this is bloomberg "daybreak: europe." nejra: these are today's top stories. a controversial opinion piece by bill dudley on the role of the fed. five-star rating, italian assets jump as the democratic party appears to except the return of the premier. we are live in rome. sink, moore shares meanwhile bp exits alaska after 60 years.

>> omar welcome to "daybreak: europe." a warmfed took up -- welcome. if the fed took up dudley's advice, to the boxing ring that donald trump wants to draw the fed toward, which is doing his bidding and contaminating the white house. farhe big question is how we have gone with the dovish shift and the pricing in the market it would help at the fed walked back the direction it's on now without big volatility and without increasing the tightening and financial conditions as well. and of course the whole political separate discussion we will get into within this hour. manus: if they did accelerate

the rate at which that shifted gears there, would be driven by politics? let's talk about the markets. a wonderful phrase that means enough. have a look at dollar-you want. it's the message from the pboc, they have had enough. nine days of dropping been consistently time to move the market along. this is the yuan against the basket which reads the lowest level in nearly 15 -- since 2015. when you got here is the pboc pus discomfort and the daily reference rate stronger than the market expected. for the six-day, drawing the line. a little bit of a bump, it's more to do with the draw down on stockpiles since june. the oil market moving slightly higher there. then just hoping to draw your attention to the dollar again,

almost at the weakest levels this year. bank of korea coming up on friday. what will they do? ubs recommended defensive the prospectst for 2020. a sense that in some of these markets, they are trying to work out what to make of the geopolitical risk. at the beginning of the week we had the shift of tone from president trump. there's a great piece on the bloomberg talking about the fact that china might see the shift in tone as another sign of unreliability in the president and it is digging in for the worst-case trade scenario. the 10 year yield dropped six basis points yesterday, holding below 150. the point to curb has been flirting with inversion. we are down there for a fifth day. a former top fed officials suggesting the central bank

should reject interest-rate cutp 2020 reelection. bill dudley states that policymakers should not bailout an administration that keeps making bad choices on trade policy. the former new york fed president argues that the central bank should make clear that donald trump will on the consequences of his action over the trade war with china. dudley'se response to column comes hard and fast. the fed rejected the suggestion that it replace politics with monetary policy. a spokesperson said that policy decision are guided by the dual mandate to maintain price stability, adding that political considerations play absolutely no role in what we do. >> today we're asking the question, how much will the op-ed impact rates? reach out to us on your bloomberg.

joining us is the head of fixed income research at society jenna rall, joining us as our guest host. -- society generale. is the fed putting too much focus on the trade war when setting his policy? >> i don't think so. i think the fed is reacting to two things. he's reacting to the fact that global growth has slowed down quite a lot of the past six months. they've talked about that much more this year than previous years. secondly, they're looking at the sentiment in the u.s. in terms of investment, internal investment. that has been influence by the trade war, but they can never say that. so they say were reacting to the fact that sentiment have shifted and we are changing policy as a result. manus: mr. dudley goes on to say

that if the fed decided to push back and refused to play along, it could helping three ways. i want to get your sense of the veracity of this argument. -- it wouldcourage reassert the fed's independence ammunition. their would you concur with any of those points? do the the fed did not thing that would have more potential to do something in the future, so that is certainly true. the first argument is very helpful. the idea that the fed could influence donald trump's thinking on trade policy one way or the other is extremely helpful. and fairly unlikely. in the second argument about the fed independence, that comes to the heart of the matter at the moment. it's not just the fed whose independence is more question globally, but this is a factor of other central banks as well.

when the reasons people question central-bank independence is because central-bank independence has done its job. it has reduced inflation expectations. that's why it was important to make central banks important. if we had central banks be more politicized maybe inflation expectations would go up. that is also part of the question about central banks. nejra: if the fed were to walk back or take a pause on the dovish tilt it has taken so far, how could it do that without causing a significant tightening of financial conditions? guy: people are expecting the fed to be much more dovish. it reflects growth expectations as well.

it would be difficult to walk back those expectations and not expect markets to react badly. i've got in the library for you now touches on what you mentioned. for then expectations breakevens. this is the real challenge, which seems to be a one-way trade and direction on this. it is firmly on the downside. is this a consequence of trade wars or is it a domestic issue? guy: i think it is both. the fact that despite a lot of monetary global inflation, it has never picked up. that we've gone into a different regime for different reasons, that inflation will be low for a lot longer.

that is something every central bank has dealt with. the ecb has been very focused on this issue and very clear about it. could indicate that the u.s. be more inflationary. things in theg u.s. would be more expensive and therefore more inflationary. on the other hand, if we had persistent trade wars, it would be negative for growth and negative for demand. people are not very sure about what the impact on inflation, the prolonged trade war, would be. nejra: bill dudley's headline of his column was the fed should not encourage trumps trade war. shouldn't we be saying as well that the fed should not encourage the markets expectations of what it needs to do? true, but i that is think the market expectation is a little bit of a vicious circle

because the market expectations react to the bed and the fed is on the hook to fulfill those market expectations. that is true for every central bank. the fed has been very good over the course of august and calming down pressures on the market. and the markets at matter in the sense of things like the equity market, the credit market, those have been much more calm than commodity or currency markets where you have seen much more reflections of panic over the course of august. innocence, the fed has done a good job in terms of calming down market tensions over the month. coming back to the deadly peace, the importance was an opportunity for the fed to react to it and say we are not a political animal. but what he was reminding people in that piece is to say you should not just assume that the fed will counterbalance whatever the administration does.

the administration needs to think a little bit more and take responsibility for its own actions. it's not a totally realistic piece. you a way of saying i give an opportunity to react to this and broaden the debate a little bit. manus: one thing that came to my mind yesterday when i was reading with the indian central bank has done, we could debate how they spend the money a little bit later in the show. to light a new level of debate from the u.s. in regard to where they go next to promote infrastructure spending and where they go next in regard to tax policy? guy: the infrastructure spending has been something we have been talking about for a long time in the u.s. and other countries as well. discussions about german infrastructure spending, it's

needed and why isn't it happening as the german economy slows down. with all these concerns about infrastructure spending, it is coming very slowly. what else do people need to say let's do more infrastructure spending in the u.s.? more of a, there is debate between the two parties about whether to have more spending. that would be more difficult. on infrastructure spending, one wonders why hasn't taken place already. coming up, don't miss our the sane interview with francisco fed president. what is her reaction to the dudley piece? let's get the first word news with annabelle. the u.k. sees an opportunity to re-staff -- restart brexit

talks with the eu. prime minister george -- boris johnson's meeting last week with his german french counterparts. u.k. official told us that to relax their language on the need for the irish backstop. is one of boris johnson's redlines for a deal. deutsche bank confirmed it has tax returns from house democrats. exactly whose returns are they? that is still a mystery. the disclosure was made to an appeals court. the panel is considering donald trump's request to block access to the financial records. a younger brother of saudi arabia's crown princes in washington this week. the visit comes days after trump signaled his openness to talks with iran. while it may have been well planned in advance, analyst say there is no doubt it will be on the agenda now that mike pompeo

is set to meet the princes afternoon. saidl's president president macron must apologize for so-called insults before he will accept funds to fight fires in the amazon. but that tune -- that tone maybe cooling. the following malaysian prime minister is in court on charges related to an investment fund. he is standing trial 25 money laundering and corruption counts. a separate trial reached the end of the prosecution phase yesterday and may conclude as soon as november. he pleaded not guilty to all charges. 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. this is bloomberg. thank you solle,

much. coming up italy's coalition deadline approaches, despite progress yesterday. will they manage to come together? we are live in rome, next. manus: tune into bloomberg radio and live on your mobile device and digital radio in the london area. this is bloomberg. ♪

manus: it is "daybreak: europe." nejra: let's check in on the markets. juliette saly has more. a little bit of a mixed session and equities. juliette: a little bit more but muted session which is a reprieve after the last couple of sessions of volatility. slightly weaker yen and the nikkei up by about .2% in late trade.

market aparthina's from what you're seeing in the auto space. although stocks looking quite good but the csi and hong kong stocks flat in the afternoon session. the protests are really starting to impact in terms of the overall economy. this chart shows the decrease in tourism numbers you see in the city, down 33.4%. data showing revenue from hotel rooms could fall by as much as 50% this month. all of this starting to have an impact on the government as well. let's look at this chart showing the hong kong chief executive's popularity is falling the most in terms of any leader we have ever had in hong kong. the hong kong to

public opinion survey. august, downged in from 31.8% in july. in terms of popularity, not very popular at all. the least popular hong kong leader ever according to the survey. manus: don't get the chart out for me. juliette saly in singapore. annabelle is here. annabelle: goodbye alaska. a deal worth $5.5 billion in's the world's -- world giants six decade present in alaska. it includes a stake in the largest producing oil field in u.s. history. it will make he'll corp. the second biggest producer in the state behind conocophillips. former uber engineers being charged with stealing driverless

vehicle technology from alphabets waymo unit. he was indicted on 33 counts and faces a maximum of 10 years in prison if convicted. his logger says he didn't steal anything. the indictment adds a new chapter to the claims of trade secret theft against uber. verge of its the biggest ever deal. there are advanced talks about a merger. to complete ahope deal within six months. phillip morris are running about 58% of the combined company. that's your bloomberg business flash. nejra: annabelle, thank you so much. let's turn to italy and the last ditch bid to carve out a viable majority in parliament after a rocky day of negotiations yesterday. the democrats are willing to

accept the return of the prime minister but some sticking points remain. the italian government bonds had their best day in almost two months. the benchmark 10 year yield tumbled. maria joins us from rome. are we closer to a new government deal now given today's headlines? maria: it has been three weeks since the government crisis erupted here in italy. negotiations continued now. we understand that under the new coalition, and i must stress it is not a done deal yet. stay but theould crucial bet is that there would be no new election, no early election. the market likes this and they like the idea that the new coalition would be more inclined to work with brussels and the previous one. there was rocky tension between

the two of them, but the talks stalled yesterday. and the final word will come of the the president italian republic. he was clear, today is a hard deadline. they either come up with the new majority or italy will go to new elections. manus: good to see you this morning. what is his game plan now? it looks like a big defeat for the deputy prime minister if that deal comes to pass. annabelle: it does look like a big defeat. the question is where did it all go wrong? he was holding close to 40% just three weeks ago. when he will tell you he completely read the whole situation wrong. he pulled the plug on the coalition to early, halfway through the summer. perhaps he should've waited until the return of parliament

activity in the fall. thisrospect looks weak at point. not only is he losing support but he could go home empty-handed or be forced out of office. there was that tweet from president trump who said at this he stays inpes that office. politics changed by the day. our guest host this morning, he said you're surprised by the endurance of the last administration. how much more assured would you ifl from a bond perspective the administration it comes to the four would stay at the top? guy: i think it would be a good administration for the market because it would probably have better relations with europe.

it would have a tendency to do and be less verbally aggressive in terms of what they want, which i think the markets would take relatively well. it's ironic when investors look at italian governments, they would like an italian government that simply doesn't do much. the way they would interpret this coalition is a government which doesn't do an awful lot. stability is something that is very important for investors. are youn your strategy, buying italy, and house so? guy: we have more spread -- and how so? guy: italy is something you really have to look at tactically. we are at the top end of the range. it doesn't matter which bonds you buy on the italian curve. i would definitely focus on the things that are most liquid. the 10 year area of the market

looks fairly attractive. manus: this is called sleeping beauty. the spreadou say could get to in this administration i think we could , a parallel move to the tightening that we have seen recently. show you rate volatility, because there something interesting going on. this is one week volatility. something is not adding up in terms of the euro response or risk to a hard brexit. do you think the euro is underpricing risk? guy: i would say in terms of a hard brexit in the immediate term, no, not really. we still have quite a lot of time here. talking short-term volatility.

bp sells up inp, alaska. the oil major is getting out after 60 years in the state. we will bring you that story next. this is bloomberg. ♪ from the couldn't be prouders

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manus: this is bloomberg "daybreak: europe." nejra: let's get a check on the markets around the world. to see you. after two strong days, indian markets are little more quiet today. what is causing the slowdown in momentum? >> good morning to you. because of the strong uptick in the last couple of days, we orbit quiet. two or three reasons. volatilityessure on

and auto sales numbers in a weakening economy, traders will be using caution right now. wait for the data to come out and then try to take some fresh positions. today.ket slightly lower but a correction for sure. much withnk you very the latest on the indian markets. anne-marie, is it just an excuse? low bute in the august we are seeing muted trading across asia with low volatility. a mixed session across asian indices. we are seeing some weakness in chinese markets in the csi 200.

foreign exchange, a bit of weakness in the kiwi as well as the aussie dollar. it's from trade friction between washington and beijing. goldman sachs says it may be time to short the canadian dollar and the bank of canada may join other central banks in a dovish shift, so keep and i'll not. sovereign bonds hovering around a three year low below 1.5% on the heel. commodities, it's all about oil. were seeing the extension of gains between wti and brent after a drawdown in the u.s.. that data should be confirmed today by the government. more than 11 million barrels of the drawdown. geopoliticalhave risk premium on the price as well as the fact that opec says they will be cutting a lot more and we should see that for the second half of the year. later in september if we

can agree on the date. bp is getting out of alaska. they have agreed to sell businesses there for five -- two eel corp. for $5.6 billion -- to hilcorp. crude output has slumped since its heyday of the 1980's. it time at thell end of six decades? dan: bp owns part of one of the biggest oil fields in alaska, is the biggest owner of an 800 mile long pipeline that makes alaska oil possible, but for them, this is all in the past. they want to focus on the

future. they spent 10 doing dollars buying fuels from bhp last year. productionka where has been declining for years, the new prospects can grow and increase the bp output and provide more revenue and growth for its shareholders in the future. nejra: give us a little more context on what the plans are. dan: this is the interesting part of it. corp is doing the exact opposite of what bp wants to do. a colleague is from texas but he is buying assets outside of the shell patch in places like wyoming or alaska that are not the sexy growth prospects that are generating revenue and look to be steady streams of money

for years to come. nejra: great to have you with us, thank you so much, dan. word newsthe first with annabelle in hong kong. the federal reserve should not bow to pressure to fix the damage caused by the president's trade war, according to the former new york fed president, bill dudley. the comments through widespread criticism. a spokeswoman for the central bank saying political considerations play absolutely no role in decision-making. an opportunity to restart brexit talks with the eu after prime to boris johnson's meetings last week with his german and french counterparts. theyofficial told us intend to relax their language on the need for the irish backstop. bank is concerned it

has tax research -- tax returns from the house democrats related to financial information on president trump and his family. but? ? exactly whose returns are they it is still a mystery. a younger brother of saudi arabia's crown prince is in washington this week. the visit comes days after trump signals his openness to talks with iran. while the treatment have been planned well in advance, analyst say there is no doubt that will be on the agenda now. secretary of state mike pompeo is set to meet the princes afternoon. set presidentnaro macron must apologize for so-called insults before he will accept funds to fight fires in the amazon. but the tone may be cooling. a presidential spokesman said

any funds from abroad will be welcomed as long as they don't interfere with brazil's sovereignty. 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. this is bloomberg. nejra: annabelle, thank you so much. washington has attacked edging for not doing enough to curb the flow of fentanyl into the u.s. calls it a reason for slapping more tariffs on china. >> some u.s. politicians out of their own political necessity disregard the fact of right and wrong, find fault and make small things big and turn black and white. , steve wozniak spoke exclusively to bloomberg,

criticizing the current situation with trade. tariffs, in't want don't want things like subsidies very much. i want the premarket to rule, but it comes from my own background which is compatible with growing up in silicon valley. all types of people and work with them. the weekend solace enter whole new level of escalation. the chart shows u.s. trade policy uncertainty spiking to a quarter-century high at the moment. is this changing your fixed income strategy at all? we'veot really, because been quite concerned about the trade negotiations and how they will play out in terms of the credit markets. what we've been focused on since the beginning of the year is affording credits that are sensitive to china trade. things like luxury goods manufacturers in france and the

german auto sector. these companies have done poorly in comparison to the rest of the market. they will continue to do relatively poorly. companies that could suffer more would be the industrial sector and things that compete in international markets, things that are sensitive to and trade alongside commodity prices. i think we will see things get worse before they get better in terms of the trade discussions. manus: you are going to love this chart. to your government paper, five-year, 10 year and 30. how much truth is there to the inw that this kind of vortex the u.s. treasury market is being driven by imported angst from the rest of the world? what smarter way should be looking at this?

it is very much driven by a angst in terms of what is going on in the rest of the world. how u.s.estion of policymakers are going to react to a world where the situation is much more uncertain and how is u.s. growth going to react to a situation where the growth outlook for the rest of the world is getting worse. it comes back to what we discussed at the beginning of our conversation today which is how should the fed react to a world where trade policy is a lot less certain, confusing changes on a frighteningly regular basis, and what kind of impact will it have on u.s. growth expectations and investment expectations as well. nejra: there's a great piece on the bloomberg talking about china's response to the flip-flop we had in the tone of president trump saying it makes china seem and even more

unreliable negotiator. if you look at the rate differentials between treasury on chinese bonds at the moment and you think about the prospect for more stimulus and whatever form that might come, does it make you want to china -- does it make you want to buy chinese bonds at all? guy: the implication is that china is viewing donald trump is more uncertain and less reliable negotiator. would assume they viewed him as a reliable negotiator before. there are gradations in terms of unreliability. one of the things we learned with the flip-flopping on mexico in terms of trade is that a deal is never done with donald trump. that is one of the problems that every other countries dealing with. what we see this year is that volatility that has been seen in that you on has not had any

impact in terms of chinese government bond yields. that is one thing chinese authorities are looking at to say we are a much more mature market then we used to be. we set our own policy now internally more than we used to inwe can weather volatility terms of the trade wars better today than we were able to in the past. do i think the chinese will ease policy? i think a little bit, but not because of trade policy. the reason they would ease policy or significantly is if they start to see the domestic property markets we can. so far they are not weakening. if they would start to weaken domestically, than they would need to react. manus: that's interesting in terms of the differential, that's part of a bigger

geopolitical creation. you talked about the currency. this is the yuan against the basket. we saw the pboc this morning saying enough is enough. they set a higher daily reference rate for the sixth day in a row. what do you take away from that message from the pboc this morning? what do they fear the most, the speed in the change in the yuan or capital flight? guy: but they fear the most is that volatility in the currency market could have an effect on the domestic economy. international capital in the chinese market is relatively low . the market was closed for a long time. it has opened up slowly, in fits and starts. capital flight is something people talk about a lot but it is less important than other aspects. the real aspect here is psychological. if you start to see volatility

in the currency markets, will people start to get worried? so far, they are not, and that is quite significant. if you like talking about the animal spirits in china, they are still quite good, even with the trade tensions and what is going on in hong kong, which could be two factors that could make chinese investors a bit more skittish. manus: i'm going to break all the rules. briefly, that's a slightly contrarian view in terms of your , or on the chinese company are we misreading the signals? chineseterms of the economy, yes it is slowing down. is it reacting poorly to what is going on in terms of trade? i think not. that is good news that the chinese authorities could take away right now. manus: we share good news on a daily basis on this show.

we have more to do. the agenda for the rest of the week, earnings from some of the biggest state on banks in china and that will be interesting. bankave china construction , china everbright bank and new economic data as well in europe including second quarter gdp for france and the august inflation for germany on thursday. they will be very closely watched. the second reading of second quarter gdp estimated to be revised down slightly to 2%. on friday the south korean central bank sets rates though no change is expected. sunday, the next round of u.s. tariffs on chinese goods is expected to take effect. tomorrow, don't miss our exclusive interview with the san francisco fed president at 4:00 a.m. london time, timely after the york opinion piece from bill

dudley. this is bloomberg. ♪

nejra: this is bloomberg "daybreak: europe." manus: i'm manus cranny in dubai. let's get the business flash headlines in hong kong with annabelle. annabelle: goodbye alaska. to sell itsd lcorpess in the state to hi energy. it ends the company's six decade presence in alaska. it will make it the second

biggest producer in the state behind conocophillips. tobacco is on the verge of its biggest ever deal. for than 10 years after splitting phillip morris, they are in advance talks about a merger. it could save as much as $1 billion a year. the company's help to complete the deal within six months. phillip morris owning about 58% of the combined company. has filed to go public. is seeking a valid -- valuation of $8 billion. it is already set to be the best since 2014. that's the bloomberg business flash. nejra: thank you so much. public markets are in danger of being downgraded to second-tier status. that's the latest view from strategist who said the share

public companies is dwindling as investors move into private markets. good to see you, what have you found? >> team says it matters because public equity markets are the most democratized way to access growth and return. if the axis is shrinking it means the inequality gap across societies could worsen. the status is changing for those who supply equity and create demand for it. businesses are shutting public markets so they can retain autonomy using private equity firms flush with cash. when we look at the number of listed u.s. stocks, it has been shrinking for 14 straight years. the global outlook is the only reason this is getting larger because of issuance in emerging markets. can, turn to private markets. in 10 years, public pension stock allegation has dropped 13

percentage points and most of that money has been piled into alternatives. private equity real estate has taken off and things like infrastructure, including things like timber, they have seen their allocations rise basically from nothing. it creates a feedback loop, you see cash overflowing and private market so there's plenty of funding for companies who want to avoid going public. manus: a great round up on the flow of money. let's look into one direction on one trade, exploring the issuance of bonds at the long in. with much of the yield curve trading below zero, sweden is looking to join other countries such as austria and login low borrowing costs. the country's debt agency says it will look into long-term bonds and how it would affect funding patterns, whether there

is demand. guy is our bond guesthouse this morning. would you buy 100 years sweden or austria? do you believe in buying 100 year paper? guy: i think it is a good investment if you think markets will continue, bond markets will continue to rally. acrossl question here is almost the entire curve an entire parts of fixed income markets. returnscome gains and are no longer really about kerry, they are more about capital gains and losses. it's more about the forecast and the direction of the market then being paid today and the coupon you are getting. nejra: that is something you're having to integrate in your strategy as well. what does it -- what does it mean in terms of what you want to buy? that is impacting the moves into

real assets. guy: in terms of credit markets, we are biased toward things that pay positive yields and have bigger spreads. we are still bullish on the market. since we think that spreads will not trough until the end of q3 and will not do much in q4, we think it makes sense to have a relatively high beta. like buying things subordinated financials and things like hybrids. we are more bearish looking out to 2020. then we will be happy to buy things with negative yield. what we really care about is capital preservation and minimizing the potential for capital losses when spreads start to go wider. i'm curious, you would be prepared to buy negative, but that goes into next year.

what is the market catalyst that would push you into that zone? i'm trying to crystallize in my mind, what is the pivot point for you? guy: in terms of getting more bearish on the credit markets, if that is your question, what it really is is this switch in terms of thinking that central banks can bail us out, which has been the theme this year, to the idea that we are in a difficult enough situation so that central banks will not be able to bail us out. the transition from believing in central banks to just being a lot more worried will take place toward the end of this year. 2020, theok ahead to world is a difficult place but the faith in central banks is very high. and it starts to dwindle people become more concerned about the growth outlook and grow so in 2020, then the

situation changes. nejra: some are saying that has already happened and raids are being pushed low. it is showing that what the fed is trying to do is going to work. guy: it's a different signal from the government markets, that reflects that the fed will bail us out or growth is just going to be low for a persistent time. then when you look at equity markets, equity implied volatility, or you look at credit markets, how you value companies, the comfort of people is still very high. we had a pool back in august in equities but it has been modest compared to the pullbacks we saw in 2018, for example. and much more modest than we saw in 2015. nejra: thank you so much for joining us, guy stear.

rejects billank dudley's suggestion it should use monetary policy to play politics. we will discuss that next. this is bloomberg. ♪

♪ from: good morning bloomberg's european headquarters in london. i am nejra cehic. ♪ crannyand i am manus live from dubai. these are today's top stories. fading trader talk. hope's way on global equities amid a controversial opinion piece by bill dudley on the role of the fed. five star rating. italian assets a jump as the democratic party appears to accept conte's return as premier. it is deadline day. we are live in rome -- day to form a coalition. we are live in room.

phillip morris shares sink -- rome. phillip morris shares sink on fears of a reunion without with. ♪ nejra: welcome to "bloomberg daybreak: europe." we are struggling for direction a little bit in markets. we are still digesting the escalation we got over the weekend on the trade war. what a piece from former new york fed president bill dudley, saying the fed should not encourage trump's trade war. there has been big push back on that piece in terms of questioning the limits of monetary policy independence. manus: during the break, we were all talking, chatting about it saying maybe the veracity of the peace was called more into question because of the risk of another trump administration and

what that might mean. there was a lot in there for everybody to get their teeth into. depends on what side of the market you will are on -- you are on. nejra: exactly. the question becomes, do they have enough ammunition to be able to pause on what they are doing without increasing, tightening financial conditions? let's take a look at equities. we saw losses in the s&p 500 yesterday but come back a little bit with the futures in today's session. we are in the green on s&p 500 index. a mixed picture in europe. cac 40 futures in the red. as i say, not a huge amount of direction in these markets. we are sort of waiting to see on a lot of things, not just the trade war, but also in terms of italian politics as well. manus: you talk about italian politics. yesterday was a pretty colossal day on the btp's. while five-star and the

democrats -- will five-star and the democrats get together? 10 year yields dropped 19 basis points yesterday. there could be a little bit more to come. guy stear was with us and said if you get this new coalition, it will be good for markets. this spread for germany could compress further. treasury market at the bottom of the board is unchanged. again, you see the lowest year to date trade. year, 10 year all percent. throughalready blown his amid 2020 call on treasury, so sub 150. they probably need to plate catch-up -- play catch up. juliette saly is in singapore.

setting seemed to send a message to markets. juliette: it certainly did. we see the onshore currency halt the losing streak it was currently on. equities, you are seeing japanese stocks finish up the session up by about 0.1%. similar to what you were saying, not a lot of conviction in markets today. we have some money going into tech stocks, boosting the kospi. china's market has been underperforming today. where we have seen strength in china's market has been in auto players today. this is after the announcement of some new rules to boost consumption for chinese automakers. 600saw the euro stoxx automobile index rise yesterday. looks like it is coming out of a double bottom it has had so far in 2019. we also see a little bit of strength coming through in korean automakers on the back of this as well, also helped out by

the fact that hyundai and its union have reached a wage deal for the first time in eight years without a strike. these new rules coming through to boost consumption from chinese authorities could help out the world's largest auto market, china, and see a bottom for its earnings and valuations. manus: thank you very much. of the big of one u.k. travel operators seems to be taking hold. they will get 450 million investment. that is something that had been much speculated over the past couple weeks. they were in talks on a bailout. ofun tourism group, unit fosun international, so that will be want to watch. following ay 21% 29% rally. it is all about holding onto that bailout.

let's turn our attention back to the story that we focused on at the top of the show. a top that official suggests the central bank should reject interest rate cuts that would help donald trump's 2020 election. it was an op-ed for bloomberg opinion. bill dudley. nejra: the former new york fed president has been arguing that the central bank should make it clear that donald trump will own the consequences of his action over the trade war with china. in a response to his column, the fed rejected the suggestion it would play politics with monetary policy. a spokesperson said policy decisions are guided by the maintainl mandate to price stability and maximum employment, sink political considerations play absolutely no role. today we are asking -- saying political considerations play

absolutely no role. today we are asking the question, how much will though dudley's op-ed piece impact dudley's op-ed piece impact rates? richard kelly, great to have you with us. we suddenly get every escalation of the trade war from president trump. all thatoncerned at fed policy is in some ways being driven by president trump's decisions on trade? guy: i think it -- richard: i think there is no question that fed policy is being driven by trade. it is the fed's job to set monetary policy for the policies given by the administration and congress. you can debate the merits of that policy but that's the way it's supposed to work. manus: good morning to you, richard. part of dudley's argument is that it is a manufactured

disaster in the making, that the fed should mitigate the damage, or refuse to play along. tothe job of the fed is maintain and sustain the recovery in the united states of america, employment, and inflation, that responsibility, some would argue, is to cut harder and faster into what we are seeing, which is a global slowdown around the world. that is the other side of this trade, isn't it? wererd: i mean, so, if we seeing those impacts come into their mandate, certainly the fed should be reacting faster. we don't really know exactly -- manus: shouldn't they be reacting faster? we have breakevens getting demolished, pmi's under pressure. i know the consumer is still strong, but some of the other pieces of the jigsaw are definitely saying inflation expectations are crumbly although it way -- crumbling all the way across. ,ichard: i guess the conundrum

manufacturing sector is weekend continuing to weaken. you are seeing trade come through. the labor market looks completely oblivious to everything going on. cpi inflation seems to be resilient and starting to move higher. i agree, the market breakevens site is there. there is definitely justification to ease. that is what i think will happen this year but there is nothing that suggests massive panic given what we are seeing on some of these impacts. nejra: i understand you are saying there is justification to ease on the inflation side. somebody people say look, the u.s. economy -- so many people say look, the u.s. economy is actually looking strong. the bismuth investment side is something to think about but is the fed making too much of a preemptive strike in terms of what signaling with cuts at the moment, given the impacts on the u.s. economy so far from the trade war are perhaps not that great? richard: given what we are seeing right now, yes, i would agree with that. the easing you are getting now

does not show up until the middle of next year. if you look that far, it looks like the worst of the slow down is probably going to be in the first half of next year. what we are seeing now does look more resilient. that is what we are trying to offset. it's very difficult because you don't have a lot of these instances of these sort of trade shocks to run through the models. that seems to be the track we are on. nejra: if the fed was to in any way pause, put a pause on the dovish stance it has taken, my guest responded saying yes, there would be a big reaction in the markets. is there any prospect at all of the fed pausing or walking back on what has said -- it has said so far? how can it manage that to avoid big volatility, big backup and rates -- in rates? richard: if the data started to , the expectation that the

manufacturing sector is continuing to deteriorate, if they see that turn into data, i think they could be justifying. if they said we are not going to provide any stimulus because this is not our issue, then i think there is no way to avoid the back of that would come through. the issue is, you create a self-fulfilling prophecy. if you are not providing monetary stimulus into an environment where everybody thinks you need monetary stimulus, you just make things worse down the line. manus: can i ask you, richard, we have put up the chart on u.s. trade policy. it is the highest in a quarter of a century. do you think equity markets are discounting this level angst relative to the bond market? do you think the equity markets will catch up to the bond markets? where were you in 1994? i think i got my first bloomberg terminal in 1994.

anyway. [laughter] richard: if you look on the trade policy side of things, you look at the relative market, i think bond markets are ahead of equities in general. if you think of the policy response, first it is country -- cutting interest rates, then providing qe, this is also the conundrum when you look at equity markets, is the stimulus you are getting down the pipeline. the stimulus we are getting from the ecb supports higher valuations where we are at. in terms of the worst to come on the trade policy, i would argue you still need a little bit of a correction lower before you are able to price that in. nejra: richard kelly stays with us. don't miss our exclusive interview with san francisco fed president mary daly. let's get the bloomberg first word news with annabelle droulers in hong kong. -- arey's political meeting in a last ditch to

create a viable coalition. the five-star movement and democratic party are close to an agreement. movementratic willing to accept conte as prime minister. the u.k. sees an opportunity to restart brexit talks with the eu after prime minister boris johnson's meetings last week with his german and french counterparts. a u.k. official told us they appeared to relax their language on the need for the irish backstop. dropping the provision is one of johnson's red lines for a deal. deutsche bank has confirmed it has tax returns sought by house democrats. the request for financial information on president trump and his family, but exactly whose returns are they? that is still a mystery. the disclosure was made to an appeals court on the panel is request to trump's block access to the financial records. a younger brother of saudi

arabia's crown prince is in washington this week. the visit comes days after trump signaled his openness for talks with iran. while the trip and may have been planned well in advance, analysts say there is no doubt that will be on the agenda. now secretary of state mike pompeo is set to meet the prince this afternoon. brazil's bolsonaro says president emmanuel macron must apologize for so-called insults before he will accept 20 million euros of funds to fight fires in the amazon. a presidential spokesman says any funds from abroad will be welcomed, as long as they don't interview -- interfere with brazil's sovereignty. global news 24 hours a day, powered by more than 2700 journalists and analysts in more than 120 countries. this is bloomberg. manus? manus: thanks for the roundup. tobacco is on the verge of its biggest ever deal. more than 10 years after splitting philip morris and our tria are in advanced talks about

a merger. they hope to complete the deal within six months. phillip morris owns about 58% of the combined company. good to have you with us. please tell me the rationale behind this deal. the market simply does not seem to buy it at the moment. >> there has been a lot of skepticism about bringing these companies back together after they split up more than 10 years ago. the original rationale for splitting up was that they could cast off the difficulties the u.s. was having with regulators. now they want to get back into that. part of the rationale would be that altria has invested in the booming cannabis market and have some investment in beer as well. they have got an exposure to a broader range of products. this would help philip morris benefit from that as well. there is a lot of geographical overlap.

the original split sort of made sense to investors, so there is some head scratching over why they would want to get back together now. although, there are some analysts saying it is a good idea. nejra: what does this mean for japan tobacco? >> this underscores that japan tobacco is trying to play catch up in the vaping market and in the heat, not burn market. alternative types of nicotine delivery systems that are displacing a lot of traditional tobacco in the fastest-growing markets, including in the big markets like the u.s. and japan. this is a big concern for tobacco companies. philip morris has had the fastest-growing product there. that has been hard for them to compete against. market,s from market to because the regulation varies. it's been very tricky for

tobacco companies to navigate this globally. japan tobacco has not done well in that. thatmbining these two, creates an even more formidable competitor for japan tobacco in those two areas, vaping and the not burn technologies. nejra: thank you so much for joining us. dave mccombs in tokyo, great to have you with us. italy's coalition deadline approaches. despite progress yesterday, will five-star and the democrats managed to come together? we are live in rome next. manus: if you're traveling to work, we are back on the radio again. i do miss radio. live,gital radio, we are we are there, we are present. we are with you every step of the way to work. ♪

♪ gone 7:20has just a.m. in london. we are just under 40 minutes away from the start of european equity trading. it is "bloomberg daybreak: europe." i am manus cranny in dubai. nejra: let's get a check in on the markets. the 10 year treasury yield having a look at whether it's holding below 1.50. we saw it drop six basis points yesterday. 10-year btp yield as well. btp's had their best day in tenures yesterday. we are fairly unchanged -- 10 years yesterday. we are fairly unchanged. there were comments from labor opposition about wanting to stave off a no go brexit. that rally taking -- no deal brexit. that rally taking a pause. manus: to our dubai market.

we see air arabia trade a little bit higher. movere just seeing a nice for the second day. bigger drop-in inventories than expected. , trading at ans near four-year load versus the dollar. it has just -- low versus the dollar. actually, it has just turned it around on the kiwi. let's turn our attention to italy. you mentioned the btp's. carvea last bid effort to out a majority in parliament after iraqi day in negotiations rocky dayve-star -- in negotiations between five-star and the democratic party. some sticking points remain. italian btp's having their best day in almost two months. the benchmark 10 year tumbled and the ftse mib managed to eke

out a pretty good surge. maria, give me a sense of the politics. can you taste success for this new political alliance? manus, we know that the negotiations between the p.d. and five-star are ongoing. the two agreed that giuseppe conte would stay as the premier. he would stay in this new coalition that would avert a new election. that's what the market likes. they like the fact that this new majority, which is still not a final deal, would avoid that majority and perhaps stake a softer tongue when it comes to brussels. this is where the negotiations have stalled and could turn to a problem, is the current deputy prime minister, who wants to stay in the role. is nod. will say there way that will going to happen,

he needs to step away from this role. this is a hard deadline. the president ofrepublic made it today is the final date. they year or there will be a new election in this country. the flip side to this story is the biggesthaps loser here when it comes to the political crisis that he himself triggered two weeks ago. he was polling 40%. now there is a real probability he is going home empty-handed. there was that tweet from president trump yesterday where he endorsed giuseppe conte and said he hopes he can stay in office. nejra: bloomberg's maria tadeo and rome, thank you -- in rome, thank you so much. richard kelly is still with us. would you be purchasing btp's? is there still an opportunity there? richard: either we go to new elections and we have a consolidated right-wing

government, or we get the coalition to come through between five-star and p.d. you have another market friendly signed and in the background you have the ecb getting ready to return to qe. it's difficult not to go in and reach for yield out. manus: with that -- right now. manus: with the expected move from the ecb, one of the conversations we just had was this concept about european credit. what i found interesting from guy is his concern about european credit into china. that's going to be the first reactive point. how do you look at european credit at the moment? he is worried about a slowdown in china. richard: you look at the corporate linkages, what's going on, you certainly see that transmission go through. i think this is going back to sort of the discussion on the fed. if the ecb is providing stimulus into that weakness coming in, it does provide some sort of upset.

you look at european credit -- offset. through.eeing that go it is more of a degradation of what goes through. you have seen the ecb talk about maybe not being as inclined to push as deeply into credit as they did in the last round. that could be the differential. we still don't know what the qe package looks like. if they avoid buying credit as much as they did in the past, that could be an issue. nejra: thank you for joining us. richard kelly, head of global strategy at td securities. the european open is coming up next. we will speak to the ceo of campari group. its iconic apple brand -- iconic apple brand is -- dab digital in the london area. manus: we have to keep a night

in terms of what happens -- an eye in terms of what happens next in these bond markets. you have seen support for equities. this is bloomberg. ♪

♪ >> new warning. welcome to -- good morning. welcome to "bloomberg markets: european open i am anna edwards alongside matt miller. matt: today, the markets say, is it too late to stop the bond rally? european yields continue to slide. european futures point to another mixed open. the cash trade is 30 minutes away. ♪ anna: dudley'som