Lets check on your markets. We are getting some euro area manufacturing pmi figures. 59. 6, thatphone to is pretty much in line with what economists expected. Higher. 10m also looking at the u. S. Year yield twoyear yield. The dollar you can see steady. We have a lot coming up right here on bloomberg surveillance. We get the latest equity market calls. Find out why he sees a correction soon. Userwe talk facebooks big news. To someone from Credit Suisse. Here is nejra cehic. Nejra u. S. Oil production has surged over 10 Million Barrels a day for the first time in decades. That comes just weeks after the International Energy agency said american output would push past saudi arabia. Decades of declining output has been reversed and the nation has been turned into an exporter. The u. K. Will agree to in transition. Told themn china, he that free trade deals would still be some time away if there is a transitional phase in which britain cannot negotiate with third countries. The uks Prime Minister has vowed to fight the European Unions attempts to extend protections for expats. Theresa may said the bloc should stick to its original cutoff date. India has said it will miss its deficit target as the Prime Minister looks to placate angry voters before National Elections next year. The country also ended a tax break. The budget shortfall will be 3. 5 in the year ending march the first. Canadas minister of Foreign Affairs has said that she is cautiously optimistic about the nafta trade talks with the u. S. And mexico. She made the comments and an exclusive interview with bloomberg. Significant differences remain. We have a hard work to do to bridge those differences. I believe it is absolutely possible. I think a winwin outcome can be achieved. Our approach in canada is to hope for the best and prepare for the worst, and we are doing both. Global news 24 hours a day, powered by more than 2700 journalists and analysts in more than 120 countries. I am nejra cehic, this is bloomberg. Francine thank you so much. And its last policy meeting under chairman yellen, the Federal Reserve kept Interest Rates on hold. Said. S. Central bank has that gains, employment, household spending, fixed investments have been solid. Market now sees a march move as a near certainty. Following the latest decision, some heavy hitters weighed in. Were dealing with a fiscally unstable longterm outlook in which inflation will take hold. The breakout is going to be on the inflation upside. The only question is, when . The Federal Reserve is tightening, they are easing up on the Monetary Policy. They are tightening through rate hikes and they are also shrinking their balance sheets. That is going to get more and more complicated. The deficit is moving close to 1 trillion, and that is because the fed itself is reducing its balance sheet. I wonder who will buy the current level of bonds. I think there are two bubbles. We have a stock market bubble and the bond market bubble. I think at the end of the day, the bond market bubble will eventually be the critical issue. For the shortterm, it is not too bad. Francine for more on the fed and the impact on the market, Peter Oppenheimer joins us now. Peter, welcome to the program. Thank you for joining us. Let me get to your notes in just a second. Youre expecting a correction, when it come from Monetary Policy or just from the fact that it could be a frothy equity market . It is difficult to note what the trigger is. A rise inink that Interest Rates beyond what the market is pricing is one of the plausible triggers. You have very little term premium priced into markets. There is still a very benign forward path. Pricing in a march increase in the u. S. Rate risescting 4 this year and 4 rate rises next year. I think it could be a surprise for all asset markets. Francine how can we be so sure that inflation is coming in the u. S . This was the big story of 2017. It never quite came. There are some signs that inflation is coming through in parts of the economy. We have seen higher commodity prices, companies, some of them are talking about higher input costs. Even without higher inflation, we have to recognize that Global Growth is extremely strong and very well synchronized. It may require just a bit more normalization of policy rates. In the u. S. , financial nowitions, they are looser than they were even when we had very unstable and weak growth, significant uncertainty. Just to compensate for that itself, we may require some moderately higher Interest Rates. Francine how much is weakness in dollar a culprit for these loose financial conditions . Youve got very tight credit spreads, the loose dollar, the Strong Equity markets. Sameare feeding off of the things, and that is to help keep financial conditions loose. No means certain that a rise in rates would trigger inflation. Equity markets have tended to absorb the first rise in rates pretty well. Rate go back to the last rising cycle in the u. S. , there were 17 consecutive rate rises and equities coped with that pretty well, because growth and profit were strong. You can argue that the same is true today. The difference is that valuations are a lot higher. There is no vulnerability to surprises. Francine tom it is in bonds and also in equities. Where is the money going into . Are seeing the money going into riskier assets. This is a reflection of having zero Interest Rate policy, near zero riskfree rate, the effect of quantitative easing, and so on. We have historically high valuations in nearly all Financial Assets at the same time. That inflation in Financial Assets has come at a time with very low inflation in the real economy, which has allowed Interest Rates to be at these very low levels. If you start to get an adjustment in any significant way, that could have a negative affect. It could spill over into riskier assets as well. I should say we dont think the risk of a sustained bear market, for example in equities, is very high. Francine you also described as a buying opportunity, right . As the correction starts, you dont how long. As we argue, we have had the longest period now without a correction in the u. S. Market since 1930 of more than 5 . A 5 correction, i do not worry much about that. In a correction, it may be more than that, and it could be more painful. Francine thank you so much. He stays with us. Global stocks are in their longest. Iod without a correction in more than five years. Well talk more about that. Will get back to we will get erck to Peter Oppenheim from Goldman Sachs. We will talk Political Risk later. This is bloomberg. Economics, finance, politics, this is bloomberg surveillance. Cehic. Nejra nejra the price rally has proved to be a doubleedged sword. Profits were lifted to a threeyear high while trading fell short of expectation. Adjusted profit came in at the highest since 2014. Cash flow was the weakest since 2016. We i am very confident that th we can meet the commitments, the promises that we made for the end of the decade. Said theyy have expect Profit Growth to come to a sudden halt this year. Results Quarterly Results highlight how the car industry has shifted into an intense rebuilding mode. Latin america is paying off the spain banks. Net income came in at 70 Million Euros compared to estimates of a. Oss of more than 140 million in extendeded trading after ebay said it it shifting its payment business. Paypal will remain a checkout option until at least 2023. Paypal separated from ebay in 2015 to concentrate on expanding its business without been thekled been shackled to online marketplace. That is the Bloomberg Business flash. Francine lets focus back on the markets. The msci world index has entered its longest period without a correction of more than 5 . Our guest inks there is still reason to remain bullish. Appetitean sachs risk indicator nears its highest level ever. Peter from Goldman Sachs is still here. Were talking about some of the indicators that would trigger a correction. Do you worry about protectionism . I dont know what youre canary in the coma and your canary in the coalmine is. Seeing positive surprises in Global Growth. Very stable on deals and Inflation Expectations, so the perfect environment for risky assets, particularly given the backdrop of tax reform in the u. S. The economies are still very strong, the question is what happens at the margin from here . We suspect that you will get some slowing of the momentum of Global Growth. Still strong, but a slowdown of the momentum. That was sotion supportive last year, which generated the secondbest risk adjustment returns in the msci world index in decades come that kind of backdrop is going to be slightly less supported. I think the disappointment could come either from rates rising a little more quickly than the market has priced or from some of the macro data being slightly slower or some growing fear of protectionism. Francine does it mean that we are in a bear market or that we are seeing a correction in a bull market . Peter we have described it as the most loving bull market ever. Importantn distinction to make. Of bearseen quite a lot markets, but we have seen a significant number of corrections of more than 10 within underlying bull markets. 22 10 corrections or more with them bull markets over that period of time. Our indicator that we have suggests that there are some factors which are consistent with what you would normally see in a market. Veryrong growth strong growth, very tight labor markets, very height valuations. What we do not have is rising core inflation or indeed an inverted yield curve. These sorts of monetary triggers which come at the end of a bull market cycle. We think that the technical setup right now, the surge in makes the market more vulnerable to a correction, but not to the bear market itself. Francine is it certain Industry Groups that look much more expensive . Peter a correction would do everything. You would see rising correlations in that sort of environment. Of course there are some that are more expensive than others and there is areas where the markets have concentrated towards winning the sectors winning sectors. Often that is what happens when you get a correction that comes through. Francine peter, thank you so much. Up next, we will focus on nonperforming loans, or a nonperforming government. What it means for the markets. That is coming up next and this is bloomberg. Francine you are watching bloomberg surveillance. The antiestablishment fivestar movement is leading in opinion polls. He told bloomberg that people should not be concerned that a victory for his party would lead to major disruptions. We will not leave italy in chaos. Lets be rock receipt, lower less bureaucracy, lower taxes, and a focus on justice and infrastructure. Francine were back with peter from Goldman Sachs. If you look at european equities, it seems like it was quite a bullish market last year, but then there is this Political Risk with elections in italy. How disruptive can they be for markets . Peter on this occasion the market is largely ignoring the Political Risk. This is the first time we have had such confidence in political events not having a downside tail risk potential, really since the financial crisis started. If you look at previous elections in europe, in recent years, going into them you tended to find european of volatility rising in relation to u. S. Volatility. This year you see the opposite. It reflects and a positive way the underlying confidence in the european economy. Vulnerablehe market to anything that is surprising, in terms of the sort of. Francine do you worry about the German Economy overheating . Do you worry about the level of euro strength hurting exports . Still the economies are doing very well in europe despite a rising euro. The growth trumps the exchange rate. When growth is strong you tend to get a rising euro. It does have a drag on earnings to some extent, and of course on performance. European it dollar terms have done significantly better when you look at comparisons in local currency terms. I think in terms of overheating, you are seeing the Fourth Quarter. Over 3 at the moment in the eurozone. The extent that seeds into cedes into concerns, particularly if that were happening at a time when the japanese also decided to tighten policy. That would be quite material shift in terms of markets expectations. Francine i guess the biggest move would be on the currencies come if that were to happen, or on yields . Peter i think on both. You mentioned earlier it has been the best are on riskadjusted basis for equities and many decades, three decades or so. It has actually been the worst to start for bond markets since the early 1990s. What is different about this year relative to last is that this year equities have been surging ahead while bond yields have been rising. There is more volatility that has come into the market. That could accelerate, particularly if you get any hints that bond rates might rice. Rise. Francine our bonds in a bubble are bonds in a bubble . Peter liabilities would come down. We have reached levels of bond yields which imply that longterm returns are extremely negative. T even i think it would be welcomed. And a reflection of the fact that we could absorb high yields. The calibration is just the speed of the adjustment and whether that spills over into asset markets, causing a bit of a setback. Francine when you talk about the speed of adjustments and if you look at the biggest essential banks in the world, which does not have one are you most worried about adjusting to quickly . Peter the u. S. Is more advanced and its cycle. Financial conditions in the u. S. Are particularly loose. Ours there really where expectations are most different relative to what is priced into the markets. Adjustment priced in the march rise, there is still a gap between what we think is likely and what the market is pricing. Lots of other bond markets will be would be highly correlated with a rise in u. S. Bond yields. Iny tend to correlate, even european sectors, they tend to correlate very strongly with changes in u. S. Bond yields. Is the uks separate from Everything Else because it is a currency story . It is benefiting from generally strong Global Growth. The more domestic stocks have been extremely weak. We have been quite cautious about the u. K. Economy. Even there your starting to see some reasonable earnings growth. Will be think it particularly different from the rest of the markets, once you adjust for currencies. Francine peter, thank you very much. Theater from Goldman Sachs joining us this morning peter from Goldman Sachs joining us this morning. We were expecting 56. 5, came in at 55. 3. I will have a complete breakdown of the manufacturing. It is having a little bit of an impact on pound. Is will have plenty more on the next. Lets get to the bloomberg first word news. Nejra u. S. Oil production has surged to over 10 million billion barrels a day. New drilling and production techniques have opened up billions of barrels of reversinge u. S. Oil, decades of declining output. Britains International Trade secretary has cast doubt on agree tohe u. K. Will brexit transition phase. The official u. K. Government position is to seek a transition years. Of about 2 the uks Prime Minister has vowed to fight attempts to extend protections for expats. Theresa may said the bloc should stick to its original cut off day of march, 2019. Canadas minister of Foreign Affairs has said that she is cautiously optimistic about the ongoing nafta trade talks with the u. S. And mexico. She made the comments in an exclusive interview with bloomberg. Significant differences remain. We have some hard work to do to bridge those differences. I believe that it is absolutely possible. I think a win win win outcome can be achieved. Our approach in canada is to hope for the best and prepare for the worst. We are doing both. Global news 24 hours a day, powered by more than 2700 journalists and analysts in more than 120 countries. I am nejra cehic. This is bloomberg. Francine lets get to one of our top corporate stories today. The Oil Price Rally proved a double edged sword. Refining and trading fell short of expectations. Higher earnings and cash flow in 2017 are also helping. He discussed the companys results and future strategy with bloombergs matt miller. Have. Oft is basically an effect the tax history,. If you like. We had to take an adjustment on our deferred tax assets. Billion noncash hedge to our earnings. The United States is our single biggest investment destination. We invest for the next few years on average, 10 billion per year. That is going to be doing well in a muchore more advantageous market. There is upside to the reduction in Corporate Tax. Tt as an oil company, you are already cohn to a gas and oil company after the century of big oil. What is the next iteration of shell . How do you see it . Above . Not all of the you are certainly right. Over the years we have shifted from a Oil Portfolio oilrich portfolio much mo