tv Bloomberg Markets European Open Bloomberg August 15, 2022 3:00am-4:00am EDT
china unexpectedly lowers steep rowing costs as industrial production forecasts slump. $532 million, that is the daily prophet of oil producers. and investors look to this week's fed minutes, including esther george and neel kashkari. what insights they will include into whether the fomc goes big on rate hikes next month or not. the rates on futures are holding soft, getting 0.3%. this may be due to what we are compared to seeing on the u.s., but also counterintuitive to what some of the stocks in asia did after that surprise interest rates cut from the pboc. it is clear that the investors are trying to maneuver that
disappointing data print out of china, that surprise interest-rate cuts means that there were some economic troubles and that filters the rent has an impact on global growth worldwide. jackson hole brought the next catalyst for some of the stocks in the u.s., but also treasuries. if you look at the ftse, getting some 0.3%. -- gaining some 0.3%. iron ore under pressure. gas pretty much under changed -- unchanged. we look at the rhine river and the global water level of that. the problem is also economically, if you have a barge or some of the ships that have to go through the rhine river, you need to put less weight to pass onto much shorter water levels. overall, we look at the global impact not only that the pboc
has on everywhere else but also on will. and if we have across asset check, you can see is and p futures down 0.2% and it is crude oil we are looking at 1% lower. china's economic recovery weekends in july as fresh covid outbreaks weighed on consumer and business spending, prompting the central bank to deliver surprising interest-rate cuts. let's bring in enda curran. what is your main key take away from the data? enda: weakness across the board. weakness in retail sales, industrial output, investment, and more signs of softening in the all-important real estate sector. the month of july was meant to be when china's economy started to turn around and we have gained momentum from the big lockdowns earlier in the year, but it has not been playing out that is what forced the central
bank this morning to respond by cutting its key interest rate for the first time since january. that move is not expected to be a big game changer for the chinese economy. given what is happening with covid zero and the real estate sector. but the move shows how policymakers are affected by the depth and breadth of the chinese economy and they are trying to pull whatever levers they can. this suggests ongoing downward pressure going into the second half of the year. francine: what does it mean for what policymakers could do next? we thought they weren't going to do much from now on. enda: this is a big question, how well they respond. the market has responded with large-scale stimulus we have seen in the past in china. the zero covid language has been
unchanged. they are willing to take economic pain in return for the keeping of the virus under control. on the real estate sector, they are not dealing out or operating on a large-scale bailout you might have seen in the west. the question is where the u-turn will come. it is less of a focus on the central bank and more on the growth and spending side of things. local governments have used up their allocation for the year, but will they be able to grow more and spend more money on infrastructure projects? francine: what does this mean for the global economy? enda: it has to be negative. again, the past downturns, we could rely on china to be a question for some of the global growth, given the record of stimulus in the economy. that is not happening this time around.
we are in a global recession right now, basically the u.s. jobs market because china is offering a pivot not like they have done for previous downturns. francine: thank you. let's get to the key market drivers with wei li, blackrock chief investment strategist. we look at valuations, but let's with china. how worrisome is this for the global economy? wei: we have the covid policy and also exports decreasing as well. thinking about global economies shifting from goods to services, that would decrease demand of exports from china. we are expecting exports from china decreasing to single digits for the next two years. all of that is also why we are seeing policymakers wanting to
come out, but we have not -- the expectations for growth this year. francine: no one predicted we would get this from the pboc. are we going to see a much more active pboc? wei: it is not just the pboc, but also the fiscal side of things. the reality is that where we have excessive easing in interest rates on production projects, policymakers have been somewhat prudent. they might want to run past their efforts, but we are not expecting a set of easing, which is why our expectation for growth this year is with a three handle and for the next two years, we are talking 4.7% average growth and you will have strict policy on the covid front. this year will be lower, but because of the restart, next year will be higher.
francine: we have a great chart that we are looking at, chinese bonds. i have to wake up. it is a monday morning. this is chinese 10 year bond. you can see that rally. do you buy into any chinese assets right now? wei: currently, we are staying close to benchmark when it comes to china allocation. we are neutral and china equities, china bonds. the balances of holding china bonds in portfolios is that when the rest of the world are hiking rates, the pboc is cutting rates. but the income potential, the annuity cut given on how interest rates has about this year. francine: we have talked about the 60-40 portfolio, but what will be the strategy for markets next month? wei: the focus is on central banks and central-bank policy response. also inflation dynamics. so far, we have seen the 60-40
portfolios beating earlier in the year and rebounding somewhat in recent weeks. we believe this is a bear market rally. we wouldn't want to change that because -- chase that because any -- from central banks is premature at that point. francine: what is the entry point? wei: we want to see a proper acknowledgment from central banks about the trade-off between growth and inflation as they make policy decisions at this point, and we also want to see them tuned into inflation. if they acknowledge the trade-off and decide to fight inflation with slamming the brakes, that would be inevitable for growth. so far, we have only seen the boe doing that. the ecb and the fed have not yet done that. we are hesitant to give that into the markets. francine: thank you.
11 minutes into the european trading day and you can see european stocks holding strong, 0.3% higher despite the pboc and china. the biggest companies in europe are due to report there profits. we are joined by april roach. can we expect price increases from companies like henkel? april: henkel reported slightly better than expected results this morning. they raised their organic revenue forecast for the full year. however, their earnings were impacted by input cost headwinds. and they face a dilemma in that they could sacrifice -- or raise prices higher, which could put longer-term growth at risk. there is also the question of
whether consumers would accept higher prices. if they move too far, the consumer could move to cheaper ground. francine: dear makers like carlsberg, how are they managing lesion? -- beer makers like carlsberg, how are they managing inflation? april: i have cut therefore your outlook a stunning strong performance year-to-date. the brewer is strong on trader recovery in europe market and strong results in the asian market as well. it will be interesting to see how the brewer affairs with its first half of the year results given the rise in commodities and energy cost pressures. the second half of the year could be more challenging for carlsberg as consumers face rising energy costs. francine: the corporate payments markets also becoming more devasting. we have the dutch payment firm adyen coming out of the report
on friday. what are we expecting from them? april: they're moving to tech stocks, which could mean good news for adyen. they handle transactions to companies like uber and mcdonald. they ended last year with a strong note when more people were expected that online. this increased their market share, and analysts have noted its strong u.s. presence and the reputation there and the rollout of new products still boast well for positive growth. francine: thank you. april roach with the latest on earnings. comments of the risk of our euro area inflation reaching the highest level since 2020. wei li, blackrock global chief investment strategist, is still with us. let's go back to some of the earnings and there is such a
lighting effect from one we get the earnings to what it tells us about the future economy. do you worry that this is crunch time for the economy? wei: this past quarter, on the surface of things, earnings are holding up better than previously feared. but if you look underneath the service, the sales numbers are better than the earnings numbers, so that suggests a margin pressure. also energy and financials, earnings growth or close to flat. some outperforming sectors, but the broader markets are not doing as well. we expect to see a recession forecasted for the euro area translated into very little earnings growth. that currently is not being forecast. francine: does that give us an indication of what the economy could do in the future? wei: some of the earnings
speakers, they are backward looking, but their guidance on how well they can pass through the rising costs to the end consumers and their forecast of margins can give you an indication about the future. our expectation is that margins would come under pressure with the rising production costs and labor costs. companies that are able to pass some of that rising production cost through to end consumers -- francine: for how long? wei: that is the point. they have this kind of environment where they can do that now, but we cannot expect them to do that forever. francine: we talk about the water levels of the ryan -- rhine and that illustrates how tight these global energy markets are. wei: the energy crisis is hitting europe in particular, but also the global economy as we head into winter. we are looking at a prospect of energy rationing facing europe.
and potentially growth is stalling in the u.s. francine: this is not priced is in the markets? wei: in terms of equities, no. there are technical factors supporting this bear market rally. you talk about some of the hope for soft landing rather than expectations of soft landing. market is not pricing this appropriately, but the credit is pricing in some amount of growth slowed down, which is when you think about portfolio construction, we talk about quality equity adjustments to portfolios. francine: do you make a difference between european equities to u.s. equities? do you need to go to emerging markets? wei: currently, we have a minus one in allocation to european and u.s. equities.
modestly underweight because we are waiting for that dovish pivot on a sustained basis that is not coming through. also earnings are way too positive. even including emerging markets, we have that rally. francine: thank you. that is wei li joining us this morning with equities abound for the china and u.s. earnings. let's get to the bloomberg business flash with laura wright. laura: saudi aramco has reported the biggest quarterly profit of any company anywhere. they reported $43.4 billion for the second quarter. the company is using the windfall to reduce debt and invest in an expansion of its production capacity. their ceo says the company expects oil demand to continue growing for the rest of the decade. japan's economy recovered to its
pre-pandemic sizes in the second quarter with growth picking up after covid curbs were relaxed. gdp grew at an annualized pace of 2.2%, below the median forecast of 2.6%. consumer spending, which accounts for more than half of japan's economic outlook, outgroup. tributes continue to pour in for anshu jain, former due to bank co-ceo -- deutsche bank see -- ceo. he has been credited with building deutsche bank's investment lending business and turning the german bank into global trading powerhouse. francine: thank you. coming up, the u.k.'s opposition labor party proposes and energy frees as the country coast -- moves through a cost-of-living crisis. this is bloomberg.
>> the much-maligned 60-40 portfolio. >> the 60-40 portfolio, generally speak, we what extent because it is something that that will markets will need. >> we need to give it more time. there might be better ways to go than 60-40, but on the base case, it still makes sense. >> i think they are increasing it dramatically at the moment if they are looking for secure yields. >> going into other real assets, real estate, private credit, can be healthy addition to the portfolio and help diversify your return. 60-40 defense the portfolio.
francine: the u.k.'s main opposition party wants to extend britain's windfall tax on oil and gas companies to fund a total freeze on energy bills over the winter. joining us now is lizzy burden. what can we expect? lizzy: keir starmer is responding to the criticism that there is a policy vacuum. you have boris johnson as a laying duck, and even the former prime minister is laid out what he would do if he were in charge. keir starmer wants to continue the windfall tax, which was originally labor's idea that the conservatives stopped, and used that to freeze energy bills, which was painful for consumers. this is what is driving inflation. the fact that labor is pushing for this really keeps pressure on the two candidates to replace
boris johnson, because this is a popular idea. there is a pole in the times today showing that this goes very well with conservative voters, and when you have got inflation high and companies raking in the profits like aramco, it goes well. francine: it influences policy? lizzy: you have seen them drop this policy before, but liz truss is not open to a new windfall tax. she is the frontrunner and she is unlikely to have that passive she wins. francine: and ftse strength. that is something we have not seen in a long time. lizzy: it is. didn't by the summer of discontent. we have the transports break -- transport strike and now the barristers as well. truss says the government has to take control to avoid a wage price spiral, but it is a
difficult argument to make one the public sector is not in control of price and not contributing to a wage price spiral. we are likely to get more data this week on the jobs inflation showing that the labor market is still tight, and patient is still climbing -- inflation is still climbing. francine: we see the labour party move on this. lizzy: i'm the one hand, this is the party of the union, but they are meant to be a government in waiting, so they cannot look like they steamrolled it. francine: thank you. . coming up, water levels on the key point of the rhine river are expected to stabilize at low levels. more on that story next. this is bloomberg. ♪
china unexpectedly lowers -- $532 million a day is the daily prophet of saudi aramco in the second quarter. investors look at this week's fed minutes and speakers including esther george and neel kashkari. what moves will they make? let's quickly take a look at what equities are doing. interesting to see that we are holding up to gains in europe. the ftse gaining. in the u.s. a different story because we are seeing different pressure. two stories to follow closely. china -- china unexpectedly cutting interest rates in the face of poor data. let's get to the sectors that are moving the most. we have a good look at what oil and industrial metals are doing.
health care and utilities on the up but basic resources, insurance and real estate down 0.6%. european power prices continue to hit new records in the fallout of the ukrainian war. we hear what some of our guests have to say. >> the storage -- the gas storage is not sufficient. >> a crisis is being produced by the cut off of russian gas which tells us how volatile fossil fuel prices are. >> gas prices will remain high and it could result in some disruption. >> we cannot magically get gigawatts of renewable energy before winter. it is a matter of saving energy. >> there should be more obligatory measures to reduce consumption. >> the first step is to become independent of russian supplies
which and the end can only be managed with additional imports was lee of lng. >> we are seeing the reduction of gas production. >> the effect of the crisis will be that europe will be further down the path to emissions reduction. francine: joining us now is a bloomberg's energy reporter. what is the latest with the rhine level? >> the water levels of the rhine river dropped to just 30%, 11.8 inches. that is lower than what was expected. this low level is expected to remain until at least the middle of this week. that is hampering the supply of vital commodities such as coal to germany and switzerland.
that increases the demand for gas. gas prices increased in the midst of the crisis. francine: germany has outlined measures to save energy. are there different details to the blueprint we had a couple of months ago? >> germany seeks to save gas consumption by 20% for this winter. that in germany, they are two weeks ahead of schedule. hoping to make sure there is no disruption this winter. germany is proposing to lower the temperature to just 19 degrees celsius for the winter
to make sure we conserve energy further and avoid supply shortages at the peak demand time. francine: overall, we talk about the rhine river so much, does this point to the fact that the market is so tight that it takes massive proportions? >> we do have lower levels of the rhine every summer. this summer, you have a situation that is much worse so the level is the lowest in many years. but gas supplies from russia are flowing at just 20% of capacity. we have less gas available. that coincides with the overall energy crisis. francine: great, thank you so
much for the great insight and the latest on energy. let's stay with that jet -- let's stay with that energy story. we are joined by michelle della vigna. when does the pressure ease off if it does? michele: it is going to be very difficult for the pressure to resolve. although we can take a more positive outlook while of this and think this is the chance for europe to create a more independent energy system with renewable and bio energy, it could be a transformational moment for europe. on the others, i think the solution does not come in the short term. it could take years to build a more independent energy supply. and in the meantime, the difficulty to find lng will
continue to weigh on european gas prices. francine: how much tighter do you believe the markets could get? michele: i think it will depend on how this winter pans out. last winter we were lucky. it was a warm winter which saved us problems in the spring. this year we don't yet know how the weather will look and we also don't know how much russia will ultimately import or export during the core of winter. my sense is we are at the time of key uncertainty. russia wants your to feel uncertain and anxiety around the winter. i think we will need to see month by month. we have a solution for the long-term. it is renewables and hydrogen based. in the near term we are subject to the market. francine: when you look at reimagining europe's energy
system, how long does it take? is there a timeline -- we are trying to wean ourselves from russian gas but this will take years. michele: it takes time to completely rebuild an energy system but if i can book back in time to a similar example. 20 years ago the u.s. was one of the most energy disadvantaged countries in the world. it was the biggest importer of energy and every energy industry was leaving the country. because of high prices, shale was developed. i think europe can achieve the same in a similar timeframe. it will take about 10 years for renewables and green hydrogen to become big enough to start to really bring the costs down in europe. we think this will mean a 50%-60% saving to the european
consumer and a halving of energy imports. it could be a revolution. francine: that means what exactly? who would be the biggest winners and losers in this? michele: the biggest winners would be the consumer and the industry in the long-term and in the near term the utilities and the big energy companies including the oil and gas majors who can develop the infrastructure. it is infrastructure based on solar and wind. mostly in the advantaged countries. a connection of these systems and then a creation of the green hydrogen industry which is at the core of all of this to make sure we can face seasonality but also allow heavy transport and heavy industry to utilize this
renewable power. and the energy system, especially -- i think would be advantaged in all of this because it is capex that we need. something we have not seen in the last seven years. francine: give me a sense of how much money we need to do this transition. is it over $10 trillion? can the european union afford to pay this? michele: the number is $10 trillion, that is what we need to complete the transformation of european energy system out to 2050 and in the meantime achieve net zero carbon. to achieve the two core goals of europe. the cost at the peak will be around 200 billion so it would be comparable in size to what we have seen in the recovery fund. it would be an extension of the recovery fund into the future.
we see a bias towards decarbonization. we believe it is achievable. we believe there is enough private capital that can finance this development. francine: this is by 2050. what needs to happen in the next two years for us to hit that goal? michele: supportive, clear and consistent regulation that supports renewables and green hydrogen. in renewables, we already have a good frame across europe but we need more support for green hydrogen and we need the better connectivity in europe. we are talking now about a gas pipeline that goes from portugal to germany. i think we also need the better integration of power. we need power grids that can go west to east and north to south and also we need in the
longer-term green hydrogen pipelines i can do the same. we need conductivity. we need the low-cost renewable producers in europe to be able to supply the rest of your with cheaper renewable power. francine: thank you as always for joining us. coming up, saudi aramco posted the biggest quarterly profit of any listed company ever. we will have the details next. and this is bloomberg. ♪
francine: welcome back to the open. we are 44 minutes into the trading day and we are seeing a reversal or pressure but we are holding onto the gains. the focus is on china and the pboc's pricing with the cut because the economy is worse than expected especially when it comes to house prices in china. saudi aramco has posted the biggest profit that any company has posted. our energy market reporter joins us now. what is behind this record
profit? is there anything apart from the record oil price? >> the high oil price is the main factor and that boosted the earnings of not only saudi aramco but a lot of the oil companies. we saw a lot of gains from the downstream segment which is refining segment creating gasoline diesel. transportation fuels. we saw the demand surge in the last few months with a lot of shortage of those products as people came out of the pandemic shutdowns and started moving around a lot getting back to the office and ordering things. we saw a lot of tightness on the refining sector and those earnings jumped up and that did help boost aramco's profit. however it is really the crude oil production sales really made the quarter for them. francine: how will they be spending their money? do we know what they are investing in? >> they are investing on
expanding the capacity to produce more oil. they have a couple of natural gas projects going on which will help them in terms of providing gas to industry and the kingdom for air-conditioning and petrochemicals. they are expanding the oil production capacity from 12 million barrels to 13 marriott -- to 13 million barrels a day by 2027. investment is going to be an increase but they should be on the low end of their forecasted capex for this year. looking at maybe $40 billion for the year and $10 billion for the quarter. they are increasing spending but not by as they could. francine: give me a sense of what investors are looking to hear from them in terms of future plans. >> potentially about the dividend. we are hearing from some analysts talking to bloomberg television earlier this morning that they expect a dividend increase later this year.
aramco did give bonus shares out to investors but that was a small bump. some investors may be looking for more information about what the dividend policy is -- could aramco increase that? the fact that they have brought down debt, they are not going to be maxing out on what they could have done on investments so that may give them a little more room. we will see what aramco management says to investors and analysts in a call later on today. francine: thank you so much, our bloomberg middle east energy reporter. let's get straight to the first word news. laura: china's central bank has unexpectedly cut its key interest rates as it ramps up support for the economy weighed down by covid lockdowns. the need for additional stimulus was underscored by official data shortly afterwards showing retail investment and production down for july missing estimates.
water levels on the rhine river are expected to steady an end extremely low level this week adding to europe's energy crunch. many barges cannot transit past the marker point west of frankfurt when the water level is below 40 centimeters. according to data it is ready yet 35 10 to meters and is set to drop to 30 today. the uk's opposition labour party has proposed extending britain's windfall tax to fund a total freeze on energy bills over the winter. the plan to be a -- to be announced later today will put renewed pressure on the government to react. the typical annual household energy bill could top 4200 pounds by january. salman rushdie is starting to recover two days after being stabbed at a lecture in new york. ap has quoted his agent saying the author is now on the road to recovery. he is said to have been removed
from a ventilator on sunday and is now able to talk. the author suffered serious injuries on friday after being stabbed multiple times shortly after taking the stage. tributes are pouring in from wall street and beyond for anshu jain. his death at the age of 59 was announced on saturday after a five-year battle with cancer. he has been credited with building deutsche bank's investment banking business and turning the german line dark into a global trading powerhouse. global news 24 hours a day, on air and on bloomberg quicktake, powered by more than 2700 journalists and analysts in more than 120 countries. this is bloomberg. francine: lar in london. coming up, u.s. lawmakers go to taiwan for a two day visit testing china's reaction after nancy pelosi went earlier this month.
francine: welcome back to the open. 53 minutes into the european trading day and we are seeing, if not a reversal, some tempering of the gains we saw earlier in the session. the dax down 0.1%. a u.s. congressional delegation has landed in taiwan for a two day visit testing china's reaction after nancy pelosi's visit earlier this month. joining us now is bloomberg's bruce einhorn. what are the latest details about the delegation and china's response? >> this is the first delegation since the visit by nancy pelosi.
nancy pelosi, the speaker of the house, the first speaker to go to taiwan in a quarter of a century. it was a big deal. this is senator ed markey from nasa choose its who is known as a climate hog. he does not have a high position in the senate. he is chairman of the subcommittee from the foreign relations committee in charge of the pacific. with all due respect to ed markey, he is not nancy pelosi. how will china react given that this is the first visit since she arrived? when she went there were days and days of military exercises. francine: we are expecting more military exercises. >> the chinese defense ministry announced today in the last hour that there are more exercises taking place.
unlike last time they have not specified the exclusion zones, areas where the chinese military would be conducting the exercises. we do not have a lot of detail. it is important because it does show that this may be the new normal for the way that beijing responds to visits to taiwan. in the past there would be congressional visits and we would not hear about it. there was a visit by bob menendez last year and it did not cause much of an issue. certainly not at the level we are now seeing. it is possible this is the way that china deals with things in the new era after the nancy pelosi visit. it is worth noting though that the other significance of this visit is that shows the strong bipartisan -- the strong bipartisan support for taiwan in the congress even after the visit of nancy pelosi. clearly from the way things look in washington, there is a lot of
upside to showing support for taiwan. francine: great, bruce einhorn with the latest on china and taiwan. add is that for the european market open. this is where we are. "surveillance: the early edition " is up next. u.s. indices in terms of futures, commodities, oil and iron ore are falling after disappointing data and the surprise interest rate cut from china. the treasury yields taking up higher and the bond curve remaining deeply inverted. dollar gaining. this is bloomberg. ♪
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