tv Bloomberg Markets European Open Bloomberg January 10, 2018 2:30am-4:00am EST
>> good morning and welcome. you are watching "bloomberg markets," and this is the european open. i'm alongside matt miller. we have got cash trade less than 30 minutes away here in europe. good morning. so, it is a big day for the bond market with yields pushing higher and investors digesting 10 year from the u.s., germany and japan. bill gross is calling a bear market and the imf is warning
the market is underplaying the risks of higher rates. are we heading to 3% on the u.s. 10 year. the u.k. warns the european union warns another financial crisis. can brexit end will for the city of london? shining a light. the eu market regulator announces a last-minute delay to our changes to the darf trading limits. is mifid now a mess? matt: let's look at futures. from where i am sitting it does not look like it will be a good open, a rainy day in frankfurt and down on the futures across the board. futures are positive, but for the most part down and that is understandable after a long march higher in equities. the s&p 500, up six day sin a row. -- six days in a row. is treasury trades, guy,
where it gets interesting, looking at 2.559%. so, that yield going above 2.5% and staying there. the question is, how much higher do we go if we are looking at the end of the bull market in treasuries? guy: it is probably 3% winning to be looking at as the line in the sand. the australian market was up five days in a row. the s&p, up six days in a row. the industrials are being sold overnight. europe had a good day yesterday, that is the bond market interesting. the japanese yen trading up by 0.6%, but it is the story surrounding the boj that is interesting. the yen is trading higher. the bloomberg dollar index down
by 0.1%. let's show you what is happening elsewhere because i want to show you the bond market and the commodities trade. the japanese five trade yields higher. the japanese 10 year, yields higher. today is a deluge of supply in the middle of the curve. you've huge supply coming out of the u.s. you have got japan, germany and china, the nordic countries coming into the curb. brent crude, copper, all rallying with the inflation story front and center. $63 with brent trading just shy of $70. dren ofe: the chil undocumented immigrants are facing deportation and have won a court order. a judge in san francisco
rejected the government's argument that the court does have the authority to second-guess whether the president improperly decided to terminate the program that was started by barack obama. former white house chief strategist ebita and has left his job as executive chairman of breitbart news. he will the longer host a radio show on sirius xm. bannon lost the support of the mercer family, and his closest financial patrons after trump spoke with rebekah mercer by phone. openingpean union risks the door to another financial global crisis if it refused to give london bankers a good trade deal. that is according to the chancellor of the exchequer and brexit secretary. the german newspaper, philip hammond and david davis said they want" version nation --
said they want" operation between the eu and financial regulators. warning more price increases are ahead. 36% of services firms are expecting to raise prices in the next three months. that figure rose 50% from 35% previously amongst manufacturers. accelerated. vowedkorean president has never to accept the north korean nuclear program after delegations from both sides met face to face yesterday and disagreed when the south proposed talks on denuclear's asian president -- talks on denuclearization. the european union markets regulator has made a surprise iie as they delayed a mifid
move. the plan to lift hundreds of ocks could not be implemented in time. of the planhe start will be pushed back as well. global news 24 hours a day, powered by 2700 journalists and analysts in more than 120 countries around the world. this is bloomberg. u.s. 10 year treasury yield has climbed to the highest level in more than 10 months, declaring a bond bear market. a looming glut of bond supply from the u.s., the u.k., germany and japan and a whole host of other countries. joining us now, james mccormick, global head of sovereign ratings. good morning. happy new year. your view is that the ratings were the best you've seen since 2011. where do the risks to that lie?
do they lie in what i said, basically, bond markets going higher? >> it is in interest rates. what we are seeing now is what we have expected. we're not that worried about 2018. we are worried about 2019 and beyond because rising policy rates and rising 10 year yields, it take some time for that to work its way into public finances, but when it does, we go very high in debt levels across every region. there will be fiscal pressures going forward. and we have to think about the current environment, whether it supports fiscal restraint. we're are not sure it does. francine: how easy is it to model what happens because we have never had an exit f from qe. how the market reacts, how the balance settles, none of this
stuff is in the history books. james: nobody has any experience looking at this. even policy rates going up is new for a lot of people, and contraction of balance sheets for central banks -- nobody has seen this before. we expect higher interest rates, obviously, longer yields and if you think about how much just eurozone governments have saved over the last 10 years because of lower interest rates, back in the envelope calculation, if they had stayed where they were in 2007 through the next 10 years and debt levels have gone up, interest payments governments would have made in the eurozone, almost one trillion euros more. the fiscal savings from lower interest rates have been quite substantial. that is about to go into reverse. we bigger deficits and higher debt levels. we will see some fiscal pressures coming down the pipe. the political environment will
be one that could be quite difficult for the fiscal nature. guy: given that, do you have fai th in the economic pick up in europe at the moment? is it real? it's on steroids at the moment. you made the point. this is not a public sector recovery. so, this is not fiscal stimulus per se that is driving this recovery. it is a private sector led recovery, credit growth picking up. guy: could it work without the extraordinary stimulus the ecb is providing? james: not to the same degree, no. once that is taken off the table we will see a return to more normalized growth in the eurozone. growth rates are much lower than the potential growth rates of today. guy: where do you think the potential growth rates -- james: between 1% and 2%.
depending on which country you look at. for the advanced economies, it is in that range. some recovery there, we are starting to see that in the data. below 2% is in the norm. we are not going to see that this year. euro growth this year is around 3%. a lot of countries will actually see falling government debt levels this year versus last year. the question is 2019. guy: from a ratings point of view, this is as good as it gets? james: absolutely and we are kind of balance. i think this year will be a good year. more countries have falling debt. we expect to see higher ratings moving higher. guy: italy elections, are you worried? how are you preparing for it? james: we downgraded italy last year, actually.
if we were to have this discussion one year ago we would be worried about italy leaving the eurozone. that seems to be off the table. nobody is talking about taking italy out of the eurozone. that seems to be no longer an election issue, but what is is the fiscal stimulus and the degree of fiscal easing that could come on the other side of the election, assuming we have a government that could deliver. debt in italy is over 130% of gdp. the deficit itself is not that high, but the debt burden is very high and the debt dynamics are very poor. we are focused on the fiscal dynamics that come out of this election. guy: oil, brent, approaching $70 per barrel. how does that change your view? james: it is a little bit higher than our forecast for the year was. we expect there will be a supply response.
we still expect oil prices to come down. 60range of sort of $50 to dollars, we think that is the goldilocks of not too high for the importers and sufficiently high for the exporters. where we are now, a little more pressure on prices and a little more inflationary in the advanced economies, but not enough to disrupt the growth story this year. guy: government shutdown in washington? james: certainly possible, but in an election year, nobody wants to be seen as obstructionist. the issues, the wall, who was going to pay for this mexican wall and the dreamers legislation, which we had developments on overnight. i think we will get there in terms of some compromise. guy: what impact does the tax cut have in your view? guy: longer-term, it makes public finances worse. we measure government basis,
around 100% of gdp now. over the next 10 years it will add another 10 percentage points to that at least. that is with mandatory spending -- guy: similar to the italian numbers, really. james: eventually and the tax cuts make that worse. we don't think the tax cut support will be enough to bring the fiscal health back in order. a deteriorating public finance story in the u.s. guy: we believe it on that note, james mccormack. let's catch up on what we need to know around the world. bondtte: guy, billionaire manager jeff fungundlach said te s&p 500 will end the year with a negative return. which is why he sees the u.s. benchmark falling after a decent run early in 2018.
he also said he is dubious of the long-term value of bitcoin. corning about 7000 jobs in italy. familiar to people with the matter, the company has started informal discussions with union to review ways to reduce labor costss, while remaining in compliance with italian law. they would be in favor of reducing the headcount through about 4000 early retirement and about 3000 voluntary buyouts over three years. a spokesperson for telecom italia declined to comment. sony's ceo wants to be a buyer in the wave of consolidation sweeping through the entertainment industry. he says is company recently talked to 21st century fox about acquiring the film and tv assets, but eventually lost out to disney. he spoke to bloomberg in las vegas. the strategy is to shore up our motion picture business, and then make sure
that any of the deals that we make concerning the future, that we are in the driver's the and not in the situation where we have to give up control of the assets we want over the years. juliette: kodak has joined the cryptocurrency frenzy sweeping the world. they are launching the kodak ain, which is described as cryptocurrency that empowers agencies to take greater control in image rights management. all the blockchain technology that underpins them are tenuous. that is your bloomberg business flash. juliette.k you, for records in a row closes on the s&p 500. it has been amazing to watch stocks around the world continue to gather pace.
although it should be said that volume has been reduced in each of the last three trading sessions. the question is, where is the momentum, is it fading? are investors really serious about getting in here? or is it fear of missing out? joinging me in frankfurt at the goldman sachs strategy conference is the global chief equity strategist. thank you for joining us. first off, on this continual street, amazing streak of new records in the u.s., but really globally, equities have been so strong. what is driving this. how is everything not already priced in for 2018? >> great question and fundamentally's, equities play on global growth. the consensus agreed that global growth is to remain strong. and synchronized this year, and
into next year as well, making it the longest economic recovery in both places. that is encouraging investors to move up the risk curb. that macrod volatility is incredibly low. attractiveery environment for risky assets like equities. there a huge risk that snaps back, especially with volatility so low, and the fact that we knew to expect synchronized growth last year. we knew about the tax reform at the end of the year. everything things to be priced in. is this a dangerous time to be getting into the equity market? peter: from a technical perspective, a correction is potentially overdue. we have had one of the longest periods in history, or the las sist 60 years, without a correction of five percent or more.
they could come from a change of expectations about the pace of interest-rate tightening in the u.s. you were interviewing earlier, talking about the view that rates could rise 4% in the u.s. the market is pricing something much less than that. if we are right that rates rise, it probably will not choke off the economic recovery, but it could trigger some type of reassessment of short-term risks. that is where potentially a short-term setback could come. guy: good morning. thank you for joining us. i want to ask you a question about sector rotation. yesterday in the u.s. with the bond market pushing north of 2.5% at the 10 year level we saw the market rotating out upon proxies, utilities, etc, rotating into financials. how much more does that trend have to run if we continue to see yields pushing up, as you suggest?
peter: i think that is a good point and one we have been focused on. generally we like financials. we think that not only is this a positive play on growth. they will benefit from higher interest rates or steeper yield curves. seene same token, we have bond proxies look vulnerable. europe is a good example of this. we are seeing a slowdown in their underlying growth rates. they are vulnerable to rising bond yields. we think that rotation will continue. matt: i want to boil down the consumer to the u.k. supermarket shopper. profits. the pretax
they seem to be positive. the economic outlook in europe is not only good, but more sustainable than that of the u.s. peter: stronger relative to trend. matt: exactly. how is the consumer looking from your perspective? peter: i think it depends on the precise market you are looking at. in the case of the u.k., the consumer is weakening. wages are relatively flat and inflation has picked up. the u.k. is a special case. elsewhere consumption is pulling up sa well. unemployment continues to come down and inflation stays quite low. we think the consumer will do reasonably well, of course, but a lot of competitive disruption in the retail space, given technological disruption.
so, a lot of price competition. that's the trend that will continue. matt: i am just laying in bed at night, thinking, do i buy equities? do i see grwoth continuing? i think of the consumer as the main driver of economic growth and corporate profits, i'm american. but where will they get that money? does that, at some point, change? do consumers, and i'm thinking of the u.s. now, start to borrow more? peter: borrowing levels have already gone up in the u.s. during the recent years. though interest coverage ratios are still very affordable. we have to bear in mind, there's been a boom in business confidence in the u.s. that's led to further employment strength, which will keep
consumer confidence high. one of the other big drivers of growth is investment spending and we have seen a ratio nation spending.n investment as investment picks up and capex picks up, that will support growth and the revenues of many companies that benefit from investment spending. guy: is the capex cycle going to be one of the big drivers this year? peter: i think capex will pick up. fewaw up until recently companies are investing in the rapid rate. ther'ee's been a long period of sluggish growth and technological disruption. we do expect capex growth to pick up. we have been looking at finding
companies that are reinvesting in their own businesses, particularly when the catch return on cash investments is ri sing. there's surprisingly few companies in those markets that fit into that bucket. but those companies reinvesting for future growth, we think they will do very well. to see you great this morning. thank you for joining matt at the conference. peter oppenheimer, chief global equity strategist at goldman sachs. we are minutes away from the market open now. expertsg's top equity will be joining us every day to look at the big market themes and individual stock stories before the open. joining us now are the equities reporters. good morning. >> good morning. guy: big picture, the market has been on a tear. has it got further to run? >> the insert we are getting is
yes. europe is one of the markets that is not in overbought territory. in overbought not levels. that could mean the rally still has legs and it could be more sustainable than some of the other regions that have seen more exuberance. guy: let's talk about the stocks we will be watching today. we were talking to the cfo of sainsbury. >> the stocks should be moving on the back of quite a few positive things. the integration of argos is going faster than expected. it looks like investors might be focusing on that. they did say they are cautious about the environment this year, which is understandable. that is one thing to look out for. guy: nordic mma takeovers of telecoms. >> we will see if that breathes some life into telco stocks.
they have been in the middle of the pack this year. guy: let's talk chocolate. >> yes, the offer will be raised for nestle. some of the u.s. operations to $2.5 billion from $2 billion. that is one to watch, for sure, the sector as well. guy: generally today we are expecting a reasonably flat open. that is what the fed is pointing to. we take a see if breather from the rally. it is the longest streak that november, so we will see if it breaks today. guy: the s&p could go either way. australia has broken. thank you for joining us. we will do this every day, bringing our stocks theme into the mix, letting you know what to expect as we work our way into the open. you can see all of these stories on your bloomberg. coming up, it's the market open.
guy: minutes to go until the start of cash trading. i think it will be an interesting session. the dollar is leave reasonably flat. the euro-dollar, 1.1935. a lot of supply coming into the bond market today, a lot of that from japan. the story seems to be surrounding financial sales and utilities. oil is another thing i want to mention. brent is trading just shy of $70 per barrel. it's up by 0.4%. the s&p.in a row for yesterday you saw a rotation out of bond proxies and you saw a
rotation into financials in other areas. that is the story below the surface. but does the s&p's six-day tear come to an end? we have five days up in europe. let's talk about what is happening with the moniter. we will see some mixed trade. london, 1131 out of the gate. keep an eye on the mtetals. keep an eye on the oil stocks. at the moment, the sector story looking more red than green. let's see what the ibex does, down by around 0.1%. i think you will see a similar story around most of europe today. the cax coming through in those kinds of numbers as well. the imap is largely red. it will be interesting to see
how the financial sector trends today. it was down yesterday. there are the financials. industrial sold off in australia and health care is trading up. consumer discretionaries are trading up. we see this rally in the oil price, just shy of $70 a barrel, generally quite red. interestingls are of the moment. consumer staples are off at the moment. his bond proxy financial story, where the balancing act of coming through from what is happening with the move higher in bond yields around the rough. we have that move north of 2.5%. we are now convincingly above it. let's get back to the equity markets. i do not think there is much to write home about. but i think the more interesting story is the stock level, where we are seeing the rotations coming through to where the markets are. lets look at the mrr and the
grr. what weet is are looking at. oil stocks, definitely biid. 3.48%. is up by financials are reasonably well bid. sainsbury looks reasonably well bid. let's show you the downside. the banks are in there, the hsbc in the royal bank of scotland. downside, bnb. persimmons, yesterday's story. ubm viola, trading up. these utility stocks are where you see money rotating out of that. that is what is happening with the bond markets. matt: absolutely. obviously, stocks have been on a tear, but the bond market
prospects in 2018. what do you think about the story of the day, the prospect of rising yields? >> i think it is an interesting term. we have seen a strong markets in the first week of january. there are clearly some issues that investors are beginning to look at. theme, you need guidance in inflation outlook. the market might be positioning for worse inflation data. a fundamental perspective, that is what needs to be focused on. friday is the key day for that. guy: yes, u.s. cpi. df inflation ticks higher an yields take higher, how does that change how i invest in equities? >> it will have an impact.
when the market moves away from the perceived view, you get changes. the initial position is that markets will sell off if we get andg pickup in yields inflation data comes through stronger than expected. i think as long as it is measured, equities will still be ok in the medium to longer term. matt: isn't that the trade-off, mark? 'm sitting here with cash to put to work, the last thing i want to do is put it in bonds, if we are looking at a bear market here, especially if i want get a return anyway. the only place to go is equities. mark: obviously, as an equity investor i would have to agree. i think what tends to happen initiallyck effect affects all asset classes, giving you a better opportunity on a very short-term basis to buy for scheaper. positionerms of how i
within the market -- i want to get this chart up. if rates go higher, how does that affect my cyclical value balance? cyclicals have been doing well. financials, you saw it yesterday with the s&p. markets sold bond proxies and bought into financials, etc. is that the rotation you would now expect to gain more traction? mark: i'm not sure. in general, cyclical assets and growth assets do well in rising rate environment because we are seeing continued stronger growth than expected coming through. so, apart from the initial shock see growthhink we'll assets doing very well in a steady raising right environment. guy: and in terms of how does this work for my geographical point of view, the u.s. is later in the cuyycle, do i rethink wht
i'm doing in the u.s. europe does not have much tech. how do i position myself around the world? mark: from the u.s. equity point of view, we have seen the tightening cycle began. if we were to start to see that occurring in europe or japan, then you've got the shock factor to come. it's counterintuitive, but i would say the u.s. equities. when i look at the possibility of buying equities i always think from a value perspective, maybe that is because i am a bargain hunter by nature. he was equities seem to be highly valued. -- u.s. equities seem to be highly valued. i realize there's a mis x difference, more tech stocks in the u.s.
what do you think of value hunting? mark: i think you have got to stick with strong fundamental work. if you look within the technology sector, i can see certain parts of that sector look quite stretched compared to history. example,ctors, for where we have seen the level increase bty 13 times. if you look at bigcap tech more broadly, it's trading at the lower end of its range because these big growth countries have not related. according to research by bernstein, bigcap tech has actually derated within the last 12 months, despite share price performance. thank you very much, we
will continue to talk about the technology side of that as well. glad you mentioned that because we will focus on it. guy: absolutely and that is what is coming up. you can watch this show using tv , as well as the video stream. you can also message us directly. up next, we are talking about tech. is apple something you should be avoiding next year as well? remember, it is the ces show as well. what are we learning about tech stocks from there? hawtin will be continuing. that is next. this is bloomberg. ♪
guy: we are 11 minutes into trading here in europe. let's look at how these markets are performing and get a sense of what is going on. around europe, largely kind of down markets. remember we have had five days up for the london market. it's flatlining at the moment. we will see how we close out, but at the moment the theme seems to be negative. australia broke a five day winning streak. the s&p, up six days in a row. yesterday, decent rotation on the back of the bond market moves. what is happening in tech at the moment will determine what the
year will look like. after four consecutive years about performance, can it continue? right now leading tech manufacturers are battling at ces to impress investors, journalists and ultimately consumers. we were talking about this during the break. does it have a lithium battery in this ere? because the the airline makes you take it out. let's talk about tech, away from ces and the razzle dazzle. will tech continue to have a great run in 2018? do i need to be more concentrated in the way i hold tech? you are saying other areas, semis, etc, they might not have such a great year. mark: i think over all
technology is not as overvalued as you might think, looking at last year.performed , but it is differentiated within the sector. or example, some of the gottenompanies have heavily rerate it. so, i think you have to be more selective in favor of growth and away from what is perceived as value. that will tie into the change in bond yields. i think investors will go for dividend yielding tech companies and that will become less attractive as rates rise. guy: what does that mean for microsoft? mark: i think microsoft straddles this directly. it has got great growth initiative. umbent some incom
businesses. i think it sits between the two. i still quite like it as an hatestment, amonst t incumbent group. guy: why don't you like apple? mark: it is a tricky one because it is cheap and if i was a pension fund manager i would be more seriously considering it. but as a growth technology company, it's far from growth. expectations of growth over the next couple years are in the low single digit topline. if the x is less successful than expected, that seems to be what out, growth could be lower than that. guy: it feels in many ways a bit like microsoft a few years ago, not generating topline growth, off a lot cash
and it depends on what kind of investor you are as to your attitude on whether or not you own it. mark: it does and it depends on what they do to change their roadmap. since the iphone, there's not been an enormous amount of innovation. even where there has been innovation, the opportunity for those innovative changes to he significantivt value are an iceberg. everybody is focusing on the service business now and that is coming under competitive pressure from companies like amazon prime, for example. guy: one thing people talk about is the regulatory risk. we talked about this yesterday. it feels like we are coming out of a 15 year regulatory cram down from the telecom sector. is there a discount i need to apply to some of these stocks because of the potential regulatory positions we could be
getting over the next few years? is that why the market almost did what it did last year, it is beginning to factor in external factors, other than what they can do with the top and bottom line? mark zuckerberg talks about this being the year he has got to fix facebook. from the investor point of view, that sounds serious. mark: he would say that because he needs to make sure he is saying the right things. it is such a large company that it is important he is seen to be politically correct. they are hiring 15,000 people this year to monitor content and they will spend a lot of money doing that. i think a lot of it has been factored in already. i think you are right. these growth names did not do better last year because of the perceived regulation risks. i do not think we will have a crashing done of regulation, which is going to heavily constrict these companies because to do that, quite frankly, it needs to be done on
a global scale and i cannot see a global initiative to crack down on the regulation within these businesses and not one country is going to want to risk being too aggressive. guy: the europeans don't really have a tech sector to worry about. mark: but they realize the internet is a vital part of their economy. if you decide as one geographic unit to climb down from a regulatory perspective and you risk the internet growth in your area, you are wil vulcanizing yourself. guy: do i overweight asia and underweight europe? big picture here. because asia has better tech companies and europe does not have many. inamed a couple already. but there are not many. is that a reason to be underweight europe in 2018? mark: i don't think it is right
to make a decision purely on how tech will do. if you were going to make that decision, then you just continue to stick with the u.s. there is a perception that asia is filled with amazing technology companies but in reality, there are very few global leaders in asia. there are some big players from a regional perspective, like the internet companies in china. but there are more global technology winners in europe than in asia. there's sap, leading their part of the market. there's very few global leaders in asia. guy: great to see you this morning, mark. mark hawtin, investment director joining us from gam. up next, we look ahead to the mid-cap sector. nejra joins us for that. shares did well on the back of that story, as you can see we are trading up around 40% on the
space though, let's find out. nejra: starting with the small-cap. the services maintenance and building group hitting the highest level since october, this after a forecast that 2018 profits would be ahead of market expectations. upside, i'mo looking at metro bank. it's risen the most since july last year, up 3.78%. group,down side, ig posting losses after the review for contracts of different providers uncovered areas of serious concern. are also trading lower. matt: thank you. we'll talk more about the global stocks rally and those headwinds bondrising yields and the market. i met a globa -- i am at a
goldman sachs conference. frank, thanks for your time. can i ask first about what's going on with this rise in yield environment. what does that say to you? to me, it says, if i have money to put to work, i will not put it into bonds. i'll have to find an alternative. frank: we are at a stage of the cycle where the global economy is ramping up growth and pipeline inflation pressures are building. thisarket is taking earlier. and therefore, you would probably incur losses if you invested in the core bonds. or jgbs. clearly, you need to look for alternatives and in this environment where actual inflation is still quite moderate, it is a perfect environment for equities and
definitely commodities which, by equates forr diversification within your portfolio. tthese are the late cycle winner assets you should on. -- you should own. matt: let's break that down and go deeper into commodities from a euro perspective. you have the advantage of at least the expectation that the dollar weakens, right? frank: that's correct. in a stage like this where outside of the u.s. global growth is accelerating, it's a phase where even though the fed has raised its rates, the dollar does not strengthen. ideally you have an environment larre you don't have dol strength, potential even dollar weakness and rising commodity prices. it is an ideal world for
investors with an commodities. matt: if we take away the currency factor and we look at equities, should we be bargain hunting? there are a lot of places that offer better valuations man the u.s.. though the s&p 500 feels like it is on an unstoppable tear. frank: there are two dimensions. one, there is value. value stocks usually outperform in a period of rising rates and rising global inflation. that is one thing to consider. tthat is usually banks and cyclical industrials. tech is on its own mission and partially where the s&p has outperformed anything else on the planet, given the relative weight of stock shares in the u.s. clearly, these two things matter. matt: german stocks, how do
german stocks look to you? how do u.k. stocks look? these valuations are cheaper. frank: these stocks are definitely cheaper. the trouble is, the tech weight is pretty small, part of the reason the dax has underperformed to the s&p. that's beneficial to the german index -- i think 35% of the index is queued towards chinese growth, towards international growth and for as long as the euro does not become too strong, german stocks should benefit from this global environment. the u.k. looks very different. ,f you look at the ftse 100 there is a lot of energy exposure. that should do well within this environment.