Transcripts For BLOOMBERG Bloomberg Surveillance 20180103

Following the successful trading session in asia. Mifid ii, 15 minutes into the trading session, there was 25 less volume ban on the 30 day moving average. Looking at your dollardollar, unchanged. Tle bit at 2. 7 my 10 year yield . Well talk geopolitics and south and north korea talking. Coming up on bloomberg surveillance, we will be speaking to Lucy Macdonald, chief Investment Officer at lianzl equities and al global investors. Twe also discussed the new financial law. And Daniel Morris also joins us at 10 00 a. M. Lets get straight to the bloomberg first word news. Nejra u. S. President donald trump has responded to kim jong uns latest threat. Trumps remark on twitter came that kimw arne warned the u. S. The Nuclear Button is always on my desk. Earlier trump claimed his peonts to pressure th pyongyang were having a big impact. According to white house officials, trump met with Vice President mike pence and members of his National Security team to discuss the protests amid liberations already underway regarding opposing sanctions. An emergency session of the security council. Nikki haley it takes great bravery for the iranian people to use the power of their voice against their government, especially when their government has a long history of murdering its own people who dare to speak the truth. Nejra the eastern half of the u. S. Already seeing record low temperatures, might now get hit with a snow bomb. A storm will raise up americas east coast. Boston could see 11 inches. Manhattan could get three. Meanwhile, the United Kingdom is being battered by storm eleanor 80 milesth winds up to per hour and the risk of flooding. After 2 billion of clients ompliance costs, the biggest shakeup is finally here. Trading volumes slumped ahead of mifid ii coming into affect today. Bloomberg lp is now competing. Orrin hatch of utah will not seek an eighth term in 2018. He is the longestserving republican senator in u. S. Sena te district. The decision could open the way for a senate bid by mitt romney, two time president ial contender. Hes a republican elder statesman, who could challenge donald trump, who he has called a fraud. Global news 24 hours a day, powered by 2700 journalists and analysts in more than 120 countries around the world. Im nejra cehic. This is bloomberg. Francine u. S. Equities have started the new year by hitting a record highs. Tech shares started the latest rally with the nasdaq closing above 7000 for the first time ever. Markets will have to contend with the rollout of mifid ii, the biggest shakeup in European Regulation in a decade. Is Lucy Macdonald and james barty. Happy new year. Lucy, when you look at mifid, volumes were down 25 in the first 15 minutes of the trading day. What does this tell you about how the market is trying to process mifid ii . Lucy theres a period of discovery over the next three months. Thats what we are doing. Systems are being brought in, which are new. We are all in that period of a fermentation and discovery. By march we should have a better idea on the research side. Francine james, if you look at the period of implementation, doesnt mean the next two to three months are going to be bumpy, or does it mean it is mo re difficult to position yourself . Jamees the process is still ongoing. We are in conversation with our clients, what they want to do. Over the next two to three months, it will all become clearer. Francine are you worried that it will not settle down as it was meant to . Lucy from the Research Point of view, i think it will. This will be fine, and we know how we are going to do it. But its certainly very different from the way everybody has worked before. As far as new channels of communication, it is different. It will take a little time to get used to. Francine when you look at the drivers for the market over the next couple of months we will talk about the u. S. , the ecb, the fomc and fed what do you think the big impetus is . Will it the earnings . Lucy the big factor for us is liquidity, and whether we can reach liquidity and what impact that has on markets. That has been the biggest driver financials since the crisis. At the end of the day, the valuations are not where they were. So, thats going to be the big question fo rus. And seeing how that plays out. Francine james . James i think the big difference last year for the previous years was we have got the big earnings coming through, which drove markets upwards last year. Yes, the valuations are where they are because of the valuations of other asset classes. One question i get from investors is, dont equity markets look at services . My answer is, against what . If you compare them to government bonds or credit, they do not look extensive. Its about the relationship between equities and the bond market. If we get the Earnings Growth driven by the strength of the Global Economy, equity markets will go up, provided we do not get any signs of inflation that cause bond yields to drop to radically. The way i am setting up my strategy is look, we are long equity markets, and that is where we have our risk. That we have short bonds against that because as long as short bond markets behave, then if we get a strike beyond that, thats the threat. Francine at some point, we will normalize, right . When is the normalization process going to begin . James i think we are starting the normalization process at the moment. We see u. S. 10 year treasury yields head up to 2. 5 head up to 2. 5 . Thats normalization after years were bond yields have been oppressed because people did not Larry Summers said we would not get there with the Global Economy. It appears we have gotten there now. Now the fed and other central things are moving away from thes Monetary Policy process. Away from this Monetary Policy process. It is tough to transition from qe to no qe to higher rates to tapering without causing a major problem. Clearly, its about central things going gradually. If Central Banks look what they are behind the curve, the market will get spooked. Francine the german bond seems ot be i dont know the word. Is there a danger that when the bond yield changes, the markets are not ready for it . Lucy i think the same thing applies everywhere. Equities look cheap against bonds, but expensive against history. They will be affected by the rise in bond yields. But i think the point made about inflation is the major risk. If theres more inflation in the system then we think and the Central Banks think, that could be a source of trouble. And lucy james barty macdonald stay with us. Plenty coming up, including more on the mifid ii shakeup. Are banks really ready . Later on the show, we talk commodities as they start 2018 in the positive territory with the bloomberg Commodity Index nearing high levels. We also focus on oil. This is bloomberg. Francine economics, finance, politics. This is bloomberg surveillance and im Francine Lacqua in london. Nejra the firm next has lifted the forecast profits. Slaes rose 1. 5 in the days through christmas eve, which beat analyst estimates for a 0. 5 decline. This is an upbeat signal for britains companies. Bitcoin has bounced back from the nearest decline. A person with knowledge, the san franciscobased firm has been purchasing small amounts of bitcoin, totaling no more than 20 million to establish a toehold. That is now said to be worth several hundred million dollars, but it has yet to return any games to investors. Alphabet google moved 59 billion euros to a Shell Company in 2016, saving the company in billions of dollars in taxes th at year. Profitsh to shield the from taxation. The setup involved shipping revenue from one irish subsidiary to a Dutch Company with no employees and then to a bermuda mailbox on by another island registered company. A mergeras abandoned with money grab after they failed to win Regulatory Approval in the u. S. Any deal would have been valued at 1. 2 billion. In u. S. Takeovers companies have prompted warnings. Ken griffins hedge fund could expend as it closes in on a deal. According to a person with knowledge of the matter, citadel has been in talks. And possibly neil chris himself. He announced he would close his firm after a series of failed credit and equity bets. Thats the Bloomberg Business flash. Francine the biggest shakeup of European Regulation in a decade is finally here. Banks and Asset Managers has been huge amounts of time and money preparing. Are they really ready . Theing us on the phone is vice chair of the European Parliament committee on economic and monetary affairs, the man who helped pass the mifid ii legislation into law. Thank you for joining us. Ii do you think the mifid start went . We decide all of the stuff in 2014. The proposal from the commission came in 2011. Being in 2018. To there was time enough for anybody to prepare and i am confident everything will go properly. Francine how big is the problem that there are still several countries that have not transferred mifid into International Law . If they have not done that, the european law automatically moves up to the clients out there. As we have done mifid, regulation is in every member state. Especially in the area of Consumer Protection. All citizensse, have rights according to the european legislation. Those Member States that have not brought things in place are protected as well. Francine sorry, a lot of Market Participants have been worried about it. Do you think there was too much panic about mifid ii . I think there was too much panic, but if you look to the core of mifid ii, its a huge regulation for regulated markets, even commodity markets. Weve made the presentation for highfrequency trading. Position limits to ban speculation. A lot of things. Everyone is concentrating on the Consumer Protection area. Hoenestly, when i was the person responsible to negotiate the legislation, when we fan of Product Development was driven not by the interest of the clients, thats what we changed. I think its right. The other thing. To make documentation on all the things you do, as a banker, distributor or salesman for the financial product, there are obligations we have, for other people as well, for other branches as well. It is only transferring what we have on other areas to the financial market. Francine how will you measure success . Do you measure it in three months, six months, or a year . [laughter] francine the idea of mifid ii was to avoid mifid iii. So, we will wait on the implementation reports by the end of this year. Then, i think we can make a serious valuation, but at the moment, nobody is thinking of mifid iii. Francine what will be different one year from now . Are there two or three priorities absolutely want to get right . Honestly, i dont see huge changes. I have some concerns, especially Smaller Banks. In the u. K. , banks give financial advice, but in the rest of europe, it is allowed. I bet Smaller Banks will leave this kind of market, but i dont see major changes. I think with mifid ii we have strengthened financial markets. Weve stabilized them and aerefore, they can create benefit for everybody who has a good approach and a good axis point for the financial product. In one year, i think we will see this is really functioning. Francine trading volume, i think in the first 15 minutes of trade was about 5 below the 30 day average at the start of trade. What does that tell us about the markets and how they are dealing with this . Ireland that is a link i dont think that is a link to mifid ii. I think that is more related to what is happening in iran, the oil cirrisis, whats happening with north korea. Its not mifid ii. Francine you dont think people want to wait to see how the first day pans out . No, i dont see any link to m ifid ii. Its creating an environment that is stable and functioning. We dont see flash crashes like in the New York Stock Exchange in 2011. This is stable running. I dont think investors are aborting the stock markets because of mifid. They are avoiding the stock markets because of the unclear political framework we see these days. Francine give me a sense of whether you think banks were too late to the game, whether they took too much time in implementing mifid ii. You told us this was a long time in preparation. I was a little bit surprised because original it was foreseen that mfid ii came into force in january of 2017. We organized a delay for one year, where everyone has a chance to prepare themselves. Therefore, i cant accept any complaints that there was not enough time to fix the system. I know some technical things had to be adjusted. As i was delivering late december, last explanation, how to solve that, we in the negotiation team, we really work hard until the end of december so everything could function properly. We stressed the commission to deliver some things in november and december, especially for systemic internalization. I think we have been everything, so everything can come into force today. Im happy this longtime legislation piece is now coming to an end and is on the market. Francine is there anything in mifid that allows regulators to deal with bitcoin . Or do we need new regulation . For bitcoin theres nothing toch has any link regulation. It. Ne is standbing behind g we have done on the International Level is to establish a group of experts that is following his cryptocurrencies, but mifid has no link to that. Francine do you regulate it . How would you regulate it, if you had to . And would you regulate it this year . Honestly, i dont see a need for these currencies, only if you do businesses in areas which are not in the legal area. Therefore, everyone should know these cryptocurrencies are unregulated agents. Therfore, its gambling and should be treated as gambling. Francine mr. Markus ferber, thanks so much, joining us on the phone from munich. Of course, for more on mifid ii, tune in to your bloomberg. , and in thego interest of full disclosure, we should they bloomberg lp competes to provide a range of services for folks complying with mifid ii rules. Still with us are james barty and Lucy Macdonald. We touched a bit on mifid. Lucy, first of all, that the regulators are certain they have been everything they can to make sure everyone was ready for it. There seems to be a sense in the market that on everyone is 100 ready. Is it a mistake, or just the way things go . Lucy i think thats right. Not everybody is ready. Clearly, theres been a lot to hundreds has taken of hours of organizational man hours. Not all companies have that luxury. Im not surprised that everybody is ready. I think what has taken longer was just making the decision about who would pay for the research and that took some time because it needed some traction with clients. I think that is a conversation that for some companies is still not done. Francine do you worry about it, in terms of unintended consequences . If we had to wait to see if it was a success, is there something that could skew the markets . James even before i joined merrill lynch, one issue about mifid ii is about, how much would it reduce the amount of Research Available to investors . Because by inches in this new system, what all investors are doing is, they are starting to reduce the number of providers of research, and talking to investors before the christmas break, they said some of the independent research we do currently, we cannot justify carrying that on. The intended consequence of this is reducing what they have to look at later on. How do you reduce research too much, so investors have a smaller pool of research. Francine i dont know whether it shows that there is a need for something, whether it is cryptocurrencies or Something Else outside the financial markets. Is just ar this speculation that does not show or translate a real demand. Lucy well, from our point of view, we are not investing in bitcoin. Well look at it when the client feel comfortable with it. We are fully on board with developing Blockchain Technology internally in the financial sector, which will benefit a lot. But the currencies are at the moment, i agree, they are more speculative until they become more regulated i think they will remain that way. Francine thank you, lucy and james. Both stay with us. Now, up next, the bigger Nuclear Button. Donald trump responds to kim jong uns latest threats. Geo politics. You can hear both sides. Some say mifid is pushing volumes lower. We just heard from one of the law people. And he said not so. Economics, finance, and politics. This is bloomberg surveillance. Lets get straight to the bloomberg first word news. Nejra the u. K. S International trade secretary has said hes looking at all options amid reports that britain is exploring membership of the tpp. Liam fox made the comments to bloomberg during a trip to china. The eastern half of the u. S. Already seeing record low temperatures may now get hit with a snow mom. Snow bomb. Boston may see much as 11 inches. The United Kingdom is being battered by storm eleanor today with some area seeing wins up to 80 miles per hour. In europe, after seven years of preparation, 2 billion, and one false start, the biggest shakeup to regulation of the financial industry in a decade is here. Ahead ofolumes slumped mifid ii coming into effect today. Bloomberg lp competes to provide a range of services for firms complying with mifid ii rules. Has senator orrin hatch said he wont seek another term in 2018. Hatch is the longestserving senator in u. S. History. The decision may open the way to a senate bid by mitt romney, the former Massachusetts Governor and twotime president ial contender. Romney is viewed as a republican elder statesman who could challenged him on who he has called a fraud. Global news 24 hours a day powered by more than 2700 journalists and analysts in more than 120 countries. Im nejra cehic. This is bloomberg. Francine thank you so much. Donald trump has responded to north Korean Leader kim jong owns latest threat, saying the u. S. Has a bigger and more powerful Nuclear Button. North korea has all but opened communication lines with the south for the first time in two years. Deadly protests in iran have intensified talks in the Trump Administration about fresh sanctions. Still with us, james barty and Lucy Macdonald. We talked you politics and the impact on the markets and how you price these, i want to go back to a point you made on inflation. Rates,year breakeven you can start to see a turnaround in that market price. What if inflation isnt there . Can we be sure that inflation is around the corner . James we cant. That has been the lesson of the last few years. A lot of Central Banks thought inflation would start to pick up and it hasnt. In the u. S. , inflation went down. There was no pick up in average hourly Earnings Growth. Sooner or later, the laws of economics will prevail. We should start to get some Wage Inflation picking up. We are now later in the cycle. The Global Economy is much stronger. If ever we are going to get some pickup, it should be starting in the nottoodistant future. Is that a 2018 phenomenon . Francine is there a danger that the fed hikes more than expected or that theres no inflation . Is it a 5050 . We will getiew is something of a pickup in inflation this year. We think the fed probably at least delivers the dot plot. Put the tax reform measures on top of what was already a quite strong economy, you are going to tighten the labor market faster and the risk of inflation picking up earlier is higher as well. Francine do you agree, lucy . Lucy i do. Weve been watching all the Central Banks as well. You can argue about the measurement of unemployment and also about Structural Forces pushing down, whether that is technology or demographics. But there are economics behind you reallygest should see a bit more coming through. I think that is what we expect. But the level of rise of inflation is still very questionable, hence the uncertainty in bond markets. Francine are we back to the phillips curve in 2018 . Was it ever dead . Lucy it probably will take longer. We just are in slightly different territory. Francine if you look at the biggest banks in the world, ecb, japan,oc, bank of theres a lot of changes. Jay powell said we have Mario Draghis term being up in two years. Kuroda is still the front runner in japan. Do you worry that there are too many changes from decisionmakers at a time when it could be quite tricky for the markets . James this year, the biggest change is at the fed. It is a massive change at a time where the fed is grappling with, how far do we push rates . This cycle could look different from previous cycles. Questionay the biggest mark is over the fed. Perhaps that is one reason why donald trump went to jay powell, a continuity candidate. The vice chairman of the fed gets appointed as well. There are very important changes at the fed this year. Im less worried about the other Central Banks. Our view is that kuroda gets reappointed. Isncine what is or who the central banker that has the toughest job in 2018 . Lucy probably powell. They are early in the stage of transition. Hes probably got the toughest job. Francine going back to geopolitics, we need to talk about dom a trump and north koreas olive branch to the south. What is a haven today . I was always perplexed that you trade yen on the back of something possibly ugly in the korean peninsula. Switzerland, obviously, as usual. Possibly singapore. Geopolitics is nearly impossible to price. A year ago, there looked to be plenty of risks out there. Day, some of the them materialized, but none of them made any difference. It is not the most important thing most of the time. What is important is liquidity, profits, and rates. That is much more important over time. Is dollar a haven in any sense, or no . James probably not. In terms of the investors i talked to, gold comes up frequently in these situations. Saycross Asset Investors you can buy relatively cheap hedges now because volatility is so low. Portfolio. Ge your it is going to cost you a relatively small amount of money to hedge against risks. You have to look at geopolitics. Is anyone really expecting a conflict in north korea . Probably not. O powers you got tw facing off, is there potential for an accident . Yes there is. Investors have to take that into their minds. Francine what is the biggest risk of 2018 . Lucy inflation, i think. There are plenty of us around geopolitics, but when you come back to it, what is the most important, inflation would be the biggest something to unseat that. Francine what does it mean for your Investment Strategy . Do you hedge . Get within the portfolios some areas which benefit. Financials, is more higher rates, more commodities, a bit probably one more of that than you would necessarily have. Francine thank you so much. Lucy macdonald from Allianz Global Investors and james barty from bank of America Merrill lynch stays with us. Stay with surveillance. Commodities in 2018 in positive territory. The index nearing its highest level since february. Later, fed minutes will be released today. We will know more about the fomcs outlook. This is bloomberg. Francine good morning. You are watching bloomberg surveillance. The bloomberg Commodity Index is near its highest level since february after rising for 13 straight days. Freezing temperatures in the United States have seen Natural Gas Prices jump. Oil is trading near the highest close in more than two years. U. S. Government data is set to show stockpiles declined. Joining us to discuss all this is javier blas. Still with us, james, head of global process at an bank of America Merrill lynch. Welcome to the program. Does it have anything to do with iran . It is a big oil producer and weve had protests. That is a bullish sentiment in the market. So far it is not disruptive to production. There not expecting situation will deteriorate significantly to impact production. Protests and Nothing Happened in terms of oil production. Backgrounda bullish not only in iran, but also venezuela and the middle east. Drancine 201017, opec manage the gamble by doing a deal with russia. Continue witho that gamble and keep russia in the deal. So far they have agreed to production cuts through 2018. I think the question is when we see whether this relationship works or not. Really in the with production not performing as much as we expected, then opec is going to stay in a good position. If by the middle of this year we see the production in texas, north dakota, new mexico, is booming, and the conversation is about extending the production cuts for another year, then i think moscow will start to have second thoughts. Francine if you look at the Commodity Index overall, how much is china still a driver for these commodities . You look at the health of china and it is linked to commodities . A big driver is china. Oil obviously is a big driver. Natural gas is increasing as ase china is emerging big buyer of liquefied natural gas. But it is not only china. If you look at the data for the manufacturing pmi, the Global Economy is entering 2018 at a very strong phase. When you are considering manufacturing is doing very well, commodities are doing very well. That is what is happening at the moment. A lot of factors underpinning each commodity from a micro level. Economy ase global today is doing very well. Francine james, what is your take on commodities . Would you invest in them . James i think it is tricky at this level. Do see it kind of capped javier made the very good point that opec has done a very good job, but will we see the shale production come back on . Our guess is probably yes. If you are an investor in oil what happens to oil and gas demand in the longer term . Weve got the rise of electric vehicles. We think that starts to impact oil demand. The u. K. Published figures yesterday saying that more than half of electricity production in the u. K. Came from noncarbon sources last year. Theres a number of longerterm issues. In the for a shortterm, we got a strong economy, opec driving prices up. Stocksthe oil and gas are probably a neutral or underweight in portfolios. More generally, we quite like material stocks. China is doing well. The Global Economy is doing well. That is a very important point. The commodity markets, particularly oil, is doing a lot better than the equities of those markets. In oil in particular, you look at the european oil companies, 5 to 6 , so theres a lot of skepticism in the equity market about the sustainability and whether these Companies Make sense. Francine james, how much time do you spend thinking about the longerterm . We spoke to someone yesterday who was saying, if you look at the Way Technology is growing, driverless cars, sustainability, climate change, could it really displace big oil . James i dont think it is completely farfetched. We look at those longerterm themes and the impact on markets. The last year was very interesting. A lot of sectors that underperformed last year were structurally challenged. Areas like media, telecoms, retail, though sectors with changes in the economy. It is all driven by internet sales. Store sales were terrible. Those structural challenges are something which investors have to grapple with now and say, what value do i put on a company which is being challenged . You saw investors exiting some of the stocks. Francine do these challenge stocks actually think of this . Guy johnson was speaking to call, who was saying, you can have facebook you cant have facebook without rio tinto, but you can have rio tinto without facebook. Are a lot of these commodities stocks unloved because they are not fashionable, but we forget how essential they are . Even if you dont like some about and sectors, think the Natural Resources sectors. People dont like tobacco companies, but they still produce a lot of money. They have very strong dividend yields. Can big oil be similar to that . Potentially yes. Were going to still need iron ore. We are going to still need copper. Were going to still need oil. I think that is going to be changing. New technologies are emerging. And means we need less coal potentially less oil. We may not need as much steel, but we need a lot of lithium if we are going to have that much electric cars running on lithium batteries. The mix of Natural Resources probably is going to change from what we are using today. Francine thank you so much. Heavier glass and james barty from bank of America Merrill lynch stays with us. We have a viewer question asking you to pick between china and japan. We will get back to that in just a second. December fed minutes will be released today. We will know more about the fomcs outlook on inflation and the u. S. Tax plan. This is bloomberg. Economics, finance, and politics. This is bloomberg surveillance. Lets get straight to the Bloomberg Business flash. Heres nejra cehic. Nejra u. K. Clothing and Home Furnishings chain next has lifted its forecast. Full price sales under the brand rose 1. 5 in the 54 days through christmas eve. That beat analyst estimates. The retailer also said cost pressure will ease over the coming months. Bitcoin has bounced back from its declines. According to a person with knowledge of the matter, the san franciscobased firm has been purchasing small amounts of bitcoin, totaling no more than 20 million. Those holdings are now said to be worth several hundred million dollars, though it has yet to return any gains to investors. So much. Thank you we had a viewer question for our guest host. This is a question that came in just a couple minutes ago. If you had to pick between china and japan, which equity market would you recommend for 2018 . James we are long both the nikkei and china. We like asia as a whole. Push comes to shove, i would probably go for japan. Emerging markets had a very good run last year. That probably lends itself more towards japanese equity markets. Is should we worry more about deleveraging in japan . They are also meant to announce a new pboc governor any minute. James we are now starting to get a shift in the japanese economy. Inflation numbers started to show a little bit of a pickup. Youve got some inflation finally coming through in japan. Youve got nominal growth in japan starting to pick up. That is a big success. Year, awhat we saw last linkage between dollaryen and profit growth. If you look globally, japan is the best area. You are a lot of upward momentum. Francine if you look at the biggest risks in the asia region, is china not something we should worry about . James completely. We talk about a lot of risks. Inflation as a risk, geopolitics as a risk. The other risk is china. They are tightening financial conditions. We know they want to deleverage the economy. In the past, when they tried to do that, they didnt get it right. Economists isr they are doing it at a much better time. You get the poll from the Global Economy. Francine thank you so much for joining us. James barty from bank of America Merrill lynch. Bloomberg surveillance joins in the next hour. Tom keene joins us out of new york. We will be talking to Daniel Morris. Also talking to simon french. We talk about brexit, mifid ii, and bitcoin. That is the truth and this is bitcoin. Francine mifid ii lands. After spending more than 2 billion, the biggest regulatory overhaul in a decade. Our markets ready . Mine is bigger than yours. President trump takes to twitter, responding to kim jong un. And the stockpile slump. Good morning, everyone. This is bloomberg surveillance and im Francine Lacqua in london. Tom keene is in new york. Happy mifid2 day. Regulators keep on saying we will have six months to deal with this. You should be ready. Tom i will tell you where i am on this, francine. I think its a big deal, and what is critical, it is a big deal for new york. The global wall street and american wall street as well. This is not just pigeonholed as a United Kingdom issue. Francine and is not a european pigeonholed. Youre absolutely right. Heres taylor riggs. Taylor President Trump has a warning for kim jong un. The president tweeted he has a much bigger and more powerful Nuclear Button, responding to kims button that the Nuclear Button is always on my desk. Meanwhile tom a little bit of technical issues there. Taylor riggs, still celebrating new years eve. Her mic doesnt work. This is what happens at the beginning of a year as well. We will give you that first word news here when we get it because there is a lot to talk about within the news flow, particularly the president and korea. We have an elevation in futures. It really hasnt come in. The truth of it. This is the theme today, which we will do in this hour and next hour. We really havent seen spreads come in, even with the inflation lift out in the 10 year space. 1. 20 move. Ha tbit big of course, fancine, we see elevated level, but quiet over the last 48 hours. Francine oil is important because of stockpiles. We put in our data check, 65. 3. Also risingcks, following a positive session in asia. But i do think a lot of this needs to be put in context of tom, 35 lower than the 30 day trading average. Tom let me go to the bloomberg right now. We will get taylor back here in a moment. This is what francine is looking at. This is the draghi chart. This is trade weighted euro, not eurodollar, not eurosterling. What is important in this longterm Euro Weakness is we are breaking out from the one standard deviation. We have this little move up here thats got my attention. Back to this level is where it becomes policy adjusting. What do you hvae . Francine i have a simple u. S. 10 year breakeven, tom. If you speak to Market Participants, they worry about inflation, which could be the one thing that is good or bad for the markets. Bond markets, they are starting to Price Inflation above the feds 2 target. It back to taylor riggs. Taylor take two. President trump has a warning for kim jong un. The president tweeted he has a much bigger and more powerful Nuclear Button. President trump was responding to kims warning that the Nuclear Button is always on my desk. A major diplomatic breakthrough between the two koreas. North korea called south korea on the hotline. The two sides began talks on plans for north korea to send a delegation to next months Winter Olympics. And President Trump has threatened to cut off Financial Aid to the Palestinian Authoritys. Ties. E palestinian authori u. S. Gave the Palestinian Authority about 616 million. In germany, the implement rate has fallen to a record low. The jobless rate in december was 5. 5 . The number of people out of work in germany fell for a sixth straight month. The Central Bank Says the tight labor markets will soon lead to higher wages. Global news 24 hours a day, powered by 2700 journalists and analysts in more than 120 countries around the world. Im taylor riggs. This is bloomberg. Francine thank you. U. S. Equities have started the new year by hitting more record highs. Consumer discretionary stocks led the latest rally with the nasdaq closing above 7000 for the first time. Joining us this mornings Daniel Morris and simon french. Thank you for joining us. First of all, i know we will get on to mifid, but are you concerned this is the last that there will be less trading volumes for a little bit because of mifid . Not necessarily. Of trading volumes, it is a question of how active investors want to be. People are trying to think find, where they want to opportunities and i think they will trade just as much this year. Francine when you look at inflation concerns, is that the wegest risk to 2018, either have too much inflation and the fed goes more than expected, or we dont have any inflation . I think we have divergent inflation problems. The u. S. Economy will lead to the fed being more progressive than the market is pricing. That sums it up, in terms of the chart on the euro. That creates a problem for the ecb, int erms of their inflationary pressures, or lack of. I expect the ecb and draghi to Start Talking down the euro. This becomes a big issue below the low 2 . Staff estimates even at a weaker euro level. Becomes much more of a problem on the eurozone than it does in the u. S. Tom simon, thanks fo rbeinor bn our new years special. Let me go to both of you gentlemen on something that seems dated. When does youll begin to compete with dividends . Yield begin to compete with dividends . Let me start with the economist, simon. Simon we have got some way to go. It is great timing, tom, because i celebrated mifid with a dividend release this morning. That was an exciting moment, putting it through the mifid portal. For me, the gap, or take the ftse, yield is at 3. 6 . You are looking at the shortend yieldingurve 4. 5 . I still think dividends become very interesting even if we have got the inflationary story wrong and the bond markets starts to be routed because yield hungry investors will go rushing for the door. They will be looking for the yield on equities. I think that hunt for yield almostemains in tact, agnostic of the economics. Tom where are you on this . You are an equity guy . When does yield begin to compete with dividends . How 2006 of me. For u. S. Equities, i think see more advantage of both sides. Also, because of hopefully higher inflation. At the same time, we have think about the impact for corporations with the text reform and all this cash coming back to the u. S. What will they do with it . It is not clear they will be investing more than they have in the past. So, you expected to come back to higher dividends and share buybacks. At the same time, you will have fixed income. So, maybe the balance does not change that much. Francine what about the distorted bond market . This is a bring to look at as the canary in the coal mine. I think it is much more in europe, the influence that you see, the biggest potential gap, where they are today and where they should be. The risk is there. If we talk about where the shocks might come, it is much more in the u. S. In europe, that is much less likely to happen. Though that gap is there, it is less likely to persist. Tom i have not shown this chart in ages. Im going to put it out on twitter for radio london and the rest of the radio worldwide. Here is the 1970s malaise. Heres the 1990s, we cant get out of our way. And here is the recent lift. Whats the element of just treading water here, dan. Do we have a risk of equities just treading water . Dan i think certainly that is more the risk in the u. S. Clearly you had 20 returns last year, quite phenomenal, given how much you already had since 2009. Then, you compare the multiple that you have on u. S. Equities to the earnings outlook and it seems out of line. The way you get a compression of that multiple is not necessarily markets declining, but earnings continue reasonably well, but the prices do not reflect that more in the future. I agree, that is probably be more likely scenario. Tom i think it is really unspoken, folks, and it will be one of our studies with our guests through january. But what about just treading water . French,orris and simon we will drive forward this discussion in the next hour, all of it wrapped around this truly historic day for global wall street with the mifid revolution. From london, this is bloomberg. Taylor this is bloomberg surveillance and im taylor riggs. Bitcoin roise following news that a big name from Silicon Valley has bid on the cryptocurrency. The holdings are now worth several hundred million dollars. This is according to a person familiar with the matter. Thiel is known for his early bust on airbnb and space x. The Chinese Financial Services giant has abandoned a plan to buy Moneygram International, and failed to win approval from a key u. S. Government panel. Citadelgriffin has said might get bigger. To acquirein talks the talent of hutchin hill capital. Thats your Bloomberg Business flash. Francine thank you so much, taylor. The biggest shakeup of European Regulation in a decade is here. Mifid2 takes effect today and even though banks and Asset Managers have spent huge amounts of time and money preparing, are they really ready . We now turn to nejra cehic. Daniel morris and simon french are still with us. Nejra, it is like they have been preparing, preparing, preparing, but you dont know how long it takes. Nejra the day sis finally here. We hear bakers have been marking around the clock to implement these rules, which, to be fair, have been in the works for many yeras. For many years. We are seeing lower trading volumes, but it is hard to tell how much of that is down to mifid ii, and how much is down to the start of the year. You just spoke on surveillance to markus ferber. He does not think these trading volumes are down to mifid2. There are some brokerages that have spoken in anonymity to bloomberg, who said in the runup today, they have seen a lo lot of lower volumes. There we are talking more over the counter, but it is something to note. Francine i have seen this conversation with lawmakers. Regulators have said, we knew the rules for a year. And then, we speak to a lot of Market Participants saying they dont know what the end game is. So, they play it safe for the next three months. Nejra the end game from the regulators perspective is to create a more transparent market, to create fairer markets, to create more competitiveness. And th ebie big change has beene research on bundling. The fallout is not something we will see today. That is something that will take a few months to come into effect. But these impacts will take time and it is a complex piece of legislation. It runs around 700 pages. I dont think many people have read every single page of that. Theres a lot of quirks to be worked out. We were told people that did not have a legal identity identifier would not be able to trade. Tom come on. You are getting way too tactical. Read 6843 of the 7000 pages, driving forward rules and returns for bloomberg on this huge, huge issue. Nejra, let me cut to the chase. How many people on global wall street will lose their jobs over mifid ii . Nejra that is impossible to predict, tom. But certainly, some could because what you are talking about there is the issue of research on bundling, the fact that mifid ii says you cannot have the same prize for research. The point of course, in separating those two is to void any sort of inducement. The reason this affects wall street is in the u. S. You are not allowed to separate those two things. Tom you nailed it. You nailed the distinction here. How is new york going to react to this foolishness in london . Nejra guess what . Initially you would say, we cant do this in the u. S. That brings another Regulatory Burden with that. The sec couple months gave wall street firms a reprieve, so that guess what, they could comply with mifid ii. This is going to have a global impact. It is not just if you are in europe that you have to unb undle the research fees. This will affect wall street firms as well. Then theres is the other question, where other parts of mifid ii could go. They could say, this has worked really well in europe, lets get some of that for ourselves. Tom if i am a major new york firm, do i run my new york shop, differentk cfas than i run my london cfas . Nejra so, i dont know. Tom we dont know the answer, do we . Nejra it is interesting you bring up the pnl. That is one of the biggest questions for the buy side, what they will do about these research costs, which they previously did not have. Will they pass it onto the kleins, or will they absorb it on to their pnl . Most Asset Managers said they will absorb it on to the pnls. Questionse of the big going forward, as well as the jobs issue. We haveters because if to provide different types of research, if we have to provide less research, that could mean there are job losses. We dont want to sit here and say this is how many job losses will go because that is another question we dont know the answer to, tom. Turnfor more on mifid ii, to your bloomberg terminal. Go to tliv for more analysis on bloombergs expert editors will step we should also said that bloomberg lp competes to provide services complying with mifid rules. Our Financial News has just been concluded in our blog. We will be back with simon french and Daniel Morris. This is bloomberg. Tom bloomberg surveillance, Francine Lacqua in london. Tom keene in new york. Let me go to the chart now with simon french and Daniel Morris. This is the five yearfive year breakeven on europe. This is something francine and our good guests know all too well. This is if you go five years and then you forward another five years, where is inflation . We have got this leg up. Is it escape velocity from the great disinflation . That is a nice thought. There are two things to think about. One, its a function of the rally based off of oil prices. There does seem to be a relation between the oil price and the fiveyear inflation. On the other hand, if you compare that level to the beginning of this year, its still relatively low. Weve had a boost in oil prices. Its hard to say outside of wages in germany when we will have another inflationary push. Its moving in the right direction, but will still be a slow process. Francine mario draghi convincingly says that it is coming. Thats the frederick. That is the rhetoric. Draghi said it was his preferred measure, that chart. I wonder if the core disinflationary process affecting europe, principally the demographics, the persistent output gap, these things are not going to go away through a cyclical upturn in activity. These pmis are supplemented with the commodity boost. The core inflationary pressures beating through into the labor market generating persistent activity a lot of that hinges lets bring it back into 2018, the macroagenda, trying to solve the deficiencies of the european monetary union. Francine simon and daniel stay with us. Coming up on bloomberg markets, a conversation with blackstones vice chairman. They will also probably talk about mifid ii, and the dislocation between equities and bonds over 2017. 2018 . Ill his picks be for bloomberg surveillance continues. We will be talking about oil and a little bit about u. S. Politics. This is bloomberg. Tom bloomberg surveillance. From london and new york, im tom keene with Francine Lacqua. Thrilled with us on economic, finance, investment in the discourse of north korea. We will touch on that. Lets get the first word news with taylor riggs. Taylor President Trump responded to kim jonguns latest threats of Nuclear Weapons with his own weapons. The president tweeted he has a much bigger and more powerful Nuclear Button after the north Korean Leader warns the u. S. At the Nuclear Button is always on his desk. Demonstrations in iran have led to more talks in the Trump Administration overdue economic sanctions. President trump met with members of his National Security team. Its an longstanding opposition to the nuclear agreement. Now the question is who will succeed utah senator orrin hatch . The longestserving republican in the senate wont seek reelection this year. He was first elected to the 1976. In his the parts are may open the door to mitt romney. He has flirted with running for the senate. Box is in china, as he is pushing u. K. As a great innovating nation. The u. K. Is in talks to join the Transpacific Partnership trade group. We are not ruling anything out. Its not something at the top of our agenda at the is a time. It would be quite raw for us to rule anything out. Trade fox said a agreement between the u. K. And china is some way down the road. Global news 24 hours a day powered by 2700 journalists and analysts over 120 countries, this is bloomberg. Im taylor riggs. Francine President Donald Trump has responded to kim jonguns latest threats, saying the u. S. Has a much more bigger and more powerful Nuclear Button. The one upmanship continues after north korea opened up medications lines with the south. Always great to speak to you, andrew. This trumps pressure on north korea actually having as big an impact as hes claiming it to be . Andrew i think geopolitics is very quickly back to center stage and theres really two sides to the story. On one side, we had can come out and said he wanted to have better relations with south korea. Were testingthey some technical checks on the phone that they used to communicate between the two sides. We may have another call later today. This is an advance of a possible meeting between the two sides next week. That is all very positive. The flipside is that trump continues to take a very hard stance. You mentioned the tweet that he sent that continues a lot of the rhetoric between the two through 2017. You have the situation now where north korea and the u. S. Continue to be at loggerheads, but south korea and north korea are warming a little bit. It is something ahead of the olympics. Hich of those two will prevail . Concerned that this is applied that north korea is seeking to drive a wedge between south korea and the u. S. On the nuclear issue. Francine you are talking about north korea as a threat to the south. Peace overture or is it too early to say . Andrew i think its too early to say, but take it at face value, remember where we were last year with the Nuclear Tests and test flying over japan. There was a lot to be concerned about. This is perhaps an incremental step or a small step in the right direction. We are hearing that there may be a facetoface meeting next week and that would be very significant. Of course, that we have the Winter Olympics coming up. Possibly in the right direction. Tom within the discussion of foreign affairs, the discourse of international relations, theres a great divide between hard power and soft power. Are we having a hard power debate or are we having a soft power debate with north korea . Andrew i think that comes down to the crux of the issue and how you want to look at that. We see what happens sometimes when you pull back and the reason that im in the middle east now where the u. S. Is pulled back on a lot of the is because of russia a very in 2017 they had positive year in terms of reaching its foreignpolicy objectives. It has now firmly established itself as a player. The same sort of thing and north korea. The u. S. Is saying weve got these sanctions and military threats. We need to keep those on the table. Dont let north korea drive a wedge between the two of us. Tom i got to go to your core competency in the middle east right now. You and i have discussed for years the linkages. Whats the number one thing in the news flow and zeitgeist that we get wrong about iran . Some of it is back to the movies where we are silly about persia or the shah. What is the thing most out of tune with the reality of tehran . Is very diversified economy, more so than any other country in the region. Its got an extremely young and educated population. I guess that would be kind of misunderstanding. That is feeding into these protests that we saw. They started with a spark about Living Conditions and job prospects. They have morphed into something bigger. Theow seems to repeating route could you have a young population thats hungry and looking for opportunities and theyre not finding them. Francine its tough to think of what som thomas thinking of best itsmas thinking of tough to think of what som thomas thinking of. Update onve us and saudi arabia . Andrew everyones kind of swept up into the conflicts and last year we had talks between the two sides. That mediation disappeared. New years eve we had this Great Big Party and the burj khalifa is all lit up. The six countries that make up the gcc, and they only put five flags up on the burj khalifa. It was a bit of a slap in the face. It was happy new year to everybody but qatar and it sells tells you a lot about where that state office. Its going nowhere. Theres no behindthescenes talks. It is really sucking up a lot of energy and undermining what is supposed to be a regional, political, and economic union. Francine thank you so much, andrew barton, managing editor for th europe, middle east, and savvy politics. Saudi politics. What is it mean for the markets . Largely ignored in 2017. Will 2018 be different . Yields you think about when you have the missiles being launched from north korea. Theres that potential for all the tix a flareup and preoccupy the market. Shortlived,e which is not our best case for next year. Are there going to be opportunities presented when the markets get to anxious and you see yields fall and risk aversion rise when the fundamentals are still quite good . That might be an opportunity to step in. There could be this horrific economy and that horrific economy, but is the l here atee Global Economy thats lifting . Daniel the cautionary tale that we want to keep in mind is that theres this view of goldilocks is a fairly widespread opinion and i think its based on reality. Growth is good and inflation is low and Central Banks are supported. What more could you want . Thats exactly what you want to think about what might be the risk to that and what might go wrong that we are not anticipated. We are expecting the worst in the came out pretty good. Is this year potentially the opposite . Tom wheres the out for opportunity in sectors . Is it in financials, banks, or somewhere else . Think technology is attractive despite the fact that you have fantastic runs last year. If you look the Earnings Growth potential in technology and not just the u. S. But emerging iskets now, that potential still dramatic and valuations are not quite stretched. Tom i like how you said that because im shocked by what honeywell reported months ago. Is one of the big surprises that we are going to see his revenues left up higher than whats expected, but actually a bigger singledigit number . Daniel i think thats just it. On one hand, what will be driving for profits in the future is that a lot of thats arty happened. Its really only be technology the Technology Sector that you will see expansion above the inflation. Tom wonderful to have you both with us. Lets talk about your morning briefing in the car. You are freezing in your car across most of america. For most of you worldwide, america cold. They are toasty in the studios of Bloomberg Radio. Bloomberg daybreak new york, boston, san francisco, radio london. This is bloomberg. Francine this is bloomberg surveillance. Tom in new york and Francine Lacqua here in london. Lets talk about oil and commodities. The Commodity Index at its highest levels in days. Freezing temperatures have seen natural yes prices jump. Oil is trading to the highest close in more than two years. According to analysts, it is forecast because stockpiles are expected to climb for a seventh week. Jonas now is bloombergs chief Energy Correspondent. Daniel morris in some french are still with us. How is oil doing . Isiranian protests it iranian protests weighing on investors months . Hobb javier resume issue driving oil prices could obviously there are tensions in iran and the protests are helping with the geopolitical that ground, but so far no exports disrupted. Present history is any guide, we have been problems in iran in 2009. Theres no indication at this time it will be affected. Very importantly its not just about the supply. Its really about the Global Oil Demand being very strong. The normal economy is doing great at the beginning of this year. Manufacturing is the strongest in five years time. When manufacturing is doing well coming need a lot of energy to produce goods and also to ship those goods. We are more and more buying online so we need more trucks. And ups driving those packages that we are ordering through amazon and online. That means more diesel consultant. Consumption. Francine what are shale producers doing . Opec needs to make sure to keep russia onside, but the Oil Producers . Javier its christmas for the shale producers in texas, oklahoma, and north dakota. Shale production in the United States is booming. Update before the end of last year with monthly figures for october. A huge increase in shale production. The United States is on its way to break that 1970s production record of 10 Million Barrels a day of crude oil and that will be happened very early in 2018. Tom in america, we are all dont care about the Macro Economic talk. International falls, minnesota do you know where International Falls is . Javier i know because its not far away from the headquarters. 33 24 and the low will be of the International Falls. Jacksonville, florida, which is not miami, but still is a plus to in the low will be minus three centigrade. Does any of that cold moves the needle on oil supply . Javier we are going to have some freezing in north dakota and even in texas. Obviously the crews are not on the ground working right now because its too cold to work in north dakota. You are right that its having an impact probably. On the supply side, they are bringing extra demand for heating and oil in new england and the United States. Suddenly the United States is consuming more gas than ever before. All best has also contributed to a stronger prize for oil and natural gas could tom. Tom lets move over to simon french. What oil price gets your attention . If we are at the top of the range, what single statistic gets it or if we go down below, which number is it . Simon i think 65 is a really important threshold and the reason being that the supply side, which we are talking about, has been historically over the last two or three years quite elastic for the higher oil price. We have seen that not just in the u. S. But globally. It becomes quite interesting from somewhat of a balanced budget perspective amongst opec nations. That starts to become more than breakeven in a number of those swing countries. Do you start to see one of the issues we havent raised his the share of aramco and what the price does for that overall evaluation. Crucially to get ahead of the story, what happens when that aramco sale is made in the downside as saudi start to come on board . Francine d like the stacks and commodities do you like the stacks and commodities . It is something we touched on in the previous hour. At the same time, the economy needs commodity producers. They are not fashionable at the moment. Simon for much of the year, its all about negative returns. It may interest positive by the end of the summer so relative with other sectors, it was the worst performing. Is there potential now for that term around . I think the skepticism would be do you think we are going to get that much higher of an oil price this year and factors will weigh on oil prices,. The other important the saleon to make is price and those that are dependent on the shale sector in the u. S. , which has a lot of potential for more production of the u. S. Francine i love the way that are chief Energy Correspondent firms he with his knowledge. He dazzles us. Ive a quiz and thats thanks to pete norman listening in. What is the only temperature the same in both celsius and fahrenheit . You can give us your answers by logging onto tv and clicking on the screen. Eranswer. At javi tom is it kelvin . Francine i dont know if i should give the answer away now. It is 40. If you are right on that coming in a signed picture by tom keene. If you are right on that, you get a signed picture by tom keene. Taylor this is bloomberg surveillance. Im taylor riggs. Lets get the Bloomberg Business flash. Two u. S. Airlines have joined banks positioning thousand dollars bonuses in the wake of tax deals. American and southwest announced the bonuses after the close of business yesterday. Airlines and insurers have led the way on bonuses. All these are pending with the Trump Administration. Here in manhattan, home resales fell in the fourth quarter. Sales of previously owned condos dropped 11 from a year ago. Prospective buyers wavered ahead of the tax bill and stood firm in their refusal to overpay. For hollywood, 2017 was a box office bust. Moviegoing fell to the lowest point in 25 years. According to a researcher at box office mojo, theaters in the u. S. And canada sold 1. 2 billion tickets last year, down 5. 8 from 2016. Kome are blaming a weea lineup of films, too many sequels, and divergence like netflix. Lets look here at the taylor rule. I put this out again on twitter because this is an important chart. This is the fed, but it speaks to a lot of other banks as well. Up we go in rates, but the taylor rule drives ever higher. Daniel morris with us and simon french. Daniel morris, let me go to you. This is ageless and that the fed tries to raise rates and the rest of the market just keeps getting out in front of the fed. Theoretically can the fed ketchup . Catch up . Daniel if you look at where we were at the beauty of last year when the fed said it was going to hike three times come he futures and it was only going to be one and done. At the end of the year, they did hike three times in the market was wrong. We are in the same position right now. Who is going to be right . We are leaning more toward the fed doing what it says its going to do in the market will have to adjust to that. Tom bring up this chart against th. Simon french, this is not europe , but is this what mr. Mario draghi is going to look at in august or october of this year . Simon we will look at the divergence between the median dot plot and where europe is going to be. What i think is really quite interesting as whether we see a fundamental structural break and the relationship between the labor market and inflation. We were speaking half an hour ago about core inflation and the absence of core inflation and even levels of unemployment that are historically consistent with fou 4 wage growth. Now we are betting 2018 on that eventually returning to its historical norm. As a seven of our times on this program, the models arent working. Be delivering on the dot plots, but thats not because the models are starting to work. Francine what is the model you think thats most broken . We mentioned german boots quite briefly, but is there something to stay away from in 2018 . Daniel i think boones are particularly unattractive for two reasons. Yields are likely to go up, but the difference is that you get. 4. At least you get some income to compensate for that potential price increase. Not risk basis is particularly attractive. Tom thanks for the briefing. This has been a great way to start 2018. Daniel morris and simon french. We will drive for the conversation. , lookinge will join us at the equity markets. Also i believe Kevin Cirilli freezing in washington. He will join us as well on the president. Stay with us. This is bloomberg. Morning, dow 7000. Were you brave enough to buy stocks . What will you do now with thou dow5,000 and this hour at 25,000 in this hour . Some is here profound changes in others, no one cares. Just in time for 2018, i need to lose weight. Good morning. This is bloomberg surveillance. Live from our World Headquarters in new york, im tom keene slim and trim. Im running the roads of the. Needs. Pyrenees mountains. What did you learn listening to people over the holidays . Francine it was interesting to talk about. , but itshe pyrenees the catalonia part. It was an interesting discussion. If you look at 2017, we moved away in europe from a lot of the concerns we had about politics and talked about growth. Not so the same in the u. S. Though. Tom i had someone stop me in the rome airport and Start Talking about the new york yankees. Francine in italian i hope. Tom its not fair. Me and its like lets talk about this new guy from miami. It was miserable. Lets move on. Taylor riggs with the first word news. Taylor president has a warning for north koreas leader to kim jongun. The present we did he has a much more bigger and powerful Nuclear Button. President trump was responding to kim jong Nuclear Button was always on my desk. Theres a diplomatic breakthrough between the two koreas. North korea called south korea on a hotline that has not been used for almost two years. The two sides begin talks on plans for north korea to send delegations to next month Winter Olympics in south korea. President trump has threatened to cut off Financial Aid to the Palestinian Authority. Palestinian leader says the president s decision to recognize drizzle as the capital of israel disqualifies the u. S. As a middle east peace mediator. In 2016, the u. S. Give the Palestinian Authority 616 million. In germany, the Unemployment Rate has fallen to a record low. It was 5. 5 and the number of people out of work in germany fell for a sixth straight month. The countrys central bank predicts the tight labor market will soon lead to higher wages. Global news 24 hours a powered by 27 journalists and analysts in 120 countries, im taylor riggs. This is bloomberg. Tom ive only got one screen this morning. Futures up five and the vix plowing under 10 as well. 120euro is still above at francine. Francine mifid ii or not mifid ii theres certainly a lot less volume been there usually is at this time of the year. As you look at some of the other impacts, asia was good and you can see a lot of the stocks in europe gaining. Crude oil having a blast currently at 60. 52. Tom this is a chart that im looking at now and maybe mario draghi as well. 910 years come up we go with the two standard deviation breakup. This begins the escape velocity from disinflation. That may be a headache for mr. Draghi as we move into this year. Francine they are watching us of the german alps, which is why i did this bond chart. This is a 10 year breakeven rate and it goes back to the fact that markets are worried about inflation and 2018 and you can see theyre starting to Price Inflation above the feds 2 target. Tom very good. It is good to speak to ron temple. Use of asset manager with a distinguished career on the buy side, managing money doing Security Research over there. I want to make clear that mr. Temple could not speak about mifid ii as so many of our guests. Theres a lot of going back and forth with their management and he chose not to speak on this morning, but he can speak on where we are beautifully in his Research Note of what can go wrong. I love how you do a page of research and you havent ittybitty paragraph of what can go wrong. Does that speak to our audience. Ronald the biggest risk globally essential banks. What you talk about with the strengthening of the euro and one of the challenges that presents the ecb is escape velocity in the eurozone. And jobay, the tax cut asked that just past the United States as a significant amount to deficits of the United States could you have an increased supply of debt and a tightening of monetary policies so Central Banks are number one. Number two is protectionism and number three is geopolitics. Tom was bring up this chart could lets bring up this chart. This is the all in world index. What i see on the moving averages is malaise. Is that the big unknown for this year instead of up, up, up. Is that feasible . Ron this a good chance that scenario plays out where you have earnings outpacing equity markets. Market has u. S. Priced in at least 70 of the tax benefit. Well got a lot priced in, but weve got good Earnings Growth out of this and that is why we are optimistic on the markets as well as the overall economy. We are more optimistic on the economy than equity prices themselves. Francine if you are more positive on equity prices but the economy, do you think inflation will be more subdued so we will get the three inches rate hikes from the fed and 2018 . On them more optimistic economy than equities in part because of those valuations. I do think inflation will become a bigger risk this year. If we look at labor markets, we are getting very close to full employment. We have sliced and diced these numbers many different ways and we think we are 1. 5 to 2 million jobs short of full employment in the u. S. , which can be achieved and that will lead to tightening and wages. We have seen evidence of broadbased wage growth across the entire income spectrum. Years, it was only the top 5 of the country getting wage gains in real terms. Nows the entire which spectrum. Now it is the entire which wage spectrum. Francine is that just the cycle . The fed has told us a couple at this was coming. I dont think the tax plan will lead to tremendous wage growth. I think its an incremental growth incentive on the margin. Tom i want to rip up the script here. This is so important. Its a beautiful chart within your research on italy as an outlier. We have an election march 4 and you beautifully paint how there is essentially europe and then theres lagging italy. What do you observe of that . What is your observation of what italy has to do with march 4 . Ron italy is one of the biggest risks coming out of europe other than the ecb surprising us and being too hawkish. You have an economy that has shrunk in real terms by 8 or 9 the last decade. For corporate profitability, its an incredibly tough environment. You have a malaise that has affected young people extensively. We basically got a pretty strong signal that there is a populist antiestablishment uprising. This is a real challenge. Tom something to look forward into the late winter and early spring of 2018 in italy. We will continue with mr. Temple of lazard asset management. Much to talk about, including mifid ii as well. You can join us on the conversation on Bloomberg Television and radio. He is freezing at the university of rochester this morning. Yes, formally of even colder minneapolis. This is bloomberg. Taylor this is bloomberg surveillance. Lets get to the Bloomberg Business flash. A big name in Silicon Valley has bet on the cryptocurrency. Peter thiel has been buying bitcoin in recent years and those holdings are now worth several hundred million dollars. This is all according to a person familiar with the matter. He is known for his early bets on airbnb and spacex. Financial may have to rethink its global ambitions. The giant controlled by jack ma has abandoned a plan to buy Moneygram International and failed to win approval for the deal from a key u. S. Governmental panel. Can a Billionaire Hedge Fund make it bigger . So the dollars in talks to acquire the talent of hutchinson capital. Shutting down hudson hill after three years of lacking performance. Tom thanks so much. I know my new years resolution is to lose a little weight. We are going to talk about that later in the hour. Kevin cirilli is not hes at the benjamin bar at the trump hotel. Wonderful to have you back with us. Let me start with the moving chairs and the changing of the guard at the white house. When are we going to begin to see bodies out and bodies in . Kevin i put this question right before the christmas break to a Senior Source that works frequently with the right House White House that says essentially on issue of Foreign Policy with secretary of state rex tillerson, the timing of his exit is likely going to do with a lot of other developments that we are seeing in the news, especially with the developers of iran and north korea. With theoves forward winter games expected to start next couple weeks as well, really the geopolitical rule is impacting these jo departures. Tom always predictable is jared bernstein. Here in the washington post, he said if wages do accelerate, trickle down theorys will go nuts, but they will need to show the games link to faster productivity growth, which trickles down to wages. The also be to explain what the budget deficit is going up because they assured us the growth inducing tax cut would pay for itself. Thats a different than full employment boosting workers are getting clout. Bargaining clout. Does anyone the white house believe in chuckle economics trickle down economics . Kevin they believe this is a leverage they will need in the midterms. Bernstein knows that this is what the white house is banking , the tax plan that even though it doesnt take effect until next calendar year that it will sta still boost the economy and make the case of the midterms at the turning it around. Francine theres so much to do. Good morning and happy new year to you. What is the one thing that you will be watching out for . I guess its a government shutdown, right . Kevin everyones talking about the government shou shutdown and they have to pass that funding bill. We all want details on the infrastructure plan. Will the House Freedom caucus support that plant and will President Trump make a deal with democrats . You know what im really excited about and cant wait to cover . Financial services deregulatory policy. That is where i think its going to be the sleeper issue here. The Senate Banking committee is moving ahead on this and the dynamics of this and whether or not they are going to get some centrist democratic appeal on the issue of Community Banking regulatory relief, thats going to be interesting. I think we have not seen that the regulations on the financial front and whether or not mike crapo can get harry reid im sorry, leader mcconnell on board. We will have to wait and see. Francine i love that story. When it comes to international politics, theres north and south korea and all thats going on with china. Trump isthat president taking a lot of the credit for the phone call between the south and north korea. How much again does he get people onside because he did do something . Its the first Major International policy win. Kevin remember what happened in syria when Prime Minister abe was with trump in maralago last year as well. I spoke with an Intelligence Community source about the situation unfolding and iran and really how it could impact the situation in north korea. On this front we are not seeing secondary sanctions on either case in the sense of whats going on with iran and north korea. There doesnt seem to be much going on in that front. With north korea, they are talking, but you look at the presence twitter account with the nuclear back and forth. Tom i want the bodyweight which on capitol hill. I run to the grace when ted kennedy was dying and orrin hatch heres a guy who grew up without indoor plumbing, dirt poor coming out of the depression. He is not the plutocracy. He is not the modern gilded age of the Republican Party. Is anyone in the Republican Party going to miss the senator from utah . Kevin the president is. Yesterday at the white house when you go to the white house and the west wing, the president has a series of portraits. Every president has photographs from the presidency and a new photo was added yesterday to the wall, or at least in recent days, and thats of senator orrin hatch. Get ready because the freedom marches out with a statement saying they are not going to support mitt romney for his run. So here we go. Tom Kevin Cirilli, thank you so much. Ronald temple is a student of this. This really speaks to the crimes theive to talk o plutocracy. Mitt romney was so successful at bain years ago. Isuy like orrin hatch someone from the past, isnt he . Ron i do think its a sad statement to say someone like that is from the past. One of the biggest things we have worried about is this wedge of populism driving in the u. S. And europe where the uprising of anger from the middle class and lower income people saying the system doesnt work for me. Ituably we will see where goes in utah, but perhaps we see this further widening. I would love to see it start winding back to where we were in the past rehab republicans or democrats who negotiated with each other. Tom they would talk to ted kennedy and things got done. Us temple will continue with and we will look at the equity markets. On Bloomberg Radio today, bloomberg surveillance, william heard will join us. The ramifications of this busy, busy january. Worldwide from london and new york, stay with us. This is bloomberg. Francine good morning, everyone. Withmberg surveillance common francine from london and new york. Tom and francine from london and new york. Certainly in ok day here. And we have rbc a little bit of a market reaction. Volumes took a hit and equities down over 30 for the 30 day average. 30 down on the stocks europe 600. Mif nothing to do with id. Volumes are lower due to the start of other concerns on the market. There were not too much concerns that it was a mifid ii problem that led to these lower volumes. Jane. G us now is great to have you on the program. When you look at the concerns, winners and losers are they cleared now or do we need to wait a couple months . Jane we will have to wait a few months. Mifid ii is a huge piece of legislation, larger than doddfrank, and spent seven years in the making. Be 100 s will not compliant with ever seen a part of mifid ii and it will take a while for them to gear up. It will take time for mifid ii to mature and for markets to adapt to it. Francine how will we measure success . Sarah jane its difficult to say how we will measure success under mifid ii. With my research with bloomberg intelligence, i spoke to unbundling aspects. Under mifid ii, managers will no longer be able to pay for investors using such directly. In a nutshell, this will lead to further consolidation on the buy side, fewer research analysts, less coverage on less popular companies, and it could negatively impact liquidity with small to mediumsize companies. The rules could also open doors for independent research providers. Looking at that, it will be very interesting to see how this works out. Francine what happens to countries like poland where they have to transpose its International Law . Sarah jane its a directive that has to be transposed into the rule of every eu country and which regulations apply directly today. I think as of today nine of the eu countries are not transpose with the two internationals including poland. Itselfid ii direct hit cannot legally apply in those countries. Takingi direct of is not effect as of today. Tom what is the when on all this . When did people start losing their jobs . When the people have the fix the p l . Write on they have to the sell side . Sarah jane i think disruption to the investment and Research Industry throughout 2017, particularly in the last quarter would sell side firms for coming out with various pricing models. More and more Asset Managers were announcing how they would be paying for that research. Most managers did announce how they would be 10 for research. It must be remembered that those Money Managers in europe or those that specialize in capital investment, their Research Consumption would be less. Tom thanks so much. I look at this on this really historic day for Securities Research and going back to graham done and basically Securities Research, i think the ramifications have barely been touched here on what to do with the bodies picked. I looked earlier on the bloomberg and 33 people covered jpmorgan. Francine i think you are spot on in terms of consequences, but if you think that one or two months ago a lot of the brokerages or banks were ready for it, it will take a little bit of time to understand the unintended consequences. Ive heard a lot about consolidation in the industry, something we need to keep a close eye. Sarah jane, think you so much. We need to bring you uptodate with more on mifid ii. You can tune into your bloomberg terminal. Go for expert editors and full disclosure, we should say that bloomberg lp, the Parent Company of bloomberg news, continues to provide a range of services for firms complying with mifid ii rules. This is bloomberg. Tom bloomberg surveillance. Global audience, the phrase in america, its like nome, alaska. We are feeling it nationwide. The safe out there. It is very cold across north america. Heres taylor riggs. President trump is responding to kim jonguns latest threats on Nuclear Weapons with his own message. The president tweeted that he has a much bigger and more powerful Nuclear Button after the north korea warned the u. S. The Nuclear Button is always on his desk. The demonstrations in iran have led to more talks and the Trump Administration over more economic sanctions. President trump met with members of his National Security team. The president has ceased on the crisis in iran to justify his longstanding opposition to the nuclear agreement. Who will succeed utah senator orrin hatch . The longestserving republican in the senate will not seek reelection. Hes 83 and was first elected to the senate in 1976. His departure may open the door to mitt romney. He is flirting with running for the senate. China pushing the u. K. As a great innovating nation. Bloomberg asked him about reports the u. K. Is in talks to join the Transpacific Partnership trade group. Ruling anything out. It is not something thats right of the top of our agenda at the present time. It would be cried wrong quite wrong for us to rule anything out. He also said a trade agreement between the u. K. Of and china is somewhere down the road. Global news 24 hours a day powered by more than 2700 journalists and analysts in over 120 countries. Im taylor riggs. This is bloomberg. Francine the Eurasia Group kicked off the year with a first look at geopolitical risks to watch. China was number one. They point to president xis speech, calling it the most you politically noteworthy event since gorbachev formally dissolved the soviet union. Joining us from washington for china,8 outlook for meredith. Warou worry about a trade and who would started start it . Certainly very high this year and we are likely to see signals of when that might take place as early as the u. S. Ramping up the 301 investigation. We look at u. S. China trade confrontation as highly probable by q2 this year. Francine in your risk report likes a say that china vacuum what kind of vacuum are we talking about . Political or economic . Its both. With the exception of a security vacuum with the u. S. Still remaining dominant. You have the strongest chinese leader in decades and he has amassed enough domestic political power to where key can he can shape chinas external environment and modify the rules within. Iss comes when the u. S. Turning away from what was a u. S. Led multilateral global order so timing could not be better for president xi. That we are going to see in 2018 a much more influential and dominant china is looking to shape the terms of trade and investment that will continue to shape Infrastructure Investment globally. You also will begin to see Global Business norms begin to bend to new sets of rules and practices set forth by beijing. Tom one of your great advantages if you had done what we all talked about which is actually get fluent in mandarin, when you listen to china in mandarin what do you hear different than the homogenized englishlanguage discourse that we get . Much more quiet confidence in chinas Global Leadership position. Much more now than ever before and certainly even more than just two years ago. This is a china that is looking to come out and play ball with the other major powers at the world table and is entirely confident in doing so. Tom stay with us. We will bring in ron temple who has in his note on china the basic idea we cant invest in china. How do we as is investors take advantage of their continued large nominal growth . Thats tough. You can go through hong kong or the domestic chinese shares. There are spillover effects from chinas growth in terms of taking about what the implications are beyond china itself. I tend to think of those from a risk perspective. Its a bit more challenging to access the Chinese Market because local shares can be very volatile. Its very challenging. Nominal growth is interesting but its changing. In the past you thought about infrastructure and capital goods. Now we are thinking more about tech companies. Tom this is critical. For decades we waited for the shift to a consumption china. Is it here . The shift to consumption is happening. Is it happening fast enough to balance out their debt problems . Thats the key question. Going back to what my colleague has pointed to, chinese dominance in tech is another key aspect of the 2018 global risk that we see coming to the fore. China is looking to rival u. S. Dominance in these industries and the question becomes should china get a dominant position . Uld be able to compete should it be able to compete with the u. S. In this way . What does that mean for the way we invest and do business now . Francine what is your answer to that . I dont know if there is anyone who can stop them if thats the route they want to go. If they become the dominant force what does it mean for the rest of the world . This is something we are going to be watching very closely because china is certainly never going to be the state capitalist model that china presents will never be an attractive alternative substitute to what the u. S. Has offered for the past six or seven decades to countries like japan, india, australia. The western industrialized system. For many other global countries that are watching whats happening chinas model is to them a viable alternative and that is something we are going to be watching closely as the year progresses. Francine do you worry about deleveraging again in china . It is not probably a clear path to growth. Abouto worry deleveraging. If i look at the chinese debt burden it has continued to rise pretty sharply. We look at corporate debt total has grown by 110 in five to six years. It is now one of the highest debt to gdp ratios in the world and its opaque because you dont know how much of it stayed on enterprise. Tom thats where we want to go. Help us with the opaqueness of linking pboc in their Financial System over to those big red doors in beijing. They are linked at the hip arent they . There certainly strongly connected, yes. Will see the pboc continue to press forward with market friendly reforms. At the end of the day the party will call the shots. Tom thank you for joining us, Meredith Sumpter with Eurasia Group. Bremmerout out to dr. And the team on fifth avenue yesterday. What a wonderful show to kickoff the year with Eurasia Group. We continue with ron temple. Your morning briefing. Youre in your car. The antifreeze is working across america. Its cold. Its like fargo, north dakota. Warming up your car in the driveway. Do it with bloomberg daybreak. This is bloomberg. This is bloomberg surveillance. Im taylor riggs. Two u. S. Airlines have joined banks in dishing out thousand dollars bonuses in the wake of a new tax deal. American and southwest announced the bonuses after the close of business yesterday. Airlines, banks and insurers have led the way on bonuses. All industries have regulatory business pending but the Trump Administration. Home resales fell in the fourth quarter. Sales of previously owned condos dropped 11 from a year ago. Perspective buyers wavered at the tax overhaul and stood firm in their refusal to overpay. 2017 was a box office bust. Moviegoing fell to the lowest point in 25 years. Canadas in the u. S. And sold 1. 2 billion tickets last year, down almost 6 from 2016. Some are blaming the week lineup of films, too many sequels and too many diversions like netflix. We could spend an hour on this book. Its not my book of the year but it is certainly my book. As would be two guys this would be two guys that actually went out and lost weight. Now whoett joining us has written a jewel. The economist i it. Diet. You look at it and laugh. Dont. This is a extremely important book. We can make jokes about it but for america this is no joke starting with the obesity of america, with the sugar level, the bad knee joints. How do we do what you did . The book. Why we wrote we hope a lot of other people can adopt the kind of principles that chris and i did. At my peak weight i was over 250 pounds and there was no secret why i got so big in the first place. If you look at the history of data on gdp per capita and consumption of food per capita they go up hand in hand. Tom is it our fault or is it business . Is it the merchandising of food in america . Do you blame the Food Industry or the complexes or is it my fault my waistline doesnt work like it used to . Theres a lot of personal responsibility here at play on how you got to tackle the problem. The government stopped coming to help you. Not comingrnments to help you. People already know that spinach is good for them and a bag of chips is not. Intentions they constantly make the wrong behavioral decision. Weve got some tips on what to do to get behaviors. Tom various daughters have told me i am going to die if i dont read your book. A guy who plays football for the new England Patriots says drinkwater. Is mr. Brady on to something . I need to drink 18 gallons of water like my team wants me to . There is nothing wrong with water. Scale everye morning. Tom i dont do that. Do you do that . Every morning. Tom we are not even going to ask francine. Im european, tom. You bring up a key point here. You are laughing at us, arent you . Francine a little bit. I was Reading Research saying the italians are becoming more obese every year that goes by but in europe theres less fast food and all of that sort of stuff. You are look at this also looking at the cost that obesity has on health care and our economy. Thats right. That obesityoubt being overweight is correlated with a lot of bad outcomes at the individual level and it is certainly costly for society. Theres a lot of incentive for individual changes to behavior to lose weight and certainly society could see reduced healthcare costs. These guys are economists so we need to have a formula. Its right here. For radio it says my waistline squared. R thats the diameter of the Pepperoni Pizza i had last night. I occasionally have pizza. No diet that asks you to give up your Favorite Foods is ever going to work in the long run. If i have a pizza i know i am going to weigh a few more pounds on the scale tomorrow. See it fromrally daytoday. If i have a pizza, i skip the next meal. I budget my dieting. Tom the middle child is emailing right now. Get a scale. I hate you. Economists diet. This is a smart book on a Huge National issue. Rob barnett and christopher diet. The economists from london, from new york. I need a glass of water. Five glasses. Go patriots. This is bloomberg. Tom bloomberg surveillance worldwide. Francine lacqua and tom keene. Looking forward to the annual sojourn for smart conversation in the swiss alps. Right now, single best chart. Ron temple with us. I have shown this chart many times it really goes back. 2000 exuberance. We are nowhere near that right now with a huge gap to the same lift we saw in the silliness of 2000. How do we have the courage to be in the markets in 2018 . Keep focusing on the fundamentals of the economy. Just got a significant tax cut which elevates Earnings Growth even moke even more. This is a Good Environment and there are risks. These are risks that we can basically plus plus option. A jump condition of tax reform. Do you combine that with sustainable Revenue Growth and sustainable operating income . The important thing to me about the synchronized Global Recovery is i think we are going to get stronger wage growth which does theoretically put pressure on margins but it also means consumers have more money to spend which means more topline growth. This is a very positive environment for companies. Part of it is priced in but there is still more upside. Its important to recognize returns will not be as good as they were in 2017. But there is remaining upside and one of the bigger risk for investors is pulling out too early. Francine we were talking about artificial intelligence. Robots. The internet of things. Driverless car is. Is 2018 Inflection Point to start thinking about this or is it too soon . Takeny of these stories years to play out and we have been doing a lot of research around autonomous vehicles. Isont think there necessarily Inflection Point as much as a build of Technological Progress and we will have to keep evaluating how far out are the revenues and how far do we have to discount them back to the valuation. Some parts of the market are overvalued. Some of these more exciting call options on innovation and technology are very risky areas for the market here it when i look across the Broader Market we see some really good opportunities beyond that narrow portion of excitement. Francine what looks profit . Frothy . The names that are too fashionable . It is easiest to pinpoint within certain segments of the Tech Industry where the cash flow just doesnt justify the valuation. We are always careful to analyze each individual company to say what do we expect their future cashless to be, whats the range of error around expectations because they could be much better or much worse. This in biotech where people get very excited about a potential breakthrough drug which is a binary. Tom to the core issue for viewers and listeners worldwide, our cabdrivers talking about doubledigit Revenue Growth with these things stocks or have we reached the exuberance irrationale . I will moke likely hear a cabdriver talk about bitcoin to be honest. A talk abouty hear bitcoin to be honest. He mentioned bitcoin. Its the first time we have had to go there this year. Are we done with bitcoin . New years eve i toasted and said no more talk on bitcoin. There you go. I already regret mentioning it. Tom is there a shade of two lip read to it . I am a bit worried that i cant find a fundamental underpinning in terms of cash flows to justify valuation. Thing foreen the same the last millennia. I tend to be more in the camp that i prefer to stick with things where i can value their future cash flows and make a Real Investment based on fundamental analysis. Francine if people start borrowing to invest in bitcoin we have started seeing signs. If this is not regulated this could become something that would be worrying for the markets at large. Thats a very important point to watch for. The good noise good news is theres not that much leverage and the Financial System is not systemically exposed. Massive massive asset class that was leverage in and of itself and those were leveraged in the casino. You had layers and layers of leverage. Bitcoin is more of an interesting cocktail conversation in many ways. Francine what is systemically dangerous . If there is one thing you would worry for 2018 what is it . I worry about chinese debt areas there is a very large amount of debt and the Chinese Government is well aware of the problem but it has been a very. Ine tightrope to walk the other Systemic Risk is the ofpolitics and the risk Central Banks and how they exit quantitative easing and years of extraordinary monetary stimulus. Theres a lot of risk around Central Bank Policy because many of us have basically gotten a bit complacent. We assume mario draghi want to mess this up. We assume the boj will not become hawkish too early. Brilliant, ron temple. We have heard the importance of ecb discussions and analysis coming into 2018. On radio, pimm fox and jonathan ferro. Maybe they will let me participate, too. This is bloomberg. Stay with us. Retail. Under pressure like never before. And its connected technology thats moving companies forward fast. Ecommerce. Real time inventory. Virtual changing rooms. Thats why retailers rely on comcast business to deliver consistent Network Speed across multiple locations. Every corporate office, warehouse and store near or far covered. Leaving every competitor, threat and challenge outmaneuvered. Comcast business outmaneuver. Mifid dayod dave one. Dollar shakes off the doldrums. Fomc minutes will be released at 2 00 p. M. Can it through the dollar lifeline . Lifeline dollar a lifeline . David welcome to bloomberg daybreak. Im david westin with alix steel. Alix did you get worries about your worried about your pipes freezing . David totally. It is not just a problem for us getting up at a ridiculous early hour of the morning. It is affecting markets at this point. It is really power prices and demand. Look at the tanker trying to get through christ to deliver products. And unbelievable story. Twohe markets we are about and half h