dani: this is "bloomberg daybreak: europe." manus: calling on china. the u.s. says russia and beijing for military aid in ukraine. top diplomats meeting in room. traders brace for higher u.s.

rates. the five year yield tops 2%. plus, aipac route -- apac rout. good morning. there is a sense of an unhinged bond market but i put it to you it is about the geopolitical flows from china, u.s., from britain to saudi and from qatar to moscow. the bilateral geopolitical throws will drive risk this week. >> a lot of risk. a crunch week on wednesday. the fed decision and the possibility for russian default. manus: the question for the bond markets, two-year paper spikes above 2% for the first time in almost a decade. more than a decade. take a look at this. what you have is above 2% for

the first time since may 2018. treasury index, 1.6% in four days last week, nearly 4% in 2022. we have not seen a wipeout since 1973 like this in the bond market. tie a yellow ribbon around the old oak tree. that just shows you the scale of the unhinged moves involved in the bond market. dani: daybreak's history lesson continues on. it does seem like something the bond market has indicated going on. you mentioned big losses in the treasury, five years above 2%. tens, the spread, the yield curve is just three basis points away from inversion. our central banks getting this wrong?

manus: will they invoke stagflation? there is something else going on. the volatility index on the bond market stands. it collapsed last week. there are some brave people in this world that are selling volatility. let's talk about what is going on. brent rolls over, the dollar goes higher. brent touches a five year low. the 10 year government bond yield in the united states of america, again under pressure. 2.04%. it is the trade situation. a five-year low over haven status. the dollar is triumphant and janet yellen, a serious competition for the dollar is dominant. dani: thanks to lower oil prices, you are looking at zero point 5% rise on your stoxx 600 after eight gains almost 1%

yesterday. a little weaker on the ftse 100. that is where the oil matrix will be living. s&p up 0.5%, dove more than 1% friday. nasdaq underperforming, perhaps a little bit tied to tiny -- to chinese text, which we will get to. manus: monster outflows from europe. let's bring the team together, standing by. our chief north asia correspondent stephen engle in hong kong. juliette saly standing by in singapore for the very latest on these markets. >> the economic and diplomatic pressures on russia appear to be growing. russia's finance ministers says it has lost access to almost half its reserves and u.s. officials say russia has asked china for help. the u.s. and china will hold their first in person, high-level talks since russia's

invasion of ukraine. the white house is warning beijing not to help moscow to evade sanctions. let's go ahead and get to our stephen engle on this point. stephen engle of course joining us from hong kong, our north asia correspondent. russia is said to be reaching out for help, but how far is beijing willing to go to back moscow? >> that is the big question. the cornerstone of chinese diplomacy are the five principles of peaceful coexistence and that includes nonaggression and noninterference. that is a delicate balancing act for beijing. they have not condemned russia's invasion of ukraine but they have also recognized ukraine's sovereignty and recognize there is a humanitarian crisis and that all out efforts thus be made to reach some sort of peace. the white house has treaded carefully on this not to single out beijing for its neutrality.

they need beijing's help perhaps in getting beijing to exert its influence. excuse me, on moscow. and also to adhere to global sanctions. that's going to be a tricky one because at least publicly -- so this meeting between the top diplomats in china and a top official in the politburo meeting with jake sullivan in rome -- manus: we are going to let you grab a glass of water, as you say, setting the stage for major diplomatic negotiations between the chinese and the united states of america. we will be back to you hopefully very, very shortly. stephen engle in hong kong. let's get to the latest on the ground.

fighting connected in the east and the south. we had shelling. how close was shelling to where you are? what is the state of play on the ground? >> from where i am at the border crossing, eight missile strikes hit the international peacekeeping and security center 20 kilometers over the border from where i am now. this is where before the war nato was working in cooperation with ukraine to train ukrainian troops at this location. nato has also said none of their soldiers were hit during the attack. it is being pointed to -- this strike was pointed to the local mayor at that point of ukraine

as yet another reason why is and their words, nato should close the skies or create a no-fly zone, pointing to the fact this is coming very close to the european borders and this should be a concern for the eu as well. we are seeing massive flows not just at this border crossing, but also at many other border crossings. the unhcr is warning that this is going to be the worst refugee crisis since the end of world war ii in europe. dani: thank you. on to china, where tech is facing her littlest selloff. it is being hit by dual headlines of political risks and covid shut down in shenzhen. juliette saly joins us from singapore.

hong kong getting slammed this morning. >> we have a really good gtv chart to show you. we have actually seen the second-biggest sell down for this index in its history. we saw that coming through friday due to a raft of reasons. you have regulatory headwinds, you have beijing's potential overture toward putin. is that going to lead to further exodus from foreign invest ors from chinese companies, is that -- all of that leading to a terrible day as we see shenzhen being locked down. the hang seng index falling by more than 4%, it is now passed the 20,000 point level. it is now holding at six year lows. the h share index at its lowest since 2009 and flowing through into a raft of these players in terms of the reopening stocks. the macau gaming index falling

nearly 10% today. all of this waiting through into sentiment we have been talking to analysts about whether you are buying the dip. there is solid momentum in terms of valuations, both on the saying good entry point. manus: how much or to what extent does this sell down put pressure for increased stimulus, the targeted stimulus we saw in 2021? >> analysts are saying there was no targeted rewriting for tech players last week. what are we going to see further stimulus in terms of the rrr cut, the mlf? you did have a front page on the chinese security journal today, the state newspaper indicating

yes, this is likely to happen. we are watching that, also the february data tomorrow. you see this in the bond market. we saw china's 10 year government bond yield falling. that is the lowest in a month. manus: thank you very much. the very latest on the markets. let's get a look at some of the things that are going to set the agenda for the week. geopolitical flows will be front and center. central banks wednesday, the latest decision will be revealed. new dot plots will come to bear from the fed. then it is the bank of england's turn. six hikes expected from the boe. dani: on friday we will have the bank of japan rate decision. there will be february cpi for the japanese economy. central banks in focus. coming up we are going to discuss the global risk on the agenda and several of the world's biggest central banks meet as we have been talking about here. we are going to get the latest from rabobank.

manus: plus we speak to -- on the outlook for the luxury sector. the impact of war and sanctions. ♪

dani: it is "bloomberg daybreak: europe." it is a busy week for global central banks and they are going to offer the biggest assessment of a changed world since russia's invasion of ukraine. you have the fed, boe, boj, all making policy decisions. manus: u.s. equity futures climbing. it is crunch time. trying to juggle central bank

actions, the possibility of a russian default on its debt. jane fully as the head of fx strategy at rabobank -- jane foley is the head of fx strategy at rabobank. we are seeing a flurry of geopolitical conversations happening. what could shift the dial in this war in europe? china is meeting the u.s., the qatari's meeting moscow and the brits going to rio. what is the most important conversation we need to track? >> we may have progress in the talks between ukraine and russia. that is obviously going to be game changing. that is the most important conversation. a meeting has been planned for sometime time, but obviously there is a new meaning given the context.

russia asked china for some kind of assistance, potentially military equipment, we don't know what the chinese have said. how far will the u.s. and its allies pushed china in terms of secondary sanctions if it does move? that is another really important part of this equation. dani: there has been much made of some of the stability of some regions. they are not is exposed perhaps to russia-ukraine. if we are looking at a world where china is more involved, does that mean we have to rebut the playbook yet again -- rip up the playbook yet again? >> completely. this is an aspect of the global economy for the next five years and beyond. imagine that we were to get some sort of agreement to the ending of the war in the near future

between russia and ukraine, what happens to russian energy supply? what happens to crops coming out of the black sea region? how are those links with russia going to be with the rest of the world? it is difficult on a corporate level to find out how the detangling of the world from russia is going to ebb out. clearly of china is on the side of russia, that hugely complicates the issue. for the next few years, almost irrespective of how soon, there is a huge complicated geopolitical angle that is going to take a long time to work through. manus: we have touched on the vulnerability of the euro you made it clear that there is a potential fund for defense and a number of other facets that could flow under the euro.

you talk about the vulnerability. where is the vulnerability going to be most manifest? is it going to be on the dollar cross? is it going to be on the yen, which is collapsing? how do you see the euro dissipation most manifest? >> there are perhaps two ways to answer that. when we look at the normal is when we have a crisis. you have the dollar and the japanese yen benefiting. at the other end of the table you have the aussie, deemed the riskiest currency within the g10 basket. that has been turned on its head. this is because of the commodities aspect. if you look at currencies like brazil as well as aussie, the commodities aspect means these currencies have performed really quite well since the start of this war. the yen on the other hand, japan

, it imports huge amounts of commodities. it has a very dovish central bank. it is not performing the way you would want it to be. you have the commodities aspect really pushing through. dani: i find it fascinating you have the yen at a 2017 low, you have the central bank story. bonds all feeding into this. does that mean in this type of environment, looking at the yen as a haven, that trade has dissolved? >> it has dissolved if you are looking at it as against the dollar. you have the fed hiking interest rates aggressively this year. generally speaking, if you want to buy commodities, you probably -- the dollar is benefiting on that. the yen will soon be performing better against other currencies that really are not doing well in this environment. think about sweden.

even to some extent against the euro, that is vulnerable. just because of its geographical location. so yes, i would not want to be buying the yen against the dollar. some people might be looking at it for a little bit of bargain-hunting soon. but really the dollar is the standout safe haven in this current environment. dani: the dollar retaining its crown. you are going to stay with us. jane foley, head of fx strategy at rabobank. juliette saly joins us and singapore. >> governments are said to be discussing sanctioning the owner of chelsea's football club along with more than a dozen other prominent russians. ambassadors from around the bloc met to discuss a fourth round of sanctions and trade restrictions with energy and mining executives as well as leading media figures.

china is planning a massive increase in coal mining. the nation's top economic planning body told officials for remaining -- for major mining regions that it wants to boost capacity by about 300 million tons. it also plans to build a 620 million tons stockpile of the fuel. china produced over 4 billion tons of coal last year. global news, 24 hours a day, on air and at quicktake by bloomberg, powered by more than 2700 journalists and analysts in more than 120 countries. this is bloomberg. manus: coming up, we discussed the commodity fx space with jane foley. this is bloomberg. ♪

dani: welcome back to "bloomberg daybreak: europe." it is a busy week ahead. we have central-bank decisions and the possible default of russia debt. still with us is jane foley, head of fx strategy at rabobank. russia set for a default. we were just discussing how potentially the market has really expected this. does it make a difference come wednesday? >> the market is prepared for this. russian debt is not going to make it easier. the last couple weeks, the market has been looking, examining the balance sheets of various corporate's that are exposed and perhaps to some extent there is this fear there is some degree of inevitability. given the sheer pressure being put on the russian economy.

clearly it is not going to be easy news. manus: often times we try to understand what tail risks are. i don't know what the probabilities are. the tail risks could take you to $200 oil. that exposes high-yield spreads. extrapolate from you that tail risk, that kind of event tail risk. have you talked about that? have you wore gamed -- wargamed that scenario? >> we have talked about prices that level. you have to be talking about a clear risk of recession in europe. clearly if you had another spike higher -- or you could have blackouts in germany. then recession would almost be inevitable.

in that short of environment you would have germany not being able to produce, not being able to export to the same extent it should be able to. europe at that point runs clear risk of very deep crisis. globally, that would spread. you would be looking at -- if europe went into recession, that would be a drag. china certainly -- the u.s. certainly. from that point of view, that would be a very significant shock for the rest of the world. dani: on the point of the u.s. you had the university of michigan sentiment coming out. you had a new post 2011 low in terms of outlook, a record low of folks thinking their financial situation would worsen in the next 12 months. in the u.s. you have bad

consumer sentiment. that leads to a recession. how loud do you think are the calls for recession in america? >> they are getting louder. you have the flattening of the yield curve. the oil curve has been flattening since the end of last year. fears about recession have been popping up since around december. the headlines of that recession do,. to get into the mindset of central banks, i think you can apply this to the ecb and maybe the bank of england, a year ago they thought inflation would come and go fairly quickly. they are now fearing that inflation could be around about two years. we need to grapple that problem. to a certain extent they should have let the growth prospects go to the back burner and they are going to focus on getting inflation down. manus: it seems to be their

number one goal. coming up on the show, we speak about the luxury sector and the impact of war. this is bloomberg. ♪

manus: it is "daybreak europe." these are the stories that set your agenda. dani: calling on china. the u.s. says russia asked china for military aid in ukraine. inflation risks. treasuries sink as traders brace for higher u.s. rates. the five-year tops 2%. plus, tech rout.

hong kong stocks drag asia lower. it is europe out, old economy in. that is the latest from bank of america's flow show. last week we saw a record outflows in europe, doubled the previous week, which itself was a record. these are massive exodus coming on the side of european stocks. manus: rabobank have wargamed the risk of that cutting off of energy flows from russia into europe and vice versa. that is a real torch paper for recession. we know not just how the outflows from europe accelerated dramatically. let's have a look at the rest of the flow show, which is credit is cracking. money flows into gold.

these are just some of the flows. money out of bonds, 13 billion. is it a capitulation moment in equities as we go into a bear market in the nasdaq? flow comes out of credit. there is a warning from bank of america on the risk to high-yield if in their view there is a constriction of energy bilaterally between russia and europe. good morning. dani: the risk is 25 to 30% and it could send oil to $200. stocks holding up ella to blue well considering the fear, angst, in this bond market. european stocks up more than 1% supported from a falling oil price. off the back, a huge outflow, so perhaps just the selling done. underperformance from the

nasdaq. china tech stocks very weak considering the lockdown, but still you're looking at green numbers, positive numbers for your futures session. manus: let's check on the rest of the cross assets. equities eke out a bounceback. the dollar up on the bloomberg dollar index. janet yellen making it clear that nothing is going to stop the dollar. that is for sure. you are seeing seven rate hikes expected in the united states of america. we have just spoken to jane foley, calling down on her euro-dollar call and terry gannon call at the moment. -- and her yen call at the moment. dani: there's a lot of central-bank action this week. one thing we are watching out for, russia. >> russia faces its first payment on a dollar bond since its invasion of ukraine. a total of $117 million need to

be paid in interest. while it is not a lot of money for the russian state, sanctions will make getting that money a lot more complicated. failure to do so could be the first step toward a foreign currency default by the russian federation. that has not happened since the bolsheviks refused to recognize debt a century ago. bonds are dollar denominated and do not include clauses that would allow for payment in rubles. putin has decreed payments the most foreign creditors would be allowed, but only in rubles. what happens if russia fails to make an except will payment? first a 30 day grace period begins. bondholders will begin to negotiate, but with whom? with major companies cutting ties with russia am of the nation had to find a firm willing to represent it. if russia does default, how could the ruling be enforced? domino effect would ensue? if the state defaults, companies would follow. there is a quarter trillion

dollars worth of russia corporate and sovereign bonds in the euro and dollar markets outstanding. default could also like rush out of international markets, making it immensely difficult to raise money. the international community has made rush of most sanctioned company -- sanctioned company is and the world. --country in the world. manus: the white house is warning beijing not to help moscow evade sanctions. >> we will not stand by and allow any country to compensate russia. there will be consequences for large-scale sanctions, we will not allow that to go forward and allow there to be a lifeline to

russia from economic sanctions from any country anywhere in the world. dani: joining us now is our asia governments editor. we have russia reaching out to china. what does the appetite look like to assist moscow? >> we have seen beijing support russia diplomatically, but we have not seen is china willing to inflict pain on its own economy to help russia at the moment. when the u.s. officials talk about, we are not going to allow china to provide russia with a lifeline, china itself really has not shown that it is ready to do that just yet. they have said they do not recognize u.s. sanctions. they want to maintain normal trading relations with moscow. but anything that would violate sanctions, they have not done that yet. we have seen china comply with

american sanctions even when it comes to hong kong. state run banks here are complying with those sanctions, so there is no indication they would not comply with u.s. sanctions against russia. the u.s. commerce secretary said that. that is because chinese firms want to have access to the financial system at large, so they can continue growing their economy. manus: thank you very much. we enter into the third week of this war, we have had a mass exodus of corporate out of russia, and it touched every sector around the world. that includes lecturing. according to our next guest, the outlook for the sector is still strong. an investment manager at gam is our guest. we have this exodus -- thank you for being with us.

russia in gases 2% of global sales, but it is the bigger dynamics we are trying to grapple with. 2% of luxury sales is in russia. what is russia being blocked off from the rest of the world mean for the global luxury here in dubai, in london, in paris? is that the risk? >> that is certainly what the market appears to be pricing in, is that the contagion effect from the invasion of ukraine by russia has an effect on consumers around the world. what is key to remember is the u.s. and chinese consumers make up 60% of demand for the sector, so it is much more critical to monitor the outlook for consumer spending among these key cohorts. the russian consumer, who you mentioned is only 2% of global sales. dani: every day i do a segment called stocks to watch.

i feel like everyday there is a new stock i'm talking about that is a luxury stock that outperforms on earnings. this is back during covid times, too, luxury was outperforming. what does it mean to have a luxury that is outperforming? does it make the sector relative to other consumer goods? >> a great question into place the sector and context, what to 21 was the sixth consecutive year the luxury sector outperformed relative to the market as we saw starting in 2016 the real emergence of the chinese middle class followed by revenge spending which was strong in the wake of the pandemic. the luxury sector tends to be resilient in times of crisis. during the global financial crisis, industry sales on average were down about 8%, but among that, some companies grew in 2009.

really huge bifurcation between brands, even at times of crisis. one of the assets that makes the sector resilient, especially during inflationary times, is its pricing power. companies on a daily basis talk about putting through price increases and these price increases tend to be sticky because the consumer purchasing these products is relatively price inelastic compared to other categories were sticker shock might be too much. manus: we have spent a lot of time talking about supply chain constraint, input costs, inflation. how or who is most exposed in this global dislocation? is it louis vuitton? is it tiffany? where did those key issues come to bear on global luxury? >> luxury companies have the

benefit of having high growth margins. the starting point for the sector, if you look at cosmetics and skin care companies, growth margins are about 70%. this comes down to 65 -- very high, an indication of the fact throw material costs that go into the production are dwarfed by the significant pricing power these brands command due to the appeal of their products and the strength of the brands. supply chain is much simpler, less complex for a lot of other industries. the concentration of production in france and italy for the key brand, somewhat insulate them from disruption as well. the high-growth margin as well as the fact they have strong pricing power relatively insulates the luxury sector compared to others. dani: manus and i have spent a lot of time talking about tail risk because a lot of them look

like the base case. the one we have been discussing is the increased complication of geopolitical ties. russia stepping in to ask for chinese military support certainly at the top of the list. should china get involved, should there be increased relations of the west to china, how big a threat is that for luxury goods to sell a lot to china? >> the chinese consumer makes up about a third of luxury demand globally, historically pre-pandemic. however, with the pandemic, all of this virtually has been repatriated overnight. the implications we are discussing right now are those we know of, which are sanctions are exports of western goods into russia as well as brands pulling out of russia voluntarily. should that happen in china, which at the moment is quite far out of the realm of imagination, that would pose a strong risk to the luxury sector, but we are

quite a way off of that at the moment. dani: thank you for joining us this morning. let's get to the first word news. >> eu governments are said to be discussing sanctioning the owner of chelsea football club along with other prominent russian ambassadors from around the bloc met to discuss the fourth round of sanctions. iran says it carried out a missile strike in northern iraq it has suspended talks on restoring diplomatic ties with saudi arabia days after iran and world powers halted negotiations to restore a 2015 nuclear deal. global news, 24 hours a day, on air and at quicktake by bloomberg, powered by more than 2700 journalists and analysts in more than 120 countries.

this is bloomberg. manus: china locks down shenzhen after a major covid outbreak. more on the story for supply chains and the impact on tax. -- on tech. this is bloomberg. ♪

dani: welcome back to "bloomberg daybreak: europe." china has locked down 17.5 million residents in shenzhen as it faces its worst covid outbreak since the start of the pandemic. infections are rising across the country, challenging beijing's covid zero strategy. let's get more with debbie wu.

amidst all of this you have concern about the foxconn factory in shenzhen. what does all of this mean, a locked down for foxconn? >> what foxconn is doing, it is halting operations at campuses in shenzhen. that includes its china headquarters. foxconn is saying it is stopping operations, halting production until the government issues approval. we do not know when that will be. the government is saying they are ordering companies to halt operations for a week until march 20. we have to wait to hear what the government does next. manus: what is the impact on foxconn and the apple supply chain?

>> so -- dani: it seems like debbie might have technical issues. that was debbie wu giving us an update, foxconn one of the biggest suppliers for apple. manus? manus: let's think about that for a moment. debbie has run nests through. -- run us through. you begin to see inflows and outflows between apple suppliers and you understand the technical overlaps. let's have a look at some of the other markets that we have in terms of this shutdown. i want to focus on the commodity block. razor-sharp, commodities are down. iron ore down for 7%. dollar strength in geopolitics.

steel under pressure. you are seeing the industrial metals fall as you have seen a city of 18 million people go into lockdown and the huge potential knock ons for trade. that is the critical point. dani: it is fascinating what james foley of rabobank was talking about. the world gets bifurcated into importers and exporters of commodities. that is part of the reason the yen is underperforming trading at a 17 -- 82017 low. have japan as an importer and it cannot stand up against the u.s. dollar. manus: a big shout out to valerie who creates the charts. she said collateral, use the oil, you shove it in as collateral. what banks are doing, they're saying is your collateral russian collateral or is it

clear and clean of russia exposure? in which case, the collateral with russian exposure has less value. that has a huge impact. do you remember mortgage-backed that used to be aaa rated? then they went -- mortgage backed securities that used to be aaa rated? then they went to junk. dani: manus, as it comes to oil, we are going to discuss that. oil is falling again this morning. iran carrying out a missile strike days after negotiations on a nuclear deal stalled and more on the geopolitics of oil next. this is bloomberg. ♪

manus: it is your monday edition of "daybreak europe." the oil market is falling again. russia's bombardment of ukraine prompts more calls to sideline the opec-plus producer. the suspension of iran nuclear talks and this week's fed rate decision are weighing on markets. i asked our energy and commodities team leader a difficult question. for me this is not a geopolitical fall in oil. the qatari's go to moscow and the yanks are meeting the chinese in rome. the flow of oil, we are rolling over this morning. why do you think given the tensions have not abated -- why

do you think there is a pause in the oil markets today? >> that is a difficult question. the oil markets are seeing some signs of de-escalation. a lot of people would say that is optimistic. another thing to bear in mind is there has been such a huge run-up, such a huge increase in prices since the russian invasion on the 24th of february. we were below $100 a barrel back then, about $90. it seems like a long time ago now. even though we are having a slight fall today, we are down 2%. in the scheme of things that is negligible. oil is still extremely high on the market is very volatile. it would not take much at all for that 2% downward swing to become a spike of the same amount or even more, even intraday. dani: well, paul, good morning.

at the same time you have sky reporting that boris johnson is set to go to saudi to negotiate, perhaps more oil from their, really encapsulating how much the west is relying on these countries. what could potential impacts be from these talks? >> oil markets will be watching closely. if the trip does go ahead and boris johnson goes to saudi arabia, in all likelihood it will be to meet crown prince mohammad bin salman, the defective ruler in the kingdom -- de facto ruler in the kingdom. the trip would be about trying to get the kingdom to increase oil production and potentially get other opec members on board with that as well. if a trip does go ahead, that might be a sign that saudi arabia is slightly closer to doing that. so far the kingdom and the other

heavyweights in opec has been adamant they do not want to break up the alliance, which includes russia. they have said they do not want faster production than what they are doing right now. dani: bloomberg's paul wallace. just a quick note while we are talking about the energy markets. red headline around natural gas, france saying it has enough natural gas to get through the winter. the concern here is the supply chain, given that russian gas is no longer an option or less of an option. edf laying out the impact from new regulatory measures. manus: also a line coming through from gazprom. gas transit through europe by ukraine is going normally. european natural gas futures have moved. huge moves in tech. the daybreak open team will pick

this up. the hang seng, tech getting demolished. a record drop in hong kong. tech under serious pressure. this is bloomberg. ♪

anna: welcome to bloomberg markets europe, i'm anna edwards live in london. the cash trade is less than an hour away. calling on china, the u.s. says russia asked beijing for military aid in ukraine. inflation risks. treasuries think as traders raise for higher u.s. rates. the 5-year yield tops 2%.