guy: friday morning. good morning. welcome to bloomberg markets, the european open. i'm guy johnson. matt miller is in berlin. what are we watching? brazil backlash. the defiant president declares he won't step down. we're going to ask the head of e.m. strategy at ubs if this is a game changer. the president heads to the middle east looking to move the agenda on from what he calls the witchhunt in washington. will it work? iran's choice.

as trump touches down in saudi, iranian people voting on whether to continue international engagement or take a harder line. we are live in iran. matt: we are less than a half-hour away from the open of cash trade. let's take a look first at where futures are after the big drops we saw the last couple of days. looks like investors are getting more optimistic in europe. asian stocks turned around. we are seeing european futures rise fairly significantly. if you look at the bund trade here, we can see that investors are selling off debt. this is a pre-day chart. i will put it into a one-day chart of the german bund trade and zoom in on that for you. investors are selling off the tot, pushing the yield up 0.36% after it had retreated for a couple days. guy: more germany does this morning.

we will talk about that later. let's talk about what is happening right now around the world. yesterday, a second day of negative trading for european equities. that is worth paying attention to. looks like we're going to see some stabilization today. the bloomberg dollar index down by 0.1%. we are going to talk about emerging markets. the dollar traded pivotal to that. the dollar in hong kong, interesting. the aussie dollar up 0.2%. get the bloomberg first word news update. here's juliette saly. juliette: thank you. president trump has denied trying to quash an fbi investigation of his former national security adviser and says there was no collusion by his campaign with the russians. >> the entire thing has been a witchhunt and there is no collusion between certainly but i can my campaign

only speak for myself and the russians, zero. juliette: at a white house news conference yesterday, trump said it was totally ridiculous to think he's done anything that would amount to an impeachable offense, but the president said he respects the decision to appoint robert mueller as special counsel. brazilian president michel temer has defied calls to step down, saying a supreme court investigation will clear him of an alleged cover-up. local media claims he approved harsh money for the house speaker who drove the impeachment of dilma rousseff. the turmoil has seen stocks, bonds, and the real tumble. steveneasury secretary mnuchin says breaking up the big .anks would be a huge mistake testifying before a senate banking committee hearing, mnuchin said the u.s. administration doesn't support splitting commercial and investment banking. >> it is a complicated question.

there's many aspects of it. the simple answer which we don't support is breaking up banks from investment banks. we think that would be a huge mistake. juliette: leaders of four u.k. political parties have criticized theresa may's approached a brexit. with less than three weeks until the general election, the smaller parties made their cases in a tv debate that may and interbank's -- and labour's jeremy corbyn refused to attend. >> you may be talk of scared to come here tonight, for your u-turns to be highlighted, for your policies to be exposed. you want this election to be only about brexit. >> we can transform our energy system to make it the cleanest and greenest. love isecent britain i under threat. by nigelay, backed farage and jeremy corbyn, is

going for an extreme brexit that will damage our futures for generations. >> brexit would never happen if it wasn't for you can't. -- for ukip. juliette: two chinese fighter jets intercepted an american military aircraft over the east china sea on tuesday. a u.s. spokesperson said the interaction was considered unprofessional due to the movements of the chinese pilots. the spokesperson said the air force is discussing the event with china. global news 24 hours a day powered by more than 2600 journalists and analysts in more than 120 countries. this is bloomberg. matt: thanks very much. the political brouhaha in washington looks unlikely to blow the federal reserve off course from raising interest rates this year. starting with an increased next month and following with another later in the year, let's see where wirp is this morning.

take a look at that screen. 97.5% are the chances of an increased rate in june. we are joined by mark cudmore from seoul. how resilient is the fed's politics -- fed to politics? no agency can be fully independent of what is going on in washington. in terms of the june decision, they are extremely resilient. there are a few ways this can impact the market. one is, is that it is turning down yet? the data remains strong. the data is saying a june hike would be ok. our markets getting hit badly? while the dramatic moves yesterday may seem like sharp deterioration, remember that u.s. stocks were at a record monday. overall, u.s. assets are at

skyhigh levels. markets are showing no problem with the hike. sorry, they are the main two points. apologies. matt: i thought maybe we could talk further about the dollar. there's been a round-trip to some extent for the dollar index, mark, from when donald trump took office until now. we saw gains of almost 6%. now we're unchanged. where do you see the dollar going from here? i'm a structural bear on the dollar. i think the dollar got overvalued in the last couple years on expectation the u.s. would start a rate hike cycle that would be aggressive and sustained. it has been very gradual. i do think the reason the dollar sold off are not particularly valid. i don't think the politics should affected too much. short-term, the dollar could strengthen.

the bigger picture, still quite negative of the dollar. there are still negative real yields in the u.s. it is not particularly attractive in terms of assets. u.s. equities look expensive. it is not a bad story either. the short-term story might be ok because the dip this week seems unjustified. guy: i've enjoyed the pound around 1.30 on the cable rate. your sense is it isn't going to last long. walk me through wide. mark: last week i changed my call on sterling. i've been bullish the last couple months on the theory the short positioning was too extreme. i thought it was too stretched for a longer-term story. we've now had a clearing out. the fact remains that the long-term story is negative. last week i turned negative on sterling. i thought the initial moves might be in sterling-yen. we've had some unpredictable

events. i think the next leg of the move is more in cable. dollar weakened, probably unjustified, but sterling has a slower growth rate. it has a larger current account deficit. the negative yield is much larger in the u.k. than it is in the u.s. all these factors point to sterling slowly depreciating against the dollar. guy: thank you very much indeed, mark cudmore. you want smart analysis throughout the day, mliv . event blogsspecific that we run. you can find those as well. mliv, fantastic throughout the day. the iranians are deciding between further engagement with the west or turning away. we're going to take you live to tehran next. this is bloomberg. ♪

matt: let's get the bloomberg business flash. for that we go to juliette saly in hong kong. juliette: thank you. billionaire hedge fund manager leon cooperman and his firm have agreed to settle a u.s. securities and exchange commission insider-trading lawsuit. cooperman will pay $4.9 million to resolve claims he made money trading on inside information according to a court filing.

cooperman didn't admit any fault and won't face any bar or suspension from trading. exchange operator euronext reported first-quarter net income declined 9% amid lower trading volumes. the company which operates markets in countries including the netherlands and france also said revenue was little changed at 127 million euros. euronext planned to acquire a clearing house earlier this year. aston martin is said to be considering a london ipo as soon as next year. the british maker of james bond cars is seeking to capitalize on the success of ferrari's listing. that is according to people familiar with the matter. at the same multiple as ferreri, aston martin would be valued at $3 billion. ikea aims to double its sourcing from india to more than $650 million ahead of the opening of its first store.

the company has broken ground on the outlet in mumbai and has a goal of 25 stores within eight years despite having trouble acquiring land. that is your bloomberg business flash. guy: thank you very much indeed. iranians have begun voting in a presidential election that will either give hassan rouhani's second term or hand the nation's top elected office to conservatives. it is happening the same day that president trump makes his first overseas visit to saudi arabia. let's join our man on the ground in tehran, yousef gamal el-din. walk me through the lay of the land. we are trying to understand what is happening in iran. walk me through why the candidates are so different in their approach to what happens next. it has been an incredible few hours.

just the amount of people coming to the polls, this particular polling station one of the more popular ones in downtown tehran. turnout is going to be key and fundamental to what the government is trying to achieve, convincing people this is the way to either approve or disapprove of the government of the last few years. they are hoping for 72%. last time around was 77%. the polls opened at 8:00 a.m. 55 million registered voters. out of the four candidates, only two crystallized, a brain risa, the cleric, and hassan rouhani. matt? matt: where do they stand now on relations with the u.s.? it has been a rocky road of late. relations with the u.s.

is one of the key factors and key talking points of both candidates. this is something they are campaigning on, on quite different platforms. one is the more liberal reformer, trying to engage the west, trying to make the agreement work. for a lot of people that hasn't delivered the results the average iranian can feel. that is what a brain raisi -- raisi, he's going to be jumping on that opportunity. there is a broader point here. it is about resetting the iranian political pulse. this could also be about succession. the supreme leader is getting older. in the history of the islamic republic another president ultimately becomes the supreme leader. guy: yousef gamal el-din joining

us as the iranians go to the polls in tehran. we are joined by ubs' head of emerging-market cross asset strategy. is this important? >> from a long-term perspective, very important. if iran chooses to continue to engage with the west, that reduces geopolitical tensions in the middle east. from a near-term perspective, i don't think it matters for the oil price. what is happening with shale is much more important. there isn't very much of a difference, which basically means there is ample supply and there is still downward pressure on the oil price. i don't think this election has an immediate impact on the markets. should iran move away from the west, and the u.s. at this point is not in a mood to engage with iran, that increases geopolitical intentions. the fact that the president is visiting saudi arabia, there is symbolism out there. the lines are being drawn.

this does increase middle east risk in the medium-term. more generally, i think that does increase -- guy: the saudi bonds have been incredibly well bid. there has been a more positive approach taken. we are waiting for the aramco ipo. iran is not very far away from a geographical point of view. if we were to see the hardliners taking over, what it puts things like the aramco ipo in jeopardy? markets downct the the gulf? bhanu: i don't believe the iran go -- the aramco ipo will change. there's a broader theme. if you look at credit spreads, you see how bonds are trading, both mainstream and frontier markets. i think there's a broader theme out there. the latter point, how gcc's reaction occurs, and how the

geopolitical risk between the sunni and shia faction in the middle east, both which have been at loggerheads for some time, how that evolves, that will change the geopolitical risk. iran becomes a little more isolationist. how russia deals with syria, turkey, that changes. matt: does it strike you that the trend is for emerging markets, the political stability of emerging markets, to be recovering while the political stability of the western world seems to be getting shakier? bhanu: given yesterday's experience in brazil, i would have to say no. risk is quitecal high everywhere. the markets have found it difficult to price political risk. events and they market is not very good at pricing them in a probabilistic fashion. risk is quite high.

it is not clear that emerging-market policymaking is becoming significantly more reformist. there have been some signs of that and brazil was the flag bearer there. there are some signs in india. if you think about turkey, south africa, mexico in june, political risk is quite high. i wouldn't say that emerging markets political risk is coming lower at the same time developed markets medical risk is rising. political risk is rising in both places. societies have become more unequal and that has mattered not for the markets as yet, but has mattered for political risk. --t: why don't we see more in brazil, obviously a lot of price action after political turmoil is reported on. in the western world, if you see price action, for example in brexit or in the case of italian

elections, there's a quick recovery. in the u.s., there's hardly any price reaction to political scandal. why do we see it so muted in western markets? bhanu: because it hasn't had any material payoff on policy so far. you would have to agree that when you have political risk in terms of posturing, once candidates come to power, things are different. you saw that in greece a while back. people thought things would be very poor, and eventually they became more mainstream and lost popularity. the populists themselves lost popularity. this happened in brazil. markets thought this was a massive shift leftward. china was growing at 12% at that time. there is a difference between the rhetoric and the reality when you see the real quality of actual governance. many candidates tone down their rhetoric.

the markets struggle with that because cause it is a binary event. they can only react to it when they have bought protection prior to the event. that has been a money-losing proposition for them because the risks have not been manifest right there. it really is about the risk distribution. this is more a risk management point. i will give you one other example. protectionism, for instance. how do you price protectionism. nafta is probably going to take more than a year and a half to be renegotiated. it is difficult to price that today. markets are probably going to react to that. the risks are going higher. matt: ubs head of emerging-market cross asset strategy, bhanu baweja, stay with us. we are minutes away from the open. up next, we look at the movers in today's trading, including euro next.

this is bloomberg. ♪

matt: we are just minutes away from the open. i'm matt miller in berlin alongside guy johnson in london. want to get some stocks to watch. euronext is one you want to keep an eye on after it comes out with earnings, first-quarter sorry, $127 million -- euros. , saido, stephane boujnah

in a bloomberg television interview, that costs are going to rise and clearing will be fragmented post-brexit. the open is next. this is bloomberg. ♪

matt: welcome back. this is how the market opening will go to. the ftse 100 looks like it will go up iced therapist 6%. -- go up by 0.6%. the european futures are reasonably well, london looks like it will go up a touch. that might have something to do with the pound softening up. i will one-month chart of the yen i am looking at. you can see that we have a lot of yen strength over the last week. investors seem to be flocking to that trade. at one point we were down to a 110 handle. you can see that under the open

bug. we recovered a little bit to 111, but still a lot of strength for the yen over the last week. even as japanese stocks turned around and recovered. guy: matt, let's talk about the open in a little more detail. that is wednesday, the big related the trump selloff. that carries on into thursday morning. the books like the momentum will -- it looks like it the momentum will continue. that is what we're saying at the moment. many.are not manus, what do you have? dollar-yen is the a little more about the risk. we are still saying money going to the yen, though not at the same aggressive rate. for me, the question is is it too early to call yesterday's

move a one-off moment. we get too preoccupied talking about 1% or 0.5% moves. these are the basic resources. we are making sure it is there. the banks are up by 0.2%. it is still a risk story. the question you need to ask yourself is when these moves will be a symptom of what's coming. toociates will be talking one or two wires this morning. they say that a trump in peach met probability is around 10%. about 50% that trump does not make it to the end of his full term. you have a banging run on financials. we are basically saying that you want to cut your exposure to

banks, and up your exposure to insurers. you have had the boom in the economy, the rise in yields fully priced. you have to take some money off the table. when everything else is wrong, -- look at the bond market, the equity market. the shanghai composite is down. there ratcheting higher the reference rate in terms of fixing on the yuan. yuan want to keep the stable. they can afford to let the dog off the leash. if they let it go, it has grown -- global ramifications. that is the move from the pboc.

let's talk about what is happening in this market in more detail. out -- up, the miners are up as well. up.iton is a -- is the futures in the index are buying out those bigger names. a decent size gains being made. some news this morning, but i wonder whether this is a continuation of a reaction of what happened in the u.k. with manifestoing of the yesterday. it will be an interesting one to see how it works its way through, but we will see.

talk about need to brazil in more detail, though. matt: investors care what is happening in brazil. the real stocks and bonds tumbled as president temer became embroiled in a new controversy. it sank the most since 2008 yesterday. he denies claims that he endorsed hush money to the former house speaker, and said he would not step down. >> i never authorize the payment to anyone to keep silent. i did not buy the silence of anyone for one single reason, because i am not afraid of accusations. i do not need a public position or special forum. i have nothing to hide. will not resign. i repeat, i will not resign. i know what i did, and i know that my acts were correct.

i demand a quick and full investigation to clarify it for the brazilian people. take a look at how investors are reacting in terms of brazilian futures. yesterday, they fell so far so fast they caused a breakaway gap in trading. you can see that illustrated by this chart. nice round even number. our editor is pushing for her own blog that does not exist yet. i have no doubt that it may. it is a huge drop. the lows and highs -- the highs of the first trade are so far down that they do not intercept the lows of the last trade anymore. that is the breakaway gap, and it is a serious technical indicator. several companies are among those hardest hit.

you pointed this out earlier that it is a sign that there are ramifications, financial ramifications for instability in emerging markets. had you expect this situation to play out? >> it is not looking great right now. it is probably the biggest event we have seen in emerging markets for the last six months, because brazil was the flag bearer of reforms. key, the underpinning of that was reform of pensions. in the next few days, you will see that being tabled in front of the congress. that is what has led default spreads to come down by 300 basis points. that is what led to brazil becoming one of the biggest performers in the equity markets, and the real being one of the most popular currencies.

if we see a turnaround here, and if you think pension reform is likely to be compromised, it makes the market question the broader story in em. the reason this has a broad impact is because the influence in emerging markets has largely been passive. if investors get disenchanted with emerging markets because we thought this was a reform a story and the reform is dying off, perhaps we've seen the bulk of the growth behind us. let's take some of the money off the table. that has an impact in korea, africa. a bad time forat emerging markets. brazil is in a different place economically speaking compared to where it was in 2015. it is because of -- you shouldn't expect an instant return to the dark days of 2015. you're talking about a 3, 4, 5

year horizon. you are staring at a dark future. ubs: you have laid out at three scenarios -- one of them is the most market friendly in which this blows over. the least is a presidential resignation. the most negative scenario you have looked at is the drawnout impeachment process. doesn't scenario three look more likely than one or two? >> it is too early to put probabilities in. given the last 24 hours and what president temer has said, it looks like we are approaching scenario three. it is serious. the market has that risk, and if this looks like a broad scenario , a drawnout scenario, i think many investors will have to deal with the risk that tension reform will only be debated, not

solved. i think that might get them disenchanted with it for some time. materialize for the broader em complex as well. a ripple in asia overnight. there was not a wave, asia did not get freaked out, investors to not react that negatively. you talk about the fact that this is passive money. if people see this process unwinding, give me a sense of the order of magnitude of what we could see in asia. emerging markets have outperformed by 6% or 7% this year. the bulk is been three countries, korea, taiwan, and china. most people look at china and shanghai and say it is underperforming, but it has done extremely well. these three countries account for 75% of the gains in emerging markets over the last six months.

the unsung hero of this inflation episode has been the tech sector. not just in emerging markets. that is the reason the markets rebounded in the u.s. overnight. they also helped asia hold up. tech are no longer cheap. if money begins to leave because of reform in places like brazil, south africa, then i think that trade could come into question. asia is still in a better place in terms of emerging markets, but in fact the bulk of the em trade is asia. if that trade reverses in absolute terms, asia would be hit. guy: what about emerging-market bonds? let's see what is happening, what is going on in indonesia. into locally

denominated bonds. it was amazing to watch. if we start to see what you are talking about happen there, how does it work with fixed income? >> i don't think a hit right away. if you see the market getting worried about reform and growth, equities get hit much better than fixed income, because it has lower inflation. over the next two years, inflation in em is likely to come down, while inflation in dm comes up. indonesia, the 10 year bond trade is roughly 7.4%, 7.5%. that is a solid rate. the rate in the u.s. is 1%. that is why people go into these places. that is why people go into brazil. when you have political risk, your questions of currency.

if the currency -- you have questions of currency. if the currency is taking away, then it makes sense. but i think the bond trade in these places -- mexico, perhaps -- is likely to unwind. guy: if that comes out of equities, where does it go? don't think it goes into em bonds. it goes into u.s. equities and back to dm, perhaps to europe. europe and em 10 to move together. moverope and em tend to together. people are tending to move away from emerging markets. i think it is likely the markets could develop in the u.s.. guy: the we'll carry on the conversation later in the program. ubs. is the head of we will have more from the soul

conference -- seoul conference. we will hear from the head of deutsche bank about why he expects softening in the eurozone. he joins us later. this is bloomberg. ♪ matt: welcome back to the

european open.

here,check on the markets and the see the ftse is gaining right now. there .4%. the dax is up 0.3%. after thess the board turnaround that we saw in asia overnight, it looks like investors want to end the week long. let's try and relate china to what is happening with the fed, and find out how the em story fits into this. china is using its currency to combat the market meltdown. not a lot is happening here. the reference rate used by the has regularly track to the measure. burgeoning -- head of emerging markets, bhanu

baweja is still with us. you have said that it is like watching corn grow, it is a slow process. ultimately aims happen. >> that happens when you have disenchanted assets. in thesk is quite high long-term. when the housing market really comes off. what do i mean by that? dimming downare because of significant tightening from chinese authorities. this is tightening from a position of strength. this is different from 2015, 2014 where you had significant in two or three series, which was major inflationary impulses. this cycle, which we see in the micro data in china, china has turned down. the epicenter of inflation has weekend.

let it is from a position of strength, and it is because of policy. taken the opportunity to tighten the screws, both in terms of finance a leverage, but also in terms of opening the economy. they allow the bonds to go through. they are responsible because been-- because growth has strong. the difference between china in 2015 and when the market learned about china and today has been the remember the -- the rimimbi. the fact that it has not been unstable, despite the big price $90ommodities, in oil from to $60, it is still calling for 2% increase. there is a link between the chinese economic cycle and global financial conditions, which is -- guy: the fed is pretty cool right now. they are looking at data out of the u.s. that is unconvincing in

many ways, but it is convincing enough to keep the fed doing what it is doing. so the fed does not have the distraction of the chinese to think about, which it did previously, which stopped it acting. >> particularly, the rimimbi. that,g depreciation of there is no bigger disinflationary force. that is why the fed worrying about that last year when it was unstable became the central banker of the world. it is stable, the fed is the central bank of the u.s.. we are looking at payrolls that is strong. that is why the fed financial commissions have been strong. the fed is able to raise rates in june. they are not that worried about the small downturn in the cycle for china because it is not reflected in the renminbi.

at assetsre looking that investors have access to and china. stocks, equities, they are down. it has been difficult with commodities as well. others are rising to an all-time high. right now trading at 19.19. do you think this is driven by chinese investors, and what affect does this have? >> it may be driven by chinese investors. i think because the capital account is close in china, there is a musical chairs out there. you saw this in the shanghai futures. there has been a lot of talk about this being driven by chinese investors. i do not think this has implications for the broader asset base in china or outside. and i also don't take this is the market worrying about the falling out of fashion. it is too early to conclude that.

if that was the case, you would see significant inflation in goods in china, and you do not see that yet. i would take the benign interpretation of this, which is that people are playing with it theyse they can, just as play in shanghai futures, and in the casino, and in the housing markets. that is what is driving this. matt: thank you very much. you will stay with us. we will talk about other things and that coin happens to be a pet interest of mine. bhanu is with ubs. stay with us. this is bloomberg. ♪ matt: welcome back to the

european market open. just about 25 minutes into the trading session, and we see european indexes up across the board. let's go to juliette saly for the bloomberg is this flash. juliette: matt, thank you. fined company in the lawn as part of a probe into a probe.an into they are under investigation. not have anrson did immediate comment, while the milan prosecutor did not respond to an email request for comment.

euronext reported income decline 9% to about -- to a lower trading volume. company said revenue changed little. to acquire as clearinghouse from the london stock exchange fell apart this year. planning an is london ipo as soon as next year. they are talk -- they are seeking to capitalize on ferrari's listing. aton martin would be valued $3 billion. that is your business flash. guy: let's bring back into the conversation ubs's head of emerging markets, bhanu baweja. we are not seeing wage growth in the united states or here.

markets do not understand what is going on. feed that into your world. let's consider places where the output gap is closing, and where we should see that wage -- wage growth. emerging markets responsible for the global output. the biggest output growth is in, not dm. aem, most places still have a large negative output gap. it probably is coming from e.m. right now. markets,e emerging where the gap is closing, you are seeing that in central, eastern europe. this place was hit badly in 2007, 2 thousand eight. it became competitive, and boomed. bulgaria, lot the, poland, -- latvia, poland.

bhanu will stick around. this is bloomberg. ♪

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it all adds up to our most reliable network ever. one that keeps you connected to what matters most. matt: there is backlash. the markets are roiled as a defiant president temer declares he will not step down. is this a game changer for the nation? and trump on tour. he is looking to move the agenda on from what he calls a witchhunt in washington. will it work? as trumpn's choice touches down in saudi across the gulf. the iranian people vote on whether cash on international engagement, or to take a harder line. we are live in tehran for the election. matt miller in berlin,

alongside guy johnson. guy: let's talk about what is going on. what are these markets looking like 30 minutes into the trade. had a return yesterday afternoon. we still have not recover the losses we saw earlier in the week. he started getting nervous about what was happening in washington. president trump goes on the defensive at a white house conference yesterday. the president denies that he tried to caution fbi investigations of his former national security adviser, and says there was no collusion with his campaign and the russians. >> the entire thing has been a witchhunt. there is no collusion between myself and my campaign, but i can only speak for myself and the russians. zero. guy: look at the language there. the president says he respects the decision to appoint robert mueller. guests theirt of

thoughts on this controversy surrounding the president. >> i do not see a train wreck. and i do not see donald trump as anything different from other politicians, except for his language. perhaps in the way he does wings in the accelerated way. >> i think the administration could do better at softening the antagonism with the press. what i think the president has made a reasonably fair assessment that most of the press is biased against him. >> think there is a lot of press that has been very negative for him. he has not done a great job of getting around that, and once he does, i think things will get back on track. it is just getting things back on track that will create that uplift. take on's get bhanu's this. >> i do not think this is likely

to go anywhere in a rush. talks are expensive. if you look at it from a valuation perspective, at least what this will mean is the kind of reforms he wants to do are unlikely to come through any time soon. the markets are expecting a high earnings number this year. q1 has been stellar. i expect q2 and q3 to disappoint. we are -- these kinds of issues will have an impact on how far reform can be pushed. that is why people are coming into europe right now, into japan, into emerging markets. the u.s. economy is, once again after q1, starting to gain steam. once you see european data coming lower, the pmi's are very strong right now, but when they go lower, i think people could move back toward the u.s.. what you do need to see the u.s.

markets give back some of that valuation. i think this is probably a fallout. guy: it has turned a little bit now. ofare back to the mid-80's pricing the june meeting. let's talk about the fed in a little detail. the fed is, to a large extent, on rails -- unrailed. it sees the data in front of it. that is in the rear premier. -- in the rearview mirror. is there anything that can stop the fed from doing -- or two, moment,a half at the and how do we price that? trying to get the bottom range on the 10 year, and i am surprised by that. >> all of the real rates are quite strong. 25 -- come off by about

it is a sensation story. have one sector which is housing. that is reflected in the real growth numbers. if you look at investment, the one place that does well is housing. the fed it would like to see that broadening up. the data released this week does suggest that all of that is broadening out now. i think your expression is the right one. the fed is on rails. it was a cautious fed. it is a fed that wants to normalize policy. i think they have reason to do that. the only thing that can completely put them off rail is if inflation rose. that would have to be q2 consumer being weak again, or a big collapse in international financial conditions, or a mixed

-- or a much bigger accident in china because of tightening. the fed tou expect be able to reduce its balance sheet significantly in the next couple years, or will they be so conservative and cautious that we will not notice that? >> both. i think they will reduce their balance sheets, but significantly, i don't know what the definition of that is. i know they are looking to reduce it i about $650 billion. diminish, ings don't think you will see a material impact on stocks. there has been a lot done by the fed themselves. i agree that there is probably one more rate hike, but it is towards the balance sheet unwind, and they will step back. that is why we're looking at hikes in june and not december. i do not think the markets are going to collapse on the basis of just that.

mind you, sometimes it is like boiling a frog. if the fed continues to go twice before that and then unwinds its balance sheet, some places, particularly emerging markets, will feel the impact. but i do not think in itself that will damage financial conditions. raise rates, will assets will return. something that does not yield anything like old is may be worth less in the future. nonetheless, it surprises me that we have not seen a stronger move for gold. a chart at 12.50 announced. where do you see gold -- at $12. 50 an ounce. where do you a chart see gold g? toit is most closely related the five year real rate in the u.s.. on the basis of that, there is more downside risk, and it is

going higher than here -- from here as the fed normalizes. is still demand from china and india, and i think that will support it. that on the basis from where the federal reserve and real rates in the u.s. are going, i would say there is downside risk by about 15%. are the financial condition indexes, and it suggests on accommodative -- this is an incredible chart in many ways. tightening then books, trying to get communication. financial conditions in the u.s. are pretty easy and getting easier. why is the u.s. economy not doing better? why do we have this rolling recession in parts of the u.s. economy that seems to migrate from one to the other? >> because the investment in the u.s. has not picked up materially. q1 was strong.

these financial conditions are loose, the quite a few corporate in the u.s. have been high in terms of leverage. as a result, they have not been able to take on the investment. business equipment investment in the u.s. has been weak. the bulk of the employment, where are those people being employed? they are employed in low value added services. that does not help the rest of the world. but it is not the kind of thing high productivity. this tells you about credit spreads being tight. actual productivity of the economy is not captured by this, and that is what drives investment and growth. medium-term term, 1.8%, 1.9% is probably growth in the u.s.. the trend rate of growth in the u.s. is likely to remain at 1.8%.

u.s. economy is struggling with that. with lower productivity comes lower investment, and that is why lower imports -- you would do not see the u.s. -- you do not see the u.s. breaking out of that trend. bhanu, thank you for your time. bhanu baweja touching on a range of topics there, which makes sense as he is the head of emerging markets at ubs. he will join us on digital radio, and you can hear radio even if you do not have dab digital radio using the tv function. you can type radio go as well. right next to it, interactive tv. if you click on that block, you will get not only a live feed on your bloomberg, that also on the right-hand side of the screen, a scrolling run down of what we

have been talking about, the assets, the commands we used to pull them up on your bloomberg as well. and the possibility to chat with us directly. send in a question for bhanu, guy, or myself, and we will get on it. coming up, we will look at how equities are performing as we approach a golden cross moment. we will discuss that jargon next. this is bloomberg. ♪ mark: guy welcome back.

brazilian president temer has denied turn -- has abuse to step down. refused to step down. realeality tumbled -- the has stumbled. iranians are voting today in a presidential election that will either give hassan rouhani a second term real has stumbled. or show a lurch back to conservativism. show a lurch back to conservativism. that would give rouhani a mandate to interact with the world economy.

greece's prime minister says it is in the hands of the nation's creditors after the nation approved austerity measures needed to complete the second bailout review. it opens the way for euro area investors to approve the next loan installment when they meet on may 20 second. it would allow greece to repay obligations of about 6 billion euros. >> therefore, the measures we are voting on would be , effective if measures for debt would start to be of limited. measures for debt that would lead us to definitive exits from the crisis. juliette: global news, 24 hours a day, powered by more than 2600 journalists and analysts in more than 120 countries. this is bloomberg. guy and matt. indexthe euro stocks 50 is approaching a golden cross on its weekly chart, with the

shorter 50 week moving average poised to break above its longer-term 200 week moving average. we have thrown in the 100 week here as well, just to show you that is as well moving up to the 200 week moving average. this last happened in august of 2013. the rally was about 20% after that. what is more extraordinary is the two moving averages are also converging with the 100 week line, the closest they have gotten since 1993. we are joined by sebastian , the head of deutsche bank. this is a technical indicator, not everyone buys into this technical mumbo-jumbo here. but if enough people do, it becomes a self-fulfilling prophecy. what do you make of the euro stock situation? >> we had a fantastic rally starting in the middle of last year, which is taken up the

index by 30%. if you ask why this is happened, is it because a golden cross was in place? i think the main driver of this was that in 2016, it was week. we have seen one of the strongest accelerations in a global growth momentum cents. european stocks have tracked that improvement. it is a very interesting situation for us. the last two or three months, we have seen prices rollover, but global markets have not responded. that is a cautious symbol for the midterm. matt: what has driven this fundamentally? we noticed over the last few weeks a real turnaround in sentiment, a lot of investors coming on the program saying they think european stocks are undervalued, especially next to u.s. stocks. it is turned it around? hassan rouhan there are 2 -->> there are two elements of it. you have seen a notable

outperformance of assets, and there were two reasons for that in my view, which is first that the global momentum has rolled over. if you look at the psi which is been falling. --re is one region globally it is rolling over in china and the u.s.. there is one region where it is not, and that is europe. relativetum in europe to global is at a 20 year high. that is gotten people excited. that after the french election, political risk has been declining, and giving what is happening in the u.s., that is not happening there. you have a relative move in macro uncertainties. relative political uncertainty declining was a helpful mix. guy: let's assume those two factors start to unwind, even at the margin, so they start to

soften up in q3, q4. look at the italian election and price that in as well. give me a sense of the magnitude of how europe might be at this point. >> i would think less about the positioning -- when you look at the data and try to make positioning a leading indicator, it never works. the two factors that we use to gauge whether undervalued or overvalued, is where are you in the cycle and where will you end up, and what his political uncertainty doing? the european equity market is t around 2%. aroundr level value is 1.6 times. you're about 5% of where you should be. chart, and i am curious to get your take on whether this is worthwhile. what we have done is backed the tech sector out of the s&p and backed it out of europe.

europe is a smaller part, but -- europe doesn't look cheap at that point. is that a worthwhile exercise? a little bit -- you get to the conclusion that you want to say, i take the index and the expensive stuff up -- out, and it doesn't look expensive anymore. i have sympathy, but there are pitfalls in it. i would say that right now, europe is trading at around 10% overall at the forward-looking measure. he will say that is significantly lower -- people say that is significantly lower. the 10 year average, right now you are in line with that average. that is not particularly expensive. when people push back and say, --you look at other measures there you are cheating at eight

-- trading at a discount. but it tracks the earnings cycle. beenarnings have underperforming for a decade, so in order for you to revalue, you need to see stronger growth in relation to the u.s.. generate -- will europe generate stronger returns? in absolute terms, it will be the best earning growth that we've seen in years. guy: that important last little bit. you will raedler, stick around. coming up, theresa may sticks to a hard exit mandate. no deal is better than a bad deal. we will discuss developments in the u.k. election. this is bloomberg. ♪ guy: theresa may has called on

voters to get her the freedom to walk away from brexit talks with that a deal, reinforcing her hard-line approach to leading the eu . we had wells fargo on the program yesterday. they believed it was a value trap. what is your view? >> i agree with that. there are two questions you have to ask about this.

what is happening to the pound sterling. the weaker the u.k. economy gets, the softer the bank has to be, the more weakness we will see there. you have to remember, it is a very cyclical -- defensive index. .t is relative to defensives boost the ftse 100. if you look at the flip side of that, it is exactly the opposite. it is domestic. it is cyclical. sterling depreciating, we expected. guy: how about the credit impulse in the u.k.? >> think that is true. the data held up better than

people expected, and one reason positiveis people saw credit impulse. what we are seeing now is a sharp deterioration of the credit impulse in the u.k., which is typically consisting of consumption coming from a tailwind in the economy to becoming a headwind, which connects to the macro weakness. matt: where do you see the pound going? we'll may have 10 seconds, but it is well above most people possible forecast as it is. if you have this combination -- soft domestic data and harsh noise coming out of negotiations, there is the potential for further downside. it is expected to go to 116 by the end of the year. matt: sebastian, thanks for joining us. --astian raedler, so it deutsche bank. stay with bloomberg television because next you have surveillance with tom keene and francine lacqua.

if you would like, switch over to dab radio and listen to guy and myself continue our conversation with bhanu. you can also get that if you type in radio go in the terminal. this is bloomberg. ♪

says talk ofump impeachment is totally ridiculous and strikes out at what he calls a witchhunt. he prepares to head to the middle east for his first middle east tour. as thes crash in brazil embattled president says he will not step down. may'sleaders say theresa brexit plans are extreme. this is bloomberg "surveillance ." a lot