Trade Pacts Prove Elusive, Treasuries Testing 5%, Temu & Shein Eye Europe
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This is the Bloomberg Daybreak Europe podcast, available every morning on Apple, Spotify or wherever you listen. It's Tuesday the 3rd of June in London. I'm Caroline Hipker. And I'm Stephen Carroll. Coming up today, the art of no deal. As the clock ticks down on Donald Trump's global tariff pause, trade deals with China, the EU and others remain elusive. Investors demand higher yields for 30-year US debt as uncertainty remains front of mind.

Plus, China's Team You and Xi'an want to crack Europe, but the lure of the US consumer makes it hard to quit. Let's start with a roundup of our top stories. The White House says President Donald Trump and China's President Xi Jinping are likely to speak this week.

Beijing hasn't commented on the prospect of a direct conversation. The leaders of the world's two largest economies have not spoken since Trump's inauguration. Meanwhile, China says the US has seriously undermined a recent tariff truce with its decision to impose a range of new restrictions on the country. Bloomberg's chief geonomics analyst, Jennifer Welch, is urging caution over expectations of an imminent call.

If a phone call happens this week, I think that is a good thing for trade negotiations. It probably will help restart momentum or at least clear the air in a way in which these tensions aren't kind of boiling on the back burner. But I think a call is unlikely. And what that means is that tensions could continue to boil because they're only being addressed really at lower levels. And it would take a higher level engagement to put them to rest or at least to put them into the background to the point where they're not interfering with talks further.

Jennifer Welsh from Bloomberg Economics was speaking as a private survey showed China's manufacturing sector had its worst slump since September 2022. The Kaixin Manufacturing Purchasing Managers Index fell to 48.3 in May as higher US tariffs took a toll on the country's smaller exporters.

Now, the weaker than expected data from China comes as President Trump's 90-day pause on his so-called reciprocal tariffs is coming to an end soon. But as the deadline looms, the White House is struggling to secure trade deals.

The European Union is preparing for another round of talks with the US tomorrow. The bloc is trying to fast-track negotiations before the 9th of July deadline when President Trump said that he would hit nearly all of their imports with a 50% tariff.

However, the EU has now warned that it may speed up retaliatory measures if the president follows through on his repeated threats. Despite promising that a range of deals are just around the corner, so far only the UK has reached an outlined trade agreement with the US on tariffs and even that deal is not in place yet. And Carline, investors meanwhile are warily watching those trade negotiations as the US faces broader questions over its fiscal outlook.

30-year Treasury bond yields once again tested 5% on Monday amid concerns over President Trump's tariff policies and a budget bill that could push the deficit higher. Christian Lawrence is head of cross-asset strategy at Rabobank.

When it comes to the yields, I do think another 30 basis points of term premium would make sense. I mean, if you look at term premium for the last few decades, it's been very low compared to historical standards. We are in a world where the fiscal stance is, of course, getting worse, and that isn't going to change anytime soon. Everything points in that direction. And there is just, I would say, a loss of faith in US institutions is far too sensationalist. But

But versus a year ago, are there some concerns about how big a role the dollar is going to play globally? I think that's fair. Christian Lawrence speaking there as a slate of labour market reports due this week could play a key role in shaping the next moves in Treasury yields and the Fed's rate path. Traders now anticipate two quarter point rate cuts in 2025 down from expectations of three earlier in May.

So that's for the US. Meanwhile, French President Emmanuel Macron and Italian Prime Minister Giorgia Maloney are to meet in Rome today as Europe grapples with the seismic geopolitical shifts caused by the Trump administration. Bloomberg's Ewan Potts has more now.

It's being seen as a reset of relations between two of the EU's key players ahead of major NATO and G7 summits scheduled for later this month. Macron and Maloney's meeting comes amid heightened concerns around trade and security after President Trump's abrupt moves upended established ties.

An Alisa official has acknowledged the two leaders' divergent positions on Trump, with the Italian PM being much more ideologically aligned with the US president. And as well as geopolitics, some testy business issues are likely to come up. The prize, if all goes well, the future possibility of a high-level summit between the two countries. In London, I'm Ewan Potts, Bloomberg Radio.

Russia and Ukraine have laid the groundwork for a new prisoner swap during their latest round of peace talks. The two countries agreed to prepare for an exchange of heavily wounded and young soldiers, as well as 6,000 bodies. Ukrainian Defence Minister Rustem Umarov says it's up to Moscow to make the next move.

We propose to Russian side to hold a meeting by the end of this month. We've been telling Russia for a very long time this war must end, and the whole world supports us in that. If Russia is serious about ending the war, it will move forward on this.

Ukraine's defence minister speaking there. Also during discussions, Kiev called for an unconditional truce, while the Kremlin proposed a two-to-three-day ceasefire in certain areas. The latest direct peace talks in Istanbul lasted only about an hour and came a day after Kiev staged one of its boldest aerial attacks inside Russia, destroying long-range bombers and other aircraft.

Now to the UK, which wants to take on a larger role as part of NATO's nuclear deterrent as Europe doubts America's commitment to the alliance. Bloomberg has learnt that the government is exploring new capabilities such as fighter jets able to fire nuclear weapons. UK Prime Minister Keir Starmer announced major new spending plans yesterday to revamp Britain's military. A blueprint to make Britain safer.

and stronger. A battle-ready, armor-clad nation with the strongest alliances and the most advanced capabilities equipped

for the decades to come. Although Starmer's speech was supposed to be a show of British strength, he failed to explain where the billions of pounds in extra spending will come from. This leaves the UK leader facing a major challenge in the future as his party pushes for more welfare spending and bond markets fret over Britain's debt levels.

Meanwhile, the UK Immigration Minister says the government isn't ruling out making new restrictions on migrants retroactive. Seema Malhotra told the House of Commons that the Home Office is still consulting on plans which would affect millions of people who come to Britain to work. Bloomberg's James Wilcock has more.

Labour doubled how long migrants have to live in Britain before applying for the right to stay to 10 years. That tougher stance is partly a response to the populist Reform UK party overtaking them in the polls. But it's also a question of budgets. There are roughly 3 million people, many in low-paid caring roles, who have arrived in the UK since the pandemic.

Bloomberg has learned the Home Office is concerned about the strain that many people would put on the welfare system if they settled in the UK, and it's now seeking to tighten the rules retroactively. In London, James Alcock, Bloomberg Radio.

And those are our top stories for you this morning. Let's have a look at the markets. So yesterday we saw the dollar selling off 0.6% lower. This morning a small rebound for the dollar on the Bloomberg Dollar Spot Index up 0.2%. The euro rose yesterday almost one percentage point. The euro retreating somewhat this morning. In terms of futures then for the European markets, we are up by about 0.1%.

Trade worries are dampening optimism about European stocks, which have had such a strong run dominating global stocks since the start of the year. And remember, European defence names had a big boost yesterday, particularly UK defence names, also BAE Systems, Rolls Royce shares were up yesterday. You,

U.S. stock futures are sliding now this morning. Mainland Chinese indexes are climbing despite the Kaixin PMI data being weak. And 10-year U.S. Treasury yields this morning trade at 443, so down one and a half basis points, those are the markets. In a moment, we'll bring you more on the latest in U.S.-China trade relations, plus why Chinese sellers seem reluctant to shift into European markets despite the American tariff threats today.

But first, another story that caught our eye this morning and how making an ideological AI might be more difficult than it seems. So our opinion columnist Dave Lee has been writing about Grok on Elon Musk's X platform, which promised to be a non-woke alternative to chat GPT and its rivals. Dave writes, the problem is when the answers the AI provides are based on data, the technology can either be non-woke or truthful, but not believable.

both. His argument is the data doesn't care about culture wars or what's dominating conversations on cable news networks or what stance anyone has to be to be on the right side, in his words, of the MAGA group on any given week. So he says, you know, if you take the example of things like, for example, climate change, if you ask AI about climate change, it's likely to tell you that it is real and that it's urgent or it's going to tell you that vaccines are effective. And that's not because of a woke bias, it's just what the data assesses.

essentially provides. And he points to the example of when you try to manage the results that an AI chatbot will provide to you and that causes problems too. XAI, which created Grok, was criticised for interventions that it made when it was found to have directed users away from any news sources that suggested that Elon Musk or Donald Trump were sources of misinformation, for example. So you can be causing controversy on both sides as well.

Dave's argument is that you can improve AI by giving it more data, not steering it away from certain sources and artificial selective intelligence, as he describes it, is of pretty limited practical use. Yeah, look, I think Dave does a really fantastic job of sort of summarising and analysing the difficulties of AI, what you want AI to look like and the sources that it should look at. But I want to kind of play devil's advocate because...

I can see, despite Dave's points, which I think are absolutely valid, right, that more data is better to give us a better understanding of the world. But I can also see sort of reasonable people on the right of politics would obviously not agree with the idea.

that more data will basically prove that all left-leaning ideas are correct and truthful. Because some things aren't measurable by data, which I think is kind of what contributes to the problem. I think there are some very clear-cut issues, and Dave cites examples of that as well, but then there are things that are going to be murkier. You know, how do you measure happiness, for example? We just don't have enough research, you know? I mean, there are so many areas of the world where... More data, Caroline. That's the answer. Right, well, you can read the piece at bloomberg.com slash opinion, and we'll put a link to it in our show notes if you're listening to our podcast.

Well, let's bring you more now on US-China trade relations. The White House pushing for this phone call between Donald Trump and Xi Jinping later this week. No sign, though, of interest in a direct conversation from Beijing. Let's bring in our Asia economics reporter, Katya Dmitrieva, for more on this. Katya, we reported yesterday on China saying the US was undermining the tariff truce and Washington in return accused Beijing of dragging its feet in this deal that was only agreed a couple of weeks ago. What's gone wrong between the US and China?

Well, we're kind of back to a war of words, right? And we're just a few weeks after Geneva and that temporary trade truce. I mean, that was May 12th, right? So it kind of began when Trump last week was in the Oval Office and he lashed out at China and said officials weren't upholding their part of the trade deal. And the issue really centers on rare earths. It's the U.S. wanting China to speed up

sending the U.S. these rare earth metals. These are things that go into critical technologies, smartphones, computers, wind turbines. And China produces 70% of these minerals globally. So it's very important they restart production and export to the U.S.,

But China shot back and said the U.S. engages in discriminatory trade practices when it comes to semiconductors, and that's likely referring to sort of a raft of U.S. restrictions on China in that sphere.

unrelated to trade. But of course, we've had this back and forth on education and the U.S. threatening to, in their words, aggressively revoke Chinese student visas. And about one in four international students in the U.S. is from China. So it carries these very real implications. And of course, we've heard from China about this issue as well. So things are just very tense right now.

Very tense. But then again, the Trump administration advocating direct discussions, a very kind of mano a mano style of negotiation. They want a conversation between Xi and Trump. Is that likely? Will it really help?

Well, the White House seems to think it's likely, and it's happening this week. You know, we had comments from several officials, including U.S. Treasury Secretary, saying that a call is needed to break the deadlock. Kevin Hassett, who's the White House economic advisor, he was also part of Trump's first administration, saying that he's hopeful for a call this week. But

You know, it's not looking likely when you look at past experiences with this and also the fact that we haven't heard from Chinese officials yet. So we've had the White House and the U.S. side saying a call is necessary, a call is good, a call will probably happen this week. China has been very quiet on this. And in the past, when this has happened, when the Trump administration has said a call is necessary, a call is happening, it hasn't happened. And

The reason why it's so important is that it's two different styles of negotiation, right? A lot hinges on this call. Trump wants it to sort of get negotiations going. As you said, mano a mano, get these two world leaders on a call. But for Xi and Chinese officials, it's...

You know, they don't want to get on the phone until there's equality and there's a deal to be done when there's something on the table and there's mutual respect is what we've heard from officials before. So will it happen? Big, big question mark.

And of course, Katya, this is coming after we've had the latest Kaixin manufacturing survey showing the sector had its worst slump since September 2022 in terms of activity in manufacturing. How much pain is the trade war causing China in the meantime?

Yeah, it's China and the entire region, right? So we had manufacturing data from May and from China to Vietnam to Japan, productions down, really led by weaker outlooks

lower exports, new export orders, I should say, and especially to the U.S. And when an economy like China relies on exports so much, it's, of course, going to hit growth, not just directly, but also labor market demand. It means less investment as companies wait for more direction. There's less hiring. And it's hitting small and medium-sized businesses particularly hard. Large companies can tend to absorb it better. So,

We know uncertainty means weaker investment, but the question is just how much in the coming months and how much pain, frankly, will China be able to withstand? Because the industrial production numbers, the manufacturing numbers have really not been good. Yeah. Katya, thank you so much for being with us. Katya Dimitrieva, our Asia economics reporter.

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Well, after Donald Trump's tariffs on China, European countries have been bracing for a flood of ultra-cheap Chinese goods. But that might not be coming, at least not yet. Despite a massive marketing push in Europe, Chinese sellers seem to be sticking to the American market. For now, our European consumer goods reporter, Sonia Vind, joins us from Frankfurt for more. Sonia, good morning. Why are Chinese sellers hesitating over shifting to Europe, even with all of the risks that doing business with the US seems to hold?

Yes, well on the surface it looks like Timo and Sheen they're really pushing into Europe with pouring money into advertising spending but the sellers they are more hesitant and more cautious and that's because of when they're trying to enter Europe they experienced hell mode as one of the merchants described it to us and what they mean by that is

that Europe is more complex than the US. There are rules and regulations that differ from country to country. There are various languages that require user manuals four times the length of those in the US. And more generally, it's also more complex to understand the consumer dynamics there.

And so when the Chinese merchants initially took a look at Europe in an attempt to move away from the trade tensions in the U.S., they realized it won't be a quick fix and it's not as easy as in the U.S. to scale quickly and make decisions.

short-term and quick returns. So once the tariff reprieve happened, it was kind of a relief for many Chinese merchants and they shifted back to the US, at least for now, for those higher short-term returns. They can make them way more easily than in Europe.

Okay. On the other hand, though, Europe is eyeing up the fact that Timur and Shirin and all of those sellers on those platforms could lead to a possible surge in cheap imports into Europe. So how are they thinking and preparing for that?

Yes, so Europe is definitely trying to get ahead of it. And while we are not seeing right now that Europe is necessarily becoming a dumping ground for the cheap Chinese products while there are tensions in the US, there has been a massive increase in low value parcels over the past years. It doubled last year compared to the previous one. And Europe

Europe and the European Union are really ramping up efforts to become more strict here. So, for example, the European Commission is investigating both Timo and Sheen over harmful products and we're already seeing more custom checks. So examples that market authorities mentioned to me were laser pointers that were so powerful that they could cause blindness and toys that exceeded the legally allowed threshold of certain chemicals.

So they're definitely cracking down and part of that effort is also to scrap the de minimis threshold of 150 euro in the European Union and also the UK is considering that. And that could really change the dynamics and could also make Europe a tougher place for e-commerce platforms.

We're talking about this, Sonia, at a point where we're in the tariff pause. We've got about, you know, just over a month left to go on the 90-day reprieve. What could happen then when that period ends if the tariffs do come into force?

Yeah, that's the big question and it really depends on what exactly will be agreed upon. One of the people we talked to mentioned that at a tariff level of 54%, the US becomes unprofitable for Chinese merchants. So there might be a point where Chinese sellers are forced to move into Europe. But what's clear is that they'll be walking into a more heavily policed environment and

Timo also seems to be preparing for that already. So despite hiking advertising spending, they're also working to increase the share of their local merchants. So they said that they want half of their UK sales to come from local sellers and warehouses by the end of 2025. And this is a model they're trying to expand across Europe. And they're aiming for 80% of European sales to come from local sellers over time.

So, yeah, we're seeing the dynamics are changing and it's clear that even when the Chinese seller is forced to move into Europe, it will be a bit more tricky.

This is Bloomberg Daybreak Europe, your morning brief on the stories making news from London to Wall Street and beyond. Look for us on your podcast feed every morning on Apple, Spotify and anywhere else you get your podcasts. You can also listen live each morning on London DAB Radio, the Bloomberg Business App and Bloomberg.com.

Our flagship New York station is also available on your Amazon Alexa devices. Just say Alexa, play Bloomberg 1130. I'm Caroline Hepke. And I'm Stephen Carroll. Join us again tomorrow morning for all the news you need to start your day, right here on Bloomberg Daybreak Europe.

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