>> good morning.

this is "bloomberg daybreak: europe." sterling crashes to a record low. calls mount for a hawkish response by the boe. stocks and futures sink and yields -- as pessimism steepened. italy is most right-wing government since world war ii. it is monday and we are on flash crash watch. sterling tumbling following more than 4% in the span of just 20 minutes. talking on the sunday shows about more tax cuts to come. that is combining with the thin liquidity hours of asia trading. we just cut to a black screen but perhaps that is effective of

the sentiment on sterling. this move right here in the early hours of trading, low liquidity, we move 4.5% to a record low. sterling has bounced back ever so slightly to 1.054, but this is the lowest since 1985, dangerously close to record low levels yet again. it is all about the twin deficits and concern over the government. this is not just a dollar strength story. it is a sterling that has fallen virtually against every currency so far this morning. euro versus pound is higher by 2.3%. will we get euro sterling parity? that would be a change even versus the lira the pound is falling, down 0.25 to 0.75%. king dollar stronger against most currencies. the yen, we have talked of the need for intervention if

speculation continues. then we have a chinese yuan that was set for its first fixing below seven dollars for the first time since 2020. and they are putting reserve requirements in. even so king dollar remains and the environment is one of risk off. stocks falling, global equities at their lowest since 2020. it will be interesting to see what happens for the u.k. bond market but right now we are looking at selling in treasuries. asia stocks falling. ftse 100 futures are up perhaps somewhat ironically about 0.5 percent. a lot of these are exporters bloomberg.com. with the lower pound -- are exporters. perhaps with the lower pound. let's dig into these historic moves on the pound. let's get to garfield reynolds and mark cranfield who are waiting in the wings. then we will have lizzy burden as well. let's get straight to you mark.

moves in the pound happened during the asia trading hours. how much do we read into it given it is very thin liquidity? >> it might be slightly exaggerated. clearly what has happened to the u.k. with the risk of an extremely large fiscal deficit now, a wide current account deficit. and with talk of more tax cuts to come in the future, people are very nervous that the u.k. has put themselves in a very risky situation. it is going to take time for the u.k. government to achieve these goals. financial markets are not patient. they want to see results straight away. they are making the easy way out, which is -- even the bank of england would be expected to raise interest rates, but are they going to do it by a sizable

amount that would really make any difference? we have u.k. rates about 2% at the moment. the implication friday is that rates would be 5%. it's going to go higher today. the bank of england is going to not raise rates from 2% to 5% in one go. they will be behind the market the whole time. i don't think there's going to be much support. is going to take a lot for it to be turned around. you may see sterling bounce. as the week goes on, the risks are clearly to the downside. dani: can we say one dollar is the for mark? >> it is not just a sterling issue. the dollar is still extremely stronger than everything else.

u.s. monetary policy is a lot compared to the rest the world. you have that weakening the pound and you have the fact traders will be looking for how much of a discount the pound will need to offer before it attracts international investors. that could be 5% or 10% below parity before they are confident international people want to invest a lot in the u.k.. >> if there is not stability in the currency itself, how willing are folks going to be to jump into u.k. assets? let me bring you into the conversation, garfield. cash market lows for yields and equities were seen -- what's going to happen when bond markets open up in the u.k.? >> i think a potential clue is

what has been happening to the bond market. looking at treasuries, australian bonds, even at futures for the german bund, they have been down, yields have been up extending moves that happened friday and that were fueled to a certain extent by the extreme jump that happened in gilt yields. you have the 10-year treasury yield up. the move in australian bonds at the short end has been dramatic. that speaks to what's going to happen to trade markets unless we get something that will push back against that. the concern is this is letting the fiscal genie out of the bottle as it were. the idea that the u.k. will not

be the last government to say, well, we are going to run a much bigger deficit because there are things going on at the back of inflation and monetary policy that we have to shift our fiscal policy and run bigger deficits. if that doesn't spread around the world, that signals a much higher bond yield around the world, not just the u.k.. dani: we are in this environment where it does seem like monetary policy can only go so far to curb inflation and on the fiscal side it does not seem like they are willing to do that. at what point -- we were just talking with mark about at what point would sterling mean foreign investors are willing to jump in. how high to u.k. yields need to get for foreign investors to jump in a market where a quarter of it is held by foreign investors? >> they would need to get significantly higher especially when you look at what is going

on around the globe. yield keep rising. you get some signs of strong demand. demand at treasury auctions has held up extremely well even amid what bank of america was describing is the worst year since 1949 for government bonds. that is something investors are willing to buy and to hold, but yields have been going higher, bonds have been selling off. and when you look at the way that 10-year treasury yield keep even as they go up, gilt yields are about the same level. there is less uncertainty from a policy point of view about the u.s. and a deeper market ultimately.

you think about the way you need a premium there on u.k. before you see strong investor flows into the market. dani: thanks so much and thanks also to mark cranfield, both from our mliv team. let's get to the political angle. liz truss's government has started drastically with the pound plunging on its fiscal plan. labor party said it would keep the cut in the basic rate of income tax announced by the chancellor but reversed the changes to the top rate. let's bring in lizzy burden. look, we have talked about the market response. what does this all mean for the bank of england? what could we see to stem these losses? >> i will take you back to the

chancellor. saying than friday the markets will do what they will. the markets are doing that. he did not think it could get worse for the pound. he added on the expectation that there will be more tax cuts. the pound, record low as we are hearing, the biggest intraday move since the brexit referendum in 2016. what does it mean for the bank of england? there was a note on friday before all these moves saying the bank would have to step in if it was going to regain credibility. you had a bank of england policy makers saying the rate will have to rise. that was before these moves. a former u.s. treasury secretary said the u.k. was looking to emerging markets. intraday -- the intro we can

move -- intro week move from the bank of england is perhaps not likely. we are do to get more hawkish talk instead. the panic has already begun. dani: i have seen some people joke and say gbp, it is the great british peso, which i should say is offensive to the pace at which has gained not just against the pound but the dollar as well. great stuff as always, lizzy burden that labor party conference. -- lizzy burden at that labor party conference. italy will have its first female prime minister at the head of the most right wing government since world war ii. let's bring in francine lacqua who has been holding ground for us in rome. what do we expect now? meloni at the top of the ticket,

what happens next? >> i cannot stop thinking about the the great british pizza -- dani: pizza? >> that is what i heard. meloni is the furthest right prime minister of italy since mussolini. they are sticking to what was promised. in her speech last night, in room, it was very clear that broadly the polls were as expected and that she won the largest majority. what it means going forward is the markets will see if she is threatening to europe. for the moment she says she will

stick to the plan. there will be some renegotiation with europe. as long as she sticks to the commitment mario draghi put in place that is something the markets can live with. on the social level, this is a woman and a party that wants to curb rights for lgbtq, or at least not give any more. the rhetoric is very anti-immigration. for the moment the markets are really focused on the economics. you could see some tension ahead about, for example, she's very close with viktor orban. you could see tension. dani: i did mean to see peso but i think i have pizza on the mind talking to you out there. >> me to. that is why we are a good double act. dani: i love it. francine, more on daily later in

the show -- on italy later in the show. a dimming verdict on the new u.k. chancellor plan. this is bloomberg. ♪

>> i think the u.k. is behaving a bit like an emerging market turning itself into a submerging market. it would not surprise me if the pound gets below a dollar if the current policy path is maintained. dani: former u.s. treasury secretary larry summers talking about the u.k. looking more like

an emerging market, or perhaps worse. part of this is about surging yields at the same time as a weaker currency. it is something we see an emerging markets. looking at the pound losses over the last few days, they are dwarfed by what we have seen this morning. it continues to crater starting friday after the new mini budget unveiling tax cuts the likes of which we have not seen in quite some time. a deficit spending already with twin deficits ballooning for the u.k. economy. in the early hours during asia trading we are seeing the biggest intraday move for sterling since the pandemic, falling more than 4% in the span of just 20 minutes. cannot get worse? will it get worse? let's get to the deputy chief investment officer at tobin to try to answer this. have we seen the worst of losses for sterling this morning? >> from my point of view, we

have seen the pound already bounceback again and i can imagine that now we will see -- will continue for the u.k. economy and the currency. dani: is it an overreaction? noncorporate debt servicing costs have jumped to 11% of gdp. does this look like a government that will soon struggle to find foreign investors? >> it is pretty high to be honest. we have gdp bonds.

stocks in the u.k.. we estimate they will have an impact on a lower scale in terms of time than they actually have to overcome the inflation that is rising and the problems to repay debt. i'm not sure they will be able to actually win. dani: if again the 25% of this market is held by foreign investors, the u.k. government, they perhaps need european american pensioners to be buying u.k. debt. what is the premium necessary to get foreign investors to back this agenda? to back the deficit spending put in place by the government?

>> we see now in the u.k. market there is the comparison. with emerging market economies when it comes to risk pricing. there is also the premium investors must ask for taking on this risk. dani: does this shift the responsibility for the boe to do something to shift stability into the market so it does not reflect something like an em currency? >> yes, you have this pressure. it is likely there will be more than has already been priced in.

i am sure there will be more depressions in the next couple days. the high volatility continues. dani: is that intraday? an intraday meeting like the likes of deutsche bank has recommended? >> if they were to come together today they would -- their job. dani: we have ecb speakers on deck this week. wednesday we are going to have other speakers as well. how will this change the tone of what we hear from the likes again of kate hill on the team? andrew bailey ensco in the

coming week? -- andrew bailey and co in the coming week? >> they will try to strike a town where they give confidence to the market. investors have a confidence crisis in the u.k., in the currency, in the economy. i think they will try to say ok, we are able to ensure stability and so on. this is what i expect. dani: do you expect this to have any spillover effects outside the u.k. into global markets? >> it is going to contribute to

the overall situation of high volatility, of uncertainty of investors. there are issues all over the place. i do not think it will have a particular impact. it is clearly going to contribute uncertainty. i think this will be an interesting week. we have economic data coming in which will be interesting. it will potentially contribute to making markets more volatile. dani: i am racing myself -- and bracing -- am bracing myself for when we see gilt markets open. coming up, italy has voted for

its most right-wing government since the second world war. we will bring you more on that live from rome. this is bloomberg. ♪

juliette: this is your first word news. the pound a record low at against the dollar. the decline follows a release on friday of a growth plan that details the biggest tax giveaway in half a century. liz truss told the bbc there is more to come. president xi jinping is reaffirmed as china's core at

their twice a decade leadership summit. 2200 officials were elected to the congress. the gathering starts in mid october with president xi jinping expected to secure a third term in office. ferdinand marcos, jr. is telling bloomberg that the philippines's investment overrides the concern about russia and ukraine.

dani: good morning, happy

monday, this is "bloomberg daybreak: europe," i am dani burger in london. sterling crashes to a record low. there is a vow for more tax cuts, and a hawkish response by the boe. futures sink and yields jump as a pessimism evens over prospects for inflation and growth. turning the page on draghi. italy set to have its most right wing government since world war ii. the losses from sterling on friday even worse in the early asia hours, experiencing something of a flash crash, falling more than 4% in the span of just 20 minutes. we saw sterling crater to a record low, that is this move here. liquidity is thin, but things are not getting better as we see more traders come online.

we are not back to the 1985 lows but we are not far from an all-time low, trading at 105.42 at this moment. this isn't just a strong dollar story. sterling falling against virtually every single currency this morning. i have a few view, seeing the euro gain against the pound more than 2% this morning. sterling even falling against the lira this morning. that is these two. we are also looking at a strong dollar resulting from this, it is risk off, people moving into havens and the haven of choice has been the greenback as we worry about spillover from the biggest deficit spending from the u.k. government in some time. u.s. dollar versus en gaining -- versus yen getting. we have china hitting against speculation, putting in reserve

requirements and trying to make it harder to do things like sure -- like short the yuan. let me show you the overall picture. it is about risk off. equities, global equities at the lowest since march 2020 after the severe friday selloff started after that many budget parliamentary plan laid out. s&p 500 futures a 10th -- down a 10th of 1%. usually when there is a weak pound ftse does better. but will exporters still be benefiting in this scenario? looking at asia-pacific, falling more than 2%. 10 year yields up eight basis points. let's turn to the story in europe, the energy crisis. when chancellor olaf scholz has returned from the middle east, having secured only one shipment of lng from the uae. it comes amid fears that germany

might face blackouts this winter as a looks to replace russian supplies. olaf scholz says there is still work to do. >> we have made progress on a series of projects that concern the production of gas. we have lng in play. also many things that have to do with monetization in key projects. this is very important for future cooperation. but also the transformation of the economy, to move forward and now of course, and the issue of empty security. dani: another company that has to figure out its energy strategy is italy, early the entirety of europe, but italy is about to usher in a new government. georgia maloney has won a clear majority, setting herself up to be the countries first female prime minister. francine lacqua is on the ground

in rome with a guest. francine: here in rome with my guest. we need to figure out the ins and outs of the coalition. thank you for joining us. meloni got the biggest percentage of votes. is it definite she is prime minister? >> this is in the hands of the president of the republic, but normally this should be the outcome of these elections. the first woman prime minister in italy. francine: also one of the first far right prime ministers, the first far right prime minister since mussolini. deborah: i don't find that an appropriate comparison, if you

are an italian citizen, you would not refer to her as far right. democratic right party. part of the coalition of center-right for 25 years now. we have been ruling for many years and we are ruling today 14, maybe 15 regions be at -- regions. francine: this is important, because she is very close, viktor orban says is a very good. she doesn't want to give more rights to the lgbtq immunity, she is anti-immigration and has a rhetoric of putting italy first. deborah: i think this is a stereotype against her going on and on. anti-migration solutions is not her. francine: but she said so on thursday. deborah: she has the right

positions of course. but if the country is choosing that party, it is democracy. she wanted to defend or bond -- victor or bond. those who gain -- francine: you can say i disagree with those policies but it is a democratic vote. deborah: of course. because we think of ourselves as a coalition and we've been doing this for so many years, and where we are rolling now, probably 16 regions now out of 20, consensus this deep, you don't see any risk for democracy. this should be the same. i understand the far left has been complaining against meloni, trying to give this image of her

as her policies that could be seen as negative or dangerous on the outside, but i feel reassured about that. francine: i know probably the markets would be afraid of the far left policies. the questions the markets have now is who is your jim maloney -- georgia meloni. in her first speech, she said now is the time to go on with the business ahead and this is why there are so many questions, she going to be far right or more moderate? deborah: i think she will be very concrete because she loves her country and i think she will do all possible things, together with ourselves. with other allies to do the best for the country in a difficult situation, as any other country in europe now, due to gas supplies and the cost of life and everything.

i expect her to be extremely pragmatic and concrete. also with respect to her european colleagues, for example. francine: do you believe the recovery fund will not be put in jeopardy? deborah: i don't think so. i am quite sure about that because we will proceed with all of the milestones we are expected to reach along this path. francine: the markets for the moment are pretty cool. what are the next steps when she becomes a prime minister, how long until we understand her economic policies? i know she wants to renegotiate the recovery fund, for example. deborah: it is not sure yet, but we need to be very quick. the chamber will be reunited on the 13th of october, and after that, the government will have to be identified. francine: is the coalition

staying as it is? deborah: yes, i expect the coalition to stay as it is. francine: the fact that -- again, a lot of questions about debt and how much the country can spend. you look at the u.k. right now with the pound crashing, mainly on spending plans, tax cuts. what can the coalition do on that front, if the u.k. is a warning sign? deborah: we have plans to reduce taxes of course, this is typical of a center-right coalition, and we will go for it. we have presented our plans, and we are quite comfortable about being able to do that. in the last 10 years, our debt has skyrocketed under the left. so we have to change the pace of the government, the new government, and we are quite positive about being able to do that. francine: a lot of investors

were worried about the one pushing for the debt to be more bloated. do you expect him to stay? deborah: yes, i expect him to stay in the coalition. i don't expect any sort of surprises. we have a common program, and with that program we presented ourselves to the italian citizens. our propositions are very clear in terms of economic policies. then we will have to negotiate, and we know that. but i am quite comfortable and certain about the coalition staying as it is and has it has -- and as it has been in the past. francine: the message that the first female prime minister can give, will be to appoint a strong finance minister. who do you think that person could be and from what walks of life could he or she be chosen? deborah: difficult to see but i

am sure meloni has some names in her hand. i think those names would be more of a technical personality. in order to reassure even the hardest critics against the possibilities of our next government to be successful. francine: thank you so much for making us smarter and how italy is thinking and what investors should be looking out for. dani, back to you. dani: thank you. francine lacqua in rome. one bit of solace for europe is after the italian election, the euro is stronger against sterling but basically everything is. gilt markets are closed, so some of the pressure is being released through the u.s. bond market. at one point, to year of 10 basis points, now nine basis points. the yield hitting 4.3 percent, now just under that. local bond markets selling off

in reaction to what is happening in the u.k. what will happen when these bond markets open at 8:00 a.m.? we will dive more into the u.k. story next. this is bloomberg. ♪

>> there is more to come, we've only been here 19 days. i want to see if over the next year people will save more of their income. i believe the british people will drive this economy and that's why i want people to retain more of the income they earn. dani: the new u.k. chancellor speaking on plans to cut more taxes despite the meltdown in u.k. assets we have seen. let's get more on this story,

the pound has plunged to record lows this morning, bouncing back slightly, still at its 1985 low. they are vowing to press on with more tax cuts. it briefly fell below $1.03. u.k. bond markets open up at 8:00 a.m. u.k. time. the chancellor unapologetic. let's bring in lizzy burden who joins us from the labour party conference in liverpool. there's been talk about the bank stepping in, how likely is that? lizzy: traders are pricing 120 basis points of hikes for november, which implies an interim meeting move. on friday, some were saying the bank of england needed to step in this week to regain credibility. you have a former bank of

england policy maker saying the boe would step in if the pound fell. the chancellor said he would answer his economic gamble by adding even more tax cuts to the fiscal event he announced friday, which of course is funded by borrowing. that is the crucial point for the pound. even though jp morgan's allen meeks said he did not think an interim meeting move was likely, he expect more hawkish talk from governor andrew bailey to try and reassure markets. the reason they wouldn't step in is because they would not want to be seen to be reacting to more fiscal policy than inflation or adding to the panic. but the panic is already very much there. dani: if we don't get the interim meeting hike, where does it stand from what we will see from the boe after this fiscal

event? lizzy: even if we don't get 120 basis points being priced, 100 basis points, which we have seen on friday, would still mean fiscal and monetary policy are pulling in opposite directions. yanking in opposite directions. the bank of england tweaked its guidance at the last meeting, said it's not just going to respond forcefully if inflationary pressures persist, but they could increase from stronger demand pitted -- demand. it is leaving the door open to bigger hikes. dani: thank you very much, lizzy burden, who was at the labour party conference in liverpool. she will have coverage of that through the day. let's get to martin malone, our guest. we were talking on the break about all sterling right now

under pressure, hitting a record low, but you say the crisis is not necessarily just about the pound or all about the pound. martin: we also have a significant crisis in the bond market. five-year gilt yield way over 5%, doubling interest rates and a short period of time. that will really slam three different borrowers, the government, mortgage holders and the corporate sector. we have a triple hit happening in the u.k. a significant fiscal develop -- deficit, a significant current-account deficit, and this significant rise in costs that will be felt by everybody. dani: you sent us a remarkable chart, the level that debt servicing costs have ballooned in recent days. perhaps we are already there, that this goes from a short-term embarrassment for the government to an actual crisis. martin: i would lay the main part of that at the bank of

england. the fed started on wednesday with a very hawkish hike. the bank of england then came in with a very minimal hike. it is basically not in the game at all. the bank of england needs to hike interest rates by 200 or 300 basis points. i don't think they should do that interim meeting. they made a huge mistake on thursday, and made a mistake by turning on qt. qt is in the domain of the chancellor and should be switched off. a lot of policies are misaligned and the way to get out of the crisis is to bring alignment into play. dani: deutsche bank said pre-much the opposite, that they should continue with qt to reassure the government. he said the policy response required what to do is clear, a large interim meeting -- enter meeting hike to regain credibility with the market.

why isn't this what is necessary to get credibility back? martin: intervention between meetings is a sign of weakness, intervention in the currency market is a sign of weakness. the new governments progrowth strategy is a very good strategy. the government needs to take a pro positive currency strategy. they need to be quite aggressive about this. there is no alignment between downing street and the central bank. the fault is with the central bank and no respect to deutsche bank, but i disagree. dani: doesn't that fuel inflation if you have the progrowth stance from the fiscal side and the monetary side don't have as forceful of tightening as someone like this is advocating for? martin: i think we have a number of things that are mixed. in america have alignment of policy. yellen is following a dollar policy that is anti- inflationary, and the fed is

following anti-inflationary policy. we have alignment in japan between the central bank and the government, they both have monetary easing. we do not have any alignment in the u.k. and therefore we have a crisis in the bond market and the currency market. it will only be fixed with alignment. dani: we did here when the new government -- not government, conservatives, but when liz truss took over the helm, we had these meetings. do you expect more alignment to come? martin: the bank of england is unfortunately not experts on the markets and the new government is on day 20, and i think by day 100 we will see something very different. it is work in progress for the government and i think the government has to align with the market, they have to bring the market with them, this misalignment with the bank of alien -- bank of england must be fixed. dani: but is the core of the

problem, can the u.k. government-funded self and bring foreign investors back in? martin: the risk is we have a crisis and they will align but we have to figure out which price -- there is no other way out of this other than alignment, no other strategy that can bring. i would recommend they should not intervene in the currency market and should not intervene by having enter meeting hikes -- interim meeting hikes. dani: what can we see to entice foreign investors back and, this is what we will offer you to help us fund deficit spending? martin: there's nothing we can do about it at the moment because volatility into the currency space is too high. global investors own a third of the u.k. bond market and half of the u.k. stockmarket and unfortunately for global investors, they have minimal hedges on currency. we need a significant reduction of volatility to entice global

investors to the u.k. that will only come when we get an alignment. dani: is not necessarily that -- it is all about stability in the market, that alignment you're talking about. martin: credibility, stability, alignment. no alignment and we will not get any credibility or stability. dani: at one point does this look more like a bar shock? martin: we have a bar shock at the moment in the bond market and it has moved from bonds into currency. dani: when does this go further than the u.k., at what point is this a global story? martin: i think what could be different is the new government, they have announced a progrowth strategy and unfortunately the global space is a very tricky space at the moment in energy and inflation and interest rates, so the timing could not be worse. dani: does this story go further in the u.k., and i ask in terms of fiscal policy, that perhaps

monetary policy has hamstrung the ability to curb inflation so you need fiscal policy to step in and that could look like higher taxes, but there is not an appetite to do so. it is a global problem, not just the u.k. martin: i think you have nailed it in one, the lust decade, -- last decade, growth was zero. the world has significantly changed and we are into a decade of fiscal policy and the timing of the u.k. change has hit some roadblocks that has made the situation tricky. dani: martin, i wanted to bring in our reporter david, who has been looking at options pricing on the sterling market. one is the probability right now we get parity versus the dollar? david: looking about 60% is the chance it will hit parity before the end of this year, up from about 32% on friday. some of that is with the move

today, but also that move alone and friday's move is spurring volatility to move higher, the markets preparing for larger and larger swings. it will probably go higher and higher, but at the moment about 60%. dani: martin, i saw some options prince around $.99. his one dollar -- is one dollar the floor? martin: it is possibly not the floor. volatility levels are now 30% for a week. we've got access volatility, the same volatility levels as the financial crisis, exchange rate crisis and brexit crisis. we could be up $1.10, or 95. we basically do have a bond crisis. we basically have a 60, 70%

currency crisis. that move to alignment is a way to stabilize or bring back wettability. dani: i love that point of view, because it does feel that ability when you have deutsche bank saying doing a hike now, perhaps jump in, but you are saying it is all about alignment to regain stability. are in, thank you for joining us. also thank you to david. that is martin malone, chief economist at alphabook. we continue to look at sterling down more than 2.5%, bond markets open in less than an hour. martin says that is where the pain is. we will cover it for you, coming up. ♪

anna: good morning and welcome to "bloomberg markets: europe."