new trade deal. president trump's message to canada, sign it or you're out. the rest of the world gets left behind. this time is not different. a new paper by the san francisco fed says an inverted yield curve signals recession risk regardless of the reason. david: i'm david westin along with alix steel. i'm looking at best buy. best buy having adjusted earnings per share from $.79, the estimate $.81, lower than expected. mp store sales is up, exceeding what expected. alix: third-quarter adjusted earnings is lower than the estimate, but the final guidance for 2019, they boosted. maybe a little weakness on the

margin versus what they expected for this particular quarter. next year, they are boosting their forecast. david: you have the basic issues, cop store sales. on the other hand, the other question was their margins, how they are doing costs. we will see how that is reflected in earnings per share. alix: not liking that third-quarter outlook, down 6%. you could argue it was a little high going in because walmart and target had been better. apples better-than-expected third-quarter results could have also been weighing on best buy. david: they exceeded -- compions on, store store sales, two different stories. alix: fx is now 7%. david: still exceeded

expectations. alix: absolutely. all that mixing into the record highs we saw yesterday. s&p over 2900 this point. 3000 seems to be the norm for strategist expectations for the index. the dollar rolling over a little bit, not getting that safe haven bid after reaching a deal between mexico and the u.s. the yield curve flattens nine basis points. we get supply coming online. isde flat on the day, but it right around that two-week high as the dollar comes off a little bit. david: we're joined by luke kawa, bloomberg cross-asset reporter and michael mckee, bloomberg economics and policy correspondent. we are glad you are here. the nafta specialist. that seems to be going away. the president says it is not nafta anymore.

let's put up with the president says he agreed to with the president of mexico. 62.5% of from 70% to madeutos sold in the u.s. enough america. how big of a deal is this when all is said and done? michael: it could be a big deal that it moves mexico forward and perhaps helps canada join in. the press conference yesterday designed to put a lot of pressure on the canadians to come to the table and make a deal quickly. the present looking to get something done by friday so they thesign this deal before presence of mexico leaves office. he has about 90 days left. the u.s. administration yesterday telling me, senior administration official told me

they have to send this whether canada is in or not. david: good news is we would like to negotiate with you. the bad news is you have four days or you're out. the markets like this. they like it. peso is getting good news, looney not some of david: let's put it back up. luke: there are some issues. that thegh to say investor state mechanism they can really overcome that by friday. that was something that brian mulroney got up and walked away from the table rather than sacrifice that. it is clear there is a lot going on. if you look at implied volatility one week, we have this going out by friday, canadian second-quarter gdp

the bank ofnd canada below it's one year average. it is not clear that the currency markets expect fireworks in the near term. michael: the canadians have been following these negotiations. the mexicans have been keeping them up-to-date on what they have been talking about the candidate should have -- about. canada should have been negotiating point when they come to the table. they did make some compromises during the canadian-eu trade agreement. the u.s. is saying, we know where you can go with this. alix: nevertheless, what happened yesterday, another record high on the s&p and nasdaq. forecasts year and continued to climb right below 3000 as the s&p climbs. are they chasing the rally? philip --

luke: a little bit. four days into this year, january 8, i was writing about how the s&p 500 was 0.5% away from exceeding one quarter of analyst expectations. that is how risk the start of the year price action was. this is not even that. we have not reached over bought territory for the s&p 500 since the day after we peaked in january. the rally has kind of got a little better since august 15, which is when we started to make this push towards all-time highs again. every sector has participated. togetherjim polson put five different indicators, including trailing pe, profit margins, bond yields, and he says the profit margin is at near full capacity.

he says there's not much room for earnings and profit margins to rise that much further. at the same time, you have nicholas saying the one thing he learned is never short a new high. you have opposite views there. alix: does rising interest rates offset the fundamental growth? that brings us to the yield curve. this paper says there is no clear data that says this time is different or that investors should ignore the yield curve flattening because of net-net. ers.a it matters -- it matt michael: officials in jackson hole were saying maybe it is different this time because we are getting the search for safe haven assets in the u.s. and questions about long-term growth in the u.s. keeping the longer end lower than it would be.

they are saying we control for that, and it doesn't matter. the normal measure we use, twos and tens is not the best predictor. this is the three-month to 10-year. they say that this has proven to be the best recession predictor. it is much further away from zero and inversion. david: this is the part i don't get, is in the flattening or the inversion? luke: i think once we get to this kind of flat, it pretty much always inverts. there is one theory that within inverted curve shows is that monetary policy is expected to loosen to offset an upcoming economic slowdown. that is different this time because the difference between the federal fund rates and twos,

the last time it was flattening along with the curve. this year, it has steepened year-to-date. participantsrket with tightening having a ways to go. the short end is contributing to this. another factor where people think an inverted yield curve causes a recession has to do with credit creation and the idea that once long-term rates are lower than short-term rates, that will destroy banks willingness to lend. it is unclear what we are using to describe what banking is. kawa: i will bet on luke versus the san francisco fed. alix: wow. david: you can find all of the , rts we just used on gtv from your bloomberg terminal. coming up, more on that not nafta deal president trump is

pursuing with mexico. this is bloomberg. ♪ ♪

kailey: this is "bloomberg daybreak." i am kailey leinz. shares of tiffany are rising in premarket trading. they reported second-quarter earnings above estimate. europe.set a 4% drop in apollo global management has agreed to buy aspen insurance management for $2.6 billion in cash. that represents a 7% premium to spen's closing yesterday.

againsthas come out t-mobile's proposed takeover of sprint. the communications workers of america says the deal would cost jobs, threaten competition, and speednot speak -- the arrival of five g networks. david: thank you so much. resident trump announced a new u.s.-mexico trade deal that he does not want to call nafta. we welcome wendy cutler. he spent nearly 30 years negotiating trade deals. thank you so much for being with us. take us through the process for a moment. we care about fast-track and the need for a certain amount of notice to congress and nafta. what comes next?

wendy: where we are now is a preliminary deal with mexico in principle. now they need to bring canada to the table. by friday, they need to sign the deal in order for a 90 day for the deal to be signed before the new mexican president takes office. canada is under a lot of pressure. the trade minister is coming to town, and she has until friday to join mexico and the u.s. in this deal. david: president trump said we will do it without canada. can he do that? wendy: people are going to have to look at that. havein congressman expressed concern about that and whether that is consistent with the congressional procedures laid out in trade authority.

also, the ambassador seemed to walk away from that of a bit when he said how important it was to bring mexico into the deal. we have seen republican leadership expressed grave ngncern about canada not bei in the deal. david: who has the leverage? isis not clear to me if it president trump or canada. wendy: that is a great question. i think the president thinks the u.s. has the leverage because he is willing to do a deal with mexico. at the end of the day, congress has to approve this deal. if congress is putting down markers that canada has to be in the deal, then maybe canada has more leverage. david: it is fair to say we are not there yet, but the president has taken a step forward towards what might look like a deal. is he bringing together our

traditional allies from europe and canada and mexico and turning toward china? he made it pretty clear that he is in no rush to negotiate with china. wendy: that is an important take away from this. we have seen progress from mexico, the framework deal with the eu, talks with japan. if we can work with our allies and resolve our differences, perhaps we can work together to urge china to get rid of their unfair trade practices. david: from your experience, if we were joined with your, candidate -- europe, canada, and mexico, would we have a stronger position with china? wendy: absolutely. i think china response much better to a group of countries expressing concerns. we need to work together to get

china to reform its economy and openness market and get rid of a lot of restrictions that are in place. we don't want to be undermined by our trading partners if china them to gain t market access at the expense of u.s. exporters. david: thank you. alix: the market reaction was clear yesterday, reversing the risk off trades. you are selling the dollar. this is mexican peso. dollar is the white line. this just illustrates the move we saw, the yellow dotted line with that phone conversation between the u.s. and mexico. joining us is philip camporeale. to show how much we have to unwind for safe haven on trade.

it doesn't matter if it is emerging markets or s&p 500 profits, the u.s. dollar, to get that right, we get asset allocation right. yesterday, we had a huge rally not because 75% of those need to be made -- automobiles need to america, therth u.s. is not going to go this alone. we have a deal. that removes a lot of uncertainty where we can rely on fundamentals for a good stock story. alix: does that mean the dollar has peaked? philip: the dollar has had a flight to quality bias to it. i don't think it has peaked. i think it will rally because the fed is going three or four times this year. the dollar has a bid to i

irrespective of the flight to quality and because the fed is continuing to move on its gradual pace. it is hard for us to predict a dollar weakness without the growth coming. david: is the monetary policy of the fed the cause, or is it reflecting underlying growth? the us economy is growing faster than a lot of other economies. philip: that is exactly. fulled dual mandate is employment and price stability around 2%. we are there. what they said in jackson hole is they are not in a rush to be restrictive. unless they see upside risk to inflation, they are not going to move much faster than neutral rights. the fed is on this gradual pace. they are just following through on their promises. david: philip camporeale is going to stay with us. has announced a

deal with mexico. izzy driving off the lot with a lemon? alix: that's bad right? david: right. you don't want to london. -- a lemon. this is bloomberg. ♪ ♪

david: trade between the u.s. and mexico have a lot to do with automobiles. yesterday featured autos prominently. they have moved up on the news. what effect will this deal have on automakers and buyers? we welcome on the phone charley chesbro, senior manager at cox auto. to us the rules of origin, which went from 62% to 75% made in north america. >> that will make a big

difference for manufacturers. i think it will be a plus for the north american industry to bring manufacturing within region. the key is going to be can we get canada on board with this agreement? david: we had a piece on the bloomberg that analyzed the difference between 62% and 75%. there were three cars. essentially the versa is a fairly substantial car. it is a pretty low volume car in terms of sales. as i said, it's for manufacturers are going to have to react differently and evaluate whether their current supply chains will allow them to be compliant with this agreement or minor tweaks will allow them to get parts from within the

region rather than importing europe oror asia -- asia. that: we also understand 45% of this has to be made with labor that gets paid at least $16 an hour. >> that will be a big boon for mexican auto workers. they have been making one dollar to two dollars an hour in many factories. this will be a big pay increase for many across the country. for canadian auto workers, this is good news. they have been complaining for decades that the wage rates in mexico were so low that there was no way to compete. that is why we were seeing u.s. jobs leaving and heading across the board. david: what about the rules of origin for u.s. jobs? -- the industry

has been focused on manufacturing 62.5% for a long time. where the issue becomes difficult it is technology components. not a lot of those are made in the u.s., yet much more content on vehicles in the region have high-tech components, and there remains some challenge in terms of canadian manufacturing as well as the u.s. and mexico to be compliant by getting all those technology components from asia. does that allow these vehicles to be compliant or not? david: automakers will have five years to comply with that. is that enough time to make adjustments to the supply chain? >> five years should be enough time. the industry has a very long lead time. they are designing vehicles today that they will be selling in 2021.

five years should give them enough time to decide how they want to do the sourcing for various components of the vehicle. for thethe big win industry is the end of uncertainty. we have been dealing with what kind of trade deal are we going to have with mexico. for a year and a half, all we could talk about was the order adjustment tax. the industry was sitting on a tan terms of how to expand and deal with the supply chain. david: thank you so much. in other news, the nasdaq seeing fresh record highs. this is bloomberg. ♪ ♪ xfinity mobile is a new wireless network

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saving you hundreds of dollars a year. plus, get $300 back when you buy a new smartphone. xfinity mobile. it's simple. easy. awesome. click, call or visit a store today. this is moving day with the best in-home wifi experience and millions of wifi hotspots to help you stay connected. and this is moving day with reliable service appointments in a two-hour window so you're up and running in no time. show me decorating shows. this is staying connected with xfinity to make moving... simple. easy. awesome. stay connected while you move with the best wifi experience and two-hour appointment windows. click, call or visit a store today. alix: this is "bloomberg daybreak." it is tuesday. after hitting record highs yesterday, how much more power will we see? s&p futures over 2900 as

strategists continue to upgrade. over in europe, it is a little more mixed. the equity market there continues to underperform, especially banks in italy. a asset classes, it is broadly weaker dollar story -- that safe haven bid coming off in the last 24 hours, helping to support the euro. the euro and the pound, they are up 0.1%. the u.k. has not asked mark carney to extend his term to 2020. theresa may comes out and says it is no big deal, brexit, we can get past it without a deal. david: she is taking success out of what has been a failure. it seems clear they will not get a deal at this point. alix: the market is saying, euro

pound is the highest level since 2017, in the market is like, yeah? david: the market has gotten used to the idea that there will not be a deal. alix: you can see that in the bond market as well with guilt moving lower. david: time to get an update on what is making headlines outside the business world. we turn to kailey leinz. kailey: the white house says president trump and justin trudeau agreed to continue productive conversations on trade. they spoke after the president announced a new trade deal with mexico that would replace nafta. mr. trump called on canada to join the deal soon. warned the u.s. that denuclearization talks are at stake again in may fall apart. according to cnn, that letter came in a warning to secretary of state mike pompeo hours before he was scheduled to leave for pyongyang on friday.

france wants to be ready if the u.k. leaves the european union without an agreement. the french government is preparing contingency plans for a no deal brexit that would deal with border controls and the presence of tradition citizens living in france. living in citizens france. global news 24 hours a day, on air and @tictoc on twitter, powered by more than 2700 journalists and analysts in more than 120 countries. i am kailey leinz. this is bloomberg. alix: the nasdaq sitting at fresh record highs. the tech industry rallied for the second day yesterday even as bank stocks lose a little bite in their margins. are we going to look at a rotation out of technology and into health care? joining us on the front his paul , sloy dahl and holst cio. tech,i am not buying any

at least any of the leaders, the are familiareople with. i am sticking with all of the above, including microsoft. the one that has been most fundamentally challenged is facebook. because i am a country and, i think facebook will be fined long-term. that is the one i am tempted to the faangs, i am tempted to sell apple as it continues to rise in price. alix: you have tech hardware outperforming versus services versus internet versus software. what do you make in that divergence? do you feel that is a shorter term blip? paul: i think there has been a rotation. hasy, merrill lynch

downgraded some of the semiconductor cap equipment names. there is a cloud over semiconductors and that industry within the tech sector is fairly large. it continues to go into software. if you go into technology at all. at least after the quarterly reports, couple of the faangs have shown chips in the arm, particularly -- armor, particularly facebook and others that are socially media focused. david: is it just facebook or netflix, or is there a larger trend going on? this shows the faangs versus health care stocks. some think there is a bigger rotation going on from technology to health care. paul: i think that is true.

is of the things you can say that maybe health care fundamentals have improved. y ifn't know necessaril besides semiconductors at the top of the sector heading for a downturn, how steve that will be great there has been some rotation out of technology into health care. i don't know if it is that fundamentally based. i think it has more to do with some slowdown in semiconductors, some worry about privacy among social media names, and you have to remember that 2018 to date until recently, the technology sector has done so well lisa v everything else -- visa vis everything else, you have to wait for it to take a breather. alix: we are waiting for that. paul meeks of sloy dahl and holst.

if you come inside the bloomberg terminal, you have the blue line as the year-end forecast continues to revise up. the white line is the s&p. is filled us camporeale- philip of jpmorgan. philip: i feel like strategists have been chasing this since 2009. know.yeah, well, i dno'on't philip: consumer spending that has been strong has been coupled with stronger business spending. jpmorgan did a survey where they interviewed a bunch of chief information officers around the country. 67% of those scenarios said they will be expanding their i.t. budget.

corroborated on friday. that is what keeps us invested in the tech sector. certainly security selection is important. for every facebook, there is an apple. aside from well-publicized 2, i thinkeats in q business and consumer spending has been a really strong fundamental. we think it is pretty robust in q3. david: is that sustainable? that went into effect january 1 that encouraged capex. philip: that is true. we are not expecting the next year. it is certainly a tailwind. alix: how else do you play the s&p sitting at a record when you have stocks sitting at 52-week

highs, what do you do? philip: this goes back to valuation. because earnings have moved so much, pe's have gotten more attractive this year. we are sitting at 60 time forward pe's. despite what has been an astronomic rally since the bottom, pe's are certainly attractive. alix: you have to pair that with what is happening with the liquor in the question of if we are heading to a recession if it inverts. the san francisco fed said there is no clear evidence in the data that this time is different or that forecasters should ignore part of the current yield curve flattening because of the perceived macro effects. how do you look at it? philip: dr. yield curve is supposed to be the best predictor. alix: that is dr. copper.

philip: we get this question so much. we're close to inversion. i don't think there is anything wrong with folks getting a little more cash, interest rates in their cash accounts and mortgage rates staying attractive. that is still accommodative for the u.s.. when we look at the yield curve, but catches are i is the ecb -- eye is the ecb is in no rush. stay atese bond rates zero, it will be hard to get the response rate past 3%. this time it is different, it feels like that is what you're saying. david: if you are putting together a portfolio, you can get different signals. is this the ecb being slow or saying something about processing for longer-term

growth, that the markets don't sustainable,h is which doesn't mean you're getting out of stocks right away, but there is a time. philip: that is a good point. it goes back to the long and being driven by foreign demand and inflation expectations, which ties into your growth forecast. the fed has gotten inflation to 2%. there is no one saying be aware of higher inflation. we think the yield curve will stay flat. that is a nice environment for risk in the u.s. alix: when would you get more defensive? philip: it would be jobless claims, housing comps in the u.s., all of that is staying resilient and strong. until that turns over, we are not taking a signal from the yield curve. alix: what about domestic equities? when you look at emerging markets versus the russell, that

shows domestic versus equity u.s., where do you stand in that debate? philip: the u.s. equity market, we are even more emboldened. 50% of our stocks were in the u.s. and 50% were out, now we are at 70% in the u.s. and 30% out. the reason for that is the entry. the dollar has -- em trade. the dollar has rallied. that puts pressure on em. you have a much less attractive story for e.m.. 2015 was a death spiral for em. you had depreciating currencies, fears of recession globally. in thel have em portfolio, just not as much as we were earlier this year. david: it's not so much the fundamentals of the economy. philip: the fundamental story somewhat, buted

the real story is the dollar. in europe, you talk about technology, there is no tech compared to the u.s.. 26% in thein europe, u.s. em.: there is tech in philip: that goes back to the correlation with the dollar. david: great to have you with us. up, gam unwinds the freeze. this is bloomberg. ♪

kailey: this is "bloomberg daybreak." coming up in the next hour, david herro, harris associates cio of international equity. now to your bloomberg business flash. best buy is falling in the premarket after its third-quarter forecast missed analyst estimates. second quarter profits were better than expected, but by u.s. and international comparable sales outperformed. investor demand for an ipo in hong kong, valuation of up to 55 billion.

there is a report that campbell soup will not be selling itself. the new york post reports the announcement will come this week. they may unveil a split of the company. activisthis week, investors said they sale would be the outcome. alix: we take a look at three things wall street is buzzing about, first up apollo insurance policy. the freeze. unwinds gam prepares to liquidate. googling trump does. newsessident surges from self on google. he tweets rigged. david: let's start with apollo.

>> this is off the rails before we get started. alix: yeah, yeah. david: apollo. going into the insurance business. >> going deeper into the insurance business in a lot of ways. this is something that private equity has its eye on across the board. apollo was the first mover with athene. kkr getting into this business. they like the assets. they are sort of a berkshire hathaway thing going on here. they throw off a little cash, reinvest. david: you get a lot of access to capital. all of that flow. alix: do they need it? i understand it you want the stream. david: you can never have enough. >> second of all, what is important about them bringing in

assets is that is how they are being judged as public companies. can they continue to generate fees after an increasing pool of assets? alix: they have increasing assets, gam does not. you have a star trader made a killing. they suspended him. they had to freeze funds, and now they are starting to liquidate. risk all over again. this is what happens when a lot of these big firms when you have a person or single trader or small group of people who are largely responsible for a big chunk of the business and who have drunken capital on their own. they are the personality that is investing. they are trying to set up some mechanisms by which people can gam.in invested in

the investment business is highly competitive. investors are pretty hesitant to stay in something where they feel -- david: the stock is down 25%. alix: they have had $2.6 billion of outflows since august. david: we don't know what it was. it was not wrongdoing. it was an isolated incident. alix: they have liquid assets and less liquid. how do you want to balance that? riskrception risk is a big in the market right now. david: we turn to the present. he is tweeting this morning about google. he did not like the results when he googled himself. areaid google and others repressing voices of conservatives.

this is a serious situation that will be addressed. in other words, they have it rigged. this is on the eve of google and twitter going to congress to testify. >> a week from now, you have big names from the tech industry testifying at capitol hill. the president, it feels like, is trying to bring that debate ahead of this. -- frame that debate ahead of this. the last time we saw tappers up tech companies on the hill, they sent lower-level people. you have jack dorsey. lawyer, and the chairman of the committee said not good enough. this will be a high-profile showdown. alix: can we learn something about president trump in this? he had a win, and then he gets

aggressive. if we look at the trend, he get something done, and that he continues . have. that doesn't bode well for china ahead.inues full steam that doesn't bode well for china. alix: happy you have time to google yourself? david: i think he cares about it. he cares about the media. alix: i have a kid. i have a job. i have a family. you are running a country. hearings have those with facebook in the privacy things. what happened? alix: nothingalix:. to be fair, facebook earnings had to change how some of their fundamental business was done. there were some actual changes. you can see that on their

shares. >> from an investor perspective, it will be interesting to see what the outcome is next week because you have the meaningful players testifying come and get president ise going to be paying close attention. alix: jason kelly, you can tune in to business week on bloomberg radio. you can get your snarkiness in the afternoon. you are snarky. come on. it is good humor. that's quite disappointing. more on what david is watching next. this is bloomberg. ♪ is bloomberg. ♪

david: this is what i am watching, the tale of two retailers. best buy on the one hand and tiffany. buy disappointed on earnings per share. their comparable-store shares were ok. tiffany beat on comparable-store sales and on earnings per share. alix: it shows how much was bacon. in.stock was at a -- baked the stock was at a record high yesterday. you miss on anything, and you can get really hammer. david: estimates were really growing for best buy. you want them to shoot the lights out. alix: tiffany did well and the luxury in general. luxurythat is how well has done. luxury goods have done really

well because of one word, china. they really drive a lot of the growth in china because they love luxury goods in china. alix: they expect global net sales to rise by triple digits. salesore on those retail in the next hour. why the fed knows they are getting into dangers territory with a flattening yield curve while markets sit at record highs. this is bloomberg. ♪ ♪

♪ alix: your turn, canada.

mexico and the u.s. come to a new trade deal. president trump -- signed it or you are out. nasdaq, record highs as analysts upgrade. this time is not different. a new paper by the san francisco fed says recession risk regardless of the risk holding down long-term rates. david: welcome to "bloomberg daybreak," i'm david westin with alix steel. whatever you think about the yield curve, equity off and running. impetus,eeded president trump gave it to them yesterday. alix: less stocks hitting 52-week highs and the volume is light. how sustainable can the rally be? david: august 28, we are into the summer. how many people are at the beach? alix: 100% agreed. david is taking off this week. s&p futures holding onto the

rally, over 2900, up three points, technology leading the way yesterday. currency market, dollar off as hidden bid comes out of the market, euro-dollar of three cans of 1% boosting above the 17 level. yield curve, 20 basis off the lows of the session, auction at 1 p.m. today, solid. what will we see in terms of supply and the takedown demand? crude flat on the day despite dollar rolling over but holding the two week high. david: over 20 basis points. steepening. alix: huge. david: let's turn to trade. president trump's announcement of a new trade agreement with mexico answered one question -- whether he could make a bilateral deal with an important partner but it raised other questions. hills,ome, carla chairman and ceo of hills & co

who has served as the secretary of housing and urban development. welcome, ambassador, always good to have you with us. carla: pleasure to join you. david: the president has an agreement. what about canada? carla: we want canada in. across,pply chains go with our northern and southern neighbors and it is hugely important to our businesses to be competitive. north america today, one of the most competitive regions in the world. david: we seem to be squeezed in terms of timing. as i understand, the administration wants something done by this friday because they are concerned about the 90 day so they cancongress get it done before the new president takes over in mexico. is that doable? ifla: i think it is doable ambassador light heiser gives notice. they could agree between now and friday. if he gives notice, he could

isnd that and tell them he doing a bilateral but he hopes to make a trilateral and get that in soon. i think it could be done, it should be done. david: there needs to be approval by congress even under fast-track. from what you understand in washington now, do you think congress is inclined to go along with the president on this? carla: congress should look at it on economic basis, if we tear up our agreement with our neighbors, we will take a hit, 11 million jobs, some say 14 million, hinge on this agreement. let's keep it going. we can improve it. they have drawn on some measures that we negotiated in the transpacific partnership to cover the modern issues like digital flows. let's not tear it up.

david: take a step back with me strategically and look at what the president may be doing, whether he set out to do it on not which is, actually getting deals with mexico, maybe canada, maybe europe. then turning and facing china. at the same time as he announced the deal of mexico, the president went out of his way to say he does not think it is time to negotiate with china now. carla: everyone has their own style of negotiation. has one style. previous presidents have had another style. it is important i think to maintain harmony. let's see what happens. we have an opportunity to expand build on our- north american relationships, let's do it. , as itif we do that appears we have taken a step in that direction, what sort of

would bergaining power brought to bear against china it in fact canada, mexico and perhaps europe agree with us? in intellectual property issues with china? carla: you can lead by example. when you negotiate a good agreement that deals with the important issues of the day, it provides a model for the rest of the world. that is what the original nafta did. the uruguay round, upgrading the general agreement on tariffs and trade had collapsed in 1990. when we finished nafta. within four months, the trade ministers from around the world came back and adopted many of the measures we had put into the original north american free trade agreement. protection for intellectual property, for international the tradeand the wto, dispute settlement mechanism. we can do it by example.

and by friendship. carla: ok, ambassador, always good to have you here. carla hills joining us from washington. alix: it was a definitive statement. inside the bloomberg, the market, currency market in particular. mexican currency pair, peso-dollar is the white line and the canadian dollar versus the dollar is the blue line. the highs get the session around the phone call with the presidents. the peso continuing to rally. joining us from boston, art hogan, b riley fbr inc. chief market strategist -- what was baked into the market? arthur: we spent seven months going from the high in january to the high on friday and a lot of that was because of the headwinds of trade. for most of this year, the number one headwind has been trade in the market.

we talked about this ad nausea. we long thought nafta would be the first domino to drop. thegood news is, administration shows they will negotiate and accomplish something. then there is the concept that weekend perhaps get canada. it will be difficult to get this done without canada. for the market, there is incremental progress of trade getting better, not worse. we have nothing but bad news on trade consistently so this is the next leg of good news and if we can get canada to join the fray on this deal, that would be great. if we don't escalate on autos with the eurozone, that would be good news and if we try to attempt china, -- that is a much longer play. wind up withu record highs for the nasdaq and the s&p, the dollar coming off, what can you buy at record highs if you need reality to take on more risk?

thing ishe interesting the new record high has a lower multiple. i think that is telling. the fundamental backed up a strong. with a longer play with china, you want to focus on small and domestic. the russell 2000, outperforming the s&p, will continue. small and middle will continue. the bulkinues to get of allocation on the equity side and i think the dollar needs more work to the downside to think about multinationals and emerging markets. we will stick to the russell 2000 versus the s&p 500 call. it has worked so far. it continues because the longer negotiation process next year, with the china situation. david: this is all hypothetical -- take us into a world in which wheat come to terms with canada and mexico -- in which we come to terms with canada and mexico. we have escalating trade tensions with china.

in that world, what happens to the u.s. economy in terms of growth and the stock market? arthur: such a great question. we think about trade policy and tensions -- the core of that is, tariffs, all of that focus is around china. there are two main issues, the dumping of steel and aluminum on the global market and the theft of it. it can and should be dealt with through the world trade organization. we are trying to get a more balanced and level playing field with china. it is difficult. midterm elections, if we are escalating tensions with china, it does not play out well. in the election cycle. my guess is we will try to see, we will see good news on trade choreographed around midterms even with china, that we are back at the table, continuing to talk, those types of things. actually getting something concrete and declaring victory

with china, certainly not 2018 business. if we can show progress, the market will be fine. alix: what about upgrades from strategists? you had barclays last week, michael purvis yesterday. do you buy that? better rhetoric into the midterms -- the you need to look at 3000 s&p? arthur: we started the year with that target on the s&p and that has to do with the fiscal policy stimulus we are seeing relatively accommodative fed. that continues. we will talk about the fed but i'm sure -- when we think about interest rates still low, inflation tame, you have fundamental backdrops for equities markets continuing to be strong. in my view, i think they are trying to play catch-up -- it is a dangerous game 12 months out.

where do we stand in 12 months if we are trading 16.5 times on trading 16.5 times on the s&p 500, that is reasonable considering yield on the 10 year? . alix: sticking with us. flatter as she goes. rates getting tighter, the question -- is it a recession indicator or is this different? the san francisco fed is weighing in. this is bloomberg. ♪

♪ kailey: this is "bloomberg daybreak," and i have the bloomberg business flash. best buy falling after third-quarter forecast missing lowest estimates. overshadowing a solid second quarter, revenue and profit were better than expected.

shares of tiffany rising in premarket trading. the luxury chain reported second-quarter revenue beating estimates. the forecast, experiencing a renaissance. firm, apolloquity global management has agreed to buy an insurance company in cash. this represents 7% premium to closing price yesterday. they are betting they can use this to generate higher returns. that is your bloomberg business flash. david: thanks. the yield curve continues to flatten. market participants debating whether we are heading toward inversion and with it, a likely recession as has happened in the past or whether this time might be different. >> the big event is the flattening of the curve. we can argue about the level it

hits but we -- the big question is -- do we get this and what will that mean? >> we will see inversion. >> when? >> sometime this year. i don't believe it means we are going into recession. >> this time the real fed funds rate is negative. we do not have restrictive monetary policy. this is about technical factors. >> especially 10 to 30 flat part of the curve, we are getting to a flattening, we could go inverted, it doesn't mean automatic recession within 12 months but it lends that way. >> the policymakers keep moving, we will probably have inversion of the curve before the end of 2019 and history shows that if the curve inverts typically, six to 12 months before recession. >> it has inverted three times since 1985 and every time it has been followed by recession. strong indicator for the u.s. economy. david: just about every point of

view on the yield curve. still with us, art hogan of b riley fbr inc. tell us what the real deal is. arthur: that what's makes markets perceptive. interest rates are held low for a decade by aggressive monetary policy. the inverted yield curve certainly has a high batting average for being a predictor of recession, unfortunately it is causal. financial institutions, banks, stopped the lending process if they cannot borrow short and land long and make a profit. it slows down economic activity. because the curve is flattening, it doesn't need to invert. there are three things that can happen. the composition of the balance sheet, said has a $1 trillion balance sheet, if the rolloff focuses more on the front end of the curve in the back and, you could see spreading.

if treasury issuance focuses more on the back, you could see spreading out. the third thing. we may not be the only central bank raising rates, either by the end of this year or the start of next year. that has kept the long end down. we are taking away accommodations so the two-year is matching monastery policy -- monetary policy. ecbou saw an uptick, the takes accommodation way in the fourth quarter, first quarter, you might see a left. just because we're flattening doesn't mean we are recessing. you kind ofms like agree with the san francisco fed. "there is no clear evidence in the data that this time is different or that forecasters should ignore part of the current yield curve flattening because of the presumed macro financial effect of qe." they tried to strip that out and look at expectations. it doesn't matter why the long and is down, it just matters --

long end is down it just matters whether there is inversion. the san francisco fed papers says that three months was well off inversion. arthur: the most popular way to look at it, the three-month 10's, that is fine. as long as they are paying attention and realize this is a dangerous situation. the fourth thing -- the fed it could slow down on tightening. they can slow down, they do not have to go in december. they know they want to raise rates four more times and get to neutral but it doesn't necessarily happen at that rate. alix: does that mean the bond market can dictate what the fed does if they keep pressuring the flattening? arthur: i absolutely think the fed is watching the flattening

of the yield curve and will change their actions if it remains where we are 20 basis points, anywhere below 50 basis points. i think it will affect their behavior. i think they know the result of the inverted yield curve is not something good 18 months down the road. alix: great to see you. thank you. best buy falls. the stories you need to know about today. this is bloomberg. ♪

♪ david: we will talk about company stories. the first 1 -- autos. alix: shocker. david: toyota invested $500 million in uber. this is part of a deal where they start making minivans powered by uber self driving technology, a way of cementing the relationship, to go forward

with autonomous driving. for companies that may be behind the self driving world, even the ev world, you have to look for different partnerships, primarily with tech companies to get a leg in. cruise, softbank made a big investment. auto companies are teaming up and having different place. -- plays. alix: david looking at cars. i am not looking at a commodity company. i am looking at best buy. this is a fascinating earnings conversation. record high yesterday, lots of expectations into the quarter. walmart, all looks good for best buy and in the third-quarter guidance missed expectations. who cares if 2019 was boosted? david: analysts have high hopes for this company.

they have done a good job of cutting margins, cost, prices, to compete against amazon alike. they have done well. they need constant upgrading. alix: they did that and a few years ago everyone was writing them off. final company story. we welcome brooke sutherland, looking at another effect. southern hass city significant exposure to mexico. they do a lot of business between mexico city and texas and businesses. you saw them jumping pretty significant yesterday on the preliminary deal. a big part of why you saw that john is the case for them is mexico exposure. that offers unique volume growth opportunities that the other railroads do not have. there has been a cloud over that

given much of the business comes from automobiles. david: is this because the new deal will increase trade? or is this reversing what had happened because they are worried it was suppressed? latter.it is more the this more eliminate the worst-case scenario for kansas city southern. on see a maximum 25% tariffs automobiles, that would crush the business. ,nother thing is the new nafta doesn't change the game for cars out of mexico. a lot of them already comply with the 75% made in north america requirement. there is only a few models that will be affected. still questions around the wages requirement. there is not necessarily a change happening, which is great for kansas city southern. trade wars,cohol, that is on pause. mexico will not attack cheese. david: they can have bourbon.

is not am sure that huge driver for kansas city southern but the idea that things -- the tension that was there can be left alone. brooke: absolutely. they do intermodal business, not just cars. ag products will factor in. they are continuing to benefit from the tightening of the trucking market. david: this is not fair. is there a railroad that would similarly benefit if canada --? brooke: i was thinking the same thing. at the you would look canadian railroads, canadian pacific, canadian national, that do more traffic between canada and the u.s.. i do not know if they had been pressured to the same extent as kansas city is. 48% of the revenue from mexico, 30% was quarter. you're talking about significance. david: they are really exposed. i had no idea.

brooke: when you look at canadian national, that is up 16%. it is not necessarily from mid-july. nonetheless, it is a good question, in terms of offshoot plays. how muchake a look at expectation was baked in that was bad. i how much the stock went up. alix: kansas city southern has a lot of great things going for it. brooke: it is the cheapest u.s. railroad because of the mexico question. alix: thank you so much. good company stores. top holdings include european banks and automakers. this is bloomberg. ♪

♪ is "bloomberg daybreak," i'm alix steel. high,tures at a record over 2900. nasdaq up 21 points.

italian banks get it, dragging down the market. for tens of 1% in europe. flatter curve, dollar coming off, no longer needed, the safe haven bid and euro-pound, the highest level since 2017. traderopping, the goods balance widening to -$72 billion for the july trade balance, widening out. the wholesale inventory numbers month on month coming up 7/10 of 1%. the conversation was -- will we see buying ahead of tariffs? that would increase the inventories but the deficit blowing out. david: this was the first month with china tariffs in effect. we will turn to michael mckee. going into this month, a lot of people were talking about tariffs. which way does it cut? michael: it is bad news for the overall gdp numbers because trade deficit subtracts from growth.

we do not have all the details on trade numbers but let me pull up a chart to show you what we are talking about. we saw in prior months, soybean exports. you can see early in the year, soybean exports soared, countries were trying to get ahead of potential tariffs. in the -- in june, we saw them flatten. did we see them start to decline? which is what everybody expects. we will get more detail on the numbers but that is the kind of thing people have been looking at. was there buying in advance? we saw this with steel and aluminum, trying to beat the tariffs, stockpiling ahead of that and i would suggest we will see the deficit continue to widen. david: the president is fixated on the trade deficit. his strategy toward china does not seem to be working this far, but maybe he would say, get tougher? he said the other day this is not the time to talk to

the chinese about doing something about the dispute, suggesting he is still focused on putting pressure on them. now we have the potential of the $200 billion in additional sanctions for china next month. we do not know if they will go through with that but that is the sword hanging over the chinese at the moment. goods trade deficit blowing out to $72.2 billion. not necessarily an indicator to gdp but buying of goods ahead of tariffs coming into effect and you have inventories on the wholesale level rising 7/10 of 1% and retail inventories rising for tens of 1%. similar story. by now, stock up, leave it, then sell. influencing the numbers. i am looking for details but the table is not coming out as fast as i would've liked. will this be a blip or a trend? michael: it looks like a trend. you get seasonal impacts. the tradesee

deficit widen, august and september numbers in particular. tariffs are causing people to stock up and it looks like also inventories rose significantly, that is a measure of trade numbers usually, then we will see the trade deficit widened. . david: what about repatriation of funds into the united states? should that in part of the lira oraterade deficit? -- ameli the trade deficit? cash wasmost of that invested in u.s. treasuries in the united states. the law was you could not take that money and spend it in the united states but you could invested in the united states to save it. that was what most companies were doing. david: the administration was

thinking there would be more investment and companies would bring their plans back here and manufacturer. which would presumably help on exports. why is there such a lag? michael: there will be lag. we are seeing business investment numbers rise but that is domestic investment. what you want to see from the trade balance is foreign investment. the current balance is foreign investment and that will happen with the lag. trade deficit blowing out to -$72 billion, year on year basis, over 5%, motor vehicles, retail inventories up over 2.6% year on year. getting ahead of the trade stuff. thank you very much, great to see you. joining us from chicago, david g herro -- eco-manages funds including the international fund which has a sizable position in auto manufacturers.

european auto trading higher following the recent deal between the u.s. and mexico. great to see you, david. thank you for joining us. how are you playing the german automakers now in relation to a trade deal being worked out? david: even before the trade deal was worked out, these companies had been hit from a price perspective, quite hard on trade fears and tariff fears. these are businesses that have operations all over the world, production all over the world. somewhate tariffs are of a negative but i think when you look at the big picture and if you look at long-term cash flow streams, the severe downward price movement, bmw in particular, have experienced, to us, have not been warranted by fundamentals. now that we see a little bit of trade pressure released, you see an uplift in price but when you

look at valuations, we think there is more to go, that the prices today, the valuations today reflect a kind of permanent dominion mission of value which we do not believe exists in these companies. they trade somewhere around mid single-digit price-to-earnings ratios and yield and in some cases, the yield is greater than the price-to-earnings ratio, which we think is a good sign of value. david: markets overreacted. does that mean you are buying more? our mo is that we are very stock specific investors. when price emerges greatly from value, we use that as opportunity to add. when price moves to value, we use that as opportunity to subtract. in most cases, in names, including the auto component companies, value has been stable

or even slightly up, with prices falling aggressively, you can imagine how we would have reacted as long-term value investors. david: i think i can put that together. let's assume the market has overreacted. when you look at bmw -- would you be more concerned about possible tariffs in effect for imports of automobiles from european, united states or more concerned about china imposing import? some of the most high valued vehicles made by the interview -- made by bmw are exported to china? david: exactly correct. bmw and china export from the united states. peanuts, it is 58,000 cars. more impactful, taxing imports from europe into the u.s..

in china, manufacturers are broadening production, bmw for instance, is starting to make x 3's and suvs in china. eventually, you will see a balance of production where sales are but as far as sedans and high ticket items, a lot of these are still exported from germany to the united states. ago,aw three or four weeks mr. monaco from the european union met with the united states and supposedly they are working toward equal low tariffs deals, which would be good for the german automakers. also do not forget, china cut from 25% to 15% for the cars going from germany to china. there have been interesting

tailwinds, beside the headwinds we know about, there are tailwinds. if the u.s. and china are in a trade war, those trucks, suvs made in alabama and south carolina, those would also enjoy a lower tariff, 25% to 50%, but because we are in the dispute with china, you do not see that. alix: for the stocks you do not own, has the selloff into the trade issue presented opportunity? is that opportunity still there considering we have a deal between mexico and the u.s.? david: we look at other things. trade issues hit share prices. we have added new names to the portfolio for various reasons. certainly, this spring and summer, the two biggest macro events that have impacted share prices have been trade and european politics. european politics have adversely hit the financial sector of

europe and you see extremely low valuations. trade friction has hidden industrials. not just automobiles but italians like cnh, the maker of farm equipment. even, despite the trade noise, we have seen good numbers. we have seen good numbers of cnh, which to us, means opportunity. price is weak as a result of the macro events but actual business conditions are quite strong. david: we will talk about the other macro event -- european politics. in the meantime, updates outside the business world. kailey leinz is here. kailey: the white house says president trump and canada's prime minister justin trudeau continue to have productive conversations on trade.

this after a new agreement was announced with mexico that would replace nafta. the president called on canada to join soon or risk being left out. north korea warned the u.s. that denuclearization talks may fall apart. a letter was sent to mike pompeo hours before he was scheduled to leave for pyongyang last friday. he canceled the trip. british prime minister theresa may signaling that a no deal brexit is not the end of the world. she told reporters on a plane heading to africa that the u.k. can still make a successful brexit. week, philip hammond said a no deal brexit woodcut economic output and add government borrowing. global news 24 hours a day on air and @tictoc on twitter, powered by more than 2700 journalists and analysts in more than 120 countries. i'm kailey leinz, this is bloomberg. thanks. let's talk about what theresa may said on that plane.

"it would not be a walk in the park. it would not be the end of the world. i have said that from the beginning that no deal is better than a bad deal." that may be the wish. there was a conversation on bbc that it would not stop. david, still with us from chicago. how do you position for a no deal? already a lot of assumption of a no deal in share prices in the british pound. if you look at what has happened to a lot of small and midsized companies, not the multinationals, but the small businesses that are their money in the u.k., they never really recover that strongly from the 2016 brexit shock. a lot of these share prices, clearly, there would be

instability, further instability, if they cannot come to some sort of deal. i would assume eventually after instability, you hit equilibrium. this is what happens in markets. some of it is projected. you will probably get more. then you have the calm after the storm. it will cause a storm if they do not reach a deal. alix: how long does the hurricane last? italian yields at record highs. we will discuss italian banks with david, next. this is bloomberg. ♪

♪ kailey: this is "bloomberg daybreak," i'm kailey leinz in

the hewlett-packard greenroom. later, democratic senator ben cardin of maryland. david: the selloff in italian assets continues with bond yields nearing the record high they reached last may and italian stocks are down more than 5% this year. is italy somewhere you want to invest in? still with us, david, there is no one better to ask the question do. to. tell us yourt cnh, prognosis for italy? clearly, the political situation in italy -- by the way -- has never been very stable -- it has something like 66 governments since post-world war ii. this is a place that tends to be politically unstable. i would add, it is also a place

that still functions despite the political instability. if you look at what the impact has been on share prices, this inability to come up with a unified government, you have seen extremely severe downward impact, especially the banking paolo, a stock down 30% off the highs in february and january, despite this and despite the low share price, business continues to do well. loan losses trickle-down and at reasonable levels. theytock of bad loans, have been offloading the balance sheet, the capital position is quite good. it is really this macro economic uncertainty, not fundamentals, that in this case, is hurting

the share price. we see this as opportunity. as long-term value investors, we analyze and measure value and try to take advantage of what the market gives us in volatility. we believe the market has given us a buying opportunity so we are of course going to take advantage. you have to look through the cycle. you cannot be looking day today, week to week. we look quarter to quarter, year to year, three-year to three-year and making these judgments. david: three-year is a good time. at some point to the business fundamentals come together with the politics. we have a tension over the budget and how much money the italian government can spend. they have to make substantial cuts, they have to go through austerities, maybe the way greece did -- cannot affect business fundamentals? david: you have to analyze and look at these things. you are right. in the case of italy, they have

a relatively healthy portion,, large portion not economically healthy, of sovereign debt. debt to gdp is 130%. there are a couple things that come to bounce. the public -- that counterbalance. the public sector owns a lot of assets and unlike greece, they can probably go through asset sales to help work on that debt. number two, and more importantly, italy is wealthy. gdpprivate sector debt to is extremely low in italy. you do not see this consumer leverage and business leverage. it is a very wealthy country when you look at private sector debt to gdp. they do have to control spending, they need reforms, but more importantly, they need to start growing the economy. the north grows. the south does not.

they have to come up with solutions to energize this economy. alix: are you adding to the current positions or looking for new positions in different italian equities? david: we are always looking for new positions. newave not added anything in italy because we are very happy with the quality and price of what we own. the value proposition of what we intessa and cnh, it price drops significantly an intrinsic value does nothing but drifts up, mathematics will tell you what we do. we take advantage of the opening value gap. similarly, price converges and resell. the value gap in this case has been opening, meeting price is moving in a different direction than underlying intrinsic value. david: we have been focused on

italy. expand to europe. do you see opportunities for investment or mismatches of price and the market to value elsewhere in europe? david: what has happened as a result of instability in italy, those waves have drifted across the national boundaries. high quality extremely well-managed banks, they have italian operations and a tiny turkish operation. things like that, despite the fact that they are not really measurably impacted by either of these places, from a fundamental perspective, share prices have been. this provides opportunity. you can see it. this has been the knee-jerk reaction of the market since the global financial crisis.

of european stability anywhere and automatically european financial sector gets hit, despite the fact that the european financial sector today is stronger and sounder by almost a factor of two when you look at capital position than they were precrisis. glencore, lawsuits, regulatory risk, a subpoena. do you add weakness? david:. you have broader issues when you look at fundamentals, with the exception of copper, your pet strong commodity prices and a lot of the key areas of off put, nickel, have been doing well. the trading operation is doing well. remember the fears of three years ago, the balance sheet. the balance sheet is strong today. debtouble digits of net and several million, there he

strong balance sheet, good commodity prices, a good trading operation, we will get to the legal issues, we think they are an attractive stock at these prices. alix: really great to get your perspective. thank you. coming up, focused on the lira moving higher against the dollar. will he get support from germany? that is the question. go to gtv . this is bloomberg. ♪

♪ alix: here is what i am watching. the lira moving higher against the dollar. the wall street journal reports that germany could extend financial help to turkey, they could come from a coordinated bailout, or specific loans, state development banks, maybe bilateral aid.

there may be european entities willing to step in. david: france has had concerns. civilized turkey would be very threatening. the immigration issue. people are concerned turkey might walk away from the commitment to europe dealing with refugees. alix: emmanuel macron saying today that their reality is that they are not anti-europe. interesting development. coming up on "bloomberg barclays head of u.s. equity and global derivative strategy upgrading the s&p price target to 3000 last week. this is bloomberg. ♪

alix: from new york city, i'm alix steel. we are 30 minutes until the start of trading. this is the countdown to the open.

moment of trudeau's truth. the u.s. and mexico come to a new trade deal. president trump's next is -- message to canada, sign it or you're out. strategists upgrading their target to keep up with the rally. and learning curve. an inverted yield curve signals high recession risk regardless of the reason holding down long-term rates. continuation of the record rally we saw yesterday. 2900.s over s&p closing at a record high as well as the nasdaq. in the currency market it continues to be sell the dollar. euro-dollar 117.