The market is underplaying the risks of higher rates. Are we heading to 3 on the u. S. 10 year. The u. K. Warns the European Union warns another financial crisis. Can brexit end will for the city of london . Shining a light. The eu market regulator announces a lastminute delay to our changes to the darf trading limits. Is mifid now a mess . Matt lets look at futures. From where i am sitting it does not look like it will be a good open, a rainy day in frankfurt and down on the futures across the board. Futures are positive, but for the most part down and that is understandable after a long march higher in equities. The s p 500, up six day sin a row. Six days in a row. Is treasury trades, guy, where it gets interesting, looking at 2. 559 . So, that yield going above 2. 5 and staying there. The question is, how much higher do we go if we are looking at the end of the bull market in treasuries . Guy it is probably 3 winning to be looking at as the line in the sand. The Australian Market was up five days in a row. The s p, up six days in a row. The industrials are being sold overnight. Europe had a good day yesterday, that is the bond market interesting. The japanese yen trading up by 0. 6 , but it is the story surrounding the boj that is interesting. The yen is trading higher. The bloomberg dollar index down by 0. 1 . Lets show you what is happening elsewhere because i want to show you the bond market and the commodities trade. The japanese five trade yields higher. The japanese 10 year, yields higher. Today is a deluge of supply in the middle of the curve. Youve huge supply coming out of the u. S. You have got japan, germany and china, the nordic countries coming into the curb. Brent crude, copper, all rallying with the inflation story front and center. 63 with brent trading just shy of 70. Dren ofe the chil undocumented immigrants are facing deportation and have won a court order. A judge in San Francisco rejected the governments argument that the court does have the authority to secondguess whether the president improperly decided to terminate the program that was started by barack obama. Former white house chief strategist ebita and has left his job as executive chairman of breitbart news. He will the longer host a radio show on sirius xm. Bannon lost the support of the mercer family, and his closest financial patrons after trump spoke with Rebekah Mercer by phone. Openingpean union risks the door to another financial Global Crisis if it refused to give london bankers a good trade deal. That is according to the chancellor of the exchequer and brexit secretary. The german newspaper, Philip Hammond and david davis said they want version nation said they want operation between the eu and financial regulators. Warning more price increases are ahead. 36 of Services Firms are expecting to raise prices in the next three months. That figure rose 50 from 35 previously amongst manufacturers. Accelerated. Vowedkorean president has never to accept the north Korean Nuclear program after delegations from both sides met face to face yesterday and disagreed when the south proposed talks on denuclears asian president talks on denuclearization. The European Union markets regulator has made a surprise iie as they delayed a mifid move. The plan to lift hundreds of ocks could not be implemented in time. Of the planhe start will be pushed back as well. Global news 24 hours a day, powered by 2700 journalists and analysts in more than 120 countries around the world. This is bloomberg. U. S. 10 year treasury yield has climbed to the highest level in more than 10 months, declaring a bond bear market. A looming glut of bond supply from the u. S. , the u. K. , germany and japan and a whole host of other countries. Joining us now, james mccormick, global head of sovereign ratings. Good morning. Happy new year. Your view is that the ratings were the best youve seen since 2011. Where do the risks to that lie . Do they lie in what i said, basically, bond markets going higher . It is in Interest Rates. What we are seeing now is what we have expected. Were not that worried about 2018. We are worried about 2019 and beyond because rising policy rates and rising 10 year yields, it take some time for that to work its way into Public Finances, but when it does, we go very high in debt levels across every region. There will be fiscal pressures going forward. And we have to think about the current environment, whether it supports fiscal restraint. Were are not sure it does. Francine how easy is it to model what happens because we have never had an exit f from qe. How the market reacts, how the balance settles, none of this stuff is in the history books. James nobody has any experience looking at this. Even policy rates going up is new for a lot of people, and contraction of Balance Sheets for Central Banks nobody has seen this before. We expect higher Interest Rates, obviously, longer yields and if you think about how much just eurozone governments have saved over the last 10 years because of lower Interest Rates, back in the envelope calculation, if they had stayed where they were in 2007 through the next 10 years and debt levels have gone up, Interest Payments governments would have made in the eurozone, almost one trillion euros more. The fiscal savings from lower Interest Rates have been quite substantial. That is about to go into reverse. We bigger deficits and higher debt levels. We will see some fiscal pressures coming down the pipe. The political environment will be one that could be quite difficult for the fiscal nature. Guy given that, do you have fai th in the economic pick up in europe at the moment . Is it real . Its on steroids at the moment. You made the point. This is not a Public Sector recovery. So, this is not fiscal stimulus per se that is driving this recovery. It is a private sector led recovery, credit growth picking up. Guy could it work without the extraordinary stimulus the ecb is providing . James not to the same degree, no. Once that is taken off the table we will see a return to more normalized growth in the eurozone. Growth rates are much lower than the potential growth rates of today. Guy where do you think the potential growth rates james between 1 and 2 . Depending on which country you look at. For the advanced economies, it is in that range. Some recovery there, we are starting to see that in the data. Below 2 is in the norm. We are not going to see that this year. Euro growth this year is around 3 . A lot of countries will actually see falling Government Debt levels this year versus last year. The question is 2019. Guy from a ratings point of view, this is as good as it gets . James absolutely and we are kind of balance. I think this year will be a good year. More countries have falling debt. We expect to see higher ratings moving higher. Guy italy elections, are you worried . How are you preparing for it . James we downgraded italy last year, actually. If we were to have this discussion one year ago we would be worried about italy leaving the eurozone. That seems to be off the table. Nobody is talking about taking italy out of the eurozone. That seems to be no longer an election issue, but what is is the fiscal stimulus and the degree of fiscal easing that could come on the other side of the election, assuming we have a government that could deliver. Debt in italy is over 130 of gdp. The deficit itself is not that high, but the debt burden is very high and the debt dynamics are very poor. We are focused on the fiscal dynamics that come out of this election. Guy oil, brent, approaching 70 per barrel. How does that change your view . James it is a little bit higher than our forecast for the year was. We expect there will be a supply response. We still expect oil prices to come down. 60range of sort of 50 to dollars, we think that is the goldilocks of not too high for the importers and sufficiently high for the exporters. Where we are now, a little more pressure on prices and a little more inflationary in the advanced economies, but not enough to disrupt the growth story this year. Guy Government Shutdown in washington . James certainly possible, but in an election year, nobody wants to be seen as obstructionist. The issues, the wall, who was going to pay for this mexican wall and the dreamers legislation, which we had developments on overnight. I think we will get there in terms of some compromise. Guy what impact does the tax cut have in your view . Guy longerterm, it makes Public Finances worse. We measure government basis, around 100 of gdp now. Over the next 10 years it will add another 10 Percentage Points to that at least. That is with mandatory spending guy similar to the italian numbers, really. James eventually and the tax cuts make that worse. We dont think the tax cut support will be enough to bring the Fiscal Health back in order. A deteriorating Public Finance story in the u. S. Guy we believe it on that note, james mccormack. Lets catch up on what we need to know around the world. Bondtte guy, billionaire manager jeff fungundlach said te s p 500 will end the year with a negative return. Which is why he sees the u. S. Benchmark falling after a decent run early in 2018. He also said he is dubious of the longterm value of bitcoin. Corning about 7000 jobs in italy. Familiar to people with the matter, the company has started informal discussions with union to review ways to reduce labor costss, while remaining in compliance with italian law. They would be in favor of reducing the headcount through about 4000 early retirement and about 3000 voluntary buyouts over three years. A spokesperson for Telecom Italia declined to comment. Sonys ceo wants to be a buyer in the wave of consolidation sweeping through the entertainment industry. He says is Company Recently talked to 21st century fox about acquiring the film and tv assets, but eventually lost out to disney. He spoke to bloomberg in las vegas. The strategy is to shore up our Motion Picture business, and then make sure that any of the deals that we make concerning the future, that we are in the drivers the and not in the situation where we have to give up control of the assets we want over the years. Juliette kodak has joined the cryptocurrency frenzy sweeping the world. They are launching the kodak ain, which is described as cryptocurrency that empowers agencies to take greater control in image rights management. All the Blockchain Technology that underpins them are tenuous. That is your Bloomberg Business flash. Juliette. K you, for records in a row closes on the s p 500. It has been amazing to watch stocks around the world continue to gather pace. Although it should be said that volume has been reduced in each of the last three trading sessions. The question is, where is the momentum, is it fading . Are investors really serious about getting in here . Or is it fear of missing out . Joinging me in frankfurt at the Goldman Sachs strategy conference is the global chief equity strategist. Thank you for joining us. First off, on this continual street, amazing streak of new records in the u. S. , but really globally, equities have been so strong. What is driving this. How is everything not already priced in for 2018 . Great question and fundamentallys, equities play on Global Growth. The consensus agreed that Global Growth is to remain strong. And synchronized this year, and into next year as well, making it the longest economic recovery in both places. That is encouraging investors to move up the risk curb. That macrod volatility is incredibly low. Attractiveery environment for risky assets like equities. There a huge risk that snaps back, especially with volatility so low, and the fact that we knew to expect synchronized growth last year. We knew about the tax reform at the end of the year. Everything things to be priced in. Is this a dangerous time to be getting into the equity market . Peter from a technical perspective, a correction is potentially overdue. We have had one of the longest periods in history, or the las sist 60 years, without a correction of five percent or more. They could come from a change of expectations about the pace of interestrate tightening in the u. S. You were interviewing earlier, talking about the view that rates could rise 4 in the u. S. The market is pricing something much less than that. If we are right that rates rise, it probably will not choke off the economic recovery, but it could trigger some type of reassessment of shortterm risks. That is where potentially a shortterm setback could come. Guy good morning. Thank you for joining us. I want to ask you a question about sector rotation. Yesterday in the u. S. With the bond market pushing north of 2. 5 at the 10 year level we saw the market rotating out upon proxies, utilities, etc, rotating into financials. How much more does that trend have to run if we continue to see yields pushing up, as you suggest . Peter i think that is a good point and one we have been focused on. Generally we like financials. We think that not only is this a positive play on growth. They will benefit from higher Interest Rates or steeper yield curves. Seene same token, we have bond proxies look vulnerable. Europe is a good example of this. We are seeing a slowdown in their underlying growth rates. They are vulnerable to rising bond yields. We think that rotation will continue. Matt i want to boil down the consumer to the u. K. Supermarket shopper. Profits. The pretax they seem to be positive. The Economic Outlook in europe is not only good, but more sustainable than that of the u. S. Peter stronger relative to trend. Matt exactly. How is the consumer looking from your perspective . Peter i think it depends on the precise market you are looking at. In the case of the u. K. , the consumer is weakening. Wages are relatively flat and inflation has picked up. The u. K. Is a special case. Elsewhere consumption is pulling up sa well. Unemployment continues to come down and inflation stays quite low. We think the consumer will do reasonably well, of course, but a lot of competitive disruption in the retail space, given technological disruption. So, a lot of price competition. Thats the trend that will continue. Matt i am just laying in bed at night, thinking, do i buy equities . Do i see grwoth continuing . I think of the consumer as the main driver of Economic Growth and corporate profits, im american. But where will they get that money . Does that, at some point, change . Do consumers, and im thinking of the u. S. Now, start to borrow more . Peter borrowing levels have already gone up in the u. S. During the recent years. Though interest coverage ratios are still very affordable. We have to bear in mind, theres been a boom in Business Confidence in the u. S. Thats led to further employment strength, which will keep Consumer Confidence high. One of the other big drivers of growth is investment spending and we have seen a ratio nation spending. N investment as investment picks up and capex picks up, that will support growth and the revenues of Many Companies that benefit from investment spending. Guy is the capex cycle going to be one of the big drivers this year . Peter i think capex will pick up. Fewaw up until recently companies are investing in the rapid rate. Therees been a long period of sluggish growth and technological disruption. We do expect capex growth to pick up. We have been looking at finding companies that are reinvesting in their own businesses, particularly when the catch return on cash investments is ri sing. Theres surprisingly few companies in those markets that fit into that bucket. But those companies reinvesting for future growth, we think they will do very well. To see you great this morning. Thank you for joining matt at the conference. Peter oppenheimer, chief Global Equity strategist at Goldman Sachs. We are minutes away from the market open now. Expertsgs top equity will be joining us every day to look at the big market themes and individual stock stories before the open. Joining us now are the equities reporters. Good morning. Good morning. Guy big picture, the market has been on a tear. Has it got further to run . The insert we are getting is yes. Europe is one of the markets that is not in overbought territory. In overbought not levels. That could mean the rally still has legs and it could be more sustainable than some of the other regions that have seen more exuberance. Guy lets talk about the stocks we will be watching today. We were talking to the cfo of sainsbury. The stocks should be moving on the back of quite a few positive things. The integration of argos is going faster than expected. It looks like investors might be focusing on that. They did say they are cautious about the environment this year, which is understandable. That is one thing to look out for. Guy nordic mma takeovers of telecoms. We will see if that breathes some life into telco stocks. They have been in the middle of the pack this year. Guy lets talk chocolate. Yes, the offer will be raised for nestle. Some of the u. S. Operations to 2. 5 billion from 2 billion. That is one to watch, for sure, the sector as well. Guy generally today we are expecting a reasonably flat open. That is what the fed is pointing to. We take a see if breather from the rally. It is the longest streak that november, so we will see if it breaks today. Guy the s p could go either way. Australia has broken. Thank you for joining us. We will do this every day, bringing our stocks theme into the mix, letting you know what to expect as we work our way into the open. You can see all of these stories on your bloo