About this transcript: This is a full AI-generated transcript of Meta Plans a Cloud Business, US Jobs Day — The Opening Trade 7/2/2026 from Bloomberg Television, published July 2, 2026. The transcript contains 17,726 words with timestamps and was generated using Whisper AI.
"Thursday the second. Good morning. How are you doing? Let's talk about what's going on. Asian chip stocks definitely following American chip stocks sharply lower overnight. Talk about that in a moment. Oil is also down. Brent's actually close to dropping into the 60s now. And it is, of course,..."
[00:00:00] Speaker 1: Thursday the second. Good morning. How are you doing? Let's talk about what's going on. Asian chip stocks definitely following American chip stocks sharply lower overnight. Talk about that in a moment. Oil is also down. Brent's actually close to dropping into the 60s now. And it is, of course, payroll day in the USA. I say, of course, it's Thursday, not Friday. The debate is raging. Anna, regarding rate hikes. Yeah, absolutely. And we'll come to that in just a moment. I seem to have started with the least interesting number on this board. We'll get
[00:00:29] Speaker 2: to the more interesting ones. Eurostox 50 futures, not expected to go very far, but I guess it's important to know that given we've got Walsh behind us, non-farm payrolls still ahead. The Cosby swinging between euphoria and anxiety on a daily basis. Today, anxiety wins out connected to the meta story. Perhaps we will dive into that down by six and a half percent on the South Korean benchmark. And crude, we heard from Guy there close to dropping into the 60s, got a 70 handle on the Brent price as we continue to watch the amount of products that is past passing through the straight to full news. The countdown to the opening trade starts right now.
[00:01:06] Speaker 3: Good morning. So has Meta just blown a hole in the case for AI infrastructure, planning to rent out a company that has been so aggressive on the build out data centers and AI infrastructure, planning, according to our reporting, to potentially rent rent out some of that capacity. Build out, overbuild out, over capacity. The market read on this, I think, was fascinating. The market take was bullish for Meta, bearish for the chip stocks and bearish for the cloud providers, particularly names like CoreWeave, which fell very heavily in the session yesterday.
[00:01:47] Speaker 1: I thought we were capacity constrained. Wasn't that the argument? Isn't that the argument? Did Meta, as you say, just upend that? I think it's hard to get a kind of complete handle on what is happening here. How much excess capacity is there? What is happening here? We don't know yet in terms of the details as to what is going to sort of what Meta is going to do with this. But everybody's been waiting for this moment when one of the hyperscalers effectively turns around and goes, OK, we're going to calm this down a little bit. What does that look like? Is that positive for the hyperscalers to the Meta point? Is that negative for the chip story? That looks like it's what's been the case overnight.
[00:02:21] Speaker 2: Yeah, I thought it was really interesting, the contrast between those two dynamics, the Meta story and the rest of the chip sector story. The fact that Meta went so strongly positive as well, up by 8% on the back of this narrative. Is that because we're actually very nervous about companies, once again, spending on CapEx, nervous about what they're planning to do? And if this means they are less likely to spend more money on frontier models, is that being seen as a positive? Well, that seems like a weird place to be when we've had such incredible valuations attached to some of the memory stocks. Should we mention OpenAI as well and how you benefit? And this is an FT story, but how you spread the benefits of AI and the build out of AI and win over politicians and populations? Well, maybe you give the mistake. That seems to be what the story is there. We knew this before, but the FT putting a number on it saying that OpenAI is considering giving 5% to the US government.
[00:03:11] Speaker 3: Which is really significant. And the reporting from the Financial Times suggesting that other frontier models would have to get on board for that to come to a concrete decision. But conversations have been taking place, according to this reporting, between Sam Altman and the Treasury Secretary and others within the Trump administration around a potential state government stake. Again, not just an OpenAI, but in other frontier models as well, so that the public can get the benefits and the upside. I think what Sam Altman is seeing is that the pitchforks are out right now in the US. There is a lot of public pushback around data centers. There's the incredible wealth that's being distributed as these companies list and plan to list. He's trying to get ahead of that. Also, with an opinion piece in the Financial Times, Sam Altman saying the quiet bit out loud, which is that there is this race to the frontier and there are safe concerns around that. And that's why he wants a governance infrastructure as well, led by the US.
[00:04:07] Speaker 1: There is an alternative narrative around why you would give a 5% state to the government. And that is that the government will protect you when things turn around, when maybe actually you start to see cracks appearing in the AI narrative and maybe valuations aren't quite what they once were. It would be nice to have Trump's back, nice for Trump to have your back at that point. So there's kind of two narratives around that. I'm sure I'm sure the one he describes is the right one. Let's talk a little bit about oil. So Brent is getting close to 60, a 60 handle. We're at 70, as Anna just showed us just a moment ago. What I think is actually more interesting is the shape of the curve. So you've got a contango, i.e. right at the front, you've got prices lower, then they go up and then they come back down again. So you've got this kink at the front end of the curve. You can see it's CCRV on your Bloomberg. And what that tells you is there's a huge amount of crude coming out of the Gulf right now. There's a glut. And the question is, how long does it take to work through this glut and what comes after what looks like a short-term glut in the crude price? So that's kind of where we are right now. A little kink in the curve. There's a lot of crude on the water. The Iranians can't even sell all the crude they've got out there. So at the moment, we're oversupplied. Right. Then what?
[00:05:24] Speaker 2: Yes. So that's the short-term glut story. You hear that at the same time as you hear the inventory story in the States, for example, looking pretty tight. Maybe that speaks to a different time period. But if you look at those numbers we got yesterday, those inventories, the lowest since 2025, March. But if you include the strategic petroleum reserves, the government's sort of allocated amount, then we're at the lowest since 2004. And maybe that tells us something about why we've got a glut as well. And they're continuing to release out of that.
[00:05:51] Speaker 1: They are. But then that goes back to the curve, which is then the price goes up again because presumably at some point you've got to refill that. So you start to get extra demand coming in. So you get this sort of short-term lower price with a more medium-term price, which is a little bit higher.
[00:06:06] Speaker 3: And the China restocking story, when and if they do that, is going to be crucial, isn't it, given the role that China's played in this whole story around the oil price? I think the Bloomberg reporting in terms of what's happening on the ground around the strait is really interesting as well. So the reporting from our team is suggesting that Iran has been surprised by how well the U.S. is actually able to coordinate with shippers to get those ships through, particularly along the coast of Amman. So about 10 million barrels per day. Then there's 5 million going through alternative routes, so land-based routes. That's 15 million. Prior to the war, you were doing 20 million through the routes. So you're not far off. If you're at 15 million, you're not far off the 20 million, which comes back to your point about whether or not we're becoming oversupplied.
[00:06:43] Speaker 1: So I encourage the Iranians, though, to say, actually, we do want to control the strait of Hummers, and actually, you guys are getting too much out, and we occasionally need to send a little warning shot across your bow or maybe into your bow.
[00:06:55] Speaker 2: Yeah. Who does it in Bolden, I guess, is the question. Let's talk about central banks, because this was a topic of conversation yesterday with Kevin Walsh speaking. We've got non-farm payrolls coming. Lots of thinking about the shape of the curve. Lots of thinking about rate hikes and the path forward there. Well, they all seem to get on well, anyway, on the stage would be the first conclusion. I thought that was interesting, because there did seem to be some who were enjoying the fact that Kevin Walsh has introduced the idea that you don't have to give much forward guidance. You can step back from forward guidance. And he definitely was continuing to step back from the idea of forward guidance, wasn't he? I guess from a market perspective, he was seen as a little bit dovish. He was talking about inflation risks having decreased. I mean, he was really just talking about the oil price having gone down. But the market took that at the margin, a little bit of evidence of dovishness, maybe less urgency for a hike. I actually thought some of the interesting stuff was about AI and his time horizons there and talking about how we might, within six months, he thinks, start to have a different narrative around AI. He acknowledged, at the moment, it's all demand and perhaps inflation. But later on, he's thinking it becomes supply side. And then in just within six to 12 months, I think it was the kind of the time horizon he was talking about.
[00:08:00] Speaker 1: That's the Greenspan argument. And he's hoping to repeat the same trick the Greenspan.
[00:08:05] Speaker 3: It becomes deflationary.
[00:08:06] Speaker 1: Yeah, it becomes deflationary further down the road. As a result, you can foresee that and you can keep rates lower and you don't have to sort of be as aggressive as you would. The market is definitely pricing in, though, more rate hikes at the front. The curve is flattening, bear flattening. And that's really interesting. And we're going to get a payroll number today. The whisper number today, I think, is 140. The market. 140. That's the whisper number. The survey number is 130. These are really strong numbers.
[00:08:33] Speaker 3: Would that be good news as bad news for the markets, though?
[00:08:36] Speaker 1: Presumably, yeah. If you are worried about rate hikes, then Walsh is basically saying he wants to get inflation under control. If the labour market is behaving and actually doing quite well, that would only further augment that argument.
[00:08:48] Speaker 2: Yes. And I thought Lizzie was making a good point. She was saying Bloomberg Economics has got a 200,000 number on it for today, which is huge. And the range of expectation is so huge, which in a strange week when we've got a holiday tomorrow in the U.S., you wonder what that does to markets.
[00:09:02] Speaker 1: Early closure today for the U.S. Treasury market. Just be aware of that. Coming up, putting off, not pulling off, putting off an IPO, why tankmaker KNDS is postponing what was said to be one of Europe's largest debuts in recent years. We'll talk about that. Plus, the yen is strengthening slightly this morning. I mean, speculation that further FX intervention may come without warnings from officials. Turn your phones on. More on that. Trade is definitely remaining on high alert. Up next, we're going to be joined by Nanette Hesler-Fader, head of investment strategy at Lombard ODA. Got any questions? And I'm sure you do. Please send them to us. IB plus. BB TV Go is the function. This is brilliant.
[00:09:39] Speaker 3: Good morning. Happy Thursday. We are currently looking at European futures down two-tenths of a percent. We're a little over 45 minutes away, of course, from the opening trade this Thursday. Markets looking ahead, of course, to non-farm payrolls. That data dropping later today out of the U.S. And also weighing up what's happening in terms of the sell-off around chip stocks, with Meta causing some unease in terms of its potential plans to rent out capacity.
[00:10:22] Speaker 1: About a decent move at the back end of the Japanese curve this morning. You're seeing, it's being led by the 20-year, I think, but you are seeing 10s up. You're also seeing 30s up as well. Maybe a little less than we're seeing. Maybe, actually, pretty similar numbers in terms of what we're seeing with the 20-year. So you're seeing this kind of move in the Japanese curve. The market is waiting also for intervention, which now apparently may, according to Reuters, come without warning.
[00:10:48] Speaker 2: Right. And we certainly haven't been getting any warnings. As our coverage over the last 24 hours has been pointing out, we haven't been getting the usual signals. So what does that mean, indeed, for Japan? What does it mean for the MOF and the BOJ? Let's talk more broadly about what's going on in the Asia session, because some really interesting developments around tech and around the South Korean interpretation of those stories. A sell-off in semiconductor stocks hits South Korea, as our scoop about Meta's cloud business plans raises concerns over the speed of the AI build-out. For more, let's talk to Bloomberg's Anthony Stevens in Hong Kong. And I'm just seeing a red headline across my Bloomberg terminal just underscoring the extent of the selling that we're seeing in Korea then, Anthony. The cost be falling by 8.15% right now. SK Hynix extending its drop to 14%. Help us understand how something that sent Meta shares up by 8% can weigh so heavily on the memory stocks. What are we learning about the market's priorities at this point around the AI story?
[00:11:49] Speaker 4: We're learning that one of the most aggressive builders of AI capacity in terms of infrastructure and compute now wants to plan for a contingency to rent out that compute. Now, how that plays out over the next weeks and months is relatively complicated. How much demand there is for compute is a very, very open question. But what investors are pricing in right now is people are going to slow down their pace of building incremental new capacity for compute. And we're seeing that trade play out very aggressively in Asia, not only in Korea, in China as well. So both AI ecosystems together are pricing in a slowdown of new infrastructure build. And obviously, one of the first places of call will be the memory trade. The memory trade has outperformed massively in the US with Micron and in Samsung and Hynix in Asia. What is important to mention as well, before you guys came in, it's been a very volatile session. Korea bounced very hard. 6% off the lows was only down around 2% at one point. And now it's coming back all the way down. So it's extremely whippy. There is a lot of narrative swirling. There's plenty of analysts pushback on this narrative about meta. There's a lot of people saying like, look, you know, the demand for compute is very strong. You can see out to 2028. Why are you panicking about this? That NeoCloud is a buy on dip and so on. So this is going to be a huge theme in the equity market, quite apart from the macro that the NFP will bring you.
[00:13:16] Speaker 3: Anthony, I guess another counter to the kind of bearish take on this is what Apple is doing. I mean, Apple is so concerned about short edition memory. Not only is it raising its prices, but it's also lobbying the U.S. administration to allow it to buy Chinese memory chips.
[00:13:32] Speaker 4: Yeah, this speaks to the memory shortage and all the strategies everyone is employing to deal with the memory shortage. So you do have Apple being quite aggressive in looking for diversified sources of DRAM. Then you have people looking to use a NAND flash to kind of offset some of the DRAM shortage. And then you have the Chinese trying to improve usage of memory using software. Remember that DeepSeek put out open source software to improve memory usage. So people are attacking this problem from all sides. And until this meta news, it was looking like, you know, the Koreans were pretty relaxed about it. You know, whatever memory you decided to use, Korea made it and it was fine. But if you decide to use less memory overall, now that's a problem for Korea.
[00:14:17] Speaker 1: Okay, we're going to leave it there. Anthony, we could go. So many angles to pursue on this one. Thanks for jumping in. Anthony Stevens on the tech trade. Nanette Hestafedo, EMEA, CIO at Lombard ODA, joining us now to carry on the conversation. Nanette, good morning. You have adopted a more neutral stance when it comes to tech. But what does neutral actually mean? How much tech is in your portfolio right now?
[00:14:42] Speaker 5: Well, we think that it's still good to be exposed to tech about at the market weight of tech and to look maybe to give more emphasis to other sectors that are indirectly benefiting as well. We've been, for example, very interested in the financials. There is quite a bit that is coming up here to support financials at the moment. Certainly, the expectations that central banks may have to do, a little bit of interest rate hikes. In Europe, it's already the case. This is supportive for interest income, for banks, for example. And then all the activity of mergers, acquisitions, the IPOs, of course, in the United States are supportive as well. In general, we are looking for a little bit of a broadening here in different sectors. So this has been the motivation to get out of tech and prefer other sectors at this point.
[00:15:44] Speaker 1: There is this argument that you get that broadening, that you see money coming out of tech and it goes into other parts of the market. And that all sounds very, very sensible. My question to you is, if tech goes down, and say it goes down reasonably hard, do other things go up or does everything go down?
[00:16:02] Speaker 5: Yeah, this is obviously always the question when you have such a concentrated market. And I believe that indeed a hard landing there would not be good for the broader market. It would probably also signal something about the cycle. But I am really encouraged by the fact that, for example, U.S. real yields here have come up quite a bit. They are now in 10-year tip yields at 2.26. What it is telling you is that actually the broader economy in the United States is surprising positively. And so I do think that if there is a little bit of volatility, you were mentioning previously the South Korean market. I think we should be putting that in that camp of volatility in the tech sector, but still overall a very encouraging environment.
[00:16:56] Speaker 2: Nanette, good morning. And so if you're investing in that, as you describe it, resilient or stronger U.S. economy, are you concerned at all that that is based on the AI trade to some degree, maybe flattered by the World Cup, but also based on the AI trade?
[00:17:15] Speaker 5: Well, AI is certainly having ramifications for the broader economy because it is going to raise productivity in a number of services and sectors there. And productivity increases are good, not only because they allow the central bank maybe to put the foot off the rate hiking pedal over time, because it also has some disinflationary properties. But then also tech is really enabling so many new solutions. So actually, I am thinking of this being absolutely part of a broader picture. Of course, the fact that we have de-escalation in the Middle East, this is really supporting a number of more cyclical sectors as well here. Think about the luxury sector, for example. And altogether, I think that we are at a point where, in fact, if the jobs market report is not showing us too much of an increase in wages, then we ought to have a good environment here.
[00:18:27] Speaker 2: Okay, so maybe luxury, maybe financials. What about other markets that maybe have been sidelined by our frenzy for all AI and memory investments? Nanette, I mean, the Chinese stock market, for example, not necessarily keeping up with the global tech story.
[00:18:44] Speaker 5: Yes, indeed, there have been markets that have been lagging. Your Chinese example is a good one. And we have now become actually more positive, more broadly. We are looking also on onshore China equities as offering interesting entry opportunities. But even just in the United States, for example, some market segments like small caps have been a little bit lagging behind here because they are not so exposed to the whole AI tech angle. And I think that there is a good catch up here as well.
[00:19:22] Speaker 3: Nanette, good morning. Is Japan potentially facing a currency crisis? How much further can the yen fall?
[00:19:29] Speaker 5: Really, Japan is paying now the price of the Bank of Japan lagging for so long. And it generally takes some time and decisive action here before a turn is coming. However, at the current levels, really, the Japanese yen continues to flag as very cheap. And so should there be more decisive action here in terms of rate hikes by the Bank of Japan or any guidance towards that? I think that there is a good upside for the yen to recover.
[00:20:07] Speaker 3: Okay. Potentially upside for the yen to recover. I want to switch focus to the UK because you have a view on on guilt, Nanette. You're seeing opportunities in guilt. What underpins that? How are you thinking about political risk and fiscal spend?
[00:20:21] Speaker 5: Generally speaking, we have been seeing this push up in yields as an opportunity for long term investors here. And guilt is a very much part of that story. We don't think that the economy is really conducive to a very big hiking cycle to be expected by the Bank of England here. And so at these levels and even with the political uncertainties that have been maybe keeping investors away, we think that the yield level in guilt is really attractive. It is higher than what we are seeing in the U.S. It is similar to what we are also considering as an attractive high yielding government bond market in Australia, for example. So at the moment, taking advantage of higher yields, either in government bonds like in the UK or as well in emerging market, hard currency bonds is a strategy that, in our view, is making very good use of risk budget here by investors. So take advantage of it.
[00:21:31] Speaker 3: OK, Nanette, thank you very much indeed, Nanette Eclaferdab, MIA, CIO at Lombard Odier. Guy.
[00:21:38] Speaker 1: It's been said in a newsletter, Jim Reid apparently pointing out that the Mag 7 have underperformed guilt so far this year. That's a nice line, isn't it? It's quite a nice line. What else do you need to know this Thursday morning? The yen strengthening slightly against the dollar amid speculation that further intervention by Japan to balsa the currency may come without warning this time. The move followed reports by Reuters that Japan may abandon telegraphing its intention to the market, unlike intervention that came back in April. Bloomberg has learned that Chancellor Friedrich Merz's coalition has reached an agreement on a set of far-reaching reforms for Germany's pension system, labour market and income tax. An agreement would give Merz's CDU-led bloc and the Social Democrats a legislative blueprint for sweeping changes to Germany's social welfare system. This is the coalition that seeks to revive economic growth and regain faltering public support. It's saying in Germany, the tankmaker KNDS is postponing its IPO, halting what was set to be one of Europe's largest debuts in recent years. The company cited volatility in the European defence sector, saying shareholders informed the firm that they want to resume the process when market conditions are a little better. And maybe take a look at Ryan Mattel's share price to understand their thinking.
[00:22:50] Speaker 2: Yes, but it's interesting, isn't it? Because that Ryan Mattel share price move was as a result of a German government decision to spend on one thing and not another, or on one company and not another, partly. That's a feature of the industry, right? So that volatility will always be there?
[00:23:05] Speaker 1: Yeah, but Ryan Mattel, that drop has been kind of sequential and happening for a little while now. And other names in the defence sector are also down. And the move is significant. Ryan Mattel's off, what, 40-plus percent?
[00:23:16] Speaker 2: So we shouldn't overplay what happened on the day they announced the IPO. It wasn't just that big drop in Ryan Mattel. It's the broader hesitancy around the defence sector.
[00:23:24] Speaker 3: It's a broader question. So Ryan Mattel's down a little over 30% a year today. But it's a broader question. If you can't get European defence companies to market and to list in an environment where you're spending historic amounts on defence within modern history, then what can you get to IPO? Yep. Good questions.
[00:23:41] Speaker 2: Coming up on the programme, we'll talk fixed income. Pedro Kumra from TD Securities joins us to discuss all the central bank commentary that we've seen this week out of Cintra. We will also look ahead, of course, to the jobs report. This is Bloomberg.
[00:23:57] Speaker 1: Thursday morning. Good morning. 30 minutes to go until the start of trading here in Europe. Equities I'm talking about. The picture is like this. Europe, as Anna was pointing out a little bit earlier, is not doing very much. The action is elsewhere. In Asia, you've seen aggressive selling. But in some ways, that's the response to the selling we saw late yesterday on Wall Street. But Wall Street is also still down. The S&P is only down by one tenth of one percent. The Nasdaq, though, is down another four tenths of one percent. So there's no dip buying yet emerging after the sell-off that we saw yesterday, which seemed to be inspired by Meta.
[00:24:44] Speaker 2: Yes, indeed. Meta playing a crucial role there in the equity market story. Let's talk about where bond markets are. And what's been happening here is yesterday we actually saw bond yields around Europe a little higher. And today we seem to be continuing with that theme, but really not by much. A lot more of the action is just like the equity story coming through from the Asia session. So over in Japan, we've seen yields significantly higher, particularly at the long end. Japanese government bonds falling, a 10-year auction drawing weak demand from investors. We continue to be on intervention watch, of course. Dollar-yen fairly relatively stable for dollar-yen, 162.23. So the yen actually up by two tenths of a percent this morning.
[00:25:20] Speaker 3: And, of course, this has been the week when central bank leaders have been gathering in Sintra, of course, in Portugal. Take a listen to their views on the rate path ahead.
[00:25:29] Speaker 6: We've all looked around and we've seen that prices are too high. And I don't think I'm the only one on this stage that's recommitted to deliver price stability.
[00:25:37] Speaker 7: I think risks, by the way, that we have to the upside on inflation and to the downside of growth are probably more broadly balanced than they were a few weeks ago as a result of what we're seeing.
[00:25:50] Speaker 8: It is very frustrating. I was very much of the view that we were going to have inflation back at the 2.0 target in the late spring.
[00:25:58] Speaker 9: There's a lot of uncertainty out there. Those risks could shift quickly. And the other part of our message is if the situation changes, we're prepared to take action.
[00:26:11] Speaker 3: Well, we're joined now by Pooja Kumra, senior European and UK rate strategist at TD Securities. Pooja, ahead of these comments from Kevin Walsh on that panel, there was a debate still, among some at least in the markets, as to which Kevin we really have now as head of the Fed. Do we have a clearer sense in terms of his priorities and his focus and his emphasis?
[00:26:31] Speaker 10: That's a big question. I think markets are still in the same place. We know that there's no forward rate guidance. And that is not just from Walsh, but it's from all central banks right now. But I think there was some devish elements of Walsh that we saw in the conference. He acknowledged the fact that inflation has fallen, inflation expectations are narrowing. And also when it comes to productive AI, he did mention that initially the focus is on the demand side of AI. And going forward, it will be the supply side, i.e. your inflation should be lower. So I won't say we got much from him, but it wasn't as hawkish as what markets saw in the June meeting. I would actually be very curious to learn about the minutes that get released next week, because he's always talked about the family fights and what we talk in closed rooms. I would definitely love to read that.
[00:27:21] Speaker 3: OK, so we look ahead to the minutes. He's happy to give forward guidance on AI and how that changes. Before we get to the minutes next week, we've got non-farm payrolls today. Does that, his comments yesterday were taken by some as being moderately dovish. Do the non-farm payroll numbers, do we get a reimagining of the strength of the labor market today?
[00:27:41] Speaker 10: I would say yes. Just if we are living in the world of no forward rate guidance, so what will drive us is the markets and the data, right? So that's what is driving how things will work right now. That's what the central banks have told us. And we have seen the three-month rate is sitting around 180K. So it does play a very important role in guiding whether that hike is still alive for the year. We also know that this payroll number will have seasonal impacts, will have impacts from the World Cup. So I would be actually looking at the different parts that led to the uptick. Like I know the number right now, the consensus is around 100. Your whisper number is around 130. But I think the components of the labor market, whether it's just seasonal and World Cup led, would be key for markets right now.
[00:28:28] Speaker 1: Is the U.S. labor market strong enough for the Fed to hike?
[00:28:32] Speaker 10: It does seem so, given what we have seen from non-farm payroll, we have seen the unemployment rate. We have seen most of the indicators, even if we forget about non-farm payrolls. I think the shakiness that we saw last year does not exist. But I think we also need to know from a seasonal perspective, the weakness in the private side of the payroll starts only in the second half of the year. Our July payrolls have been jinxed for the last two, three years. Sure.
[00:28:57] Speaker 1: But I guess what I'm really asking is, can I park payrolls normally super important? Can I put the labor market to one side? Walsh is clearly concerned about the inflation picture. That means I get a flatter curve. He's going to try and keep inflation under control, which is better for longer term, better for the long end of the curve. The front end comes up. How flat does the curve get? Could we get to a position where it inverts?
[00:29:20] Speaker 10: I don't think we are in those levels primarily because we are not facing the kind of inflationary shock that we saw in 2022 that drove our curve in the negative level, right? If we are saying at least for the pressure from the oil is dissipating and the fact that, OK, the financial now what we are seeing is the real yields are doing the work for most of the central banks, even before they hike, right? Like when it comes to mortgage rates, it's already priced in. So I'm not looking for flatter curves. We will get flatter curves, negative curves, only if we are looking for multiple rate hikes, which is not our base case. We are still, we think that Fed can still remain on hold, maximum one hike, but we're not looking for more than that. Yeah.
[00:30:04] Speaker 2: Buja, are we going to be testing the rationale that if you talk hawkish, this isn't just the Fed, this is other geographies as well. If you talk hawkish, you let the market do your work for you, you don't actually have to hike. How many times can you do that? For how long can you keep doing that?
[00:30:18] Speaker 10: But to be honest, I mean, other than U.S., I don't think any now the central bank, whether it's ECB or BO, you need to talk hawkish.
[00:30:26] Speaker 2: Yeah, with the oil price having dropped.
[00:30:28] Speaker 10: Yes, yes. I mean, with oil prices being dropped. But yes, after a point, even verbal easing or verbal straining, if that's a word, does not work.
[00:30:37] Speaker 2: Right. OK, so we keep an eye on that. So you don't think that the Fed needs to hike then. You think that they're actually on hold. And what does that mean for the ECB? Has the narrative around the ECB shifted, either based on what you heard on Cintra, or just by watching the oil price, which is, you know, Brent now 70 is the handle.
[00:30:53] Speaker 10: Yes, I think the key factor, the thing that we all heard that June wasn't an insurance hike, I think that got repeated a number of times for us. When it comes to ECB, we are back to the milder scenario where oil prices come back to pre-war level. But I was, you know, if you look at ECB's forecast, even with the milder scenario, they are looking at core to stay above 2.3, 2.4 in the next two, three years, which just tells you that there is a hawkish bias clearly embedded within the ECB, irrespective of oil right now. So for me, yes, July is no hike, but markets should not totally fade the idea of a hike.
[00:31:32] Speaker 2: What explains that, do you think, Pooja, that view at the ECB, that even with oil prices not as a major component, inflation doesn't get back down to target?
[00:31:42] Speaker 10: I think there is an ongoing reassessment of the neutral, right? And I think that's where Lane came in two weeks back, saying that, you know, the new neutral is 2.5%. So from an ECB perspective, I don't think that they consider themselves overly restrictive at these levels when domestic resilience still remains. And also the fact that you have fiscal coming in, right? You have that AI boom, not to the extent that we are seeing in U.S., but there's still money circulating in the system.
[00:32:10] Speaker 1: If tech sold off, if AI became cheaper, would the Fed defend the stock market or take the deflationary hit that would come from that, that benefit that would come from that? Because it strikes me as there's two kind of competing narratives, one of which you need to keep the U.S. economy going and retail spending and all those kind of good things. But on the other hand, if AI becomes significantly cheaper because we see the bubble deflating, that's what Walsh wants. That's what he's hoping for is going to happen. So how does he react to that? Because if you prop up the AI bubble, the danger is you don't get that deflationary benefit until much further down the road.
[00:32:54] Speaker 10: I hope Walsh is not looking at just the stock market when he's doing the policy. That's what I hope. But I think that's what the idea he has been trying to say, right? That first of all, you will see that kind of demand that increases inflation, but it's deflationary, whether it comes via tighter financial conditions or the AI changes productivity level. And that's why they want to readjust the neutral to lower and not higher. I know this is a theory. That's how we get there, I guess. Yeah. Yeah. And the thing is that you will not have a straight path. You don't have a straight path just because we did not expect, like, for example, the Middle East. It was not in our outlook for 2026. I don't think for any. So I think there are lots of bubbles, shocks that we are living through. But the logic that they are putting right now is very medium term. I know it's disinflationary, but we cannot play it right now.
[00:33:45] Speaker 1: I'm just wondering kind of how strong the Fed put is ultimately going to be. Pooja, nice to see you. Thanks very much for joining us this morning. Pooja Kumra, senior European and UK rate strategist, joining us from TD Securities. Thank you very much indeed. Coming up, a leveraged AI bet tied to SK Hynix has grown so large that it's beginning to move the stock it was built to track and the wider market by extension. It's a great big take today. We're going to do that story next. This is Bloomberg. Bloomberg.
[00:34:18] Speaker 2: Welcome back. This is the opening trade. 7.44 then. That's London time. So 16 minutes until the start of trade. And the European futures picture is flat to negative depending on which of these markets you choose to focus your attention on. The FTSE 100 futures picture looking particularly negative. Of course, the tech theme in Asia has been dominant. And we see the Cosby is down by 7.9 percent is the latest installment of that story. And no doubt that's having some kind of influence, Tom, on our expectations for the start of trade here.
[00:35:00] Speaker 3: Well, indeed. Talking of the Cosby then, across trading desks from Hong Kong to New York, the wild ride in South Korean stocks has become a hot topic. We're seeing it again today, of course, to Anna's point. An explosive growth in a leveraged ETF is reshaping trading in one of the world's most closely watched chip stocks. Bloomberg's Asia Equities reporter Charlotte Yang joins us from Hong Kong. Charlotte, tell us more about this fund and why it's become so important, so central to the share price moves in the chip maker SK Hynix.
[00:35:30] Speaker 11: Yeah, so this ETF called CSOAP SK Hynix leveraged product, it was listed in Hong Kong in October. And in just a couple of months' time, it has grown so large and so fast. So it now has asset owner management of $13 billion, and that is largest of its kind globally. And so this product is built on one very simple promise, which is to provide two times the daily performance of SK Hynix. And to do that, they have to go through a rebalancing process every afternoon, which means they have to buy into the rallies and sell into the declines. And because of the size of the product, and also along with some smaller peers, products like that, they now, on volatile days, their rebalancing flows and the derivatives tied to it, they can account around 60% of SK Hynix turnover. So essentially, we got into a situation with this kind of like what traders call a tail wagging the dog. The SK Hynix shares are now being influenced by these derivatives and products built off it that was merely supposed to just track it.
[00:36:32] Speaker 1: In terms of how extraordinary this is, have we seen anything like this before? This is just, the moves on a daily basis are extraordinary. Have we ever seen anything like this in terms of leveraged ETFs?
[00:36:47] Speaker 11: Yes. So while we're seeing leveraged ETFs booming around the world, especially in the U.S., it is quite unique in terms of SK Hynix, this case, because the size of the product, the leveraged ETF, is very extreme compared to the size of SK Hynix and its turnover. And also, when we think about it, we have to consider the important role SK Hynix now plays. It is, it accounts for nearly 30% on Korea's Cosby index. It is also playing such an important role central to the global AI trade this year. So what this means is, when we see a big down day like we had last week, the kind of decline exacerbated by these mechanical flows from these ETF products is not just going to stay within SK Hynix. It's, we're seeing that manifested in Cosby and quickly filtering through the other Asian markets, and even with the pressure filling overnight into the overnight U.S. session as well.
[00:37:43] Speaker 2: Charlotte, thanks very much. Thanks for the update, Bloomberg. Charlotte Yang with that really interesting story around the dynamics in the Korean market, and important globally, as she points out. Let's talk about global markets now in today's three minutes on the opening trade with Markets Live executive editor, Mark Cutmore. Mark, good morning to you. So thinking about the rates picture and how we go into the non-farm payrolls report today, you know, the rates picture looks pretty steady right now, but the back story has been that we've been perhaps wrong-footed a little bit by how hawkish we've seen the new chairman of the Fed be over recent couple of weeks. How does that set us up for this payrolls report today?
[00:38:24] Speaker 12: I think it's a really interesting setup. There's a bit of divide in the market. I've seen some reports out today that this non-farm payroll doesn't really change anything. People have cared less about the jobs market. Revisions are so large. I completely disagree. I think in the short term, this really matters. I admit it's only short term. And the reason I say that is we've got about a 30% probability of a July hike priced in now in U.S. front-end rates markets, about seven basis points priced in. And I think the NFP today will kind of really decide that because we're going to want to have clarity whether that number is complete, that chance of rate hike is completely removed on a soft print today, or if we get a very strong print, it becomes a very serious conversation, which they're kind of going to want to get some clarity on before the blackout period. So I think today's non-farm payrolls really matters because we've got a short window of trading afterwards. We then got the long weekend holiday. And I expect we'll see an overreaction. The reason I call it an overreaction, even though I think we've got the importance, is that I think that because of that low liquidity, we can really run with whatever that impulse is, is if we get a shock out of the print today, that'll run into early next week. And then next week we'll go back to the story, hey, the revisions are massive, they're so volatile, we shouldn't read so much into one print, and we might unwind some of that move. So I am expecting NFP to really matter in the short term today.
[00:39:39] Speaker 3: Mark, if we do get a strong print and then the bets increase on a July hike, how much of a risk is that to the US stock story?
[00:39:48] Speaker 12: I think it's short term quite problematic because ultimately it hits the high duration stocks, and that's the AI tech stocks, and they're the ones that completely dominate the direction of the market. So it'll be quite painful at first. But I think ultimately we're going to see higher yields because of a strong, resilient economy. That's a positive reason for higher yields. And that's going to be good for a lot of the value names out there, a lot of small caps, the ones that are more exposed to the economy. So what it'll do is an increased breadth, and it's ultimately a bullish signal. But unfortunately the smaller number, the fewer number of AI names will dominate the overall index returns, even if it's good for breadth in the market.
[00:40:28] Speaker 1: Mark, the Cosby is clearly tradable. Is it investable?
[00:40:34] Speaker 12: It's a great question. I would say at this level it's very hard to buy in as an investment into the Cosby now unless you have strong belief that the AI capex bubble driven out of the US has a number of months ahead. I think that, again, it's very, very high beta linked to that. So if the AI capex bubble is going to continue, then Korean stocks will continue to do wonderfully despite the volatility. If you're worried that's wobbling, no, you can't invest here because the risk reward is terrible and it's got to just be a trade. So I think that's probably the answer. I think it's more of a trade than an investment right now. I do think that it's important to emphasize that I'm not saying that Cosby is topped. It all depends on the AI capex bubble. And certainly traders are absolutely loving the opportunities there at the moment.
[00:41:26] Speaker 3: Bloomberg Markets Live executive editor, Mark Cardmore, Mark, thank you. Remember, you can get up-to-date analysis and insight from Mark and the rest of that team. Just go to MLive Go on your terminal. Chloe Malley is standing by now with our stocks to watch. Chloe.
[00:41:38] Speaker 13: Good morning, Tom. Good morning, Tom. Defense, European defense, is going to be really in focus today because the tankmaker, KNDS, has decided to delay its IPO. And so that is significant for two reasons. First of all, because it was said to be one of the biggest IPOs in Europe in recent years, but also because of the reason provided for this delay, which is just that it's too much volatility in that defense sector. So as we can see here, this basket of European defense stocks really rallying and then having so much up and down over the last year or so. And so this could really weigh, this delay on this IPO, could really weigh on the likes of Ryan Mattel, SAB, etc. this morning. Moving on to UBS, which has enough capital to meet the Swiss government's capital requirements, according to the Swiss National Bank, with the S&B saying that taking into account the expected profits and also the transition period, the UBS is going to be able to comply and crucially also is going to be able to distribute that capital to shareholders. That is going to be something that investors will be really focused on, and that might lift those shares even further this morning. So UBS is going to be in focus. And finally, oil is also in focus today because Brent has fallen to the lowest level since before the war. We have seen the oil flows through the Stray of Hormuz climb back up very rapidly. We are now at more than 10 million barrels a day. And so, of course, this has put a lot of pressure on oil prices and therefore pressure on those oil majors. And so all of those names up here on the board are going to be very much in focus this morning and could see a bit of pressure on the back of those lower oil prices.
[00:43:10] Speaker 2: Chloe, thank you very much. Chloe Mellie with the latest on those stocks in focus. So there's certainly a number of sectors we will be watching. We're also very much watching what's going on with the yen right now. I'm sure we've got a session chart we can pull up and some latest moves on it. But 161.65, so the dollar dropping, the yen suddenly strengthening. No very obvious news lines, but we're getting into the European session. And we've been talking this morning about that Reuters report that suggested intervention could come with no warning. And just yesterday we were talking about how there's been no warning.
[00:43:45] Speaker 3: Unless this is Japan briefing Reuters, there's going to be some, I mean, this in itself is something of a warning, isn't it? There we go. So we're seeing that strength in the dollar on the back of this. There was also some lines just after seven about South Korea, the U.S. and Japan potentially coordinating on intervention. That may be a factor as well. It's been flagged by our MLive team. There's lots of things.
[00:44:06] Speaker 1: We just don't know. There's lots of factors you could fold into this. Is today the right day to do it? Do you do it in front of payrolls? The market's kind of sitting, waiting for payrolls. Is that the right moment to strike? Do you wait until after payrolls? Potentially you could see, you could be pushing it. So you get a yen positive payroll number day. Do you push that further with intervention? Or do you just wait until Friday when the Americans have gone home?
[00:44:29] Speaker 3: Yen positive being a weak number.
[00:44:30] Speaker 2: Yeah. Yeah. Yeah. Do you wait until the Americans have gone home? I remember saying that into the last U.S. public holiday and then absolutely nothing happened. Nothing happened. So, yeah, we're all scratching our heads on that one. But certainly the facts on the ground are that we've seen a big move in dollar yen just in the last few minutes. We've also seen some substantial moves in the bond markets, of course. Yields over in Japan moving higher, up by seven basis points at the 10-year horizon right now. The futures picture, though, very much reflecting the tech narrative. A bit of nervousness there perhaps coming through from the open section.
[00:44:59] Speaker 3: We should watch the likes of ASML but also Schneider Electric and the other players, NVIDIA and STMicro, the other players, either in the chip space or the data center space on the back of this story. And what we see in terms of the pressure down on chips.
[00:45:12] Speaker 1: Meta into Asia, into Europe. The amplitude, it feels like it's getting smaller.
[00:45:16] Speaker 2: Dutch futures, to your point about chip makers and chip equipment makers, they're down substantially. This is Bloomberg.
[00:45:24] Speaker 1: First of the morning, good morning. A couple of minutes to go until we start equity trading here in Europe. Yesterday was kind of Walsh Day. We were watching to see what Kevin Walsh had to say mid-afternoon here in Europe, down in Portugal. It was also Meta Day as well. Meta certainly causing some significant market volatility around its new plan to basically build a cloud business. Anyway, Europe went out here. The American market finished a little lower, which may account for what Tom said.
[00:46:13] Speaker 3: Looking at futures there, building on the losses of yesterday for European stocks, currently pointing low by 4 tenths of 8%. And on the Meta story, we are going to be watching, of course, the read-across, potentially, given the sell-off that we've seen. The chip stocks that you flagged, Guy, in the U.S., but also in Asia, with the cost speed in South Korea, of course, down about 7%. They could be that read-across. So we're looking at futures over in the Netherlands, pointing low by 6 tenths of 8%. You've got ASML, you've got ASM International, of course. So we look at those stocks as well in terms of that potential ripple effect. FTSE 100 futures currently pointing low by about 34 points, down to 3 tenths of 8%. Interestingly, some of the commodities got a lift yesterday on that more moderate or at least dovish take that some had seen from Walsh. But you do have oil prices lower, so that is a fact, potentially, for the U.K. as well. Anna?
[00:46:57] Speaker 2: Let's have a look at some of the sectors and stocks in focus then. We've got certainly the defence sector in focus. KNDS postponing its IPO, but also Quantum Systems doubling its valuation. So different dynamics taking place there. Sodexo is in focus, the catering business. Third quarter results ahead of expectations, raising their organic revenue forecast. Some analysts suggesting maybe this is a little conservative from that business. And buyer in focus for two reasons. They have been lifted to buy at Deutsche Bank after the Supreme Court ruling recently. They're also consolidating one of their businesses over in the States, Guy.
[00:47:30] Speaker 1: OK, it's going to be interesting to see whether the KNDS story is actually positive for defence today. Maybe you don't get the portfolio effect. So I'm going to watch for that one, see what happens there. The tech story is going to be front and centre. Oil is also a factor. You're going to see that certainly filtering through into the FTSE 100, which is already down by one tenth of one percent. Amsterdam is going to be interesting this morning. I think that's where you're most likely to see the Meta slash Cosby story showing up here in Europe. So we're going to watch for that one. But we don't have any trades on that one yet. So that's the kind of those are the two narratives we're basically plugging in this morning. Lower oil plus also significant volatility within the tech sector. The CAC's not doing very much. It's up a little bit this morning. The IBEX is up a little bit as well. But the AX is certainly a little softer, Tom.
[00:48:13] Speaker 3: Yes. As we look at the individual sector kind of breakdown right now, you've got personal care gaining nine tenths of a percent. Food and beverage, consumer health care, all up between three tenths and nine tenths of a percent. But it is technology that's facing the biggest hit right now. As the sector was also under pressure yesterday, the losses continue to compound, at least for now. So tech is down at one point one percent. Basic resources also a little weaker by five tenths of a percent. Industrial goods, a little softer as well by five tenths. Energy on lower oil prices down three tenths of a percent. But by far the biggest losses, at least for now, coming through in the tech sector, Anna.
[00:48:48] Speaker 2: Yes, I can see at least seven tech stocks that are down by more than two percent. So it's pretty broad. You know, that weed across from the Korean story perhaps is in there. NASDAQ futures continue to point lower. So maybe that's that sort of broad weakness we've been thinking about. But we're pretty divided, aren't we, in terms of sectors going higher and lower across European equity markets. Sodexo, those shares on the rise after the company lifted their guidance, as I mentioned. And some analysts have been saying that maybe from this catering business that the guidance was a little bit conservative. So that's one of the stocks that we are watching. There's room for upside in the drug space, it seems. Sanofi is moving higher this morning. And Bayer on the back of that upgrade and some other news flow as well.
[00:49:27] Speaker 1: The market's looking for safety. The market's looking for areas that it can hide in. We've talked about this recently. Farmer's an area that has been pretty unloved for quite some time. Started to see that maybe turning around. But Nestle is the biggest points game this morning. If you want to hide out away from the tech space, that's where you do it. Though I do note that Ryan Mattel is up this morning by one and a half percent. So if you don't have to make space for a new company, do you therefore maybe value the companies that are already listed in the same space?
[00:49:54] Speaker 2: And there seems to be some news around Ryan Mattel as well, around a contract win. So that's another dynamic perhaps around that particular share price. Let's take a step back and think about where we go from here. Charlotte Ryland, lead investment manager at CCLA Investment Management, is on set with us this morning. Charlotte, nice to have you with us. Thanks for joining us. So we've finished the first half of the year. We're on to the second half, it seems. Memory chips and the memory trade certainly seem to be a really dominant trade in the first half of the year. How are we set up then going into the second? What's your priority and your focus?
[00:50:27] Speaker 14: Yeah, I mean, I think the big question we're going to have is, is this a moment in which the market starts to broaden out? Because it's been incredibly narrow in terms of its leadership, in terms of being very focused on technology. And then on top of that, very focused really on that, just that memory trade. And we have a huge sway into the market actually, which have been pretty much ignored. I mean, we can talk about the AI losers, but actually beyond that, there's lots and lots of sectors, whether it be things like health care, whether it be things like staples, which are trading at sort of valuations you haven't seen for a very long time. So, you know, at this point, if you get a little bit of that momentum coming out of those tech stocks, is there a lot of value elsewhere? And I think there probably is.
[00:51:01] Speaker 2: Yes. Do we have a crowding out? We were talking about crowding out around IPOs earlier. But do we have a crowding out in terms of narrative and conversation that the AI trade and the memory trade has dominated so much of the news coverage, the conversation around this desk? Are other things just being ignored and that's wrong? We should be giving them more attention, Charlotte. Is that a feature of these markets?
[00:51:21] Speaker 14: I mean, you can sort of understand why the market's doing it, because you're getting this tremendous growth in profits from one part of the market. And, you know, it's not just there's huge volumes coming through for some of these chips. It's they've got the pricing power as well. But and everything else is sort of trundling along in a sort of the same state that it was before, which is very solid growth, but clearly not as exciting. And I suppose that big question is at what point do you start to see that growth begin to fade a little bit from those tech areas and normalize out, even if it's just the law of large numbers coming into effect and that makes those other things looking more attractive.
[00:51:51] Speaker 1: Why does why does this tech get sold off? Why does brought is it is it automatic that we get broadening? Everybody's talking about this broadening trade. Yeah, we're going to get broadening. It's going to be as easy. You just sell that and buy that. But doesn't just isn't there a danger that just tech comes down really sharply and everything comes down with it?
[00:52:07] Speaker 14: I mean, there is a danger of that. And I suppose it depends, you know, how much of you think that growth, global growth has been driven by this tech trade, because clearly, if you look at the industrial sector, it's been great if you're selling things into data centers. But otherwise, it's been pretty soggy. If you look at consumer, again, being pretty soggy for quite some time. So if that sort of froth comes out of the market, do you then look at the economy and go, OK, this is actually not a great place to be?
[00:52:29] Speaker 1: Why is Nestle worth more if tech is worth less?
[00:52:31] Speaker 14: Yeah, yeah, I suppose so. But other than Nestle is now at this point, you know, looking pretty darn cheap. So you don't have to assume a great deal.
[00:52:37] Speaker 1: But it might be cheap for a reason.
[00:52:38] Speaker 14: It's cheap because the consumer, one, is struggling and therefore you've got trade down, etc. And it's struggling because of individual missteps within the company. But clearly, you've got a new management team and they're trying to turn those things around.
[00:52:49] Speaker 3: Charlotte, do you think the CapEx story is starting to unravel at this point?
[00:52:53] Speaker 14: I mean, it's very difficult to say this is the point at which they stopped spending. And I suspect it isn't the point at which they actually stopped spending. But is it a point at which they maybe take a breather? And that's the big questioning because these guys are spending a huge amount. And maybe the Meta story is saying, well, we've built too much. But I suppose the trouble with Meta is that they never had a very clear monetization argument.
[00:53:16] Speaker 3: So what do you monitor if you're thinking about that part of the equity story? What are kind of the red flags for you in terms of how you think about that and what would change your view and give you more conviction either way?
[00:53:27] Speaker 14: Yeah. I mean, I think the things we've been watching is, you know, companies like Microsoft or an Amazon, you know, these are very cash flow generative companies. And they've been able to fund all of this expenditure without becoming heavily indebted, without having to go for massive equity raises. But is there a point at which that begins to tip over and they actually become what was a great cash flow engine into something actually looking a lot more like a telco back in the 2000s? That would be the real red flag.
[00:53:51] Speaker 2: That would be a real red flag. And so do we know any more, as we go through this AI trade, do we know more about where moats are robust and where moats are vulnerable, you know, companies that are vulnerable to competition from AI? So I think it's taking a more positive view of the capex spend, thinking it's worth it because it's going to deliver productivity gains. So who's on the losing side of that? Do we have a better understanding? Because it seems in some sectors our thinking is still evolving. You know, we sold a lot of software stocks. Now maybe some of that's being rethought. Advertising, caught up in that sell-off. Some of that's being rethought.
[00:54:25] Speaker 14: Yeah, and equally with some of the data companies, you know, things like London Stock Exchange, for example, was selling off in the beginning and also last year in terms of, you know, is that going to be disintermediated? But, you know, quite a lot of that business is, you know, proprietary data. It's, you know, stuff that's really hard to displace. So I think the market is being a little bit more, you know, discriminating in terms of what the losers are. Software has been the interesting one because, you know, you've got companies like Adobe is trading on like eight times earnings at this point, still growing its earnings at 14%, 15%. But you've still got that sort of terminal value and things like the Intuit numbers, which we had, you know, a few weeks ago in terms of actually beginning to see a slowdown, beginning to see competition coming through for their business. That sort of suggests actually this is real. There is a real coding challenge for these justices.
[00:55:08] Speaker 2: And you talked about some of the consumer facing sectors looking sluggish. Do they look better with oil at $70? Will that be a story in the months ahead, do we think?
[00:55:18] Speaker 14: I mean, clearly, I think if we'd had Iran carried on longer and it carried on being a much bigger inflation issue, I think that would clearly be poor for all consumer stocks. As it is, you know, the oil price has gone up, it's gone back down again, it's not probably had a huge impact in terms of the inflation numbers. But it is, you know, particularly the lower end of the income thresholds, you know, life is difficult and it's not getting any easier for people.
[00:55:43] Speaker 1: Can I come back? I'm trying to understand. Kevin Walsh, I was listening to Kevin Walsh yesterday. He is hoping that we get this sort of disinflationary story that comes towards us as a result of AI. And that got me thinking about what the Fed put ultimately looks like. Will central banks protect the stock market if the stock market drops at this point? Because the recent history is stock market goes down, Fed either does massive QE or does something, cuts rates aggressively. But if you want to get to the point at which the AI story becomes a productivity boost, you need the price of it to come, probably need to come down. And he's kind of talked about that as well. So do I perpetuate the stock market, which is keeping spending high and prices high and all these sort of things? Or do you think you can gently deflate that, sort of deflate the stock market and get the cheaper benefits of AI further down the road? How do you play it as a central banker?
[00:56:39] Speaker 14: Yeah. I mean, I suppose if you were a central banker, and if you're Kevin Walsh, you know, what are your objectives? One is keeping inflation uncontrolled, and two is the job market and the real economy. And I suppose if you think back to, you know, the GFC, that was a huge banking crisis and it was actually hitting the person on the street. But the stock market going down itself is not actually his responsibility. So he should be keeping his eye on, it is a much more inflationary environment today than it was, you know, for 10 years, you know, prior. So I think you need to keep an eye on that. And is there a deflation story or, you know, an efficiency story coming from AI? I'm sure there will be, but it probably takes quite a long time to come through.
[00:57:13] Speaker 1: And you need costs to come down to get that. Is the Fed put protecting the stock market there in the same way that it once was? If the stock market goes down, but it doesn't affect the real economy. Now, I have questions around that, but we'll park those for the moment.
[00:57:27] Speaker 14: Well, that's a joke. That's OK.
[00:57:29] Speaker 1: Can, can, can, would Walsh be OK with a lower stock market if it produced better benefits for the economy further down the road? I, this is, I'm just, I was just trying to listen to him yesterday and trying to understand what the implications are for stocks.
[00:57:42] Speaker 14: Yeah. I mean, as I say, I don't think it's his job to keep the stock market up. It might be what Donald Trump wants him to do, but, you know, his job is to make sure the economy is on the right footing. And I think, you know, we are in a different place from where we were for 20 years when we had very, very low and falling inflation consistently. We're now in a place where it's much more higher and it's much more volatile. And that's his central job is to make sure that doesn't get out of control.
[00:58:04] Speaker 1: Yeah. And the labour market. Charlotte, nice to see you. Thank you very much for stopping by to see us. Charlotte Ryland, lead investment manager at CCLA Investment Management. Call 6 looks like this this morning. Let's take a quick look at what we are watching. Clearly, tech is in focus and you can see that with ASML down circa 2 percent. But you do have defence stocks getting a little bit of a lift elsewhere. Luxury is not having a bad morning and chocolate is not having a bad morning. Chocolate is another thing. Nestle having a slightly better day. Let's talk tech, though, and figure out exactly what is happening here. Let's start there with Chloe.
[00:58:32] Speaker 13: Good morning, Guy. As we expected, we are seeing that read across from that weakness in the KOSPI and those South Korean tech stocks going over to Europe, spilling over to Europe. And we're seeing all of those companies that are associated in some way with this AI trade in the red quite significantly actually today. So the likes of Swatek, ASMB, Semiconductor that are in that semiconductor and semiconductor manufacturing equipment kind of sector. But also Prismian, which is more on that kind of AI infrastructure, data center, infrastructure side of things. All of them in the red this morning. Moving on to Sodexo, the catering company is in the green this morning, up about 6 percent after upgrading its revenue forecast. And this is really thanks to very strong momentum in that North American segment. And some analysts have said that this might prove to be actually quite conservative. So there's maybe even further to go for Sodexo. And it also actually also led Compass, which is its peer, also higher this morning. Bayer is also in the green this morning after being upgraded by Deutsche Bank analysts, which have said that this is really on the back of this overhang about with the litigation being removed after the company had the Supreme Court ruling in its favor. And so this is really going to be something that really lifts that overhang for Bayer. And so we're up about 2 percent there. We're also in the green for some sportswear stocks. Well, actually, Puma is now down, but it was up earlier after being upgraded by JP Morgan. So Adidas being resumed at an overweight rating, Puma being upgraded to a neutral rating. And Puma in particular, they said that the story looked very different from a few months ago, but that there was still a little bit of things to assess as to whether there would be that growth going forward. So that might explain some of that weakness now. And finally, CTS Eventim, which is a company that sells tickets for live events, for concerts, is also up this morning after being upgraded by other analysts, saying that the company had seen such a de-rating over the last few months that it had now a very appealing valuation and also that there was some expected earnings momentum going forward. And so we're up about 3.4 percent on the back of that upgrade for that company as well.
[01:00:47] Speaker 3: Chloe, Chloe Mellie, thank you very much indeed with the stocks on the move this Thursday. Coming up, tankmaker KNDS postpones its IPO, halting what was set to be one of Europe's largest debuts in recent years. The details next. This is Bloomberg.
[01:01:23] Speaker 2: Welcome back. This is the opening trade. It's turning into a bit of an interesting session, actually. Not at the overall level, maybe. The stock 600 not really going anywhere, nor is the FTSE 100. But the Cat Garant is actually outperforming, up by four-tenths of one percent. A host of stocks going higher there, whether it's the grocery sector, the catering sector, it's the luxury names. So there's a host of strong moves higher over on the Cat Garant. The AEX was the area of our focus previously, and we are still seeing some weakness in the tech stocks. So that's still very much a theme.
[01:01:51] Speaker 1: Is this broadening out? Is this what broadening out looks like? I'm hearing a lot of broadening out chats at the moment. Let's talk about what we're seeing in Germany this morning. It's a yesterday meeting of the coalition to basically push through, agree on a reform package that this guy, Friedrich Merz, the German Chancellor, wants to pursue. Today, this morning, we've had the briefing. It's not sure if it's still ongoing, but anyway, we're being briefed about what this ultimately means. The headlines that come from it are effectively January 1st, 2027. There's going to be a €10 billion per year relief package on income tax. So that's going to come through at the beginning of this next year. In order to fund this, they're going to push up the higher rates of tax. There's going to be a 45% rate of tax, taxable income, €250,000 or more. That goes at the 47% if you get to 80%. There's also a change in employment regulation for high earners as well. They're going to look at the EU supply directive. They're going to implement that supply chain directive. They're also looking at reforms as well in the car and the chemical industry. But basically, this is also a package that kind of includes what's happening in terms of the pension reform story as well. But Germany trying to make itself more competitive is the headline story here.
[01:03:04] Speaker 3: More competitive and, of course, with a deeper and stronger defence sector as well. But are the capital markets going to play that role? Because that takes us to the next story, which is about tankmaker KNDS postponing its IPO, citing market volatility in the European defence industry. The delay is particularly significant, of course, as the sector has been a bright spot for Europe in an otherwise slow year for debuts. Here with the details, Charles Capel, our equity capital markets editor for Europe. What led to the delay?
[01:03:31] Speaker 15: It's, as the company said, it's the volatility in the European defence sector. Now, there is one name in particular which we are hearing has been triggering this, and that's Rheinmetall, and that's the German defence company. It's very much a peer of KNDS, also makes military fighting vehicles, also makes ammunition. And I'm sure you remember on the day that KNDS's IPO was announced, at the same time as it was announced, we saw a significant drop in Rheinmetall's share price. Now, that was because the German government or the German military had cancelled an order for some warships. It had given the order to TKMS for eight ships, smaller, faster ships, and that had shaken some of the confidence in Rheinmetall, which has been one of the best performing stocks so far this year. That makes it far harder for investors who are looking at buying shares in KNDS to justify the valuation that was being sought. So it's that direct read-across, and it's the German government on one hand taking this action with Rheinmetall, and at the same time trying to take a stake in KNDS, 40% stake, and trying to help it go public. But that's one of the key stocks that is influencing this decision.
[01:04:53] Speaker 2: And so is this a bad omen, Charles? I mean, you would have thought that contract wins and losses is a feature of the industry, isn't it? And sometimes stocks move quite a lot on that. You would have thought that anybody looking to list would be thinking going into that, the fact that there could be volatility. I mean, is this a bad omen then, or is this just bad timing and something very specific?
[01:05:16] Speaker 15: I think there have been some questions from investors around the European defence trade for a little while. There was a really strong rally coming into the start of the year. In January, when we had that listing of CSG, which is a not dissimilar company to Rheinmetall and KNDS, the European defence stocks were hitting all-time highs. Now the steam has started to come out of that. That particular decision by the German government perhaps could raise some questions about how reliable they are as a partner and how consistent we can consider those orders and whether, and also the strategy that the German government is going to take when they are undergoing this real moment operation.
[01:06:00] Speaker 1: I think it's probably worth pointing out that at the highs last year, Rheinmetall was trading on like 80, 90 times. So I think it's kind of, it got to some quite punchy multiples. Maybe we've seen a slight sort of re-evaluation of that. Charles, you've got to be busy. Thank you very much indeed. Charles Capel, our equity capital markets editor for Europe. Thank you very much indeed. And we're going to get more on the European defence sector a little later on. We are going to be joined by the co-CEO of the German drone maker, Quantum Systems. This is obviously a very hot area of this defence space right now. The company has recently raised $1.2 billion in a funding round. That interview a little later on in this show, Anna.
[01:06:40] Speaker 2: Yeah, absolutely. Drones in focus. We will return to the defence story. Let's turn now though to the energy sector. Shares in Europe's oil majors have flipped from winners to losers as easing Middle East tensions lead investors to turn selective on energy. Let's continue this conversation with Martin Kasniak, who is part of the Bloomberg FX and Central European team and has been analysing this story. Good to see you there, Martin. So European energy has been one of this year's best performing sectors. Obviously that was driven by the higher oil price. Why are investors becoming more cautious? The obvious answer is a lower oil price. But take us into the story.
[01:07:21] Speaker 16: Hello, good morning. So yes, indeed, European energy companies are generally bought because they generate strong cash flows and we redistribute a lot of debt to shareholders via buybacks and dividends. And this year on top of that came the war in the Gulf and that led the investors to pay a premium for crude oil, giving a boost to the shares of these companies. Now with easing of tensions, investors even talk of a glut instead of scarcity in the oil markets in 2027. So the question is whether there will be any new driver to boost the shares again. Many strategists think that the sector can still generate returns for shareholders, but they no longer expect it to outperform the broader market as they did earlier this year.
[01:08:07] Speaker 3: And Martin, there is some differentiation, isn't there? Some companies have performed better than others. Why is that?
[01:08:14] Speaker 16: Yes, for instance, there is a lot of activity in offshore drilling and other oil-related services. And that has helped the shares of companies like Tenaris, Saipem and Sub-C7 to be standouts in the sector this year. On the other hand, companies like Shell and BP, so large integrated ones are more balanced and they don't have those obvious near-term drivers. They are still generating a lot of cash, but investors are asking what drives the shares higher from here.
[01:08:44] Speaker 1: Okay, so what does that tell us about what we should be watching in the second half of the year?
[01:08:50] Speaker 16: The biggest question out there is the oil price, whether the market has removed too much of the geopolitical premium. Some commodity analysts think that the physical oil market will take a bit longer to normalise because inventories remain low and shipping hasn't fully recovered. Some others think that the tension has already shifted to a potential supply surplus. So investors will be watching inventories, OPEC production, Chinese demand and obviously developments in the Middle East.
[01:09:24] Speaker 2: Thanks very much. Thanks for the analysis, Martin. Good to speak to you. Martin Kasnik with the latest on that story. I mean, oil prices, yeah, 70 handles still on Brent, down by 1.1%. So we continue to watch what's happening with the Straits of Hormuz, the language coming out of the White House, also interesting to watch in terms of what happens from here.
[01:09:43] Speaker 1: The key question is, you get a short-term glut, a lot of oil comes out, market gets flooded. You've already seen kind of the Gulf benchmarks coming down really sharply. So clearly there's a lot of oil coming out, but there has to be this next phase where you refill. There has to be this next phase where it normalizes. We are short of oil still. So what happens, is the price of oil in the medium term higher than it was when we went into the conflict? And if so, what do you do with that from an inflationary perspective?
[01:10:11] Speaker 3: And is the U.S. and China waiting out to get to a certain price point where that becomes attractive to refill those inventories? I mean, we were touching on the point that for Iran right now, they've got millions of barrels at sea floating on tankers that they can't shift. And they can't shift. So, and you've got the other amount of OPEC plus and the UAE not being part of that. And maybe they want to continue to drive their market share and expand their market share by aggressively exporting as well as the strait reopens.
[01:10:38] Speaker 2: Energy security is certainly part of the conversation as we see the Japanese and Indian leaderships talking to each other. That's a feature of this morning's news landscape. Coming up on the program then, we'll pick up on one side of that, the yen very much in focus. We will talk Asia economics with Alicia Garcia Herrero from Natixis. This is Bloomberg.
[01:11:08] Speaker 3: This is the opening trade. We're 30 minutes into the Thursday session. Happy Thursday. You're seeing we've come onto this market with futures pointing lower for European stocks. You're actually up about a tenth of a percent. Are European equities providing something of a safe harbour amid the latest round of chip sell-off? Maybe, maybe there's some evidence of that today. Over in France, the cat current is up four tenths of a percent, the best performer across the major indexes in this region at least. The DAX is gaining 38 points and you're seeing bodice gains for the FTSE 100 up a tenth of a percent, Guy.
[01:11:39] Speaker 1: OK, let's look at the internals. 357 up, 229 down. Slight bias to the upside. Volume, a little light. Let's talk about where we're seeing some winners and where we're seeing some losers. Safety is certainly at a premium today. You're also getting some upgrades in the grocery sector, which is helping. Sodexo is up by 6%. Car4 up on an upgrade, I think, is up by 3.41. Ryan Mittal is trading a little bit higher. There's a contract story there. Plus, also, I do wonder whether the KNDS narrative portfolio effect kind of story will be giving Ryan Mittal something of a boost. But that stock is well, well off its highs. Downside, let's talk about where we are, where we are, seeing some weakness. Tech is certainly the epicenter of the action. Soytek is down by 5.5. ASML is down by 2.4. Totally understandable, given the volatility we've seen out in Asia. JT Sports down 1.66%. You've got a little bit of Nike, maybe to factor into that narrative as well.
[01:12:31] Speaker 2: Let's get an update on some of the other stories we're covering this morning then, Guy. And OpenAI has reportedly started preliminary discussions about giving the U.S. government a 5% stake in the company. That's according to the Financial Times. The CEO, Sam Altman, and other executives proposed that move as part of a broader arrangement under which Washington would hold 5% of each of the leading U.S. AI developers. That might include anthropic and listed sector leaders like Google and Mesa, though it's unclear if those other firms would agree with that proposal. Oil is falling for a third day amid signs of progress in indirect talks between the U.S. and Iran. According to a U.S. official, commercial shipping through the Strait of Formus has surged over the past few weeks, with American military support helping boost oil flows to more than 10 million barrels per day, underscoring Tehran's now limited ability to perhaps halt shipping. And attention is shifting to the U.S. jobs report later today. Investors will be looking for fresh signals on the policy outlook. After Kevin Walsh's remarks at Cintra and that conference taking place there, they dampened expectations of a July rate increase. Bloomberg Economics expects June payrolls to rise at a robust pace, exceeding even May's strong gain. Guy.
[01:13:46] Speaker 1: OK, let's talk about what we're seeing in the market this morning. Let's talk about what we're seeing in Japan in particular. The yen has obviously been moving to a once unthinkable $200 per dollar level. And people are talking about that certainly as a risk in the medium term. That's an extreme scenario. Some investors consider a slide of that scale within, though, the realms of possibility should the Bank of Japan further fall behind in terms of policy tightening. Alicia Garcia Herrera, chief APEC economist, is over joining us here in London from Texas. Good morning.
[01:14:22] Speaker 17: Good morning.
[01:14:23] Speaker 1: How far could the yen go?
[01:14:28] Speaker 17: Well, it's gone very far already. So that is why any scenario, including the $200, is not unthinkable. It is just unlikely, but not unthinkable. And I think you can already see how worried Japanese authorities, MOF, BOJ are, because it does seem to me they intervened after the $162, and probably because they're so worried about U.S. employment data today. If it's strong, as you seem to believe, and I think most market participants do, that would be really leaning against the wind if they were to intervene after that. So the yen could have gone really far. I think they're giving a signal to the market that, you know, they will. But doing it before so that it's not so costly. They've already lost a lot of reserves intervening. So, yeah, they don't have all of this ammunition to stop this if the dollar continues to be strong or even stronger.
[01:15:26] Speaker 1: Isn't the only way to do this just to raise rates?
[01:15:29] Speaker 17: They should have risen rates much faster. They fell behind the curve. I think they had this idea that if they were to hike, the yield curve would remain as steep, which to me doesn't make any sense, but that's what they believe. So they delayed, delayed worrying about long-term yields. But actually now they need to worry about everything. They need to worry about the short end, the long end, and there is a limit to how much they can hike if they do believe that long-term yields will elevate further. That's their limit. It's a fiscal dominance problem.
[01:16:10] Speaker ?: Yes.
[01:16:11] Speaker 2: So do you think we've seen intervention today? Is that what this looks like? Nobody said so. No one ever knows.
[01:16:17] Speaker 17: But I would argue that, you know, that correction can't happen if everybody's reading your screens thinking that U.S. data will be strong. Yeah. I mean, why would you do that otherwise? Yeah. So I doubt this is a market movement. I just doubt it.
[01:16:32] Speaker 2: OK, so this does have hallmarks, then, you think, of some kind of intervention. And picking up on that BOJ point, then, so the limited extent to which they can move by, you say that what's happening at the longer end as a curve, the fiscal dominance story.
[01:16:44] Speaker 17: And this is the key point why yields have continued to move up in Japan, because Takaichi's policies seem to indeed miss this point, that, you know, that people worry about the fiscal sustainability of Japanese public debt. And by making continuous announcements on further easing of every sort from military expenditure and beyond. Just remember, you know, just before the elections, this VAT on basically daily, I think it was mostly on staples and so on. But still, you know, that moved the market. So I think she needs to be very careful with not giving this impression that she believes there is no fiscal limit to Japan. There is. And that is what would bring, in my opinion, if she were to introduce a fiscal consolidation plan, that would help the yield curve and in a way would help the yen because people would see the end of that crazy high yield for a country with the highest public debt in the world.
[01:17:56] Speaker 3: But we're not seeing any evidence of that fiscal consolidation plan at this point. So you're saying 200 is unlikely, but it's not it's not out. It's not off the off the off the table of potential outcomes. What are the broader global ramifications of that? I mean, the export engine of Japan, the carry trades, how are the trading partners react to that?
[01:18:15] Speaker 17: So basically, Japan doesn't need 200 to export at all. And if you look at, you know, there's a lot of surveys, Jetro, all of these Japanese manufacturers. They would be happy with even lower than 162 because their imports become very expensive. So there's no need for them to go to any further. We also have to realize that the Japanese manufacturing structure is changing. Japan is becoming quite central into this into the chip supply chain. We have rapiders who have all of these quite new companies competing on and, you know, two nanometer semiconductors. Of course, rapiders is very small compared to TSMC. But the point is, is the one and only able to produce a two nanometer chip. So Japan is really getting into the supply chain, which is very positive. That doesn't need a 200 yen. So but why do we have that? This is the same as Korea. Why do we have this very weak Korean won? Because it so happens that these are net creditors, humongously large investors, especially Japan, these lifers. What do they go to? Taiwan is hugely relevant into U.S. equities. The more you hear that this A.I. revolution is for real, it seems the U.S. government does believe that when I heard about open A.I., this means that these investors will continue to believe and that will weaken these currencies. Now, this is the NTD. This is the Korean won. This is, in a way, the yen. So this is also this outside pressure for weaker currencies in in developed Asia and possibly even the R&B, although this is a different story.
[01:20:00] Speaker 3: So China is also a net investor. Yeah, correct. And yet the renminbi has rallied 5% versus the dollar.
[01:20:05] Speaker 17: Yeah.
[01:20:05] Speaker 3: At least onshore.
[01:20:06] Speaker 17: It did rally. But whether that will continue is a big question to the market. And the reason is that in the same way as, you know, everybody would have loved to invest in SpaceX in China, which was not allowed, not even Hong Kong. So they are kind of missing out. I think the feeling is they're missing out on what the Koreans, the Japanese, the Taiwanese can do in terms of, you know, investing in this so far pretty profitable. And China is well aware. So this is the 29th of May announcement of draconian controls on outbound, mostly wealth management outflows. So you can see already that there is a pressure. There is a latent pressure on a weaker CNH, which wasn't there at the beginning of the year. You're absolutely right. But this is driven by outside factors and by the fact that Chinese companies are not very profitable. So, you know, you can see that on the index. And this is involution. We all have learned this word as if it were, you know, one-on-one economics. It's kind of a very strange economic reality, but it is real. So by having very unprofitable companies, investors want to go elsewhere. And that, in a way, puts downward pressure on the CNH.
[01:21:19] Speaker 3: OK, very, very, very interesting. Thanks for coming to the studio and giving your thoughts on the Asian FX space on another big day for the yen, of course. But those dynamics for the Chinese currency also at play. Alicia Garcia Herrero, chief AIPAC economist at Natixis. Let's turn attention back to the tech story, but this time in terms of regulation, because Google has lost its EU court fight over a 4.1 billion euro Android antitrust fine. That line crossing at 8.34. This relates to an appeal by Alphabet, the Google parent, of course, to a ruling back in 2018 where the EU had fined Google 4.3 billion euros in 2018 for anti-competitive practices on the Android operating system. It appealed that, went to the European Court of Justice, and now they have ruled against Google. So a non-insignificant fine for that company.
[01:22:09] Speaker 2: Eight years in the making, then, this.
[01:22:11] Speaker 3: It takes time.
[01:22:12] Speaker 2: These things take time.
[01:22:13] Speaker 1: They take a lot of time. OK, what are we going to do next? We're going to talk about the European defence story. We're going to talk about drones and the European defence story. Sven Krug, the co-CEO of the German drone maker Quantum Systems, is going to be joining us. Recently raised 1.2 billion in a funding round. What are they going to do with that money? We're going to find out next. This is Bloomberg.
[01:22:32] Speaker 2: Welcome back to the opening trade. We are just, well, 44 minutes, 45 minutes into the European session, and we see a bit more positivity. Interesting that US futures are still pointing lower, NASDAQ futures in particular, and we do see some negativity around the tech sector here in Europe. But broadly speaking, flats are positive across these European equity markets then, Tom.
[01:23:08] Speaker 3: Let's get back to the European defence sector right now. Tank maker KNDS has postponed its IPO, halting what was set to be one of Europe's largest debuts in recent years. The company's citing volatility in the European defence sector. Meanwhile, that news coming as German drone maker Quantum Systems announces that it has raised 1.2 billion in a funding round, doubling its valuation to more than 7 billion US dollars. Joining us now for an exclusive conversation is Quantum Systems' co-CEO Sven Krug. Sven, good morning. Interesting times in terms of how we think about the capital structure supporting defence in Germany. You've come through with this raise. How easy or not was it for you to fundraise, and what are you putting that money to work on?
[01:23:51] Speaker 18: It was easy. I mean, the growth in GDP spending is ongoing, especially the exponential growth in spending for unmanned systems. So, the future of warfare is ongoing. So, it was quite easy to raise. And for us, it's about going still into speed, accelerating our spendings into scaling and driving this industry forward.
[01:24:14] Speaker 3: And does part of that speed and that acceleration also involve acquisitions, reporting in the Financial Times, that you might be looking to acquire Stark? Where are you in those conversations? Can you confirm that?
[01:24:28] Speaker 18: M&A is a huge topic for us, not only now European-wise, but also global-wise. If Stark is a target, I cannot comment on that. I think we have especially an approach to fill our multi-domain gaps with the capability gaps of unmanned systems, air, land, sea, software, and AI, have to be filled for Europe. And yes, for sure, we are looking for the right targets on the M&A side. If Stark is a target, again, I will not comment.
[01:24:55] Speaker 2: Okay. Sven, good morning to you. So, you said that this was pretty easy to do, easy to raise. We're seeing wider reporting around the defense sector right now, suggesting that the volatility in investor attitudes towards defense means it's difficult to price assets. Was it difficult to price what you were presenting to investors?
[01:25:15] Speaker 18: I think, again, I mean, the market is at the beginning of the hill still in the defense industry. I think that we have a long way still to go forward and in growth. And I think there's a normalization ongoing on valuation. I think that's the part where you're right, that the relations will be normalized. And for some companies, it's easier to raise. For some, it's not. Because it's how you are set for the future. And we talk about KNDS, for example. I think the set for the future is different to ours. And that's why it was, again, it was quite easy to do so.
[01:25:51] Speaker 2: Do you think, then, going back to the consolidation story, do you think that consolidation within the sector will be smaller businesses coming together? Will it involve the larger defense players? How do you think consolidation is going to play out, Sven?
[01:26:06] Speaker 18: I mean, the consolidation will come. First, I think we have to, the industry and also the defense market has to accept, okay, how are the new players? Where's the role of these new players? How is the mixture of manned and unmanned systems in the future? So I always bring the example of the black coffee of the manned system and the milk of the new unmanned systems. And we have to find the right mix at the right cappuccino, so to say. And this is happening at the moment. And I think the next months and years will showcase who can deliver on the future and who cannot deliver on the future.
[01:26:43] Speaker 1: That sounds nice. I call it a cappuccino right now. Sven, let's talk a little bit about, does Europe need fewer but higher tech drones? Or does Europe need a lot more lower tech drones that can be produced at scale? Where does the gap exist right now in terms of the type of technology that we need? Is it better to have things that you can scale and scale quickly? Or is it better to have high-end technology that can do more?
[01:27:13] Speaker 18: I think we need for sure both also in the future, also the right mixture. But you're right. I mean, the lower-cost drones, especially what we see in Ukraine, this is an upcoming topic. It's all about scaling. It's about mass on the battlefield to win the battle against Russia at this moment. And this is now also flooding from their doctrines also to Europe and also to all native countries. So we will see more lower-cost systems on the battlefield. I mean, we saw it with the FCAS discussion. So the higher-cost systems also on submarines and all these topics, on tanks, I think this will be decreased. And yes, for sure, the lower-cost system will increase. But again, at the end, we need also high-quality systems on the high end of pricing. And we have to mix it with the right numbers and the right quantities of lower-cost unmanned systems and other systems around.
[01:28:10] Speaker 1: In terms of – I have a consolidation question as well. Let me ask you my consolidation question. Ukraine now has an awful lot of very cutting-edge technology. Is that where Europe needs to go shopping in terms of the consolidation story? How do we bring that technology that has been developed very quickly in Ukraine and battle-tested into the European story, into the European defense space?
[01:28:39] Speaker 18: As you know, maybe we have two joint ventures with two Ukrainian companies. We actually signed last week a contract with a partner of Tencore in producing more than 2,000 unmanned systems on the ground. So building the biggest fleet of unmanned systems from one company coming for this battlefield. So I think this exchange has to happen. I would not say go shopping. It's about building this industry with the right capabilities, with the right assets. And this merger of the learnings from the battlefield of Ukraine, this is what we have to do. And that's why it's absolutely needed that investments have to be happened, that they can increase their capabilities. And yes, as we do, building joint ventures and then doing the right thing, which is needed, and building the future of unmanned systems.
[01:29:29] Speaker 1: But do those JVs turn into takeovers? Why do a JV now? Why not buy the business? Can you buy businesses in Ukraine right now?
[01:29:40] Speaker 18: I mean, it's not so easy to buy 100% of a business in Ukraine right now. I think there are IP and export regulations behind this. And also, the Ukraine government knows quite well about these assets which they have. But I think we are invested in these companies, not to 100%, but less. But that's what we can do now at the moment. And I think that's correct. We are learning also from these. We are learning about scaling. We are learning about the lower cost production, like you described. And we are building in these joint ventures the production facilities here in Europe. So, Europe at this moment, in Germany, is learning how to build 10,000 copters, as we do with our joint venture of Frontline Robotics, and how to build more than 2,000 UGVs here in Europe. And this has not happened before. And this has not happened before, but this is happening now.
[01:30:31] Speaker 3: Svendis, does the procurement process still favor the primes, the incumbents, over companies like yours?
[01:30:41] Speaker 18: I would say this is changing. I mean, it's getting more decentralized. It's getting more focused on innovation. So, innovation spendings are, again, back into business, so to say. But, yes, we have to fight for our role. We have to make these connections, building these networks, and being seen, and bring these capabilities in. I think this change we have still to drive. And if they are in favor or not, I cannot judge. But I think we are on the right way for this change. Could this change be faster? I think it has to be faster. But we are working on it.
[01:31:16] Speaker 2: Svendis, how would you rate the pace at which the German government and other governments around Europe are turning commitments to spend into actual spending?
[01:31:26] Speaker 18: I would say Germany is quite well in this. I mean, we have set our budget not only for this year, but also for the future years. How we want to increase our GDP spending is also backed up with this budget. I think there are always ongoing discussions. But I think it will be fulfilled. So, I feel that we are doing right in the quantity of spending. But I don't feel right in what elements we are spending to increase the efficiency of these spendings. If I look around Europe, I mean, we have heard the last days in Great Britain, they will announce a $5 billion package for unmanned systems. Is it enough? Not. It's not enough. It's still only a small portion and not the whole bucket. But I think it's going also in the right direction. But many other countries, I think, also have to increase. But if I look at the Baltics, Estonia, Lithuania, I think they're doing right. And in total, we are also here on the right track.
[01:32:25] Speaker 2: Sven, thank you. Sven Crook, Quantum Systems Co-CEO, talking to us about his business, its fundraising and the wider sector.
[01:32:33] Speaker 1: Yep. A lot of interesting things to discuss around that. Okay, let's talk about payrolls coming up a little bit later on today. It's Thursday, not Friday. The U.S. is out tomorrow. So the survey number is 113. The whisper number is 138. Bloomberg Economics thinks it could be closer to 200,000. Where does Skylar Montgomery-Kerning think that number could be? Let's find out.
[01:32:55] Speaker 19: I mean, I'm not going to give you a number.
[01:32:56] Speaker 1: Come on.
[01:32:58] Speaker 19: That's the game. Yeah. Non-farm payrolls sometimes feels like a bit of a random number generator. Exactly. So I had a look at how often you get upside surprises. And you can actually get like a fair whack of upside surprises in a row. In 2022 and 2023, there are 14 upside surprises in a row. And I think because there's so much variation in the data and you get such big revisions, you need to look at the trend instead. And this would be the fourth upside surprise in a row if Bloomberg's economics forecast comes true. And I think that's really the point, is that there's a very high bar to price out hikes. If you had a zero print today, the pace would still be 140,000 jobs added. And that's much higher than kind of near break-even numbers that you're expecting to have unemployment stay steady, which is zero. So I think there's a pretty high bar to have those hikes come out unless you get a very negative number. And it means that we just have to keep watching the data. And you need to get the data turning the other way, I think particularly for dollar downside.
[01:33:53] Speaker 3: I think we can blame the football for all these good numbers. We can. We're not going to dissect the England performance yesterday. Quite yet, but they're still recovering from that shock. We did manage to pull it out of the bag, finally. Thank you, Harry Kane. What happens? Does, is Walsh comfortable with 30 basis points of higher rates priced in by the end of this year?
[01:34:16] Speaker 19: Yeah, I think absolutely. I mean, I think the main message that you're getting from him is that he doesn't want to give you guidance. What we get from guidance comes from the SEP. It comes from the dots, which were clearly hawkish last time around. And I thought it was really interesting yesterday. You had all this commentary around the hawks being disappointed. And yes, you had yields come off a little bit when he was actually speaking. But they were pretty much flat on the day and the dollar rallied. Yeah.
[01:34:41] Speaker 2: Yeah, indeed. So that move didn't last all that long, did it? We will look ahead to that data with anticipation. Skylar, thank you very much. Skylar Montgomery-Koning from the Markets Live team. NASDAQ futures pointing down by 7 cents 1%. The tech trade very much still in focus. That's it for the opening trade. The Pulse is up next. This is Bloomberg.