and analysts in over 120 countries. i am taylor riggs. this is bloomberg. equities, bonds,

currencies, not as chaotic as yesterday. we need to triangulate where are we after what we have seen in the last few days. the curve is flattening. a pause off of the two day move. oil is still elevated. the vix backing off of lower equity prices. was 3.09. 3.06 right now. .76. crude 77 gold is not so much a trend that a drop. now.e at 1293 right francine: european stocks edging higher.

downward.ed treasury yields are steady after the spike yesterday. the dollar is also flat. oil declined. we did have news in the oil market. $70 crude is putting a break on consumption. i'm following everything to do with italian yields. tom: i'm going to go with serious charts. this is a brutal chart. i love the word portal and all that means for mathematics in the physics of the business. move one, the dollar chart. it is a bundled chart. really good math. your we are with two standard deviations.

we blow in april 2 some real volatility riding around. i'm sure we will get to this with geoffrey yu. this idea that this gap gives us a lot of room to move to a stronger dollar as the market chooses. bloomberg.his is my i was thinking of doing italian yields but i know we will spend a fair amount of time looking at that. burberry. executive is now trying to enlist investor support because what he said was there is a turnaround plan, but he is offering a 150 million pound share back. this has to do with the creative and an artistning expected to show his first

collection in november. that will be a make or break time to see if the shares recover. u.s. 10-year has spiked, catching a 2011 hi. >> we think over the balance of 2018, yields are going to be somewhere between 3% and 3.5%. we do not think the 4% target is realistic. we do think hikes were already well advanced. pimco cohead and robert me there. riley, andare david

geoffrey yu. treasuries? what happens now? there is potential for them to move higher from where we are. i think we have now gone through what we were anticipating which was to go through the 3% to the 3.2% maybe. one of the things that was interesting from the speech by john williams who is the incoming head of the new york fed was in terms of the terminal rate. he was saying that the mutual rate for the fed funds is going to be around 2.5%. if that is the case, that it is longero be very hard for end treasuries to push 3.5%, ifntly through be're end point is going to

3.5%. hard to disagree with that and i find the markets reaction quite interesting. if we go back to late january and early february if we talk , it ishe 10-year 3.1% hard to think about what the s&p would've done, but today it is calm and collected. there is not much more to price in. geoffrey yu, wonderful to have you on with us. i want you to frame the correlations in the market versus other times we've begun to unwind. we have studied stan fischer's book after imf 1998. we study before how these heavy correlations begin. are we doing it again? geoffrey: we are. that is fundamental for asset allocation.

clients at the beginning of the year are saying what we do when we have bonds and equities and we are selling off at the same time higher yields and lower equities. where are you seeing that diversity play? especially when u.s. data is doing well. i think you are seeing a more normal reaction but we cannot discount correlation. we're going to talk about em as well but this is absolutely critical. , what arealk into ubs you looking at as the litmus paper, the dynamic between those correlations? is it something big like dollar-yen or is it something more nuanced? geoffrey: it is more nuanced. let's go to 10 year versus the s&p and what that relationship is doing. looking atase is

correlations and is good news mean good news or is it bad news? if we go back to a good news is good news environment, we can stay long risk. david riley and geoffrey yu, both stay with us. the u.s. and north korea summit could be in doubt after north korea criticized the u.s. is one-sided demands. what exactly happened? is there a perception problem that the north korean leader feels like he is being bossed around? >> i think that is the case. i would characterize it as the second round in a boxing match. north korea is coming back after being punched for the last few weeks by the u.s., particularly by trump, taking credit for themum pressure, giving impression that north korea is

basically acquiescing and coming to the table because of the push by the u.s. all indications today are that they are saying we have a skin in this game, it is high-stakes and we have leverage. francine: what to the chinese want? want theseese nations closer and can they convince the trump administration to dial down the rhetoric? peter: i think so. i think immediately after this the chinese foreign minister put out a statement saying we do not want further escalation of tensions. no more provocations. i think china is playing the middle person. they clearly do not want the tensions to escalate again. they do not want north korea to be a nuclear power just like the u.s. on the other hand, they do need

-- north korea is considered a geopolitical buffer for them so they do not want north korea to collapse. on the other hand they do not want north korea to have a nuclear weapon. tom: the united states military said all the right things off of these defensive maneuvers which were routine, predictable, and have always been done for years. how is that received by the south korean government and by the north koreans? the usual statements from the pentagon? peter: remember this is a joint military drill, meaning the u.s. and south korea are involved. they have been annual. sometimes they have escalated them, sometimes they have de-escalate at them, meeting the number of troops and weaponry used has gone up and down depending on the tensions on the korean peninsula. north korea has maintained that these drills are just a precursor to a preemptive strike

-- it is a dress rehearsal to attack north korea. for north korea it is a major threat. for south korea and the u.s., it is just par for the course in the sense that they need to be prepared because of the threat from north korea. remember, north korea has tens of thousands of artillery units along the border. they have a paramilitary of about 6 million troops all under the guise that they want to unify north korea. whether that means normalize relations or military action. francine: peter, thank you so much. now is time for the bloomberg business flash. here is taylor riggs. taylor: the called a breakup united technologies are getting longer. has proposed a three-way split of the maker of jet engines, elevators, and air conditions.

the plan echoed remarks by another high-profile investor. burberry is seeking investor report for the ceo turnaround plan. the coat maker bounced a buyback shares. burberry reported sales that trailed rivals in the luxury sector. the new creative director unveils his first collection in september. it will be the first bank merger in saudi arabia in two decades. there is a preliminary agreement for -- is a $5 million all stock deal. saudi arabia has embarked on a diversification and privatization plan but it still blocks foreign control of local banks. that is your bloomberg business flash. last half anthe hour we have learned that the deal between the league and the five-star movement to form an

italian government is 90% done. the two party leaders are due to meet again today and could announce a final agreement. italian 10 year yields are moving higher as headlines continue to cross. let's get the latest with bloomberg's rome bureau chief. we have had a number of reports as to what is in this final report agreement. i am hearing debt relief. what do we know for real that is in this plan? we do not even know for real if this 90% is 90% true. we do not know. the thing that is scaring the markets is they want to hundred 50 billion euro right off, that which isllion dollars, not even technically possible and they want to renegotiate european treaties.

this is making markets edgy. they are thinking these guys are going back to campaign mode. they are becoming scary again. and then there is all the other stuff. we do not know where they are getting the money. flat tax or some form of heavy tax cuts. all of these things together are unsettling for the markets. time, event the same if they do the campaign promises , they stop to stick to their campaign promises. this is why the five-star and the league did so well in the elections. >> i agree. so many commentators are telling us, let them try. give at least part of their promises. even if they fix part of their promises, the markets will not like it, the eu will not like it. the real issue is how will they pay for it?

will they allow debt to spiral out of control? is that even feasible? we will have to see. tom: how different is this? i want to know. in the history of there being 3000 governments since world war ii, i want to know what is going to be different does go days, two months, seven months from now? will we see a change government by christmas? >> i'm not even convinced they will make it. i still think there is a chance they might not make it and we might not have a populist government. if we do get a populist government, italy has had 70 governments. part of the reason -- italy has had so many governments. after world war ii they made a system that made it difficult to pass things. they did not want governments that were to powerful.

that creates the problems we know italy has always had, that on the other hand it protects you from governments that want to do things that the markets do not like. we will have changes if the populists take power. we will have different tax laws. we will have some recharging on the pension reform, but i do not think they can completely change the system. it is a slow-moving system. francine: thanks so much. our rome bureau chief. david riley ofto bluebay asset management and geoffrey yu. let me bring you to the spread between the 10-year and german unds. does bluebay own any italian bonds, are you selling them at the moment? david: we currently do not hold any btp's. we do have exposure to some of

the periphery, especially greece. if the btp spreads were to meaningfully move wider from have they are today -- we seen reasonable moves, 10 basis points to be hitting the 160 mark. i think that be an interesting entry point. francine: is there a risk that the rating agencies put in and what does that mean for btp's? is a potential risk that comes from the rating agency taking them to a sub investment grade. i do not think the rating agencies are going to be doing that anytime soon. like the market, they want to see whether government is formed and what is the implementation. document,at leaked some of the rhetoric that had been coming out of both five-star and the league, even

on the fiscal side, was a bit more nuanced and conditional. introducing a universal basic income subject to labor market changes and so forth. we've just come out of an election trying to form a government, and trying to get these agreements through their own base as well. i think one has to be careful about taking it too literally. come back with geoffrey yu and dive into emerging markets. he knows his correlations. , someone not so sure about three or four rate increases. this is bloomberg. ♪

tom: i am tom keene in new york. let me tell you what we are going to do over the next number of hours. dominic will join us from deutsche bank with michael spence. a wonderful time to speak with professor spence on china and also on italy. he spends a good amount of his year in italy. right now david riley is with us, hubei management, and a perfect day to speak with geoffrey yu of the union bank --

david riley is with us, bluebay management, and a perfect day to speak with geoffrey yu of union bank. eventina is a discrete and all i can think about is ecuador was a discrete event 30 years ago, mexico was a discrete event, and as you know thailand was a discrete event in 1997. how we get to discrete to where they are combined? geoffrey: it sounds like it has been combined already. brazil some risk. mexico of discrete event when it comes to politics. asthe market treating it collectors of discrete events? they're looking at the politics and the oil prices, not liking the fiscal position right now. they say em is like catching a falling knife. international economics 101

says the trilemma is different for em. in america we have a fully developed financial system. in europe we have a developed system, more bank centric. what is the financial system of these em countries? do they have an adult debt market and do they have the flows and short-term paper to compensate for the shocks? here is where you have to think like a stock ticker. who has dollar liabilities? which countries have local market liabilities, local currency liabilities were they behave more like japan. to 500%, the 10-year is to going to be 10 basis points. that is where you start to differentiate and start to look for total returns. francine: where do you see the dollar going? potential fore

the dollar to be higher than where we are at the moment. it is a low conviction view. we have taken positioning to protect our em exposure. the reason the dollar has been rallying is less to do with rates and more to do with concerns around global growth. is the u.s. economy the only story in town? we came in this year and it was about global conversion and inflation. now japan had a negative, europe data has been weaker, and out the markets are thinking the u.s. is the only game in town. i do not think that will happen. i think what we're going to see in q2 is a rebound in asia, china still holding up pretty well and then on the back of that i think it will be hard for the dollar to sustain a rally. francine: going back to italian bonds, which is probably the

biggest move after treasuries yesterday, where do you see it going? is a deal or a government that is unstable better than a special election? david: right now it is a big diverge in process and we have many outcomes. the key question is without ecb report, if the ecb were more theish, especially where oil prices, given the current situation, where would bonds be and that is why markets are in wait and see mode. we had the wonderful erdogan interview. at some point, central banks blank, even if it is not a domestic construction. what is your reading on the history of the federal reserve wetem saying wait a minute, have to slow down the language and the vector of rate rises. to asky: then you have

the question, does the federal reserve feel an obligation to the rest of the world? tom: do they? geoffrey: they don't feel they have an obligation. tom: do they? geoffrey: right now it is the u.s. first. they will take and america first approach. if we do have a liquidity prices , if there is going to be a massive rise in dollar demands, and we see some of the moves we see in 2011 and 2012, the swap lines are still open. they are saying they will never close the swap lines. it is incumbent on em to clean up their own houses first. tom: what are we going to do with turkey? i think we have to take a step back and think how the domestic politics and populists will think about imf intervention. i do not think that is on the cards.

the reserve situation is improved. em currencies in general with the lira are starting this process from a cheap currency perspective. dollar turkey was on the two handle. i think that makes the adjustment easier. francine: thank you both. david riley and geoffrey yu. now let's go to the middle east. a saudi arabia unit has agreed to pay a 29% premium to acquire the bank of scotland's -- it would be the first bank combination for almost 20 years. joining us from dubai is bloomberg's mideast financial reporter. they were trying to sell this before. ?ow significant is the timing finally there is a deal on their flock to down and it is a high premium. for the great news

consortium of investors which own the 40% stake. this is a legacy asset from when the acquisition took place. it has been up for sale since then, which is a decade ago. now they have managed to secure a 30% premium to get this deal to go through. rbs is going to be in there to some extent because this is a stock deal. rbs is going to want a stock in a bigger and more liquid bank, so there is more opportunity for them to sell this in the future. ultimately, it is a good deal .or rbs francine: talk to me a little bit about how these international banks need to approach the middle east. saudi arabia is embarking on

this huge privatization plan, a huge diversification plan, but as a foreign bank you cannot have controls local dutch cannot have control of a local bank. correct? >> access for international banks in the kingdom has been limited. there are only about 50 foreign banks licensed to operate in the country. jpmorgan, deutsche bank are all there. other banks have been applying for licenses and operate through the investment banking licenses which enable them to advise on the privatization you're talking about. with this program that has been theched a few years ago, prize coming out of saudi arabia, all the fees you can raise out of these deals are in people- are luring

from across the world. what it sounds like to me is we have seen this before were these second-tier banks want to go international and pick up investment banking business, but don't they have to compete with the big guys? if it is going to be a feed bonanza, who is in line first? certainly jpmorgan and hsbc have a very well established franchise in the kingdom and have managed -- they already on the deal, which if it goes ahead will be a huge fee payday. where also seeing things like the pis and international investment spree going on. banks want to be close to that and advise on all kinds of deals. the opportunity is there.

jpmorgan and hsbc have been well-positioned. citigroup struggling to reestablish the franchise there. the dynamic in saudi arabia is interesting because it has been a paid to play model where banks have to come in and throw balance sheet around and do some lending. that is what is going to help you get the advisory mandates later on. that benefits banks like the hsbc. matthew, thank you so much. .atthew martin from dubai we are getting breaking news from tencent. they did move a few months ago when they posted fourth-quarter earnings. this is a huge company in china. the online advertising revenue stronger-than-expected.

if you look at what we have heard, income has been unexpected as well. i would urge a word of caution. inse figures are just coming . i think last quarter the headline number was quite strong. we just need to make sure these key numbers are really what they are advertised. i am seeing online gaming revenues are rising 26%. they have not only social apps but also internet services, they are now on to mobile value added, online advertising, e-commerce. we will take deeper into the figures and bring you any breaking news we get from tencent. in the meantime, let's get to bloomberg first word news. north korea is putting a damper on optimism for a damper on optimism for breakthrough at the summit with president trump. the regime is threatening to

cancel next month's historic meeting. the government criticized the u.s. for what it calls a one-sided demand that north korea give up its nuclear weapons. the north also canceled discussions with south korea over military drills with the u.s.. administration is considering a number of ways to keep coal and nuclear power plants online as a matter of national security. an energy department official says 90% of military facilities are served by civilian utilities. the international energy agency has cut its forecast for global oil demand. the iea predicts that the highs prices in three years will take its toll. oil is up 70 -- up 17% this year. british prime minister theresa may has set a deadline for her cabinet to agree on a common stance for brexit.

she will publish details next month. the cabinet is deeply's let on how britain's trading policy with the eu should change. global news 24 hours a day on air and on tictoc on twitter, powered by more than 2700 journalists and analysts in over 120 countries. i am taylor riggs. this is bloomberg. tom: thank you so much. instead of doing a data check i want to show a five-day chart of a dxy index. this is the index everybody looks at. minutes, we have had another run of stronger dollar, really getting up to the intraday we saw yesterday. that is a great precursor for one of our themes, which is china. with us is david riley and geoffrey yu.

we understand there managed by t boc and an original government. varioushina into the challenged and fragile pacific rim countries? geoffrey: it is a question of chinese demand. yesterday one number that was pointed out was you have asset growth in the high single digits. 20%s nowhere near the numbers we have seen a few years ago, which generates the wealth effect on the part of the chinese consumer. that is the key question. there may be more upside from here. have em instability, and i'm not suggesting we are there yet, but if we do get em instability, how does that affect what president xi needs more than anything, which is stable gdp growth? go back to what

the government tried to do in 1997 and 1998 was stabilize growth, use the reserve. 2015, chinak to started the roundup em instability. now the rest of the em is looking in stable. china is the safe harbor right now. if they stay the course, then em can look to china for guidance. francine: do you agree with that? it seems like it could unravel quickly. david: in terms of china, i agree. it is the anchor at the moment for emerging markets in the face of the gathering storm that is coming from a stronger dollar and higher u.s. rates. to your question, whether emerging markets as a whole -- storyne: the china trade -- if you look at the chart, it

is unclear whether you could even make the argument that it is manipulated, because it goes the other way. could it turn ugly? david: it could turn ugly as part of an intensification of tensions between the u.s. and china. the mood between the u.s. and china at the moment with respect been somewhat better. i think back to tom's question earlier about how the fed would respond, i think it is interesting that one time when the fed did respond to the rest of the world emerging markets was when there was pressure in china and the chinese economy was slowing significantly and we saw outflows. we are not seeing that at the moment. china is the anchor. andong as china is anchor

commodity prices are firm, there will be support and value in emergency -- and value in emerging markets. tom: this is news in real time. this is dollar-lira. there is flapping in ankara and they are looking at it in beijing and other things. the rationalization, we are going to go flat, and we come out here to 4.5 in the last couple of coffee. tell me about the butterflies the-- to me about butterflies in turkey and what they mean for e.m. and president xi. geoffrey: president xi will be looking at the entire em story. are they going to protect the currency? that is going to be instrumental for em currencies to stabilize. for his counterpart in turkey, president erdogan, we know the

impact, it does slow growth down. are they ready to take that step to regain stability. tom: thank you so much for being with us today. he goes into the office at 10:00 a.m. in london. geoffrey yu with us. we will continue with david riley. .ou are terrified at bluebay you are at ubs london, your knees are shaking. you're going into a meeting, what is your best weapon? o.b go -- gtv g bloomberg. stay with us for more data checks this morning. ♪

francine: this is "bloomberg surveillance." two top executives have left tesla. this is in the wake of the chief executive's announcement that he will be flattening the management structure. let's get straight to a bloomberg opinion columnist. i am dying to ask you about tencent. it did beat estimates. talk to me about tesla. this is more changing at the top. i think there is a certain question as to whether it is elon musk getting rid of people or people deciding to leave. it seems like me is lot more of the latter than the former. and itbe quite abrasive may be that is panning out in the way other people are thinking, do i really need this anymore?

he talks about flattening the management structure at tesla but i think he needs to learn to be able to delegate effectively. to take it all on himself when he is running four other companies, that does not seem to be the best way to generate how you for shareholders. francine: you know everything there is to know about opec. first quarter profits past management estimates. this is a massive company. i think it has the eight biggest market cap in the world. they areencent offering a lot of money in new investment and they're working to leverage their existing properties with new offerings. they can push additional products and it helps coming after the christmas quarter, that is what everyone buys their new mobile phones. you buy the phone and you download new apps and that is something tencent is benefiting

from. tom: can i go back to tesla? what we are seeing in america is simple. a fancy tesla car and a guard rail and the tesla is burning. sometimes a body in it, sometimes not a body in it. i do a google search and some people tell me tesla is superfood -- is super safe and other experts tell me it is not safe. can my kids drive in a tesla this morning? alex: i think your kids can itolutely drive in a tesla, is whether they are willing to let a tesla drive them. calling it autopilot is misleading. it is not autopilot like you might get in a plane. used to meet you have your eyes on the wheel. there were reports in the wall street journal that they had considered putting more safety measures into the car, where would monitor the driver and say you need to get hands on the wheel.

some of these elements were not included for cost reasons. i would give -- i would cut them a certain amount of slack. there are a lot of car accidents every day. they do make a run for their own back by talking about how safe they are and then you see these accidents. francine: thank you so much. alex from our bloomberg opinion. david riley staying on. later today, the nigerian minister of trade and ourstments joins us from d.c. euro. -- our d.c. bureau. this is bloomberg. ♪

taylor: this is "bloomberg surveillance." laying out a plan

to triple its revenue in china by 2022. wantsain of coffee shop to open 600 locations a year in china. starbucks is relying on momentum there to offset underlying growth in the u.s. and underwear -- and elsewhere. the drugmaker says the general counsel will retire next month. inartis says the move came discussion of the company's contracts with michael cohen. international paper says it will not make a bid for the company unless it is recommended by the board. ip says there is a compelling rush for a combination. that is your bloomberg business flash. francine: let's get back to one of our top stories. we learned the deal between italy's leak at the five-star movement is 90% done according

to a league official. on. is what i want to focus if you look at italian bonds, they slumped as the populist parties are struggling to form a government and they seem to be discussing a government debt write-off worth billions of euro . we heard from a leak lawmaker -- from a league lawmaker saying they want to discuss this 250 billion euro right off. let's get back to david riley of bluebay asset management. let's remind our viewers and our radial -- and our radio listeners, you do not own any btp. my chart which is the spread between italian and spanish yields. does spain look more attractive given what is going on in italy right now? david: from a valuation perspective, not necessarily. i think spain is a good story and has been in improving story in terms of economics. it does have its own political risk.

recent polls are showing there is a strong populist element within spain as well. i think what it highlights is you are getting a spread on italy -- twice as much spread on italy relative to spain. i think italy should trade wider to spain on a fundamental basis but if italian spreads were going to go through 150 approaching 160, that is an interesting entry point. italian entry risk and systemic risk is high. francine: i know the situation is fluid. i know there are number of leaks . i do not know if it is testing the market or something we need to take seriously, but when you hear about the government discussing this government debt write-down, what do you think. this will never happen?

they are more populous than i thought they would be? how should markets interpret this? david: i think one should discount that because it is playing to a domestic base. if the ecb were to genuinely right off 200 and 50 billion -- 250f government debt billion euros of government debt -- it is precluded from doing so -- and in that world i would be a buyer. we are not in that world. the concern the market and i would have around those kinds of proposals is not that they are serious proposals, but that it indicates a lack of seriousness and a confrontational approach with the rest of europe. for this debate between france and germany about how to move europe forward, it is about germany wants swift reduction,

france once risk sharing and it is a harder thing to persuade germany and other parts of northern europe for risk sharing when they have an italian government with those kinds of proposals. david riley with bluebay asset management, thank you so much. we have seen the dxy index respond to new dollar strength. lira up to 4.5. in our next hour, michael spence and a guest from deutsche bank. this is bloomberg. ♪

.

♪ tom: a sea change adjustment in markets. higher u.s. rates that change

the em calculus, in this hour, dominic konstam of deutsche bank and north korea will not do a model. the talks may not happen. michael spence of new york university on china, the two koreas, and the convergence of geopolitical economics. turkeyhe conversation, attempts to find a bid. the lira hits 4.50. this is "bloomberg surveillance" live from new york, i am tom keene and francine lacqua is in london. lastr dynamics in the hour, the trend of yesterday continues. a stronger dollar. francine: stronger dollar. trying to figure out what is happening in italy. story on the

terminal, italian bonds are slumping. anti-establishment parties are struggling to find a government. chatter that they discussed a government debt write-down with billions of euros. making markets nervous. tom: reality headlights when you are running government, different from running for it. italian story with taylor riggs. at forming ad populist government said to be winding down. the head of the anti-migrant league said the negotiations with the five-star movement are in the final stretch. demandsparties made that the european central bank bite off on the $300 billion in debt. is putting a deaf or on optimism for president trump. the regime is threatening to ascel the historic meeting

the government criticized the u.s. for what it calls a one-sided demands that north korea give up the nuclear weapons. they canceled talks with south korea over its military drills with the u.s. japan's economy with a speed bump, their gdp for the first time in two years contracted as it shrank for the first time in the first quarter at 6/10 of 1%, capital investment fell and private consumption was flat. growth tost calls for resume with exports expected to regain traction. more executive departures at tesla. thomas aas reorganization with two top executives leaving their energy unit. and the product director for stationary storage. that is according to people familiar with the matter. elon musk says he is fighting the management structure. -- flattening the management

structure. global news 24 hours a day, on air and at tic toc on twitter, powered by more than 2700 journalists and analysts in more than 120 countries. i am taylor riggs. this is bloomberg. tom: a churn to the market after the see changes of yesterday. features churn. curve flattening after the steepening of the last few days. churning. off the surge from the last two days. vix 14.48.xt screen, 3.09%isenthal noting it yield at 4% yesterday. francine: european stocks are higher. global markets overall are

trying to regain composure following a hectic yesterday. treasury yields steady. focus on italian bonds. a possible debt write off plan. dxy indexes, the agent -- ancient. a headline now that turkish lira trams loss is their central bank says it will take "necessary steps." maybe you see that with a little bit of a pause in the dxy. the story is yesterday, we come down, come back up yesterday, dominic konstam is joining us in a bit. francine: burberry came out with

earnings and a strategy from the chief executive, handbag sales, the new chief executive also lying on buybacks to safeguard investors and to get their support for a turnaround plan. datember will b.a.t. because that is what -- will be a key date, a new creative director set. their trial centered relations, share prices underperforming their peers. tom: headline when it came across the bloomberg, it gave me pause, when you look for investors, you wonder what that means for the future of burberry. you are studying that carefully. we look at the news overnight,

korea, the moves by north korea to say maybe not the meeting in singapore. joining us is kevin cirilli. firstly go to peter. what is the domestic mood in seoul, south korea about the dynamics overnight and the ability to get to the singapore meeting? >> a surprise. and disappointment. everybody was scrambling, particularly the president about what was going on. 24 hours ago north korea wanted to have minister level talks follow-up korea, as a to the historic summit between south korean president and kim jong-un. definitely surprise. although the markets did not react as much as some people anticipated, mainly because the market folks feel this is a part

of posturing by north korea. in negotiating ahead of the summit in singapore. the feeling is that will happen. there will be significant roadblocks and negotiating going on. today was the first sign of that. francine: is it better to postpone the meeting, just because you want to make sure the u.s. president is prepared? for north so terrible korea and the u.s. if it to place after summer? >> some analysts are advocating for that, mainly because it feels the trump administration is not prepared based on the comments they have made. since theeight weeks talk of the summits have occurred and there seems to be quite a bit more preparations to be had. many analysts think postponing

it work out better for the donald trump administration. tom: thank you for your .ate-night work in south korea we appreciate that. we never appreciate kevin cirilli in washington. i want to get to the pennsylvania primaries. the korea news, how bad does the president need this junket to singapore? kevin: from a policy standpoint, it comes down to whether or not north korea's dictator will dictate with the americans or if he will further isolate himself. look at the deal president trump did with china in regards to zte. criticism from democrats on that deal. for the reversal in trade restrictions. but this is all about north koreans trying to be able to attract infrastructure investment, both in the

transportation sector and in telecommunications, which is what i am hearing about that zte deal. keep forng-un wants to the isolating himself come he doesn't not just from the united states but from european allies and chinese investment. to what youto go learned in the primaries last night. a nice conversation, they do this in the "new york times" where they take to columnists who disagree and you get insight. this is gail collins and bret stephens, among republicans, the most promising senator from nebraska, smart come interesting, opposed to president trump. lankford from oklahoma who is smart on foreign policy. democrats maggie hassan and , purple state

politicians with crossover appeal. voiceese people getting a coming out of these primaries? inl we worry about them november? kevin: an interesting point from gail collins. i would go deeper into the pennsylvania results last night. i grew up outside of philadelphia. regardless, last night mattered in pennsylvania, a state that went for president trump, republican for the first time since 1988. i have my eye on the senate race , president trump did a robo call for lou barletta against senator casey. a crowded republican field and president trump's nominee won. crowdedat be a

field that bernie sanders endorsed another opposing candidate, and she beat out the socialist sanders'candidate and suburban philadelphia which is what decides where the state votes in gubernatorial and senatorial and presidential elections. the sanderss for wing of the party in pennsylvania last night, and a win for the program candidate -- pro-trump candidate. democrats are still having tension. between center is him -- centrists and the more progressive wing. francine: thank you to kevin cirilli. coming up, an exclusive conversation with james bullard who will talk about inflation and u.s. wage growth at 1:30 p.m. in new york and 6:30 p.m.

in london. this is bloomberg. ♪

♪ -- >> this is is "bloomberg surveillance." shares of an irish packaging company are calling with international paper says it will not make a bid for the company unless it is recommended by the board. they say it believes there is a compelling strategic and financial rationale for a combination. already's founder considering another $100 billion technology fund. the new fund would draw from a wider range of investors, most

of the money for his first fund came from sovereign wealth funds in saudi arabia and the uae. it will be the first bank merger in saudi arabia in almost two with a preliminary agreement for hsbc's saudi arabia and unit, a $5 billion all stock deal. saudi arabia with an unprecedented diversification and privatization plan. that is your bloomberg business flash. tom: thank you. dollars with new strength. turkish lira strengthened off central bank comments. i would note on the yen euro axis, weaker euro and stronger yen on relative basis in the last few hours. we said we wanted moments like this when we invaded this show, thrilled to bring you in our international and political economics, dominic konstam of

deutsche bank and from new york university, michael spence. we are honored to have you. we will go to professor spence on china. francine lacqua told him to live in italy and we will do that in a bit. ,ominic konstam on this market you made a great call one year ago saying we would see real gdp growth. is your call of a year ago of a better economy and lower inflation, better real gdp, is it threatened i this dollar strength from jerome powell? a little bit threatened. if all goes well, it will not be derailed. i would hope that the central banks would be cautious going forward over the next year or

two, continuing to prolong the recovery. we still think inflation will be well contained. hopefully, real growth potential will go up. that is what we wait for. want a stronger economy but potential to go up. when you look at the biggest concerns for the fed, where do treasuries go from here? , cap thatgo above 3.5% or go higher? >> important to understand why yields are rising. most people do not. the main reason why yields are rising is because of term premiums rising. it is a risk premium in the market, a risk that in the end yields may have to go higher.

does not necessarily reflect the fact that the fed itself is being priced to become much more aggressive. of scope forty yields to continue to rise. without necessarily suggesting the fed will overkill the economy. the concern we have is that, when you increase term premiums, risk assets reprice in a bad way. tom: this is fabulous. we are addicted to what we see within the modern market data. we all want to be like dominic konstam. all of your work is what we do not see. what do we not see right now? what do we not see at deutsche bank and j.p. morgan and

bloomberg surveillance? >> one is the world has become much more data defended. -- dependent. in the data, we see more than we used to. less guesswork. that is an important long-term trend. the thing that seems to me that you do not see in the data, the potential for rising systemic risk associated with trade frictions and other things. tom: take that mathematically to where you are. clients, issed to it the same epsilon as 2006 and as thailand 1997 or ecuador 15 years before that? >> yes, always something you could find to potentially derail the system.

right now, most people look at the buildup of debt, specifically in the corporate sector. impossible to second-guess systemic risk. than we didt more in previous crisis. we have a better tool kit now. , it may not be a good thing but interest rates can go negative. there are other things that can be done. tom: we will speak to james later, do you predict rate rises in the summer and in autumn, the fed will get off the 3, 4 rate rise bandwagon? phase, ioing through a think, of bearish wheat bearishng -- perish --

steepening. difficult to far, a risk of a derailment of risk assets and a big way and you may quickly have to go back into some kind of risk off wristers -- recession environment. if the central banks are cautious, my guess is we can stabilize things. when you talk about , started, in the u.s. by a global recession? has growth peaked worldwide? what does it look like in the next 18 months? >> we can look at the components of the yield curve that excludes turf premiums as recession risk. the federal reserve runs a similar model but these the market yield curve, neutral yield curve, more precise. point, thee-year

market is 50% and the two-year point, 25%. .ight now, it is 5% recession probability is rising over the years coming up. reflected in how the market abuse how the fed can take rates and the fact they may have to reverse that. that is why we want to scale back and would like to see those come down. do that, if the central banks will continue to remove accommodation, is to raise potential growth. the only way you can do for the recession risk. that on the one year, two-year forward basis, we can raise potential. if you get meaningful spending, perhaps that could help. that remains to be seen. you.ine: thank

we see a little bit of concern on the markets, do you assume that world growth has peaked? >> growth momentum has peaked. the change in growth has peaked. more in certain areas like europe and asia and a lesser extent in the u.s. we use, in the case of credit indicator, called excess liquidity, it is very weak. we would like to see that recover in order to be comfortable that the momentum in growth is just that, and not any kind of means of slowdown in growth. for that to happen, you need credit to expand, seeming unlikely, or inflation to come down. that -- a few years ago, the great

convergence, are we converging now? mentioned,konstam negative rates in europe and a different united states, a transatlantic divergence, maybe divergence, eastern where is the convergence you wrote up years ago? >> that convergence was catching up to the developed country by the emerging economies. lots of pickups along the way -- iccups along the way. tom: we had to get a 92-year-old in malaysia -- what is the convergence of the tigers right now in asia? >> the asian economy is driven largely from china's growth. there are lots of questions about and balances, it looks like it is reasonably durable. india is growing. tom: do you buy what professor

spence is talking about? the dynamics i see, i see more than three standard deviation moves in some measures. >> there is less convergence perhaps in some sense. when you talk about bricks -- tom: jim o'neill is shopping a soccer team. -- someone ison trying to put globalization on hold, not just here but in europe. maybe that dilutes the force for convergence. i agree that you will not stop convergence, it has to happen. world, moreiven convergence in the long run, just maybe interrupted. francine: michael spence from nyu and dominic konstam will stay with us.

a couple of headlines coming from italy, the populist leader on the five-star movement are talking. set to meet on wednesday in the final push to take power jointly. the program is affecting the isd market, the spread significantly higher than yesterday. not as high if the ecb was not intervening. the government program is 90% agreed on, according to officials from the league. coming up, doug kass. this is bloomberg. ♪ mom you called?

oh hi sweetie, i just want to show you something. xfinity mobile: find my phone. [ phone rings ] look at you. this tech stuff is easy. [ whirring sound ] you want a cookie?

it's a drone! i know. find your phone easily with the xfinity voice remote. one more way comcast is working to fit into your life, not the other way around. ♪ ."m: "bloomberg surveillance francine monitoring headlines in europe. does italy have a government as we begin this half hour? francine: no it doesn't.

is a program from the league, have been so many that are not that market friendly that i will be cautious about what comes out. tom: they don't have a soccer team in my lawn either. right now let's move -- in milan either. right now let's move into equity markets. go --i want to guest: by the way, i am sitting in my office with my two docs dachshunds.

-- interest rates were suppressed, but this your markets are more or less unchanged. we have the reality of instability and instances to see -- and inconsistency of policy. mainstreet has thrived and wall street has stagnated. i think we have a new regime of volatility emerging cummaquid student with a general rising rates -- a general rise in rates. tom: all of a sudden, the rationalization catches up with the equity markets. describe for our audience how we instability, and

how the u.s. stock market ends up with a headache. instability, the because algae to me is interest rates. yesterday afternoon we had the highest treasury yield since , and the five year since 2009, 10 year since 2011. people saying 3.1 is not meaningful in the 10 year, why is the rate rise dangerous? it is very simple. when we assess the impact of the rate rise, we should look at debt service of the product of the amount of debt and the interest rate imposed on that debt. the observation that the rise is inconsequential is wrong given the record of private and public debt outstanding compared to any time in history. then we have the issue of the

, as dr. spence would say, flat network and interconnected. i am concerned that the administration's hastily contrasted strategy tweeted out inconsistently is beginning to have a negative impact on the real economy in terms of and deferring -- investment plans. has fallen victim to getting a trade war in china and getting into it with north korea when nuclear weapons are involved. francine: where do you see

treasury yields going on the 10 year in the u.s.? guest: that is a great question. historically there has been a specific equation that the 10 year yield basically equates to the nominal gdp in the u.s. nominal gdp of course is inflation. but we have factors that suggest that relationship has changed. we obviously have the amazon deflationary impact, and we have anchoring of short-term interest rates impacting our tenure yield. instead of correlating one to one, perhaps the tenure should trade at around .8 times nominal gdp. the question is, if you do the calculus given that tenure breakevens were up three basis points to 2.2% expected inflation rate in the future, we can to the calculus in figure out what growth rate for the u.s. 10 year is predicting, and

that is only 1.67%, which seems too low. if we assume consensus growth of real gdp 2.5% plus inflation, multiplied .8 times that, the intrinsic value of the tenure should basically be 3.7% or 60 basis points higher. high andes are too bond yields are too low. tom: thank you for the math exercise, former dean of the stanford graduate school of business. michael spence was taking notes. doug kass of seabreeze partners today. thrilled to have him with us. we are going to have a news break and come back on china. taylor: israel is coming under increasing diplomatic pressure following the bloodiest confrontation with the palestinians since the 2014 war. turkey has expelled the country's ambassador a day after

and kara -- after ankara recalled its own envoy from israel. france called the israeli military response "unacceptable ," and the u.k. termed it "shocking." the international energy agency has cut its forecast for global oil demand. oil is up 17% this year. the agency says inventories are below average for the first time since 2014. british prime minister theresa may has set a deadline for her boring cabinet to agree on a -- her warring cabinet to agree on a common stance for brexit. may's cabinet is deeply split on how policy should change with the eu.

malaysian prime minister monthly mohammed indicated he won't step aside anytime soon. the european union has set out to identify possible solutions for salvaging the iran nuclear as theyithin weeks attempt to contain the fallout from president donald trump's decision to pull out from the landmark deal. >> we are determined to ensure that the deal stays in place. we know it is a difficult task, we are determined to do that and we are putting in place measures to help and sure that this happens. this is true on the european side, with the willingness and determination insight. taylor: global news 24 hours a

day, on air and on tictoc on twitter, powered by more than 2700 journalists and analysts in more than 120 countries. i'm taylor riggs. this is bloomberg. tom: thank you so much. we see even further dollar strength in the left moments. dominic comments of deutsche , and a laureate with a particular interest in china. what i see permitting across all of international relations theies of asia is technology and history in our certitude and belief in the asian growth model. professor spence, you would suggest those two are going to innce up against each other technology in the asian growth model. >> that is right. we are at the point where the digital technologies are powerful enough to outperform

the labor-intensive, process oriented manufacturing that was the core of the asian growth model. , the obviouspens question is what is the growth model for the early stage, relatively of course, developing countries. i don't think this is a problem for the middle income countries. i think they are ok. by and large these digital technologies will be a net positive for them. but for the poor countries in asia and other parts of the world, there is a real open question about what the new relatively powerful growth engines are. two books for the summer. one is on robert mueller, and the other is that the asian

model was tested not through dictatorship, but a more strict authoritarian democracy or even non-democracy. what does technology due to that political model that worked in technology due to that political model that worked in singapore, worked in taiwan, and after a number of efforts in vietnam as well? >> you have to adapt to it, so the technology let loose unregulated says lose a whole set of forces in society and political processes we are now seeing and trying to figure out. i think the outcome is they are going to regulate, and the china case is pretty clear. china has a completely different regulatory model with respect to the internet than the entire west. the europeans are moving in. we have a lightly regulated internet. that is about to change. in china, the communist party retains the right to access the data and retains the right to filter content when it deems it to be inconsistent with the

broader social interest. francine: right, but professor -- >> broadly speaking that is what direction we are going. , it wouldin the u.s. be very difficult to see that kind of regime like in communist china. are you talking about social media, or about technological advancement in general? we used to confuse globalism, globalization, and technology. people feeling left out because they don't have the right skill set. but we are talking about a social media crackdown. social we are seeing media crackdown with respect to data security and fake news and other things in the west, but you're absolutely right. the western democracies are not going to be able to take anything like the china approach to regulation. it is just not going to happen. the thing that makes this so complicated is that it is not the sort of privacy, security,

etc. issues that digital technologies are increasingly crucial to national security and defense. tom: one final question to dominic. strategistsed to about their executive policies, but i am going to dovetail what deutsche bank is doing. your new ceo traveled to asia and reaffirmed deutsche bank in asia. tell me as an economist, not a deutsche bank executive, of the gdp difference between those asian tigers in china and where we are in the western world. it is not what it used to be, but what is that gap now, that your two-year gap in asian -- that year-to-year gap in asian growth versus what we are seeing in the rest of the world? >> it is obviously a lot less, but i think it is still there, and there's still plenty of opportunity.

of the things about the new digital technologies is it creates a lot of opportunities for financial sectors. it doesn't mean the growth isn't there. tom: michael spence with us and dominic konstam. your knees checking this morning with dr. konstam. you can dazzle him a chart from bloomberg. here's dollar index breaking out. on tv rt chart on your terminal. this is bloomberg.

♪ francine: -- taylor: this is "bloomberg surveillance." i'm taylor riggs. let's get the bloomberg business flash. according to people familiar with the matter, british ,rugmaker has been raising cash and may sell u.s. crestor rights. there is a preliminary effort by hsbc's saudi unit for a $5 billion all stock deal. saudi arabia has embarked on an unprecedented divers vacation and privatization plan. that is your bloomberg business flash. francine: taylor, thanks so much. in the last hours we have learned a deal between the

league and the five-star movement to form an italian government is 90% done. that is according to league officials, something that was a pension of salt. the league's leader, matteo , saysi -- matteo salvini he will not be an obstacle to forming a new government. with us is michael spence, and my you's economic -- nyu i economic professor , and dominic konstam of deutsche bank. would it be better to go to fresh elections? >> there a variety of views on that. given the outcome of the previous election, in which the five-star movement and the ,eague got over 50% of the vote i think you have to give them a chance to form a government and try to govern.

i think that is a process you are seeing underway. there is considerable uncertainty about what kinds of policies with respect to the domestic economy and the european union. that uncertainty is not going to get resolved. i don't think going to another election right now is the best answer. francine: professor, we are also hearing -- and again, i would put a word of caution because we are trying to figure out from our own sources exactly what the proposal is -- but we heard that there is a joint program which could also ask the ecb for some debt relief. this is not something that has actually been agreed to in the program, but it is certainly spooking the bond market. just because of that, what does it tell you about what the government wants to do? >> i don't think that is going to be well received in the rest of europe, as well as the bond

market. there's quite a lot of that kind of policy thinking among these two parties, and i think we have a kind of greek style situation when they confront the reality of the rest of the european union. tom: i think you just perfectly set it. we have a greek style situation. francine, you have a terrific perspective on this. this is a headline that just came out. i thought it was a joke. "italy's berlusconi sent to trial for alleged corruption." it is not related, i guess come into this new government, but from where you sit, is this business as usual in italy? francine: i don't know if it is business as usual, but you could argue that silvio gross gunny has had many trout -- silvio burlsque tony -- silvio

esconi has had many trials over the years. fact now that there is another trial -- i don't know if it is a new trial or the same trial for corruption -- is something that may have an impact on the formation of this government. tom: we have the dollar strength , maybe with a weaker euro as well. we are going to look at a chart and try to figure out where we are. let me tell you about an upcoming important interview here on bloomberg across the world this -- world. this is with nigeria's minister , trade, and

investment. this is bloomberg. >> single best chart is brought to you by invesco, who asks what people really invest in.

♪ francine: this is "bloomberg surveillance." tom, i know you will be tuning in later today.

big decisions why we hear from sink any financial -- synchrony financial's chief executive. 9:30 london time -- new york time. .om: single best chart on oil i'm dazzling the professor with my french. real.c konstam, this is all of a sudden we are back to $80. what does deutsche bank say about this new place for oil given all the other instabilities out there? economic level, obviously it is sort of bad news for the consumer. at least in the u.s., we have the fiscal stimulus. the argument is it is going to

be sort of a wash. tom: what about in non-dollar-denominated parts of the world? >> that is part of the problem. that is partly why you're seeing with the rising rates as well the risk of yen and the emengthening dollar -- of and the strengthening dollar as part of that as well. back a couple years ago we had the big rebound. i think this is -- the big capex rebound. barrel, does$70 a it actually put a brake on consumption like the ia seems -- the iea seems to be suggesting? >> the challenge now, when you

have studied oil in the past on the u.s. consumer, it really is a response to savings. you could make an optimistic that because of this fiscal stimulus, and the end it is not that bad. tom: thank you so much for joining us. professor spence, thank you as well. michael spence of new york university. much more to talk about here. you thisine for morning is the strengthen the dollar continues, particularly against weaker euro. please stay with us. this is bloomberg.

♪ alix: --david: diplomatic

jeopardy. north korea cancels talks with south korea, and says it may not continue with the u.s. u.s. treasury bonds move higher than in seven years, with some people warning it is getting higher still. and finally paying attention. , talk about writing down sovereign debt is another matter altogether. welcome to "bloomberg daybreak." i'm here with julia chatterley. alix is off today. you see the pressure we saw yet.s. equity markets, and futures in the green are very minor. we will continue to watch that over the coming couple of hours. obviously the shift