vonnie: top stories we are covering from the bloomberg and around the world. trade tensions intensifying. china is vowing to retaliate after president trump threatens tariffs on another $200 billion worth of chinese goods. we'll discuss the impact of trade on the economy and much, much more with the chief u.s. economist for morgan stanley. and later in the hour, we will hear from the c.e.o. of investments, his outlook on deutsche bank and the european inancial sector. we are 30 minutes into the trading session. abigail is here, and we're continuing as we began the week. abigail: we have a selloff on our hands at this point. we are at session lows for the major averages. we have the dow down 1.5%. the s&p 500 down 1%.

the tech-heavy nasdaq right now on pace for its worst day since the end of april. all of this, of course, on fears, concerns around developing trade tensions, continuing trade tensions between the u.s. and china. of course, the dow has been hit by this the most, finishing down more than 1% last week, lower yesterday. this is a six-day chart of the dow. this is the first time the dow has dropped six days in a row since march of 2017. and over these six days, losing 2.8%, the worst stretch since the end of april. so investors are very concerned that a potential trade war could really dampen global demand for various products. if we look at some of the movers afect by the possibility of this trade, not surprisingly, some of the material stocks, u.s. steel and freeport both down. boing and general motors also sharply lower. boeing, of course, an aircraft company, and it is thought that when china does announce the retaliatory tariffs, it's very likely it could be against the

aircraft space. those shares lower, weighing on the dow. we hop into the bloomberg, caroline, it's really developed. this is a one-year chart of the dow. beautiful up trend last year with the buyers in control. the index above its moving averages. this year, lots of volatility on many fears, including trade war fears. yesterday, above the 150-day moving averages, now below those moving averages. i talked about it yesterday, it's below those moving averages, probably down to the 200-day moving average in that range in yellow. finally, caroline, let's take a look at the commodity complex. oil, copper, soy beenes and wheat all sharply lower. in fact, soybean and wheat on pace for the worst days since the summer of last year. these simmering trade concerns really hitting the financial markets on this tuesday, caroline. caroline: you're right. risk aversion is the name of the game right near europe as well. 19 minutes to the close of trading, and what a day for the stoxx 600.

what's falling? it felt like the miners, materials companies, really underperforming, down by 2%. tech stocks also under pressure. this is a concern that any of these trade issues could spill into this particular sector, in particular down by 1.55 percent. check out these particular industry groups on the red. ray of green is consumer staples, but the green is few and far between. let's look at some of the key stocks on the move. there is one green that i want to look at. the swiss drug maker why,? a little bit of m&a flavor for them. they're buying a stake they don't already hold in a company called foundation medicine. $2.5 billion for the fact they took the 43% they didn't already have. what's in it for roche? getting the right drug to the right patient at the right time. this is why they're buying into this u.s. company. eanwhile, at one point, it was

down 20%, a record day in terms of the downward trajectory. why? it's all about profit warning, this coming from the u.k. department store, not a pretty day for them. however, it's not a pretty day for the british pound. let's keep the eye on another u.k. asset, because the british pound at the moment currently off by about .6%, a key vote was thrown out yesterday. this is really undermining the u.k. government led by theresa may. she doesn't get that focus on the brexit deal done. this is all about parliament having a meaningful vote after what the brexit deal looks like with the e.u. at the end of the day. and notably, there's another key vote tomorrow. all eyes on that, will she once again be pushed out by what the government is wanting, what the rest of the u.k. parliament is wanting. keep an eye on swedish and norwegian crona. this is all about the currencies most exposed to

trade tension and commodity. vonnie: trade tensions reaching a new country. another $200 billion in chinese imports. former u.s. treasury secretary larry summers weighing in on what a trade war would mean for the global economy. >> trade war is not likely to be large enough that it's -- that its direct effects damage the economy, profoundly. but its psychological effects, effects in increasing unconsent could be very serious, and we're certainly getting later in a cycle of escalation. vonnie, with us now. ellen, larry summers saying it's going to be the treasury and so forth effect. however, we are starting to get tariffs actually hitting from next month. at what point does it hit the real economy? ellen: we're seeing it play out

today. markets, risk, the market impacts are apparent, but there's been no impact on the real economy yet. we haven't actually put in place these tariffs yet. but on july 6, 34 billion of the first 50 billion announce that had hit more than 800 products, 800 chinese goods, gets implemented. we estimate that by the end of this year, that is impacting g.d.p. growth by .1. you might say so what? the economy has been fundamentally sound. we're getting good, real data on the economy, but there can be cumulative impacts that start to build here. what about the next round of $50 billion? the next round of $50 billion. what about the $200 billion is that president trump announced last night? and then the kicker would be, if you add auto tariffs to all of that, which we have readied in our pocket to deploy depending on what europe's response is to the expiration of the steel and aluminum

tariff exemption. you can start to see impacts build on one another, and certainly we know the federal reserve has not taken into account possible trade impacts. he was saying it was a low risk before, and probably become a more prominent risk. but i doubt that any of the policy makers have started to think about these impacts in terms of how it might be reflected, but certainly going into the september meeting, they've got to build in these july 6 tariffs that are set to take place. vonnie: does this continue to escalate? it's difficult to know what the president is going to do next. but there are 39 legislative days before the midterm. can' ford to, or the opposite, does he want to? ellen: well, we are certainly in an escalation phase right now. it's hard to argue any differently. but whether we can or not get to the next sort of deescalation in this will depend on how the negotiations play out or what the response is from other global leaders.

our expectations that we do get to a deesque story phase, but it's not before we get some rounds of tariffs into place. so i think certainly, i don't rest easy, and i don't think anyone should rest easy saying, well, this is just the typical tactics, threes how the negotiations play out. this is sort of how you play the game. because, of course, there is the risk that escalation never ets to that deesquer to phase. vonnie: where do with see the economy hit first? will we see inflation in terms of certain goods and the prices going up? or is this really something that hits the investor and business mindset? ellen, i think this is already impacting investor mindset. we see these periods on the back of tariff announcements. and certainly certain sectors, when you take that list of, you know, thousands of goods and start to boil it down into specific categories, sectors,

you know, investors can see who would likely be impacted, and so we're seeing investors parse through that now. in terms of the economy, you know, i'm concerned about the price effects of tariffs, because traditionally, as the monetary policymaker, you look rough price effects as transitory. but when you're in late-cycle economy, with inflation pressures that are already building, knocking on the door of the fed's 2% goal, if tariffs start to add to those inflationary pressures, can you sob certain as a monetary policymaker the upside is due to tariffs and how much is due to inflationary pressures naturally building in the economy. so the risk is that you overreact as a monetary policymaker in terms of raising rates faster because of higher inflation. that would be a 2019 story if that's how it plays out. vonnie: do you think in any -- due any anticipation we will flare powell any sort of service paid to the issues of

trade? will we see any movement in terms of the hawkish tones we heard just last week? ellen: in a way, we've already seen some of this play out f. we think back to early this year before the march fomc meeting where even governor brainerd, one of the more coverish on the board of governors, gave the from head winds to tail winds speech, and there was much more enthusiasm around the tax stick husband earlier in the year. now wee heard policy makers pare back that tone. still, sticking to the gradual removal of policy is necessary, fund mental economy is sound. but the chair and others have highlighted that this was a low-risk before that has become a more prominent risk, but as yet, they don't see it impacting the outlook. but at some point, the writing is on the wall, and they need to build in the first round of tariffs into their outlook. vonnie: what happens when we reach the zenith?

when there isn't an impact more that you can actually put tariffs on, do things escalate beyond that then to sort of treasury buying? does china start selling treasuries? if you look in the library, you'll see there's only so much that the u.s. can put tariffs on. ellen: right narcotics sense, president trump choosing 10% on $200 billion in chinese goods, well, flyers way quantitatively for china to fully retaliatory in kind, because they don't import $200 billion in goods from the u.s. but that does mean that you have to then turn to a qualitative response as well. and we actually heard something like that mentioned by china today in response to last night's announcement of the $2 hundred billion in tariffs. you start to think about trade restrictions in other ways, restrictions on companies, investment restrictions, and all of those are something that

certainly china could have at its disposal, because it just can't match up quantitatively. we import much more from china than china imports from us. vonnie: right. ellen is sticking with us. ellen zentner from morgan stanley. we'll continue our conversation in a moment. in the meantime, let's get news. day lee: vonnie, democratic senator elizabeth warren has moved to block president trump's nomination of a new chief for the consumer financial protection bureau. she's currently at the office of management and budget. warren has put on hold the nomination. she wants her to turn over documents about her role in the administration's zero tolerance immigration policy. new home construction rose to the fastest pace in a decade last month. residential starts rose 5% between the annual rate of 1 oosm 3%. the only region was to see a growth, where stocks rose 62%. eanwhile, a proxy for future

construction. immigration will be the focus when president trump meets with lawmakers today. they want to end the separation of families caught trying to enter the country illegally. the president is showing no sign of giving up his policy. and in the u.k., british prime minister theresa may's government is trying to head off a potentially humiliating defeat over brexit. officials will meet today with lawmakers pushing more for over the divorce process. hey won't be offering any more concessions. they vote vome on an investment. global news 24 hours a day and at particular tock on twitter. wer powered in more than 150 countries. this is bloomberg. caroline? caroline: coming up -- tomorrow at the e.c.b. forum, mario draghi speaks alongside his counter part at the u.s. open.

and a posey panel moderated by stephanie. capture it live on the markets for you now t. is a down day. we are seeing $250 billion wiped off the s&p 500, worst day since may 29. it's the worst day in some weeks. ever single industry group is movement. we've got a risk-off trade and a search for the haven. this is bloomberg. ♪

caroline: live from london, i'm caroline hyde. vonnie: and i'm vonnie holiday. this is bloomberg markets. ellen, we mentioned the fed, how difficult it is to model

out what's actually going to happen to the real economy. of course, we had the tax cuts, and so there is a thought out there that maybe tariffs might outweigh some of the benefits that we saw from tax cuts. ellen: i think this is a really common question we get from our clients. at what point do the trade tensions, especially if they continue, outrisk the benefits we get from a tax cut from. a business perspective, i might have just had some corporate tax rate drop, and i might have had a lot of plans for the benefits from that, but perhaps i still hold off on some investment, because i might be sitting in one of those industries affected by possible tariffs i might have uncertainty around my pricing structure going forward or my supply chain disruption, so i might hold back on some of that investment until i get clear. so certainly we might have seen stronger investment numbers than what we've been getting. on the household side, one way you could look at it, thank

goodness we got the tax cuts, because they've been helping us weather higher gas prices. so by our estimate, the rise in gas prices this year stand to shave off about 1/3 of the benefits from lower taxes, personal income taxes. so those lower taxes are helping us weather the sort of added tax from higher gasoline. that's one way you could look at it. but another interesting thing that we've looked into for this year is that in any given tax year, about 75% of workers overwithhold. so think about it, maybe not many of your viewers, afluent, educated, well paid viewers, probably aren't used to this waiting for the big tax refinanced to come in the first quarter. but for the bulk of americans taxpayers, they like giving the government a tax-free loan for the year and giving the sum back in the first of the year to spend on vacation and

splurges and big-ticket tusms the reason why we are overwithheld in any given year is because we try to get it right on our w-4, which is the form you fill out when you get employed on how many deductions you're going pay. many of us should have requested a new w-4 form after these tax changes to adjust the withholding. but ale let you guess how many average americans tanks went to their employer and said, hey, i need to change t. probably not many. many of those workers that are typically overwithhold will now be grossly overwithheld this year. that's money that's owed to them, on top of the extra we've been getting in our paychecks. that's going to come in terms of the wind fall in the first quarter of next year. record high tax refund season, we think they'll be about 8%, or 26 or 27% higher than they were last year. that's a big jump in income that's coming in the first quarter. vonnie: what is the danger, is that inflation will really pick up at that point? are all of these things going

to outweigh each sandore we'll have this big pass that we're already seeing, or is it really going to pick up steam? ellen: if i were the fed and looking at late-cycle economy with pressures building, tax stimulus that might make consumers more price tolerant, which might make it more easy for companies to pass on prices, affect tariffs and how much might get passed on. if i'm a policymaker, then i'm going to be absolutely confident that at the very least i'm going stay at or above my % inflation goal. why would i not be worried we're going to see them break out above that? one, the inflation pressures we've seen so far have not been broad based. of course, this matters when you're an economist. it's very concentrated in particular sectors. they pick up the inflation we've seen. he other one is wage growth. wage growth has been rising and continues to rise, but at this point, still remains at a level that would not suggest inflationary spills over to the

broader economy. for those two reasons, i would not be expecting a breakout to the upside. vonnie: if the trade flattens, are you expecting we're going see the yield between two-year and 10-year continue to narrow that much more, we're not going to see any pickup any time soon? ellen: that is the view. there's been a call all year of the flattening of the yield curve, and i think there's more in store for that, and that's certainly his view and our view based on the economy conditions that we think will prevail. vonnie: give us your global perspective. i know you're the chief u.s. economy, but we're about to hear from the e.c.b., they're all in italy. we've got powell is going to be there. we've got the central bank of australia, all going to be monitoring tomorrow. but what are you sneeg terms of the central bank policy and the differentiation with what we'll

see between the u.s., who's going to have one rate hike the rest of the year, versus a holding back? a potential for holding back from the u.k. as well. many pushing off the rate hike as soon as august. ellen: i think it's going to make it more difficult slog for the fed when they're the ones that are lifting rates further and creating a larger differential. i don't expect that to be something policy makers jawbone about specificly at this meeting. i think we're going to hear a lot about the frisks trade at this particular meeting, because that is the risk of the day as they're going into these talks. but the fact of the matter is, it does become a more difficult slog for the fed this f they find themselves alone on the global stage of removing economy, and particularly when it's creating flows and nishese e.m., which can have secondary feedback. i think it's still very careful, but i think they'll reiterate and other leaders

will say the strength of the global economy is still in place. one thing our u.s. has been saying it's not just this is turning into the cap ex cycle, it's perfect as well. so there's real positives from cyclical p.e. vonnie: ellen, we have to have you come back soon, because it's going to be an interesting summer. our thanks to ellen. this is bloomberg. ♪

vonnie: this is bloomberg markets. caroline: now it's time for the bloomberg business flash. we look at some of the biggest business stories in the news right now. in germany, audi has named its sales chief to be the interim c.e.o. he's replacing rupert stadler, who was suspended after being arrested in a diesel emissions

investigation. prosecutors reportedly tapped sadler's phone and arrested him because of fears he might have tampered with evidence. roche has agreed to buy 43% of foundation medicine it doesn't already own. the price, $2.4 billion. that represents a 29% premium to yesterday's closing price. and that's your bloomberg business flash. w, still ahead, davide is up next, talking italy and the outlook for deutsche bank. this is bloomberg. ♪

>> live in new york i'm vonnie quinn. caroline: live in london, on caroline hyde.

markets.loomberg let's check in with the first word news. >> the trade disputes between the two largest economies is getting worse. china fell to retaliate after president trump threatens goods. on another -- another batch of goods. kim jong-un is in beijing where he will brief china about his meeting with president trump. it is his third trip to china since march. the opec meeting in vienna is shaping up to be one of the cartel's most contentious effort. russia says they should consider raising output by 1.5 million barrels a day because the market is a most balanced. -- ministers are discussion

discussing a smaller increase. economists are growing more skeptical. down from 60% in may. officials told a -- will hold a policy meeting this week. global news powered by 2700 journalists and analysts in 120 countries. this is bloomberg. vonnie: a precarious time for financial services. the yield curve is flattening. ecb is real but -- withdrawing stimulus. great to see you. let's begin with this point about trade tensions. how much risk is there in the aggressive posture president has

taken toward china and the intent on pulling back from international agreements that has annoyed the europeans? >> there is high risk. globale 40 years of growth which has been based on global trade. basically strengthening of the international corporation agreement. someone wakes up and screams and shouts and tried to change what ultimately has benefited the world. it is going to be an adjustment. you're going to see it in lower bond yields. less means banks can lend in the united states. measureshese ultimately are inflationary. fund of flows that

benefit the most global banks like jpmorgan? >> the issue, it depends on the global savers. the united states has a deficit. it is printing more current see around the world. a 6% deficit. it needs to come in the states from foreigners to fund the economy. flows.ld see short-term long-term it is not clear. it will damage the competitiveness of u.s. economy. >> do you think there is risk the chinese would take a retaliatory policy against u.s. financial interests if these tensions heat up further? >> china has pegged its currency

to the u.s. dollar which does not make much sense to be honest. i will sell you goods can you buy my goods, i buy your treasury. that is the deal. if donald trump only looks at one side of the equation the chinese can say i'm going to stop buying your dollars and that and eufinance it yourself. >> how close are we to that? what is goingnow to end that being. weekendd easily see a dollar simply because the $1 trillion that needs to be financedcan already domestically. >> i want ask about italy. .our funds had a rough month

was that because of italy? >> as a firm we did well. our strategy had more exposure. surprise.ok us by minister is ae very solid person. it is beyond the populist rhetoric. seen themready proposing a finance bill to the european commission which is matching with the former finance minister did. >> italian financials repriced, 20% lower after may 15. they have rebounded a little bit but they are down. is that the right level? >> given the uncertainty. the reason is because the price of the two-year treasury yields

in italy might be overdone. >> if there is value are you increasing your position? >> we have been increasing since the selloff. >> italian financials make them up. >> overall they make up 10% which is a bit overweight. >> where were they before? 67%.ross europe we had we reduced it to 30. european banks were down around 25 percent. year to date less than 3%. doing pretty well relative. around 115,ancials, the lows were 70. the highs were 600 through

lehman. we are off a good value assuming rates will rise. >> how about deutsche bank. you have said equity and credit were uninvestable so long as u.s.ement was committed to investment banking. the new ceo is doing what you wanted, withdrawing from u.s. investing. is it still uninvestable? >> here the question is to see execution implementation. how fast they can cut from the u.s. to shore up revenue costs in the core part of the business. the first decision taken is positive. i think they were aligned with the former ceo wanted to do. now it is about execution. speed education will tell. >> if you -- are you buying get?

>> not yet. i want to see numbers first. what did you think there was no growth for the equity? what's they like an underlying strategy. you have a financial that makes no money. the key problem is it doesn't make any money. it is stable, solvent, it just doesn't make any money. >> why is the credit uninvestable? >> it is not. when the bank stalls because it doesn't make money people question sustainability and the cost of funding rises. suddenly the profit shrinks. whichre interconnected might be the need to bite the bullet and shrink faster. >> to cut their way to success. >> yes. once we have established a couple of things. clearly there is a lot of trade

tension. you have the yield curve flattening. you have the credit cycle nearing its inevitable end and the ecb withdrawing stimulus. whatthat as the backdrop is attractive? >> what is attractive are strong u.s. financials. they have a competitive edge. they are posting their return around 10%. they will keep printing numbers. , threeivalent in europe or four years behind where the u.s. cycle is the which will benefit out of interest rate normalization. >> let's name some names. what is good? what we find attractive are the alternatives basis. blackstone.

they are generating a free cash flow yield. ,hey are not incorporated investors can buy them, so we love them. flow. cash in europe we like the company with exposure to rising rates. basically what happened in the u.s. that we think will happen in europe. we are talking about union suisse.bmp and credit >> in the credit world? >> we like europe. today, apple for apple, same credit risk across the 60 largest financial institutions in the world. in the state's 3-4%. in europe, 7-8% which is very

attractive. perspective you we better off taking the risk. it pays you almost as much. >> why is it underpriced? >> it is seen as complex. 80%. they will always feel more comfortable at home. >> that explains it. >> exactly. fascinating interview. thank you as always. , anng up on bloomberg exclusive interview. her take on the central bank. sachs,ear from goldman lloyd blankfein.

and a check on the big decliners today. down, trade tensions ratcheting up. losers, it is a down market.

>> live from london, i'm caroline hyde. vonnie: this is bloomberg markets. had larryof course we summers earlier warning developed countries are badly equipped for another recession.

>> the issue that has preoccupied monetary policy, the avoidance of inflation is no longer the top issue. the top issue is the maintenance and getting to full employment. that is going to be a more difficult challenge because of the sharp declines we have seen around the world in the neutral real interest rates. maskeds that have been by the substantial fiscal restrictions we have seen. popularized the fear of secular stagnation. some thought you walked away from that. i thought you were doubling down on it. >> that is right.

some people think the economies are growing. that shows the stagnation theory was wrong. i have the opposite view. it required in norma's fiscal stimulus to get the economies to grow and that demonstrates validity of the second most stagnation. when ie to what happened first talked about secular stagnation. you have had far more fiscal expansion, far lower long-term interest rates. we have asset prices that have increased in an unsustainable way. it is not the economy has healed itself. the set of developments predicted by stagnation theory have happened. many make the mistake of condemning those developments as inappropriate because they are excessively expansionary

fiscal policies. >> many would say we are looking at wage growth. we are starting to see some signs of acceleration and wages. give it some time. who put it the way you just did come out in a we have seen an enormous perspective fiscal expansion. creatingces have risen a wealth of fact. seere not going to increases in the stock market. guard be they stay on with policies regarded as improvement. then we keep this going for a while.

we are living with a brittle economy. downturns happened. the odds are 20% each year. the normal playbook is to cut interest rates by 500 basis points. caroline: fascinating conversation with larry summers. we have more perspective on central banking. matt miller is live. matt: i'm here with kristin forbes. the former member of the bank of england monetary policy community. i have heard brave reviews about the session you were speaking in. classes.t of these things ie interesting have heard you were talking

about, we need to rethink about the way we measure inflation, the way we calculate the phillips curve. how do you see that? ,> since we are in portugal prince henry the navigator, what would he have done if they kept over predicting the latitude? do you throw away the instrument ? or do you fix the instrument to make it work? we need to try and fix our model. they have not been working terribly well. they have been over predicting the return of inflation. what we need to do is take better account of what is going on. our models have been too focused on domestic slack and expect that to explain inflationary trends. you are in, you

cannot just look at domestic verbals. you need to account for the rest of the world. matt: mario draghi spoken seem to be thinking of europe as a vacuum, not as interrelated as it is. do you think that is why we haven't seen the convergence? area, smaller economies needs to do this. part of the discussion is underlying inflation. some of that is temporary. there still is a lack of underlying inflation. .here is still work to be done some of that in countries such as the euro area, there is still slack in the economy.

there is still unemployment room. that is back to the old model. here,they are so focused they are focused on price sensitivity. in europe larry summers was saying he is urging central bankers to look at the labor market and job growth. all these traits being suggested by you and dr. summers, are they going to change the way they do business? to relate what summers was saying we don't have a great natural of what is the rate of unemployment? we all need to be cautious. at otherd to look indicators and be modest in terms of what we do know. there is general agreement.

.hat is what i got he is looking at broader indicators. developsw data relative to the forecast. the u.s. that needs to find a new way to measure unemployment. >> on that there was interesting discussion. unemployment is only actively participating in the labor markets. a lot of people drop out of the economy. don't worry about inflation, maybe if you don't necessarily think it is measured the right way. true for the big economy of the world? >> i would take a slightly different approach.

i would argue we should focus on underlying trends and what those price pressures are that will persist. matt: what do you think about the price asset bubbles? abouttainly, i think accommodative monetary policy, as folks get back to work, but it is cost. you have to rebalance that. if you live in an economy, it could get people back to work. about asset price bubbles within the tool is microeconomic policy. matt: back to you. vonnie: fascinating stuff. oil is lower.

economies, and the meeting, chris, great to see you. beforee the trades on friday? >> i think we are going to go higher. despite a strong dollar, having oil traders concerned that third-quarter earnings, ultimately as long as it holds that level, it can go higher. calculating the different effects on the one hand? you have trade war's escalating. definitely fractious meeting coming up. >> i am wayne china as something that is going to take some time to develop.

if they do occur it is going to be tit-for-tat right now. there is a concern with russia and saudi arabia coming in adding that production level. saying that they are going to that, they might break away and produce on their own. i believe will lead to higher oil prices. >> where do you see the price and the intermediate turn? to be atk we are going 64:50. if that does not hold 62 is the base. theo 68 and a half before july 4 holiday. vonnie: all right. that is today's futures in focus. caroline: fascinating conversation. oil is down. the market continues. the european close coming up following stocks in the red.

tech sector underperforming as trade tensions continue. similar moves, if you are looking towards the haven, the pound plunging lower on the back of the seven-month low we are hitting. .he prime minister losing u.s.uro down against the dollar. more of that with the european close. what's a gig of data?

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this is the european close. mark: the top stories we are covering, stocks slipping. trade tensions intensified. president trump threatening tariffs on chinese imports. bowing to retaliate forcibly. and little progress and brexit talks. a call for a contingency plan. happening, it is wonderfully encapsulates the mood dominated by the escalating trade spat. we're