dani: morning, this is "bloomberg daybreak: europe". i'm dani burger in london and these are the stories that set your agenda. u.k. government hopes to build confidence in its economic program a day after the bank of england's dramatic intervention. the pound resumes decline amid over at liz truss's plan. defies market gloom as it gears up for the biggest ipo in a decade with shares priced at the top of the range. what a dramatic week. the action by the boe to stop the shocked causes another shock to the system but it was bearish bets that got decimated. this is the chart we brought to you yesterday morning. it exemplifies the wildness of this market.

30-year yelled in the u.k. started the month at 2%, gets all the way above 5%. that caused concerns about mass liquidation and causes the boe to step in. so yesterday,, this massive 100 basis point rally, we are now just under 4%. that had an effect on not just u.k. gilts but the entire market reverses. anything predicated on stronger dollar, all of those bets shut out. this is all the main etf's of treasuries, credit and stocks. commodities also a big rally. the best day for risk assets since 2020. a lot of folks getting stopped out who had bearish bets. we are resuming some of the declines today. asian stocks are playing catch-up, higher. but u.s. futures are not as

strong today, struggling to post anything like a gain. essentially unchanged. bloomberg dollar spot resuming its climb after dropping 1% yesterday. sterling also falling, if you can't find fair value in the bond market, does sterling take the brunt of the damage? and u.s. 10-year yields moving up, this was at 4% yesterday we are now at 3.8%. it is a lot to break down as we focus on the u.k. story. we have lizzy burden at the boe and paul dobson on the fallout from yesterday's gilt market intervention. the british government pledging to forge ahead with its mini-budget, despite the bank of england hoping to stave off a crash in the gilt market. as liz truss's tax cuts ripple

through the markets. let's get too busy outside the boe, the bank is delaying qt, if anything, they are doing qe at this point. lizzy: i've just emphasized that this was very much a financial instability decision not monetary policy. as you say, the bank of england needed to step in to control gilt markets in response to the chancellor's fiscal earthquake. so they've restarted quantitative easing, at the same time, there is pressure to do a massive rate hike to curb inflation and save the pound. it makes the bank of england look like they are not only confused but beholden to fiscal policy. what's next for the bank having one, our economists reckon you will get a 100 basis point hike

in november, market still priced for an intra-meeting move. the chief economist said we can expect a significant move in november, but there is always the chance the bank under well yet again -- underwhelms yet again and decides to wait until the chancellor announces another raft of tax cuts. and we're expecting an assessment from the office of budget responsibility. dani: it feels like but calls for a to u-turn are coming in fast, are there any signs they might? lizzy: the prime minister and chancellor have barely been seen. the prime minister is only doing local radio today which has a generally older audience, she is dodging the difficult financial

questions. there is huge pressure on liz truss to sac kwasi kwarteng but they are political soulmates, so it would be a personal humiliation for truss. it would not make a difference because they are so aligned. there is pressure to u-turn, to call a recess, but junior ministers interviewed are saying these plans are going to grow the economy. every major economy is facing similar blowback. but that is not going to wash because the imf is named checking the u.k. what is interesting is you will see truss under pressure to cut spending to restore f iscal credibility but that will be politically unpalatable. she said she wanted to take on

treasury orthodoxy but she is butting up against market realities. dani: bloomberg's lizzy burden there. the bank of england's dramatic intervention took global bond traders by storm, and bounced stocks as well. let's get to bloomberg's executive editor for asian markets, paul, it seems like in trying to solve one stock we ignited a different stock? -- shock? paul: the biggest take away is how huge volatility in cross assets is. in the big bond markets, how easily prices have moved in both directions. we are all rates traders now, we are all beholden to these risk-free rates, but they have a

lot of two-way risk. that is filtering across everything else in global markets, the boe increases in yields, denting currencies, then slamming it all back in the other direction. it raises -- for pushes down the tolerance levels, i suppose, for anyone that has a model for assessing their positions. it takes more liquidity out of the system and makes everything even more fragile. dani: which is terrifying considering liquidity in the bond market had all but evaporated. it sounds like what you're saying is volatility is here to stay? paul: that's very much a conclusion you can take away. let's give the boe some credit. they stepped in to alleviate

huge swings we were seeing in gilts, but beyond that they were saving pension funds with exposures that were starting to look very fragile indeed. they were saving the savers as well, which they were there to prop up the entire financial system. how close we came to something that could have been much more damaging and systemic. we don't know yet but it looks like it was time for people to get particularly worried. with that kind of revelation, you can only see that volatility will remain for the time being. dani: at the end of the day, the boe are the lender of last resort, it doesn't seem fair that a consequence of finding fair value should be allowing pensions to blow up. the biden administration is alarmed over market turmoil

triggered by the u.k. government's economic plan. they are seeking to encourage liz truss's team to dial back tax cuts. joining us now is bloomberg starfield reynolds -- bloomberg's garfield reynolds. janet yellen kind of saying we are not seeing any dysfunction in this market. how should we interpret the global impact of what is happening in the u.k., and the need for policymakers elsewhere to respond? >> a big part of that global impact is precisely that this touches a nerve point four politicians, central bankers and markets. you've got a situation where a central banks have been strong on the idea they need to raise interest rates to destroy demand, that's the subtext to

bring inflation down. even if that's going to cause pain to households and businesses. the question is, to what extent are various governments going to be okay with doing their part to make sure central banks can do this? what's going on in the u.k. with unfunded tax cuts? leading to the bank of england moving to buy gilts when they are about to start selling them for quantitative tightening is throwing all of that into turmoil. as well as the spill over, u.s. markets, if you look at, swap options, rates traders in the u.s. are more concerned about wild swings in 10-year rates than they have been at any time since the global financial crisis. even more so than they were during the pandemic.

that's the market saying this is a problem. as far as the u.s. goes, the imf commentary and some other u.s. politicians, what the commerce secretary was saying, -- >> i want to review what that point was, gina raimondo saying the policy of cutting taxes and increasing spending is it going to fight inflation in the short-term or put you in good stead for longer-term economic growth. direct and biting words. garfield reynolds breaking down the global impact for us. let's break down key things we will watch out for, at :00 a.m. u.k. time we get spanish cpi and german inflation in the afternoon. for a p.m. huw pill will speak.

the cleveland fed president is a participating in an inflation panel. mary daly will give a presentation later this evening, we are watching u.s. job claims and gdp. there is a huge range of ecb officials due to speak in lithuania today, that includes mario senteno. but first, we have more reaction to the rally sparked by the bank of england's intervention as the follow-up from the u.k. mini-budget continues. porsche is set to pull off one of europe's largest ipo's in a decade, it started trading today. we are live in frankfurt later in the show. this is bloomberg. ♪

dani: welcome back to bloomberg. i'm dani burger in london. 10 year yields fell over 100 today. one who is transfixed is william hobbs, the barclays cio, a double var shock, boe steps in the other direction and then this happened, is this a broken market? william: that is quite the opening question. this year, it has been like a bond market red wedding. in a way, we have been surprised by a tide gone so quickly.

but yeah, it leaves a very volatile market to trade. dani: do you trade them? william: at the moment, we have no strong positions on the u.k. within our macro book, but we are looking quite intently. the key is to not get lured by sudden changes. sterling looks interesting on the short side i would say, but you have heard from my ib colleagues that they are negative on that outlook. dani: i appreciate the game of thrones reference. i am interested by this idea of can we find fair value in this bond market? if there is a lot of margin

calls and yields spike up, that does not bode well, does that mean sterling needs to act as this release valve for concerns about the u.k. economy? william: the bank of england is in a tight spot. everyone is waiting for this announcement on november 23, is that going to help us understand the fiscal picture to a greater degree? are the markets going to give the chancellor and boe the breathing space until then, it's a long time, isn't it? then we have these pressures we are already starting to see, mortgage markets, have we transferred from an energy crisis to a mortgage crisis? dani: can the boe hike 150 basis points which is what the market is pricing, if we have so many floating rate mortgages tied to rates? william: i was just reading on

the way in, the u.k. economics team, their assumption is no. you can say 75 at the next meeting, but the pressure is on the u.k. economy. there was already recession coming, but it feels like that is getting larger and the risks are getting more precarious. can the bank of england go so hard, it seems unlikely. dani: it looks like a government that is not willing to u-turn, how does this end than? william: if i had the answer to that... often, in these situations history tells us there are muddle through paths, if the chancellor communicates

correctly with markets, and so on. but one suspects there is going to have to be spending cuts. this feels like people are equating this to the b strategy where you are forced into spending cuts further down the line. are they going to be allowed that long? that is difficult. but the short-term outlook for the u.k. economy is dark. we wouldn't go so far as the em comparisons that have been doing the rounds. the u.k. has strong institutions. it has lost credibility on the fiscal side, there is work to reassure markets about adding fuel to the inflationary fire that are making the job harder. dani: what about spillover effects. on the policy side, gina

raimondo was really bringing biting words, is there possible spillover effect to other markets? william: the u.k. is a small economy in the context. we have long since ceased to dominate world trade or any kind of economic metric. from that perspective, the crisis in the u.k. should not have the reverberations. what we did say yesterday is you do see confidence effects reverberating into markets. just the moves the u.k. spurred in global markets were extraordinary. dani: it seems to be happening every day that the u.k. is impacting the market, but i look at treasury market liquidity and it is just so bad. seems very susceptible to this type of shock. william: you are seeing in an

inflationary environment, your policy choices are narrowed significantly. that makes a lot of the short bets of the last few decades much more precarious. that's the big fame, safe havens have provided very little safety this year. all of the safety has come from areas like growth stocks, long-duration, gold. dani: i am daily on the phone with my producer saying please mention gold. they are selling it at this moment. the boe is able to step in and save pensions. in terms of policy transmission to the economy, have we seen the limits? william: monetary policy is much more constrained. the words are being bandied around, unfairly, of fiscal dominance and monetary

financing. the problem is, how do you have this time limit, how do you extract yourself? these are very difficult times to be a central banker. our suspicion is that globally frontloading rate hikes everywhere but turkey will ultimately be successful in the battle against inflation. but in the short-term, it is a very tricky macro environment. dani: i certainly don't envy them, really appreciate your time, william hobbs, barclays wealth management cio. the wait is finally over. europe has a blockbuster ipo, we are live from the frankfurt stock exchange with portia pushing amid all this volatility. this is bloomberg. ♪

dani: welcome back to "bloomberg

daybreak: europe". i'm dani burger in london. europe has been waiting for a blockbuster ipo and we've got one. portia set for one of the biggest in a decade this morning. the parent company volkswagen has gone for top pricing despite market turmoil. tom mackenzie will be speaking with the cfo's of course and via -- of porsche and vw, but now he is at the frankfurt stock exchange. what does this ipo mean for porsche? tom: those negotiations are going down very well indeed. you can see over my shoulder one of the earliest models, about

1948. this is a huge day for volkswagen and porsche, and for the ipo markets of europe. we will get into more detail. it's going to be valued about 75 billion euros, vw is the majority owner, they will get about 9.4 billion euros, that will go towards electrification and building out software as vw tries to catch up with rivals like tesla. what it means for porsche, the family so consequential in the history of these brands, will once again have a significant stake 30 years on from they tried to take over. that failed but now with this new structure, they will get about 25% of blocking shares. some concerns from shareholders on what is otherwise looking

like a positive day. they are around governance and voting structure. porsche hopes to generate revenues of about 39 billion euros with return on sales of 18%, up from last year. and it's looking positive, shares priced at the top end of the range, 82.5. we will see how it plays out on the market opens, but so far the demand has been solid. dani: looking forward to that debut. tom mackenzie they in frankfurt. coming up, we continue the u.k. story. hi, i'm denise. i've lost over 22 pounds with golo in six months and i've kept it off for over a year. i was skeptical about golo in the beginning because i've tried so many different types of diet products before. i've tried detox, i've tried teas, i've tried all different types of pills, so i was skeptical about anything working

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dani: good morning, this is "bloomberg daybreak: europe". i'm dani burger in london. massive task ahead, the u.k. government hopes to build confidence in its economic program a day after the bank of england's dramatic intervention. but the pound resumes its decline amid ongoing doubts over liz truss's tax cut plan. wall street higher on the rally triggered by the boe. porsche defies market gloom as it gears up for the biggest european ipo in decades. a dramatic day yesterday that saw u.k. 30 year yields slide 100 basis points after rising 200 over the past month. i want to get straight into the market check, the u.k. market is closed. a lot of folks were stopped out of some bearish bets.

we saw everything rally yesterday. it's not strange to see some of that fading this morning given some of it was more on the technical side. we are looking at s&p 500 futures that have been struggling to find their footing. they were down, they were up, but the effect has been little change. the bloomberg dollar spot fell 1% yesterday, at the moment up .4%. some strong dollar trades back on for commodities. also, sterling at 1.0802, william hobbs at barclays saying they would look at the short side bet. the 10 year yield a wild ride, it was above 4% just over 24 hours ago. this just shows you the big round-trip, higher three basis

points this morning. with the first word news is juliette saly in singapore. juliette: the european union has proposed a new package of sanctions on moscow that would ban european companies from shipping russian oil to third countries above an internationally set price cap. this is to pay for the further escalation of the war. the risks of an attack on the gas transit network have increased drastically. >> we do not want to continue getting revenues from transit. it is because our european partners are seeing for the time being they depend on it, and they want russia to prove they are a unreliable supplier not ukraine to stop the transit.

we are going to continue transit at least while it is technically possible. despite the hostilities, we proved to everybody that we are a reliable transit country. juliette: hurricane ian has hit southwest florida with a deadly surge of water and catastrophic wins. more than 2 million people have been urged to play in what could be one of the costliest storms in u.s. history. florida is braced for widespread blackouts and floods. pakistan's foreign minister will have to revisit an imf package because of the recent telephone floods -- toll from floods there. the damage is expected to exceed $30 billion. he warned of a cost-of-living crisis because of food and the war in ukraine. 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: now the british government has pledged to forge ahead with its mini-budget, despite the boe staging dramatic intervention to stave off an crash in the gilt market. u.s. officials are concerned that the volatility to financial markets. it's had a lot of folks calling great britain an emerging market. we are ripping up the script a little bit here. i want to bring in marat ulgen, hsbc head of global research, we brought you want to talk about em and we are going to do just that. we have had a lot of talk that where yields are higher and currencies are weaker, you have term of trade shock that it looks like an em market. is that a fair description? marat: thanks, dan a. i'm no u.k. expert but what i

can say from my experience when an economy has imbalances like high inflation and budget deficit, refinancing requirements. and when the global environment changes, when there are headwinds and risk appetite sours, markets are asking for adjustment. and then obviously, there is an impact on yields, and inflation to the upside because of weakness. that has been happening across emerging markets with large deficits and more external change. dani: what does history tell us when there are credibility concerns, how does this typically end in terms of what level of yield it attracts investors back in? marat: usually what happens is

investors are looking for coherence market policies to restore confidence across emerging markets. this sometimes happens through higher rates. the bank of england was already in a tightening cycle, and then on the fiscal side, and eventually you saw market confidence with coherent policies, things stabilized. and we will see what happens. dani: last point on this, marat, i know you can't comment on the u.k. specifically but i wonder about imf bailouts. we had become specifically which feels very strange, what has the imf's recent history been in addressing deficits in emerging markets? when does this come to a head where the imf has to step in? marat: it is happening across a

lot of frontier markets, from argentina, sri lanka, pakistan to egypt. many of these countries are in negotiations with imf, or securing a program to help funding. imf is asking for coherent market policies, which includes fiscal policies as well to address high public debt. it is happening across many frontier markets, and to some extent this includes monetary tightening and changes in the currency regime. it's all about the whole set of microeconomic policies that would restore confidence in sustainable growth and reducing balances. dani: your most recent poll of investors on em is pretty stark, 41% are bearish about the

outlook. can there be change in sentiment around em until the fed stops its rate hiking cycle? are we really at the behest of american central bank policy? marat: it's a great question. fed rate hikes is still very significant. but the top concern is now recession, especially in large economies. global recession has overtaken top concerns. it would immensely help when the global monetary policy outlook changes to less restrictive at some point. but this is also about recession. in this survey, it is almost universal expectation that investors are looking for lowered recession over the next

two years. but in the u.s., this share was 56% in the june survey and has shot up 80%, and over half are now looking for global recession. this is now a dominant concern what is happening when investors worry about higher cost of funding. they all surmise in this quite depressed sentiment. one consolation is we have seen a big letdown in sentiment in june, this time the letdown is rather modest. and em equity mood has improved. cash levels are really high. those who say they want to decrease their cash levels this survey has increased. perhaps some people are looking for a catalyst to deploy cash reserves. dani: the good news is that everything is so bad right now that perhaps the only way is up. depressing but you have to take the good news where you can get

it. thanks for playing ball, no em tourism, marat ulgen, hsbc global head of research. coming up, be ecb governing council member gediminas simkus joins me next. this is bloomberg. ♪

>> i think it was the right thing to do given the technical factors that had arisen in the market. and it's obviously brought some important stability to the gilt market. it does not resolve any of the fundamental contradictions in british policy. dani: former treasury secretary larry summers weighing in on the

boe intervention. let's look at a different central bank, joining me now is ecb governing council member gediminas simkus. minister, happy 100-year anniversary of the bank of lithuania. exciting in many ways. i want to start with the u.k., there has been a rupture in markets that sparked the boe intervention which we did see in global bond markets. are you worried about risk of financial stability? gediminas: we are in the midst of ongoing russian aggression against ukraine you saw a peach -- peak of energy prices. you have seen a not

well-functioning electricity market. with the when you suffered from very high electricity prices in august. this will definitely have an effect on economies, corporates and households who suffer from the decrease in purchasing power. we do have financial stability risk but it doesn't mean we are not trying to maintain those risks. that is the job of central banking. dani: i just want to be clear, there is risk from the energy crisis but in terms of u.k. market turmoil, is there financial stability risk beyond the u.k. itself? gediminas: all the markets are integrated. i wouldn't exaggerate this risk coming from the u.k. market in terms of effects on the

euro-area market, i would like to talk about. dani: more generally, we've heard the imf or about this idea that fiscal policy has been working in opposition to monetary policy. we have seen right-wing governments be elected in europe. are you concerned about fiscal being at loggerheads with the work of the ecb? gediminas: that's a good question because what the ecb does is to put inflation in medium-term to its target level of 2%. what we've seen is monetary and fiscal policy going hand in hand during the covid pandemic and trying to cope with that shock. this time, we have a very

particular situation where there is a need of fiscal policy to help corporates and households but it should be very directed not to escalate inflationary pressures that are very intense the moment. dani: you have mentioned the energy crisis intensifying inflation. earlier on monday, you said your low end is 50 basis points of hikes, how high would you be willing to go? gediminas: [laughs] i can make a joke, this guy -- the sky is the hike. 50 is the minimum, but with underlying pressures broadening, we have four weeks until the

next governing council meeting. we will have more data and meeting by meeting decisions. the decisions will be taken in four weeks. seeing all these inflationary pressures, i wouldn't be surprised to see even higher inflation for september than the 9.1% we saw in august. my guess would be 75, options will be on the table but 50 is the minimum. dani: you heard calls that 100 would be too much, i know 75 is what you are leaning towards. what is 102 much -- 100 too much? gediminas: i joke about the sky, 50 to 75 would be my choice. dani: if we look beyond october, how do you judge the neutral

rate, when you think we will get there? gediminas: there is a difference between natural interest rate and terminal, which the market is worried about. i believe the natural interest rate is somewhere lower than 2%, but there are many estimates of this concept. as regards the terminal rate, i would say there is too much focus. from my policymaker perspective, what i'm worried about is to make inflation 2% in the medium. i concentrate on these meeting by meeting steps in order to have inflation there. instead of considering what will be the final stop, or at the current juncture, we definitely need to make forward steps to cope with inflation pressures. dani: perhaps we are too

premature in discussing the terminal rate, gediminas, but one that is not is qt. i wonder what you make of madame lagarde saying that debate should start to happen once we are done with interest rate hikes, would that be too little too late do you think? gediminas: we started monetary policy normalization in december last year. we need to have this holistic view of all the instruments in our toolbox. quantitative tightening is one of ours, so we need to start discussions as soon as possible. it doesn't mean making decisions exactly after the discussions,

but we need to have a strategy how these instruments go hand-in-hand with our monetary policy normalization plan. dani: and another one of these instruments is that of tpi, keeping spreads contained. we talked about this idea of financial stress, the boe stepped in and we saw yields fall everywhere. given the market stress we are seeing at the moment, are you getting concerned about italy? at what point does it make sense to use these tools at your disposal? gediminas: interest rates is also a reflection of stability. all of our economic factors

explain the development of one or another country. the same for spreads, tpi is a powerful instrument to cope with be unwarranted fragmentation in the financial markets that are not justified by the economic fundamentals. we need to monitor all the situation, but one variable or another is not decisive, whether we have a fragmentary market. i don't think we have fragmentation issues at the moment in the euro area. dani: i have to wrap this up where we began, you talked about the energy crisis and its impact in europe. this week we have seen more stress coming to the fore, nord stream pipelines going down, alleged sabotage on the part of russia to those systems.

are we sitting on the precipice of another about of -- bout of energy driven inflation? gediminas: i think i lost connection. dani: i'm afraid we have lost his sound. gediminas simkus, governor of the bank of lithuania, celebrating 100 years of the central bank. let's shift to the corporate world and the macro impact, totalenergies ceo has told bloomberg its russian interest may come to an end as tensions escalate in the war in ukraine. he says it is game over for russia. >> when you have what happened in russia, it is a drama.

the consequences immediately were clear. we will not invest in any more projects in that country, even if we had built 10 years, but that game is over for me. just because i am responsible to allocate capital, it is not safe to invest in a bad country. i spent three years in qatar 20 years ago, so i have a lot of personal relationships. we are working hard to have access, qatar has 50 million tons, 20% of the market they want to add as supply. the market requires it. we have made some good offers and are happy to be largest international partners. we are the first to invest in energy in qatar 40 years ago. it is part of the dna of a company like totalenergies.

we have to be careful about geopolitical risks. let's have a large portfolio and spread our risks in order to rebound. dani: totalenergies ceo there. let's dive into the charts. we have bloomberg's market editor with us, valerie, you promised me a cracking chart and said you have something that will show everyone we are looking at the dollar wrong. >> the last bout of dollar strength since august is totally misplaced. it is not about the rise in u.s. yields but the structural change in europe. i have trade balances of the u.k. and europe, these have fallen off of the cliff as a direct consequence of energy. we are importing expensive energy, and exports have plummeted because of the effect of high prices on and history.

-- on industry. that causes currency to weaken, we are seeing that selling of cable and a euro while this happens. dani: it is a vicious feedback loop because you are paying more and the currency weakens more. we have been deficit spending the last four decades, so why is this time different? >> it's different, the u.k. and europe is asking investors to fund this at a totally different time. the era of qe infinity is over. dani: that screams to me this is over. >> in the past, when we have seen a rally in yields, we see weakness in currencies. complete opposite dynamic here. yields are rising alongside currency weakening. this is saying we need to find new equilibrium to balance this trade. foreign investors are going to

demand higher yield to fund these deficits we are running. dani: that's a scary, poor percent is not out to get that -- 4% is not enough to get that? >> that is causing the rise in dollar yields which is reinforcing dollar strength and reinforcing this narrative. i'm not sure where the next equilibrium is going to be. dani: you are breaking our american bias, it is starting in europe. that is our bloomberg's market editor. all the focus on the u.k. we will monitor the market fallout. this is bloomberg. ♪

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