tv Bloomberg Markets European Open Bloomberg July 18, 2022 3:00am-4:00am EDT
equity trading. i'm tom mackenzie in london. the week starts risk on, central banks take center stage, the ecb battles to restore credibility with its first rate hike in a decade. the political alliance propping up mario draghi's government in italy crashes down. plus, investment rif, china getting the cold shoulder from global investors as president xi's policies backfire. let's check on the futures after a decent day on wall street friday, for the week european equities ended marginally lower but the s&p 500 ended up more than 1.5%. teachers with gains of the .8% despite concerns about the politics of italy. we look ahead to the ecb's decision on thursday. economists expecting 25 basis
points from the ecb, the boj expecting their decision the same day. that was a 100 gaining .4%, a rebound in iron ore and copper. china pledging to support the economy and officials weighing on banks to ensure liquidity for property developers as the mortgage strike continues. the ftse 100 gaining, the cac 40 gaining by .6%, and in spain gains of .7%. let's see how things are playing across assets. the s&p futures currently getting .6%. building on the upside we saw friday. the dollar softening and that is part of the risk on mood we are starting to see, down .2%. pointing to relief possibly for the euro and yen. we watch the italian 10 year on the back of that political risk, july 20 is one mario draghi will
find out whether he can persuade the coalition to stay together, or if we get election. 3.34 on the italian 10 year, up significantly but below the 4% threshold that caused angst within the ecb. brent $103, gains of 2.29%, despite the fact that president bynum came back from sadia arabia saying he thinks they will release more oil onto the markets. let's go to mark cudmore, good morning, what is in focus for you this week? mark: good morning, it is risk on out there as long as you are not looking at italy. we are talking about why this relief rally might have legs but i wouldn't get too carried away. this is a chart of cftc s&p e-mini net positioning over the last two years, the market is net short based on those futures.
many are saying this is extreme, when looking at their z-score's they are saying this is extreme short positioning and you look at this end ago, fair enough. watching the same chart on a 20 year window you might say we might be getting a little stretched the last two years but in the grand scheme of things, this position is not that big at all. we are much more bearish in the early stages of that pandemic. and those were great times dubai. normally when we get to extreme, it is a reverse indicator but we are nowhere near extremes. one caution for those who have used this, the most extreme point is september 2007, which basically picked the peak of the market pretty much within about a week before the great financial crisis. if you are in a severe or
fundamentally negative situation, which we might be heading into later with the extreme tightening financial conditions, then you don't want to fight positioning too much. we are stretch based the last two years but not in the last 20 years. tom: maybe more room to run for this relief rally, but with those important caveats, our mliv managing editor mark cudmore, thank you. joining us now is peter oppenheimer, global equity strategist at goldman sachs, good morning. let's start with the three month fee where you are cautious, is there anything you are seeing in the markets or over the last few days particularly around inflation expectations which seem to be having lower which makes you -- ebbing lower which makes you more optimistic? peter: in the short term i would still be cautious. there is a lot of volatility and
a lot to play for. on the positive side, most indicators suggest investors are pricing some kind of recession now. it wasn't the case earlier. i don't think a deep recession is being priced yet. as we just heard, most of the measures we look at when positioning on sentiment have showed significant deterioration but not really at extremes. the market rally has a lot to do with the hopes that inflation is now peeking at least at the headline level. you have seen a big rally in longer-term rate expectations suggesting that the markets are priding -- pricing a big cut during this period of weakness and that may be premature. tom: let's unpack your views on inflation. you pointed to this maybe we are starting to see the peak. are you convinced we are there, or do you need to see deep data heavy before you are more
certain. peter: there are two issues. there is the inflation rate which most people and economists look at. in the u.s., we have seen that rise to the highest level since the early 80's and it may be close to a peak, but the data we got suggest that core inflation is still rising well ahead of most people's expectations, and is pretty broad-based. i think it is premature to believe that inflation will come down quickly or that the pressure has eased for central banks to continue to tighten. one inflation rate may start to come down, but the reality is prices are still rising, maybe at a slow rate, and that may still need tighter financial conditions before we can see a real stabilization. tom: we are looking ahead to the
ecb later this week. the consensus seems to be they are behind the curve when it comes to the need to tighten, partly why you are seeing euro-dollar near parity, how much of a headwind is a weaker euro for european equities as we get into earnings season? peter: well, of course, this cuts both ways. many see the euro as being positive as it helps boost revenue of companies, many of which are dollar earned. on aggregate, 5% for the euro against the dollar would raise the earnings by 2.5%, so it is a net positive from an earnings perspective. if you look at a 1% slowdown in global gdp weighted by where companies are selling their products, that would not european or -- knock european
earnings by about top percent. if the euro is weakening when global growth is weakening, the net effect is a negative one for europe. that is the relationship we have seen play out over recent months and will probably continue. the key thing for europe is really about growth and the point at which investors get convinced that the rate of deterioration in the earnings cycle is stabilizing, and inflation is peaking, and at that point, i think we could see reasonable recovery which is why we are more positive on a 12 month view. tom: i wonder how much of a fly in the ointment btp could be, how concerned are you about the risk from rome? peter: it is clearly an issue. we saw a few years ago how much markets focused on this issue, increased uncertainty and raised spreads. we are in a very different environment now, coming from a
point where interest rates are extremely low and all as he rates -- policy rates are negative lbs likely to rise this week. -- albeit likely to rise this week. ultimately, this is coming a very difficult time for the ecb and european economy when it is facing some of other growth challenges and importantly, the issues around gas and energy. so, i think the cocktail of factors europe is facing, geopolitical risks, energy supplies, concerns about potential fragmentation and widened spreads is obviously a negative. but we have to also recognize that private sector balance sheets strong, bad spelling -- hank balance sheets are strong. a good deal of that negative view is in the price. tom: negativity in the price,
the spread between the italian 10 year and the german bund is about 210-250 basis points. an eight basis point move in terms of the yields up this morning. peter oppenheimer of goldman sachs will stay with us, we will get more of his calls after the break and analysis on the applications of that policy in china. a redhead right now, haleon op ening at 330p after a spinoff from glaxosmithkline, they are a personal health care products company. we will continue to watch the action. china risks a period of financial de-globalization as they blame president xi jinping's policies for increased wariness. this is bloomberg. ♪
years, president xi jinping is facing the risk of a period of deglobalization. investors point to his policies as the reason why. sophia, what is the sense you are getting from investors in europe about the appetite or lack thereof, for china at this point? >> good morning, it was interesting to zoom out and just talk to people with a global view. the sense i am getting is rather than debate when to buy the dip in chinese assets, which is very much what everyone was talking about last year when the stocks and credit market were collapsing, it is about should i be reducing exposure to the country? it has become, is this a country i need you have -- i need to
have in my portfolio. the bond market is the second largest in the world and the stock market is the second largest. investors are telling me you can actually get exposure to china without buying chinese assets via japan, europe or equities in the u.s. and that is a much more attractive kind of investment opportunity now for investors with the global view. tom: avoiding direct exposure while still trying to get some kind of color in terms of china for those portfolios. what kind of problem could this pose to she should in, -- to xi jinping, he has been relatively effective at encouraging foreign capital to enter chinese markets? >> when he became president in 2013, he opened up channels for foreign investors to buy equities on shore.
this story has been about china's opening up under him. the problem is that foreign investors have never had such a large portion of chinese assets, around 10% at its peak earlier this year. i love this quote from matt smith, when it comes the supertanker of western capital moving away from china, xi jinping has to encourage the domestic market and investors to fill that hole, and the question is can they, when the loss of household wealth in china is so tied up with the property market, will they want to invest in stocks and bonds if actual household wealth is falling to one side. the question is, what can replace this foreign investment if we get that supertanker looking elsewhere.
tom: check out that peace online and on the terminal. still with this is peter oppenheimer, equity strategist at goldman sachs, have the policies of xi jinping undermined the appetite for exposure to chinese markets, or is this a short-term phenomenon and we wait for regulatory clarity? peter: i should say first of all that china has performed very well as a stock market in recent months, turning around massive underperformance in the public that proceeded. we have been underweight china for some time because it has prevented a lot of value however there are three concerns related to china. one of them is covid and the zero-tolerance policy, that is had a big impact on growth. shanghai contracted around 14%
year on year in the second quarter alone. property and growing concerns about the vulnerability of the economy and the banks to the property sector. and third as you have been discussing is the gradual trend toward deglobalization, or regionalization was is one of the things we talked about in our postmodern cyclopes. one of the differences we envision going into relatives of the last 20 years. these factors will be a challenge, it is one of the biggest beneficiaries of liberalism -- globalism, but there is value in the stock market and we need separate that from the economy. and i agree that there are good ways of accessing exposure to china through other markets. tom: ok and before the break we
were talking about how you are relatively defensive on a three month basis, 12 months you are looking to add, what falls into that basket? peter: first, i would say why we are being more positive. bear markets always need a trough, as your recession is bad and earnings are revised down. when things look most bleak is when equities start turning positive, usually as inflation and interest rates peak. we expect that to happen and a recovery in equity markets. in that context, two things will do best to begin with. things that are the utmost high beta and so, cyclicals and [indiscernible] of the market. second will be the things which have fallen the most. there will be a decent relief
rally in the most hard-hit areas around technology particularly if we see interest rates come down over that time horizon. tom: peter oppenheimer, chief global equity strategist at globe and sat -- at goldman sachs, opportunities but with caveats around recession and the data, in technology over the next 12 months, cyclicals also where you can be adding along that time high-rise in. we will bring you earnings, including novartis, chipmaker asml, and sap. this is bloomberg. ♪
tom: welcome back to the open, 22 minutes into the european trading day read risk on, gains of almost 1%. gains on italian stocks, the etsy gaining -- the ftse gaining .4% despite political rancor. the dollar is down, bloomberg dollar index by .5%, feeding into risk on. nordea, the biggest nordic bank with a beat on second-quarter earnings.
vodafone is up .7%, they sold off part of their towers business in new zealand for $1.1 billion. deliveroo cutting guidance, that stock is off 1.2%, year-to-date down 60%. it is a big week for european earnings with a number of major companies due to post reports. for more, we are joined by our reporter who has been looking at companies, particularly novartis, and health care companies. they are usually guarantors first steady growth, can they keep delivering? >> novartis is expected to take a hit from the strong u.s. dollar but adjusted for those effects they are still on track for single-digit growth, and
roche, which reports on thursday, might even raise their guidance so k-swiss -- swiss pharma could yet again proved to be a safe haven. tom: longer-term, it has been painfully strong for many of these companies. looking at chipmakers, we are all concerned about getting chips onto the market, how is asml? >> they said they will delay spending and that could affect asml's performance. investors could be worried that demand his f -- has peaked, so any forward-looking comments from asml will be key to watch, tom: remarkable that we could be looking at a surplus of chips now.
when it comes to software, higher interest rates typically pressure technology, does sap live through this? >> sap has a lot of recurring revenue, but a lot of their portfolio is tied to back offices. and back offices are the first areas that get hit in times of economic downturn. bloomberg intelligence therefore expects sap new license sales to decline. sap might not provide the protection it usually does. tom: thank you very much indeed for walking us through some stocks to watch ahead of this earnings season as we move closer and get more details for these companies. maybe something have a safe haven still within the health care space. .9% gains across european equities. the u.k. and ftse 100 up 75 basis points, just 25 minutes of
the session. the ftse also in positive territory despite the uncertain fate of mario draghi. euro-dollar with gains of . 6%. sectors are led by travel and leisure, 1.6% and let by the defensive sectors as we were discussing. the farnborough airshow takes off today. we are live at that event next. this is bloomberg. ♪
we are 30 minutes into the european trading day. the week starts risk on as central banks take center stage, the ecb battles to restore credibility with the first race type -- rate hike in a decade. mario draghi's government in italy comes crashing down. china is getting the cold shoulder from global investors as president xi's policies backfire. it is risk on, commodities and oil are up, basic resources, copper and iron or as well. july 20 is when mario draghi will address parliament. the dax is gaining 105 points, up .8%. ftse 100 in the u.k. is up a little over 1%. let's see how things are playing out across sectors. energy and the top of the list
would basic resources gaining .2%. pressure from china on the banks to support property as that mortgage strike continues. health care another defensive's the green. let's get to the farnborough airshow now, back for the first time since 2019 with a convention showcasing the best of commercial and military aviation. anchor guy is at the event -- with a run of excellent interviews throughout the next hours. what is the top take, who are you going to be speaking to? guy: we've got some great guests lined up, we will speak to the ceo of boeing commercial and the ceo of airbus later on as well. this is a shell that is focused less on the airlines and more on the airline manufacturers. both sides of that equation are
ultimately facing the same problem, it is not a demand issue, it is a supply chain issue. the carriers are short labor, but also the manufacturing sector which has supply shortages on a number of fronts that are impacting this industry. supply chain is where the purpose is going to be. yes, it is farnborough and boeing needs a win, we are hearing delta may deliver an order for 130 maxes, which is certainly greatly is for that company. the supply chain is where you want to focus attention. one of the biggest suppliers is spirit, it is boeing's biggest supplier and a huge supplier to airbus as well. they make frames for the 737 max, and aircraft boeing is keen to get back up to full capacity. tom gentile, i knew i was going
to make a mess of this, is the ceo, i apologize, but very nice to see you. you are the ceo of spirit aerospace, and you are the guy to talk to about supply chains, how is it going? tom: it's been a challenging three years, the max was grounded, then there was the pandemic. we also saw a huge drop in production. in 2019, we produced 606 max units, in 2020, we produced just 72. and so, we saw a huge reduction in revenue and cash flow, we had to lay off workers. it was challenging in 20 and 21. but we are starting to see production rates increase on narrowbody aircraft. mystic travel -- domestic travel has started to recover in the u.s. and europe. that means the max, the 737 and
the a320 are starting to go up. after a disappointing 2020, 2021 saw about 160, this year we are projecting 300. on that a320, the production rates never went below 20 in a particular month now we are at 50. >> how is financing for the supply chain working or not working right now, how stressed is the supply chain? tom: they are stressed. there is a cash conversion crunch is how i would describe it. in 2021, with rates going down, we could not stop the chelating orders. the supplier still had cash but because we had so much inventory we started destocking.
with narrowbody rate starting to go up on the max and a320, suppliers have to hire people and by raw material. they will not get the cash for six to 12 months, so there is a working capital crunch. we have seen more bankruptcies in the last three months than during the whole pandemic. guy: in terms of what happens next we will see a potential economic slowdown. it could be severe, how does this industry that is in the process of ramping up have to deal with a recession? how does that economic turn affect this industry? tom: it is always an impact, airline balance sheets are already stressed they took out a lot of debt during the pandemic. that means they have less ability to make new purchases. with fuel prices going up, there is imperative to get next generation aircraft that are more fuel-efficient, so the
sustainability agenda requires it, so there are competing forces. we expect narrowbody rates to go up, and if it goes up slower that might not be so bad because it gives the supply chain more time to adjust. guy: how is the narrow and wide body mix going to change? you provide systems for the 737 max, there is a longer-range version coming, aircraft with huge amounts of range, how does the mix between wide bodies into exchange as a result of those aircraft and how does that feedback to spirit? tom: narrowbody have always been the workhorse of the industry, let's say 60% of the total aircraft. especially as we, the pandemic, domestic travel coming back for international travel, you see a bigger mix of narrowbody's. within you a320, xlr and max 10
with longer range, some of the routes that used to be served by wider bodies will shift to narrowbody. we expect narrowbody to account for 75% even 80% of the mix going forward. most of our backlog is narrowbody aircraft. guy: the big story is the dollar, you produce in dollars, but a lot of the industry is geographically hedged. nevertheless is there an impact to the industry from the strong dollar? tom: most of the transactions are in dollars but some costs are in local currency. in the u.k., spirit has 4000 employees. those costs are in pounds, so with dollar revenues appreciating, and pound costs depreciating, that helps margins in the short term. guy: tom, thank you for catching
up, we look forward to success. we will see that delta order potentially coming through. we will be speaking to some of the great ceos of this industry. stand deal coming up from boeing and guillaume faure later on. we will be talking to united's chief sustainability officer and rolls royce to understand what the next phase of the industry looks like but we have been hearing about the desire for more efficient aircraft. back to you. tom: guy braving the heat for us, 39 degrees. i have been told that tom will be wearing a panama hat. we will bring you the latest live. this is bloomberg.
uncertain environment. >> i think debt crisis is a low probability because we have seen the central bank continue to be supportive, they continue to come out with new tools. >> a lot will depend on decisions taken around gas and energy. >> we will do our utmost to avoid the severe impact to our gdp and our employment rates. >> the opposite scenario which has to do with negative supplies of energy, we might have recession next year. >> if you are to keep your eye on the direction and make the right investment it will be all about selection. >> if the economy is not entering into a deep recession. tom: bloomberg tv guests on the potential for the european recession, that was our mliv
pulse question. mario draghi is under pressure to reverse his pledge to resign as soon as this week. the former ecb chief will address lawmakers on wednesday when he is expected to declare his intentions. tommaso, a crucial week for italy, what will we expect from draghi on wednesday? >> ciao, at the moment we expect draghi to confirm his resignation when he speaks to lawmakers. but we are two days away essentially from his speech and things can change because there is going -- growing pressure to stay. there is a petition online with or that -- more than 400 bears asking draghi tuesday. this morning, there was an
interesting column by the former prime minister saying, you have to stay, or your legacy will be hard. tom: that pressure on these former ecb chief tuesday in his position. but the reality is about the coalition, what we know about the horsetrading going on right now? >> the leader of the five-star has been aggressively [indiscernible] the center-right parties are saying we don't want to run anymore the country with the five star. but on the surface, the five-star could be divided. we are hearing of growing opposition inside five-star to support draghi. it is a chance for him to change his mind by dividing the five-star and having part of the
party supporting the government. at the moment, this is unlikely, the most likely scenario is that he will resign. but in italy, everything is possible. tom: everything is possible in italian politics, as the couple of days to go until the prime minister makes that final decision. our milan bureau chief getting us up to speed on how things are evolving. let's bring in silvia ardagna, head of economic research at parkways. -- barclays. what is the italian risk factor at this point for the euro zone? silvia: good morning. it is clearly a challenging time. we would hope to have more news on the potential for russian gas to be restarted. but it is also the week for the
ecb to hike policy rates and unveil the anti-fragmentation tool. the talents comes with the fact that if italy goes through snap elections, it would be very difficult for the ecb to use its anti-fragmentation tool to shield italy from any market [indiscernible] already challenging to understand what is a fair spread versus what is not. we have published in our research showing the range can be very wide. but right now the challenges are magnified. tom: we are looking at a spread of about 220-230 basis points, what is the danger level that could trigger action from the ecb with the caveat that they
will face pushback from the germans another northern europeans to using this tool if this comes down to politics. silvia: this fragmentation tool would allow the orderly transmission of monetary policy. we are clear on that. in our research, we said it will not be used if the spread widens during a time of political crisis in italy. it is not just because of german resistance but a legal issue. the ecb has the prohibition of monetary financing up government , and in this circumstance, but gray area would be too great for the ecb to intervene. perhaps the usefulness of this tool would be to shield other countries from spillovers of the italian political developments.
and so the ecb in that case could use the tool. tom: when it comes to the rate hikes, the markets are expecting 25 basis points on thursday. we have heard of the canadian central bank and fed officials suggesting that frontloading could be effective to get back to about neutral, and then you can start cutting. why is frontloading not being considered by the ecb? silvia: the sources of inflation are completely different. this is a supply driven stock. it is linked to energy and supply-side bottlenecks. in the euro area there is still some negative [indiscernible] and we should not forget that inflation expectations have rean chored after being anchored to
the downside for 10 years. we don't expect the ecb to be frontloading, we expect 25 now, 60 in september, another 25 in october and then we think they will pause. mild recession is our base case, even with russian gas flowing again, but there is risk for much deeper recession and this has implications for the medium-term inflationary outlook. tom: your base case is for mild recession, that assumes that gas continues to blow even at 40%, but what gives you the confidence the recession will be mild? silvia: the risks are to the downside and we keep flagging that. under our base case we have inflation picking in september then gradually declining and nominal wage growth that will finally start supporting consumption. we still have negative real wage growth over the next year, and
that is why we think tightening of financing conditions is going to be way too decisive is not warranted. we have a mild recession hope because we have nominal wage growth, gas flowing back to europe, no rationing. tom: policy remaining overall accommodative as the ecb looks to play catch up with the fed. the central banks with a 25 basis point hike on thursday. thank you, silvia ardagna, head of equities research at barclays. control of the u.k. conservative party, candidates clash over taxation policy in a tv debate. more on that story next. this is bloomberg. ♪
conservative party leadership debate. >> there i -- this something for nothing economics is not conservatism it is socialism. >> you are taking money out of people's pockets, that is no way to boost the economy during a recession. tom: we are joined by our reporter, who came out on top from last night's tv debate? >> it felt like rishi sunak did pretty well with his presentation and he comes across as slightly more charismatic. liz truss directly acknowledging that she is not the best presenter but still making her case for tax cuts.
another candidate came out at the bottom according to polling. a pretty mixed bag but sunak came out on top. tom: andrew bailey not escaping the ire of some of these candidates. >> liz truss argues that the bank of england has done a poor job of taming inflation. when she was tested on her tax cuts, her reply was it is a monetary policy to control inflation. so, clearly the boe might be subject to change if she was to become prime minister and that was a key point in last night's debate. tom: breaking down who is likely to position ahead of that final leadership contest, they
continue to vy for the prime minister ship of the united kingdom. you are seeing gains across european markets of more than 1%. s&p e-mini's up 5.8%, nasdaq futures gaining 1.2% on the tech heavy index. that is it for the open, surveillance is up next. worth noting, the bloomberg dollar index is down .5%, part of this risk on move. the pound is performing well as well, gains of .8%. stay with us, this is bloomberg. ♪
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