Surveillance. What a week we had on the markets last week. This is the tension as we get onto monday. This is what im looking at in terms of stocks. They are gaining some 1. 6 . We are also seeing futures in the u. S. Pointing to a higher open. Things can reverse quite quickly and change quite quickly. Downan see the vix index some 10 and eurodollar, 1. 2276. If there is an infection beyond equities and the vix, it would be in credit markets. Also coming up, we talk markets and last weeks correction with Morgan Stanley. Later on, we talked to eric nielsen, chief economist at unicredit. Plus, we talk ecb and brexit. Lets get straight to the bloomberg first word news. Is readye u. S. Says it to engage in Nuclear Talks with north korea. Vice president mike pence dubbed the new strategy maximum pressure and engagement at the same time. The comments signal a shift in policy after they agreed to pursue a dialogue with pyongyang at the winter olympics. Budget director Mick Mulvaney has warned the u. S. Will post a bigger budget deficit this year. He says cutting the spending shortfall over time is possible based on sustained economic growth. The white house is expected to release its 2019 spending proposals today, which mulvaney says includes a plan to cut deficits over 10 years. A preview of the document didnt state how those cuts will be made. The israeli plane that crashed on saturday was likely hit by a syrian missile. The f16 was hit after israel struck an iranian control days in syria. It is the first time israel has lost a combat plane to enemy fire since 1992. Ray dalia has quadrupled his short bets against e. U. Companies. Bridgewater capital has at least 13 billion in short. The hedge funds biggest bearish position is against the oil giant total. Angela merkel says shes determined to serve another full term as german chancellor, rebuffing party politics. Merkel urged spd members to back the Coalition Deal in next months vote, which would allow her to form a government after months of deadlock. South africas Ruling Congress meets today to finalize the transition of power from jacob zuma. The leader has told supporters the party must resolve its problems, including accusations of corruption. He is expected to succeed him in the presidency as well. London city airport says all flights are canceled on monday after the discovery of an unexploded world war ii bomb in the river thames. The navy has established a zone around the device which was found during planned Development Work. The airport has advised passengers not to go to the airport. 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. We are getting some breaking news out of airbus, issuing a statement on the engines of the a320 neo. Airbus now saying that 30 of the a320 neos have faulty endings engines. The most important aircraft for airbus, we were told, was the a320. It has been forced to suspend some deliveries. Indigo, the indian lowcost airline, yesterday disclosed that pilots have had to turn back, and that was an alarming new problem. Somean see airbus down 0. 9 . Investors are getting a reprieve. Global stocks recovering from sinceworst weekly rout 2011. The stoxx 600 is up this morning. The blowup in volatility has sparked a shift in the futures market. Futures spiked to a record net long last week and traders are eagerly awaiting u. S. Inflation data. With treasury yields on the rise, can the gains hold . What is to come, we are joined by andrew sheets, chief cross asset strategist at Morgan Stanley, and peter dixon. Also joining us is dani burger, who has been following this closely. Happy monday. Danny, thank you for coming in. A sign that investors are preparing for a new reality . This is a little bit healthy, that we are seeing a move away from this. It is shocking when you look at how drastic this is. Most of that is driven from a reduction in short positions, but there was so much money behind those short positions. That is a trade that had been minting money for the past few years. Volatility has been so breathtakingly low. Take offtors needed to those positions. Also as we get more inflation data rolling in, there certainly are signs that perhaps the facade of stability has cracks in it. Outcine have we figured exactly who are the winners and losers in the correction . Dani certainly people who are holding the vix btps are a loser in this situation. I spoke to a hedge fund based in denver. We talked to so many investors who were hurt, so it was a nice change of pace. One of thecoat on short volatility etfs. A 17. 5 million gain from a 200,000 bet. If anything, that shows that warning signs have been out there. Whether investors were willing to listen was a different story. Francine andrew, what will this week bring . The end people called of the volatility on wednesday . I think it is important to step back and say that the move weve had so far is similar to a number of the sharp drawdowns weve had in this bull market. Volatility beginning relatively early on in that correction process while markets remain volatile, i think we are still on track for that. The end of last week, you had some of these lagging Asset Classes catch up. In credit indices, you are back closer to the oneyear wides. Another of these Asset Classes have repriced. That puts us in a healthier place to find a base. Francine credit hasnt really repriced, has it . Peter obviously credit is going to depend on the macro environment and what happens with regard to centralbank policy. We are in a situation where Central Banks are not providing the support they once did. I think we start to see a number notarkets, one of them expecting a major crack, but continued widening. Francine are you expecting a repriced in credits . Andrew it depends on the instrument. The cash market, Corporate Bonds themselves, have repriced relatively little. Again, i think some normalization of that would make sense. Maybe the indices have made the majority of their moves. The cash market absolutely should respond to some of this higher volatility, this greater late cycle return. Francine let me bring you over to my chart. This is basically a very simple s p 500. S p with 200ly the and 100day moving averages. If you look at some of the fundamentals, you were saying that this volatility is also pentup. Is it difficult looking at moving averages to see what comes next . Sometimesng averages becomes a selffulfilling prophecy. Them,t tend to look at but looking at momentum is important. When we look at credit markets, seeing what areas have been hurt, the etf credit market, talk about some bearishness. Short interest has skyrocketed. Derivatives trading looks bearish right now. , had thestate street most outflows last week on record. Certainly there are some nerves around risk assets. Francine do you look at moving averages at all . I think it is one of those funny things that statistically, they mean very little. Francine because of the psyche . Andrew exactly. All of us are looking for any sort of anchor that will help. If we look at how futures and the s p traded, they traded off significantly between monday night and tuesday morning. They retested that low late last week. Comfortnk theres some taken from traders in the u. S. That the s p has completed that retest. Peter i tend to agree. The moving averages, they tell us about momentum. Technicians use these. They scrutinize them very closely. At the moment, they are telling us the market corrected. That was a necessary correction. Francine very few people got the timing right. Peter it is virtually impossible to get the timing right. We cant predict the timing. We dont know why it happened. We saw that spike in volatility. Weve been here before. This is 2015 in replay. Francine people should really watch surveillance more often. Andrew sheets, peter dixon, and dani burger. Plenty coming up, including a shift in policy. America says it is ready to engage with north korea. We are live in seoul. Plus, oil bounces back, but concerns cast a cloud. Will it undermine opecs efforts . We will get reaction from the middle east. This is bloomberg. Francine markets, economics, finance, politics. Im Francine Lacqua. The u. S. Says it is ready to talk to north korea about its nuclear program. Comments by mike pence signal a shift in policy. For more, we are joined by peter , our seoul bureau chief. Theres been quite a shift in policy. Is it a real shift or just optics . That remains to be seen. It sounds real, mainly because the u. S. Has no choice other than to alter their shift. They were left in a sticky situation with south korea, which got an invite to have a summit with north korea, and south korea was in a bind because they didnt know what to do. If they did have the summit, that would put the u. S. , their alliance, in an awkward situation. It sounds like the u. S. Is trying to bridge that pretty brilliant move by north korea by trying to put a wedge between the u. S. And south korea, and obviously u. S. Does not want that to happen, and they came up with this policy shift. Francine what is next for south korea . Did north koreas Charm Offensive have an impact on this . Peter could you repeat that . Francine what happens to south korea . North korea sent the sister of the leader to do the Charm Offensive. Did that work . Francine yes, very well. If you ask anybody on the street, they would say her visit to south korea, which was the first time a kim dynasty bloodline stepped on south korean soil, it was historic. Overshadowed the opening ceremony. Movements, an analyst describing her looks, the plein air, the way she carried herself, the way she smiled, pretty much took up the newscast. , the Charm Offensive, was a grand slam. Francine peter pae, bloombergs seoul bureau chief joining us this morning. How should investors be playing geopolitical risk . Still with us, andrew sheets and peter dixon. Thank you for sticking around. We can either talk about geopolitical risk, what it means for the markets, but we can also talk about the travails, the Trump Administration, the white house, infrastructure. What will dictate the markets . Is it the spending, or can geopolitics be at the forefront . Andrew i think that question of spending has gone to the forefront. Theres been some more aggressive moves on trade. Been quite notable is throughout the month of january, you had this steady rise in the implied real Interest Rate. I think that was consistent either with expectations of tighter policy, but also more by honoring more borrowing. It seemed like spending proposals were continuing to increase. The new budget no longer aims to eliminate the deficit in 10 years. This is something that is going to be with us in the background of markets. Francine do you agree with that, peter . Peter to a broad degree. The fiscal stance has been very much to the four. Now we have something concrete to work on, which is good. Going back to your original question, do we worry about geopolitics . Probably not. The way the markets have been going over the last few months, the worries have been purely based on fundamentals, sentiment, expectations, that kind of thing. Geopolitics will continue to play a background role throughout much of this year, unless the unexpected happens. Francine the unexpected would look like a threat of nuclear war . Peter you could have Something Like that. Im thinking more in terms of some kind of saber rattling over china. We know of their expansion into the south china sea. Is that going to cause any concern with regard to trade talks . Francine what is a haven right now, andrew . Yen shouldhink the have some of those properties. We like the currency. We think it will be negatively correlated to risk. I think europe is going to be a pretty attractive place to be. The political situation looks relatively good by the standards of the last five years. The economy is strong. The central bank is going to have an easier time. The currency and the stock market are cheap. I think europe is going to be a pretty attractive place. Francine are you not worried that euro creeping up is a real concern for ecb . Andrew it is a concern. Draghi has been vocal about that. European equities have three other big tailwinds coming behind them. The banks are becoming profitable again. The Energy Sector and commodity sector is benefiting from a rise. Europe has a lot of exposure in e. M. The stronger euro is a headwind, but we think those other tailwinds will outweigh it. Francine peter . Peter with regards to europe as a haven, many of the problems which have afflicted europe are not to the forefront now. But they are still there. Europeseeing signs that is trying to be more serious with regards to building a proper union. Andrew,ly agree with given the alternatives out there. I think what makes the u. S. Deficit and budget situation so hard to analyze is theres just so little precedent. The u. S. Is probably going to run a deficit of 5 of gdp. You havent had anything close to that since the late 1960s. We struggle with how to quantify something. Francine senior u. K. Ministers are preparing to deliver a series of speeches. The schedule begins on wednesday with Boris Johnson appealing to both sides of the debate. Theresa may is expected to offer new security relationships when she gives a conference in munich. My concern is that we were surprised about the Customs Union and the fact that they would abandon it. I spoke to Iain Duncan Smith and he said that was always the case. Are the markets who do you listen to . Do you listen to theresa may or a hardliner such as Iain Duncan Smith . Theresa may is caught between a rock and a hard place. Sense that the altra leavers offer something different. They are not offering a policy. What we are looking for is some clear evidence, clear signals of what they actually want from the agreement. That is exactly what the european government are asking for. Francine what does it mean for the bank of england . Do they need to build ammunition so they can react, or is it too dangerous to go for a hike . Peter if we look at the impact of brexit on the economy, it has taken some of the edge off. Brexit is going to be a slow burn. It will be under performance for a period of years. I think the bank can justifiably say, we dont need quite the same degree of monetary easing as 2009. Rate hikes are certainly on the agenda. Andrew, do you by any u. K. Assets . Something we look at like the u. K. Equity market, which is trading at the largest of any global equities, there. We are a little more cautious on the pound. There is a lot of uncertainty there. I think that is a key point. Theres still a lot of Unanswered Questions here. Francine ok, thank you both. Andrew sheets from Morgan Stanley and peter dixon from commerzbank. Coming up, we talk oil. Oil bounces back. Is shale production in the u. S. Holding back further gains . If you look at some of the me, we do haveth a chart for this, but it is one of the funds that was oversold last week. Basically showing the worst is over for now. However, it still trades more than twice the price of the ishares treasury bond etf. There may be a little pentup demand. That leaves ample room for the ratio to return back to its fiveyear mean. We will discuss that next. This is bloomberg. Markets, economics, finance, and politics. Im Francine Lacqua. Lets get straight to the bloomberg first word news. Nejra the u. S. Says it is ready to engage in Nuclear Talks with north korea. Mike pence dubbed the new strategy maximum pressure and engagement at the same time. The comments came after pence and south korean president moon jaein agreed to pursue a dialogue with pyongyang during conversations at the winter olympics. Budget director Mick Mulvaney has warned that the u. S. Will post a bigger budget deficit. He says cutting the spending shortfall over time is possible based on sustained economic growth. The white house is expected to release its spending proposals today, which mullaney says will include a plan to cut deficits. Didntew of the document state how those cuts would be made. Angela merkel says shes determined to serve on other fullterm as chancellor, rebuffing party critics. Merkel urged spd members to back the Coalition Deal in next months vote. Ruling African NationalCongress Meets to finalize the transition of power from president jacob zuma. The leader has told supporters the party must resolve its problems, including accusations of corruption. He is expected to succeed him in the presidency as well. London city airport has been closed after the discovery of an unexploded world war ii bomb in the river thames. The navy has established a 200meter exclusion zone. Carriers have canceled flights. London city airport advised all passengers due to travel on monday not to go to the airport. 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. Rebounding from its biggest weekly decline in two years. Gains are still being limited. Bets onnds scaledback rising wti prices by the most since august. Our middle east Energy Reporter joins us from dubai. If you look at the factors driving the latest volatility, is it shale . Last week, the rout took a lot of the oil stocks with it. Good morning. It does seem to be shale. Shale came in pretty strong. There was a lot of length in the oil market. Were still seeing investors taking record long bets on oil prices, betting those prices are going to go up in the future. Theyve kind of dialed back a little bit. It seems there is some nervousness that the increasing amounts of shale coming in will bring down the prices, and we are seeing some doubts about the strength of demand in the market as well. What is the view on the drop in price and rise in u. S. Production . In good days, im being told saudi arabia and russia demand is rising. On bad days, people say the shale producers are back. Brave face putting a on it in the middle