judgment day for italy, they wait for the commission to revise or resubmit the budget. it's an unprecedented step. we have an exclusive interview with the italian prime minister. rebounds are short-lived as the market awaits u.s. earnings. to call the equity roller coaster. they are trying to stop modifying it in an asset management programs. david: welcome to bloomberg daybreak. before we came on the air, president erdogan on had some strong things to say, a saudi general led the team in. he says this goes up to the top of the government and he wants the perpetrators to be tried in turkey. have he said he may not ordered the killing of the journalists. you saw equities bottom with that.

there was some conciliatory language there. david: he was statesmanlike. he did not go after the king. the president sent the head of the cia to do the investigation. the president said he's not satisfied with the answers he's getting. alix: united technologies are front and center. and a boostedt its low-end sales forecast for the year. the stock is up .4%. companies,industrial you have a house and have-nots. you have the big conglomerate guys are doing well. we will spend more time on industrials during the program. harley davidson had a big beat. the estimate was $.51.

it was 3.7% better than analysts estimated. if the stock is up almost 5%. a lot of motorcycles are going out the door. alix: that will weigh on the stock market. you have the s&p futures a little bit off the lows of the session. this is a very good side for risk off. it started over in china despite actions from the government. it spread to europe. it's now continuing in the u.s. the euro-dollar is flat. it's a flight to safety. when it comes to bonds, it doesn't matter what it is, the yields are down by four basis points. crude is getting whacked. -- energy minister of saudi arabia speaking. there could be 2 million barrels of oil a day. david: it's time now for the morning brief. we're going to get earnings from

caterpillar and verizon. at 9:30 a.m., we will hear from several federal reserve presidents. at 8:00, the world series against tonight at boston. it's going to be pretty exciting. alix: it's time for the first take. michael mckee joins us. let's start with italy. it's the spread i want to focus on. we are now up over 300 basis points. the question in the market, what financial stress will we see for anyone to get their act together? points is theasis pain line for italian banks. that's when everyone is watching if the capital ratios go down. that's a real problem because they are the only buyers right now. that's a problem for the italian government as well.

stocks for not doing well. this may go on for quite some time. >> italy is not alone. european shares have been trying to recover. that's consistent with what's going on globally in the equity market, a pretty big meltdown across the world. as we head into this earnings season, it's too high for forward growth considering the italian situation and brexit. generally, it's not great economic growth in italy. earnings picksee up to stimulate equity performance amid the political chaos. they have exposure to china. the chinese stock market. you don't even see that sentiment where. david: beautifully done. that brings us to china. china has been all over the place.

they are coming back down again. they are up and down the last couple of days. this is quite a story. the chinese government every day tries to do something to shore up the markets and the economy. michael: over the weekend, tax cuts. someone tried that. so far, it hasn't shored up the market. shares of and uses collateral in loans. there are questions about chinese growth. trade war's, china's influence on the world has been largely through trade. are broughtucts into china, assembled and sent back out. that's a bad sign for the world. the chinese markets have gotten more exposed. they were very internal. contagion some of the leaks out. gina: when you get a government

coming in and they're going to , that's aary policy good thing. that's the risk on scenario. that was yesterday. i think it takes a while. thek about how many time fed used until we get the trigger bottom. i'm not can. today, you've got a situation where the central bank is attempting to shore up investor confidence. the economic data continues to deteriorate. you will reach a trigger point where that's enough stimulus. the market is telling you it's not enough yet. oftentimes, you only see those in bear markets. you only see these big surges in a bear market meltdown. volatility alone is a symptom or signal that was happening with the central bank is not enough. it's not quite enough to shore up investor confidence just yet. alix: even if you have good year -- earnings, we don't believe it

just yet. the numbers we have seen so far this morning are pretty good. harley davidson came in very strong. they had a pastor of the leak for raising prices. caterpillar in about half an hour. why the soft? why are things in a one-month low? michael: it's news around the world and sediment. harley is fascinating. they are going to move overseas because of the tariffs killing the business. it's kind of interesting to look at that. forproblem going forward investors is we are at a peak here, or we were in the second quarter. when you look at the earnings surprises, we are at 75%. 50% of companies -- i've got a chart for that. bigger than 50%

be earnings since 1998. 22%g forward, we are at earnings be so far for this quarter. if you look in the second quarter of next year, you're looking at 7.5%. revenue is not matching up at all. we are looking at 5% in the first and second quarter of next year, fewer than 50% are reporting positive revenue surprises. the lookout is for slowdown. gina: it's a tough question. thank you very much for that one. it's a defensive of trade in the equity market right now. as earnings, we question the earnings outlook. you see a defensive rotation into cash and bonds. i think we are seeing that. i believe this whole scenario we

have undergone the equity market is about margins and margin risk. we are pricing in a new environment. we had this margin expansion over the last several years. the outlook a month ago. we've been reassessing ever since. until we get to a point where companies are sure of expectations and we have priced in a different marginal outlook, we will not see a bottom. we are in the process of finding that right now. until earnings season is over, we know -- won't know when the bottom is in. david: thank you very much for being with us. if you want to look at charts, these are the charts we have used throughout first take. you can use them yourself on the terminal. coming up, we talk more about china stock. they are swinging back into the red overnight. with jurrien.

my from new york, this is bloomberg. ♪

: this is your business flash. they have suffered a setback in the california court. allegationsial into of weedkiller. cut damages from $289 million to $79 million. the company faces thousands of related lawsuits. vape runs the most in a decade after margins disappointed. they produce optical sensors. the push into augmented reality have made them a critical supplier. shares are falling today.

they pulled out from the troubled swiss manager. management in the july after allegations of record-keeping. that is your bloomberg business flash. david: the chinese government has taken steps every day to support its economy. despite the efforts, the stock market was down 2% today after a similar ride yesterday. welcome from hong kong, our chief asia correspondent. thank you for being with us. it seems like they are helping things. is it working? almost hard to keep up with the pace of announcements. a message theyg want to stabilize. today, we had another 2.7% drop. pacific down to china

factors, others say global risk off. there is no doubt that the authority and the actions they are taking and the record they are delivering, they are willing to step in. they are watching it closely. all indications are they want to stabilize things. david: i wonder if this is taking a page out of the values book. they led these announcements. they said whatever it takes. we are going to be here. we are not going to let go. >> that seems to be the message. they seem to be succeeding. the currency has been stable. them givenessure on the trade war story. they are having some success. on the market side of things, we had this innervation --

intervention. we had a very strong statement i aboutesident x unwavering support. there is still downward pressure on the stock market. all of the rhetoric and the combinations of actions are not putting a floor under the ceiling. we may move from the action we are getting to something more pronounced and interventionist. david: thank you so much for your reporting from china. alix: we are looking at the csi on the 30 day basis. four days of straight 2% moves to the up-and-down side. does that create opportunity? join us is the fidelity investments manager. when we look at that market with that kind of volatility, do you have to look and pick and choose about what you want to buy right now? jurrien: there is a tale of two

china's. you have the strong going consumer tech stocks and also the internet stocks. then you have the really cheap enterprises, the stuff is trading at a five multiple. when you are looking at e.m. in general, you have to choose between those two. one are structural growers, one or more cyclical. china is going through its two-year cycle. consistent very two-year cycle where it reflate's, the economy booms and overheats and then they tighten. they been tightening. the last two months they have been an easing mode. they are trying to inflate the economy again. when you are playing cyclical versus structural, that's the main decision in terms of whether the chinese authorities are successful this time. i wouldn't want to that against

them. one of the questions over the long-term is how many times can they go back to the well and create more credit and do more stimulus. will still have the same multiplier it has had in the past? that's a big open question. david: as we assess was going on, are we looking at the stock market too much? compared to the s&p, it's the lowest it's been since 2005. it's down that low. is that important? how important is that? jurrien: i don't know that it's that important specifically. there are large gaps in performance between the u.s. and u.s. developers, especially in emerging markets. china is a large part of that. we've seen these gaps before. differential-year in total return is about 21%,

which is significant. the swing and earnings growth between the u.s. and the rest of in the developed markets it's gone from 11 percentage points to -13. that is in the last six to nine months. the gap is very big. it is juicy enough for me to take a look at. what is going to be the catalyst to close that gap? my sense is that they 2019 story. by then, china should be in reflation mode again. the u.s. from an earnings growth perspective should be decelerating. i know we are going to talk about that later. earnings will go from 24% back to 10%. those9, we will see pieces of the puzzle coming back together. we are missing the catalyst. david: it appears china is

buying reflation through leverage. can they afford to continue to buy inflation? this is what happened in 2015 and 2016. the chinese government said no more debt. we are done cranking up that multiplier for new credit. then the economy really slowed in 2015. they were trying to do the anticorruption and cons elevating businesses. it was they realized easier to go back to the well. they infused $1 trillion in new credit in 2016. they had the predictable overheating and they started raining and then again. we will have to see if they really decide this time that we are done with that. they are easing policy on the monetary side. they are cutting taxes. we will have to see if that will

do it or not or if the chinese government is going to be ok having structurally lower growth. it's not the end of the world. you can't grow at 7% forever. i like that buying inflation, that's a good point. budget uncertainty ways on italian assets. more on that next. this is bloomberg. ♪

david: the european commission will give a formal response to the italian budget. we will probably get that later this morning. budget, reject the triggering a negotiation. i'm sure you've been following this closely. people expect given what the deficit levels are that the eu will say try again. they will go back and forth.

what does it mean for the real economy? jurrien: europe never ceases to have had winds. there is always something going elections, it was greece a few years ago. now it's italy. my senses for the people who are having to deal with italy in terms of them running afoul of their budget deficit targets, it's annoying and the problem. my senses it's better than dealing with the italian referendum on being in the euro and having a majority site -- say they want to leave. a problem, but my senses it's not an unresolvable problem. they will settle somewhere in the middle and kicked the can down the road. nobody has a choice to do anything other than that. saw today that btp's

are rallying. spread it, there is on the pressure on the markets actually have some kind of compromise to get done. same in thesee the u k with brexit. the can get kicked down the road. they will get an extension. they will promise to go to 2%. that's going to have to be good enough. we will revisit a year from now. plus basis it, 300 points spread out over bund is not that bad. theome point, we can play reversion game. they will probably tighten from here. not a lot is going to happen. outr than to work something and promises being made and then

revisiting a year from now, maybe italy has a new government by then. my sense is this is not a systemic issue for the european markets or the global markets. it's one of these headwinds we are going to have to deal with. they have one of these after another through politics and other things. italy, there have been various problems, debt problems, problems getting taxes paid. stocks the european market. it's approaching the lowest level ever compared. in italy, people live the same lives. is this a great place to live, but not a great place to invest? jurrien: in the u.s., capitol hill's been beating labor for many years. get -- gain.g to

economy hasn't really grown in 20 years, since italy joined the euro. they have an expensive currency. they can't do what they like to do, which is to print money and run large deficits. it's a good place to live, not a good place to do business. microcosm of the labor versus capital story we are dealing with in the states right now. alix: we do have some earnings trickling out. verizon beat. they have some strong momentum as the 5g era begins. more earnings next. this is bloomberg. ♪

comcast business built the nation's largest gig-speed network. then went beyond. beyond chasing down network problems. to knowing when and where there's an issue. beyond network complexity. to a zero-touch, one-box world. optimizing performance and budget. beyond having questions. to getting answers. "activecore, how's my network?" "all sites are green." all of which helps you do more than your customers thought possible. comcast business. beyond fast. but earnings are coming in pretty solid.

futures are off by 35 points. the dow is off by one percentage point. the nasdaq is getting hit the hardest. in europe, bank stocks for getting hit. the dax is the underperformer over there. it is a risk off tone anywhere you look. yields are down by two basis points. the dollar's down against most currencies except the yen. 3m is out. we're looking at those. they also seemed to lower their fully -- full-year forecast. the low before was $10.20. they had to adjust their earnings forecast. the stock was off by 3%. if you miss, you get clobbered. david: caterpillar looks like they have attempts straight quarter beating estimates.

it was $13.3 billion estimated. it's a very small beat. it was a beat nonetheless. they are down 2.3% of the moment. they are maintaining. alix: they were and one year low yesterday. it's not going to be a good sign for this particular group. they've done really well. they've done better than people have expected for the last couple of years. alix: also, lockheed martin comes in. sales are stronger than estimated. over $14 billion, their earnings outlook will see $17.50 per share. they had seen $17 and five cents -- $17.05 per share. on the surface, it looks solid. by .8%.ck is off

it's interesting to see the initial reactions to any numbers that we come out with. verizon wasn't instant sell even though the numbers were good. david: we don't talk much about defense stocks. that's a growth industry right now with how much money the government is spending. lockheed had a problem with the f 35. they had to shut it down for a day or two. alix: they are going to be a midterm play as well. house,get a democratic there is that part as well. let's get more earnings reaction. joining us is sarah hunt. lockheed is among the names she owns. 3m up over 5%. what did you make of the numbers that just came out? sara: caterpillar came in in

line. something that would make people happier if they would boost stock. alix: what do they need to see? sara: you had such good number at the beginning of the year. for the industrials right now and the concerns about trade, it's enough to be a problem. you're not growing as fast. that's not good enough for this market. they started discounting earlier. i think for three of that such a broad-based industrial the numbers are not a good sign. you feel like stocks are being punished? think about where the market has been, it went up straight from june until september. you were at highs three weeks ago. now people are looking at this and saying with my prospect for next year? starting to get

into discounting was going to happen next year. you're not going to get the boost from the tax cuts. there will be concerned about global trade, was going on with china. all of that makes it problematic for earnings. even though it's good news, it's not just what happened, it's what you see for next year. david: moving on from industrials, they really took a hit. i'm going to put up a chart. automobiles and financials and homebuilding are taking a hit. is this indicating where we are going with the economy? sara: you are raising interest rates. now payon't want to higher financing for automobiles or housing. his is a question of the economy slowing and these are the bellwether's? there will be attention of people want to blame interest rates for that. gdp still looks pretty good.

big-ticket items in things you are running on credit, higher interest costs become a bigger factor. on banks, it's also industrials. 3m highlights that. this is the monthly performance of the industrial sector. it's a bad month for the industrial sector. what is justified? where do you need to be strategic in how you invest? jurrien: it comes down to a serum mentioned, the market is looking ahead. 84% are beating their numbers. there is still a very strong actor out there. people are looking ahead. they are wondering if the stimulus will have only a fleeting affect or now that we are approaching or in the

lifecycle phase of the economic cycle with rates rising and liquidity tightening and the fed another central banks, what that was to valuations. they are all headwinds, not to mention trade. they are coming down. profit margins are the things that everyone is focused on. profitll happen to margins next year? industrials are feeling that as well as the pinch from a slowing china. it's a double whammy in terms of slowing earnings. together, it prevents the market from really doing better right now, even though the forward pe is down to 15.9. that's a pretty good outcome. that's a 20% reduction even though the price is down 7%.

we do stuff differentiated between high labor costs and low labor costs. you have seen that with homebuilders, autos, financials. thatreally differentiation. david: there are a lot of headwinds and uncertainties. we've come down a fair amount in the price-earnings ratio already. when does the market price that in? when will the value be appropriate? sarah: if you look at what people worry about, we don't know yet where the terminal value will go. when the fed says we have done enough and we are ready to pause, you are already seeing more rate hikes planned for 2019. a few months ago, we won't get anymore. i think that's part of the problem the market is struggling with. if we knew when we would stop hikes, and on rate

x.propriate pe is that's for the disconnect is coming in. there is a lot going on on the cost side and companies raise margins. alix: then you get a good number. lockheed martin has a good number. the operations or greater or equal. what do you make of that? things,n the scheme of you would think that would be worth a pop in the stock. sometimes you will get a reaction to numbers. it's not either a one term a longer good look. this is lets fly to happen next year. the defense guys got up good boost from tax cuts. how do i deal with that going forward? i wanted to come back to

financials. i hear from both you and sarah about interest rates. quarter after quarter, we heard from the big banks we would make more money with a higher interest rate. let's put up a chart here. these are the regional banks that excluded some of the big trading business. this is where they are compared to the s&p 500. they are almost at a record level low. why is that? higher interest rates as well a strong growth tend to favor financials and banks. an inverted yield curve tends to be the kiss of death. -- curve is not invaded inverted yet. as the fed guided the market toward more rate hikes rather if the fed is not 3% on thetop until

overnight rate and the 10-year is just above 3%, we will have an inverted curve. the signal from that will probably be less than it has in the past. the cost of capital will still be on the low side. people are putting that in their playbook. rising rates is fine. not if they rise to much. it inverts the curve. that turns the margin upside down and takes away the incentive to lend. i think the market is looking at this late cycle regime that we are heading into. they are just connecting the dots. financials tested the early cycle play. alix: it's turning into a very ugly session. the dow is off by about 400 now. the nasdaq is getting hit the hardest. where do you buy today? what is left to sell? tough question.

you have some places like defense were there will be growth going forward. people will continue to pay for growth. it is still right now, people are looking for growth. you end up going back to some of those tech names area if i can get these cheaper, maybe that's a better place for me to be. you've got that growth coming forward in tech stocks. it's difficult. until you get through the china issues and you understand where that's going, it's tough to be in that space. alix: sarah hunt, thank you. let's break through some of these earnings. i will take 3m. they lowered the full-year earnings forecast to the low end. that's because of currency issues. down by a the s&p whopping 6%. it's a very broad based company.

it has a lot of risk for the other industrial companies as well. david: caterpillar did have a narrow beat. they areme time, worried about raw material costs. we go back to the margins issue. they may have trouble with material and freight costs, including tariffs. alix: harley davidson had some problems. david: what is the pricing power? they were just getting back on their feet. that may be part of the story with caterpillar. it was making headlines outside the business world. emma: erdogan is not buying the saudi story. he said the killing was the result of a thoroughly planned plot. he wants the saudi king to hold the perpetrators to account. the 18 suspects identified so

far should be tried in turkey. a devices been found at one of the homes of billionaire george soros. the device was discovered in a mailbox at his house in new york. the fbi is now investigating. he is frequently criticized by .ight wing it's game one of the world series tonight. the red sox face the dodgers. it will likely be cold at fenway park. the temperature will be 50 degrees. it's the first time they have faced each other since 1916. global news 24 hours a day powered by more than 2700 journalists and analysts in more than 120 countries, this is bloomberg. david: the world series is tonight. we are all excited about it. baseball,gest team in 108 games.

we are going to tie this in. this is the 100th anniversary of the last time babe ruth help the red sox win the world series. the owner of the red sox was a theater producer. he wanted to find a show. ruth to theup babe yankees. alix: you are kidding? how did you know this? david: the new york times. i didn't prepare for the program. damn i was waiting for a yankees reference. you get the winningest team in baseball. how is it going to go? jurrien: they are going to win of course. there's never a bad time to be a boston sports fan.

i will certainly be watching tonight. we will keep our fingers crossed. i know there are seven games in the world series. we saw a big spike down and dow futures. 3m was reporting as well as caterpillar. they are all getting hammered today. caterpillar was warning about their margins because of tariffs. coming up, another stock having problems. they fell to a nine-year low as assets drop in the wake of a manager suspension. this is bloomberg. ♪

emma: we are here in the green

room, coming up, the morgan stanley wealth management had of investment and perform strategies. this is bloomberg. alix: three things wall street is thinking about this morning. first the asset is dropping by 18 billion. investors pull their money in the wake of the suspension. goldman brings markets to the wealthy. they are pitching products to the visions customers. you five disclosures, about between morgan stanley highlights how they smear departing employees on their public record. david: joining us is jason kelly. we talked about this before.

it feels like a slow-moving train wreck. jason: basically, assets are fleeing this fund. is this is a tough time to be an asset manager generally. these are going down, volatility is up. unless you have a good take on the market, you're struggling overall. thing, a lot of money managers have gone public in the past few years. everything is that much more in the open. you wonder whether that element plagues. david: is that because of mr. heywood himself? are there questions about irregularities? it wasn't anything illegal. jason: it doesn't fall him. the question in any firm like this,if he was able to do how good are your controls? how good is your compliance? alix: what do you do?

it's a really competitive industry to begin with. goldman sachs, this came out yesterday. they are moving the markets division into the wealth management business rather than where it was before. it was more of a consumer. why? do they want to cross sell that product to less rich people? jason: not fewer rich people, more rich people. that's part of the story. they don't want to be the ultrahigh net worth people. jason: it raises the question of are you diluting the brand? now, i'm a high-end goldman customer.

i'm going to be getting these emails? you would think they would be better than that. we will see how it plays out. stepping back, with interesting here is we've seen a lot of people move. now he is starting to put this mark on the structure of the bank. this is a huge growth area. they are lagging from their big competitors. markets are huge growth area? that was a big lloyd blankfein initiative. alix: the growth immigrates. jason: you wonder if he is signaling something different here. they are talking again to hedge a little bit. david: morgan stanley is on the bloomberg. jason: it's a chilling story. companies, american people do not talk about it.

when you call for a reference check, you're very careful about what you say. when you are in the financial area, you are required by regulators to say why somebody left. aren: the accusations people are saying nasty things. it's on the record and it's hard to walk back if you are that broker who left. it's a hard balance for the regulators. people want more information about brokers moving from place to place. it gives a lot of power to the previous employer. isid: one of the allegations they won't go someplace else. alix: isn't that like a noncompete clause in a contract? you can write that in. jason: you can in some cases. of what sin forst

and whatnot. doesn't person really have the ability even financially to fight this against a raft of lawyers from morgan stanley or whoever. david: that's a chilling story. you can tune into jason every day on bloomberg radio. alix: i have news on brexit. take a look at the cable right here. is 21.her the day the moving averages at this level. there are reports the eu will offer theresa may u.k. wide customs. they will require a separate treaty. they will offer u.k. wide customs. they are trying to make some headway. this is from the eu side. david: they are trying to get to a deal. i don't know why they would want the customs arrangement.

like there is going to be a softer brexit. that's a good sign. the question is does great britain have to inhere to all the rules and related -- regulations? i guess the good news unquestionably is they are trying to come to terms. alix: if they come to the table -- david: they want to come to the table. alix: this is completely complicated and not clear. david: exactly. alix: let's get back into earnings. you were watching it caterpillar. ,avid: we want to welcome karen a bloomberg intelligence senior analyst. expectations.beat

they said they will have problems with costs. the stock is down. karen: they warned the tariffs would cost them $200 million. it was a little bit less than that. just meeting is not ok. they had been meeting. alix: why? you would think they would've gotten into the number. karen: people are concerned. it's the peak of the cycle. will be able cost to catch up. i do think people will believe that. input costs are having a big impact on these companies. david: is there good news because they keep growing their sales? they turned it around a couple of years ago. nine: they have had quarters of beating and beating by a lot. it just stopped. said things are up

in most markets. things were up in all markets before. the timeline is going to be fine. it's more margin than top line. alix: do they have pricing power? karen: they did increase prices to catch up with tariffs. cost is going up faster. david: thank you so much for being with us. alix: coming up, the morgan stanley wealth management person will be here. it is a risk off day. this is bloomberg. ♪

alix: industrial that smacked.

3m and caterpillar disappoint. the market punishes them. it's judgment day for italy. the european commission will judge there budget. we have an exclusive interview with the italian prime minister. five --ies to backstop companies. the market completely ignores it. david: welcome to bloomberg daybreak. i am david westin. it is earnings day. donald's just came out. they be comparable source sales. -- beat comparable source sales. on the revenue overall, $5.37 billion. beat comparable shares globally, missed a little bit on

u.s. sales. they beat on revenue. alix: we get a good sign for them. nature ofe defensive the market. a while ago, they would have been hammered. mcdonald's missed on that the strong everywhere else. david: just like you said, they are up 2%. they are getting a little bit of a reward right now. alix: it's really bad when it comes to 3m and caterpillar. let's look at the futures market. they are off a full percentage plus point. a little lower after 3m and caterpillar came out. caterpillar was heard on margins. those are bad news for those big industrial companies. the euro-dollar is up .1%. there could be an offer to the u.k.. we don't have a ton of clarity on what that means.

it is helping the market in the euro as well. you can see that in the tenure market, the yield is down five basis points. crude is really getting whacked. the saudi investment conference, aramco says we can get to 12 million barrels a day. it sustainable. it we will backstop the losses from iran. saudi arabia has other things on his mind than just the price of oil. they are making nice. it's time now for the morning brief. we are going to hear from several federal reserve presidents. morning, the european commission will announces they will reject the italian budget, that would begin a process of negotiations. at 8:00 tonight, the world

series starts. alix: a third of the companies will report in the s&p this week. it's been a rough day for some the early movers. 3m is hurt by a percent as well. join us is lisa. i want to start with you. i want to get the lay of the land. i was mentioning that caterpillar was in a one year low. >> the expectations were low. what you see a guinness people forecasting on the forecast. what killed him was they didn't offer anything for investors to look forward to in 2019. fine, are stable and where is the growth? when you look at the companies that have reported so far, we are getting the beats on the bottom line. when you look at some of the sectors and you look at the ones that are performing well, they

are not encouraging from a broad market perspective. are fine sectors and stocks, they are not the things that are going to power us higher. we want to see those consumer discretionary names. they are not performing well. alix: fair point. we are looking at the worst months for -- month for industrials in seven years. sector, how'd you look at that? is this a value play? it as a are looking at cross-section. we recognize that the dispersion more growth oriented stocks and value-oriented stocks is at a 20 rise. we want to take advantage of that dispersion. likee fine value industrials. we want more defensive posture, owning things like utilities.

telik, stable. some of those types of stocks. we look at things like the caterpillar earnings. we are not surprised. one of the things we have talked about with our clients is while certainly we think the u.s. felt we werene, we going to be at a point where the capital markets started diverging from the economy as .ompanies faced some headwinds the earnings expectations after a year where the s&p has been putting up numbers that are 25% above year ago, that's powered by those tax cuts. we start facing some headwinds. aey could be things like stronger wage growth, higher commodity prices, the implications of tariffs or intermediate parts prices.

things like the stronger dollar itself is a headwind for exporters. david: how much of this is a margin issue? deske margin expanses expansion because of tax cuts. the federal government is giving more money back. lisa: the top line has been quite healthy. that has been a function of the economy. sales growth is extraordinarily healthy. that is contributed to the 20% bottom line. i guess what i would say is in the third quarter, respectively we will begin to see pressures on that operating margin. costs,looking at wage cost to capital. it's pricing power. caterpillar is trying to raise

rices, harley davidson on the other hand is doing well in europe. >> you do see some companies that are able. passed along 100% of their costs. 85% was the number delta gave. they don't have that power in industrials. they talk about this. interesting,t's how much more specific the ceos and the cfos on the calls about the pressures. this is a huge factor. the earnings call, they are putting on their statement and being specific up the pressures. we don't have the wiggle room on the other side, that's when you get this crunch. what about the cost of capital? lisa: we are seeing real rates move up close to 80 basis points. we are starting to see spreads

move out by 40 basis points. for some the companies it's been an extraordinary year. issuance has been down 10%. in the next five years, we will hit that wall. 700ill start to see between million to $1 billion. capital ist cost of going to be an issue. alix: they have not held up so far. that point, you can see the s&p is 1500 composite. they were very exposed with rising yields. right there,. >> long growth is abysmal. when you look at some of the retail bank earnings we got this

morning, the growth is not there. there are too many players. they can't compete. their deposits are rising. when you talk about homebuilders , 1% net new order growth. david: on the banks, how much of this is deposit data? ofs is the issue, you think hanks making more money when rates go up. they have to pay more for the deposits. lisa: there is an element to that. targets ofing toward likely 3% over the next nine months. hikes,ave three more that's an element of what's going on. i do agree with the point he made around loan growth. that is part of the issue. the spread on net interest income that many people have

been hoping for is it coming in as robustly. alix: why? bank of america blamed it on shadow banks. it's just not there for the day banks. lisa: i buy a little bit of all of it. the investment grade market knows the explosion of the shadow back market. any have gone from investment market of $2.7 trillion to $6.3 trillion. we have more than doubled the size of that market since the last week did that's a lot of competition for corporate betting. david: you follow the markets very closely. to what extent does this homebuildersh reflect the overall economy? uphave gdp numbers coming friday. they may not be doing as well but the economy is fine.

: are you talking about the tax cuts or the 2% economy we will revert to. that is still good. that's where you get some disconnect. they don't think once happening now is going to continue into 2019, this idea of peak growth. whether that's backed up by the economic data i'm not sure that's true. the psychology in the market, that's where it is. alix: we are looking at a pretty ugly day. thank you so much. it's great to see you. give you a brief recap of where we are. missed estimates. caterpillar, a similar story. they are raising prices, but prices for them are rising faster. that is dragging down competitors like john deere.

lockheed martin had a great earnings report. they saw 6% growth. that is down by .2%. it seems like the conversation is going to be what do you want to buy on a day where everything gets hit? even if they come out a little bit strong, they still get it. the market is unforgiving. let's get an update at once making headlines. emma: thank you. not by the saudi version of the story of jim all caps on the. -- the journalist. the saudi king to hold them to account. on a fewg the blame security and intelligence usbers will satisfy neither

nor the international community. emma: an explosive device has been found at the home of george soros. according to the new york times, it was discovered in a mailbox. there at the time. the fbi is investigating. he is criticized by right wing groups. cutsof a vote on a middle -- class tax cut is new to republican leaders. president trump's and congress will vote on a bill to give middle-class people at tax cut of 10%. the republicans say there is no works.tion in the global news 24 hours a day powered by more than 2700 journalists and analysts in more than 120 countries, this is bloomberg. david: coming up, the btb bund

spread continues to widen. more on that next. this is bloomberg. ♪

david: the european commission is mean in strasburg today. it's anticipated the eu may reject the italian budget. join us from rome is the western european economy editor. it's widely expected that the european commission will say no thank you very much. are they right? the italian government expects results, that the commission will say no. they expect the commission will

say go back to the drawing board. what the italian government will do when it gets back to the drawing board, that's the open question. they have three weeks to decide. david: there been back and forth's with different countries overtime under this procedure they have. we are in uncharted territory. have you ever outright rejected a budget? kevin: this is the first time they have rejected it. this is a pretty much unprecedented move. a very serious sign for the italian government. byy are making eu history going back to the drawing. david: thank you very much. from also with us is lisa morgan stanley. what is it in europe?

marketook, the european has gotten extraordinarily cheap this year. expectations had been for decent growth coming into the year. we had disappointments on it gdp growth. now we are coming into the earnings season. we thought we could see a stabilization of earnings. we have had some more disappointment on the european side. tough. the ecb wants to exit and move forward and 2019 with a hiking cycle. the inflation numbers seem to be supporting that view. scenario forinto a europe if they can't get the growth going. that's been a disappointing factor.

we want to own some stocks there. we want to be a stock picker. alix: the value trade is not as appealing. lisa, she will be sticking with us. david has some breaking news. they are signing a power deal. david: when the ceo said he's not going to go to the conference they are having over there. maybe this is why. not: if you had companies putting their money into the country, who does? what is that lead saudi arabia? david: normally there is somebody else willing to do business with saudi arabia. there is always an advantage for somebody. there's an opportunity here. alix: that will probably be china and russia. with earnings,

they are dragging down the area. this is bloomberg. ♪

david: it's time for the bottom line. we look at three companies worth watching. i am going to start with buyer. there was a large jury verdict on the weed killer. it got cut down. $290s originally for million. it got cut down to $79 million. why is the stock down? they said they were responsible. they said you can have double the actual damages. the judge said we will uphold the liability. that will have real ramifications. the same in that zone, i'm taking a look at caterpillar. the stock is down by 7%.

they have higher costs due to tariffs and freight costs. that is urging -- hurting their margins. it was a $40 million impact from year, theyr the full see the $100 million range. it's not as bad as we thought. it's really interesting to see the other industrials as well. david: we are looking at 3m. we are going to be joined by brooks sullivan. brooke: what you are really seeing is this run-through of the fears of peak industrial earnings. granite ---- for organic growth was a disappointment. it's not disappointed to see the slowdown. this is what people have been

looking forward to think about markets like automotive and tech. you are starting to see pressure there. there was some concern they would walk back their guidance. they flagged that run materials were going to be a bigger headwind than they anticipated. what not the guidance down was foreign-exchange. david: 3m is a very big company. who are they selling to? if they are not selling as much, what does that say about the rest of the economy? these companies reach a peak. you can compare that to united technologies. they had really impressive rockstar organic growth. you sort of see that's what happens when you get later in the cycle. they tend to slow down while longer cycles continue the momentum for the time being.

alix: lockheed martin came in solid. the growth next year will be 6%. honeywell came in super solid. why is this surprising the market? it's a little bit worse than people were anticipating. people were prepared for a 3m guidance, they were prepared for a slowdown. this has accelerated from what people were prepared for. that's why you see such a dramatic selloff. david: they are announcing now abide back. alix: that's going to help. in your experience, does that make the short cycle and early indicator? does that indicate we will have problems down the road? brooke: this is the starting point. this is when you see the trend

develop and that trickles down to a longer cycle company. if you think about where to take your stock, there may be more room to run. they are coming up on a similar type of peak. this is what we saw at some of the industrial distributors early on. the customers are these big companies like ge and honeywell. aey are starting to see slowdown get past the long. alix: thank you so much for joining us. we are going to turn to another sector, that's technology. we will see amazon and bloomberg. this is bloomberg. ♪

david: breaking news.

toldttire prime minister bloomberg that 2.5% is a cap. they do not have any plan b. deficit, 2.4%e compared to gdp. that will be our cap. ifare ready to reduce necessary. there is not any plan b. we are not gamblers. we are not basing our kids future on roulette. bonds in europe and by btp's came up. we had selling on the margin in the 10 year and you have euro-dollar paring gains. percolating in the market.

he went on to say we are open to negotiation. we want to talk to you. a dialogueut to have with the commissioners. i am moving forward to talk with them and to explain details of the budget. they're going to ask me to change the measures. it will be difficult recovery cannot affect the. difficult because i cannot affect that. the italian not government. he said we are not leaving. we are staying with the e.u.. the spread should come in. financialonly manipulation is it is not fundamentals. we are not going to budge. david: it is a negotiation until

next year. alix: there are stories percolating in the markets. the futures market, about earnings. s&p around the lows of the session. nasdaq 100 one of the worst. you have industrial earnings coming and heavy. in europe, you have a selloff. that followed chinese equities lower. european banks turning a leg lower as italian equities taking a dip lower. in other classes, italy worry feeds through. euro-dollar flat. losing a gain it had. a rally in btp's and yields were down six basis points earlier. we are flat. in the u.s., that is a safe haven trade, it is going to be gold, the 10 year. crude keeps getting hammered. arabia, saying

they will backstop anything they need in terms of supply at the saudi investment conference. staying in tech, nasdaq closed up .5% yesterday on strength among the big tech companies. they are set to report this week. all reporting on thursday. what is the role of tech in helping the market turnaround? david kirkpatrick and still with us is lisa shalett. -- joining us now is david kirkpatrick and still with us is lisa shalett. a market celeb lasted for 24 hours. what are earnings going to need to prove? david: that earnings have not changed. divergence because facebook has clouds hanging over it regulatorily. amazon and microsoft are free of that at the moment. basically, in these trying

theseies, there is -- in giant companies, there is nothing holding them back. terrific earnings and facebook would have had terrific earnings next week except that it is going to suppress them to show it is trying to do something. it has been thought that big tech companies are immune from tariffs and geopolitics. is that the case? i would not think of it that way. these companies are so intertwined with the global economy, you cannot say they are separated from policy issues. they are global. they are immune to the vicissitudes of any individual economy. there seeing a change in attitude of the planet towards these which any investor has to watch because it is going to mean policy pushback which will affect companies like amazon.

alix: vicissitudes. nice job. lisa shalett, we talk about a change. are we seeing a change in leadership? lisa: yes. we think we are. today, it looks like the market whereing a fear trade folks are worried about earnings, growth. from that perspective, the technology sector that is going to put up the numbers can save us for the minute. earnings growth is going to be fine. thisis more important at point are price-earnings multiples and the fact that we are in the final innings of the fed rate hike cycle and interest rates are going up. they're going up from a real perspective because of where we are with debts and deficits and

they're going up because inflation expectations are drafting higher. higher rates means lower pe. that hits the lower -- longer sectors, it tech and discretionary have remained in amune from these issues for good part of 2018 and our view, .hey will need to get revalued today, it is about earnings. tomorrow, it is about pe ratios and tech can be vulnerable. alix: david? david: i do not agree. not shownanies have they are responsive to interest rate changes. if you look at facebook, google, and amazon. sorry, microsoft, google and amazon. those are turning business toward the cloud. is of global industry turning toward the cloud and these companies are the

beneficiaries of that. even as you have economic changes, you have to look at the overlay of business management strategy changes that are b side ofg the b-@- these companies. lisa: there are always going to be winners and losers. emerge and separate from the faangs and continue to be dominant. consumer discretionary and tech as a sector are going to have to suffer revaluation on lower multiples. david: we hear about the cloud all the time. where are we in the growth of the cloud? it cannot keep going forever. david: it is relatively new. david: how far are we? david: in the third inning.

the problem with that metaphor is the landscape of tech, the cloud is going to be something else. 5g is going to change the notion of cloud computing. more of our lives are going to be sacked into these repositories of digital storage. that is going to make opportunities for new companies. it is going to require the architecture to shift. in that sense, we are in the first inning. alix: is this time different? 10%ou have tech making up and you have the value which is energy at 1% but a huge amount of the russell 200 value index, how do you make that rotation? lisa: i do nothing get is going to go out to the woodshed. -- i do not think it is going to go out to the woodshed.

those valuation dispersion is too big. to be persistent. david: lisa shalett, thank you. david kirk patrick is going to stay with us. let's get an update on what is making news outside the business word. turkey's president erdogan is not buying the saudi version of the death of journalists jamal khashoggi. he says his killing was a result of a thoroughly planned plot. he wants the saudi king to hold the perpetrators to account. erdogan also said 18 suspects identified so far should be tried in turkey. given thes have strongest indication yet they are trying to keep oil prices from rising. opecnergy minister said are going to produce as much as they can. president trump is counting on cooperation to soften prices when sanctions on iran take effect next month.

lived to fight another day on brexit. over the weekend, members of her conservative party were talking about ousting her. they are furious about the idea of it may want to extend the period in which the u.k. would abide by eu rules. may 1 time by agreeing she would not split northern ireland from the yesterday u.k. -- from the rest of the u.k. global news 24 hours a day and at tic toc on twitter, powered by more than 2700 journalists and analysts in more than 120 countries. i'm emma chandra. this is "bloomberg." coming up, the saudi investment forum kicks off today. the state of investing in saudi arabia and what deals might come from the conference. and their 20 million power deal with the saudis. this is "bloomberg."

emma: this is bloomberg daybreak. i'm emma chandra. coming up, an exclusive interview with the state bank of india chairman. this is "bloomberg." david: saudi arabia signed more than 25 deals ranging from energy to metals in riyadh. joining us from riyadh is yousef gamal el-din. thank you for joining us. there are headlines coming up. there's something else going on today. speaking todogan parliament and having words about saudi arabia. was he as harsh as we expected? most observers were expecting a bombshell and that did not materialize. were that the

turkish narrative differ from the saudi version of what happened that day. maintainsh government this was a killing, it was planned in advance. it was not an accident. the question that remains unanswered is, where is the body? we will wait for more details. david: we have this odd situation developing. we had siemens say they're going to put off signing that power deal in saudi arabia. what is that about? the ceo decided he was not going to go to the conference. yousef: the conference is underway. to make arying showing that it is business as usual. latest headlines from seamen show, it is not business as usual. the detail is going to go ahead.

the timing has been postponed. the optics are off. understand asian companies might be signing agreements as well. presenopean and american ce is less than last year and you can feel that from what our colleagues have been telling us. david: thank you so much. joining us over the phone an economist who specializes in emerging markets and russia. the question for me was, as europe and the u.s. pullback, who steps in? from russia's perspective, what is important is to maintain

reasonable working relationships with the actors in the middle east regardless of what sides these actors are taking in complex. this applies to saudi arabia as , even though in the case of the syrian con flicked, they are on opposing sides -- conflict, they are on opposing sides. there has been a working relationship between the two last year, when the king visited moscow, we have seen them as the u.s.ls and is pulling back from the investment summit, the russian companies have no such issues and they are continuing with their presence. of corertant area operation between the countries -- of cooperation

between the countries will be weapons deals. we saw germany suspending arms deals to saudi arabia which is the largest arms importer in the world. russia can step in to fill the void. to the crownback prince and the plan he had for saudi arabia, to attract investment into the kingdom. russia may be willing but do they have the capacity to put investment into the kingdom that would make a difference or do they have the capacity to take investment and put it to good use? they -- russia has some firepower but it is unlikely they can fill the gap left by other actors. last year, during the king's visit, we saw deals between the countries. those would go ahead.

in this conference, the expectation was to sign deals to the tune of $50 billion. russia is not in a position to fill the gap left by other actors. other part is, you have saudi investments investing in tech, whether it is softbank. tesla, uber. do you expect a backlash? david: to some extent, a backlash is underway. it has to be seen in the context has bigger scrutiny that begun to be directed at this entire tech industry. ethical aspects of their behavior is more and more under the microscope or it -- microscope. if they are perceived to be taking money from a country led by a murderer, that will

undermine their social standing. they are sensitive to that because these are consumer companies. a lot of it depends on how this situation in saudi arabia is resolved. this thing between erdogan and the crown prince, neither side is someone i would put stock in ethically. is going tothat determine the way we perceive saudi arabia long-term. signs now look like they cannot get out of it. these change quickly. say, there is a shortness of attention span on the part of businessmen and investors. go out six months, one year, will this be put to one side or is this significant enough that longer-term relationships could be altered with russia, china, others? in the case of russia,

this incident will have little impact. in the case of western countries, we can expect a longer-lasting impact, unless there is a credible satisfactory explanation from the saudi side. earlier today, president erdogan provided such an opening for the saudi administration to distance themselves from this by conducting an investigation. careful inwas distancing the king himself from this incident. the saudi side can come up with an explanation that is , over thery to allies medium run, we can see this issue being put to the back burner. case, it will the

have longer-lasting effects. it will act as a sort of wake-up investors whon will take a more skeptical attitude toward the conference. headlinejust heard the that evercore is not going to go to the conference. siemens is going to delay signing that power deal. effect, at the end of the day, that is what is going to happen. david: you think they will leave it on the table. for how long? going to the conference is one thing. i want to come back to turkey. you know turkey as well as russia and saudi arabia. this is not tond make light of the situation, mr. erdogan has a problem. the kingdom of saudi

arabia at a disadvantage. saudi arabia could help them out with cash. is there any prospect of a , that the saudi arabian kingdom could invest in turkey to help him with his budget? inan: it is difficult for us to know all the background talks regarding this issue. honestly, i think the discussions are more of a political nature rather than financial. the areas of disagreement between turkey and saudi arabia are wide-ranging and it is a matter of regional influence battle between the countries. i think president erdogan would use this incident to his in terms of political gains rather than financial support. alix: thank you very much.

good to see you. coming up, industrials getting killed and dragging down u.s. futures. more on what i am watching. this is "bloomberg." ♪

is thehat i'm watching possibility for a brutal open due to earnings. 3m, caterpillar, talking about them, down by 6%. caterpillar is a margin issue and 3m was organic growth. united technologies reported their seeing higher-than-expected materials cost. they do see a headwind. what i find interesting, lockheed martin is in positive territory. they see sales growth next year. the stock was down. if you can deliver you can get some kind of upside. david: .6%. there have been headwinds.

earnings will save us. when they do not, the market does not like us. alix: the distinction between the honeywell's versus deere and 3m. we were talking earlier about -- the longer versus short cycle and how that is coming into play. futures at the lows of the session. whether there will be contagion from short cycle. alix: we are watching earnings, watching the dollar, will that benefit from safe haven flows. coming up, steven desanctis. this is "bloomberg." ♪

jonathan: from new york city, made jonathan. the countdown to the open -- i am jonathan ferro. the countdown to the open starts now.

♪ coming up, the global equity rebound short-lived. u.s. investors worried. the stock market weakest sectors taking more pain. financials coming in at one year lows. the credit market is looking wide open. bondsx pricing -- pricing as soon as 30 minutes away. we are deeply negative. treasuries receiving a bid, yields are lower by six basis points. that is your yield this morning. risk aversion is back at mid spiking volatility and uncertainty. >> things are ugly. >> people are nervous. >> we have the issues of trade tensions. >> continued tightening by the fed, other central banks. >> people are scared about the