♪ francine: italian showdown. efforts to form a caretaker government stall after the threat of early elections loom. euro looks to stabilize. president trump goes ahead with plans to slap duties on chinese imports. justin trudeau's line in the sand. he tells bloomberg that he would rather see nafta die that except hardline demands from washington accept hardline demands from washington. ♪ good morning, everyone and

welcome to "bloomberg surveillance." i'm francine lacqua here in london. when itn epic rout came to the markets yesterday. there are concerns about a fresh election in italy. we are looking at stocks to date. you can see we are not falling out of bed like we did yesterday. the signs that things are stabilizing somewhat, but we are expecting more news about exactly when we get and if we get fresh elections, and what that means for your investment. stoxx 600 in europe pretty much flat. euro-dollar is stabilizing. the two-year gross yield is at 2.20. we saw a lot of the banks yesterday significantly to the downside. correlationirect between it yields up and the concerns that the banks hold so much of this italy issuance. an auction is planned later.

is down 1.6%. pagani,talk to fabrizio formerwill talk to the director general for market operations at the european central bank, francesco papadia. we will also speak to our donovan, the chief -- paul donovan, chief economist at the ubs. let's get straight to the bloomberg first word news. . taylor: here is taylor riggs italy may be headed toward snap elections as early as july. that is after the latest attempt aw form a government s leave. rally leave --

this could force the president to dissolve parliament, leading to elections. raise is prepared it to interest rates again as inflation accelerates. o money according to tw managers. they said that further tightening will depend on inflation data, which will be released june 4. the nation will not resort to introducing capital control. president donald trump has said he will move ahead with plans to impose tariffs on chinese imports. finalite house said a list of targeted imports will be released by june 15, and that terrorists will be imposed shortly that -- tariffs will be imposed shortly thereafter. canada's prime minister has a message for donald trump on nafta. canada would rather see a trade deal diet altogether -- die

altogether than accept certain hard-line demands. justin trudeau made the comments. >> i will stand up for canadian interests. i will only sign a deal that is good for canada, and no nafta is better than a bad deal. we have made that very clear with the president. taylor: the white house has a flurry of final preparations for president donald trump's planned summit with kim jong-un. north korea's former spy chief is traveling to new york to meet mike pompeo later this week. japanese prime minister plans to visit washington for a meeting with trump on june 7, five days ahead of the scheduled summit. global news 24 hours a day, powered by more than 2700 journalists and analysts in more than 120 countries. i am taylor riggs. this is bloomberg.

francine? francine: thank you so much, taylor. efforts to form a caretaker government in italy stalled yesterday as populists continue to push for fresh elections. a seniors from rome is member of the treasury of italy, fabrizio pagani. bloomberg's european markets is in london with me -- european markets managing director is in london with me. stear, head ofuy e.m. and credit research at societe generale. let's get to fabrizio pagani. thank you so much for joining us. when you look at the premier designate, he is expected to meet the president today. what is the most likely outcome of italy and what happens over the summer? good morning,

francine, and thank you for inviting me. it is very difficult to make any predictions. i think all options are on the table. early elections are possible. the formation of a government as possible as well -- is possible as well. i would recommend not to follow hour-by-hour the evolution of italian politics. investors should look at fundamentals, step back, look from afar, look at the italian economy, its strengths, the growth rate, public finance is under control, the bank system, which is healthy, npl's going down. these are things that really matter. francine: how dissatisfied are italians with the euro and the european union? do we know? fabrizio: say that again, sorry.

francine: how dissatisfied are the italians with the euro? fabrizio: i think -- according to recent polls, most of the italian population is still in favor of the euro. there is a lot of commotion around this issue. i think most of the italian people do not see the euro as italy's problem. they see italian economic problems in other areas. i think we have a problem of productivity, a problem of complicated public administration, we have problems all of that. i don't think the euro is perceived as a problem to move ahead. francine: you are a numbers man. what should happen with the ock in block in italy -- l

italy? francine: -- fabrizio: we project the deficit at 1.6. we are running a primary surplus above 1.5%. that is declining. we have a budget which is expansionary in its content, but in line with european framework is the path to follow. francine: what should happen with the vat? v.a.t.? fabrizio: i think we should find a way to sterilize the increase in a way which is not damaging to growth. i think that is possible. we have shown that these kinds of issues can be sterilized. thecine: i know we started interview with you saying that

investors should focus on the fact that the italian economy is strong. if you are an investor, what is the case for staying in italian equities, or in italian bonds? what is the business case for italy? fabrizio: the first business case is obviously that italy is less expensive than other countries. this is a very strong business case. look at the sectors. i think we have a very strong manufacturing sector. let me just give you a number. orts raisedur exp above 500 billion euros. this is gigantic. we have a major manufacturing trade surplus. very few countries in the world have that. alsonk -- you know, let me dwell on that. it is not only the traditional

fashion, sectors -- fashion sectors, but we have a very strong robotics sector, mechanic, and someone -- so on. i think it italian companies have come out of the crisis more resilient, and much more integrated into the global value chain. fabrizio, the concern is that people are still voting for extreme parties because they do not feel part of the recovery. do you feel that the upcoming re,ctions, whenever they a will de facto be a vote on euro membership? fabrizio: i don't see a major party -- any major parties making that at the center of the election. it is not really in the cards of -- and italian exit

an italian exit is not in the cards. there might be quite wide margins around parties, and quite wide differences, but i don't think any parties will go to the elections saying that they want to exit the eurozone and possibly out of the european union. i think that would be not a very good move. how many do you know calls the european central bank put into the italian treasuries over the last 24 hours? i don't know. francine: thank you for giving

here onthoughts bloomberg tv. markets showing signs of stabilizing after yesterday's rout of european stocks. relative calm gives some credence to western asset management, which said earlier that the fell off went too far. , bloomberg's european market managing manager, and guy stear, head of e.m. and credit research at societe generale. now -- is now the time to go back into italy? would you stay way from it? >> i think in the short term we will probably see more weakness than gain.

i think for domestic investors, the fact that yields have come up a lot, particularly for yield-based domestic investors makes it an interesting opportunity. i think it would definitely be -- there would definitely be a domestic demand. francine: what needs to happen it italy for markets to stabilize -- in italy for markets to stabilize? >> let's be clear. before this week, markets were pricing in a negligible chance of italy leaving the euro. now they are pricing in a non-negligible chance of that happening. is not agh it likelihood or base case scenario, there is a risk of that, and that is enough to scare investors enough.

thewere talking about possibility of a party standing on an anti-euro platform in the election. if the political parties were also come out against that, that might give investors more confidence. be auction today is going to an interesting measure of investor appetite. it should go ok, given the amount of redemptions that have come back into the market, and the local interest. the market is injured, or damaged by this confidence. the bitter spread is very wide -- bidder spread is very wide. francine: you have also been looking at technicals. what started as a violent move an italian bond yields, but then it kind of infected all asset classes. >> we have seen carry trades. those do not do very well in volatile environments.

we have definitely heard of hedge fund managers pulling back from their. market makers were not willing to step in and talking about if this is going to last. spreads are quite wide. we still do not see market makers really wanting to play in this market. that will continue to be a hindrance for italian bonds from here on out. francine: let me bring up my charts. you can see that the s&p 500 flirting with the 50 day moving average. were you surprised that italy is kind of touching the s&p? >> absolutely not. we looked at this yesterday in terms of the correlation between credit markets. if you think about what happened in 2011 when we had the peripheral crisis, every credit market went wider. you had u.s. credits in euros, which went wider by some 50% over the course of the year.

you had u.s. dollar denominated credits going wider. the reality is that contagion from whatever source, wherever it starts, contagion across markets happens all the time. francine: what the markets complacent before monday -- were the markets complacent before monday? guy s.: i think they were. we had a lot of increase in political risk after the u.s. elections. generally, 2017 was all about carry trades, and volatilities going to zero, more or less. that we haveesson learned over 2018 is that we can forget everything we learned in 2017, because political risk is back. francine: do people have a long memory?

and cast themselves back to the euro crisis? is that one of the ways to explain the violent moves yesterday? >>. -- lutely >> absolutely. the esoteric places that people look for refuge were all back on yesterday. there was a feeling that this is a broader risk. francine: are there any technical levels, or any technicals on certain parts of the market that you would be looking at for either signs of stabilization are things getting worse -- or things getting worse? >> fund managers use some sort of risk and put to say they are going to cut risk when things become too volatile. so many levels were breached yesterday.

i would not be surprised to see people pull out of markets. francine: have you seen anybody go back in the market today? is there an appetite? but too scared -- our people too scared? >> there is a lot of hesitation. i think we need to see more stability. the fundamental picture has not changed since yesterday. we are going to need to see more relief, more signs of stability before we are going to have a lot more players stepping in at this moment. francine: does it change what the ecb does? this is a chart that we looked at yesterday. -- whatto what the ecb the ecb stay firm -- will the ecb stay firm? i think part of

pretending that that chart is say,appening is maybe they if we focus on the fundamentals, we will maintain the policies. nothing has happened in terms of fundamental changes over the past two weeks. the reality is, a lot has happened. francine: a lot of the parties are actually calling for elections very soon, like in july. would you expect a lot more markets of newhe elections are extended until september, october, or possibly 2019? >> yes. markets are generally more liquid over the summer months, because everybody is at the beach. prolonging that risk would only leave that uncertainty and cloud hanging over markets. francine: thank you so much for joining us. check out mliv . it is terrific. yesterday there was so much

appetite on the markets to find out what our team got. guy stear from societe generale stays with us. we are talking spain next. upping the pressure. trump stokes trade tensions as he moves forward with plans to impose to risk on chinese imports -- impose tari ffs on chinese imports. this is bloomberg. ♪

♪ francine: this is "bloomberg

surveillance." i'm francine lacqua here in london. donald trump has said he is moving ahead with plans to slap tariffxs on $50 billion of -- tariffs of $50 billion on chinese imports. bloomberg spoke exclusively with the canadian prime minister justin trudeau about his trade negotiations with the u.s. he says he would pull out of nafta if the terms are not favorable enough. >> i will stand up for canadian interests. i will only sign a deal that is good for canada, and no nafta is better than a bad deal. we have made that very clear with the president. francine: we will bring you more from that exclusive interview with justin trudeau later. still with us is guy stear from societe generale. the italyen through conversation, but how much

should markets be concerned about this u.s.-china trade relationship getting worse? it seems to get worse, get better, get worse, get better. guy s.: i think you are right. i think cyclically it is on a trend of getting better, getting worse. structurally, it is on a trend of getting worse. what is the impact on china itself? what is impact on the rest of the world in terms of trade relations? i think that china has actually surprised on the upside in the past month or so with some of the data, the production data. since they have eased monetary policy in little bit, the loans data was relatively good. that the immediate impact on china, i am personally concerned about the property market over the next 3-6 months. the immediate impact on china is fairly limited. the bigger impact is on the rest of the world.

francine: europe has the most to lose, and germany and specific germany in specific? guy s.: i think it does. a lot of the european trading takes place inside europe, but a lot of it takes place around the world, so i think germany is very sensitive. francine: up next, btp's rebound, yields on italian bonds fall across the world. we are live in brussels next, and we also speak to a former ecb director. this is bloomberg. ♪

♪ francine: economics, finance, politics, this is "bloomberg surveillance." i'm francine lacqua here in london. let's check in on what is trending across the bloomberg universe. president trump will meet

japan's prime minister of head -- ahead of his expected summit with kim jong-un. what the rbs chief financial officer -- the rbs chief stevensonofficer ewen unexpectedly resigns. there is only one story that dominates. read why mario draghi could need a much bigger bazooka this time. it is all about italy, and second, we take a look at the bond markets. i am also looking at the markets, of course. a little bit more green on the screen than we saw yesterday, when it was a sea of red. the cac 40 is down 0.6%. i have this bloomberg function. that is a very latest on the markets.

let's get the latest on the bloomberg first word news. taylor: italy may be headed for a snap election as early as july. that is after the latest attempt to form a government saw premier designate leave a meeting with the president without an agreement on a cabinet team. by him could force the president to dissolve parliament, leading to elections. turkey is prepared to raise interest rates again if inflation accelerates. moneys according to managers who met with turkey's central bank governor and deputy prime minister yesterday. they cited the official, saying that further tightening will depend on inflation data released on june 4. the nation will not resort to introducing capital control. donald trump has said he is moving ahead with plans to on $50 billion of chinese imports and curb investment on sensitive

intellectual property. he said a targeted list of imports will be released by june 15. it is the most specific the administration has been about the timing. the white house has announced a preparations for president donald planned summit with kim jong-un. north korea's former spy chief is traveling to new york to meet secretary of state mike pompeo later this week. meanwhile, the japanese prime minister plans to visit washington for a meeting with the trump on june 7, five days ahead of the scheduled summit. global news 24 hours a day, powered by more than 2700 journalists and analysts in more than 120 countries. i am taylor riggs. this is bloomberg. francine? francine: thank you so much, taylor. italian bonds are rebounding this morning i had of a debt auction that will be a key test for investor appetite.

yields on a two-year notes dropped the most after peaking yesterday at 2.8%. let's get straight to our reporter on the ground in rome. it is quite difficult to know what happens next. arenderstand the populists now making an 11th hour push for power. how likely are fresh elections in the summer? >> it looks very likely. last hour wase saying that it is pretty much likely. he did say that italians do not like to do much in the summer, so he does not think that july is a very good idea. it is likely that we will have these elections. it is difficult to see exactly what is happening right now. we know he has met with the president, but there was no list drawn up of cabinet members.

this is from unofficial speaking to us on the sidelines of it. the populists seem to be making a last-ditch effort. salvini says he does not see how a coalition cap and at this point -- could happen at this point. he is basically saying he has no chance to form a government. a little bit more on the moderate side, someone saying they are returning to the negotiations table. these are some of the headlines i'm writing this morning -- i am reading this morning. everything is pointing to fresh elections, whether it is july or september. the date seems to be unknown. francine: thank you.

joining us from brussels is francesco papadia. he is the former director general for market operations at the ecb and also previously worked at the bank of the tilly -- bank of italy. what italy hold elections sooner rather than later -- will italy hold elections sooner rather than later? keeping the uncertainty for a long would be damaging. most important of all, what would be the issue that would be decided by elections? if there is a doubt that the that are likely to form a government would push for a euro exit, we would see turmoil and difficulties continue. give a credible commitment that the euro is not

electionstion, then will take place in a much more orderly way. i don't think that it would be too difficult. thiso difficult to get credible commitment. all the rest is under discussion, but the giro is not -- euro is not. francine: many people see the upcoming vote as an informal referendum on the italians'view ofthe euro -- italians' view the euro? is that wrong? francesco: it would not be wrong if there is no credible commitment. managed toies say no, this is not on the table. we are not discussing and are not considering. unlike what we said until now,

in participation of italy europe. nother a italians would say to the euro, possibly no to the european union, or whether they would say yes to the euro and european union. francine: is there a danger that actually -- we had, for example, mr. salvini say that this would not be a vote on the euro straight away? -- straight away. is there a danger that whoever comes along might try to get italy out of the euro? francesco: they are making this noise about the euro. it is understandable that now they -- that they are on the country,governing the

-- let's are member that two thirds of italian debt is now held by italians, are worried. they want to know what happens to their savings. if this reassurance is not given, we will continue to have this terrible turmoil in the market. francine: the -- do italians support the euro or not? i know yesterday there were a lot of scandals picked up by the italian press. said of people in brussels that was wrong and he should not have said that. will it play into the psyche of the italian voter? francesco: if you look at the euro barometers, you find out that within the euro area, italians are least supportive of the euro.

yet there is more support for the euro against the euro. my take is that italians are not in favor of beating the euro -- leaving the euro. they understand that a close link to the euro and european union is the best way for italy to become a fairer country, richer country, a less corrupt country. -- this is the time to remain a member of the euro area and a member of the european union. francine: we have quite a big option for italian bonds -- auction for italian bonds. do you think this is a litmus test? francesco: no. we cannot say it is the end of the story one way or another. we are in a very volatile situation. everything can happen, everything can come out from the political sphere.

i think whether it goes well or badly, that would not be the and of the story -- end of the story. francine: will it change the way that ecb perceives risk in europe? will it change their normalization plans? francesco: i don't think so. i don't think so, in any significant way. i think that the ecb could do very little -- can do very little in these conditions, one way or the other. the problem was created by italians. it is a political problem, not an economic problem. italians have to deal with the problem. they cannot expect the ecb to come and help. the governing council would never agree to help a country that does not want to be helped. any action that the ecb could riskwould not settle the of the political problems.

i don't think that the ecb can do much in these conditions, except in saying that they will continue to do what they have done, but nothing more than that. francine: do you believe the markets overreacted yesterday? francesco: i think -- you know, the markets are reacting in a way that cannot be forecast. exercise to futile try and judge, and guess what the market will do in the next hour or so -- in the next hours. the basic issue is that the confidence of the market about italy remaining in the euro has been shaken. until this redenomination risk is taken off of the table, the turmoil will continue. francine: thank you so much, francesco papadia. coming up, we talk about justin

trudeau's ultimatum as donald continues to stoke trade tensions. the canadian prime minister it says that no nafta deal is better than a bad one. this is bloomberg. ♪

♪ francine: you are watching "bloomberg surveillance." i'm francine lacqua here in london. president donald trump has said he is moving ahead with plans to impose tariffs on $50 billion of chinese imports. the white house said a final list of targeted imports is due to be released by june 15, and that tariffs will be imposed shortly thereafter. canada's prime minister has said he would rather see the nafta agreement die altogether then

accept certain hartline demands from the u.s. -- certain hard-line demands from the u.s. >> we continue to believe deeply in-winhere is a win-w opportunity for canada, mexico, and the united states. is a veryat trade powerful lever to create opportunities, and jobs, and growth in our economies. we understand that there is exempt -- anxiety about trade out there. as a country, we have been working hard to make a case for trade, working hard to demonstrate that we could sign progress of trade deals -- progressive trade deals.

we have demonstrated that issues like gender equality, workers rights are integral to creating the success to trade deals, and creating growth. >> how do you think it will affect the summits if the u.s. has just slapped tariffs on canadian steel? >> taking a step back on what the actual summit is focused on. ae g7 is fundamentally gathering of the world's most advanced economies to talk about the economic challenges that we have in common. economicone big challenges that is shared among much of the developed world. reassure people that all the changes we are going through in our workplaces, from automation to artificial intelligence, to globalization in general, how are these factors going to ensure that the growth we create is fairly

shared by everyone? in any trade deal, there are always ways for the for compromises, waste to understand that we can get to wait -- to a win-win-win. i will stand up for canadian interests. i will only sign a deal that is good for canada. no nafta is better than a bad deal, and we have made that very clear with the president. canadian that was the prime minister, justin trudeau, speaking to the bloomberg had of economics in toronto. let's turn to turkey. ur comments on turkey and we will move on to emerging markets. first on turkey. what does it take to get lira?ors back buying

guy s.: i think it will take some time. over the medium term turkey has achieved strong growth rates. they have done that through fairly easy monetary policy. they had changed some of their priorities in terms of monetary policy. there has been a new commitment by the central bank to rein in inflation. they are doing the right things. i am afraid it will take some time for investors to give them the benefit of the doubt. francine: this is my bureau -- lira lra chart chart. given the buildup in emerging-market debt, how vulnerable are these governments to that hikes, and to dollar strength? what is important to note is that distribution of dollar-denominated debt.

asian crisis, particularly in the last 5-6 they have reduced the amount of dollar debt that they have done. they are less sensitive. the problem is on the corporate side. there has been under norma's increase in the amount of corporate emerging-market debt which has been issued since 2010. i'm afraid that vector through which changes in fed policy could really hurt the emerging-market world. francine: are there any emerging markets that you would stay away from more than others? guy s.: china has had the biggest increase in corporate debt by far. china has done some of between 05% of the net corporate dollars -- in dollars.

that is where i think the risk lies. francine: we have seen a couple of defaults in china. is that a good sign? guy s.: i think in the medium-term, yes, it is a good sign. these things have a snowball effect. theeed to keep in mind that chinese eastern seaboard is really sensitive to the property sector. i think it is the volatility of the property markets which really could -- that combined with more expensive dollar financing could be a thing that comes back in the second half of the year. francine: thank you so much for joining us. he is guy stear. -- bnp robot has run for the last three years and is now making a push.

we would discuss that next. this is bloomberg. ♪

♪ francine: economics, finance,

politics, this is "bloomberg surveillance." i'm francine lacqua here in london. let's get straight to the bloomberg business flash with taylor riggs. taylor: royal bank of scotland chief financial officer has resigned to pursue another opportunity. the u.k. state owned lender said the search for his successor will commence immediately, and that stevenson will remain in his position to ensure a orderly handover. vivendi's television channel last its three decade hold on the broadcasting rights to french football. it is a major loss for the company as other companies that p prices.-- bid u the rights to three of the main packages. this starts in 2020 and they will create a sports channel to show the matches. that is your bloomberg business

flash. francine: the last decade could be described as one of calamity followed by recovery for european banks. the line for a book about how bnp paribas has grown in the last three years. some have crowned as the jpmorgan of europe. our bloomberg editor joins us on the program. we talk about banks from all angles. what has bnp paribas done differently than rivals? >> it stayed intact. a lot of banks over the last decade have try to decide what businesses they will enter, what businesses they will exit. bnp paribas has stayed in all of them. it is doing all of the kind of basic banking is this is that are not that sexy, but quarter after quarter they generate

income. management, custody banking, lending to mid-cap companies. that formula has worked for them. francine: matt mead bring up the deutsche bank chart -- let me bring up the deutsche bank chart. thet is striking to see how french are making this huge push into germany. they have set up a commercial sectors in manufacturing areas in germany. even as deutsche is struggling to withdraw from the u.s., and rebuilt in germany. francine: thank you so much. bloomberg surveillance continues with tom keene. this is bloomberg. ♪

francine: italian showdown. efforts to form a caretaker

government stall. did yesterday's selloff go too far? tariffs on track. in the sand.e he would rather see nafta die then meet hardline demands from washington. good morning. this is "bloomberg surveillance." is back in new york. i am francine lacqua in london. all the talk was on italian markets. be very auction will important. what is fascinating is the idea of what we saw yesterday and a better take this morning as well. francine: yesterday on the back of italian political risk, even

the yen moved. here is taylor riggs. taylor: the lighthouse is racing to prepare for the revised summit with north korea. the administration expects the meeting to take place, but says clarization has to be on the table. a u.s. delegation is meeting with north korean officials and kim's top advisers is coming to the u.s. the trump administration plans to impose tariffs on chinese goods by the middle of june. china warns a matter what the steps the u.s. takes, and will defend its economy. justin trudeau says he would rather have no nafta than agree to a bad trade deal. he says it is still possible to get an agreement for canada, the

win, but mexico to all made it clear he will not accept such hardline demands from the u.s. italy appears to be headed for another election in july. they cannot reach an agreement on a new cabinet meeting during a meeting with the president. they will meet again today. not form ald government, there could be an election and 60-70 days. global news, 24 hours a day on-air and on tic toc on twitter, powered by more than 2,700 journalists and analysts in more than 120 countries. this is bloomberg. francine: thank you. this is what we're looking at. yesterday, the markets were seeing a huge selloff. global markets are gaining a little bit of composer as there seems to be fresh efforts to form a government in italy. we had encouraging economic

data. treasuries falling back. a lively haven bid has subsided. stoxxro jumping, euro stabilizing. italian bonds rebounded with the 10 year falling as much as 19 basis points. the shorter tape you can see is italian two-year at 26. 2.0 four. we look at it a little differently. 2.04 is what we are looking at. equities, bonds, currencies, commodities. 1.1611. what i'm really watching as the german two-year yield. -0.76 yesterday.

the dollar stronger. bitcoin has been weaker each day i was gone. we are covering the latest in italy from all angles. ome and in london. we see a lot of the main parties wanting elections in july. that could be problematic. they want different things. the populist thing could have a lot of momentum if they go to election send. the party wants to turn this around and make it about euro. >> this election could become a different a referendum on teuro.

he is optimistic that italians do not want to leave the eurozone. that is what opinion polls showing. their walking back the idea of euro skepticism and wanting to leave the euro. it is interesting what comes to play. we just heard from solving the saying that july is too soon. even though the populist has tried at a last-ditch effort to form a government, they say it is impossible. we spoke to someone at treasury. what is the mood like on the ground? are people in full campaign swing? elections,ve people would become more populist? >> on facebook they have been saying get out and vote.

they are putting the president hostile on the situation. they are in forms of campaigning. one thing we are watching is this bond option in the next hour. italy. a litmus test in we are saying bonds doing better. many are saying the appetite for the bond market could give sentiment on how investors feel. is it international or domestic? francine: thank you, so much. larry, when you look at the , the row yesterday, was a justified? i think the move is

exaggerated. these moves would be only predicated on real concerns of an italy exit from the monetary union. in the current environment that is not on the table. none of the major parties are serious about that kind of that .pproach what is in question is some of the rules italy has to abide to be a full-fledged member. they are negotiable in many respects and there is room for fiscal expansion. from that perspective the market has exaggerated the move. this looks like an opportunity to reengage in areas the market has sold off. francine: even if you have fresh elections in july that could see the populists with more power than they have now? larry: i think what we are finding is it is going to be difficult for the 2 major

populist wings to find common ground over policies that they can sustain through government. we are in a time of a highly hasionalized outcome that divided left and right, north and south in italy. there is concern about stability of a government that seems to be fresh elections. what is probably the case is no constellation of new government will lead to a genuine exit from the eurozone. the pressure that would put on the banking system. there is an uncertainty premium not knowing what comes next, but i would argue that is fully priced into the markets. tom keene in new york. i'm interested what the german two-year yield signals to mario

draghi. i understand it is contained in italy and a better wednesday morning, but the german two-year yields made another run for a -.26%. they have to look at that? it is an oddity from a monetary policy respect to. use out of the position it initiated several years ago. ultimately the middle of next negative interest rates. the pricing reflects the distortionary effects of the the safe haven asset, the german fixed income market. the current circumstances, the central bank has to look at that as hopefully a short-term aberration of market pricing rather than a signal of the future course of monetary policy.

imagine that the yield makes sense from the perspective of the central bank. if you fell to this uncertainty was going to dampen spending across the eurozone, and this felt this uncertainty was going to dampen spending across the eurozone, it is too early to draw that conclusion. francine: what does this mean for ecb policy? the ecb'sange willingness to normalize by the end of the year? the ecb are caught in a catch 22 situation. they help 2 risks contingent to their profile forecasts. you have upside inflation risks, and you have some not materializing, albeit from the levels. there are downside risks to the growth portfolio. for the euro we would say it will take its cue from the growth not the inflation.

it is about signals. it depends if the ecb's tolerant about letting inflation run hot because of transitory factors. francine: i'm looking at the s&p 500, the 50-day moving average. if you go back to italian politics, is there a danger that none of the parties talk about europe participation or not. the markets take it as a referendum on euro? can you hear me? it realize that was for me -- i did not realize that was for me. francine: i will ask you the question again. yep. it would seem to me from

a monetary policy perspective, picking up on the previous point, the ecb can tolerate modernist overshooting on the oil price affects are pretty pronounced in how high oil prices have climbed over the last year. now, the more recent weakness of the euro. they're looking at a sustainable rate of inflation that will depart from those two particular affects and look at the economy. course inked to be on terms of the eurozone growth story. there has been softening through the first few months of 2018. the underpinnings of growth, which are income formation, the household sector, rising corporate profitability, bode well for continued expansion of we can avoid the risk we were fromng about before

the political arena. mode. in wait francine: do you think there is a concern? none of platform is on the platforms in italy, that the markets will freak out at the populists wins because they will take it on a referendum of the euro in italy? >> there is a lot of bad news. they are attempting to strap a late -- attempting to extrapolate. greece to what we saw in in 2015. we really need a very euro skeptic agenda. happens, -- now we see the 1:15 as the interim referendum point.

up, the deputyg , -- andd parker partner, a chief investment officer and italian banks. it will be interesting to see his take on italian politics. this is bloomberg. ♪

taylor: let's get the bloomberg business flash. scotland bank of cfo has resigned to pursue another opportunity.

seen as awas potential replacement for the ceo. 787's are likely to be grounded because of problems with its rolls-royce engine. it will happen because of force inspections due to durability. sorrell is returning to the london stock exchange six weeks after his ouster as ceo of the world's largest advertising company, a firm largely funded by sorrell. takeover torse leave sorrell in charge of enlisted companies. he wants to build an international communication business. francine: thank you. trump is going ahead with china

tariffs. joining us is the bloomberg economic reporter. it comes a couple of days ahead of the nafta talks continuing. let's get straight to enda curran. at the latest between china and the u.s., it seems one day it is escalating, the next it is the escalating. where are we now? we are on the escalation side. --had strong words from the a strong words from beijing. they weren't flip-flopping would damage the credibility and made it clear that china has the theon to strike back if u.s. pushes ahead with unilateral measures against china. we had a strong response out of china. that even as these negotiations go on, the trade

tensions between the world's two biggest economies are quite severe. francine: the world is trying to figure out how much you would have to suffer. what we're talking about is the plans to impose tariffs on $50 billion of chinese imports and curb investments in technology. what does china need to give to the u.s. to prevent that from happening? enda: that is a critical question. there is a view that china can ofe offers in terms buying more goods. spoken with agricultural and energy products to shrink the deficit. the crew of the division comes to the structural side of tiny's economy. they want a high-tech economy -- of china's economy. they want a high-tech economy. not offering state aid to technology companies, that is where it is going to be

difficult. the structural stuff is much harder. tom: good morning. with was a real surprise the news yesterday. how will beijing respond? there is an incremental pace. xi, how does he respond to this discreetly, or is this a small matter within the larger discussion in beijing? was takenink china aback by the twist in developments. it had been on a sort of de-escalation on trade tensions. if the talks do not go ahead, that would signify china is retaliating in its own way and getting serious. there is a feeling that china will give it a whirl, and see of the northahead korean talks. nonetheless, china has made clear that if they have to retaliate they will do so.

they made that clear with a spokesperson to foreign ministry. china will not take it lying down. but isep hopes going, some point they will retaliate. that is the signal today. tom: thank you for the reports from hong kong. larry hatheway. is a weapon for china. they have a did mess, and international calculus -- they calculus, an international calculus, and a trump calculus. viraj: we don't think it will be a tool that is enforced. chinese and the pboc have made strong efforts to stop the theory of capital outflows and bring a bit of stability in the chinese yuan.

that is what will happen. to diffusen the yuan global trade tensions. it is intro go. white now we are at crunch time when it comes to u.s. trade policy. you have this deal tariffs rolling over potentially on friday. section 332 on auto imports. things are escalating. n, that is the counterpart to u.s. trade policy. tom: i loved what you have been writing in the last 90 days on u.s. international economics. doesn't the turmoil mean dampened growth? c,ntry a, country b, country you get a deafening of gdp? larry: i think the idea of trade wars is overdone.

the repeated trade skirmishes are not helpful for recovery that is trying to gain confidence. this is the most unloved recovery we have seen in our professional lifetimes. it is unloved in part because there is lingering lack of confidence in the corporate and household sectors. adding this political uncertainty about trade scare versus -- trade skirmishes or the previous discussion in italy, it is unhelpful for what we need at the time, a pickup in investing spending given that companies have surplus cash flow and the ability to dispense. confidence is the name of the game. that is the just tractor -- that is that the tractor that is the most worrisome. francine: we are seeing that there is a big pond option in italy that is seen as a litmus test. we understand that the 2028 bond sale covers 1.48, the 2823 bid

covers 1.5 three. italy is selling floating bonds for 2025. the average yield is 2.5%. success,ink this is a or are we trying to read too much into it? i think that question was for me. it not since we are reading too much into it. we are in uncertainty, but not necessarily confident about what the outcomes will look like. also, making the added point in regards to the straight skirmishes and discussion around it, around currency, the chinese have a number of different instruments they can use to persuade the americans to back away from the policies they are talking about or enacts. not all of them are in economics or finance. includeuld -- it could

discussions around the north korean discussion or the south china sea. there are different levers that could be brought in to mitigate the effects of u.s. trade policy vis-a-vis china. francine: we are getting breaking news on the italian bond option, 2028 bond bid to cover ratio is the highest since december. does it mean that they are more stabilizing -- there are more stabilizing times ahead, or could it turn back to what happened yesterday? viraj: the bonds will take their cue from politics in the short terms of issuance. same for the euro. the euro will take its cue from the politics. francine: it is difficult to say who is buying these things? are we looking too much into this bond option as a test of european stability and italian stability? viraj: it is too early. when you have the number of conversations for italian politics, it is too early for

buyers to see this is a great opportunity. -- lly, francine: thank you for joining us. meanwhile, as nafta negotiations continue, justin trudeau has said he would rather see the agreement i altogether then u.s.t certain hard-line demands. he spoke exclusively to bloomberg in trenton. we will have more on that allow the day. we look at the markets and moves we saw in euro. to paulp, we speak donovan about his europe and further integration. this is bloomberg. ♪

francine: this is "bloomberg surveillance." eyes on italy, we had bond action which market purchase of its were saying this was a

litmus test. patel says it is important, but take it with a grain of salt. we don't know who is buying it. the italian demand for the 10-year bond option is the strongest since december. around 3%, the highest since may of 2014. joining us is the ubs chief also markets ashworth -- marcus ashworth. at italy, what concerns you? that italy could leave the euro, or that further european integration takes a step back? l: italy is not going to leave the euro. near, therere

italy is going anywhere. they are in the euro for good or ill. european integration, president for the grand plans banking and fiscal integration, the italian political uncertainty offset that. idea explain the market turmoil yesterday? how do you explain the market turmoil yesterday? has: any honda dealer that watched an episode of "the sopranos" things they are an expert in italian politics. of leak and five star, these are shoehorned into a coalition together, a respective coalition

together, that was never expected to last long. political uncertainty when you have a lot of debt and populist inclinations in areas of the ,lect it, -- the electorate that could lead to concerns. donovan, thank you for the mention of dominoes pizza. we need to educate you that the discussions we are having on italian political economics are occurring at angelo's pizza on 57th street, fourth generation italian pizza. good pizza in new york. what is the pizza going to be in the gdp in italy? does ubs markdown italy as a financial system? no.: at the moment, what we are seeing right now is noise.

the italian economy was performing ok. it has been a lack guard of europe. lending being part of that, the bank lending has not picked up like it has done elsewhere. incrementally, what has happened will change the italian fundamental outlook one way or another. it does not change the european outlook which is a way we are revising growth numbers higher as per today revised gdp numbers from france and other countries. do you go long euro here? 117 to 115 handle. is that the mother of all 2018 opportunities? if we look at the long-term fundamentals, on a 12-month of you, the euro, we have a strength them the dollar is more likely to weekend. at the moment -- likely to weaken. at the moment, the arrows coming

against headwinds. we have noise in italy and spain. that hasigh oil price come off a bit. if you have to pay $20 more for buyrrel of oil, you have to $20 more. that will be a support for the dollar. in the near-term there are headwinds. longer-term, structural lead, the dollar is on a back foot. the current account deficit is there and will be getting larger. that will present challenges for the dollar on the longer-term. , the nextmarcus general election in italy, which come in july, september, or october, is it a referendum on the road? i can't believe the populist parties would fall for that trick.

neither have said they want to leave the euro. boxed into the question of is it a referendum will make it harder for them to game leeway in the polls. i think they will say no, this is brussels versus rome. ,hey will turn around and say not in terms of where we understand it, but that is where the debate lies. francine: for this change ecb policy? i think the only reason the ecb's should change policy is the current market disruption raising fears of systemic risks in the financial system. i do not think we are at that stage yet. i think the ecb should focus on fundamentals. whether mario draghi is focused on fundamentals is a different question. i think the economics of europe is pretty strong and pointing to a process of gradually tightening central-bank policy

over 12 months. better information as of the netherlands, granular data of a better europe. six that better europe get months to a better gdp into a better choice set for mario draghi than what he has now? not sure the data is universally strong. there is a general sense of a weakening first quarter. whether we will see a bounce back in quarter to you the jury is still out. do understand that economies in europe are generally stronger and we are yet to be clear this patch- if this is a soft or something more sinister. i think it is a soft patch, but i don't think we can get too excited on european growth, bailing the ecb or the european economy out of a tight spot in italy, which is not going to go

away. francine: a morning must-read that we picked out out of the bloomberg italian peace that marcus wrote yesterday. you write it is well within the ecb's capacity to contain this crisis using existing capabilities. making a political point and holding back from overt support, it has lost control. time is on the offense to recapture control. had we know the ecb was not buying bond options today? they are under strict instructions not to reveal what they get up to with the ecb, otherwise there will not be a party or activities with them. you can see when the ecb usually comes in. clearly, that was a low of the market. the ecb has a lot it said it

would do, reinvestment's. i bought coming off this week. at the same time it is regular around 4 billion a month qe. it has not made a big effort to make clear to markets it has been active. i would expect something, but some of the statements have come out from the ecb and related parties that have been disappointing in my mind. whatever was said by draghi in 2012, it was with the implicit support of germany and the outright monetary transactions. to have aint we need confirmation, not just in the ecb, but important parties in the rest of europe. germany. that is the concern is if the ecb says, does, or buys anything apart from may be pushing back the start of normalization, would it not be seen as something

political? could that backfire? see: i think if you were to direct and overt intervention, that would be something that would be potentially problematic. it would raise questions in the german media about what was happening. i don't think that is especially likely. i think the ecb is able to revise in stability. yield levels, which is what low.rs, in italy is very funding costs for italy are likely to be lower. when they re-issue bonds, they will be at a lower yield than the bond that is maturing. that is likely to be the case as we go ahead, even with the volatility of markets. i don't think there is the sense of urgency that some of the charts of the last days might suggest. francine: thank you for joining

us. marcus ashworth and paul donovan raij patel staying with us. don't miss an important interview 8:00 a.m. in new york. this is bloomberg. ♪

this this is "bloomberg surveillance." tom is back from a long vacation. this is what the markets are doing yesterday. they were down significantly

because of political turmoil in italy. global markets regaining a little composure. panic over the italian political crisis seems to be subsiding. encouraging data points out of the eurozone. nerves are more steady. dollar as the haven bid seems to be ebbing. the world map on your bloomberg terminal, you can see clearly, in italy, going between losses and gains. it was gaining 1% earlier. the market is trying to figure out exactly what is happening. tom: on bloomberg worldwide, mr. cottarelli saying he is on head old. it will be fascinating to see what he does in the next couple

of days. francine: it depends if he can form a government or not. otherwise, fresh elections. let's get to the bloomberg bloomberg business flash -- bloomberg first word news. taylor: calling the three killings in the city of liege terrorist murder. he was killed in a shootout with police. authorities say the shooter was serving a prison sentence, but was on authorized leave at the time of the attack. president trump's turn on china and trade raises the stakes for the next round of negotiation. president trump is going ahead with plans to impose tariffs on chinese imports. talks will resume june 2 in beijing. the wall street journal says the decision to move ahead with the tariffs could stop the talks. a sign of trade tensions between

the u.s. and china. the trump administration will set limits on chinese visa applications . it could reduce the time at chinese citizen could stay in the u.s.. the president says it is to protect american intellectual property from being stolen. onnzo abe is heading back trump's plan to impose tariffs on cars and metal. he will meet with the president on june 7. global news global news, 24 hours a day on-air and on tic toc on twitter, powered by more than 2,700 journalists and analysts in more than 120 countries. this is bloomberg. continuing the italian conversation, the nation's financials have been amongst the hardest hit over fears of exposure to sovereign debt.

stocks have traded at the deepest discount since february 2017. halted during trading yesterday. let's get back to marcus raj patel.nd vi was saying the fundamentals haven't changed. how do you set or the links between italian btp being smashed? we would not necessarily , asany major impact yet paul was alluding to. italian bank holdings, though they fell by 100 billion over 2017, this year they have risen a lot.

a bit lackluster considering this is a perfect time to cover shorts. thanks with 21 billion and redemptions, you would expect them to reinvest heavily. was a lackluster auction. it suggests there are further problems. the crisis continues. the ecb will look at liquidity for italian banks. keep liquidity going, the last they want is for italian banks to be forced to sell btp's. francine: does this bring you back to the euro crisis? i don't know if the market was complacent last week. this is kind of like a euro crisis sentiment without the underlying crisis, or if this could get as ugly? ofaj: there are a couple technical factors for the euro as to why this is slightly

different from what we saw in 2010. you might not see as much of a sustained risk premium. one is the back stock lingering in the background of investors. you also have a stronger external position for the euro zone. they didn't have that in 2010. also support for the long-term valuation of euro-dollar is massively undervalues. all of those factors suggest euro downside from here requires an escalation. it has to be contagion risk to price in further political risk into europe. get indon't want you to trouble at ing, so i will go to marcus. this is deutsche bank. we know this chart well. this is a beyond elegant chart. , whenare called kisses the moving averages, tight. we have a gorgeous caskiss in m.

where is the level when major banks rationalizing this trend, where is the level we say we have to do something? it.us: we are possibly past deutsche bank's comment that employees will find that fate in july doesn't sound like it is a happy place to work. it is cuts and more cuts. their problem is their business model doesn't make money. cutting it will just lower its cost. they are in a tight spot and they will hope the economy picks up enough to bail them out. italy, germany, and the rest, is the only easy rate out ut in mergers? isn't that the immediate

breakout when cost can be reduced no further? is a desperation measure with the heavy regulation, cuts, and mergers. tom: are we there yet? viraj: i don't think we are. -- marcus: i don't think we are. mergers are harder than they were. everyone kicks the can on a number of different prospects on and italian banks. i don't think we are quite there . tom: bring up the chart. .his chart i find spectacular the rationalization of events by try toket as the banks adapt. i don't know where this chart goes but further south. if you look at the

trend, are those moving averages? tom: yes. overall, what we saw yesterday in the markets is off of technical levels. were away when you last week, i don't know if complacent is the right word, calm. yesterday, everything coming to the forefront. tom: i was on my bloomberg alert every minute the entire way. this has been wonderful. thank you, so much. we are thrilled to bring the synthesis of all europe this morning with paul donovan of ubs. let's cut to the chase. what will mr. draghi do? how will he assess his italy? in the near term, mr. draghi will do nothing. it is something he is good at doing. i don't think we will get a

rough change of policy on the noise we are seeing or the volatility of financial markets. beenconomic data has picking up, inflation numbers are higher than expected, even allowing for the oil price. spanish inflation is taking up a little higher today. the consideration is ultimately price stability. they don't want to engineer financial volatility, that has to be where they go over the medium term. over the medium-term, keep quiet until markets calm down, long-term focus on the fundamentals. tom: when we look at mr. draghi's toolkit, it is about a balance sheet. how does that affect the short-term bond market, the paper the ecb holds? what will it do to the short-term bond market? ul: the ecb is somewhat

constrained because they cannot buy bond yields below the refinance rate. all of the short-term paper they own is italian, spanish, and portuguese. the long-term is all german. that is not a deliberate policy, that is the rule the ecb operates by. this is like rolling over debt has beenesting coupons a big deal when it comes to lending policy. the ecb will carry on as is for the time being. they may step out the framework for how quantitative policy will be managed over the medium term. i don't expect them to stop investing maturing bonds. that continues for years because of this maturity issue. the bank could be set out over the course of the summer, which may provide more stability in terms of medium-term expectations. francine: how long do you expect

the turmoil to last in the markets? if it is through the summer and the italian election is postponed and we saw market data like yesterday, could it impact fed policy at the margins? paul: if you're going to get really turbulent markets, you have to raise questions about financial stability. if we are talking about irrational market moves and don'ted overreactions, i think the turmoil goes on that long. i don't think it collapses overnight and we go back to normal. in the and economic is the only thing that matters. we have to wait for the economic fundamentals to assert themselves. in market conditions it can be a problem, but we will get there in the end. i don't think the fed will be taking this seriously into consideration.

the fed has to deal with its own problems on fiscal stimulus, rising inflation, and a fully employed labor market. the fed has its own objectives to worry about. hit back atina just president trump's plan to push billion tariffs on $50 on chinese imports. is that likely to put the fed off track? paul: this is too small to worry about. .his is not a trade war a trade war would be a policy tot produced the real trade gdp ratio. this isn't going to do that. a 25% tariff on $50 million of goods partially made in china is not going to be that disruptive. the inflation impact is negligible, mainly because we expect companies to find their way around the tariff. only one third will actually

bite and 2/3 will be abated -- will be evaded. tom: thank you so much for joining us on short notice. appreciate your effort. coming up, we will not only continue the story on europe, mixed opinions on what the bond auction meant for italy, but we will turn to the united states of america. we are really going to dive into where we are as we moved to the june 13 fed meeting. stay with us. this is "bloomberg surveillance." ♪

♪ tom: this morning in italy, caught a rally to the rescue as -- markets retaliate.

populist politicians confront market realities like a bond option. -- auction, a did not go that bad. the fed will not blink. komal sri-kumar and chris rupkey. good morning, this is "bloomberg surveillance" live from our world headquarters in new york. in london, francine lacqua. on italy and the bond auction, i like what marcus afterward -- marcus ashworth said, that it was a bit indeterminate right now. francine: the concern is markets were looking at this as a kind of litmus test where the market panic yesterday to see if we were going to get more of that or not. a lot of people are saying we is by. look at who

it's all about -- who is buying. therekets really believe can be an italian exit from the euro, we could ask act more pain. -- expect more pain. tom: i think we need team coverage, you and me from rome, the artichoke tour. german two-year yield improving here to a -.70, that is my litmus paper. francine: overall, like us, markets regaining composure. tom: absolutely regaining composure. our first word news in new york, here is taylor riggs. taylor: the white house is racing to prepare for the summit with north korea. the administration says it expects the meeting to take lace, but says denuclearization in north korea has to be on the table for president trump to agree. a u.s. delegation's meeting with

north korean officials and one of kim's top advisers is coming to the u.s. china is warning president trump cannot carry out his plan to impose tariffs on $50 billion of goods. the wall street journal says trade talks between the two countries could be derailed either trump administration action. canada's prime minister says he would rather have no mass death and agree to a bad trade deal. nafta thanave no agree to a bad trade deal. have been mentioning, a bond auction in italy helped to reassure jittery markets. italy's that office saw five and 10 year bonds. global news 24 hours a day, on

air and tictoc on bloomberg, powered by more 2700 journalists and analysts in more than 120 countries. i am taylor riggs, this is bloomberg. tom: thank you so much. a nice bounce, dow futures up 105, curve flattening . let's move onto the next screen. a 16.35 and there is the german two-year. more than anything else, that is what i am following. that is a higher yield. that should be green on the screen. 6 basis points better in the german two-year, dollar weaker if of that big 95 handle and put bitcoin in there just to put bitcoin in there. francine: always good to look at

bitcoin. the panic over the italian little gold crisis subsided -- political crisis subsided a touch. we had encouraging economic data. haven bids,at the they ebbed a little bit. andian bonds are rebounded the 10 year yield falling as much as 10 basis points and the two-year rebounded a touch. it was a successful bond auction, but the political impact continues. we are covering the latest on all angles. anne-marie, let me kick it off with you. do we have a government or even know who could be prime minister today or tomorrow? anne-marie: no, we don't. nothing has changed at all. we do not know who is leading the government.

-- saying that he either wants -- as a premier or fresh elections and the third we have is cottarelli meeting with the president. they are not making an announcement right now because of what happened in the markets yesterday and this bond auction, not a disaster, not spectacular. maybe that will quell the markets and maybe the officials will want to make some sort of announcement. reporting they are holding back because of how terrible the selloff in the market was yesterday. francine: we are hearing they don't want to put a foot wrong. jones, if you look at brussels, yesterday was significant. it got the italians very mad,

but also a lot of people slammed them in brussels. john: officials in brussels -- jones: officials in brussels are in a tight spot. they need to be supporting democracy and trying to get the message out there, but the kind --market violence turbulence is not what they want to see as well. the german member of the brusselscommission in came out and basically said look out what you do because this turbulence on the markets can be a lesson for you. the officials in italy as well as officials here in brussels were quick to come back and say we support the voters and the voters are the ones that need to make the choice here. backjones hayden, you go to covering -- and you have seen

this a million times. the outcomeg to be of this uproar in italy for the rest of europe or is it just consider the 47th sideshow since 1946? jones: it seems to be much more than that. called. is trying to be they are -- is trying to be calm. they are in the middle of other crises they are trying to deal with. i have the u.k. trying to leave and that you have suggestion this populist rising in italy may be against the euro and if they go to another election, is that going to be a referendum on the euro? that is legitimate concerns about what is happening in italy and it can have broader ramifications. tom: mr. cottarelli has been a good friend of "bloomberg surveillance." we have had him on a zillion times.

elywill he be graded by the -- how will he be greeted by the elites of italy? annmarie: he is for sure a friend of "surveillance." reaches --graded -- he will be greeted with open arms. the elites like him. sts do not like him. he will be welcomed by the elites because he is not a euro thisic, which is what comes down to. how long if he is even able to form a government. many say he will not get a confidence vote. how long he will last remains to be seen. the president likely wants

cottarelli to have time in power to get the budget done. he would be the man to do this and that is why he wants these elections. if they were to happen in september and not july. election, let the genie out of the box. although the populists are quite ambiguous about where they fall on the euro skepticism scale, that is what this election will be around, it is a defect out -- de facto referendum on the european union. francine: joining us for more on the italian situation is surrogate poor -- italian situation is sri-

kumar. >> many of these fundamental structured issues were not adult with, so everybody was asleep flooded theecb -- market. that is one way of looking at it. the other is nothing really changed and just a few weeks back, the same two-year italian yield that spiked yesterday was in negative territory. the, as was the case with majority of the euro crisis, is large andcrisis writ nothing has changed at the economic level. as i have been trying to say, call him down, nothing drastic down, nothing drastic

will happen in the next few days. i think i am willing to go out and say italy will not be used -- leaving the eurozone. almost surely, not ever. francine: how difficult is it to quantify and qualify how dissatisfied the italians are with the euro and the e.u.? sony: italian gdp per capita, real gdp per capita has stagnated at 1999 levels when italy joint the euro and it was only last year for the first time that gdp per capita exceeded the level. lost to large decade under the euro. most italians realize that this is not a really a problem from the eurozone. this is not really a problem inflicted by the european union, almost entirely of domestic creation. tom: sony, you have been a

brexitul voice to us on and the united kingdom. "the guardian" had an article overnight on austerity in the united kingdom and changed united kingdom. is austerity working in the united kingdom? are they becoming more american and less european? sony: i think the u.k. always was much west social democratic than the rest of the confident -- continent. especially if you compare with the netherlands and scandinavia and perhaps, germany. we have always stood apart from the rest of the continent, more toward the american version of capitalism. yes, i think austerity has pushed us further in that direction and the politics you see emerging is a backlash against that. tom: sony, when you look at the

euro experiment, what will you look for and anticipate the rest of the year? panic, think the italian which fortunately has subsided, will increase the urgency of eurozone reform discussion. sadly, it is not going to be simple because one thing you see is all of germany's risk fears coming true and this is exactly what happened last time when the .opulist policy played out what germany's fear has -- is at that at playsee such that the french president, who has been asking germany to come to the table and do more talksharing, will have to even harder because the germans watching what is playing out in the markets and watching the italian elections are going to

be even more reluctant to have any kind of risk sharing, which is strictly necessary to achieve proper eurozone reform and make sure what happened yesterday in the market so it doesn't happen again. francine: what does it mean, sony, for the future of europe? is this less integration? does it but the banking union and capital market union in jeopardy? hard to sayvery because there are two forces pulling in opposite direction. the first is, this highlights the -- of the banking union and other structural reforms. on the other hand, it highlights of the necessity of structural reforms, which the eurozone had become complacent about. this worsens the political space available to be able to enact these reforms. which one of these will be more powerful? i am afraid it is too early to

tell. dominate.se two will either way, the situation will come to a head. if we miss the boat in putting those structures in place, i believe the eurozone will continue to suffer future bouts of liquidity. , thank you forr joining us this morning. in the coming moments, sri-kumar will join us and chris rupkey. really look forward to speaking with them. later this morning, david o'hara will join bloomberg television. this is bloomberg. ♪

taylor: this is "bloomberg

surveillance." bankprise departure, royal of scotland. the seatbelt unexpectedly resigned to pursue another opportunity. stephenson was seen as a potential replacement for the ceo. -- is returning to the london stock exchange 6 weeks after his world's largest -- company. acquired. will be it is a reverse takeover that will leave sore l -- sorrell in charge. that is your bloomberg business flash. tom: i want to clarify that right now, thank you so much for that report. what he's doing is what he did at the wireless company a few years ago, a reverse merger

where he will take s4 capital, which he is a very large thunder of -- funder of. he is doing what he did with wpp years ago, but i want to make clear, this is standard operating procedure for what you see when you are doing a lot of acquisitions down the road. economyto the american and we have sri-kumar and chris rupkey. what does curve flattening signal to you? powell?chairman not chairman powell, but it seems to be a lot of members on the committee fear they should not keep raising short-term rates because it will cause the curve to invert. tom: should they fear that?

chris: i don't think so and powell said directly, no. the reason it invert it in the got out offlation control. when the curve starts to flatten, it is telling powell as the chair that maybe we are not going to do a recession. tom: there are the expertise on chris rupkey. you come at it from a more gdp standpoint. is gdp or the expectation of gdp telling rupkey what the curve will do? i have long maintained on your program that the fed is not going to raise interest rates even three times this year, let alone 4. tom: what will be the catalyst to get them to adjust? where are you this year, three or four? what will be the catalyst to destroy chris rupkey's afternoon

one day? komal: it is coming from abroad for the first time, from italy. the second reason will be all the trade wars with every single trade ally now against the united states and all of that is going to have an impact on gdp growth. you cannot have continued gdp growth doing so well when we have trade conflicts with different parts of the world. we heard interview after interview today that europe is actually doing pretty well given the political dimension. where is your gdp estimate on the united states of america 12 months out? is it three-ish? chris: there is always one soft quarter, so we never quite make it to 3.0%. a were 2.6% last year with

target of 3%. we are pretty close. thank you so much, gentlemen. chris, let me focus on italy. i want to go back to my chart of the day, the s&p 500 flirting with the 50 day moving average. yesterday we saw the markets incomplete turmoil. was it pent-up tranquility that needed to go somewhere or do you think it could turn ugly? turn: i think it could ugly. i'm usually pretty positive, but i think the problem is this will play out over the next 30 to 60 days and there is no real resolution. if this had happened back in 2012, it would have been a disaster, systemic risk, but the ecb foam to the runway. unemployment rate in the area in 2012.

italy, of course, it was 13% and now it is 11%, but they are the outlier. i don't think we are in a situation where the world will tremble, but you have to worry about what the fed will do. the fed odds for a september ike -- hike are only 20% in the market. you have 7 fed members looking for 4 times, but the market is a at the moment, no. and it is partly due to italy. francine: what i don't understand is italy was always going to be a political circus no matter where it went. what happened between last friday where the markets were calm and what happened yesterday was basically suddenly saw people saw this on a referendum on the euro. is that right or our markets understand -- misunderstanding? chris: what became crystal clear to american traders was going to be another vote potentially on the euro and the country might

exit the euro area. i think that is what frightened people. it depends on what the vote is going to be like later on. it could be extinct days of -- 60 days away. francine: what do you make of traders strategy on italian assets should be? komal: i think what is happening is all short-term development. shockeders who were essentially made money and there was a lot of money to be made ongoing short. i think there is a lot to say about what will happen in italy. i don't think italy is going to leave the eurozone. as we all know, italy has had political crises in the past without it affecting the medium-term outlook of the country. whether you have elections on july 29 or sometime in september, elect the populist

coalition, run the government, let the market show interest rates will increase even further, bond yields rise, and then i think there will be more support for the eurozone after that happens. sometimes short-term pain is very helpful in the medium-term in terms of strengthening outlook and that is exactly the way i see what is happening on scene long-term to be beneficial rather than helpful -- hurtful. tom: we had chris rupkey weigh in on a sub 3%. you have been a great skeptic on the sustainability of european economic growth. where are you this morning? komal: i would say significantly sub 3%. tom: is that the consumer? komal: it is partly the consumer, the consumer was very weak in the first quarter and investment spending picked up because of the tax law changes. later in the year, i think the

consumer is going to be the dominant one and when you have 70% of the economies moving down, there is no way to make it up with the remaining 30%. tom: i am thrilled both of you are here today with differing opinions, which is what makes for "bloomberg surveillance." sri-kumar, and chris rupkey. went off inket italy. we will talk about american finance and american economics, former governor of the federal reserve, randall krasner -- kroszner. look at that at noon today. ♪

francine: this is "bloomberg surveillance." tom and francine from london and new york. let's check in on what is trending on tictoc, president trump will meet shinzo abe ahead

of his expected summit with kim jong-un. it is a pretty good story. on bloomberg.com, it is about --ks and you and stephenson -- stephenson unexpectedly resigning. our most read his stories on the bloomberg terminal over the past few hours all italy. there is only one story dominating investor's interest. read why mario draghi could need a much bigger bazooka to deal with italy and we take a look at the bond market and the top of the pile is political moves in rome. about euro markets, regaining a little bit of composure. as we all know, it's all about politics. euro rallying and we saw the italian political crisis subsiding a little bit, but we are none the wiser about what

happens next, whether we see elections in july and september. what i am reading is a popular -- possible alliance between ue andnd five star -- leag five star seems to be fizzling out. the general magistrate calls the three killings "terrorist murder." wasorities say the shooter sentence, wason on authorized leave at the time of the attack. turn ont trump's latest china and trade raises the stakes for the next round of negotiation. president trump says he is going ahead with plans to impose tariffs on $50 billion of chinese imports. the wall street journal says the decision to move ahead with the tariffs could stop the talks.

another sign of trade tensions between the u.s. and china. the trump administration will set limits on chinese visa applications starting next month. says it is toe protect american intellectual property from being stolen. tv canceled rosanne barr's series after she compared a former -- apologized before saying she would be quitting twitter. abc entertainment resident said " rosanne's twitter statement is t andtent -- abhorren inconsistent with our values." global news 24 hours a day, on air and tictoc at twitter, powered by more 2700 journalists and analysts in more than 120 countries. this islor riggs, bloomberg. tom: thank you so much.

it is always an important conversation with the gentleman from canada, that would be the younger trudeau, justin trudeau as always on trade and nafta. he spoke with stephanie in toronto. >> we continue to believe deeply there is a win-win-win opportunity for canada, mexico, and the united states. we are continuing to work constructively with the united states and mexico to do that. we know trade is a very powerful lever to create opportunities and jobs and growth in our economies. we understand there is anxiety about trade in sort of large segments of the population that don't feel it worked very well for them and that is why we have been working hard to make a case for trade, to demonstrate we can sign progressive trade deals

where we demonstrated that issues like protection of the environment, gender equality, workers rights are integral in creating the success of trade deals and create growth. >> how would you think it will affect the summit if the u.s. just slapped tariffs on canadian steel? friday is the deadline for that. >> taking a step back and what the actual summit is focused on. the g7 is fundamentally a gathering of the world's most advanced economies to talk about the economic challenges we have an problem and there is one big economic challenge shared right across not just the g7 some -- g7, but much of the developed world. how do you reassure people all the changes from workplace automation to ai to trade deals and globalization in general --

how are these factors going to ensure the growth we create is fairly shared by anyone? in any trade deal, there are always ways to look for compromises and ways to understand we can get to a win-win-win. i will stand up for canadian interest and only sign a deal that is good for canada and no nafta is better than a bad deal and we have made that very clear with the president. tom: the prime minister of canada with stephanie flanders. on trade, mr. mueller, and immigration in washington, kevin cirilli. i want to ask you one question on trade because the other stuff going on in washington is unreal . the --deau speaks about nafta and then you bring it to

china. how does the government of the united states respond to how china will react to yesterday's news? kevin: it is interesting because the president is not backing when from thely president, from their perception , tried to lift restrictions on zte. we are in the middle of negotiations, so it is very fluid. i am not sure the president would be too upset when canada says it would prefer no deal at all. the base of the trump movement is very much against nafta and that is where it gets interesting because the president, from their perception, could walk away and say, we tried to make a better deal and they said no, so no nafta. tom: i want you to tell me how

the immigration debate is changing in real-time on capitol hill. whether it is children being fingerprinted at the border, whether it is the president's direct comment on immigration, what is actually changing in the debate? kevin: nothing. issue. midterm even if they put up a vote, it will never pass before the midterms. democratse way to get on the report card, so to speak, to be forced to vote on this because any real substantial policy change is so unlikely that a policy debate would come before the midterms. tom: mr. smith at foxnews really came out and tore to shreds one of the president's tweets. help our global audience with what the word meddling means with mr. mueller.

kevin: president trump tweeting publicly he believes mr. mueller could be meddling in the midterm elections, that is a direct attack on the russian collusion and russian meddling in the 2016 election. unanimous consent amongst the intelligence community that that happened. criticizing president trump for that rhetoric and president trump according to mr. gowdy, took it too far. tom: that was brilliant for our global audience and shows the .ackstory's intentions kevin cirilli, thank you so much. patiently on set, sri-kumar and chris rupkey. you mentioned earlier trade affects gdp. that is an export-import dynamic. every article i read says we need to boost exports.

how do we do that? komal: i think it is not done by just focusing on the trade balance. you want to do it with the current account of the balance of payments and you want foreign investments by u.s. companies to be opened up, more sectors abroad to open up u.s. investment so you get more money on dividend payments and as well.t goes normally, if you look for the market opening a lot more than restricting imports, we are likely to get a better reaction from our trade partners than otherwise. been toohe issue has narrow a focus and then responding to it by sharply reducing the imports to the u.s. economy, especially when the global change has been -- become so important. in the case of automobiles, it is very hard to say where the

car comes from with the cars -- parts coming from different parts of the world. it makes it more important to emphasize expansion of relationship rather than containing it. francine: i guess the concern, and over the last hour or so, china has slammed president tariffsflip-flopping on . i guess the concern is the biggest loser in all of this is europe, the countries that solely rely on exports such as german carmakers. komal: -- chris: the president is probably not going to stop until he sees the policies in place or the quotas or the tariffs are there, to try to rein in the goods deficit we have with the rest of the world. this reminds me a little of italy. this is like a story that is just not going to end. he told his base and he promised

them during the election he would make these changes and that is why they quick resolution here, a quick trade agreement, i don't see it happening. about the only good thing we can look for potential he is like what happened with south korea. table hard.e in reality, they did not get as much as they thought. they limited imports to the u.s. for another 20 years, but they came away with less -- they settled for less than their rhetoric suggested. china is a different story. when you look at the staggering amount of imported goods coming in from china, i don't know how you are going to change that because it has been a 20 year trend where the imports continue to flood in. francine: if you say you don't see how this will end well, doesn't mean the markets are

complacent on trade tensions? chris: i think trade tensions will be there. for the economy, if you are a leader, you don't want to make big changes. people don't like big change. what the trump economics team is suggesting could be big changes. i see that as a lot of uncertainty and something that could eventually come back to bite them and slow the economy. the fed will do in the coming 12 months as well. chris rupkey with us and sri-kumar as well. you have got to get chris rupkey on the phone later and you will need charts to prove your story. you can do that at gtv . you can steal these charts and make them smarter. i like this one on the bottom on deutsche bank and other european banks. lacqua in london.

lacqua in london. i am tom keene. please stay with us. this is bloomberg. ♪ bloomberg. ♪

francine: good morning, everyone. this is "bloomberg surveillance ." tom and francine reunited from london and new york. we had most major italian banks to the downside after the turmoil started by the italian politics. a lot of investors saying this is a referendum on the euro. other people not agreeing with it. today we also focus on rbs after the chief financial officer unexpectedly resigned and deutsche bank a leg lower, -- a leg lower. joining us to around all the

bank stories is jonathan tice, the senior banking analyst for bloomberg intelligence. thank you for joining us. if you look at the italian banks, we also spoke to an executive yesterday saying they should not worry about italian becausere than expected he said the clients are there and the economy is strong. you cannot look past this. deratct is the banks are ed because uncertainty has grown. we know with the reduction plan that the government guarantee rolls off in september. we now do not know for next year how much more the smaller banks can do because there is a lot to do and you have the hit to capital that the drop in bond is going to cause. rating and the problem

is they want to get back it -- the catalyst to get back in at the moment. francine: is it elections and no populist or populist saying they don't want to get out of the euro? i absolutely wanted to talk to you about rbs. we had this unexpected resignation. do we know why and does it change the succession plan? john: we do not know why, but you have to work on the assumption that -- is not staying longer because he's -- he was not looking for the top job. even at jpmorgan, the relative pay you put have been -- you would have been given in bonuses, you now have the settlement and years of the government capping the share price and what you can pay as bonuses, still.

you have got to imagine it is and of internal wrangling either there is a great opportunity somewhere else or he thinks he is not first in line to the throne. tom: you mentioned jpmorgan. within the european bank turmoil, what is the advantage for the european multinationals? how do they adapt and adjust in what we see in share price and economic politicals in europe? john: if you go back a few years we would have been talking about m&a. we still don't believe you are going to see any big deals and the u.s. banks don't need to buy in europe to do lots of business in europe. with this turmoil as well, the one thing we will try to work out as -- is we know march was a slide months. it was supposed to be picking up. hithis risk off has trading, they will just do some

hiring. good storyhere is a we covered earlier on bloomberg markets saying if you look at mp isropean banks, the probably the most like jpmorgan in europe, but they are trying to go to germany. you share to give price reaction in the last five years and you have to guess what it is. this one, deutsche bank, below 10 euros. how significant is that and how does each executive make a case for people investing in deutsche bank? john: with great difficulty. -- cost tois barely equity and it will not be when you take in reset during charges toring charges. domestic retail is still a horrible place to be in europe and germany and there is no silver bullet although they need to shrink and refocus, but it will take years.

francine: thank you so much, jonathan tyce. and komalris rupkey sri-kumar staying with us. we will talk to them later about volatility and inflation worldwide purred coming up on bloomberg tv, one of our top interviews -- worldwide. coming up on bloomberg tv, one of our top interviews. we will ask him about the spread between btps and german bund. this is bloomberg. ♪

tom: "bloomberg surveillance" we go dots. i try not to do this too often. it is the acclaimed bloomberg dots chart and all we have to know within your disagreement with what the fed is going to do is we are here right now at 2.2% and we are supposed to go up to hear and then we are going to go up to here, the terminal rate at 2020. sri-kumar, you say this is too high. we go longer-term almost near

3%. can we even do that? komal: i don't think so. you also have the chart with the red line at a much lower level. tom: which signals the different terminal view. komal: i think that is more realistic than the green line you have showing continued increases. the reason being, the fed has been repeatedly optimistic and repeatedly wrong in expectations for inflation and economic growth. i don't believe they have gotten wiser in the last couple of years and they are going to be anymore -- tom: chris rupkey says the red line is wrong and it will migrate up to some level. how do you calculate terminal rate? where is it? chris: it was 5.25%. way up here, folks. bring that chart up free to there is the history of where we were. on radio, it looks sort of like the new england patriots trying

to figure out what to do with tampa bay late in the game. chris: i don't know why they can't move it slowly up to 4%, i don't see the reason. the intellectual reason is the real neutral rate of john williams and thomas law back is 0.5% so if you don't get more inflation, it cannot get up there. i don't really buy it. fed fundslling me 3% rate short-term borrowing cost -- komal: very quickly, i think if they do that and keep increasing to 4%, they will rapidly invert the curve, cause a recession, and that is the end of the rate increase and we will talk about cuts after that. chris: an inverted curve does not cause a recession. it is just a statistical artifact that precedes recessions. francine: right, chris, but it has always been right. komal: you have never had a recession without an inversion.

chris: the fed chair does not believe that, so end of argument. the only reason the curve inverted before was the fed raise rates too high to fight inflation. if there is no inflation, they are not going to push rates to heart. -- too high. i don't see the danger in an invert -- inversion. gentlemen, we need you back to do this again. sri-kumar is 50-50 whether he will come back. jon ferro still cannot get over liverpool, crushed over what happened. pimm fox and i could care less. bloomberg radio, we will do it next.

♪ alix: markets exit panic mode,

hemorrhaging stocks in italian debt stop for now. no trade truce in china. tariffs plans to impose of $50 billion after secretary mnuchin says there was a trade truce. who is in charge? populists make a last ditch effort to make a government. the country could head to snap elections as soon as july. david: i am david westin, right here with alix steel. you know it is a crisis in italy if they are going to vote in july. they are at the beach. like eight weeks you get in italy for vacation? david: that is gone. alix: a sigh of relief after the deep selloff across all asset classes, equity futures up 12 points. a broadly weakerol