About this transcript: This is a full AI-generated transcript of ‘Economic Isolation’ Plan for Iran, Farage Wins UK Election — The Opening Trade 8/14/2026 from Bloomberg Television, published August 14, 2026. The transcript contains 14,318 words with timestamps and was generated using Whisper AI.
"Friday the 14th. Good morning. How are you doing? Let's talk about what's on the agenda. Bond investors sending a warning message to Scott Besant. Is he listening? America apparently has a new plan to defeat Iran. We're going to hear about it next week. And OpenAI sees revenue surge ahead of a..."
[00:00:00] Speaker 1: Friday the 14th. Good morning. How are you doing? Let's talk about what's on the agenda. Bond investors sending a warning message to Scott Besant. Is he listening? America apparently has a new plan to defeat Iran. We're going to hear about it next week. And OpenAI sees revenue surge ahead of a potential IPO top.
[00:00:21] Speaker 2: Let's have a check in on the market set. European futures pointing to getting to two tenths of a percent, close to three tenths after a flat session by the close yesterday, still near record territory for European equities. Brent continues to be in focus, of course, as we think about what comes next for Iran with that potential plan and details next week. Currently at eighty seven dollars a barrel, closing on an eighty eight, just up eight tenths of a percent so far in the session. You're seeing a little bit of modest strength for the Japanese currency dollar down right now, just over a tenth of a percent versus at the end one fifty nine twenty six. Of course, accounts that we continue to monitor. The countdown to the open trade starts right now.
[00:00:56] Speaker 1: Friday morning. Good morning. What do we need to talk about? We need to talk about that auction yesterday. The U.S. 30 year bond auction firmly in focus. Everybody's trying to figure out what message it is sending. The bond investors are sending to Scott Besson, the U.S. Treasury secretary. Is it you've got a sustainability problem? Probably not. Is it maybe at some point you should think about maybe either increasing revenues or cutting spending? Yeah, probably that is the message. I don't think it's a message surrounding the Fed. But the question now is, is the Treasury secretary listening? Skylar, do you think he is?
[00:01:40] Speaker 3: I mean, I think he's certainly listening and watching. I'm not sure there's a lot he can do in terms of containing that yield. Right. I mean, in terms of actual intervention, all you could really do is buy the long end. And that feels very much like an incursion that's not warranted.
[00:01:54] Speaker 1: Or just sell the short end. Or just sell short. So you could shift it a little bit in terms of issuance to the front end. Maybe that takes the pressure off the back end.
[00:02:01] Speaker 3: But we're already above that kind of 20 percent that you're meant to have in bills. So I think it's very limiting. And yeah, otherwise it's just do less debt. And that seems unlikely.
[00:02:11] Speaker 2: So bid to cover ratio was OK. But 5.21 percent, close to that, around about that. The highest level demanded by investors since what, 2000 and 2001? 2001. So there you go. Well over more than two decades. So it is a warning shot. So let's tie in the inflation data. Producer prices then coming in a little softer on the headline basis. Does this point to further steepening of the curve if you get the front end captured around this level but continue concerns about what happens in terms of issuance and high yields at the long end?
[00:02:42] Speaker 1: Yeah. These are two different stories though, aren't they? You've got an kind of inflation story which is affecting the front end. Maybe the market's thinking about what's happening with the Fed. That's the narrative. The Fed's one story. The back end's a completely different story, which is about debt sustainability. It's the fiscal story. And it's really interesting to see kind of which way, which is going to become the most important of those two factors for the bond market going forward and which one we should be focusing on.
[00:03:06] Speaker 3: Well, I mean, I think also you need to consider the fact that there is a floor on the front end, right? So you had deficits expand massively in 2008 post-COVID, but it didn't really matter that much for the long end because R was lower. But when you look at R minus G, that's what you're really thinking about. And growth is quite concerning now relative to that. If you have 5.5 percent nominal growth in the U.S. this year versus an R that's not that far away from that.
[00:03:29] Speaker 4: Yep.
[00:03:30] Speaker 3: I think, too, we're so unsure about what the outlook is because it's very much influenced by what's happening in the oil price, right? So we had oil come down yesterday and that helped bonds across the curve rally. And I think there's really a question of how sustainable that is. We're still in this phase of stalemate between the U.S. and Iran. The U.S. has announced, and Scott Besson in particular, has said that they're going to announce unprecedented subjunctions next week. And I think the question is really, what is that actually? You know, investors will be parsing that over the weekend. Does it mean that you're doing something with China, which potentially opens up a new trade front? What exactly is it and will it be effective?
[00:04:07] Speaker 2: The China point is really crucial because if you really want to exact pain in terms of the oil exports of Iran and its economy, then you have to sanction at least Chinese and potentially Indian companies as well and try and restrict their access to that crude. And to your point, that then sets up a very tense situation with Xi Jinping heading to Washington in September.
[00:04:27] Speaker 1: What this also tells us probably is that the U.S. administration is parking this issue until the midterms. We've got to do something. Kinetic warfare is not delivering the result we hope for. Therefore, we're going to turn to economic warfare and we can basically park this issue until the midterms. And maybe that's also the message for the wider market, which is you can put the Iran situation to one side. The hope would be that oil prices remain reasonably stable during this period. But the danger is that they don't and they drift or they push higher. But it feels like the U.S. administration, at least for now, is saying we can't do this. We can't manage a big war with the risks and the volatility it comes with going into a fairly serious election in November.
[00:05:08] Speaker 2: The here and now, then, is the status quo, if that is the situation. As we think about inflation, we think about energy, but we also think about the spend around AI. Interesting that from the producer prices, you saw things like digital components, computer components actually increasing 28 percent. That's a record. That ties us to a story around the spend then and what's happening with the Frontier Labs. Reporting from Bloomberg today, the OpenAI is looking at revenues, at least on an annual basis, annualized revenues of around of around 40 billion U.S. dollars. So we have an update there. At least that is the reporting from Bloomberg. The Financial Times reporting that its key competitor, of course, Anthropic, is set for potentially north of 100 billion by the end of this year. They are still on track, Anthropic, for that IPO, potentially as soon as October. The reporting suggests that OpenAI is still going to push theirs back until 2027. But the revenues are continuing. They are continuing both of these Frontier Labs. The gap is there, clearly, between Anthropic at the forefront and OpenAI in terms of driving revenues and getting traction at the enterprise layer. They are still getting that traction. Does that continue? And are those who are buying their services starting to get a real return? Are we starting to see evidence of that? Because they're certainly adopting.
[00:06:17] Speaker 1: It has to keep going until we get to the IPO. We are prepositioning. You've got to get the numbers right into that IPO, don't you? That's the challenge right now. And the challenge also is, can I get there first?
[00:06:29] Speaker 3: I mean, it's how much is already out there and are we worried about valuations from that perspective? I think, too, overnight we had AMD announce a $4.75 billion bond offering and that adds to your troubles at the long end, right? It tends to be long duration. If you have credit markets shifting longer duration, that also means those markets become more sensitive to your interest rates.
[00:06:50] Speaker 2: That was a record bond issuance, wasn't it, for AMD? Again, as they try to spend to meet the demand that they're seeing for their GPU.
[00:06:54] Speaker 1: AMD did well. The numbers were nice, weren't they? Yeah.
[00:06:59] Speaker 2: Projections are solid. Yeah. They're seeing demand and they're starting. They still have about 10% share versus NVIDIA's 90% share. But there's work that's being done there.
[00:07:08] Speaker 1: Okay. Let's turn to some of the corporate news that we are watching this morning. Aviva is out with numbers, says it is on track to deliver its three-year group targets. The adjusted operating profit comes through at $1.33 billion. That is ahead of estimates, $1.25 billion. The first half operating EPS, $31.8 billion versus an estimate of $29.7 billion. So we've got a beat. Amanda Blanc is sitting next to me. She is the CEO of Aviva. Good morning.
[00:07:32] Speaker 5: Morning.
[00:07:33] Speaker 1: How have you beaten?
[00:07:33] Speaker 5: I've been good. How have you been?
[00:07:35] Speaker 1: I'm very well. Good. How have you beaten? How have you delivered these numbers?
[00:07:39] Speaker 5: Well, look, I think there's three things we're going to be saying to the analysts this morning. First off, the performance of the business is really strong, up 24% on the profit, a 20% return on equity, and that's six years of profitable growth. But what's contributing to that and what gives us the confidence in the numbers is two things. The direct line integration is going incredibly well, and you're seeing that coming through in the numbers, but also the wealth business and the other growth platforms are performing really well. We now have over $260 billion of flows onto the wealth platform. So all of that's contributing towards a more capital-like business, so 70% capital-like now. It was 50% a few years ago. And we'll be talking to the market today about our confidence beyond 2028, what all the growth platforms are that we have, the advantage of AI, our customer advantage, and all of the growth we have from general insurance and wealth. So lots to talk about, so very exciting.
[00:08:34] Speaker 1: That's a long list, so let's back up a little bit and talk a little bit about what is happening with the direct line integration and what's happening with motor insurance. You are highly exposed to motor insurance. It's been a tough place to be recently. Do you feel that business is now turning a corner? Are you starting to see the balance returning to that market and starting maybe potentially to shift in your favor?
[00:08:54] Speaker 5: Yeah, I mean, certainly. We've definitely seen, so we've put through six points of rate in the first half of 2026. The market has probably put through about 3.6. We're pricing ahead of the market. We did the same thing last year. This is the power of the scale of the business. You know, when you've got twice as much data as anybody else, then you've got a lot more insight. You've got a lot more ability to be able to price. And with the direct line, we've actually improved the combined operating ratio by 10 percentage points over the last year since we completed the deal. And now Aviva and all its brands will be the number one market share on the price comparison website. So we're doing very well. The market is hardening in motor and so we feel very confident. It is getting better. We're definitely seeing that rates are going up in motor insurance. Absolutely.
[00:09:40] Speaker 1: Outperforming costs?
[00:09:41] Speaker 5: For us, yes. Yes. Because we've got approved to pay garages and owned garages where we get the benefit of around £500 a claim by owning the garage. So, you know, it all depends on the dynamics of your business. But for us, certainly.
[00:09:55] Speaker 2: Okay. Amanda, good morning. We'll get to the world part of the business. Absolutely. But stay on insurance for the moment. With what we're seeing in terms of the climate and wildfires, how much exposure does Aviva have? Is it going to hit profitability at all? Is it going to have any impact on profitability for this year?
[00:10:10] Speaker 5: So what we're seeing in the UK, so the incidents that you saw yesterday, actually our first response is obviously to those customers. We do have a few customers impacted by the Stourbridge fires and we're in contact with those to make sure that we put them into an alternative accommodation and make sure that they're looked after. It isn't going to affect the combined operating ratio as we see it today. And we actually give guidance this morning that we will hit the combined operating ratio ambitions for this year. We've also had impacts in Canada. So the wildfires in Canada and British Columbia. But again, you know, yes, it's over the quarterly. The Q3 is the big season for cat events in Canada. So, you know, we will be hit for that in Canada for this quarter. But we see that the projection for the end of the year is safe.
[00:10:53] Speaker 2: OK, the end of the year projection holds despite those challenges with focus on Q3 in Canada. Talk to us about the wealth business. You talked about the flows then. What is driving those flows? How are you changing up the product mix for your clients? And does that sustain itself? Do you see those level of flows continuing in the quarters ahead?
[00:11:10] Speaker 5: So, look, I mean, I think the really good news is it's completely sustainable. So if we think about the wealth business, it's broken into the workplace business. So workplace pensions. So we have, you know, a very, we have the largest workplace pension platform, over 160 billion of assets. If you look at that business, effectively, workplace, the market has grown. Today, it's 760 billion. It will be 1.3 trillion by 2030. We are taking, you know, we have a good market share. We have the largest market share in that market. A billion pounds of regular contributions every month, as well as the schemes that we win. So, you know, there's a really strong and sustainable growth there. And the advisor platform is also doing really well. We've had, you know, an additional 10% of customers onto that platform in this reporting period. And we're seeing good flows onto that platform. So, you know, wealth flows up 32%. So it's great news.
[00:12:02] Speaker 3: I mean, in terms of that wealth business, are you seeing any kind of trends with regards to something that could tell you something on the economy? You know, is there concern around a new prime minister, around potentially new policy with the budget coming in November?
[00:12:15] Speaker 5: So I think, first of all, it's incredibly resilient. So if you think about people are saving from their salary into their workplace pension, and you've also seen that people have, you know, a significant amount of assets. So our Aviva customers alone have one trillion pounds worth of assets. So, you know, that's our estimation. But, you know, the market itself is really huge. What we see from the government and what we want from the government is, you know, no kite flying on different policies on pensions as we run up to the budget. Because we've seen that in the previous period, but that's really bad for customers because customers are making decisions without really knowing what the outcome is going to be. So we did see in previous budget run ups that people were taking money out of their tax free, you know, their tax free pension. That's not good because, you know, they don't actually know what's going to happen. It's a sort of just in case. So, you know, we would just urge the government to just, you know, be careful about the messaging in the run up to the budget.
[00:13:13] Speaker 3: I mean, I know you use AI as a company quite a lot for underwriting, et cetera. How has that impacted productivity and has it led to job losses?
[00:13:21] Speaker 5: So, first of all, we are a massive user of AI. So we've been using machine learning for the last 10 years, and we'll talk this morning about the benefits of that. 200 million, we believe, in our personal lines underwriting is benefited from the use of machine learning and all the different models that we use. 100 million additional on the indemnity spend from using fraud models in claims. So we're seeing real benefits on our underwriting, which obviously allows us to write more business, but also to write more business more profitably. In terms of the way that we're thinking about roles, clearly roles will change. But at the moment, what we're saying is that creates capacity for us to be able to write new business. And we've got so many opportunities in terms of the amount of business that we want to write that we will use that capacity to do that.
[00:14:08] Speaker 1: Is it too early to figure out yet whether the AI you're using is profitable? This is the question we're asking loads of CEOs and trying to figure out the answers sort of cumulatively. What's the ROI on AI at the moment?
[00:14:20] Speaker 5: Well, look, I've just given you some of the numbers. If you think about it, you know, that 10 years and there's a one year cost, 200 million on the profitability in personal lines, 100 million on indemnity spend. You know, we've got smaller examples, like in our protection underwriting business, we've got the underwriters using that. So it means that they've got nearly close to 100 percent accuracy and they're able to write, underwrite, you know, 50 percent, use 50 percent less time to underwrite. It means you can write an additional policy. So we are definitely seeing a good ROI, but we're going to be incredibly disciplined about the way that we invest. So we've always been disciplined, you know, and I think that you see that coming through in our numbers today. The amount that we spend on change has to meet the ROI hurdle, otherwise we won't do it. And as we invest in AI, the benefits that we accrue, we will continue to reinvest in new use cases, but we will be very disciplined about the areas. It'll be in customer, it'll be in claims, it'll be in operations and it'll be in IT. Those are our four sort of enterprise wide areas and we'll focus our investment in those areas where the returns are better.
[00:15:29] Speaker 2: OK. How do you, hyperscalers are issuing a lot of bonds into the market. We were just talking about one of the chip makers, but hyperscalers are doing that as well. Massive bond issuance. How much exposure does Aviva have to that hyperscaler bond issuance? How are you managing that? What is the risk profile looking like?
[00:15:44] Speaker 5: So our bond experience is very, very on the, not in that area. So if we think about the way that we invest from Aviva investors and aren't using our own balance sheet, you know, it's investment grade and it's all brought by Aviva investors. So I'm struggling for the word, but you know what I mean. Originated, that's the word, by Aviva investors. So, you know, we would, we're obviously long-term investors and we are invested in corporate bonds. We're also invested in gilts. But I mean, we will be looking very carefully about those areas in which we invest. I do, I don't believe today we have any real exposure in that area.
[00:16:22] Speaker 1: Just a very quick question. Do you think yields are going to continue to go higher from here? And what does that mean?
[00:16:26] Speaker 5: Well, I mean, I'm not an economist.
[00:16:29] Speaker 1: Sure. But you are a major sort of part of this market.
[00:16:33] Speaker 5: Yes.
[00:16:34] Speaker 1: You talked about, do you think, do you think broadly yields are going higher from here? Is that the world you are looking at here?
[00:16:39] Speaker 5: Well, look, I think what we've seen this year is that, you know, obviously yields have risen, right? And so we will respond to that on our balance sheet. But our balance sheet, we will hedge for some of that activity to make sure that we sort of don't hit too much exposure when there's volatility in that space. But honestly, I think that we are responding to long-term trends. We are long-term investors. We're not responding on a day-to-day basis.
[00:17:06] Speaker 1: It's great to see you. Thank you very much for having me. Thank you very much for coming by to see us. That was, of course, Amanda Blank, the Aviva CEO, out with numbers this morning. Looks like it's ahead of expectations, that package of numbers. Coming up, the U.S. announces new tariffs targeting drone imports with China very much in the crosshairs. We're going to talk about that. There are wider implications to this story. Plus, parched soil and scorching heat are threatening Europe's crops. We're going to discuss what it means for global food supplies and the inflation that may come with it. But up next, the U.S. reverting to economic pressure against Iran as the stalemate in the Strait of Hormuz continues. We're going to go live to the region for the latest. If you've got any questions, you want to join in the conversation, you know where to find us. IB Plus, BBTV Go is the function on the Bloomberg. We'll be back in a minute. This is Bloomberg. 28 minutes to go until we start trading here in Europe this Friday morning. It's been a fairly quiet week. This morning, we're looking at a fairly positive picture, though, relative to where we started the week. At the beginning of the week, we were getting nothing. Now, we're at least getting something in terms of the upside on equities. We're up two, three, four-tenths of one percent. There's only one stock going ex-dividend today. I think it's a big one, though. It's Nova Nordisk. So, we'll certainly pay attention to that at the get-go in 38 minutes.
[00:18:31] Speaker 2: To the geopolitics now and what's happening in Iran, turning to the latest on the Middle East. Oil ticking higher this morning as Treasury Secretary Scott Besson says the U.S. will roll out unprecedented economic measures against Iran next week. Let's bring in Bloomberg's Abiy Abu Omar in Dubai. Abiy, this changed approach from the U.S. seems to have cemented this week. We'll see what happens over the weekend, of course. They've gone through a number of U-turns on how to approach Iran. What has Besson been saying, and what is the optionality when it comes to further economic pressure on Iran?
[00:19:05] Speaker 6: Yeah, good morning, Tom. Well, we're supposed to start seeing the implications of these threats starting next week. This is what Scott Besson had said. And essentially, what he was doubting was a combination of the worst economic pressure placed on a country alongside a naval blockade in the Strait of Hormuz against Iranian ports that will continue to take place. So essentially, Scott Besson did say that this combination of economic isolation that the world has never seen before is going to take a toll on the Iranian economy. We've reported, of course, that inflation levels in Iran have reached really high levels recently, about 80 percent year on year. And then we also have from the Energy Secretary, Chris Wright, also saying that they have a losing strategy, of course, referring to Iran, and that will lead to the collapse of this regime because of these economic pressures. So as you have mentioned, quite a U-turn from what we were hearing from President Trump and other U.S. officials just a couple of weeks ago about the biggest military strikes against Iran. Now we're going back to a state of economic pressure to be placed on Iran. Now, the question here really is just how effective will that economic pressure be? Because if you remember, this year started with protests in Iran regarding that economic or the economic conditions in the country. And perhaps our Bloomberg Economics team puts it best. And they say that if 47 years of sanctions have not broken Tehran's will, more of the same is unlikely to produce any changes. So we know that Iran is under massive, massive sanctions and also the latest sort of examples we've seen being placed on Iran, the oil sanctions continue to be in place. The naval blockade continues to be in place. Their assets are still very much blocked despite all of these being concessions in that MOU that was reached in June back in Switzerland. So a lot of analysts are essentially saying this is probably not going to have the impact that the U.S. is hoping to have. Meanwhile, all eyes, of course, are on the Strait of Hermos and what exactly will happen there and what exactly will happen with that deal between Iran and Amman to reopen it. You're seeing a little bit of upside movement, of course, Tom, this morning on Brent crude, about 1 percent higher, still below $90 on the barrel, though.
[00:21:18] Speaker 2: Abir, thank you for that update. Abir Abu Ammar in Dubai.
[00:21:22] Speaker 1: OK, what else do you need to know this Friday morning? The Trump administration is opposing tariffs of up to 100 percent on some foreign-made drones and components to reduce reliance on overseas suppliers. The top rates will apply to drones of a certain size or those that possess national security capabilities, while other imports will face lower duties. The announcement could heavily affect Chinese drone sales and may, amongst other things, increase pressure on Beijing ahead of a planned meeting between Trump and Xi Jinping that is coming up soon. A KNDS ammunition plant, which is located to the southeast of Rome, has been rocked by fire and explosions, forcing the evacuation of company personnel. Italian police say no injuries were reported. The facility makes ammunition for land and naval forces, as well as missile warheads and rockets. And an unusually powerful El Nino is raising the odds that 2026 will surpass 2024 as the world's hottest year on record. That's according to monthly analysis of global weather data by Berkeley Earth, a non-profit research group. It comes as Europe bakes in its fifth heat wave of the summer, staking wildfires across the continent. Waterways such as the Rhine and the Danube are also running low, hampering transport and energy production. So, essentially, we're just talking about the insurance aspect to this. Now we've got to think, I think probably the next big challenge that I think this market will face is food inflation. It just seemed everywhere I'm reading pieces about what food inflation is going to look like latter part of this year and into next year. And is this the next big inflation hump that we're going to have to deal with?
[00:22:54] Speaker 3: And maybe it's not that big of a deal for developed markets, but for emerging markets, energy and food are very big bits of that consumption basket. And EM debt is held up very well.
[00:23:03] Speaker 2: We've got a chart in the Bloomberg reporting as well in terms of Europe's acreage around grain and how just over the last 25 years that has been shrinking. Just the reality of farmers, how do you actually plant in August and September when the ground is rock hard? And so they're delaying the planting season, which again points to those shortages and very likely higher pricing. Current crops are failing.
[00:23:26] Speaker 1: Fertiliser prices are super high. Diesel is also super high, which is a big expense for the farming industry. But this is also something that consumers react to. So if you think about the de-anchoring of expectations in terms of inflation, this is a big story. Plus fuel. Anyway, what do we got coming up?
[00:23:41] Speaker 2: Well, that brings us to the central banks, doesn't it? And how they react to some of these pressures. The yen will be in focus as well, continues to be in focus, hovering around that 160 mark against the dollar intervention risk again. We're going to discuss the latest from FX markets with Sockgen's Kit Dukes, his views on the carry trade and the dollar. That's coming up.
[00:24:18] Speaker 1: 29 minutes to go until we start trading here in Europe this Friday morning. The futures picture here in Europe looks positive. Over in the United States, it looks a little more negative. But we are, yeah, either side of the flatline, basically. U.S. futures are down a little bit. European futures are up a little bit. I'm not sure how much I can really take away from this. But it's been, broadly, a pretty positive week for risk.
[00:24:37] Speaker 2: The oil markets and the linkages with the fixed income, well, let's see if that's still holding up. We're currently seeing oil prices up 1%. You're seeing yields up about one basis point. If you're checking on sovereign debt of the eurozone. So a little bit of moves in the debt markets of the eurozone. The big interest overnight, of course, was the 30-year auction in the U.S., which drew a yield of north of 5.2%, the highest level since 2001. But that's a picture across the European sovereign debt right now. German bunds currently at 3.14, not a huge amount of movement. 0.80s, a little bit of selling there, yields up two basis point. Let's get to the currency story because the yen remains, of course, within striking distance of a crucial level against the dollar, 1.60, even after Prime Minister Sanayi Takeuchi's government was said to support an interest rate hike. BlackRock's Rick Reader weighed in on whether the recent intervention moves are enough to stabilise the currency.
[00:25:33] Speaker 7: Is the Bank of Japan going to be hawkish to support the currency? And heretofore, they've been a bit deliberate in terms of moving it. This moving in September to sort of stabilise the currency is a big deal. Intervention, you know, I've watched intervention happen over time. You need to really keep going with a lot of firepower. I would argue it's not the most durable way to get there.
[00:25:56] Speaker 2: Okay, let's continue the analysis in the FX space and bring in Sokjen's head of FX strategy, Kit Dukes. Kit, good morning, happy Friday. With the yen in focus then, is it the BOJ or is it government spending that will do it in terms of finally putting a floor under the yen?
[00:26:13] Speaker 8: It's growth. And I think that's the problem in the sense that if they don't have growth, they can't defend the currency with higher rates credibly because it makes the situation worse given their debt levels. The government doesn't really have much headroom to spend enough money to get growth, again, confidently on its own. So they have to manage and exercise getting more growth. I feel sorry for the government in the sense that, you know, they got hit by an energy crisis, which they're particularly vulnerable to, at exactly the wrong time when they're trying to draw themselves out. I think the long run's better for Japan. It looks to me as if the economy's on an improving path. But right now, you can't have, you know, consensus forecasts of growth well under 1% for a country with a bit of inflation and a very big debt level and think, yeah, I can just whack rates up and everything will be fine.
[00:27:04] Speaker 2: So the picture improves, but the here and now is all of those challenges that you've outlined. Does the carry trade then continues to have momentum?
[00:27:12] Speaker 8: Yeah, I don't. I mean, I would have my carry trade in the Swiss franc, not the yen right now, because the level says that when this turns, you might, you know, you might go a long way the other way eventually. But yes, the carry trade appears to be alive and well. Lots of people doing it and lots of currency pairs. It's a decent funding currency for people because the rate differentials are big and they can't close enough to make a difference. And that day to day, I don't think that changes. And so, yeah, so the next thing is more intervention.
[00:27:38] Speaker 3: I mean, we've seen increased intervention from Japan. We've also seen an escalation from the U.S. in terms of first a rate check, now actual intervention. Is there a next step that would actually contain the depreciation?
[00:27:50] Speaker 8: You have to do more. You have to persuade people that the risk of running these carry trades isn't worth it. My sense is that there's still a desire to get short yen on every one of these moves, thinking we're going back to 160 something. They can't really hold this. So, you know, I think it's important that the U.S. came in. I think it's a big message that not just about Japan, but that the U.S. doesn't want the dollar to be this strong against that Asian bloc. You know, the U.S. is very cheap. The Korean won is very cheap. So the U.S. has a stake in this, but you're not going to win it in one round.
[00:28:32] Speaker 3: I think right now it's very hard to have conviction because you've got this worries around intervention. For the dollar, is the Fed not going to hike? For the euro, the pound, the yen, you've got an energy shock overhanging. Is there something that you have a very strong conviction on in terms of a view?
[00:28:46] Speaker 8: No, in the middle of summer, it is really hard to have strong conviction. My conviction is mostly that what drives everything is growth in the end, that, you know, we trade rates day to day, but the underlying growth story matters. Today's retail sales numbers in the United States are more important to me than the CPI or the PPI data just because I want to know if a K-shaped economy actually is weakening somewhat when I've watched so many signs that say the U.S. economy is outperforming the rest of us by a country mile all year. And if we get back to that U.S. economic exceptionalism, we're going to get back to a strong dollar.
[00:29:23] Speaker 1: So if the rest of the market is selling the dollar, you'd be buying it?
[00:29:26] Speaker 8: Well, we are nervously today, but I'm waiting for the numbers and wanting to, like a good strategy, strategist, yes.
[00:29:32] Speaker 1: But your point really is that longer term, you think the dollar is well supported because the market is getting nervous about that as a concept because the data is softening up.
[00:29:40] Speaker 8: Unless the data softening is genuinely softening, that's where the fight is. I don't really see why the U.S. economy should be losing. If the U.S. economy is really slowing, then I think the rest of us have a big problem.
[00:29:52] Speaker 1: Yeah, well, precisely. But is the U.S. economic growth story sustainable? It's being driven by an AI boom and a government deficit that is epic. Are both of those two things sustainable at this point? There's very little evidence that either of those two things are going to change.
[00:30:06] Speaker 8: They're not going to stop. So the question to me is, are they just fueling wealth for a small part of the economy?
[00:30:14] Speaker ?: Yeah.
[00:30:14] Speaker 8: And leaving a lot of people facing, as to your point, higher costs for food, higher costs for gasoline, higher costs for this, that and the other, and not much employment growth, even if the economy is full employment.
[00:30:27] Speaker 2: Where do you land on the ECB right now? As we think about those inventories in gas, gas inventories low, we've been talking about wheat prices, we've seen about higher oil, growth seems to be picking up a little bit. Are we underestimating how far the ECB may have to go with additional highs and what that means for the euro?
[00:30:44] Speaker 8: It's certainly, Bob, the picture is looking a little bit brighter and if the picture looks brighter and the currency is a little bit more stable, that they might have to worry slightly less. I don't think they're going to have to raise rates much because the underlying growth story ain't that good. You know, still that, you know, it's difficult. I thought the rate rise just before 2000 and just before the crisis in 2008 was one of the worst mistakes anybody made. And I get told off for thinking so by lots of Europeans. They have an inflation target. I think hiking rates into an energy crisis when you haven't got much growth just makes life harder later.
[00:31:16] Speaker 3: I'd be interested on your take on the sell America trade. Is it still something that's hanging around or does the energy shock mean it's just gone to the background?
[00:31:24] Speaker 8: The sell America trade is a President Trump trade. He would like us to sell the currency. I don't, you know, it hangs around in the background. I think we're in a catch up for other asset prices relative to America sort of trade. But I'm, you know, the only rational sell America trade is I don't believe in the AI revolution. I'm not clever enough to know, but it seems pretty real to me from where I'm sitting. So, you know, my best guess of the average U.S. growth rate over the next five years compared to Europe, it's not going to flatter Europe if I stuck that down a piece of paper.
[00:31:58] Speaker 1: So the U.S. should be hiking rates possibly. Do you think the Fed is restrictive at this point or do you think it's neutral or do you think it's a common kind of where are we in the requirements to make sure that that growth trajectory is can carry on because you don't want to getting out of hand and you don't want individuals, the bottom end of the K to have a big problem here, which is what increasingly it feels like.
[00:32:25] Speaker 8: And this might be this might be a situation where the bottom the bottom end of the K has got restrictive policy and the top end of the K really hasn't got any constraints or anything. At some point, you have to focus on the people rather than the multi-billionaires.
[00:32:39] Speaker 1: Right. Anytime soon?
[00:32:42] Speaker 8: At the moment, you steer the line and say, I think the Fed would be lucky compared to some in the sense that they have the option of not doing anything because rates aren't as low as they're anywhere else where. So the sort of the default is let's keep watching. Yeah. And I think the pressure that was building to raise rates has faded away with the data. But that's most likely to leave them sitting and saying, well, OK, let's just wait a bit longer and see because they're going to be conscious to what's happening to the rest of the economy.
[00:33:15] Speaker 1: OK, great to see you, Kit. Thank you very much indeed. Enjoy your weekend. Kit Duke's FX Strategy is head of FX Strategy over at SockGen. Let's talk about the UK politics. We didn't actually address that with Kit, but let's focus on what we've seen this morning. Reform UK leader, Nigel Farage, has won a special election in the seat of Claxton in the southeast of England. Other major parties refuse to take part, leaving Farage to face more than 30 minor candidates, one of them with a bit on his head. Bloomberg's Lizzie Burden joins us now. What does this tell us?
[00:33:44] Speaker 9: Well, look, it was just expected. This is the easiest seat that Farage could have won. 62.8% of the vote he won. Yep. But as you say, it was joke candidates against him. By the way, it was a personal best for Count Binface.
[00:33:58] Speaker 1: Yep.
[00:33:58] Speaker 9: And Farage didn't want to turn up to the decision because arguably he didn't want to have a photograph taken with a bin, a man dressed as a bin. But he had said that there were security concerns, PA reporting that Essex police hadn't advised any of the candidates not to attend. But look, Farage has improved on his vote share here. The number of votes as well behind him compared to 2024. But the pollsters have been talking about Farage fatigue. And I think this is what's interesting because it's not just fatigue around the scandals around his finances. It's also a recognition among senior reform figures that calling this by election, this special election in the first place makes them look like they use stunts in the reform party. And when it comes to the future of the finances investigation, we could be right back here with another special election if indeed the parliamentary standards investigation drags on and concludes that he violated the rules. And it could be more serious opponents than the bin the next time.
[00:35:01] Speaker 3: So if you have a weaker Farage, does that mean anything for Burnham's policy in the here and now?
[00:35:06] Speaker 9: Well, I think one of the reasons why there is Farage fatigue is because Burnham is doing well, both in terms of connecting with the public in a way that Farage has been traditionally associated with, but also because he's hammering home this message on the cost of living. And so this special election doesn't change the fact that the focus is now on October the 28th, the budget, and it doesn't change the priorities that Burnham and his Chancellor John Healey will take into that budget, the cost of living, welfare reform, fiscal discipline, and social care. So if anything, this having Farage back in Parliament is just going to encourage Burnham to double down on both his approach and his policy.
[00:35:43] Speaker 2: Yeah, and we've got some reporting today as well from our team on the attention within Burnham's team around where to land on taxes for small businesses versus some of the bigger corporates. So that remains one of the other issues as well. Well, Lizzie, thank you for the broader implications of what we're seeing in Clankton, of course, our UK correspondent anchor, of course, of Daybreak. Meanwhile, some Fed policymakers are questioning whether inflation will continue to slow.
[00:36:08] Speaker 4: We've gotten two recent reports on the inflation side that are definitely better than the earlier five months that we've had this year, and so it's welcome. I love to see that those numbers are coming in lower. That's a good thing, but I don't have confidence that we're going to continue to see that or that we're going to see them low enough that it's going to bring us back down to that 2 percent number.
[00:36:32] Speaker 2: Cleveland Fed President Beth Hammock, who is currently a voting member of the FOMC. We're going to have more on the central bank's inflation fight next. This is Bloomberg.
[00:36:41] Speaker 10: It's a combination of inflation expectations, term premia, fiscal concerns as well. But yields are very attractive at the moment, so I think that that's reflected in the demand. But there is a hell of a lot of issuance coming through.
[00:37:06] Speaker 11: If you were alien from outer space and you landed in this economy, you'd think right now, hang on, inflation's been above target for five years, as we keep hearing. It's had a fresh impulse this year, given the Iran shock. Given the risk that the long end of the curve is going to rise, if you don't get a grip on inflation near term, I think they've got to take action.
[00:37:22] Speaker 12: We think the risk in the bond market is very asymmetric. So it's very hard, in my mind, to really see a big bond market rally unfolding. Where is that going to come from if the central banks won't be cutting? And surely that's very unlikely in this scenario.
[00:37:35] Speaker 13: The back end of the yield curve really should be under pressure, just given the poor debt and deficit dynamics. And so you would argue for a much steeper yield curve, where short-term interest rates should be quite well behaved, and longer-term rates are sort of the release valve for some of the eggs.
[00:37:49] Speaker 14: They could well be, I mean, especially when it comes to fiscal spending, right? And it feels like the bar for investors and bond market has been set higher, particularly in the U.S. I mean, you've seen in the last few weeks, actually, U.S. yields at the long end of the curve have underperformed a reason more than in other markets. And that means that that bar has been set higher.
[00:38:14] Speaker 1: OK, a few of our guests who have joined the show this week discussing some of the issues contributing to the elevated yields that we are seeing, particularly at the back end of curves here in Europe, but more pronounced yesterday, maybe over in the United States. It's Friday. What have we learned this week? It's the middle of August. Maybe not that much. Let's try and discover exactly what the narrative is right now and talk to our Marcus Live executive editor, Mark Cudmore. Mark, it's Friday. It's even more towards the end of Friday where you are. What is the takeaway at the end of this week? What have we learned?
[00:38:47] Speaker 15: I think we're back into a bullish environment. So we're through the earnings season pretty much. It's been extremely strong globally, but it's emphasized that the AI inflation bubble is still, you know, going happily along. So we expect, you know, stocks globally to continue to do well, with AI being the main kind of engine for that, at least until the next earnings season. And then we kind of be on watch again. And that's one of the narratives. The other one is that the stress on long-end bond yields, as your guests outlined there. Now, I watched that clip, and one of the things that worries me is that it's so consensus. I mean, I think long-end U.S. yields need to go a lot higher, but it does worry me that basically everyone seems to agree. And that is a slight concern that it's maybe kind of, you know, we've already got the premium priced in for now, and maybe we do need to wait another catalyst for that next move higher in yields. And perhaps the move higher in yields takes much longer to play out than some of us are thinking.
[00:39:44] Speaker 3: I mean, does that mean we're just not that worried next week? There's not a catalyst that means you have long-end yields rising, earnings are good, growth is strong, inflation is a little bit lower. Does that mean we can kind of sit back?
[00:39:57] Speaker 15: I think that's right. I mean, look, you know, you always, everyone hates kind of saying this on TV because obviously the one moment you kind of sound complacent and say, there's no risk on the horizon is when something kind of blows up. And you've got the ever-present Iran threat over the weekend. But in reality, this is like the ideal time for this, like, you know, choppy bullishness. We're in the low liquidity, low volatility summer markets. People aren't going to rush to try trading something aggressive without a major trigger. So carry trades will likely perform. Equities will likely go higher. Yeah, we'll get a few random moves. We'll get a few choppy things. But we've got through the major, you know, we've got through the major central bank meetings, we've got through the major data points, we've got through inflation, we've got through jobs, we've got through the Fed, we've got through earnings season. The big risks are behind us. So unless you get something that, you know, isn't expected, yeah, I think you just sit back, you collect carry, you expect vol to go lower, you expect equities to go higher. That's probably right.
[00:40:49] Speaker 2: There we go. We have it on record. Mark Cudmore, we have it on record. No risks on the horizon. We may revisit this clip at some point, Mark. Mark, on the oil to equity story, can we add final confirmation that equities really don't need to worry about oil?
[00:41:06] Speaker 15: It's equities don't need to worry about oil until the game changes materially. Now, what I mean by that is that we expect there to be tit for tat from the US or Iran. No one really believes any proper ceasefire. No one believes in any kind of sustainable kind of deal. But the general narrative is, is that we're not going to have material escalation before the midterms. Trump does not have an incentive to really kind of blow up energy prices much worse. And of course, there's a lot of speculation out there that they're lacking the ammunition to currently escalate the situation at the moment. So I think we're expecting this to tell us, well, we'll get some scary headlines. But unless we see oil prices 20, 30 percent higher from here, no, it's not a big risk to worry about.
[00:41:50] Speaker 2: Bloomberg Markets Live executive editor, Mark Cardmore. Fantastic. Thank you, Mark. Have a great weekend. Remember, you can get up to date analysis and insight from Mark and the rest of the team. Just go to MLiveGo on your terminal. Let's get your stocks to watch. This right, Able Louise. Louise.
[00:42:04] Speaker 16: Morning, Tom. Starting off with Aviva here in the UK, the insurer. Now, they've had quite a solid set of first half results. You can see over the past year, their shares have ticked up slightly higher. They've been trying to diversify their income streams and diversify that business. So a strong set of results, confident of hitting their targets. I know that you interviewed the CEO earlier, talking of their wealth unit strength there. Also saying that exposure to the motor insurance side of the business potentially is improving and not as bad as feared. So we'll be keeping an eye on that one after that set of first half results this morning. Now, turning away from insurance, turning into shipping, looking at MERS, the shipping giant, they've been raised to a hold by Nordia. Now, taking a look at their year to date, it's obviously been a strong rise there, about 30% there on the back of all this volatility that we've been seeing. But raised to a hold, Nordia is seeing that there's more room for growth, potential for more buybacks there as well. But if you take a look at the analyst ratings, majority are for a sell. We've got 15 sell and 11 hold. So obviously still some caution there, despite that rise by Nordia. And then finally, taking a look at the defence sector, after news overnight from the Trump administration saying that they're imposing tariffs, 100% tariffs on drone imports. Going to take a look at the usual suspects across defence, Airbus, BAA Systems, Ryan Mattel. Obviously, there's been a lot of news in the defence sector and there's been a lot of gains as well that we've been seeing. But on the back of this news, this could benefit European companies. Those tariffs won't be as strong for economies that the Trump administration has got trade deals with. So slightly less tariff sets. We'll be keeping an eye on the defence sector with that.
[00:43:45] Speaker 2: Louise Moon, thank you very much indeed. We'll be watching tech again because Applied Materials is actually, after hours, was down. So there may be a read across to the likes of ASN.
[00:43:55] Speaker 1: Great numbers, but it's come a long way very quickly. Yeah, so expectations had risen.
[00:44:01] Speaker 3: I mean, the next tax earning isn't really until NVIDIA at the end of August as well, in terms of a big catalyst going to Mark's point.
[00:44:07] Speaker 1: We've got Jackson Hole coming up. I'm not sure we're quite done with the Fed yet. So that's interesting. So it'll be interesting to see how the tone is set by Kevin Walsh at Jackson Hole and what kind of implications that would have, whether or not we get some clarity in terms of how he sees the world. It says he won't give it to us, but Jackson Hole would be a good opportunity to give it to us.
[00:44:23] Speaker 2: Do you think at the end of this week, the divisions that the Fed's, I mean, we heard from Beth Hammock sounded quite hawkish, but do you think those divisions have become less acute on the back of the more benign inflation pitch that we've had so far, or do they remain a challenge for Walsh?
[00:44:39] Speaker 3: I mean, it's probably still very challenging, right? You've got Hammock that's very much on the hawkish end of the spectrum who's still sticking there, but the data's definitely shifted dovish. What I think is interesting is the market's still holding on to that hike this year, and it's kind of signaling a one and done as a, look, we've done something.
[00:44:55] Speaker 1: Yeah. I'm not sure what that would actually ultimately achieve, and it may end up looking embarrassing with hindsight, but that's certainly been the experience over at the ECB. So we can basically wrap up the week. I thought Scarlett was very brave earlier on. She basically said to her boss, I can sit back. I can take it easy. There's nothing happening here. We can basically cruise through the next week with nothing to see here. Is that the mood music on the MLive desk right now?
[00:45:21] Speaker 3: I mean, maybe the UK is the most interesting story, because we do get inflation data next week. That inflation print is for July when we get the utility bill reset, and there are these big questions around, is the economy in the UK actually as strong as the first half indicated.
[00:45:33] Speaker 2: Interesting. There's some reporting on the Financial Times today from Starmer's previous allies saying, don't mess this up. The economy is looking OK, and the GDP growth came in a little stronger. So the most exciting thing next week is UK CPI.
[00:45:46] Speaker 3: Maybe, yeah.
[00:45:48] Speaker 1: And Skylar, who's going to be back with us for most of next week. She's going to be back for two hours, so she's going to be putting a shift in next week. OK, that wraps things up. Five minutes to go until the equity market opens. Skylar, thank you very much. Enjoy the weekend. We'll be back in just a moment. Future's pointing a little higher. Friday morning. Good morning. A couple of minutes to go. Let's talk about kind of where we are this morning. So Europe, this is the US session yesterday. This is the S&P. Europe went out here. We finished up there. That's probably the reason why European futures are pointing positive this morning. There's a few kind of idiosyncratic single stock stories which are in the mix. But broadly, I think that probably is the narrative. US futures are flat, slightly negative right now. So it's not as if we're kind of moving into a particularly positive picture this Friday. But European futures have got a little bit to price in. We do have a few single stocks that are probably worth focusing on. So they may give us kind of a little bit of a lift here and there. But broadly, we're up two, three, four tenths of one percent on.
[00:46:59] Speaker 2: Some stocks to watch then this Friday morning. Watching defence, watching tech, watching Viva. We were speaking to the CEO, of course, of that company at the top of the hour. That was a beat coming through for Viva. So we'll watch if there's any price action and reaction to that. In the tech space, applied materials coming out with earnings. It was a beat. The forecast was also a beat. And yet, after hours, that stock is down about five percent. So there could be a bit of an impact across the tech space, the SMLs of the world in Europe. Defence also in focus. President Trump signing an order to put some restrictions and tariffs on drones into the US market. But we'll see if there's a read across to the defence space in Europe, of course, the likes of Ryan Mattel and others. So those are some of the sectors and individual names we're watching as well this Friday.
[00:47:43] Speaker 1: OK, here we go. Let's talk about what we're going to see in terms of the numbers. The story broadly at the moment this week certainly has been one, I think, of marking time. I think we're waiting for everybody to get back. We saw, obviously, the momentum trade fade. Now we're kind of waiting for it to move in the opposite direction. And that's kind of where it feels like we are in these markets. You've still got the earnings season continuing, though thus far it's been incredibly positive, really, in terms of the numbers that Europe is producing. And maybe that just continues. So this is the story. Let's show you some numbers. The FTSE 100 not delivering a great deal on the upside. I'm interested to see how Aviva trades this morning on the back of its figures that it has delivered. You've got ASML, which could be interesting as well, on the back of AMD's numbers, which were out last night. So we'll watch what happens with the AEX when it gets going. But at the moment, there's not exactly a lot of headline action. We were expecting something a little bit more positive. Maybe we need to see some of the other single stocks opening up to give us that action. But yeah, there you go. The FTSE is up by one-tenth of one percent. We're going to be looking for two-tenths of one percent in a few moments. The AEX is up by two-tenths of one percent. The IBEX is up by two-tenths of one percent. It's an uninspiring open. So what we're going to do is we're going to lift the lid. We're going to take a look below the surface. Tom, what do you got?
[00:48:52] Speaker 2: Top-performing sector so far is media. That's up one percent. Travel and leisure also up six-tenths of a percent. Auto is gaining five-tenths. So the majority of sectors in positive mood, of course. Gains coming through for most sectors. On the downside, three sectors so far in negative territory. Biggest losses coming through for basic resources as a sector down 1.2 percent. Healthcare also a little weaker, just by two-tenths of a percent. Food and beverage after the best gains across three sectors yesterday. Currently, that sector is flat. So it's media at the top. Basic resources down by 1.2 percent right now. Guy.
[00:49:27] Speaker 1: In terms of what we're going to be watching later on in the day, you've got some fairly interesting data coming up, actually, which I think is going to be worth watching. I think you've got the University of Michigan survey, which I think is going to be interesting, Katona's survey. And it's going to be interesting to watch exactly what that delivers because that's really sensitive to gasoline prices. And then you've got retail sales in the U.S. as well. So I think that's going to tell us a lot. I'm not sure it's going to deliver much in terms of the European story. You've already kind of laid out what we're getting thus far. It's interesting. Rolls-Royce, Ryan Mattel, some of the defence names are certainly up this morning. Some of the banks are up as well. It's interesting, once again, you've got some of the farmer names and actually some of the mining names on the back foot. Astra is moving a little bit lower. I think you've got Nova going XD today,
[00:50:14] Speaker 2: so just keep an eye on that one. Antofagasta, on your point around mining, then currently down 3% amongst the biggest losers.
[00:50:21] Speaker 1: Copper's on the tear at the moment.
[00:50:22] Speaker 2: American, Anglo-American, yes. So copper, you've seen a little bit of softness for gold and silver today. Copper currently down 4 tenths, but above that 14,000 level, of course, for copper. Let's broaden out the story right now and get some insights across these markets. Bringing Gerry Fowler, who is Global Derivatives and European Equity Strategy Head over at UBS Investment Bank. Look, broadly, Gerry, take a big step back and global markets are at or around record highs. Are the ingredients there to grind higher from here or does this get derailed?
[00:50:54] Speaker 17: Yeah, absolutely. I mean, it's been an incredible earnings season, particularly in the US, but also in Europe. A lot of it is being driven by top-line growth that's allowing margin expansion as well. And so this is just a pretty unprecedented growth era. And in fact, it's not even necessarily grind higher. Parts of the market like the Nasdaq, which are not yet at highs, are actually looking outright cheap considering the scale of sales growth that they are generating. It's really astonishing.
[00:51:17] Speaker 2: An unprecedented growth era.
[00:51:19] Speaker 17: Yeah.
[00:51:21] Speaker 2: You mentioned the Nasdaq. Do you want to lean into that? What's being overlooked right now?
[00:51:26] Speaker 17: Well, sure. So certainly the technology names in the Nasdaq were very well held alongside things in Korea, the AI trade. But really what we saw for a month or so was de-risking into summer and a lot of volatility in single stocks, both of which caused further de-risking. And so winners got sold and losers got bought. That appears to now be over. And as people come back from holiday, I just expect they're going to take advantage of that and lean back into the same trades, particularly because if you look at the average of single stock volatility, it was north of 50%, like really unprecedented highs, not just outright, but also relative to the index. And since earnings season has sort of given everyone a bit of reassurance that the AI trade is still growing very strongly, that volatility has dropped down into the mid-30s. So all of the VAR calculations in any fund using leverage is basically saying you can add a lot more leverage if you like.
[00:52:14] Speaker 1: So it feels like this is just the tide going in and the tide going out just in terms of the leverage that's being added at the moment.
[00:52:21] Speaker 17: Certainly in the last month or so, yeah.
[00:52:22] Speaker 1: That's what this market feels like at the moment.
[00:52:26] Speaker 17: But you suggest the fundamentals are there. The fundamentals are more than there. So the concern that I think was an ex-post narrative as to why the market was falling was that there was too much spending, too much CapEx. That's, in our view, not remotely true. Keith Parker has rejoined UBS. He's published his big launch piece. And one of the key focuses on that was that CapEx has grown to 650 billion. That's up from about 300-odd billion a year ago. The backlog of cloud revenue that is going to be generated based on data center growth is up a trillion dollars over the same period to 2.4 trillion dollars. So you've got 2.4 trillion dollars, which is 100% of existing cloud revenue that's going to get booked into realized revenue over the next two, three, four years. Google said that they think they're going to monetize about half of their cloud backlog within two years. So the revenue growth within cloud businesses, growing because everybody wants to get their data onto platforms to make use of AI, is absolutely astonishing. And it's causing massive sales growth, which has not been priced more cheaply since 2011.
[00:53:29] Speaker 1: What's the cost of that?
[00:53:30] Speaker 17: Well, exactly, yes. So the problem is that in terms of building the data centers, there is a huge use of capital. So we can see that the free cash flow for some of these companies is down to zero, if not negative. That is missing the point, though. The reason the free cash flow is low is because the CapEx is high. Sure. The reality is the operating cash flow is actually growing very strongly and consistently. So actually, in our estimates, the operating cash flow does cover the CapEx in the aggregates. But obviously, there is a demand for capital here and there. There's opportunistic, you know, taking of capital where possible. Google raising equity, SpaceX IPO. You've got some debt funding here and there for data centers. So more and more people want capital. Debt funding here and there. Well, remember, this is also layering on top of governments who have a huge need for capital, not least of all the U.S. government running a 6%, 7% deficit. So we are in an era now, we have entered an era of crowding out. You know, the rise in bond yields that you've been talking about is not inflation expectations led. It was out of COVID. But in the most recent rise that we've seen from sort of 4.4% to 4.7%, none of that was inflation led. That was all in the real yields. And that's because investors are basically saying, I need a better return to bother buying bonds.
[00:54:39] Speaker 2: How far does that go? Do we get to 5% on the 10-year by the end of the year?
[00:54:42] Speaker 17: So I don't know. We've done some. And also, what is the consequence? So with a standard crowding out, you can still get access to capital, but you need to be, you know, something that people want to invest in and you need to be willing to pay that cost of capital. So more and more parts of the economy, including consumers, but also perhaps small businesses or higher debt burden businesses may start flinching or being less able to pay that cost of capital. So you might get a little bit less demand for capital. But it's a flinch.
[00:55:07] Speaker 2: It's not a credit crisis for some of those smaller businesses.
[00:55:09] Speaker 17: Well, it may be, but they may be small. So it may not actually cause any real problems. The big businesses with lots of profits, they're still going to be able to take that money, but it does impact their valuations. So we looked at what happens if Treasury yields go beyond 5% over the next, say, three months. So you get this. What's that, sorry? 10 years. 10-year yields. And it turns what we think would otherwise be a 5% to 10% rally in the S&P and Nasdaq into a 0% rally. So put 50 bps on 10-year Treasuries, you're probably taking 5% to 10% off equity returns. So super strong growth, but no equity market rally. Super strong earnings growth is already there. I think you could justify the equity rally even here. And investors still want to chase that. I think that they will because there is still money that wants to buy into equities for that growth. But yields continue to tick higher. They become more appealing. And so steadily, you'll get parts of the economy that weaken and other investors that actually look at that yield going, you know what? I want that yield instead. So it just becomes competitive. That's the whole point of crowding out. It is a competitive market for capital and bonds are going to try and compete with equities. Can I just loop back to something you said about the cloud providers?
[00:56:08] Speaker 2: Because there is this concentration risk. So the dependency of a Google, for example, on open AI and on Anthropik. And by some analysis, if you take them out, then the cloud growth for Anthropik is pretty paltry. Is that something that you would look at? Are you worried about the concentration, particularly on Anthropik and open AI and that spend there?
[00:56:29] Speaker 17: I don't think so because, and this is the same question as to whether we think the Chinese open source models will destroy the entire trade. Chinese open source models that are cheaper are competing with the closed models like Anthropik and open AI. So there's certainly competition there. But AI is coming and AI needs data centers and companies need to get their data onto a cloud to make use of AI, whichever AI it is. So the big companies offering the cloud services, Amazon, Google, Microsoft, they are going to be growing their cloud businesses pretty much regardless, unless suddenly we realize that we don't want AI anymore, which might come at some point in the future, perhaps if companies spend a lot of money, get their data on the cloud, try AI and go, oh, this doesn't work for us. But the closer you get to people who know about AI and the closer you get to people who are using it, the more positive they are, not less positive about the productivity benefits. The people who don't like AI and basically say it's not productive and it's never going to go anywhere are the people who just haven't used it enough, in my opinion.
[00:57:22] Speaker 1: And how far does that go? We all know AI is going to be a big story. It is going to be game-changing. It's going to be revolutionary for the economy. All of these build-outs have ended up in a situation where either the cost of capital becomes too high, there is a kind of mismatch between, there's like an air pocket that exists between building it and the reality of it. How big a danger is there of that at the moment? Or is this just going to be a smooth curve? It'll be the first smooth curve we've ever seen in terms of a major infrastructure kind of revolution that hasn't delivered a point at which you go, this needs to get cheaper, we need to commoditise this, that's what's going to happen, and as a result of which, the companies that are loaded up on debt struggle. Do we need to go through that?
[00:58:15] Speaker 17: So I think all of that's potentially quite likely at some point, but we're really only two years into this. I mean, think about it, it's really only two years ago there was widespread use of AI. It's only a year and a half ago that reasoning got developed. It was only about six months ago agentic capabilities were released. It's only about two months ago that anyone really started actively using them, and I'm talking about the leading-edge users of AI here in countries and companies that have access to it. It's a big world out there. So I think this is very, you know, we are very, very early in a long process, and it'll take a lot longer than the next few months to realise that, you know, there may be...
[00:58:48] Speaker 1: But someone seems to be very good at looking forward.
[00:58:50] Speaker 17: You could, but, you know, we're trading the market here, and, I mean, if we're really going to look forward, actually, one thing we potentially should talk about is the Social Security Trust Fund, which will run out of capital and need new money by 2032, well within a 10-year Treasury window. So actually, like, thinking about some of the consequences of that side of the fence as well. We'll come on to that later, but, you know, I do think that one of the more imminent concerns is going to be that there is an enormous level of margin expansion that is happening because the ability to supply AI is very constrained relative to demand. That will clear up within a couple of years, probably, because there is a lot of semiconductor manufacturing coming online in 2028. By then, maybe we need even more, and we still have a supply and demand mismatch. But the margin is very high because we're undersupplied.
[00:59:35] Speaker 2: Do you want to be looking at adoptives in Europe?
[00:59:38] Speaker 17: Yeah, so, I mean, Europe is interesting because nearly half the market now are financials and industrials, and that's because of fiscal stimulus and, you know, a few other nuances here. There is also an AI trade within that. But we upgraded healthcare a couple of months ago in part because it had cheapened and was less well-owned, and in part because we could see the troughing in things like the GLP-1 pricing, and we could start looking at volumes again. But also, our analyst is very bullish on AI being productive within healthcare, potentially first, maybe even before banks, which I thought would be where AI would be most productive first. So there's definitely use cases that are growing, and the key there is that if you can make use of AI to, what it should do is expand your margin. The best value of a margin expansion is if your margin is low. U.S. margins are already high. European margins are moderate, and small cap and emerging market margins are lower. So if you get AI productivity coming through, then actually it's the rest of the world where the earnings can start to really accelerate.
[01:00:33] Speaker 1: Just tell me about your concerns around what is happening with the U.S. Oh, it's a... Just in a second. Yeah, in a second. But is the U.S. going to have to raise taxes?
[01:00:43] Speaker 17: One or the other. So the U.S. Social Security Trust Fund is expected to run out of money in 2031 or 2032. That's five or six years away. At that point, either the benefits get cut very materially or they need to be funded out of existing fiscal balances, which requires more Treasury issuance. A lot more Treasury issuance. Yeah, which implies higher yields
[01:01:03] Speaker 1: and the crowding out effect goes even further. Gerry, nice to see you. Lots of ground covered. Gerry Fowler, UBS Investment Bank, Global Derivatives and European Equity Strategy Head. Quick look at the call six. Let's figure out what is happening here. I think Novo's got XD today, so just bear that in mind. Tech is actually a little softer this morning, so ASML is responding to AMD overnight, despite the fact that I think that AMD did pretty well. So you can look at that from either side of the coin. Nestle, a little softer, but defense stocks definitely on the front foot. Aviva is down this morning, I see, on Louise Moon's first board. So let's start there.
[01:01:38] Speaker 16: Yeah, Aviva slightly down into the red. That's after their first half results, which did come through relatively positively, but obviously not enough to boost share prices and impress investors this morning. So moving on to HelloFresh, they have had a ratings change. Taking a look at their shares, down over 5%, almost 6%. They've been cut to underweight at Barclays. Maersk has also had a ratings change. We can take a look at seeing how that is impacting their shares this morning. Boosting them over 3%. They had good results yesterday. Second quarter results that came in quite strong, and they've been raised to a hold at Nordia. Now, most of their ratings are still at a sell, but that's boosting that there. Now, taking a look at Normal Group, also up into the green, almost 8%. That's after they've issued a buyback, about 200 million euros. So positive news for Normal Group over in Germany. And then moving on to DFDS, another company that we're watching as well this morning. Really soaring, in a way, today, up over 15% into the green. That's after they've increased their guidance. And then just quickly, on the other side, looking at GB Group, they have actually cut their forecasts, and it's really weighing on shares, down over 26%. They've cut their full-year revenue growth outlook.
[01:02:53] Speaker 1: Thank you very much indeed. One further stock I think we should maybe just have a quick look at, and that is SAP. You saw yesterday, probably Workday up over 30% at one point. Silver Lake in talks to buy that business. Valuations in this space have got a little cheaper recently. But SAP, bouncing back potentially, on that revaluation of the sector, maybe, that the Silver Lake talks imply.
[01:03:15] Speaker 2: Yeah, a bit of a change in narrative around the SaaSpocalypse risk, with software actually performing pretty well in recent months. Coming up, OpenAI said to be on track to generate a revenue run rate of more than $40 billion. More on that story next. This is Bloomberg. Welcome back. Bloomberg understands that OpenAI is on track to generate over $40 billion in annualized revenue, roughly doubling its run rate from the end of 2025. The chat GBT makers' revenue has accelerated in recent months, bolstering the company's plans for its Wall Street debut. Let's get more from Bloomberg's Anthony Stevens. Anthony, do we know what is behind this rise in revenue for OpenAI and how much traction they're getting right now at the enterprise?
[01:04:18] Speaker 18: Yeah, that's interesting, right? The fact that they've kept their pricing power at the very top end. So the coding part of the platform and the chat GPT work is driving this. This is a pretty decent increase from the last month's revenue as well. And the ARR is pretty much double what they had before. So this sets the stage quite nicely for any IPO plans that it might have and also pushes back on this argument that Chinese models and their competition at the lower end and the medium end is kind of eating into US institutional demand for AI, right? So the remainder of the kind of market is being taken at the top end by Anthropic and OpenAI and it seems like it's a very strong moat at the top. Now what's going to be important about the guidance is as these new models from the Chinese continue and we had another one drop just now from Jipu or Z.ai how it continues to maintain this leadership is going to be important.
[01:05:18] Speaker 1: Yeah, and talking of Chinese models pricing's starting to get really interesting because they've been super cheap up until now. It was really interesting to see DeepSeq basically quadrupling the price peak price. So it's the peak price which is interesting here for its flagship AI model. What are the implications of this? Is this just trying to push users to other times of the day? What should I read into this?
[01:05:44] Speaker 18: Yeah, it's that subtlety that you highlighted that is very important, right? They want to move people away from the peak time and this is because as everybody knows China has constrained on the compute side there's only so much of it to go around so they want to move it to the off peak hours. That being said it is an attempt to monetize AI better given that this model is doing really well it has very good statistics in terms of performance they do want to get more money out of it. Now remember DeepSeq is not pursuing profits as ardently as some of the other players because it is funded in the back end by a very successful hedge fund. It's a very different model from almost all the other frontier model makers, right? But that being said a 4x increase in peak time is meaningful but let's put that into perspective the output tokens are still an absolute fraction of the price of the Western models so we're still talking about cost per task which has been the pushback from OpenAI and Anthropic. Look, it takes more money net-net to complete a task successfully using the Chinese models versus the Western models so this debate is very live and ongoing. Are we talking about tokens being cheap or are we talking about tasks being cheap to achieve?
[01:06:53] Speaker 2: Yeah, and what this means for the chip makers as well AMD of course amongst those at the forefront with their GPUs and that company Stephen, delivering a record bond sale for the company in the US yesterday how much appetite was there? What are the signals that we should be taking from that?
[01:07:10] Speaker 18: Look, the early signals are that it's very tight the early indications were that it's tightened from IG credit which is already very tight in the US versus historical standards this company doesn't carry a lot of debt even if you put this new deal on top of its existing debt load they have the cash to cover it their guidance is super strong they pretty much anticipate their kind of revenues exploding from the fact that the AI server space is extremely fast growing we had very strong results from Lenovo in Hong Kong yesterday you have the Taiwanese players limit up a couple of times after earnings and then you must remember that Intel priced very easily in the equity market so we're getting a lot of demand for this space in both equity and credit markets and it'll be interesting to see how much tighter versus IG this can get now that's going to be hitting a reasonable floor right? Like there's only so much tighter credit can get in the US while there's so much supply so this demand supply dynamic rather than just outright demand is going to be the key determining factor of how well AI credit trades going forward
[01:08:16] Speaker 1: Anthony we were just talking about crowding out and what is happening in terms of that trade yeah certainly one to watch Anthony Stevens joining us on the tech trade the latest on that let's talk about what's happening when it comes to the weather trade 26 is on track to be the world's hottest year on record a forecast reinforced by an unusually powerful El Nino scorching temperatures straining economies across the globe already dealing with pain caused by the conflict of course in the Middle East let's get the latest from the Bloomberg weather and climate reporter Joe Wirtz who's joining us around the table
[01:08:47] Speaker 19: morning hey how are you doing I'm hot it's been very hot hottest day of the year here in London just yesterday
[01:08:55] Speaker 1: are we going to have to get used to this is this a 26 phenomenon or is this a 26 27 28 phenomenon talk to me about kind of where we are and what comes next because if this is a kind of if this is something we're going to have to get used to we're going to have to see some big changes
[01:09:10] Speaker 19: yeah well I mean researchers meteorologists talk about this being a new normal we've just seen you know here in Europe it's just been just an unrelenting stream of heat five heat waves now here in Europe and we're starting to see sort of the mounting toll this is taking we're seeing drought start to pick up we've seen wildfires just you know this heat dry weather has just baked vegetation and farmland and turned it into wildfire kindling and we're starting to see a big toll being taken now on farmers and agriculture it's raising food security risks and inflation risks as those things mount and it's important to know that these are not things that are easily reversed right once these once the soil starts drying out in those deep deep root layers
[01:10:04] Speaker 2: it's hard to reverse talk to us about the technology that's being deployed around forecasting because that's new
[01:10:10] Speaker 19: yeah that's right well it's you know the extremes are increasing but also the consequences you know the grid is increasingly powered by weather sensitive technologies like wind and solar and you know there's a big rush on to try to understand that better and get more data to understand supply and demand better we're seeing companies start using drones to get fly into the atmosphere and to help unlock data from areas where there's been really big gaps I talked to a company out of Switzerland that's using drones and testing them in Norway Oklahoma Switzerland Germany to capture better data that will you know give people a better look at the atmosphere
[01:10:58] Speaker 1: there's a great story on that go and check it out it's well worth a read this morning in terms of what that data is delivering and certainly there's a market for that stuff Joe nice to see enjoy the weekend stay cool Joe Wirtz joining us on the latest technology around what we are and how we're managing the data coming out of the climate okay what we've got coming up apart from the fact that it doesn't look like it's going to rain this weekend we've got the NFL preseason there is horse racing I understand in Siena in a small square
[01:11:27] Speaker 2: no saddles no I went a long time ago but it was pretty it was pretty hairy
[01:11:33] Speaker 1: for the riders it's quite hairy for the audience it's brutal anyway so that's on proms continues the FA community shield final I think is on this weekend as well but it's not going to rain and once again that's the narrative here it's another
[01:11:46] Speaker 2: weekend of heat yeah another weekend of heat forecast that maybe you get some rain next next week before we get there coming up Bloomberg Tech we're going to be talking robots there's a lot of hype around humanoids but this could be a turning point just how close is the technology becoming part of our everyday lives we just explore that next stay with us this is Bloomberg