dani: good morning. this is "bloomberg daybreak:

europe", i'm dani burger in london. no action. the boe quash is speculation about emergency moves as traders bet sterling will reach parity with the dollar. the dollar rally pauses as stocks and futures edge higher on a day when the s&p closes at the lowest level since 2020. guilt and treasury yields soared. ecb president lagarde says policymakers want consider qt until interest rates are normalized. the bond vigilantes out in full force yesterday, sending gilt yields to historic moves. u.s. yields moving to multi-your highs at the same time the equity market was crushed. we do have some relief today. we're looking at christine lagarde at the moment, there we go, looking at a software dollar today allowing some relief when it comes to sterling and europe. both hovering around 1985 and

2002 lows, respectively. today's weakness means we can jump in and by risk, s&p futures up .7%. goldman and blackrock warning to ditch stocks. we have yet to price in earnings recession, and continued aggressiveness from the fed. 10-year yields are down five basis points after the biggest move since 2020. now looking at a 20 high in u.s.10- year yields. this comes after a week two year auction yesterday that reinforced the selling. is this the beginning of something breaking? this picture was started by what we saw in the u.k. yesterday, starting with record lows in the

pound but morphed into a crisis of confidence in the bond market. this is intra-day moves, but since thursday, these moves are kind of crazy for one-day moves. yesterday 2-year yields rising 100 basis points. on a time horizon, all these yields surging the most on record. as we reflect on the fact that u.k. debt spending has tripled to the highest on record. we will get more from our reporters around the world. we will look at the fallout from the u.k. minibudget. zoe shave ice will give us the latest comments from christine lagarde, and juliette saly will digest market moves in asia. let's get nor -- more on crazy u.k. guilt moves.

we are joined by bloomberg's paul dobson, yesterday, was it orderly or panic? paul: a bit of both. it was a step change in yields across the gilts curve. that sharp adjustment was needed to take into account the fact that government measures are going to push inflation higher and force the bank of england to go harder to contain them. i guess the market repriced almost in the blink of an eye. there wasn't much chance for panic or people to get out, it is more taking that one on the chin. when you look at the performance of gilts, the past five days have been epic, this year u.k. bonds in general have lost 27%,

in sterling terms 40%. they'd about the effect on savers holding onto them as a safe place to full cash, that is a damaging wipeout. dani: it is while do think that at the end of last year 2-year yields in the u.k. were under 1%. we are trying to digest u.k. moves but we saw spill off into the wider market, dollars swaps have collapsed. is this the beginning of a var shock? paul: those measures of implied volatility are higher since the pandemic, so definitely a lot of fear in the market now. there has been a lot of time to get used to this, so i get the impression that market participants have been scaling back for some time. timing-wise, we are getting close to the end of the quarter

which will put extra juice behind all the moves we are seeing. the stories about how much cash people are sitting on suggests they have scaled-back compositions. liquidity in the market is nasty, wide spreads difficulty executing large volumes tells you there is not that much out there. people already paring back, maybe that volatility will encourage people to continue to. in terms of how much of a shock, because people have been taking action all this year, that will dim the effects. dani: we are already talking about quarter end balancing, but i am going to sidelined that. bloomberg's paul dobson. a slight rebound in the pound, but we have speculators increasing bets that the u.k. currency will slide below one dollar.

let's get more from david finnerty who has been tracking this. some really wild moves yesterday. we are seeing dollar softness today but we had a dollars that was stronger versus everything, fx volatility moving to new highs for the year, where do we go next? >> it looks like even more volatility ahead. as paul indicated, quarter end rebalancing will add to it. we had the chief economist of the bank of england speaking. markets are looking for the bank to raise 100 basis points in november and 75 in december, they are looking for hawkish rhetoric from huw pill. if he doesn't meet expectations, sterling will come under pressure. there are other boe speakers this week, but will add to market volatility as they try to see is the bank of england going

to meet what we think they will do? next month there is payroll and u.s. cpi data, and arguably the biggest of all, earnings season starts next month in the u.s. if earnings, under even more pressure, and start to selloff more, you will see more bond volatility. your dollar will get stronger. the biggest event will be leading into earnings season, and that lasts for a fear weeks. there is no respite on the near-term horizon. dani: we have not seen the swan event yet. david finnerty there, thank you so much. let's move onto the ecb, christine lagarde says they will consider shrinking its balance sheet only once it has completed normalization of interest rates. let's unpack this with zoe, who

leads our coverage of western economics. zoe: we need to figure out what she is actually saying. the ecb over the past decade with all these crises has accumulated 5 trillion euros in bonds through its asset purchase programs. there have been calls from several policymakers saying we are hiking rates, why do we still have this huge pile of bonds? we know that next week at a so-called non-monetary policy meeting which is in cyprus, that this will be mentioned by some more hawkish members. lagarde is saying we cannot think about this until we normalize. what does normalize mean? the ecb has done two rate hikes this year, one at 50 and another at 75, that has brought the deposit rate now to 0.75.

markets are expecting them to hike another 75 this month, that would bring them to 1.5% for the deposit rate. some say that is close to normalization already. it could be that maybe now is to early, but a month from now they could be near a normalized rate. dani: all the attention yesterday was perhaps wrongly on sterling, but it was also a stronger dollar pushing the euro further below parity. how much will this factor into the ecb's thinking? when does the pain stop for the euro? zoe: the official line is that the ecb does not have a currency target. it watches the currency but does not actually target it in anyway. the issue is, the weaker the euro, the more expensive it

becomes to important things. right now, we're in the middle of an energy crisis, and oil is priced in dollars which does not make life easier for the euro area. which as we know is probably going to be slipping into recession over the winter months already. dani: zoe, thanks for getting up early for us. let's get over to singapore now and get a check of how asian markets are faring. juliette: we are trying to recoup april 2020 lows, with japan and australia doing heavy lifting but we are flatline on the regional benchmark. japan's 20-year yield top 1% for the first time since 2015, prompting the boj to do more longer end bond buying. continuing to see weakness on the hong kong market although re-upping stocks like the macau casinos doing well, but this

index is still at october 2011 lows. and weakness for the onshore yuan as pboc tries to defend a 14-year low with a stronger than expected fix in the currency. we are never far from the story telling us how rocky the recovery is. we saw profits for the first eight months fall further in terms of industrials as we continue to see the impact of lockdowns. weaker than the 1.1% decline from january to july. a bloomberg index of indicators showing us how much momentum you are seeing in the china economy showing that this recovery is impeded by the global slowdown, just adding to these downgrades for china's gdp growth next year. dani: juliette saly, thank you so much, in singapore. atlanta fed president rafael bostic is worried the u.k.'s

gamble on growth and its potential spillover effects on the u.s. and global economy. we want to show you pictures from central japan where they are having a state funeral for the former prime minister shinzo abe, the first formal state funeral since 1957. seeing the u.s. vice president, the indian prime minister modi, and australian prime minister al banese along the rest. abe is assassinated during a campaign speech. ♪

>> i think what we've seen in the reaction to the proposed

plan is a real concern. and a fear that it will add uncertainty to the economy. one of the things i spend a lot of time thinking about is how do we create more certainty for consumers? dani: atlanta fed president rafael bostic on the risk posed by the u.k.'s gamble on growth to the u.s. and the wider global economy. we felt the ramifications of a crisis in the u.k. bond market yesterday but i want to focus on what happened in the front end of the curve in the u.k.. we saw a more than 60 basis point rise in the front-end. we are looking at 104 basis point gain in the front-end of the curve. at the start this year, we were below 1% on front-end gilt yields. this is the biggest gain on

record across the curve. it was not just contained to the u.k., we saw u.s. bonds hitting multi-year highs, and global equity selling off as well. where do you hide out, let's take that to lale akoner, bny mellon investment strategist. looking at this rapid change in the bond and stock market, how have you adjusted? lale: thank you for having me. right now, markets are pricing that increasing real risk which is putting pressure on equities. you have to run low risk, you have to pay for rate insensitive stocks and sectors. position for yield curve in aversion. in the u.k., it's clear that the bank of england needs to deliver an aggressive rate hike and frontload hikes it will do later

on with the package we have right now. short duration equity and income are the places to go in stock markets. dani: is this looking like something of a var shock? lale: markets were already worried about higher inflationary pressures. especially on the core side, there are not indicators that the sticky components of inflation are coming down. therefore, the market is still not pricing an aggressive pivot from the fed. this is on top of all those worries that real yields are going to move higher. we haven't found to the bottom get in markets, and you have to position aggressively in this environment. dani: does that mean piling into cash? u.s. money market funds with 5 trillion sitting there.

you are getting yield but how attractive is cash? lale: i think it makes sense to increase cash positions. it makes sense to go towards high-quality. stay away from speculative. i'm not saying get out of the equity market completely. you can be positions defensively. at some point, bonds and some parts of the income market are going to be a buy, we are eyeing those opportunities but we are not there yet. dani: what will be the signal to jump in and by bonds and equities? lale: there is one indicator, the employment cost index in the u.s. overall will tell us if wages are coming under pressure. if we see that index coming down in a material way, we will be

convinced the fed is done with its aggressive tightening. that is going to signal a buy for the market. it is looking forward in a 12-month fashion. that is when we will start getting away from defensive parts of equities. dani: what about the u.k., what would it take to convince you to go in and by guilt -- buy gilts? lale: this package is good in the sense that it leaves it to the government to deal with high energy and food prices. the impact of those on real incomes. the government will deal with that, and leaving the inflation part of the picture to the bank of england. i really need to see material action from the bank of england

for me to be convinced that they are really on top of this event right now. we are going to see probably the bank rate going up to 2.5%, and when that happens the market will come under pressure and we will see yield curve inversion in the u.k. shortly. dani: we had a statement from the boe saying they are waiting to see what things look like by the time we have our next mpc meeting next month. lale: if you are trying to understand how markets react, there needs to be credibility forming. yesterday you so markets were under pressure, so they weren't convinced, of course. we are looking for a major rate

hike from the bank of england, given the fact that the pound is under severe pressure. i need to hear personally from bailey a whatever it takes type of communication that will tell me they are really on top of this situation. we do think they will deliver a major rate hike before november. dani: i've heard the argument that the boe should not do that because it kind notes a -- connotes that they are coming from a place of weakness. lale: to me, i don't think the rate hike is a problem. i think the magnitude of the rate hike is going to be important. it needs to be such that it does not communicate to the market that they are losing control and therefore they have to do this.

aggressive tightening might cause recession as well. that's a worry we are seeing in the u.s. i think the magnitude is going to be a very important signal to the market to understand whether they are on top of it. i do not see any problem for them frontloading their rate hike schedule at this point. i don't think that is a problem, i think the magnitude is going to be the issue here. dani: what do you foresee happening if the boe does not do a inter-meeting hike, if they do 50 basis points or something less extreme than the market is pricing? lale: i think they are going to monitor it very closely. they will see whether the pound is in freefall. if there is a case for going not to aggressively in a sense that the economy shows material

slowing down, therefore they are trying not to do a major rate hike, maybe there will be a case for that as well. i think it is too early to predict a major crisis-type scenario. i don't think we are there yet. the government is taking the task of helping consumers and businesses, leaving it to the bank of england to deal with inflation. i'm sure they will deliver the rate hike the market is asking. dani: lale, thank you for joining us this morning. lale akoner, investment strategist at bny mellon. we will continue our conversation around global risk with christian mueller-glissman with goldman sachs. ♪

dani: welcome back to daybreak europe. i'm juliette saly in singapore with the first word news. european natural gas prices are near their lowest in two months as increasing stockpiles counters supply concerns about russia. milder weather forecasts are also helping drive down prices. russia has granted citizenship to edward snowden, the former u.s. nsa contractor who disclosed a top-secret spying program in the united states. the whistleblower has been living in russia nine years. the u.s. says he could now be conscripted to fight in ukraine. bullets wagon is likely to push

the porsche ipo at the top end of the initial range. the sports carmaker would be valued at almost 73 billion dollars. they are expected to set the ipo price wednesday, with shares to begin trading thursday. global news, 24 hours a day, on air, and on bloomberg quicktake. powered by more than 2700 journalists and analysts in more than 120 countries. coming up, we have first, monetary policy normalization and then

dani: good morning, this is "bloomberg daybreak: europe",

i'm dani burger in london. no action, they boe quash is about an emergency move as traders increase bets sterling will reach parity with the dollar. the dollar rally pauses as stocks and futures edge higher. the s&p closed at its lowest level since 2020, while gilts and treasury yields soared. ecb president lagarde says policymakers mode consider quantitative tightening until after interest rates are normalized. we have some signs of a turnaround after historic moves yesterday, with gilt yields surging to new highs, over 4% for many of them. a pound-sterling at one point at its weakest on record. we are having relief from a weaker dollar this morning. euro and sterling are at their lowest since 1985 and 2002

respectively. s&p futures slightly higher after falling to a new low. goldman and blackrock warning rates are likely to move higher and we need to price in earnings recession. it is a global bond market under pressure, emanating from the u.k. but resulting in a 10-year yield at its highest since 2010. yesterday was the biggest move higher in yields since the march 2020 flash crash. an abysmal 2-year auction contributed. we have really historic moves in the face of concern of a bond market crisis, with u.k. debt costs of higher and pounding the

pound. bad pun. let's get to vasileios gkionakis , citi head of fx strategy. is this a logical response, a normal adjustment to the need to attract investment to fund the fiscal budget, or is it something more concerning? vasileios: i think the two are related. you would really need to ensure that investors retain confidence, what we've started seeing since the end of last week is [indiscernible] the big picture with markets is fiscal trajectories, not so much

in terms of the size but how we finance, in the face of already high inflation is rather unsustainable. and something has to give. dani: we had a traders pricing 200 basis points by the boe. what do yields have to do to attract capital without seeing a complete flight from gilts? vasileios: there are two sides to this equation. on the policy side and secondly, the market response to policy. i think it is impossible to [indiscernible] i think if you take the u.k.

government moving ahead with the plan that has been announced, and have a headline associated with the end of this plan. something has to give. that is going to be higher yield not because of expectation from the higher risk premium. dani: and the question of who blinks first, the boe or u.k. government, it sounds like you are in the camp of the boe that blinks. what is the form that looks like, a intra--meeting hike? vasileios: a emergency hike was ruled out. initially, i thought august was going to be bad. i think a large emergency rate hike would do more bad than good.

the market would think inflation is getting out of hand. if they do take a studies stance, -- steady stance, it will have to hike rates but emergency rate hikes will start more panic. dani: i think about this idea that the u.k. treasury has been holding weekly meetings with the boe. with those meetings, we had a hike from the boe yesterday of just 50. are we perhaps overestimating the stomach for the central bank and the rest of the nbc2 get aggressive? vasileios: that is definitely a risk. we have to understand the

peculiarities of the u.k. markets. the housing market is a large part of the economy. unlike the u.s. and many other european countries, the market is dominated either by variable rates for by 2-5-year fixed rate mortgages. every time you have a large part of the population buying at a higher rate. imagine what this means if you go from a 2.5% fixed rate mortgage of right to a five or 7% mortgage which is the terminal rate. we may have to do that because of inflationary pressure. again, i think we should take into account that this is going to be a very fragile economy. dani: if the u.k. government's

aim is growth, that mortgage headache seems counterproductive to this aim of growth with debt servicing costs moving to the highest on record. it is something we were talking about yesterday, it means the boe and government need to get on the same line. it might sound like a challenge to their independence. vasileios: i don't think it's a challenge to their independence. right now we are more in a challenge of 101 thinking. what i mean by that is we have either worry, or we are hedging towards inflation and we have a high inflation rate. we need to expand the supply side of the economy. at the same time, protecting the most vulnerable. the fiscal part should not

increase risk premiums, and should put downside pressure on inflation. we are not getting that from the current policy. this is where you have the boe and treasury working in the opposite direction. dani: just to be clear, you say it does not help put downside pressure on inflation. what about the supply-side aim of this fiscal package? vasileios: again, we are talking about tax cuts which are not targeted. we are not really having a supply-side expansion fiscal package. we are having a demand driven package that will put upside pressure on inflation when the bank of england is

trying to drive inflation lower. dani: does this move into a prices for sterling? we saw this massive reaction in the bond market with concern about the government funding itself. at what point does it become something structural that sends the pound lower than the dollar? vasileios: i think we are already into some sort of a currency crisis. the u.k. is running an 8% current account deficit, 80% of gdp. -- 8% of gdp. that is what we are getting.

unless investors get compensated for the higher risk they are taking by a significantly lower, currency. dani: given the headwinds, and the risk of being in a currency crisis, how much worse do things get for cable? vasileios: as i've said for euro-dollar, it is just a round number. i think the market wants to see parity and more likely than not we will see parity. dani: thank you for joining us, and making me more depressed how expensive it will be to go home to the u.s. let's get you some of our top stories, with the first word news is juliette saly. juliette: hong kong's chief

executive says action was taken against more than 1000 people over the weekend who divide protocols. travel costs have jumped with airfares to and from hong kong soaring since the end of hotel quarantine rules. negotiations between the biden administration and tiktok to let the app operating in the u.s. have stalled. the sticking point is concerned that chinese ownership poses a national security threat. the platform will be allowed to keep operating in the u.s. with restrictions on how data from american users is stored. nasa has successfully crashed a spacecraft into an asteroid 11 million kilometers from earth. it could be weeks before astronauts know if they have achieved the goal of nudging the space rock off course. it is part of early plans to protect earth from potential

asteroid collisions. global news, 24 hours a day, on air, and on bloomberg quicktake. powered by more than 2700 journalists and analysts in more than 120 countries. dani: juliette saly there in singapore. coming up, the oecd slashes its global growth outlook amid the ongoing energy crisis. all of that next. this is bloomberg. ♪

>> our forecast is a challenging one because we are forecasting significant slowdown of the economy. united states growing at 0.5% next year. and still a slowdown in china. globally, we are talking about

significant slowdown. dani: the oecd economist speaking to bloomberg. the organization has lowered projections for global growth, under 3% this year. let's bring in our chief asia economics correspondent. i feel like i don't remember a time when we weren't cutting growth projections, what has led to the latest cut in estimates? enda: there is always a mechanical aspect to be forecast , institutions are catching up on where they were. it is easy to see how they fall behind the curve. they are talking about the whole gamut of issues, the energy crisis in the euro, the slowdown in china, inflation in the u.s. that is why they have downgraded all of the g20 economies except

indonesia. the downgrades that our forecast means there will be just about 3 trillion less of gdp output this year than they were forecasting last year. it is not just the energy story, or an inflation story, they are talking about the risk to food security. they see this as an ongoing threat. it is a sobering take and importantly, they are not get calling it a turning point either. dani: i've got fiscal action on the brain considering the u.k. i wonder how much of a global issue this is, not tax cuts but an economy that needs fiscal action, inflation that needs fiscal governments, and politicians that don't have the

stomach to do so. enda: every region has a different story but inflation remains quite high. it is becoming more broad-based than expected. you have central banks having to raise borrowing costs to try and slow down activity, and slow down the energy prices. you have that at a time when governments are worrying about slowing growth. but they have to be careful because if they respond with a lot of borrowing, they might get an adverse market reaction. so it is a very difficult balancing act. that is why the central banks are trying to seize the narrative and say the primary job is to get inflation back where it should be, then start to worry about the growth story.

but this is leading to all kinds of complicated trade-offs. we are seeing that in the market reaction. when you edit it all up together, it is powering sentiment and will have impact on growth. dani: the fear of global growth, it is this self-fulfilling loop because it makes everyone flee into the dollar which puts pressure on all of these economies to get more aggressive. enda: the dollar story is ricocheting through every corner . the yen lost its safe haven status and has had record losses, forcing the government of japan to buy it last week. lots of speculation about how the chinese authorities might

respond. and you have the story in western europe. the strong dollar is pulling money away from the rest of the world, and away from developing economies. and forcing central banks to raise interest rates perhaps more than they would have to defend their currencies, which is hurting growth. it is kind of a vicious cycle. it is strong dollar, it helps exporters but only if there is demand, and not if currencies are weakening at the same time. it is hurting countries that borrowed in dollar. it is having a net-net negative affect overall. dani: voting in moscow's

referendums is due to end today. this is bloomberg. ♪

dani: ["bloomberg daybreak: europe", i'm dani burger in london. at 11:00 a.m. we will have the riksbank governor speaking on the situation in london. at noon, the focus is on the boe, we will have the chief economist speaking. how will he address current turmoil in this u.k. bond market? the st. louis fed president will be speaking at a barclays monetary policy forum. at 3:00 p.m., it is a data drop from the u.s., we will hear

consumer confidence data. and find out how the h ousing market performed. there will be an expiration of 2-year treasuries. the president of the u.n. general assembly says member states agree nuclear weapons have no place in a civilized world. there are threats russia made threaten the use of nuclear weapons. the end of that referendum to annex ukraine will end today. rebecca, today the final day of that ballot in russian held regions, what do we know so far? >> we are waiting to hear the results of that so-called "vote"

by putin to annex parts of ukrainian territory. we await not just results but to see what putin does. there have been growing signs of discontent about the progress of the war in russia domestically. we have seen criticism in state media in recent days. and sporadic protests as a result of this order to call up 300,000. with concern that russia may close its borders to men of draft age. dani: that dominated talk at the un's general assembly. that was the topic of conversation but what were the main takeaways? >> we have the u.n. secretary general condemning this vote by putin, saying it violates international law and the u.n. charter. we saw the u.s. and its allies

taking advantage of this opportunity to cast russia as a pariah. we are looking to see whether the u.s. and western allies will step up commitments to ukraine. ukraine is asking for more military support to take advantage of its offensive so far. and we are watching this bill democrats have raised which would offer 12 billion dollars to support the ukrainian effort. dani: rebecca giving at the latest on ukraine and bun general assembly. gilts are not opening for another hour but the front pages in the u.k. dominated by moves we have seen in reaction to the fiscal budget.

really top-notch puns, the pound kwar-tanks. and honey, i shrunk the quids. kwarteng saying he is not concerned, does he change his tone when he meets with london's top bankers today? that's it for bloomberg daybreak, markets: europe is up next. this is bloomberg. ♪

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>> good morning. welcome to bloomberg markets europe. i'm anna edwards.