♪ manus: good morning from bloomberg's middle east headquarters in divine -- dubai. china's foreign minister warns over a new cold war. hong kong protesters hold their biggest rally in month over controversial new legislation. the united states observes memorial day as coronavirus deaths approach the 100,000 mark.

on downing street, pressure grows on boris johnson. bailout bogged down by wrangling over key details. swift approval from brussels once the plan is finalized. a warm welcome to "daybreak europe." you are going to hear people drone on about liquidity. it does not change the risk sentiment. equities are leaning into the reopening narrative versus the sino china political discourse. you are seeing lockdown perhaps being lifted in victoria state. tokyo expected to lift their state of emergency. equities are leaning into that new narrative of reopening. the yuan drops. beijing tightens its grip. china sets the yuan at the lowest fixing since 2008.

it is all about managing disorderly moves. city joins jp morgan in cautioning asian effects. citigroup, we do not like asia affects -- asia fx. dollar's bid, oil is up. since 2009drill rate gives you crude gushing up by over 1%. dollar-yen, as i said. the market is the longest of yen since october. let us focus on the china story. what is going on? china warns american leaders of pushing toward a new cold war. the foreign minister had this to say. the u.s. should give up on it's wishful thinking

>> israel's longest leader gave a defiant and rejected allegations, accusing his opponent of trying to stop him. progress in settling claims. reached verbal agreements that could resolve up around 25,000 claims. it is part of bayer's $10 billion plan to end the battle. the company is likely to announce the settlements. the collapse in air travel has left the airline with more than 600 pilots and cabin crew in spain.

that does not mean they will all be job losses. europe's biggest low-cost airline is looking at lower pay, part-time work, ryanair trying to restart operations from july 1 with about 40% of its usual capacity. global news 24 hours a day on air and a quick take on bloomberg followed by more than 2700 journalists and analysts in 120 countries. coming up, tensions rise between beijing and washington. china's foreign minister says american leaders are pushing toward a new cold war. this is bloomberg. ♪

manus: this is bloomberg daybreak: europe. significantly worse according to the economists who broke down the country's annual policy documents released on friday. the chinese government has setting an annual the chineserowth foreign minister has warned politicians in america are pushing the nation into a new cold war. that is after the u.s. condemned china's proposal to introduce national security laws in hong kong. mike pompeo said the united states strongly urges beijing to reconsider its disastrous proposal.

here we are. the chinese are warning of a new cold war. what might that mean? there is a trade one -- phase i trade deal that is shaky. what are the risks associated with that? >> good morning. slowdown was every investor's concern in 2019, proven largely by the concerns around the u.s.-china trade war and the impact that had on global trade and investment intentions. if that rises again to cold war levels, that is going to make not only investors nervous, purchasing managers nervous, all of those things that could send the real economy into trouble. trump has decided a tough on china approach should be central to his reelection campaign.

the last three weeks we have seen new export licensing laws to prevent non-american chipmakers who want to sell to the u.s. using huawei chips. you have seen other measures like that have a real impact on investors. i was reading a morning note saying the risk is those major u.s. banks with exposure to hong kong, those tech companies whose parts flow into hong kong and onward to the united states -- the risk is the u.s. retaliates to china against hong kong with terex and that s&p.n aggressive impact on five to 10%. ofi think the direct impact exposure to hong kong by the

great, channel, not so hong kong is not the global power it once was. gdp is just a 10th of mainland china's foreign bank exposure into that is not really problematic. there is definitely going to be some fallout. some banks could be more exposed than others. concerned about companies exposed to hong kong property markets. we saw that wobble a lot during the protests last year. real estate investments associated with that. marketng's property already has shaky fundamentals. it is the most overvalued property market in the world by many metrics. let us just pick up on

that stream of thought. it goes back to a conversation the last few days. the biggest seminal shift in our lifetime will be the transfer of responsibility from corporate's to us. we are going to work remotely over the next five years. commercial property prices may not exactly crash, but they are going to get repriced. this is the paradigm shift we need to get our head around. commercial property usage and the transfer of risk and responsibility to the individual from the corporate. fascinatinghat is a aftershock to consider from the covid-19 prices -- crisis. if you think about central business district prime property, it is a huge expense to many corporations. it is one of their biggest line items on their cost sheets.

if new technology which has been rolled out at a rapid pace across many firms working from home, if that holds up, if people think their productivity prior, companies are likely to take advantage of that. if some central office district around the world could be in seenle in london, we have -- we have been very nervous about commercial property for a long while. a lot of new supply coming on stream. i think that is one, when we are thinking about the long-term effect of covid-19, that is certainly something investors should think very carefully about. made anyve you structural change, as we think about some of these big items, trade wars, the risk -- when

francine interviewed christine lagarde, christine lagarde talked about the w's. the w in terms of the economy's opening, re-closing, and war. have you done anything which is skewed because of w risk? been decreasing our exposure to emerging markets through this. it started in march and continued in may, actually. thinks in part because we negative valuations are becoming complacent around the risks of the shape of the recovery globally, but it is also to do with the rhetoric between president trump and president xi. actually, we have been pretty

cool on emerging markets for a while. that phase one trade deal some people got very excited about is historythe year now, but the strings attached to it, the increases in imports china had to meet in our opinion were completely impossible. they were highly likely to be hauled over the coals by the white house. that is before we had all of these new measures to be tough on china over the last three weeks. coupledy that trade war with the effects of the we haverus has meant been increasing our exposure to emerging market activity. certainly jp morgan and citibank are vicious in the emfx space.

do not hang up the phone. monday morning needs to go seamlessly smooth. edward smith. good man. up, boris johnson has mounted a staunch defense of his senior aide amidst angry demands from across the political spectrum. just fire the advisor for allegedly breaking the lockdown role. bloomberg surveillance, simulcast on bloomberg radio and television at 12:00 p.m. london time. bloomberg surveillance. 12:00 noon tuesday. don't miss it. ♪

manus: this is "bloomberg daybreak: europe." boris johnson launches a staunch defense of his senior aide dominic cummings after he allegedly broke lockdown rules. -- u.k. prime minister has minister traveled well he was supposedly isolating for coronavirus symptoms. >> i think he followed the instance of every father and every parent. i do not mark him down for that. i believe in every respect, he has acted responsibly and legally and with integrity. it comes as britain's

chancellor has authorized a plan phase strategically important companies. the government would rescue any company whose failure would disproportionately hurt the economy. while it is not clear which companies the government deems strategically important, some of the nation's employers are reeling. the travel industry has collapsed. auto sales have all but folded. meanwhile to the bank, the deputy governor has added his voice to the chorus of policymakers refusing to relet negative interest rates in the u.k.. he said in an interview, that is perfectly reasonable, to have an open mind on cutting rates below zero. edward smith is with rathbone's, he is still with us. a clack is a group of actors

harming the actors on stage. the clack rose. edward, how close are we and how destructive would they be to our portfolio? >> i do not think we are that close. it is right the bank of england has said they are considering them. they have been quite clear they are not ruling them in right now. the governor is not a fan of negative rates. he said it creates problems for commercial banks and it is hard to explain to the public. that has been the bank of england stands for quite a few years now. they do not want to rule out. the academic evidence on their efficacy is mixed. central bank's have used them around the official account from the swedish central bank has been released and is pretty

damming. the ecb thinks they are working well. that academic study from the federal reserve bank in san francisco suggests cutting to negative territory is still effective, but perhaps by as much as 40% less effective than the cut when you are in positive territory. i think because the evidence is mixed, because of past comments from the bank of england, i think we are more wait and see ramp-up in qe as a first measure before negative rates furthered down the line. line.ther down the manus: everything you said is sound. the market is still pricing and pushing for irp. what takes sterling back to 35 euro? it did so on lockdown.

now i have a number of other lawyers. i saying he's ready to do strategic saviors in the economy. you have a contraction in the u.k. of 14%. which lever is it that dominates the fx story in the first instance? >> a lot of people look at interest rate differentials such as currency moves. the interest rate differential has broken down over the last 18 months, also the last 2, 3 years. there has been virtually no correlation between relative interest rate differentials on the pound. actually if the pound had followed interest rate differentials, even taking into account these market irp, theons of an pound should be much stronger.

i do not think that will be the main lever. what is weighing at the moment -- manus: edward, hold onto that thought. time has clashed against us. edward smith on the pound correlation. ♪

manus: good morning from bloomberg's middle east headquarters in dubai. it is "bloomberg daybreak: europe," your top stories this monday morning. china's foreign minister warns the u.s. of pushing the nations towards a new cold war. hong kong protesters hold their biggest rally in months. the controversial new legislation. and united states observes memorial day as coronavirus deaths approach 100,000.

on downing street, political pressure grows on boris johnson as he backs and embattled aid. lufthansabailout of is said to be bogged down by wrangling over key details. berlin is seeking swift approval from brussels. warm welcome to the show. asian stocks rallying a little bit. you have got a -- on dollar yuan. the narrative is about reopening. that is what drives the market, from australia, to tokyo, where the state of emergency is said to be lifted. asian stocks up by .6%. there is stress in sino-u.s. relations. some callers are saying -- cory is saying it is all about managing the depreciation on the yuan. will we pass 720? markets like to test levels. citigroup and jp morgan cautious on asia fx.

onigroup are not bullish asian fx but are bearish on the south korean won. again, those of you who are hoping that the u.s. should give mind isanging china's wishful thinking. the hedge funds, by the way, have moved to net long versus net short for the first time since march on the dollar. you are looking at crude storming away. the reopening narrative, the demand for energy. could have 75% this month. were in negative territory over a month ago. must talk about the fed. the boston said president expects companies to begin receiving money through the central bank's main street lending program within two weeks. we emergency scheme is designed to provide credit. small and medium-sized u.s. companies. the fed has been under

increasing scrutiny under the programs slow launch since its announcement in march on whether the fed will publish its beige book. it is likely to confirm sharp economic deterioration and point to uncertainty around the outlook for the united states of america. edward smith is with us. the narrative this morning for markets is all about reopening, but when we look at lending to main street america, this is narrative begins to take shape. 600 billion dollars making it to main street. how important is that? very important. there's been a lot of criticism in the u.s., particularly in the u.k., about how slow some of these huge lending programs that market have gotten very excited about in late march and eight toe, how slow they have been get out into the real economy. i mean, they are working in

financial markets, financial condition have been arrested. they have tightened by a fraction of what they did in 2018, 2009, and that is usually important, but now, they need to get out into the real economy because corporate and household balance sheets are on water and that needs to be arrested, too. a lot of discussion around the dollar. i want to get your sense on this. we put the dollar and the s&p together and there is a view --t this robust resilient dollar, it is critical to where we go next in terms of the s&p. do you look at the relationship between the dollar and the s&p at any level? run piecesl, when we of analysis, there's looking at the relationship. lots of variables over the s&p. the dollar actually has a pretty

weak effect surprisingly. certainly affects some export oriented corners of the s&p, but overall, it does not have a huge effect. it has a much greater effect on investments like emerging-market assets which are really sensitive to the dollar. the s&p, not so much. we think the dollar is overvalued on a range of currency valuation frameworks, perhaps more complicated ones bringing relative savings. we are not sure how much further the dollar can increase, but at the same time, we do not see a big weakening anytime soon. manus: one thing that struck me as i read through your notes is you see the probability of -- a

50-50 probability of a v-shaped versus a protracted recovery. now, how has that shifted? how has that progressed? and what is it that skews you towards the v? edward: we are trying to remain grounded by the probabilities. if we look at the path markets have taken over the last two months, they are now within 5% to 10% of our estimated fair value for a v-shaped recovery, and we think that is not pricing into high probability. a probability. we think it is 50-50. remain to grounded by those probabilities. certainly, the data that is out in may suggests that the economy

is becoming a little slow to recover. china took longer than many people expected to recover initially, so there are? about canquickly the economy spring back. we are 50-50. the deflations of narrative, how has that driven your thinking or your preparedness? cash certainly does not seem to be a huge momentum behind the inflation story, although wages are going to be under pressure. many people say to me, if you have 36 million people unemployed and an unemployment rate at 10% on a recovery trade, the momentum for wages, it is not a bright picture. no, we certainly think wage growth is likely to decrease. statistically, you have had some

funny numbers because a lot of a lotpaid work errors -- of lower paid workers have dropped out of -- sorry. i am getting some noise in my ear from the computer. manus: my apologies. edward: -- inflation story. areink a lot of investors worried about all the stimulus getting out into the economy and causing inflation to go up. milton people citing friedman. of course, the problem with that sort of view is that it overlooks something which in jargon terms is called the philosophy of money. how much that money that is being created by central banks and the government is actually blowing through the economy, and we think that will remain subdued as people increase their precautionary savings, as some

companies pay some of that government stimulus back, and that will hold down inflation, even if we do get a reasonably strong recovery. at thei think you were lunch i was at during the weekend. m2 might be exploding but it is all about the velocity of money. thank you very much. you have just confirmed two of the biggest trades. my guest host stays with us. do not hang up the phone. and he china protests -- anti-china protests return to hong kong. denouncing china's security law. the biggest outcry since the coronavirus swept through the city in january. the legislative councilmember spoke earlier, who is vice-chairman of the democratic the betterment and progress of hong kong. take a listen. have twoof all, i also

denounce the violent protests yesterday. as you have seen from the tv. ordinary -- because wasifferent appearance, he beaten up by a group of protesters. it is very cruel. very violentis behavior, first of all. the second thing is people, if they opposed to this piece of national security law, one of the reasons for how they do not understand the nature of the law. actually, i believe that do not need to worry or be concerned because if you are not sort of terrorism crimes like or you are not engaged in orething like a petition engaged in this organized act,

then you need not worry. those who engage in terrorism, organized crimes, those who need -- would be concerned -- >> foreign investors also seem to be concerned that with this new law, it is an erosion of so many aspects of independence or the semblance of independence, including judicial independence. is that a valid concern, and what do you say about the argument that beijing is willing to trade hong kong's as an international financial hub as being separate from beijing in order to consolidate control? with that disagree point. first of all, i make that very clear. the enactment of this national security law, the purpose of that is to make sure that we have a safe environment in hong

kong to protect national security. virus continues to carry on, we will lose a safe environment, and nobody will be willing to -- in hong kong, in the long run -- nobody will be willing to invest in hong kong in the long run. in macau, they have done the national security legislation. have a make sure that we safe environment. now, if people have concerns about this national security now, theuld say details of the national security law remains to be seen, but once we have the details, i am sure the central government will come out and explain to everyone. >> put it this way then, the way things are shaping up, and obviously, we have to wait and see how this plays out, is that this will be introduced by

decree. is being snuck in. it will not go through the normal legislative process. of, would you be in favor being introduced in a similar way, if it was not this? a lot of people have expressed is beingcern that it implemented without the consultation of the hong kong people as well, and you know, that is a valid concern to have. what would you say to those people, that beijing is railroading this through? in accordance with our basic law. in the article, article 18 of the basic law that the central government does have the right to incorporate the national law into and three of the basic law, and by way of promulgation, it would be implemented in hong kong, so it is done in accordance with the basic law.

i don't see anything wrong there. manus: that was the hong kong legislative councilmember speaking to the crew in hong kong just a short time ago on bloomberg. coming up on the show, china accuses u.s. leaders of pushing a new cold war. relations between the countries have hit a new low. violence on the streets of hong kong. we have more on the u.s.-china relations. this is bloomberg. ♪

manus: this is "bloomberg daybreak: europe." i am manus in dubai. american leaders are

potentially pushing towards a new cold war. the prime minister has said the wishfululd give up its thinking on changing china. he added the situation is dangerous and could endanger global peace. violence has returned to the streets of hong kong. right police have clashed with hundreds of protesters watching against china's dramatic move to crack down on dissent. joining me now is the ecfr director of asia programming. thank you so much for joining us. this sweeping legislation, as it is referred to, decriminalized any criticism of china. why is china doing this now? is it in patience with hong kong or is it a sense of panic? degrees impatient to a because this law was supposed to be enacted by the hong kong government for a long time but it is also a sense of seizing

the moment. the world is very distracted with the pandemic and one could think that this is the worst of all times. for china, this is not the worst of all times. this is quite a good time to make decisive moves, as we see all around china at the moment. it a decisivel move. mike pompeo says it could lead to the u.s. reconsidering the special trade status of hong kong. tiehose two together -- those two together because they are quite far apart. janka: the standoff between the u.s. and china is getting more fierce by the day. these moves on hong kong by the central government are very clearly directed towards establishing institutions on the ground, so the maintenance of security -- the institutions potentially within educational facilities, so the special

administrator would turn into just another chinese city. whether the u.s. is willing to accept that, whether the u.s. is willing to do that will be seen, but it cannot be resolved easily anymore because this move has been made by the central government in beijing. by thehis to be moved hong kong authorities, it would be a fun story but we are in a different territory now than we were with the extradition. manus: we have ratcheted higher, from what you just said. we have ratcheted higher, so extradition law was one wrangle. here we are with a completely different level of risk. what does that risk take me to? what is a cold war in 2020? what does it look like? what does it feel like? how will we know we are there? that we are not facing a cold war because that analogy is misleading. it is oversimplifying for the complex dynamics that are

currently at play. we are seeing an all-out confrontation between the u.s. and china across economic, technological, the trade space, and as you can see, even in the political and diplomatic space. the only thing missing is basically a military confrontation at the moment, and we are inching towards a very tense security environment. i think the escalatory's -- de -escalatory steps are necessary. boxed into their domestic context. it is about domestic politics both sides are playing. we are in a situation where the hong kong people will become pawns in this bigger conflict, but it's also a domestic problem that beijing has been wanting to resolve for a long time and it is just speeding up the process. manus: do you think that the e.u. and the united states -- how will they fight back? how will they push back?

the u.s. have got tariffs capabilities. it can perhaps lodge tariffs against hong kong. it can decry the special status of hong kong. series ofe escalation, retaliation? the use of my phrase, cold war, is to quote the foreign minister of china, so perhaps he is underestimating the scale of where we are? janka: i think the chinese government has been referring to the cold war for quite some time . western institutions are maintaining a cold war mindset for a long time. this has been a phrase that has been used quite a bit. i think what you were referring to is one of the measures that europeans or americans could go take. i am afraid that the toolbox is pretty empty on this one. there are a number of economic measures that can be taken. the enforcement of human rights pensions have been put into place but this would not counter

the overall problem of beijing's ability to institute this law and beijing's ability to actually move on this. the question remains whether this is a breaking point, whether this is a redline in the overall relationship with china. only if europe and the u.s. are willing to really risk the overall relationship over this, then more decisive measures could be take in. manus: let's see where the offramp is or the escalation. , director of asia programming. coming up on the show, lift sounds as 9 billion euro bailout is boxed down in talks in brussels. more on the story. this is bloomberg. ♪

manus: this is "bloomberg daybreak: europe." i am manus cranny in dubai. lufthansa's 9 billion euro bailout has been bogged down in talks with brussels. horses tell us the discussions are meant to ensure swift approval once the deal is finalized. our senior editor, benedikt kammel, is on the line. great to have you with us. lift on this set almost one week ago that they are in advanced talks about this bailout. what exactly is holding it up in brussels? benedikt: the devil is in the detail. on wednesday week from the chancellor, from angela merkel, that they are on the home stretch for the deal and looking to confirm as much. we really thought this is a matter of a day or two until we get white smoke and the two sides lay the deal, but since then, really nothing. the liberations are now at a

stage where they are taking whatever they have cash doubt to the european commission. they need approval from the european side as well and it is a matter of how long germany might hold a stake in lufthansa, what the rules would look like a possible m&a, what would an exit look like for the german government? repayight lufthansa whatever money they have gotten? what about outstanding aircraft orders that we know exist? all these kind of things still need to be had out. it seems like that is taking a little longer. there's really no alternative to a deal. for really bailout or bust lufthansa. they made as much clear. we have to be a little patient. we are hearing a supervisory board meeting might happen tomorrow and we might then finally get the final ruling and the approval from the e.u. side and from the germans. manus: ok. it is mostbut

unlikely so it is probably -- senior editor in europe, an addict camel, tracking -- benedikt kammel, tracking lift on set. the european market open, special monday. ♪

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manus: good morning. welcome to "bloomberg markets: european open." i am manus cranny. your top stories. a new cold war. the u.s. should give up on its wistful thinking of tenant -- wishful thinking of changing china according to the foreign minister. violence on the streets of hong kong. asian markets shrug off the prospect of further escalations as mainland china is in the green. european futures are up with markets in the u.k.nd