Sector is feeling some pain from trade. Lets check markets because we are to have a negative Market Impact overnight. Given the heightened geopolitical tensions, we saw the 10year yield dropped. Were back to 1. 81 right now and rising once more. Treasuries selling despite that manufacturing data. We have the s p 500 down 0. 7 . The only sector that is positive is energy. Not that strange when you think oil prices are a few bucks higher. The dollar index is close to 97. The yen is stronger. Most currencies are weaker versus the u. S. Dollar, which is acting as a safe haven. Gold as to point to well because you can see gold is up another 1. 2 . We are close to the 1515 mark. Crude 63. 60. We are off of session highs. Rent trading 68. 81. Big reactions on the treasury markets. Isn is significantly weaker. Stocksxx 600, european are down. Airline stocks are suffering the most. Risk off toassic geopolitical events in the middle east kind of day for these markets. Just day two of 2020. Vonnie a complete reversal of yesterdays trade. That airstrike ordered by President Donald Trump that killed one of irans most powerful generals near baghdads international airport, and will draw a quote severe retaliation from iran. Lets get reaction from washington. The president took a few minutes g. D then tweeted out a fla there has also been pompeo appearance on fox news. Forhey are calling deescalation. I think they hope that iran deescalates its activities in the middle east and maybe even goes to the negotiating table of the u. S. , although that seems hisly unlikely, given importance within the iranian government. They are trying to send in message after the iran controlled militias attacks against those u. S. Installations in iraq. You have defense secretary mark warningd the president iran there will be serious consequences if those attacks continue. We saw the president follow through on those threats last night. Guy how much are we hearing about the legality of this attack . The u. S. And iran are not at war. From a legal point of view, this must be anticipatory selfdefense. How much are you hearing about that, and how much communication with our allies has there been . The legality is a big issue. If you read the statement the pentagon put out last night, there were lines about how he had been responsible for american deaths and had been plotting new attacks that would have targeted americans. U. S. Officials have not provided any details or evidence to back theyup, but you can expect will use that legal justification to say the president had Constitutional Authority to carry out this raid. With regards to the allies, there has been outreach by secretary of state mike pompeo and other senior officials today france, the in u. K. , and other allies. Vonnie that is jordan joining us from washington, d. C. Will irans Energy Infrastructure the targeted at this point . Will there be a supply disruption . There are two ways to get a supply disruption from the iranian side. And igniteretaliate a world war iii type of thing. Low probability scenario, almost describable. What is iran going to do . It has to retaliate. It has chosen how to retaliate mostly by attacking Oil Infrastructure of some kind. I think that is what the oil market is focused on. Will the retaliation involved not american installations but Oil Installations in the gulf . Vonnie the potential and most likely definite iranian response, and there is also iraq that is unhappy with what is going on and has powerful Energy Infrastructure. Does that mean even if there is some attack on infrastructure, at least most developed nations will be ok for oil . That is a good point. We saw that immediately after those installations in saudi arabia was attacked and 5 Million Barrels were taken away from markets for two or three days. Prices came back down because inventoriesmercial and the ability of the rest of the world to ramp up production, and demand prospects are not seem to be all that high. There is less fear. Then there is the entire Financial Market you can use as insurance. The market has been very skeptical of any lasting impacts from any violence in the gulf. Guy good morning. How will the gulf states react to this . How will iran communicate to the gulf today . At what point do you think places like to buy and dubai and the Energy Infrastructure of the uae is at risk . The other side of the gulf is probably a little afraid. You saw during those attacks that the iranians have the power to strike at will, if you want to use that phrase. That makes it very difficult to defend against those cruise missiles and drone attacks. More hardware has been sent to saudi arabia, and probably the north and east side is well defended. There is so much infrastructure all around the gulf. Vulnerableplete with infrastructure. You can attack the tankers directly as they have done outside the strait of hormuz before. There is the entirety of the south of iraq that does not have a lot of redundancy. Targets infrastructure galore around the western side of the gulf. Do you think we are good to have Higher Oil Prices this year than last year . A lot of funds are divesting their Energy Assets. Is that god to turn out to be a mistake as a result of the geopolitics . As we saw importantly in 2019, oil prices and oil equities began to divert. Folks are not in love with oil equities, and oil prices are doing their own thing. Oil prices react to fundamentals. The fundamentals are good. They are firm. If we have a global macro that improves as we believe it will, oil demand will return. Supplies, not so much growth. High 60s or mid60s, there are about high 50s or low 60s for wti. Equities, hold different story. You need to believe the Energy Transition that mr. Bloomberg and others by championing is not going to take toys as fast as we want it to. That means oil demand prospects dont go into a ditch, and that means you need to keep investing in equities. Right now very few people are in love with equities of oil and natural gas because investors think it is a dirty business that is going to be replaced by the business of market of tomorrow. Vonnie the stakes are very different for the u. S. Then for europe. What could happen for europe to put its stake in the ground . Happening inat is the background is complex negotiations have taken place. This is not going to end in world war iii. This is going to end in a new treaty of some kind that can be pushed to the congress. We think iran wants to come back to the socalled family of nations. Europe, japan, china, india, even russia all want iran back at the table. The arabians themselves want to come back. Earth then iranians themselves want to come back. Vonnie how on earth will that happen given this is the most dramatic escalation yet . Do you see khamenei allowing a new Nuclear Agreement . It depends on what irans allies and want to be allies do. The europeans have a lot at stake. The europeans do not want this confrontation. They never wanted it to begin with. This is the Trump Administration unilaterally ripping up that deal for all the right reasons. Dont likellies ripping up that deal. Americas allies have been fighting to get some sort of new deal in place. The Trump Administration has a choice to make at some point depending on how iran retaliates. The Trump Administration has a choice to make, we want to have before the election or after . As we start to think about the response we are going to get, what im hearing from you is you anticipate it is going to be an economic response. Economic targets will be the target of choice. There is a clear redline the president has as to hitting u. S. Infrastructure and u. S. Citizens. You are anticipating an economic response. You think that is something the u. S. Will tolerate. I think what the iranians have to do is make a choice. Theynot understand why apparently killed a contractor a a fewted i dont weeks back. I dont understand why they double down and had their proxies lay siege to the u. S. Embassy. Withoutd to deescalate losing face. That means you attack something that drives up the price of oil. Think, go out and kill another american. That is the most important redline. You remember the attack on the american drone. President trump was very close to sanctioning a retaliatory strike that would have killed a number of iranians and chose not to do that because in the president s words no american had been killed, so it would have been disproportionate. Now an american was killed and the embassy was attacked. We are not good to have another benghazi, what the president has said. You have to deescalate unless you really do want to start a very big war. Tonie right now brent is up 68. 72. Lets check in on the first word news. Drope Federal Reserve may a hint on plans for the repo market with the minutes on its december meeting. We could get an idea on what it takes to shift Interest Rates on hold all year. Throughs have changed 2020. Those deadly bushfires in australia have ended the political honeymoon for Prime Minister scott morrison. Scott more since clumsy handling more since morrisons , going to hawaii a day after declaring a national disaster. Germany faced higher prices and job losses at the end of 2019. Inlation accelerated to 1. 5 december. It is still well below the European Central bank target of 2 . Germany has been struggling with a slump in manufacturing. In the u k, Prime MinisterBoris Johnsons government is looking for widows and misfits. He says he wants to overhaul the way the Government Works out so he is seeking people with different skills and backgrounds, saying the government needs true cognitive diversity. Global news 24 hours a day, on air and tictoc on twitter, powered by more than 2700 journalists and analysts in more than 120 countries. Guy thank you grandmas. I think life is about to get very interesting for the british civil service. Lets talk about how the escalation in the middle east is impacting markets. This is what you would expect on a day like today. Up 3. 5 . Wti gold continuing a bid. The market coverage continues. This is bloomberg. Vonnie live from new york, i am vonnie quinn. Guy from london, i am guy johnson. This is bloomberg markets. Risk off. Abigail doolittle, over to you. Abigail you just stole the words out of my mouth. Risk off is what we looking at this friday. The worst risk off day in about a month. Take a look at the s p 500 and the nasdaq in the u. S. This in response to the increasing geopolitical tensions smd that disappointing i manufacturing report. Nonetheless, losses down 0. 7 . The nasdaq down more than 1 . In europe, the dax down 1 . Of course, one area of the markets popping, oil. Its take a look at it today chart of brent crude. A pop of 2. 42 . Tensions inising the middle east, fears that the supply picture could be disrupted. Masking the risk off picture for stocks, haven assets rallying on the day. Take a look at the 10year yield in the u. S. Bund yield german down. One area of weakness solidifying the risk off picture, the transportation index and airline index. We will see big losses for the airline index, down 3. 1 . Unitedn airlines and falling on fears of rising oil, fears that the economy on a hurt. Basis could be vonnie thank you for that. Still ahead, does the conflict with iran changed the Federal Reserves plans . Willll hear fromt we hear from two Federal Reserve president s today. This is bloomberg. Vonnie time now for etf friday. Caution spreading across Financial Markets after that u. S. Airstrike killed a top iranian commander. Etf to talk about the space now. Im looking at the aerospace and defense etf. It is up a quarter of a percent because some of the aerospace and Defense Companies are higher today. Big one. S a it got really big when trump was elected to office. That is good to be uptodate. Upre are a few other today. There are a few other ones. This one i expect to see a lot of trading today, especially with volumes going over to dfvm as well. Lets talk about the oil etfs. From an equity point of view, not a loved sector. You saw it all the way through last year. There is divestment going on. You seelike this, do that instinct reversing, or do you think the Bigger Picture, the story around oil, it is still too toxic . The Bigger Picture is still down, but i think if you look in december, if you look at flows, energy was the secondbest sector. If you look at news like this, that is going to keep feeding some of the energ interest in energy. You can see days like this, there could be news of followthrough. Maybe this starts energy back on peoples radars. Vonnie if that is the case, what are the etfs that are specifically heard by this . Is it all other etfs in the universe . The ones that are going to do well are the safe haven etfs. Y volume at the end of the day. It has been good at taking some moves and shrugging it off. If volume is low on spy, you can expect most of the market to recover in a couple of weeks. That is a really telling sign. Great one down a of where we should be looking today in etf land. It is time now for the latest Bloomberg Business flash, some of the biggest business stories in the news. It is a record for tesla. It delivered 112,000 cars in the fourth quarter, the most ever. Buyers rushed to take advantage of subsidies being dialed back or eliminated altogether. The biggest seller is the tesla model three. Salesile, toyota december in the u. S. Fell more than 4. 6 . Sales also felt that did better than expected. Gm deliveries were down 6. 3 . The estimate was down 6 . Latest Bloomberg Business flash. Up, what we have got coming ian bremmer, Eurasia Group founder and president. He will weigh in on this conflict risk in the middle east after the iranian generals killing in baghdad last night. That is next. This is bloomberg. Is bloomberg. When it comes to using data, everyone is different. Which is why Xfinity Mobile is a different kind of Wireless Network that lets you design your own data. Choose unlimited, shared data, or mix lines of each and switch any line, anytime. Giving you more choice and control compared to other top wireless carriers. Save up to 400 a year when you switch. Plus, unwrap 250 off a new samsung phone. Click, call or visit a store today. Vonnie live from new york, i am vonnie quinn. Guy from london, i am guy johnson. This is bloomberg markets. Lets check in on the bloomberg first word news. The uss the air strike that killed one of irans generals thwarted what it called an imminent attack. Defense secretary mike pompeo would not provide details. Killed the general in baghdad. The militias that extended irans power across the middle east. Iran has warned of retaliation. There is concern this could turn into a bigger confrontation. The turkish jet company that flew former nissan executive carlos ghosn from lebanon said he did not know he was on board. Back inl, bolsonaro is the spotlight. He says he has a hernia in his abdomen that will require additional exams. Felldays ago, bolsonaro and suffered temporary memory loss. In jakarta, flooding has killed at least 43 people, and hundreds of thousands have been evacuated. Nearly 200ft neighborhoods underwater. It is the worst flooding in six years in indonesia. Global news 24 hours a day, on air and quicktake by bloomberg, powered by more than 2700 journalists and analysts in more than 120 countries. This is bloomberg. Guy thank you very much. To conflict in the middle east and implications across the globe. We are joined now by ian bremmer, Eurasia Group founder and president. The market kneejerk response is to buy risk assets. The next response is to fade that risk off move. Is that the correct response . Ian i think it is. I have seen too many people that are saying we are now at war with iran, which is far from the case. It is certainly a big escalation from the United States, but there is a big difference between the americans taking out this general and the iranians and miket mike pence pompeo. In the past they have backed down. Trump is not the most predictable president. We know that. We know the iranians dont want to have their Nuclear Program the liberated or their military capabilities in the region. They have had a lot of problems geopolitically in the past month. I think they will retaliate. I think there are bigger problems for the u. S. In the region and globally that we can get into. I would be surprised if this tips us into a direct military confrontation with iran. That is what i think the markets would be reacting to if they were really worried. What is now clear is where the red lines for the white house lie. You kill an american, we are coming after you. You attack the american facility, we are coming after you. Does that dictate how tehran is going to respond to this . They clearly missed cap later. Calculated trump as a paper tiger. They have to hit tankers, lung him up, captured them. Blown them up, captured them. The american reaction was we are going to send some troops to saudi arabia that they are going to pay for. Incredible restraint. So much so that the saudis thought they needed to open diplomatic channels with iran because they could not count on the americans. There was a red line. That redline was american lives on the ground. Amanistion that when sue orchestrates an attack on an american base and one american citizen is killed, that leads to a reaction and a more escalate tory reaction reaction than they expected. I believe there will be an facilitiesmerican throughout the region by proxies. I believe it will be harder for americans to maintain a true presence in iraq, and the Iraqi Parliament will move to legislate against that. Saying different than the iranians are actually going to try to hit commence or it suratean commence o american targets, like an american general. It was not personal before, it is personal now with the ayatollah for this particular killing. If the u. S. Wants this to be the final act of aggression, how does it back down . What is the olive branch or peace offering from the u. S. . Publicly it is going to be hard. Privately, you can still send messages through the qataris, the french, the japanese. Trump is ready to talk. Iranians losehe wars and win negotiations. That is an interesting tweak to send out. Tweet to send out. Trump is much more about trying new nuclearith a deal that he signs his name to. His credibility with being able , additionalranians sanctions in the last year, they are not able to produce ore export much of their oil anymore. Irans mastermind of proxy wars and terrorist networks across the region is gone. Trump has credibility. A lot of people were wondering where is the deterrence value in the Trump Administration . They now dont have that problem. I think the question is more the limitations of the iranian response. I dont think you will see an olive branch from trump in the next few weeks. I think the iranians have a lot they can do by the actions they do or dont take in the coming weeks in terms of the decisions following theake successful attack by the u. S. How does iraq respond to aggression on its soil . Ian the International Response here is in some ways more problematic than the iranian response. Aggression on its soil . Has beenis a country that increasingly concerned about the level of iranian influence over the government and over the military. That is why you had massive demonstrations across the country a few weeks ago and why the government fell. Now with the americans engaging in military strikes that have killed iraqi civilians and not discussing with the Iraqi Government in advance, that is going to cost a lot more anger at the United States than iran. We have to all recognize that the only way you keep iran out of iraq is if iraq is an authoritarian government a, like it by nonshi was under saddam hussein. A lot of downside with that kind of iraq. With theve a democracy majority shia, iran is going to be the government with the most influence. We dont have a lot of u. S. Allies around the world. The european and french governments cannot and opposed the u. S. Attacks came out and opposed the u. S. Attacks. That is kind of shocking, but it shows how broken the u. S. Relationship with macron is. American unilateralism, you are going to see a lot more of that. The more americans are looking for help or support from allies, it is going to get harder given the nature of the Trump Administrations orientation towards unilateralism. Guy what is offlimits in the gulf . Is due by offlimits dubai offlimits . Is it Energy Assets . Give me an idea. Ian this is a major escalation from the u. S. Despite all the concerns i dont have about direct war, i dont think all those things are offlimits from direct attack, especially since we are not talking about direct iranian control of their own forces. We are talking about proxies that act with some level of autonomy and a Leadership Structure that will have been disrupted. The potential for miscalculation on the ground across the region is higher than we would like it to be. Vonnie thank you for your time. That is ian bremmer, eurasia founder and president. Joins us, nancy davis to discuss market reactions to the escalating tensions in the middle east. This is bloomberg. Vonnie live from new york, i am vonnie quinn. Guy from london, i am guy johnson. This is bloomberg markets. Lets check the markets now. Abigail as we were discussing, definitely a risk off tone on this friday. 500, itseck the s p worst day in about a month. Well off the premarket lows. Theratcheted up tensions in middle east, the weeak ism numbers. Vix popping higher. On the havens side, we have a bit more of a rally. Check the 10year yield losing six basis points. Rallyingese yen against the dollar. Dollaryen at 108. Oil is popping higher, but for risk off reasons over tensions in the middle east. Subsectors especially sensitive to todays town. If we take a look at the airline index, its worst day since october. Index. The semi that was last years big winner. Today. Rs selling chips bonds rallying. Bonds rallying. Vonnie thank you for that market check. Us get back to the heightened geopolitical tensions in the middle east. Joining us is nancy davis of quadratic capital management. Correctly predicted the 2008 downturn. What are your predictions for 2020 . Nancy i think investors need to be focused on diversifying at this point in the cycle risk assets, stocks, bonds, credit. Everything is expensive right now. I think what happened overnight is a reminder that investors need to know what you own, whether you are a passive investor or active investor to really understand what is inside your portfolio and your exposure. Vonnie if we take diversity as a given. We are on top of diversity always. Where is the best place to be . Nancy we launched a fixed etf that has exposure to inflation protected bonds and options that provide investors long fixed income volatility. Most etfs access equity volatility, and that is a good place for investors to diversify, especially when you have events like last night, it has inflation protection and long fixed income volatility and access to the yield curve, which the yield curve can steepen from Inflation Expectations or the markets risk equity selling off and the fed expectation of rate cuts increasing. Guy why do i need fixed income at this point . Nancy many fixed income investors use the barclays ag index. It has no inflation protected bonds in it. The benchmark,g you are missing the inflation component. Whether you are a deflation is more demographic, deflationist or demographic, whatever your view is, think about a trade war, it would be higher prices and potentially lower growth. It is a good time going into the u. S. Election to make sure your portfolio is diversified. Also the barclays ag is 28 of that index is mortgages. Mortgages are inherently short volatility. I dont think many investors realize they are actually think they when they have a defensive portfolio. Having diversification is really important. I think last nights events are a reminder of how important a diversified portfolio is because you never know when you wake up in the morning what is going to happen overnight. I guess i am asking how big of a risk do you see of there being a significant inflationary impulse coming through . The last 10 years and has demonstrated it has demonstrated it is not been a significant risk. Quite the opposite. With Central Banks doing what they are doing at the moment, volatility within bond portfolios has been an looks like it is going to remain relatively soft. Nancy what we like is actually Inflation Expectations. If you look back to 2013, the u. S. Yield curve as measured by the twos and tens was over 450 basis points. There was no tail. The yield curve flattens it so much because the fed and limited operation twist in the wake of the european debt crisis. It is funny to look back at 2019 and greece was the bestperforming market globally because a couple of years ago that was really the catalyst for the european debt crisis. The yield curve flattened, and the yield curve is largely Inflation Expectations. F you go to a bank and open a cd and say it is not enough yield, so you open a 10year cd, you get paid very little risk premium. It is a normalization of Inflation Expectations. Powellingle time testified before congress or when they started cutting rates last year, he kept talking about Inflation Expectations are what is driving actual inflation. I am curious if you leave aside ivol, are there trades you would put on that would benefit from this particular situation in any event . Nancy i think having many investors heavy in credit exposure. Near alltime tight. I think there is a lot of money in the private equity space and private Credit Credit spreads, credit space. Credit spreads, you are not getting rewarded for that. Vonnie thank you, nancy davis. Ahead, oil up today as the killing of the iranian general in baghdad stokes fears of greater conflict. That is coming up. This is bloomberg. Bloomberg. Guy live from london, i am guy johnson. Vonnie from new york, im vonnie quinn. This is bloomberg markets. Ira, how prepared were you for the turmoil overnight, which sent prices up 4 before the state at level . Frankly, i was not prepared for it. Anything, i was looking at the energies, and they were starting to roll to the downside. I was watching that more than anything. When i got the newswires as to what had happened, i knew the first market it was going to go up was the Energy Market because it is the most susceptible. It is right across the border from iran. They can stop world shipping of oil. The funny thing is they help the u. S. Because our shale price will follow the brand. If they take off of any of the brent crude, the u. S. Says we can produce more and give you more oil. That is the funny part of it. Thatnt know the next shoe is going to happen. Iran will do something, whether it is in oil, infrastructure, attacking another embassy, the simple fact is they went too far. They killed an american and then they orchestrated an attempt to take down the embassy. They went too far. Is at 62. 65. Based on yesterday, the oil market did not react at all even though there were some tensions ratcheting up. Does this sustained over the long haul . No. What you need to make them sustain is unique to cut supply or increase demand. The problem we have is on the demand side. What is good to make it go up . Even though we did a u. S. Chinese trade deal, that takes time to work through the economy. Where are we . We are in a supply disruption potentially, not at hand yet, but potentially. Does it stay . Does something happened . What does iran have to gain by attacking saudi arabias fields again . I think it is more or less other areas they go to. That is where they are going to create mischief. Vonnie certainly a busy day for you today. Thank you. Guy time for a Bloomberg Business flash. Lets kick things off and hong kong, the Worlds Largest luxury conglomerate lvmh will close a store in hong kong shopping district. Retail sales in the city have plunged since the start of antigovernment protests. It is the best news for manhattan real estate prices in two years. Home sales fell just 1. 2 in the quarter. That is the smallest yearoveryear decline since 2017. That is according to a report by douglas element real estate. Gates scheduled to give his charity over to real estate. Now he wants billionaires to pay higher taxes. He says u. S. Lawmakers should raise the estate tax and increase Capital Gains tax. Bill gates is the worlds second richest person, currently worth 114 billion. That is your Bloomberg Business flash. We are going to be counting you down to the european close. We are also going live to the American Economics Association meeting taking place in san diego. We will be speaking to this gentleman, charlie evans, the chicago fed president. We will get his take on what has just happened in the middle east manufacturingsm number, which was a significant disappointment. This is bloomberg. Nt. This is bloomberg. Whether youre out here on lte or here on a wifi hotspot, Xfinity Mobile has more coverage to keep you connected to what matters most. Moooo. Thats because its the only Wireless Network that automatically connects you to millions of secure wifi hotspots and the best lte everywhere else. Save up to 400 a year when you switch. Plus, unwrap 250 off our best phones. Click, call or visit a store today. Guy irans top general is killed in a u. S. Airstrike. The baghdadted at airport in a dramatic escalation by president trump. Oil spikes and bonds catch a bit of a bid. Or a a kneejerk reaction game changer for markets in 2020 . After disappointing u. S. Manufacturing data, closing out the year with its weekl weakest monthly performance since the recession. In london withn vonnie quinn in new york. Were counting you down to the european close on bloomberg markets. Vonnie breaking news on u. S. Crude Oil Inventories for last month trying down one point 4 Million Barrels. That is not as much as was expected