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QUEST MEANS BUSINESS

Stocks Down on Fed QE Position; 3D Motion Sensors Examined

Aired June 20, 2013 - 14:00:00   ET

THIS IS A RUSH TRANSCRIPT. THIS COPY MAY NOT BE IN ITS FINAL FORM AND MAY BE UPDATED.


RICHARD QUEST, CNN HOST: It's a case of sell, sell, sell. Investors worldwide dump out of stocks and it's all after the Fed's QE warning.

Now behind the Bernanke backlash tonight, the reasons why markets are in turmoil. And an Xbox U-turn: angry gamers made Microsoft change its mind. I'm Richard Quest. It's a very busy day. And of course, I mean business.

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QUEST: Good evening tonight, stocks have tumbled in the United States. And around the world after the Federal Reserve chairman rattled investors by breathing new life into the specter, the exec -- the eventual exit from quantitative easing. Look at the major markets and you'll see. Let's start in New York.

The Dow is off 1.5 points. Take a look at how the day -- it came straight out the gate late, straight out of the gate there, and it has not recovered. And if you look at the three-month session of the Dow, you'll put it into perspective. It's now started to give back quite a lot of gains. We're back to sort of the level of mid-May.

If you take the FTSE, similar sort of story, down 3 percent for that market. Again, the three-month number on the FTSE, a lot of those gains, way, way up. It's all time -- it's not its all-time -- of its most recent highs back at the beginning of June.

If it was only Europe and the United States, so be it. One of the problems, of course, that people were worried about is growth in China, whether China's going to have a so-called soft landing. Look at the Shanghai composite.

Lost nearly 3 percent in the Thursday session on its own. All the way down, right the way through, and the three-month on the Shanghai also shows the point, again, from its June highs, everything has corrected very sharply down.

All of this the results of a few words from Ben Bernanke on Wednesday night's news conference.

(BEGIN VIDEO CLIP)

BEN BERNANKE, CHAIRMAN, U.S. FEDERAL RESERVE: The committee currently anticipates that it would be appropriate to moderate the monthly pace of purchases later this year.

And if the subsequent data remain broadly aligned with our current expectations for the economy, we would continue to reduce the pace of purchases in measured steps through the first half of next year, ending purchases around midyear.

(END VIDEO CLIP)

QUEST: Ending purchases around midyear, a strong run on the back of cheap money. The prospects of it improving U.S. economy without QE, that should be the words that investors long to hear. Well, they don't at the moment. Bond yields have spiked, the 10-year is as high as 2.45 percent, the highest since August 2011.

What's puzzling is why investors aren't more positive about the state of the U.S. economy, with signs of recovery noted by Bernanke.

From New York, Michael Gayed is the chief investment strategist at Pension Partners.

Starting to look a little bit perverse, isn't it, a strengthening economy and yet the market falls out of bed.

MICHAEL GAYED, CHIEF INVESTMENT STRATEGIST AT PENSION PARTNERS: Well, but it's strengthening in the words of Bernanke. When you were -- take a look at the way various asset prices have behaved this year, there actually is very little confirmation of the reflation story, which is ultimately what Bernanke has been trying to push through.

When you look at the way homebuilders have stalled against the S&P; when you look at the way a lot of defensive sectors have led the market higher, there is this belief actually that we're not quite out of the woods.

You know, a strong economy tends to coincide with rising yields that are gradual. The fact that they're spiking can be a deflationary shock. To me that means that Bernanke's not going to step back any time this year.

QUEST: OK. So the core justification, if you like, for why the market should fall so strongly, just because he says he might take his foot off the pedal, to end up with two 3 percent falls and coming so far off the top, it seems overdone.

GAYED: I think there is an argument to be made for that because, in many ways, the bond yield spike is overdone, giving global deflationary pressures, especially with China and emerging markets, if you're going to look at the reaction of most markets following Bernanke's speech, it's actually less about the U.S. equities and more about the cyclical country trades.

Those fell much harder. We're (inaudible) perverse situation here, where U.S. domestic banking policy actually affects overseas markets much more than ours here in the States.

So that's a very strange thing. And that means that I think we have to be very cognizant of this idea, that it could create actually a crisis overseas.

QUEST: Everybody knew this was going to happen the moment QE3 came along and the moment the exit strategy was always going to happen.

So if this is what we are getting when he merely suggests September or October, the end of the year, what on Earth can we expect when we get there?

GAYED: Yes, it very much depends on where inflation expectations are. The dilemma here is very simple. The Fed is trying to step back from stimulus. Yet the market itself does not expect inflation; it expects deflation. This is based on price data.

Now if you're going to step away from stimulus and you already have deflation expectations in the system, that's a very, very nasty combination. You could see a very substantial fall.

If, however, reflation expectations do return -- and I think the global economic situation is going to be very key to that -- then, yes, you can see a recovery in asset --

(CROSSTALK)

QUEST: Hang on.

GAYED: -- across the globe.

QUEST: You are saying that you believe global inflation could come back at a time when there's not a sign of it anywhere to be seen in all the developed countries?

GAYED: No, no, I'm saying global deflation is unequivocally the big risk. It's been the big risk all year.

QUEST: Do forgive me.

GAYED: In many ways, Bernanke is living in his own bubble if he thinks that we are away from the deflation risk that has haunted us. You know, the Fed can be blamed very clearly for one thing and one thing only, underestimating how severe these deflationary headwinds have been. The fact that we're in our third round of QE I think proves that.

QUEST: Do forgive me, (inaudible) to listening to conversations through earphones and earpieces. You eventually hear some very strange sort of -- deflations turn to inflations. All right. Good to see you. Thank you for joining us tonight.

Ben Bernanke may be about to ease his foot of the QE accelerator. If he does, where is the vehicle headed next? We will show you -- QUEST MEANS BUSINESS.

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(COMMERCIAL BREAK)

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QUEST: So the Fed chairman has promised the bank will still support the U.S. economy even after QE is wound down. In other words, he used a motoring metaphor to describe what will happen.

(BEGIN VIDEO CLIP)

BERNANKE: To use the analogy of driving an automobile, any slowing in the pace of purchases will be akin to letting up a bit on the gas pedal as the car picks up speed, not to beginning to apply the brakes.

(END VIDEO CLIP)

QUEST: Now apply, slow the car down. Well, here we are, to prove the point, this is what we're all (inaudible). What is the effect of slowing down, easing up on the gas pedal? This is, of course, the U.S. economy going 'round. And it's moving along now at a fairly slow, jittery pace, largely because, of course, they say of quantitative easing and low monetary policy.

Now what he said he's going to do is stop and slow down the rate of purchases. He's not saying he's going to stop it; he's just going to cut back on the amount he's doing.

Then later in the year, he will literally stop buying those. But he's not just going to do it overnight; he's going to do in a measured fashion.

Meanwhile, the U.S. economy here will be picking up steam along with the rest of the economies and that's always a problem that can happen; something gets in the way. So the U.S. economy comes along until finally interest rates start to go up.

If everything has gone according to plan, it's around 2015 when this happens; everything's moving nicely forward unless, of course, you get to something's wrong when that happens.

Our thanks to Scalextric, which is owned by Hornby Hobbies (ph), who of course lent us this and there will be much merriment as we've proven exactly what happens.

David Bloom, David Bloom, as you look at the way the cars were going 'round the U.S. economy, that's maybe the point --

(CROSSTALK)

DAVID BLOOM, GLOBAL HEAD OF FX STRATEGY, HSBC: Always comes off.

(LAUGHTER)

QUEST: The point is this: the economy will build up its own natural momentum and therefore he's merely taking --

(CROSSTALK)

-- QUEST: things away while it does that.

BLOOM: Yes, but the shock of taking the money away is instant. The economy improves over time. So there's a lag structure. What you're talking about is the economy is slowly improving over time, but money becomes more expensive, now, today, right here, because we are now pricing in that into the future.

So there's a difference between financial markets which act now and the economy which improves in the future.

QUEST: But the economy can withstand these sort of small, relatively small increases.

BLOOM: But (inaudible) things you showed were piffling. I mean, equity markets are going to back to where they were three months ago. In emerging markets at the moment, we're getting creamed.

I mean, we've got India at all-time highs. We've got bond yields in South Africa selling off massively. So the shock wave --

(CROSSTALK)

QUEST: And that's because -- and that's because why?

BLOOM: Well, it's also all about positioning. Everybody did the same thing.

(CROSSTALK)

BLOOM: They went into the emerging markets. The doors are very small and you all say hello and how are you and you're getting to the theater. Someone shouts fire. There's a tiny little door and you're all squeezing out. And that's what's going on at the moment. People are exiting what they thought was quick, easy money and they didn't understand the risks appropriately.

QUEST: The dollar in all of this, there were two -- there are two mechanisms that we've got to look at.

First of all, gold, which is now down at a multiyear low.

BLOOM: It is.

QUEST: And then, of course, the dollar itself.

BLOOM: The big dog's eating. The dollar's powering ahead.

QUEST: Why?

BLOOM: When the Fed changes its interest rate policy, these are tectonic plates. We know what's coming next. We know --

QUEST: (Inaudible).

BLOOM: -- higher rates, but meanwhile, Turkey's cutting rates; Poland's cutting rates. ECB's just cut rates. The rest of the world is going in the opposite direction and that's key for effects on bonds.

QUEST: So are you saying that it is a just a pure interest rate differential that will boost the dollar?

Or will it be the fact that actually the U.S. economy will be doing better; U.S. corporations will be doing better, GDP will be rising?

BLOOM: You've got to hit the bell. You've hit the nail on the head there.

QUEST: You do it. Go on.

BLOOM: All right.

That's Questy on the spot there. You were on the spot. This is the U.S. assets going to outperform as their assets outperform, the dollar will (inaudible).

QUEST: You just want to play with the Scalextric (ph). Admit it.

BLOOM: But the -- it always comes off. You try to go faster and faster and faster. And that's what eventually the market's worried about, rates eventually are going up.

QUEST: Let's go to the floor of the New York Stock Exchange, Felicia Taylor's been watching this all unfold, joins me now.

Felicia, as we've been watching and running around the cars, what do the traders make of it?

FELICIA TAYLOR, CNN CORRESPONDENT: Well, that's -- it's exactly about the traders today, and that's who is really in the marketplace. You've got to remember, Richard -- and this is the point that I've been trying to make all day long.

This market needs to be data-dependent. And that's what the Federal Reserve chairman has said. He's going to continue to watch the market data come out and when it's appropriate for him to pull back, he will.

So he's still hedging his bets. We've known this has been coming. They're just repricing the risk in the marketplace.

I'm joined now by Jonathan Corpina, who will emphasize that fact for me.

This is not something that we haven't been expecting. I mean, a pullback of -- now we're at the lows of the day of 260 points, this is not panic selling.

JONATHAN CORPINA, MERICIAN EQUITY PARTNERS: Right. When this whole program started, we knew it was going to come to an end at some point. And we knew that there was going to have to be tapering to get to the end.

So this is all stuff that we've known. It's been priced into our markets already. There is no fear; there is no panic that's going on. This is something that we've been expecting. It's just we didn't know exactly when it's going to start.

So clearly, the last two sessions that we've heard from Chairman Bernanke has given us some inclination, some transparency as to what the process is going to be and when it might particularly start. We don't have all the information yet. But I think we do know that it's going to be a nice, slow, orderly process to see if our economy can stand on its own again.

TAYLOR: Well, and that's the point, is we need to return to the fundamentals that the market used to trade on. We've had three-plus years of quantitative easing. We never thought -- I mean, that's highly unprecedented actions.

CORPINA: It is. And we haven't lived in an economy like we've seen over the last 4-5 years before. It's going to take some time for us to kind of figure out what the landscape is going to look like moving forward, how we are going to be on our own.

But look at the economic data that we have so far. Jobs are getting better; home prices are getting better; spending, retail, all getting better from levels that we've seen before in the past. So if we get a little bit of a pullback in those areas there, it's going to take a little bit to then move forward, maybe one step forward -- I'm sorry; one step backwards, two step forwards at this point.

TAYLOR: But still those economic numbers aren't at the levels that the Federal Reserve has said they want to see. We're looking for 6.5 percent unemployment; we're looking for 2 percent on inflation. We're not near those levels yet.

CORPINA: We're not. And maybe those -- that bar is a little bit high at this point right now, and it's going to take some time to get to where we're going to have to go to. But looking at what we've seen from the economic data so far, it's been a slow process.

I think people want to get back to normal, whatever normal is, at a quicker pace. It's going to be slow. Just accept that it's going to be slow, accept that it's going to take time. And realize where we've been and where we're wanting to get to.

TAYLOR: So now is the onus on Washington. I mean, this is now something that obviously the Federal Reserve has been talking about for some time.

Is the responsibility in Washington to take action?

CORPINA: It's kind of a combination of everybody. Clearly, it's going to be for Washington, because they're going to have to monitor this whole process very slowly and very meticulously. If they see some sort of slippage that's happening, they might have to not pull back as fast and maybe push on the gas a little bit.

It also takes support of us, in support of the economy to make sure that, you know what, we can stand on our own. We can do this on our own. We've learned a very expensive lesson over the last five years. Now let's take that and move it forward.

TAYLOR: So, Richard, obviously a 250-point drop isn't something that anybody wants to see. But nevertheless, in this kind of a marketplace, where we've seen such great gains since the beginning of the year, this is not a panic selloff.

QUEST: Felicia Taylor joining us from the New York Stock Exchange, so many metaphors about foot on the gas, slowing down, moving forward.

You've wanted to do this, all right, here we go. So as we come back in just a moment, first, tonight's "Currency Conundrum." Why has -- ohh! Why has the new 5-rupee coin drawn complaints? The new 5-rupee coin, it's too heavy, its circulation is limited, it bears the image of a Hindu deity? We'll tell you later in the program.

The dollar is rising against the -- most currencies, unlike stocks the dollar continues to be the one that is leading the way. QUEST MEANS BUSINESS.

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(COMMERCIAL BREAK)

QUEST: Tonight on "Make, Create, Innovate," the latest in mobile and tablet technology, there was inspired by a structure that was built more than 1,000 years ago. That is the structure, of course, 3D motion sensors. Now in the old days, well, you would have a (inaudible) computer. You turn things 'round and absolutely nothing happened. It didn't recognize that something had changed.

Nowadays, of course, you turn things 'round and as you turn them, the picture moves with you. It makes it so much more easy and enjoyable for enjoying this sort of technology.

So Nick Glass went to meet the man behind this revolutionary technology.

(BEGIN VIDEOTAPE)

(MUSIC PLAYING)

NICK GLASS, CNN CORRESPONDENT (voice-over): A little bit of handheld electronic wizardry -- I move, the child warrior Link moves, we both move together.

What began as a little bit of fun is now everywhere, (inaudible), very clever microchip embedded in all our smartphones, in all our cameras.

BENEDETTO VIGNA, TECHNOLOGY INVENTOR: I invented the 3D motion sensors. And this is a device (inaudible). It is able to detect the motion in any direction that

GLASS (voice-over): Benedetto Vigna trained as a nuclear physicist until he was tempted away by industry. In 1995, his new boss set him a challenge, something called MEMS.

VIGNA: When I got the papers, and this is that MEMS means micro- electrical mechanical sensor. Before that, this word was unknown.

GLASS (voice-over): Vigna literally drew strength from the structure of a famous Buddhist temple in Japan, like the temple, the sensor had to be robust to survive a child dropping it.

VIGNA: The Japanese pagoda, it has a single pivot. And then it is like a flower, OK, with different level of floors. When there is an earthquake, the structure like this don't go down because you have only one pivot.

GLASS (voice-over): Vigna's company went into partnership with a Japanese games giant, Nintendo.

VIGNA: They were also looking to simplify the way people was dealing with the game controllers. Nobody was doing a 3-axis sensor like we were doing.

So we took a risk on both sides. But I think after seven years or eight years now, we are both glad of what we did, you know. We changed together the way people play games.

GLASS (voice-over): It was soon clear that the sensor had other applications.

VIGNA: This is the beginning after the game, we went to the smartphone. And this is the device with a different function, different sensors. It can rotate. You can rotate the image (ph). So this is true for smartphone. It's true also for tablet. Except for here we have our motion sensor. When you flip, it adjusts.

GLASS (voice-over): The sensor is now an essential part of every smartphone, tablet and camera. And this is where most of them are made, a factory in Milan more like a space station, shining discs or silicon wafers built up layer by layer some 3,000 sensors per disc.

At 18 million sensors a week, factory production is phenomenal and so is annual turnover.

VIGNA: Now we put up the same (inaudible), the market, (inaudible) around $1.6 billion. When we started, it was zero.

(LAUGHTER)

GLASS: One billion dollars?

VIGNA: One billion dollars, yes. One billion dollars. With nine zeros.

GLASS: This is the latest commercially viable application for 3D motion sensors. My body is covered with sensors, some 15 of them. And every movement that I make is replicated on screen by this virtual dummy behind me. Already this technology has attracted interest from doctors and from sports scientists.

GLASS (voice-over): And at the heart of all this success is the simplicity of the sensor itself.

GLASS: It's actually physically holding something and you're seeing something happen that you're manipulating the machine.

VIGNA: (Inaudible). Absolutely. When I was at the university, I studied quantum chromodynamics. It was too complex. This is much easier, it's simpler to explain (inaudible).

(MUSIC PLAYING)

(END VIDEOTAPE)

QUEST: Tonight, a thrilling end to the battle for sales between Boeing and Airbus at this week's Paris Air Show. Now I can tell that it really is down to the wire. We've been following all week. Bearing in mind these are numbers provided by the companies, because they know whether they are conversions from previous MOUs, letters of intent, existing orders.

So they already know what's firm (inaudible).

Boeing tells us they sold 442 aircraft. And that's the equivalent to more than $66 billion at list price. So far, so good.

As for the Airbus total, Airbus -- ohh. Airbus goes onto 466 aircraft. That's $68.7 billion on paper. So that of course is mainly the A350s that went out the door.

Airbus stole the show, but it is just by a nose, total sales for both companies valued at $135 billion. I emphasize there would have been huge discounting (inaudible) to keep the customer and the manufacturer and it's absolutely confidential. We've got no idea what those discounts would be.

Airbus wins the Paris Air Show. It's Farnborough next year.

Coming up next, feeling the Fed fallout, Wall Street didn't like what it heard from Bernanke. And neither did the rest of the world, except perhaps Russia. Russia's finance minister has been talking to John Defterios. In a moment, QUEST MEANS BUSINESS, good evening.

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(COMMERCIAL BREAK)

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QUEST: Hello, I'm Richard Quest. There is more QUEST MEANS BUSINESS in a moment. This is CNN and, on this network, the news always comes first.

(BEGIN VIDEO CLIP)

QUEST (voice-over): The United States is working to plan formal discussions with the Taliban at the group's new offices in Qatar. Afghanistan has not rejoined in the plans for peace talks. That's despite some modifications at the Doha office, apparently made to placate the Afghan government.

Two people have been killed in a major explosion at a fireworks plant near Montreal in Canada. Homes and businesses within a 1-kilometer radius of the plant were evacuated as a precaution. Officials say they won't know what caused the blast until it's safe to approach the building.

The actor James Gandolfini has died of a suspected heart attack during a vacation in Rome. His next stop was due to have been Sicily to accept an award at a film festival. Gandolfini was 51 years old and best known for his role as the mob boss and family man Tony Soprano.

The football superstar Lionel Messi has been summoned to appear in a Spanish court in September to face possible charges of tax fraud. Messi and his father are said to owe the taxman $5 million. They both deny the charges.

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(END VIDEO CLIP)

QUEST: Shares, stocks, equities across the globe have been falling and they continue to fall for a second day after Ben Bernanke hinted that the Federal Reserve could soon begin winding down its bond purchasing program. The stimulus has largely been responsible for driving the stock market rally over the past couple of years.

Bond investors are also feeling the pain; the selloff in Treasuries has sent yields rising sharply. We're now off 200 -- well, it's 300 points. This is, I'm pretty certain, the worst of the session, down under 15,000, a loss of nearly 2 percent. That 2 percent would be pretty similar to the sort of losses seen in the major European bourses, London up 1.75, Frankfurt similarly.

Russia's finance minister is downplaying the effect that the Fed might have as it tapers off, as it isn't to the Russian market and what that would be. At the St. Petersburg International Economic Forum, which got underway today, where John Defterios is currently.

JOHN DEFTERIOS, CNN CORRESPONDENT: Thanks, Richard. In fact, we're enjoying the long white nights here in the capital of Czar Peter the Great. But you can feel the cold winds blowing, if you will, off of the fabled Neva River as a result of the comments by Ben Bernanke. It's amazing that, Richard, it's 5,000 participants here.

But you can see the CEOs walking along the grounds with their smartphones, checking the market damage. And it's been quite brutal for the emerging markets in particular. Russia was down nearly 4 percent today and we've seen 11 percent correction since April.

Now having said that, I asked the finance minister if they can withstand the activities of the Federal Reserve if they decide to curtail that bond buying in the second half of '13, 2013. He's suggesting it's not going to be a problem. Let's listen in.

(BEGIN VIDEOTAPE)

ANTON SILUANOV, RUSSIAN FINANCE MINISTER (through translator): We believe Mr. Bernanke's statement about reducing quantitative easing will not have a serious impact on the situation of the Russian financial market. We do not have so much speculative capital that could then flow into American assets. I think that Russia will be less impacted compared to the other developing economies.

For our part, we are sticking to our plan to place our bonds on internal and external markets. But that will not lead to an increased cost of borrowing. I do not believe that this statement will have a critical impact on our financial policy.

DEFTERIOS: We had this conversation in three or four months' time, will the selloff in emerging markets and the amount of capital leaving the emerging markets be quite nasty because of the change in Federal Reserve board policy, though?

SILUANOV (through translator): I am always optimistic. As far as Russia is concerned, as I already said, I don't see any problems. As for other emerging markets, I think these speculative outflows of capital, these waves of capital should calm down. And I hope that in three months we won't see any turmoil.

(END VIDEOTAPE)

DEFTERIOS: That was not the case today, Richard. We saw the ruble go down another 1.5 percent. It's right near a 1-year low as we speak. And that rout in the Russian equity market today, particularly the dollar- denominated equities, was the worst in the emerging markets overall. The overall MSEI index, by the way, hardly moves on a daily basis; a half a percent move is very large.

Richard, it's down 4 percent today. So quite a correction; shivers going through the emerging markets. And we have a lot of different emerging market representatives here, kind of scratching their heads, wondering when the corrections are going to happen. But it was $4 trillion flowing into the emerging markets over the last four years. So the painful exit is now underway.

QUEST: Right, but here's the point, John. Once this initial shock is over, these markets that you're talking are the faster growing market economies in the world, the emerging markets. You know this far better than I do.

And therefore surely the minister's right to have an element of optimism because that's where the money will flow long-term.

DEFTERIOS: In theory, yes, but not all emerging markets are enjoying that sort of robust growth that you're talking about. So China slowing down to 7.7 percent. Yes, that's still excellent. India's still in the range of 5 percent.

But Brazil's struggling to get 2.5 percent in 2013 and a lot of criticism on the ground here in Russia, Richard. Growth is earmarked for 2.3 percent to 2.5 percent in 2013. They had this magic number in their minds of getting 4 percent growth. They didn't get it last year; they're not going to get it this year.

And the heat is on. President Putin before the G8 summit called his cabinet together, saying we need to move more quickly, more rapidly to diversify the economy. And as you know, that doesn't happen overnight.

So the finance minister and the new central bank governor here in St. Petersburg, kind of trying to work the lines here to suggest that it's not a problem right now, although the selloff is quite severe today.

QUEST: I think it's getting late there, John; still daylight for you, though. And probably some more hours of work to do.

John Defterios in St. Petersburg tonight.

What a mess for Microsoft. After the break the company's forced to change all its plans barely after unveiling its newest game console. And it's not the first time that's it all in reverse for Microsoft.

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(BEGIN VIDEO CLIP)

QUEST (voice-over): The answer to tonight's "Currency Conundrum," why is the new 5-rupee coin drawing complaints? The answer: C. The image of a Hindu deity on the coin has upset people as India's a secular state.

Shopkeepers say many Hindu customers won't use the coin because they have kept it for worship instead. Some in the Muslim community object because in their religion, showing images of Allah is not allowed.

(END VIDEO CLIP)

QUEST: Microsoft made an abrupt U-turn on the Xbox. The company's rolling back the plan to apply heavy restrictions to how its new console can be used not only online but also the digital signature.

The changes come after a stinging backlash from gamers. Microsoft's original plan was to insist on having the game box One connect to the Internet once every 24 hours. There were limits on sharing and selling physical discs. It's all gone now.

Not the first time Microsoft has caved into criticism. It's working on an update of Windows 8 operating system and admitted users' complaints were loud and legitimate.

Keza McDonald's with me, U.K. games editor at ign.com, the games and entertainment website.

Were you surprised that Microsoft went into reverse on this?

KEZA MCDONALD, UK GAMES EDITOR, IGN.COM: I was hugely surprised personally, because despite the enormous backlash from gamers, Microsoft is not traditionally a company that tends to reverse in quite such a dramatic way as this.

They come from a position of market dominance in consoles from Xbox 360. And it's very strange of them to reverse like that.

(CROSSTALK)

QUEST: (Inaudible)?

MCDONALD: I think a lot of people said it's because of gamers, because there's so many thousands of gamers came out and said we do not want restrictions on how and when we play games; we don't want to be told when we can play them. We don't want to connect to the Internet every 12 hours --

(CROSSTALK)

QUEST: They still used it. Or were they threatening to boycott?

MCDONALD: I think most people were switching to the main rival, Sony. And here's the real thing: it's not so much, in my opinion, gamers that have caused this change. It's Sony who went all out at this year's E3 Expo, which is the big video game expo every year. Sony went all out right for the throat of Microsoft and said we support used games. We support gamers.

And I think Microsoft probably looked at the preorder numbers and went.

QUEST: But how did they get it so wrong?

And also with Windows 8. I mean, surely, they test this thing, they have a policy. They must discuss this.

Why do you think, Keza, they got this so wrong?

MCDONALD: I think that what Microsoft was shooting for is something like Apple's system, which is a beautiful -- from a corporate standpoint, a beautiful system where everybody has to play within the walled garden. And Microsoft was going for a digital future in which there was a greater level of control and also benefits that came with that by causing things to be digital only.

So if you wanted to buy a game, you bought it from Microsoft (inaudible) Internet (inaudible) --

(CROSSTALK)

QUEST: (Inaudible) didn't do it, why couldn't Microsoft? Or was it a case of because Microsoft did that, the genie out of the bottle, you can't put it back in again?

MCDONALD: I think it's partly to do with console gaming culture. Everybody who's (inaudible) --

QUEST: (Inaudible) Microsoft get it so wrong? They must have known that gamers like you and others would have been up in arms, spitting feathers.

MCDONALD: You would think so, wouldn't you? I think this is the most puzzling thing about this entire reversal, is how could Microsoft possibly not have known that this would have this kind of reaction?

And it's possible that there was an element of bravery there that (inaudible), the head of the Xbox business basically said, look, we know we're going to get a bad reaction, but we're going to do it anyway. And if that's the case, then this is a sign of weakness, too, to reverse on that vision.

But I think, I mean, it seems to me that --

QUEST: You're an expert on all of this. So tell me, in a nutshell, do you see it as a sign of weakness or a sign of bravery or a sign of maturity that they've reversed?

MCDONALD: I think it's a sign of maturity. I think that adapting your business strategy this late in the game, one week after announcing, I think in the long term it's going to pay off very well. It looks ridiculous now to some people. But in the long term, they've done, I think, the best thing for consumers.

QUEST: Good to see you again. Thank you so much for joining us. Many thanks indeed.

The weather forecast now, Jenny Harrison at the World Weather Center for us this evening. Good evening, ma'am.

JENNY HARRISON, CNN METEOROLOGIST: You, too, Richard. Yes, two things you need to know about Europe, I'm afraid, and that is there's a big split across the central and western areas. It's unsettled; we've got some very wet, windy weather and across these more eastern regions, the south in particular, some very hot, dry conditions.

Now the last few hours, some really ferocious storms through areas of France. The Low Countries also Germany and in fact some pretty amazing reports. Look at this in Germany, 18 millimeters of rain in just a few hours. And then in the Czech Republic, 3 cm-sized hail has also been reported.

So not surprising we've got some warnings for those storms. But I'm afraid it's not really getting at better anytime soon as we continue through the first part of the weekend. Another system comes straight in behind the next, tends to really anchor itself across Scotland. So just staying very unsettled across much of the northwest and much cooler, too, with this particular system in place.

But meanwhile across the south and the southeast, still those temperatures well above the average. But as I say, there are storms that could actually be quite significant times, more warnings in place, a huge swath of Germany down into southern France under these warnings for large hail, strong winds and tornadoes.

It could impact your traveling, certainly, for the last day of the work week. Look at this, Munich, some pretty heavy rain expected, generally later Friday. But maybe hour-long delays for you there.

Also the cloud, very low cover for London up into Glasgow as well, so maybe 45-minute delays there. And I mentioned the wind, well, certainly a breezy morning in Dublin on Friday. Then we come to the heat.

Now this shouldn't delay your travel plans. But be prepared for it if you're obviously already in central and southeastern Europe. But if you're heading in that direction, look at this, 11 degrees above average for Budapest, Sarajevo, Prague. These were the actual temperatures this Thursday. Berlin, 10 degrees above average.

Now the heat waning a little bit across these more central areas. But really pushing into the southeast. Meanwhile, this green and blue giving a pretty good indication as to where the below average temperatures will be. So feeling pretty chilly for this time of year across much of the U.K. and Scandinavia.

Some showers in Warsaw on Friday, but the temperatures still a little bit above average. And then Budapest, we've got temperatures generally around 30 degrees Celsius. And you can see here in Sofia, we've got temperatures up to 34 on Sunday. But really unsettled across the west as I say, the nice weather is across central and southern areas, and very nice across the Mediterranean, Richard.

QUEST: Jenny Harrison, we thank you for that.

A final look at the Dow Jones industrials tonight, off 285, down nearly 2 percent on a very grim day in the market, but a rather splendid day for those of us that like games.

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QUEST: From the Paris Air Show, this is MARKETPLACE EUROPE. I'm Richard Quest.

There are large planes, small planes, civil planes, military planes and very noisy ones, too.

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QUEST: As the rate of youth unemployment in Europe continues to crisis levels, companies across the continent are discussing what they can do to help and none more so than the aerospace industry.

Safran is one of the biggest players and as Isa Soares now reports, the company's looking at apprenticeships and other ways to get the young into work.

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ISA SOARES, CNN CORRESPONDENT (voice-over): Meet Adrien. He's one of the lucky ones.

ADRIEN LEROUX, SAFRAN APPRENTICE: I work on this part not with the part, a new design of this part. And my job is to program the manufacturing.

SOARES (voice-over): He's been an apprentice with Safran for three years now, and soon he'll be on the company payroll.

LEROUX: The most important is to work with a lot of people not alone and to win experience of traditional walls (ph) and company culture.

SOARES: This part is crucial to Boeing's 737. It holds the engine to the wing of the aircraft, making component parts such as this one requires high level of technical know-how. So on this site, there are some 210 apprentices. At the end of their apprenticeship, 20 percent will get a job.

SOARES (voice-over): Safran has always offered apprenticeships and internships. Now they have an incentive to take on even more. The European Union is offering the company lower taxes to hire and train young people. It's all part of a push to get Europe's Lost Generation back to work.

CLAUDE MATHIEU, SVP, SAFRAN: Even if in countries like Germany or (inaudible) got a long tradition, I would say, of welcoming apprentices. It wasn't the case, not that in the same way in other countries. So (inaudible) consistent approach in terms of indication (ph) of our apprentices' internship.

And second is to make known for companies but also for our suppliers, which are most of the time smaller companies, that we are ready to welcome young graduates, young (inaudible) people in order to feed our growth of our activities.

SOARES (voice-over): The company's recruitment plan is ambitious. This year it's looking to hire 7,000 new employees, 4,500 of these will be based in Europe and half of them will be young people.

As France grapples with a shortage of skills, young engineers are highly regarded. For the company, it's the benefit. Their skills make Safran more competitive.

MATHIEU: Our (inaudible) to make sure that the talents available will be able to join our activities and to be trained in order to have a carrier pack (ph) in the coming years with the (inaudible) group.

I would say that the competitiveness of the activities in France is really at stake.

SOARES (voice-over): With the young talent on the production floor and behind the desk, Safran must now begin the hard work. This year, it's looking to dedicate 4 percent of its payroll to training. That's a total of 1.4 million training hours, a serious investment in the next generation.

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QUEST: Isa Soares with the next generation of aerospace engineers.

After the break, Tom Enders, the CEO of EADS. The company's selling lots of planes. Now it's time to make money.

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QUEST: The Airbus A380, the pride of Airbus, the super jumbo.

Welcome back to MARKETPLACE EUROPE at the Paris Air Show. EADS says that the 380 will break even in 2015. The plane received 20 orders here at the air show. The chief executive of EADS, Tom Enders, says now it's all about profitability.

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TOM ENDERS, CEO, EADS: The goal is to have a growing, profitable, increasingly international company. We have a company that last year alone had double-digit growth in revenue. So we're not lacking growth. This is largely coming from commercial, from Airbus, from helicopters.

QUEST: There are the rumors, of course, you want a more balanced company, 50-50 between Airbus and, say, the military and the other divisions.

Is that fair?

ENDERS: I do not believe in the string of pearls strategy where, over time, you buy a lot of smaller companies, et cetera.

So we are reviewing that and we are reviewing also the necessity, you know, what drove us 5-6 years ago to go for a -- or strive for a balanced company, is not necessarily the same environment today.

But on the other hand, I mean, you see right now defense is declining or shrinking. Commercial is still nicely growing. So the big question is the cyclicality that we had in the commercial business for so many years, is that still with us?

So every reason to review the strategy assumptions back from the last decade.

QUEST: Essentially, EADS becomes a commercial aircraft company.

ENDERS: Well, we are today really. I mean, defense reviews are roughly 20-21 percent. We are almost 80 percent a commercial company.

QUEST: Are you satisfied that you have a commercial board now and not a board dictated by the politics of your member countries? Or is there still more work to be done?

ENDERS: No, we have -- we have a very good board. I would say in terms of quality, industrial experience, financial experience, that's a board second to none. I mean, we have six different passports on the board. I don't think there is any company around in the world of aerospace and defense that has a better board than we do.

The industry is a very political one. It's not about shareholding or if you have some residual government shareholding that we still have. So you always find politicians, decision-makers tempted to try to interfere. But we're used to that. I mean, we can perfectly guide and govern the company irrespectively.

QUEST: Which makes you a politician as much as a chief executive in the sense of navigating these political waters.

ENDERS: No, I wouldn't say I'm a politician. (Inaudible).

QUEST: (Inaudible).

ENDERS: I'm a chief -- I'm -- no, God, no! I'm a chief executive who knows how to navigate in such an industry.

QUEST: Without getting burned in the process.

ENDERS: Well, not too much, at least.

QUEST: With the BAE failed takeover, was it particularly bruising for you coming so soon after you took the helm and being such a high profile first move in your administration?

ENDERS: When you do something like that, you always need a window of opportunity. You need the stars all aligned, almost all stars were aligned on that deal. We went for it; Ian King, my partner in crime on the other side, we both knew it was a risky undertaking.

But we thought it was worth trying at this particular juncture. And when we recognized that it wasn't possible, we both jointly and orderly extracted from the -- from approaching.

QUEST: So if you look at the commercial aviation side, what more would you like to see come from the Airbus part of the company?

ENDERS: Well, the importance is that Airbus increases profitability. Airbus was, for many years, has been burdened by too many development programs in parallel. Now this is phasing out; now the 800 am in front of ashallie (ph) is in the delivery process. The 350 is proceeding. We still have another project, the re-engining of a single aisle, the so-called Neo.

But with the focus being on the deliveries of the aircraft, less development, less development burdens, the 380 will become break even, margin break even in 2015.

That's still our absolute target. Airbus will not only build a hell of a lot of aircraft in the year and deliver them, more than 600 aircraft in the coming years, but will also become significantly more profitable. That's the most important delivery from Airbus.

QUEST: And the European economy: what do you believe needs to happen for competitiveness in Europe?

ENDERS: Well, I say we have great workforces here in France, in Germany, in Spain, in the U.K. These are very competitive and very skilled workforces. We get a lot of support. We cannot complain. We are hiring. We're still hiring. The EADS Group overall is probably hiring up to 5,000 people this year. So you can see how successful we are. Of course, over time, we will become more international.

QUEST: Finally, are you having fun?

ENDERS: Yes, from time to time, yes.

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ENDERS: Except probably air shows.

QUEST: Do you not enjoy it?

ENDERS: Yes, I do. I genuinely do. Look, aviation is a wonderful -- is a wonderful industry. If you had been with us last Friday, then we'd (inaudible) the first flyover 350 under perfectly clear skies in Toulouse. It's such an emotional demand. So it's emotion. It's business. It's got everything that's exciting for me.

QUEST: And if it makes money, you'll be really happy.

ENDERS: Absolutely.

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QUEST: Rather magnificent, the Airbus A380 and Tom Enders, chief executive of EADS.

And that's MARKETPLACE EUROPE for this week. I'm Richard Quest at the Paris Air Show. Whatever market you're in, I hope it's profitable. I'll see you next week.

END