tv Bloomberg Surveillance Bloomberg October 4, 2018 4:00am-7:00am EDT
♪ francine: treasury yields a spike to highs on new data. crude hovers at near $86 per barrel. russia's energy minister tells bloomberg that prices look to height. the u.s. department of now investigating the money laundering case involving denmark's biggest bank. good morning, everyone and welcome to "bloomberg surveillance." good afternoon. i am francine lacqua here in london.
we saw a repricing of treasury yields. stocks are down, dollar is getting. we need to look at -- gaining. we need to look at the ripple affects. the other thing we are watching out for on the back of our great interview the annmarie hordern did in russia with the minister of oil of russia is of course brent. brent oil. mr. novak saying prices for him seem too high. keep it here on "bloomberg surveillance." we have someone from the bank of international settlements for an exclusive interview. will talk to him about the banking sector and some of the risks. let's get to the bloomberg first word news with taylor riggs. taylor: bill gross sees demand from overseas investors. he tweeted lack of foreign
buying at these levels likely leading to lower treasury prices. his comments come at a particularly tough time for bond bulls. u.s., the white house has received the fbi report on allegations of sexual assault against supreme court nominee brett kavanaugh. that comes as senate republicans have started the clock for a make or break test vote tomorrow on his nomination. if that succeeds he could be confirmed during the weekend. italy has said the tears deficit targeted at 2.4% of gdp with a commitment to reduce in 2020 and 2021. this comes after pressure from italy's finance minister to contain the ruling coalitions spending request. the government still has not published the economic growth forecast.
the government says those details will come today. the u.k. prime minister's officials are john uplands to rush -- trolley up plans to rush in brexit -- are drawing up plans to rush a brexit deal through congress. mp's wouldtimetable vote on whether to accept or reject the divorce treaty by the beginning of december. theresa may's office declined to comment. oil has halted gains near a four-year high. prices have jumped this week on concerns over tightening markets ran at the risk of losing another customer. russia's energy minister has said the market may be overdone at current levels. >> current levels maybe a little bit high. what we think the markets will
be striving to reach is a balance, which will be first of all stable and acceptable to both producers and consumers. these levels are probably a bit lower than what we see today. the president has spoken about a $65-$75, which seems to be an acceptable level. taylor: global news 24 hours a day, powered by more than 2700 journalists and analysts in more than 120 countries. riggs.ylor this is bloomberg. francine? francine: thank you so much. chair, jerome powell, has been talking about policy again, this time saying central banks may eventually raise interest rates to levels where they begin to restrain economic growth. >> interest levels are still accommodative but we are gradually moving to a place that they will be neutral, not that they will be restraining the economy. we may go past neutral but we are a long way from neutral at this point. francine: you just treasury
yields have spiked -- u.s. treasury yields have spiked to this highest -- the highest level since 2011. the yield on the 30 year have pushed above the 3.52% mark. for more on all of the market moves we are joined by mark cudmore and -- r and live strategist -- r mliv strategist. i think yesterday there was a perfect storm for treasuries. we had jerome powell making those relatively hawkish statements. he said we are a long way from neutral and we may go past neutral. and of course we had this big surge in commodities recently driven primarily by oil, but it was spreading into other assets like aluminum and agriculture commodities. all those three things together drove the market to higher yields when we were just below
those kind of highs. we were a bit vulnerable to a squeeze and now we have about one. -- have got one. francine: what are you watching today? >> can this yields move continue? i don't think this is. a give changer i think we got into a higher range. -- a game changer. i think we got into a higher range. we might be in a new range of -- 2.9%-three 3% 2.9%-3.3%. despite saudi arabia and russia --. overall, we are going to get a little bit of an uptick in inflation here. at the moment it has not gone too far but it does need to run
out of steam soon. francine: thank you so much. great work from mark cudmore. you can of course follow all of the market insights from mark and the rest of the team. log on to the bloomberg and mliv. let us know your thoughts on one higher oil price becomes a risk wheneveloping nations -- higher oil prices become a risk for developing nations. what's next for yields and u.s. assets? ,oining us now is elsa lignos and james bevan. james, is it a game changer of treasuries continue going higher or not? james: absolutely not. if you were say -- if you were to say that nominal bond yields are heading about economic growth, that is a game changer.
francine: what does that mean for the dollar? good it means a relatively environment for the dollar but particularly against the japanese yen. dollar-yen is one of the most leveraged places in foreign exchange on u.s. rates. that is really where we see the impact going forward. --isere a feedback loop there francine: is there a feedback loop that dollar goes to height there could be contagion from emerging markets? elsa: at the moment the correlation is strong and significant. the elasticity is a lot lower than it would be traditionally. the hedging behavior of domestic japanese investors. they are a natural bid in the dollar-yen market. francine: what is your take on treasuries? james: i don't think we are anywhere close to this big a perfect storm. i think yields will had higher ad higher.
i think the fed funds rate itself is going to 3.4 in the next 12 months. global investors look at u.s. yields and say that is fantastic in the context of yields we can pick up either in japan or in euro land. that pressure i think will keep yields lower than they probably should be. francine: james, let me bring you to my chart, a treasury positioning chart. you can see speculators in short treasury positions at record levels. james: everybody accepts yields heading higher. i regarded yields heading higher as good news. to yen butoing back also japanese yields, they have been rising to levels when the boj began negative rate policy. how much of a nightmare is this for governor kuroda?
have already seen that the bank of japan has not really been able to influence the outlook for inflation with the policy actions they have taken. they are to -- more dependent on what the rest of the world is doing than what they are doing themselves. that in turn will drive the young lower. -- yen lower. francine: how much more could yields be rising considering the selloff in treasuries? what does it mean for boj policy? james: i think the bank of japan will want to raise rates, surprisingly. simply because japan's consumer is now reacting negatively to the low rates. but the rates up, interestingly i think japan's consumers would spend more money. francine: are we now on uncharted territory? elsa: i agree with james. we also have a call for u.s. rates at the end of next year. is it uncharted territory? , it's still a relatively low
inflation environment with good growth. francine: overall does it change actually the perception that the chinese have for treasuries or not? is there a link with trade? james: i look at the portfolio composition of china and they have an overdependence on domestic deposits. they will continue to want to export money. we know that in 2017 they exported about $1 trillion of capital. i think those trends to export will continue. i think the u.s. treasury market will continue to be a destination of choice. if you look at the handbag it'st levels into china, very clear that the chinese people are now doing handbags as an investment. francine: especially if they are hermes. next, with crude trading near
♪ francine: economics, finance, politics, this is "bloomberg surveillance." i'm francine lacqua here in london. let's get straight to the bloomberg business flash in new york city with taylor riggs. taylor: the u.s. has started an investigation into a money-laundering case involving denmark's biggest bank that has already toppled its ceo. criminal investigations are underway in estonia and denmark. ofs is after a large part $235 billion that floated through a unit in the float --
country many to be treated as suspicious transactions. amazon is eliminating monthly bonuses and stock awards for warehouse workers and other hourly employees. after the company pledged to raise pay to at least $15 an hour. workers for the e-commerce giant in the u.s. were eligible in the past or incentives that could have told the -- hundreds of dollars. amazon says operations and customer service staff will still see their total compensation improve. the head of the u.s. federal trade commission has indicated it is reviewing the data breach at facebook that affected 50 million accounts. chairman simons asked about the attack. he declined to specify whether there was an active investigation of the social media giant. a facebook spokesman not immediately comment.
that is your bloomberg business/. francine? francine: let's talk about oil. brent halted gains near $86 per barrel on emerging concerns that prices have rallied too fast. that is as traders bracing for iranian losses. we caught up with alexander novak and asked him where he sees the oil price heading. >> current levels may be a little bit high. what we think the markets will be striving to reach is a balance, which would be first of all stable and acceptable to both producers and consumers. this level is probably a bit lower than what we see today. if you listen to the main panel, the main event of today, the president has spoken about a $65-$75, which seems to be an acceptable level. francine: is the old price too high at the moment.
still with us is elsa lignos from rbc and james bevan from ccla investment management. if it goes to $100 can it actually hurt world growth? james: absolutely. it becomes a global headwind. global economy needs a higher oil price like it needs a hole in the head. francine: at the same time, is there not a readjustment that if it goes to $90 or $100 there will be less demand? does the market not rebalance itself? james: it does, but it still a shock to equity levels. a recession of the global economy would bring in the next few bear market -- huge bear market.
francine: how does it translate --? elsa: we have seen a breakdown between petro currencies and crude. you have the likes of india, which are particularly susceptible to higher oil prices. then you have the likes of canada, where you had the positive news, lng canada. you put all that together and the narrative has turned a lot more positive. i don't think in isolation that these currencies are benefiting from crude. it is in the places they are in line with existing narrative. james: i worry about canada. i worry canada has increased its deficit to the global financial crisis. housing prices are elevated. canada is absolutely in the crosshairs. elsa: we do disagree.
it is in the crosshairs relative , but certainly compared to other highly indebted countries out there canada actually has a much better structure of debt, longer maturity, and less sensitivity of consumers. james: i think in the next crisis canada and australia are the big bets. it will go horrible for them. elsa: i think canada relative to sweden, norway will be the outperform or. -- outperformer. francine: six months or one year? james: when the global credit of the quiddity crisis -- and liquidity crisis reemerges, which is certainly will. next few years, then economies that are relatively exposed will be found wanting to. canada -- wanting. canada is one of those countries that i believe is going to struggle. francine: afternoon tea at the
ritz that we are betting on. james: absolutely. [laughter] elsa, when you look at the emerging markets does oil make a difference between importers and exporters? elsa: yes, and it makes a difference in terms of current accounts as well. when you are highly dependent on oil imports, an oil shock does not necessarily mean you will be able to import a lot less. there will be a demand impact. francine: are there emerging markets that you pick out as winners? is an obvious one that people see as an underperformer. it is hard to identify the really positive solid stories and where they are positive, like the likes of mexico, positioning is pretty crowded already.
i would be cautious about getting too carried away with the positive emerging-market stories. in this kind of environment you have to look for countries where you don't have a current account deficit. czechoslovakiat as an economy that i think is remarkably well played and has been sold off partly on general on general horribly bad news. francine: elsa lignos from rbc europe and james bevan from ccla investment management both stay with us. let's talk cars. that technology driving the auto industry today. >> in the industry today the products and services around the products are taking the drivers seat. of yearsnot the case ago or 15 years ago or the process is, the organization, the global extension were the elements of success. now we are back to electric cars, connected cars, autonomous
car's. all this is made possible because of the arrival of their he competent sensors -- very competent sensors, lower costs, artificial intelligence. i think 15 years ago we were dreaming about cars with the level of atomic that you are able to do today, but it was not possible because the components and technology that allowed this to happen were not available. francine: do you think it has been faster than you thought? >> yes. in a certain way we were imagining some of the functionality but we did not know how this would happen because the components were not ready. now it's coming much faster. now that the components are here it is going to go much faster than we thought. francine: how fast? >> you are going to own a car. a lot of people want to own a car and they want to be able to drive one, but they also want to be driven when they decide not to drive.
if you are in a traffic jam or in a highway, you don't want to drive. if you are on a road and you want to drive and enjoy the scenery, you will be able to drive. this is absolutely going to get it in all the cars. what you will go beside this is the car without the driver, which is a completely different topic mainly for commercial use. i bet you will still driving a car but you will be much more in charge. you decide what you want to do. you have your hands on the wheel and eyes on the road, that's it. you will be able to do many other things. francine: went is that happening -- when is that happening? >> 2022. francine: that was the renault chief executive. make sure to catch all episodes of "leaders with lacqua." the last couple of seconds we had some breaking news.
, one ofan indian bank the biggest in the country, and it has accepted tundra -- a retirement request from the chief executive. we spoke to her many times on the program. you can see the share price is gaining in touch. i imagine this is on the back of hope that others will change maybe some of the lending practices they have -- practices. they have named a new chief executive. let's get back to james bevan from ccla investment management. . this is breaking news how would you view banking and the emerging markets -- breaking news. how would you view banking in the emerging markets? is it a good investment if they get stuff right? james: i think if they get stuff right is the natural transmission mechanism for economic growth and therefore a key driver for keep -- future prosperity.
if banks are well-positioned and controlled the risk. of problem i would observe in a number of asian banks, i look at who bids for deals and coupons deals -- who funds deals. a very large number have gone to asian banks and not the u.s. banks. francine: all right, james. you can see the next share prices about 4.5% higher -- the prices about 4.5% higher. fresh --me they said loans were the lowest in 11 quarters. a lot of regulators, including in the u.s. and india, are examining some of the indian bank's accounting and government practices following
claims of a quick quote pro -- quid co-pro. you see the share price going up 4.2%. james bevan from ccla investment management stays with us. up next it is our weekly brexit show. we want ask nicholas boles whether the prime minister's speech has done enough to heal brexit divided in the party -- divide in the party. we will go through that, some of the top economic news, and pound. what discount do from here -- what does pound do from here? this is bloomberg. ♪
millions of dollars from international banks since 2014. bloomberg.com, from pizza to lambos. its sky rocketed since origination. and then in third place, a decade after its financial collapse, iceland faces turmoil in the tourism industry and italy offers to cut prices amid market tensions and interest rates may be gradually lifting to neutral levels. i'm getting breaking news. i think this is a market move. let me check in. the turkish leader extending its slide, weakened 2% versus the dollar. i think we have a chart. this is a beauty. this is the difference between
the u.s. dollar and turkish lira. i brought it back to october of 2017. the last couple of months or so, did kind of a also bit of a zigzag but the trajectory definitely seems to be turkish lira sliding and the central bank did show independence. we'll keep our eye on the turkish lira. we're also getting breaking news out of greece. -- we is set to have the talk about greece as it relates or not to italy and there are parallels to that and maybe we'll talk a little bit more about periphery europe next. corporate shares have fallen after denmark's biggest bank has fallen since they started a investigation in the money laundrying case that toppled the c.e.o.
the development comes as criminal investigations are underway in denmark after danske said $235 million that flowed through the baltic countries in 2007 and 2015 may need to be treated as suspicious transaction. joining me is peter, bloomberg's reporter in copenhagen. first of all, danske says it's working with the u.s. t.o.j. investigation. how big of a risk is this for shareholders? peter: it's a big unknown and something people are watching carefully in the market. some analysts predicted -- incorporated predictions of possible fines in the estimates. the problem with the u.s. d.o.j., the mythology they may apply to danske if they apply a fine, there are different avenues to choose. it's really a big question ark.
francine: what exactly could see the end game in this, is it holding more capital or the fine or can they do both? peter: both things are on the radar. nothing is decided and the bank y even face more -- may face increased council requirements in the home jurisdiction because it is said they're facing increased reputational risk being involved in this adjust lapped another $5 million demand this morning before they announced the incorporation with the d.o.j. but we may also see fines coming in from other jurisdictions or from danish courts. francine: thanks so much, peter, our reporter in copenhagen. this is something we'll keep trying to figure out. and it's one of my most impressive charts. i like this chart because i
forget about this chart. if you look at danske bank balance sheets compared to other countries, it's bigger than the economy which is why we should care. it's our show live from our london he had quarters. let's get to the bloomberg brexit bulletin with taylor rigs. taylor: teresa may faces a conference this week. that's as top tory politicians try to undermine her leadership including secretary boris johnson and described her brexit strategy as deranged but have renewed her plan to revive the so-called checkers plan. >> possible responsibility being governed especially at a time like this is that you've got to unite and keep a cool head and you've got to accomplish the task you've been entrusted by the people to engage with.
i don't see any appetite for that kind of division. taylor: the u.k. president is set to make a brexit offer to the european union in an attempt to open the door for a deal. according to the official, the talks are stuck on the question of how to avoid the need for police and custom checks on the border between the u.k. and ireland. the british side sees a path to reaching an agreement. the brexit secretary dominic rob said the comments were speculation. toyota said it would temporarily need to halt u.k. car production in the case of a hard brexit if the company crashes out of the e.u. without a trade deal, toyota president said the result in logistics disruption would force a shutdown. the world's most profitable carmaker joins a growing list of carmakers making contingency plans for a no deal brexit. news 24 hours a day on air and
powered by more than 2,700 journalists and analysts in more than 120 countries. i'm taylor rigs. this is bloomberg. francine? francine: the annual conservative party conference came too a close yesterday from a speech from prime minister teresa may. after dancing on the stage she made the case for a pragmatic approach to the e-talks and they may be preparing to rush her brexit deal through parliament to head off a rebellion within her party. fast tracking the idea is set to add pressure. for some insight on the state of the party and brexit talks, we're joined by nick, a conservative member of the u.k. parliament and brett. thank you for sticking around, james. nick, let me start off with you. if you look at the czech response, the e.u. rejected this plan. what does e.u. do next?
>> it was significant in her speech yesterday it was a great success and her best speech as prime minister. but in that speech never mentioned the word checkers which is the name of her -- she didn't even mention it as the place she's going for the weekend. there's a pretty clear indication she's moving beyond checkers. and the question is, is she moving to a place that both with secure the agreement of the other european state which was not forthcoming but also secure the prospective members of parliament and that's tricky. francine: is it norway or canada style agreement? nick: it's neither and i personally would prefer after going into a norway style arrangement for the interim and negotiating a canada star pretrade agreement long term but not what the prime minister is intending. i think what is much more
specific and detailed changes and particularly focused on the irish backstop in trying to find a way to allay the concerns of the european concern on the irish border without committing us indefinitely to stay in the customs unit and if she did do that she would lose a number of m.p.'s and not get it through the parliament. francine: is she safe through a leadership conference? nick: i actually thought about that before the conference and the conference will have cemented her in place until after brexit. the reality is there might have been enough people to trigger a leader vp vote but she would have won it and won it handsomely. we don't have time to be honkying about a change of leadership. we're leaving the european union 24 weeks away and we need to get a deal and not change
leaders at this point. francine: what are the lines in the market, are they looking at the leadership challenge, what the markets looking at, leadership challenge or the fact the e.u. can crash out with the same prime minister? james: it's incredibly relaxed with the nature of the challenges ahead and is sleepwalking for what i consider deeply important and i'm entirely on his point, it would be smart to get it to look like the norway deal and rules that come out of the e.u. one feels the hard brexit -- no, we don't protect the rules and don't want to be above it and will find it hard to accommodate that agreement in the way they'll have to face. >> i think there's an illegal of total freedom and sovereignty and what one has to reminds people is we're complying with international standards as an economy like
every other economy. the truth is the modern economy works on the basis of common standards in huge areas. conceding that the european union will be a number of the course of those on the products is not a great defeat. it is actually just a rough reality of the modern world. i think james is absolutely right. there are a number of my colleagues, if it's more than 20, we're in trouble and i do not absolutely under or accept that. francine: is it an illusion or trying to gain power? james: i think it's poison, anyone who would take on the leadership now with the promise we'd have brexit delivered once and for all and the economy would motor ahead. that to me is nonsense and completely concede it's perfectly possible to have brexit that works over the long term and definitely possible to have a soft brexit in the works instead of a hard brexit and i think the next would be
liverpool and you want to put your head before the pulpit and say give it to me, i can deliver. francine: as brexit swamped the agenda and not allowed the government to protect the cause leading to the brexit vote [nick: definitely. we've been arguing for a domestic agenda. but most of the civic service and parliament doesn't have anything to do. breast cancerity consumers the prime minister at moment. all other products of state could get on with other stuff and they're not. that's the cause. there is no time in the center and also there's a very strong sense the prime minister doesn't have capital and doesn't have a majority and can't afford to lose votes in the house of commons and trying to conserve whatever goodwill she has among m.p.'s for the key vote. we're all paralyzed until
brexit is done and the question is, will it be done march 29. of that i'm pretty sure. it's looking increasingly likely all the big questions about the long term relationship would have been unanswered and left so vague we'll have a continuing argument and continuing debate about brexit after mail 1. james: let's put together the risks. nick: there is a hard agreement the e.u. brought back the british parliament and they said no and there will be a vote of confidence and may be a mess. might be the national government or production or they changed leadership. from a market point of view, it's not a good outcome. and that's a astonishing high probability given the set of circumstances. but that's at least a 25% chance of happening. francine: unless the e.u. says
let's postpone this and freezes negotiates and actually change it. nick: i'm talking about the e.u.&mrs. may's negotiating team have agreed they just are get -- timothy: there -- vng questions that would entering it, from the time they're shut to yet saying i'm absolutely not buried in the market. and there are european elections in may and we're not having any candidates because we're not in the elections and if we were in the european union and after may it would then be a huge political problem. aybe there.be a deaveral for a few technical details like ratification to happen. but a major deferral i don't see happening. there's almost only one thing i'm certain of and that's that.
francine: thank you both of you, nick boles, conservative member of parliament and stay with "surveillance" more coming up sbuing the bank for international settlements. the president joins us for an exclusive interview at 11:30 a.m. u.k. bank time and for years he was at the bank of mexico and would be interesting to get his thoughts on emerging markets and trade tensions. later on, bank of america's chief financial officer joins us at 1:30 p.m. u.k. time. this is bloomberg.
francine: james, what do you do with the lira? james: i avoid it and would observe the economic turkey but also argentina and columbia and south after today to just that we'll see further currency turk weakness because they run current count deficits and are dependent on foreign capital and borrow a loss in other people's currencies.
this is a bad place to be. in contrast, i look at economies like czech czech, and accepting in many views that is not even a emerging technology and malaysia is well placed and seeing depreciating currency and improving fundamentals. francine: does it make it worse for the rest of the emerging markets. is it indices or unsophisticated money that if something happens in turkey it will kind of spread. james: there are three factors and there is interlinkage between regions and less linkage between turkey and brazil as market indices may suggest and leads to the other issue that a lot of investors have a broad-brush approach to most assets and don't know what they're doing and say let's increase emerging market weightings and buy a fund with trackers as well and something goes wrong and everything is thrown out. the third issue relates to the root cause of the problem which is the recycling of money from
quantitative easing and emerging quantityies in support of yields and becomes testy when it moves from quantitative easing and tightening. francine: does the fed keep an eye on dollar strength? should it and does it? james: i think the fed's focus is almost entirely domestic and i would observe mr. powell has said pretty much this since february. and i think he has played an immensely straight path and een clear. it's fascinating to it's fascinating to me he's not an economist and he speaks in a way that everybody can understand. e is a world economist and speaks gobbledygook. francine: what does it mean for the markets? james mr. powell is making it clear what the agenda looks like and the uncertainties of which he has to wrestle including this premise as they tighten rates and really know what the neutral rates are. how can anyone say at what point monetary policy seizes to be expansionary and he's brave
enough to stand up and say i may be central bank with a lot of tools at my disposal and we may get it wrong but we might get it right and that's important. francine: how much does it have to do with trade and you might not know the effects until it's too plate. james: the movement of currencies is more important than tariffs. again the market has the wrong focus here. the 10% tariff on the $200 billion of chinese goods that were announced a couple weeks ago is $20 billion which in the context of a trillion dollar economy is just a drop in the ocean. far more important i think in terms of the trade factor, u.s. and china which effectively shows out in the currency pairings is all about technology. it's about who is going to be the dominant global player in terms of politics as well as economics. francine: coming up we speak to
surveillance." i'm francine laqua. let's check london. >> you see the picture across the region. the ftse, the dax, all in negative territory, slightly quieter than 2% but a negative sentiment because you had treasury yield spiking to 2011 highs and have come off a little bit but let's look at the stalks we're watching today with north hidro where they shut down a plant in brazil. aluminum rising for a second consecutive day. and the highest since mid january and concerned over global supply crufrpbl. we look at the top and bottom of the stock 600 at a five month low raising their long term 2020 revenue and profit targets and danske bank back in the news again and the u.s. saying they're probing the money laundering scan that will topple the c.e.o., the former
c.f.o., said to be recommended by danske bank as the next leader of the company. francine? francine: thank you so much, sebastian with the market moves. let's show you about turkey and we had a move on turkish lira because i'm using the bloomberg terminal and if you're a bloomberg terminal user and we certainly hope you are and should do the same because it's a wealth of information. and consumer inflammation in turkey but a trend in prices showing a sharp deterioration last month amid higher pressure on producers and is the central bank in reflection of monthly developments and puts a little more pressure on the lira. the turkish inflation basically is at a near record high and all has to do with lira. it was the inflation report yesterday and now putting
monetary policymakers in a little bit of a bind. the central bank went to the highest level in nearly two decade. bloomberg surveillance continues and tom keene joins us. and from the bank of international settlements we're joined for an exclusive interview 11:30 a.m. u.k. time. this is bloomberg. snolet ♪
to a high. the fed may go past neutral and hype to reform the restrain. economic growth. crude hovers $18 a barrel. we're told prices look high. a danske scandal widens and case involving denmark's largest bank. tom and francine from london and new york. tom, we have a big piece of news coming out of a bloomberg business week spoof. it's probably the most significant known supply chain attack ever against u.s. companies. this has been taking quite a lot of years to get to. chinese hackers implanted tiny microchips in servers that made their way to data centers of some of the world's biggest companies including amazon and apple, according to an investigation conducted by bloomberg business week. according to extensive interviews with intelligence and corporate sources the attack reached almost 30 u.s.
companies by compromising america's technology supply chain. in email statements, amazon, disputed the story and the latest edition of "bloomberg week" hits stands tomorrow. we talk to jordan rochester, one of the lead investigators in this story. jordan, what exactly have we found out? jordan: yeah, the basic gist of this story is in 2014 and 2015 according to our reporting, a of of china's people's liberation army implanted malicious microchips on computer servers bount for u.s. companies. those computer servers wound up in very targeted, very large companies including apple and amazon. and what these malicious chips did was compromise the software on these hardware devices at the kind of level you can't detect. it's in many ways the ultimate
silent attack, and this was a very major discovery for these companies and u.s. intelligence services. francine: jordan, well done covering it and writing the story for bloomberg business week but where you've kind of grown accustomed to the off the wear based incidents is a hardware incident more serious than a software hacking? jordan: absolutely. this story has taken well over a year for us to report and write and you know, a lot of that is learning what is a harbor attack, it's science fiction for us as reporters and the public at large, a hardware attack is simply the most effective type of computer hacking any organization can engineer. the reason is hardware controls -- it's the hardware of a computer system is compromised. it will irrevocably compromise the software that sits on top of it. there's no commercial security
system that could detect that kind of man up lailings. it's a super, super, superserious to detect without physical examination of the hardware which almost no one does. tom: i want to go to the story i you and mykal riley but with an a distinction that the server mother boards of apple and amazon were compromised by these microchips the size of a grain of rice. are we saying that the motherboards on servers of the c.i.a. and pentagon were compromised as well or not, which is it? jordan: here's an interesting question. one of the contractors in this story, so a subsidy of amazon is a company called elemental technologies. almostal technologies appears to have been targeted because while they provide video processing technology to large
cable companies, they also provide -- they provide computer hardware to sensitive national security missions throughout the u.s. government including -- tom: i want to be clear, within your reporting, the follow-on reporting, can you suggest these microchips replaced by an operable force of the people's liberation economy, are those chips on u.s. navy warships? jordan: we don't know that and don't report that but we do know those entities were a target and the reason why that division was targeted. tom: jordan robertson and mykal riley with bloomberg this morning reporting on a hack, a cyberattack by elements of the people's liberation army against american corporations. some 30 corporations are listed, including apple, including amazon. i want to go to some of the emotion within your bloomberg business week. we'll bring this up, reilly,
these are elements out of a lengthy article as well. no, that's not what i want. i want the chart from matthew reilly. do we have those or not? ok. let us continue right now, jordan, with the idea of the technology involved. these are microchips that are placed by supermicroservers. where were they placed, in china, in taiwan, or were they indeed even placed in california? >> according to sources for the story, these chips were implanted in the supermicromotherboard. supermicrois the company that makes these servers and mother boards, by manufacturing subcontractors in china where the mother boards are actually made. tom: they're made in china as well. this is very strong language, jordan, say members of the people's liberation army is involved in tiber attack on
american corporations. how have the chinese respond instead jordan: the chinese government hasn't directly answered the questions we submitted to them over many months and the chinese government says it, too, is the victim of supply chain attacks and we know from eric snowden's leaked documents is the data is the case, the u.s. government does supply attacks as well but this is a manufacturing hardware attack and not seen an example publicly of today. tom: i want to show this. it's too important. anthony, get up that white screen right now. this is one we just had up on the yanksy arrive. this is the idea from china -- bring it up, please. it involves china using a tiny chip and ceding changes. akin from throwing a stick in the yancey river up from
shanghai and assures it washes ashore in seattle. it's supermicrochina spies appears to have found a perfect conduit. francine? francine: the companies denied this, how can we be certain this happens and tell us more about the ongoing investigation. there's still a probe. jordan: one of the things we as journalists take seriously is company comments and you know, in this story amazon, apple and supermicro, the supplier of this computer hardware, all denied any of these events occurred. we take it seriously. however, we have voluminous reporting from 17 total sources including inside those companies, apple, amazon and others and extensively within the u.s. government this attack did indeed occur and as you correctly point out, this is an ongoing highly classified top secret u.s. investigation. that's one reason we believe the companies would deny this reporting and in addition,
there's no consumer data that's alleged to have been stolen. this attack was about long term access to sensitive networks. by that logic companies are not required to disclose this information and no advantage for companies in confirming this reporting. francine: in your reporting with mykal riley that took more than 12 months who actually detected this suspicious chip which is the size of a grain of rice, first? >> this is an amazing story because these attacks happen probably more often than we're aware of but companies simply don't look at their hardware to see if these malicious microchips are there. the way these were discovered is it was arequiring a companies called elemental technologies and is part of a security audit, they subjected the hard wear to testing and found indicators of malicious behavior on those servers and dug deeper and found these microchips. apple's case our understanding
is it was a random spot check of problematic servers that led to this detection. most companies don't have the resources of amazon or apple to look for these hardware. and it could be a model for how you do this work if you have those resource. francine: was the intent to buy or gain access to information, is it hacking for something else? jordan: when we first started learning about this information, our asungs, which i assume many members of assumption musts an well is about stealing siry consumer data. that's not the case at all. all the evidence beef been able to acquire and the vore interviews suggest this hardware attack is about access and about opening a secret backdoor to networks for long term access and not about consumer data at all and our
sources tell us the goal of the attack was theft of intellectual property from these corporations. tom: to give the president gregg credit and the secretary of commerce and others have been if way out in front and i suggest washington is moderately distracted this morning with other matters. let's take a guy with senator mark warner, the senate of fat is familiar about this and how would these senior government officials respond to the idea that the people's liberation army has microchips on servers of 30 u.s. companies? jordan: one thing we wanted to make clear in the story is obviously the trump administration is very hard on china in many ways and so is the obama administration, at least privately. these discussions began with us under obama. and i would suspect that folks that have been read into these classified briefings have been
aware of this for some time but never been made public before so i would expect they're strong. tom: within the well laid out denials, can your overand people know that amazon's cloud system does not have these microchips on their server mother boards? jordan: it's a hard question to answer. tom: you don't know the answer then? jordan: we don't know. one of the questions they might have to answer is what are the procedures to make sure something like this is ongoing. it's a hard problem. you think of a company like amazon with hundreds of thousands of servers around the world. they can't check every single . e of them for hardware and it is a perfect system. francine: how common is this, does the u.s. and other country
dos it? jordan i the u. absolutely does and spends billions trying to figure out ways to hack in other companies. the u.s. used to be a manufacturing business. we no longer are. but what the u.s. government has to do is trip pre-existing computers and handle it that way. china owns manufacturing and its final assembly for many components and systems. if china wants to hack in systems at the manufacturing level, china has an ang no other country has. francine: in your wider reporting, will this have an impact on asian chipmakers overall and can it blow up in a concern about safety of making some of the components not in the u.s.? jordan: you know, i think it could. ovebler is idea of obviously the trump wants to
bring things back to the u.s. and there's logic. and companies and organization have to look at their hardware and do security audits. right now it's not being done because it up ends the business model. a lot of silicon valley business model is based on the idea of inexperience of computer hardware outsourced to china and other places, asia. when you start adding layers of security on the computer hardware it gets more expensive. so it has not been a business policy ell -- business model and i would suspect companies try to differentiate themselves saying we do extensive hardware security analysis to supply that level of comfort to scurems. -- consumers. francine: thank you very much. jordan robertson has done most of the reporting and was a lead writer on this amazing bloomberg business week story. for those of you joining us worldwide, this is an investigation that has been
conducted by bloomberg business week. this is what we know and the most significant known supply chain attack against u.s. companies. chinese hackers implanted tiny microchips in servers that made their way on to data centers of some of the world's biggest companies including amazon and apple including to a investigation done by our own reporters. we're joined by james beliefen at c.e.o. investment and patrick, first of all, reaction. does this change the way the components might be made? patrick: it might. it falls under security and i suspect there will be strong rhetoric pushing for sensitive instruments at a minimum to be manufactured in the united states. my first thought is margin compression probably for the technology sector if it does lead to that.
francine: i do have a good chart on micro that i'll come in a second but are you overweight on semiconductors and is it too soon to know and we need to wait of the reaction. >> i think the context of what's been happening, the 2025 thesis was always about china wanting to scale the heights of technology, to be a leader, particularly in areas like military defense and this revelation on the assumption if totally confirmed highly is consistent with china's appetite to become the major player and that does mean there will always be pressure for technology companies to rebel all borders and can only raise the game. tom: we've been raising the game and james bevan, i want to go to a broader view and remember talking to you 10 years ago, kevin roguff of harvard and how we're so dependent and we all are linked
knowing by this technology and wrapped around thighs so-called servers and mother boards and now these p.l.a. microchips as well. every company now, because of this article and reporting, every company has to revisit ter .'s of use, almost seen use of working with china. that's a cost, isn't it, an expense to doing business. james: talking quite right and would be wrong to say this is an issue that affects only china. we have plenty of news stories about russia being just as keen in understanding how it can take advantage in the cyberworld in which we now operate. everybody in our views show technology as critical among supply chains and critical in com obtaining technical varieties and the weather will rise and the other interesting
thing that ken was talking about a decade ago was the imbalance of free trade and of course technology was on of the things that broke down barriers of frequency prayed and plays strongly to the trump ministration view, they want trade. it's important for the long term health of the economy. tom: there's the military team with direct allegations within our reporting and there's also a separate seam of intellectual theft. it may be intellectual theft of military yots but what it comes down to is the trust and with this reporting has been sattered. refutable how would you propose auch as the united states areo king tom
i don't have a clear. -- i don't have a clue. james: we shouldn't overdramatize what's going on. countries have spied on each other since we well began. this is a new form of that activity. there are revelations coninstantly members of the european country spy on each other and there's horror this could be happening. it's the real world. francine: the servers were developed by sprupermicro computer and bring you to my chart this affected the performance of chair price for supermicro, a san jose based company and one of the biggest supplier of server mother boards. even before this happened it underperformed the nasdaq and also apple. patrick, away from that. i don't know if you're interested in the stock, will this fuel more tensions between the u.s. and china? >> it will fuel more tensions, it's great sound bites.
the rhetoric will be strong as james pointed out. one will be shocks it's happening and left has been from the white house administration and is going to ben on going friction between the u.s. and china and there has been friction and the continuation extends. francine: thank you both, james bevan and patrick armstrong. remember, bloomberg users can interact with some of the gtvgo. hown using do you have veggetting reporting done in bloomberg business week and long on to c.e.o. this is bloomberg. ♪ ♪ ♪ ♪
tom: we welcome all of you worldwide. tom keene in new york. markets on the move, yield higher. e.m. crushed this morning. turkish lira backing up. francine did a nice job on that in the last pour. bloomberg business week has broken a important story, a military espionage in the hacking of apple and amazon and is a cover of bloomberg business week and will be one of the great themes of the day in washington and yes, the kavanaugh hearing as well. we'll get to that in a moment. i really want to draw your attention to this important story by jordan robertson and
mykal riley and bloomberg business week will join us in 10 minute. first alert news, here's taylor rigs. taylor: they've received the results of the sexual assault allegations on supreme court nominee brett kavanaugh. the report is being sent to the senate where they'll review it today. the senate republicans could hold a vote and he be confirmed over the weekend. and ence accuses china said it has coercive measures and part of the trump administration campaign to increase pressure on beijing. there's concern the price of oil has prison too fast. intermediary halted gains at $76 a barrel and up 4%. traders appears to have discounted growing output from
usda add and -- saudi arabia and russia. teresa may, they've learned government officials may head off a rebellion from may's conservative story and want a law to ratify it after signing the term of the divorce in reduce else. 24 hours a day on air and powered by pik-tok. i'll taylor rigs. this is bloomberg. francine and tom [tom: huges moves on the market and coming off the powell discussion, equities bonds and cursory market. curves steepening from 22 to 34 basises points. that's a big, big move. euro breaks 15 and backing up on the equity tension at 13.7. the 30-year bond, 3.37%.
and dollar 86 index blows out above 96. francine: the benchmark yield treasury is the loudest since 2009 and spreading in europe spurring more gains for the dollar and that of course is triggering widespread declines in equities. patrick armstrong stays with us. oming up tobias, citigroup's chief u.s. equity strattist coming up at 6:00 a.m. this is bloomberg. ♪
eventually raise interest rates to levels they begin to restrain economic growth. >> interest rates are still accommodative but gradually moving to a place they'll be neutral and not that there will be a train on the economy. we may go past neutral but a long way from neutral at this point probably. francine: back with patrick armstrong. there was quite a move when it came to treasuries. first of all, does this continue and hurt equities like jeff says they will? patrick: definitely the u.s. equity market is longer in duration than ever before. the companies driving the markets have no earnings right now and all valued on what their earnings may be. u.s. market, very long duration. bonds, people think about duration, we're short both because of interest rates. will we witness the biggest years?nd crash in 20 patrick: there's a generation
of investors that don't know you can lose money and you may get a vicious circle where you see capital drawdowns and you are risk free and get the yield curve which is natural and when you get inflation you get a voluntary measures. and i think we'll see the fed deliver on their dots. powell spoke reasonably hawkishly yesterday but his whole premise is we don't have inflationary pressures right now. they are there and building and the feds looking at cages, and four years ago it was .2% where it was 7.8%. talking hawkish and getting to neutral but something equity and bond markets aren't happy anymore. this shows the armstrong visualization of move and we go to the language of jean claw
treesh aye. -- jeanne-claude triche tsks. and the yield of the 30-year bond. the path is well within two standard deviations which is normal, normal, normal and then patrick, it is not. there is a rationalization to every abrupt move. where are we in that rationalization now and what is the symbolism if we get to a three standard deviation move and 30-year bond yield. patrick: the bonds are still higher valued despite where they were last week. you need this, typically the 10-year bond is the same as the economic growth of the company and we're way below that and a trillion dollars deficit coming through a late cycle. the economy is performing above capacity.
wage rote going the significant disagreement. you look what amazon is doing. the biggest issue is they can't find job later to fill openings. 25% is the highest ever. tom: the same chart and i squeezed it down to see where armstrong is heading. armstrong said we ought to be up here at 5% and the 30--year beyond well. and we're only here as the same start you moment ago. it's a long time. patrick: it won't go there quickly but quicker than people expect. two years ago we were talking about lower, structural stagnation and now in a goldilocks. the next phase is goldie locks doesn't take you too much but a trillion dollar deficit gets you. it means what for who?
patrick: the bonds are in a bubble. the u.s. equity market is in a bubble. a dollar even day -- adollar even a day and in 2008 you were $4.50. it's never been higher on that multiple ever. price of sales never higher. ebida 198%. the u.s. markets are a little expensive, the reason lernings look ok is you had a big tax cut and interest rates being low and wage dosts not keeping up with the economy. the margin is higher and means reverse as well and the economy will look expensive on all those measures. hubble is a strong idea. francine: actually if you're right and they've achieved to historical value. patrick: what has? francine: the earnings. patrick: they're 70th rcentile and not crazy
expansive. francine: it means the markets are taking the belong bets on the market. patrick: we're humans and hard to look down the road. you're getting all time high profit margins now because you've had a crazy backdrop of tax cuts and interest rates and for some reason wage growth hasn't keptup a very strong economy and you had low commodity prices. all those things are changing now. globalization outsourcing has been a huge boom and if we get in protectionism it's another growth of profit margins that may turn. people look short term and the profit margins were this and think they'll improve and had is the forecast and there will be headwinds that were previously tail winds. francine: thank you so much. patrick armstrong stays with us. this is what we're seeing from russia. he's the minister in charge of petroleum for russia. he's alexander novak and our very own emery is moderating
this panel at russian energy week and delegates include the russian minister and opec secretary general. e did also have an exclusive sbler view with the minister yesterday where novak said prices are high. do they automatically adjust or actually hurt world growth? patrick: it's a tax on people importing oil and taxes will probably moderate because we think saudi arabia and russia will start to produce a little more like they promised they would a few months ago. you've got the white house administration talking about opec needs to do more. but the trump administration and policies towards iran have created a few million barrels out of the market now and pushing prices higher right now. the markets are not totally out of whack but more out of russia and saudi arabia and we probably level off where we are.
francine: two questions at $o 0 and $100, how much does it hurt emerging markets and actively at what point do they start opec and the allies, can they actually fill the vacuum left by the iranian section? patrick: it's saudi arabia that has to fill it. francine: can they? patrick: they probably can. i don't know if they will. the emerging market consumer gets hit higher on emerging oil prices than anyone else because it's a bigger proportion of their consumption basket and don't have discretionary savings and where you see consumption hit first. francine: thanks so much. patrick armstrong stays with us. coming up, a chief financial economist coming up at 6:00 a.m. in new york. 11:00 a.m. in london and this is bloomberg.
tom: good morning, everyone. "bloomberg surveillance." i'm tom keene in new york and francine laqua. operatives of the p.l.a. hacking in the computers of apple and amazon. first your news in new york with taylor rigs. taylor: it's the most significant supply chain attack ever against u.s. companies according to an investigation by bloomberg business week. operatives from a unit of the chinese army implanted tiny microchips and servers that made their way into data centers of some of the world's biggest companies, including amazon and apple. the chips allow the attackers to create a self-doorway into networks using the servers. amazon and apple disputed summaries of bloomberg business week's reporting and so has supermicro, the company that assembled the servers. starting this morning senators will get a chance to look at
the f.b.i. report in sexual assault allegations against supreme court nominee brett kavanaugh. the white house received the report overnight and sent it to capitol hill. a test vote is set for tomorrow and a final confirmation vote on kavanaugh could take place over the weekend. the british government said russia almost certainly hacked the u.s. democratic party's presidential campaign in 2016. the evidence from the u.k.'s national cybersecurity center could feed into that investigation by special counsel ron earth -- robert mueller by meddling. authorities blame the kremlin for a number of cyberattacks over the years. and italy and the european union have looked at populist government plans and the european department claims italy will overshoot its department of 2.4% because the growth rate is too low. the italian prime minister is firing back and said the tone of some of the e.u. commissioners is inappropriate and believes they're unhappy. italy has limited immigration.
global news 24 hours a day on air and at tic-tock on twitter powered by more than 2,700 journalists and analysts in more than 120 countries. i'm taylor rigs. this is bloomberg. francine and tom? tom: china in its military is shaken to the foundations on espionage. bloomberg business week published a story which suggests the supply chain of our hardware and servers, our mother boards has been often compromised by microchips the size of a grain of rice. maybe the tip of a pencil and they've been placed by chinese operatives on boards with apple and amazon. no discussion there of the pentagon or c.i.a. but there's illusions to that. to provide clarity, the editor of the story bloomberg business week joel webber. congratulations on your journalism with rochester and mykal riley. what was it like two years ago, three years ago when these two guys walked in your office and said this is happening?
joel: we've been working on the story for more than a year and put the bar at an incredibly high level and they rose to it. the main thing that we really wanted to address with this story is that consumers, most of america, most of the world is familiar with something called software hacking, services with equinox and yahoo!, this is different and far more troubling because it's a hardware hack. and using a little tiny chip implanted in china during manufacturing of supermicro mother boards they were actually able to reach some of the biggest u.s. companies. tom: within the 30 companies, amazon and apple are the big guys on the block, there's the idea what about our military? senator warren of virginia and the dakotas, say wait a minute, what does the pentagon know? jordan said earlier we really don't know. is that the next order
question, are these microchips in our government and on our warships is the next question. joel: the story takes place in 2014 and 2015. this is not a frequent thing. it's incredibly rare. one of the quotes in the story likens it to a unicorn jumping over a rainbow. what we're talking about is something no one has been looking for. software is something it makes sense for. no one has been looking up hardware and is the great vulnerability america doesn't seem like it was ready to talk about it. tom: come on, this is science fiction and like "the matrix" right? joel: what's significant is a supermicro motherboard is ubiquitous, almost everywhere, 900 countries. tom: is there one here? joel: no, there's not. 00 companies in 2015 use supermicro products and it's such a small piece of the
supply chain. you bring up the military. what half r what happened is they end up in elemental which was acquired by amazon in 2015 to expand what became prime video services. guess who else uses elemental, which is a video processing service? fantastic software but use supermarc, o hardware and that's d.o.d. and others and we don't know where it goes beyond that but happens to reach customers with sensitive government and corporate secrets. francine: i'm going to read out part of the third paragraph. first of all, congraduates on an outstanding piece of investigative work and urge everyone to go on their website and open it up and read it. on the server's mother boards the testers found a tiny microchip not much bigger than
the grain of rice which wasn't part of the board's original design. how many of these things are tested? does it mean that we need now to test absolutely every particle? joel: it really gets to a question of what is commercially viable. to protect a threat like this, you have to put server mother boards through x-ray machines and in some cases, electron hike row scopes were used to detect this and something so mall the yake ed eye will be able to detect it. and if you look at a super motherboard and look at the images that accompany the story, there's a lot going on. like you, tom, you guys aren't going to know where to look but a sophisticated person will be able to put it through an x-ray machine and detect whether something has been compromised. keep in mind we feel -- according to our sources, this was a targeted attack.
this is not something that affects every one of supermicro's customers. it's targeted. francine: the u.s. is looking into this and it's been open more than three years? joel: yes. francine: have they had conversation with the companies and have they removed that. the companies deny it ever happened. joel: the statement is in a company article. we put a bar incredibly high on his story. the source are were incredible and come from u.s. intelligence, company insiders and felt they met a threshold this is in the public's best interest we publish because again, this is not something that we are accustomed to looking for. people are aware of software hacks but no one is looking for technology hardware attacks. tom: this is wonderful. joel webber, thanks so much, bloomberg business week. we'll have much more on this reporting through the day.
francine: this is "bloomberg surveillance" tom and francine from london and new york. let me bring you to my chart. we're doing it differently than just looking at b.c.p. and spreads. you can see the spread widening between italian and spanish yield and the same move with italian and portuguese yield. hsbc says things are likely to get worse for italian bond before they get better but our patrick armstrong has been buying into some of the dips in the market and bond yield. why do you have conviction to uy italian bond?
patrick: we've been buying them when they're 3.1 and selling at 2.7. the market will overreact to noise a italy right now. any time there's strong rhetoric out of the government what they're going to do on deficits and spending, yields spike up and we think people just overreact. we're talking about .1%, .2% on the deficit and won't be that meaningful. end game for italy, they basically put something to the e.u. they agree with and cheat. they've been doing it for years and not a great model or address the issues they have but avoids italy leaving the euro zone and why yields are higher. francine: you don't buy it italy having a secret plan to leave the euro? patrick: they might. look how hard it is for the u.s. to leave and we don't have the same currency. i don't know how logistically possible it will be for italy
and the italian government changes 12 months away and it people desperate if realize the costs and what is involved and i don't think it's low probability. tom: thank so you much patrick armstrong with plurimi wealth. in london called the guillotine an cloture is how the senate gets to a vote and cloture was committed and on we go to a vote. joining uso our chief correspondent kevin sirily and maybe we can touch on the bloomberg business week story as well but right now on kavanaugh, what do we see? kevin: we'll get the vote on friday and this just after the white house putting out a statement and saying essentially through a spokesman they believe the senators will have ample time to review the document and brett kavanaugh
ultimately will be confirmed. the bottom line is the focus will be on these independent republicans, murkowski, collins, blake and see where they'll come down on this. om: how big is the document? >> we don't know. it was interesting when i interviews chris coons, the democrat from delaware that muches for this week long extension with senator flake said one of the things being discussed was issue a top line report to the public so folks would be able to read a top line report. i don't think we'll get that. i think this f.b.i. report will remain behind closed doors and the senators will review it and you'll hear different talkings with a day of high drama and political theater and the supreme court will be decided within the next cumming days. francine: there's a great story out of "bloomberg businessweek" called the big hack and how china used a finey chip to
infiltrate american countries [will this give initiative to president trump? kevin: this bombshell exclusive report is already penetrating here inside the beltway. vice president mike pence will give a speech later today talking about how the chinese are doing a much worse job of hacking than russia did in the 2016 presidential election. the issue of china in particular and cybersecurity very much on the mind here and look for vice president mike spence to mat grounds and discuss it. great reporting by our colleagues. francine: great reporting. we await of course some of what will come out of it i guess from the chipmakers, tom, and some of the administration. thrinks so much, our kevin c cirilli in washington. and we watch out for a
superstar-studded panel with the russian minester and the opec secretary general. what we're trying to figure out is what high royal prices many for world growth and what it means for demand and whether saudi arabia can fill in that vacuum left by iran ran sanctions. very have plenty more to come. our "businessweek" "cover story" and the big hack, how china used a tiny chip to infiltrate america's largest companies. that's next. this is bloomberg. ♪ . .
attached to the pla, attached to servers used by apple, by amazon, similar servers used by the cia and u.s. navy warships. the chinese say they are an "resolute defender of cybersecurity." chairman powell says the american economy is particularly bright. renewedar finds strength, oil at $86 a barrel. committed, the kavanaugh vote. good morning everyone. this is "bloomberg surveillance." francine, the headlines out of will finallythey
help the domestic economy. moving.re what is most interesting is this article on espionage by china. bigcine: this is our bloomberg scoop. significantst supply chain attack ever against u.s. companies. this would be chinese hackers implanting tiny microchips in servers that made their way into data centers of some of the ,orld against companies including amazon and apple. let's get straight to our lead reporter, jordyn robinson. this will create waves. who have you spoken to this morning? just seeing the responses from this big story. it is important to note that this tip came to us from the
obama administration. while the trump administration has beenn china, this a long-running concern of administration officials that the supply chain for computer hardware is subject to tampering . anything made in china could be subject to tampering of this sort. essentially a hardware attack. type the most significant of attack someone can engineer. francine: this is huge. serious than more the software-based ones we are used to. who found it, by mistake, by chance? >> there is a lot of luck in finding theses things. do chips are designed to one significant, malicious thing.
the way amazon and apple discovered these chips -- amazon did a pre-acquisition security audit that found these tiny chips. apple found it because it was having trouble with some of these servers. tom: the reaction is throw the bums out. the continuing investigation for espionage. i get all that. except we need the hardware. how do we get thethe continuingr espionage. hardware? should it be made in iowa? there is this knee-jerk reaction to say let's make it all here. the computing needs that modern silicon valley needs are
expansive. it is unfathomable how much computing power we need. asian manufacturing is reality of the modern digital life. the fbi investigation is looking at whether that company was infiltrated by chinese spies to facilitate this attack. the solution is you have to look at your hardware. tom: is this report hinder the investigation? this is a three-year-old investigation. we don't know whether this would hinder the investigation, but these investigations are long-running and design to ferret out spies inside these companies.
it is hard to find spies inside companies and develop those sources, so i'll believe is the interest and publicizing this outweighs any potential this could disrupt an investigation. this offers incredible insight into the supply chain. portland, one in san jose, so where do we think these unauthorized microchips were inserted? the brilliance of this attack. supermicro is based in the u.s. with a large santa fe headquarters. areof their motherboards manufactured in china, and that is where the attack occurred. some details we found fascinating about what that process look like.
it's not like you go to the ceo and say we will plant malicious chips on your motherboard. this was a highly targeted, highly sophisticated chinese government operation. it is not easy. tom: jordan robertson thank you very much. they will go to the emotion of this article. idea it up right now, the of the yangtze river. it is akin to throwing a stick assuringze river and it washes ashore in seattle. spies appear to have found a perfect conduit. has been way out cyber.eporting on this will jump the conversation.
what will the likes of mark warner do? there could be congressional hearings. vice president mike pence is set to deliver an address in terms of hacking. coupled with our excellent reporting of business week and now the midterm election 30 days , the administration looking to pounce and move the conversation away from russia and onto china. what the vice president will say is to outline in explicit terms what precisely can be done to stop china. you have to remember the geopolitical landscape come the back-and-forth in trade talks. tom: one of the books of my summer come the threat matrix, the idea of a cia come fbi that works with confidence. forget about kavanaugh.
forthese agencies ready another round of cyber espionage review, study, and investigation? argue they are. despite the ongoing political these trusted institutions have faced in recent years, they have been moving ahead with regards to , hackingg security from russia and china, as well as actors in the middle east. of legislation, you sell bipartisan legislation to bolster state institutions to protect against attacks in the midterm elections. we will have to wait and see if the states will need more funds to protect from hacks during the midterm elections. francine: the story and the hacking basically give more ammunition to trump space ahead
of the midterm elections. sure it think, i'm not would be a base argument, but it would cause everyone on spirit the hacking issue -- everyone. the hacking issue has been largely focused on russia. what this does is essentially say this is not just a political story, not just a republican story. this has deep impacts on financial institutions, silicon valley institutions, education, health care, across industry, and something no one particular industry can say it is immune from. tom: thank you so much. our chief washington correspondent focusing on the judiciary committee, and fbi. guests, maybe the markets, and they moved yesterday.
that is a pretty important piece of news. there are two questions traders want to know. does it go to $100 a barrel in the short term? if it does, does saudi arabia have the capacity to make up for it? does that also hurt demand from emerging markets? let's get straight to bloomberg news. house hase white received the fbi report on sexual assault allegations against brett kavanaugh. a spokesman said the report is being sent to the senate. republicans expect to hold a vote tomorrow and he could be confirmed over the weekend. vice president mike pence will accused china of meddling in the upcoming elections. he says china has launched a campaign of propaganda, spies, and course of measures. it is part of the trump
administration campaign to increase pressure on beijing. there is concern the price of oil has risen too fast. gains around 76 dollars a barrel today. may wantsime minister to rush a brexit deal through parliament. government officials hope that we'll head off mays own conservative party. they want the agreement ratified by lawmakers in two weeks after signing the terms of divorce in brussels. --ing says >> we see that whole front of urban mobility transforming right before our eyes. we are building prototype vehicles today and expect to be flying those vehicles in the coming year. boeing is working with
regulators to develop a traffic management system for the aircraft. global news 24 hours a day on air and on tictoc on twitter powered by more than 2700 journalists and analysts in more than 120 countries. i am taylor riggs. this is bloomberg. thanks so much. these guess with with you, you can rip up the script. let's do that. let's go to this chart. you have been way out front on optimism, on the american economy, now the 30 your bond almost up to three standard deviations. marketsnows his equity are joined at the hip of text income markers -- markets. worry about it getting close to 3.5%.
at that point, you will wipe out the flexibility you have around equity risk premiums. 3.5% on 10about the year yield that will be the disruptor. price the 30re not year yield at this point. tom: there is the rate of change, and it is sobering. >> it is pretty interesting. drew a line inld the sand more than the 10 year yield of 3.25%. when that broke about that, this is the second day of that, there is follow-through selling. i don't know how far it will go. we were thinking the trillion dollar deficit starting october 1 plus the balance sheet wind down of treasuries, that $1.5 trillion of financing hitting the treasury market, that that would push up yields, and here
we go, the second day. francine: how much of a nightmare is this for the boj? global bond selloff has been that sent the japanese yield to a level last seen before the central bank introduced negative rates. not talk to anyone in our office overseas, but in that boj,- forgetting japanese investors heavily invested in u.s. securities, that is probably one of the reasons that treasuries are being sold, because we have gone through this important level. i don't know how far it can go. up because going crude oil prices are going up, inflation pressures from crude oil prices, so we will see here. tobias, are we looking at a perfect storm? >> the perfect storm is if
everything came together, this could be one squall, but you have the midterm elections, earnings estimates for next year are probably too high in the equity markets, the potential for them to be higher, and lastly come issues around trade and how they will play out, particularly via china. i suspect the rhetoric against china will be ratcheted up again. tom: the article is just another example of military exercises. how does cyber fit into citigroup's analysis. when jordan robertson's article comes out, we are not moving on. this is espionage. >> i don't think anyone a shock to there is chinese corporate espionage. concern. we all worry about our accounts
being hacked. tom: that is not in the article. >> that is part of the broad discussion around cybersecurity. i think there was an article in the wall street journal or new york times about banks in the u.s. seeing a ratcheting up of attacks against them. the cyber world and wars will be continuing for a while. tom: there are costs to the economy. you have been one of the arch optimists come always out front, glass half-full. we are way over half-full. againmake america great come a morning in america, and all that. when do you say enough? >> it's always darkest before the dawn, they say. times can't get that much better. tom: how do you change or call at imufg?
when have had times unemployment is extremely low. we have kind of reach the endgame for the economy. everyone has a job. it is hard to forecast at the moment because the unemployment rate is low. because the unemployment rate is so low, there are more and more for a growthlling slowdown in 2020, if not an outright recession. francine: just going back to the big chinese hack, you say we know this happens, but does it give the trump administration more ammunition to be tougher on china, and what does that do to growth? >> the dollar strengthening is a problem for world growth in the sense money flows away from emerging markets, not just china alone. one of the long-held beliefs of president trump has been china
is "ripping us off." he has had that view for 30 years. that is consistent. this focus on china is stepped up. read that the sino-american trade relations are different than the mexico-canada relationships. the ascendancy of china has original superpower and global , that trajectory was there already. does the repricing of treasuries hurt equities? >> at this point, we are not that worried about it. 3.5%, it wille to get more challenging. we expect bond yields to move higher and more wage pressure, nothing to do with the , but theent yesterday
gaps between unemployment rates are shrinking. literally explain why wages haven't gone up yet. tom: why? >> for the last 18 years, it has 10 a tight relationship with wage growth. as the gap shrinks, you will have more. tom: do we need a yellen victory lap? >> she got what she wanted, didn't she? she cap rates lower for longer. but not so much contagion, , but alsol linkages fx. i see lockstep indian rupee come a philippine peso. -- rupee, philippine peso. is it normal? back toone wants to go the contagion of the asian financial crisis 20 years ago. -- tok it is 2% effect
specific. it is amazing how turkey has come off the news headlines are quickly. tom: where is the opportunity? have the hydrocarbon people. $86 a barrel, where is the opportunity? >> we still find value in the energy space. see this change in equity leadership away from growth to value. that might be the effect of higher commodity prices, higher yields, and that is something we have been waiting for for a good while. you hear the people talk about the death of value investing. knell ringing the death too early and there is opportunity growing in the value space. francine: do you think the fed
will try to keep dollar strength in check? you mean if the fed continues to raise rates were that strengthen the dollar? francine: and heard emerging markets. how much do they look at this? far itepends on how goes. everything i am hearing is the line in the sand for a lot of people, and that is why the fed is getting more cautious, as the , thatnds rate gets to 3% is more of a line in the sand for emerging markets. the fed might want to slow down the rate hikes once the fed -- torate gets through 3%. francine: thank you both. let's get straight to the bloomberg business flash. bank isdanske
investigating the money laundering case that has led to the ouster of its ceo. theays a large portion of 235 billion dollars that flows through its unit in estonia may need to be treated as suspicious transactions. the bank said it is cooperating with u.s. authorities. japan, softbank, and toyota are starting an on-demand transportation service. ride-hailing for japanese public agencies and private companies. that will be followed by a rollout of vehicles in 2020. to your to an softbank are trying to catch up in the field where u.s. technology and car companies have taken the lead. that is your bloomberg business flash. bring up this chart as we go to break. up.ets us dxy currency back a gazillion the dollar strong, ugly,
ugly, strong dollar, ugly, ugly. here is the move. what sounds good, a motel 6 accord? a trump hotel accord? >> it is interesting. i'm struck why your graph, the major move in the dollar, the strength is when commodity prices were crashing. other way.going the we will come back. oil at $86 a barrel. stay with us. this is bloomberg. ♪ is is bloomberg. ♪
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taylor: the most significant supply chain attack against u.s. companies. operatives from a unit of the chinese army implanted tiny microchips and servers that make their way into data centers of some of the world's biggest companies, like amazon and apple. attackers toowed create a doorway into networks using the servers. have disputedle summaries of bloomberg's reporting. morning, senators will get a chance to look at that fbi report into sexual assault allegations against brett kavanaugh. the white house received a report overnight and sent it to them mostll,: this comprehensive review of a supreme court nominee in history. tomorrow,s set for
and the final confirmation vote could take place over the weekend. saysritish government theia almost certainly hack u.s. democratic party's presidential campaign in 2016. nationalnce from the cyber security center could feed into the investigation by robert mueller into russian election meddling. british authorities bring the kremlin for a number of cyberattacks over the year. global news 24 hours a day on air and on tictoc on twitter powered by more than 2700 journalists and analysts in more than 120 countries. i am taylor riggs. this is bloomberg. tom: thank you so much. it was a banner yesterday as we spoke to many people within monetary policy, including trolls evans. , our next guest is with the bank of international settlements,
called the central bank of the central banks, where he is general manager. he is the former governor of the bank of mexico. how close are we to an emerging market crisis? ecuadore comparisons to , even to mexico. how close are we to true em instability? >> hello. yearld say during this that the pressures on emerging markets have increased. i would say today the main inssure has been contained turkey and argentina. i would say from some years ago until now that emerging markets have made a lot of progress in terms of strengthening their macroeconomic framework.
the pressures they face in the future will be increasing normalization in the u.s. and other monetary policies. tom: one of the leaders of thinking about the new theory of economics has been william white of canada. new area of economics or can we use the old models to move forward. >> we need new models, but we don't have to forget what worked in the past. , they are still valid. in terms of monetary policy implementation, one has to keep in a on the final objective of monetary policy, which is usually inflation, growth, but also financial stability. it is the interaction of all the
that need to be balanced out. is aine: first of all, it great pleasure to speak to you. it is almost 10 years and central-bank started slashing interest rates and buying bonds. government debt is higher than before the crisis. are you worried that central banks won't have the firepower ? next time? of the sovereign debt needs to be taken into account. some countries will need to be careful about that. central banks will be able to use its war chest. we now have instruments we thought we didn't have before, so right now what is important
is to move forward gradually on normalization so that if push ands to shove in the future monetary policy action would be necessary in case of recession come the central banks will have space to act. a fight thew with next recession if they don't have a bazooka? do they need to normalize quicker than the market is expecting them to? >> i don't see why central banks would not be able to do whatever they need to do. howe are no restrictions on this could be used if necessary. we are in the position where it to containequate what has been done in the past and bring it back to normal circumstances so that if we have
, recession and the future there will be enough space to do so. tom: the president took a .assive victory lap on usmca how bad did mexico lose? >> i think mexico did fine. one of the most important things here, the bulk of the news is relationshipercial for mexico with the u.s. is really important to have access to u.s. markets. was put into question, and that generated a lot of uncertainty. that stopped investment for a while. it was difficult corporate's to plan looking ahead. agreemente have a new
with some modifications in the market, but all in all a very positive agreement, one that will allow both countries to win. do you expect a trade war between the u.s. and china to escalate. is it inflationary or deflationary for the world economy if it does? difficult for me to be the futureill u.s.e trade policy in the if we take the case of nafta, there were ups and downs. they've recently prevailed. hopefully at some point we will
convert in the case of china. war in termsn open of trade between the u.s. and china, it can be really disruptive. it is something we need to keep in mind, that most of the trade in the world economy is production done by productive value chains, and that can be disrupted easily. if that happens, then production can suffer and we might have slower economic activity and lower commodity prices, and therefore inflationary pressures , but to have lower inflationary pressures is not good because of probably lower global growth. i wanted to come back
to the financial crisis. given the level of debt and risk-taking, we know countries thanks more resilient to sharks, but have they done enough to prevent shocks from hitting banks? well, yes, i think so. i think the reforms have been very thorough. much all alletty aspects of financial institutions. been an important change in the culture of banking institutions. they are far more prudent now. therefore we are much better prepared for any shocks in the future. tom: thank you so much. the bank of international settlements in zürich. radio, weng today on will drive the conversation forward. right now, bloomberg daybreak.
>> this is "bloomberg surveillance." let's get your bloomberg business flash. danske bank so the u.s. is investigating the money laundering case that has led to the ouster of its ceo. a large portion of the $235 billion that flowed through its unit in estonia may be suspicious transactions. the bank is cooperating with u.s. authorities. softbank, and toyota are
teaming up to start on-demand transportation services. it will offer ride-hailing services for public agencies and private companies, followed by a rollout of self driving vehicles in 2020. toyota and softbank are trying to catch up in a field where u.s. technology and car companies have taken the lead. of aerials the age taxis is getting closer. the ceo spoke with bloomberg in seattle. >> we see that front of urban mobility transforming right before our eyes. we are building prototype vehicles today and expect to be flying this vehicles within the coming year. he said going is developing a traffic management system for the aircraft. that is your bloomberg business flash. tom: thank you so much. he is from south dakota, the former governor, now senator. we will now try to commit to a
kavanaugh-free interview. there is a lot to talk about with judge kavanaugh, but let's move to some important matters. businessweek says the people's liberation army and elements of the chinese military put inrochips on motherboards servers and america's corporations. what are we going to do about it? we are now at a point of clear cyber attack, thoughtful espionage, by china. we will not respond with a lot of rhetoric. what is the to do list? >> to begin with, this is not new. this is something we have been looking at for quite a while. it is not just china in full in it. it is a matter of a lot of different countries looking for
data. the concerns we have had this placed some guidelines regarding which companies we would do business with china because some of the concerns expressed here. it is not just china. multiple countries have an interest in doing so. the technical capabilities are there. it is a matter of whether our ability to detect these types of chips is up to the job. second of all, how do you respond? you can either have the best defenses possible, or also some deterrence. we will need both. , signs ford for the department of defense has made it clear that for the next 10 years that defensive capabilities alone will not be enough. towill need some deterrence
slow down the cyber interference. tom: when you ran for governor of south dakota, spielberg could do a movie on it. i'm sure you were shaking hands at a walmart are many walmarts in south dakota. how do we balance chinese espionage, chinese cyberattacks, with our need to buy something cheap at walmart, that great consumption machine. how do we balance those two ideas? >> you have to identify the systems which you absolutely have to protect. it's one thing to buy shoes, ,hirts, commodity-type items but when you get into the technical side of things and areas where you could have embedded chips, you have to look at what the purpose of them is in the first place. we have a number of
communications companies across the united states that would try to buy the most inexpensive products possible. thatave electric utilities want to buy inexpensive materials they will incorporate into their systems. the warning as you have to be very careful when you buy from overseas, because sometimes everything that is there and for a low price might be subsidized by another foreign operation. the reason is to get their commodity products embedded into your systems that eventually might very well the able to be tod in a clandestine system benefit the country. this is not new. it is something we have been aware of and something we have been working on and trying to defend against. francine: what does this mean, senator? will there be extra testing, u.s. companies need to change their supply chain and how they source things? >> that is occurring as we
speak. , the being directed companies in many cases are, whether they have to be purchasing with special care types ofrd to the equipment they are buying and who they are buying it from. companies that were not on the list of suspected problem children, but who have been added to that list. those companies in many cases will be taking out old equipment and putting in new equipment. tom: why are we only learning about this now? francine: we hear about cyber attacks, software, but not hardware, why? >> it is coming to the attention of the public right now. the two u.s. companies involved are both not confirming what has occurred in the past. has beenn, bloomberg able to piece together what they believe is happening.
it has been going on. it is not something that is a surprise to the security community. it is one they continue to work on. communitythe security were not go out and broadcast what they are finding out. some of the best ways for us to collect data is to remain silent and continue to learn more about our adversaries. tom: i want to talk about trade. south dakotaea of dealing more with candidate than mexico. the idea of importing potassium .hloride and bovine meat i don't want to know what that is. i guess it is mystery meet as well. your president says it was a historic agreement. how bad did canada lose? >> it will be good for both countries, for all three countries. for the u.s. to come back to
stability in the markets will be very important. mexico is the number one buyer of corn from south dakota, soybean meal, and soybeans. beef is number three right now. canada we will do $1 billion of trade in south dakota with candidate. these are important relationships we want to maintain, but candidate it locked up their egg products and were protectionist in nature with regard to their ag industries, including dairy. fact that canada was using a system in which they were basically dumping their products at subsidized prices on the open market and competing unfairly with our producers. rightesident have the idea when he said this has to be fixed. it done asing to get
soon as possible and get back to regular business. china, soybeans going to that is 25% of the entire market in the u.s. tom: senator, thank you so much. patiently waiting for our single best chart here it -- chart. citigroup on this great equity market. canadians open the season last night. montréal lost. it is a disgrace. the season is over, right? over, but we wish the team luck. tom: let's look at the prediction for the bull market. alan greenspan says you need a bull market, and we have had a bull market extraordinary over 100 years. what is the citigroup surprise index say now about this perpetual surprise?
bitt has bottomed a little and turned up. i would not make economic predictions. it is designed for fx trading, not for predictions or equity markets comes so people use it without understanding it. it is discussed in properly and inaccurately why the street. -- by the street. inhave seen some pickup prices, oil prices in particular. pressure ond with wages creates this inflationary potential. i wonder how much the fed was trying to get longer yields potentialprevent the flattening of the yield curve or inversion. tom: so much of this is dividends competing with the yield. are we there now? don't think so.
i think people are more focused on the simple appreciation. what are we up? almost 10% on the year? dividends, i guess because interest has been so low by the fed for so many years that people don't judge the stocks based on dividends, at least people i talked to, as they used to. they like the role of appreciation. i do. when there is no concern that central banks don't have ammunition to do with the next crisis if they don't normalize quicker, do you believe it? >> i will not disbelieve it. notion of trying to normalize to get amateur straights high note to use that as a tool defend all off what could be the next economic slowdown, rather than going to the non-traditional tools like
qe, those are crisis measures. that we are not talking about another global financial crisis that requires extraordinary measures. the notion of normalizing to address a normal recession is different than talking about what do you do if there is another crisis. that is where there is a lot of discussion around how do you restraints potential on central banks to meet the next challenge. that is different than a traditional recession. is that a fair assessment that it will be a normal recession and not a financial meltdown? >> just going back to the toolbox that the central banks have, that was very interesting from your guest there. what is scary is that don't realize in the u.s. that the toolbox is already empty. yellen gave a talk recently and
said during the next crisis, if we go into a recession, they have some tools, which said to me they will obliterate the fixed income market in the united states. she said they could promise to keep rates at zero for 10 years and do qe to drive 10 year treasury yields below 1%. you wouldn't need a fixed income economist with a ten-year treasury yields below 1%, let's put it that way. tom: bond down, yield up. that is the latest. are we in the bond bear market now? >> i think people are thinking, hoping, i am not sure. people have been looking at this line in the sand were 30 year treasury yields, they tested a number of times, 3.25%, including get through it. now they have broken through it and people are saying this is a new bear market, but you need inflation to pick up.
jerome powell look to the 1990's and did not think that was an inflationary period, so it will be tough to get inflation going and yields higher. couponwn about a year's from the middle of 2017, about 3%. thank you very much. i want to remind you through the day, particular with our bloomberg technology platforms, important follow one conversation from our bloomberg business week article on chinese espionage, apple, amazon, and 28 other companies. ♪ her companies. ♪
ields in years. chinese military unit made chips to embed in servers of 30 u.s. companies, creating a doorway into any network that uses these machines. malicious chips were never found, amazon and apple issued denials. david: welcome to "bloomberg daybreak." a lot of news today. alix: yesterday, bond yields, 3.2%. we should talk about this chip hack. it is day two of a global bonds selloff. s&p futures closed poorly yesterday. now down 10 points. euro dollar higher in part because you're seeing