David . David for now whats making headlines, we have kayley here with the first word. Kayley President Trump has set aside longstanding differences with former republican president ial candidate mitch romney. The president endorsed his run for a u. S. Senate seat in utah. Romney has been critical of the president but lens are trying to hold on to their majority in the senate. Meanwhile, President Trump is open to tightening background checks for gun buyers. The white house said the president talked with republican senator john cornyn about his bill to improve compliance with the background checks. The republicans long proposed bills but is finding a way to curb gun violence after last weeks shooting. Teresa mays team has a plan to halt brexit payments in the European Union back slides on a trade deal. According to those familiar with the matter. They believe by holding billions of pounds from the e. U. Could be necessary. Global news 24 hours a day powered by more than 2,700 journalists and analysts in more than 120 countries. m kailey, alix . Alix were discussing the top three stories. First up is walmarts disappointing outlook and deutsche cuts more staff. Morgan stanley wornes bornes the stock slide with the appetizer before the main andre. Was it a crudite or a tuna tartar. David brook sutherland and Michael Mckey. Brook, well start with you. Its interesting, there seems the sales were above whats estimated but were knocked on the e commerce. Brook thats the only number that matters for walmart investors is how are they competing with amazon and they cant afford to lose momentum and it will be troubling and well see the comments they make for the explanations for those numbers and the trends theyre seeing. It sort of had been the moment after the Holiday Season where people took a step back and said maybe retailers arent necessarily in this apocalypse and maybe they can fight off amazon. Any step back will be trouble. Michael to be their they were up 24 and then 34 . Did we think theyd keep increasing 50 quarter after quarter . Brooke you have to look how fast amazon is growing and how much the share is taken of that market. You kind of do need to see them keeping up that momentum if theyre really going to be a real competitor to amazon. Alix affected tax rate, 24 , 26 and isnt as great as they expected. So a doublewhammy. Michael on the tax front and not only that the amount theyre set ago side or anticipating as a benefit from the tax bill, much smaller than people anticipated, only 207 million by the Fourth Quarter. People were thinking perhaps amazon and walmart would take a lions share of peoples spending of the tax benefits theyre going to get and thats not happening. At least theyre being very kevintive on their forecasts. David have they gotten all the boost out of jet. Com they can get because they have gotten some boost . Brooke sure and well see how it plays out and they made a couple acquisition with a couple e commergs startups and trying to take that technology and leadership and plug it into their system. A lot of that will evolve overtime. Some of the companies they purchased are significantly smaller and you have to lug it in walmarts system and soak up as much as you can. I think well see some benefits from the deals down the road and probably continue to be inquisitive. David from walmart in retails to alix not really, they both have problems. David Deutsche Bank first, 250 jobs in investment banking. Sounds like a big deal and im sure they are high paying. They have 97 employees. Michael its an ongoing effort cut costs. N to what youre looking with Deutsche Bank and hsbc are two different banks with two different sets of problems and arent indicative of whats happening in all of european nking because theyve been morenbun in trying to rebuild their Banking System after the financial crisis in the u. S. And their banks are farther behind. We had troubled banks for a while. Bank of america took a long time to dig out from under and what seems to be happening with Deutsche Bank. Alix they were hurt bay of underlying loans. But theyre trying to get some of their employees to take a unpaid sabbatical. Will this be the how do we know this will wind up being the end . Michael we dont know because theyll put it off as long as possible. Its different in europe because theyre supervised generally by the local central bank as opposed to a systemwide account, which theyre moving towards the u. S. Model somewhat. But it will take a while for us to see when the water goes down, as it was said, who is swimming naked . And the big bet ray dalio is making a lot of people dont have their suits on. And another analyst saying hes wrong. Theyll be in enter shape when they raise Interest Rates because it will improve their net interest margins and their profits will go up. One thing we should note about hsbc, they didnt have a great Fourth Quarter but have done pretty well over the last five years or so of the seven years of stewart gullvers term in reducing exposure to bad loans and risk and also to raising profitability and returning money to shareholders so theyre not badly positioned for the future as they undergo a c. E. O. Transfer. David sometimes the outgoing c. E. O. Wants to clean things up and then hand it off. Alix unless youre g. E. With the one exception. Here, clean it up. The over top story is Morgan Stanley, the selloff we saw in u. S. Equities, theyre saying Morgan Stanley is just the appetizer. Brooke, heres the why, theyre looking at u. S. 10year inflation and as the yield moves out of the trend line weve seen the last four years, that could be the huge disrupter in stocks. Brooke theyre not alone in this. Jp morgan came out on a similar call and looking at the inflation cash rate. What stood out from the Morgan Stanley report is inflation is rising and growth slowing and has been a question in particular, can they pass on rising costs to their customers. A lot of customers said the benefits from tax reform we expect you to give them to us in terms of pricing increasings. Well see how will you can pass off those costs. David we saw it in the latest regional i. S. M. Reports, the purchasing managers reports, theyre paying more for raw terms, their costs are going up but their prices received havent moved or gone down a little bit. Companies are still seeing their margins compress and are absorbing the crost increases. When you can pass those along. The greatest impact, an economist said c. P. I. Is going up and well see prices rise. Growth will rise a bit in the beginning of the year because of taxes and then fall back. It may be that what theyre saying at Morgan Stanley, a question of timing but theyre looking at the same forecast and wondering growth is slowing and prices are rising, can you keep this up . Alix thanks, brooke, and Michael Mckey of bloomberg news. Well talk about that question with andrew sheets in a minute. Albertsons, the grosser will buy riteaid in a deal that accelerates a change in the Retail Industries and acquire the parts of riteaid after a sell of nearly 2,000 stores. Looking at it here, theyre looking at cost energies of 375 million and incremental Revenue Opportunities of over 3. 6 million. Albertsons is one of the largest nations grocery retailers buying parts of rite id that havent been sold. David look at the premarket move. Alix theres more selloff in u. S. Equities to come. This is bloomberg. Alix the stock market has gotten a taste of the potential damage from higher bond yield but the biggest test is yet to come. According to Morgan Stanley, the recent selloff was the appetizer, not the main course. Its when growth softens while inflation is rising and that returns suffer most. We remain on watch for sticky handoff in the Second Quarter as corn rises and moderators moderate. Andrew sheets, the chief cross asset strategist. Thanks for being here. Why is the Second Quarter going to be the turning point when growth is supposed to be pretty solid . Andrew look, its never possible to be as precise as youd like to be around these things but when i look at our economist forecasts, you do have two overlapping themes that cross over in the Second Quarter. Youre going to have inflation picking up not just in the u. S. But the euro zone and in japan. At the same time we think a number of indicators like i. S. M. And Global Economic indices are going to be moderating. So its not necessarily that its going to be a recession or the stop slowdown but these rising Inflation Numbers will seem potentially more worrying when the Economic Data is not as strong as its been. Alix fair point. Lets watch what yields youre watching. People look at the tenure and say 3 , 3. 5 and you look at 10year yields inflation link notes. I have the chart on bloomberg and were around the high we saw in 2015 of 82 bids. Basis points. What do you think is the breaking point in the equity market when it comes to yields . Andrew look, i dont think i think unfortunately you cant be too precise about a back breaking point and the reason i like this chart a bit, real rates, i. E. The Interest Rate over and above inflation, is probably the most important rate when it comes to thinking about equity markets and discounting tax flows. For all thats happened the last five years and the markets shifts thinking about growth and inflation and stagnation. Eve actually been at a long range for these long run expectations where policy will be. Were at the top end of the range. While breaking out of it doesnt guarantee anything, it does suggest Something Different and that difference is something the market may have to assign a higher discount rate for and i think thats the reason why were not expecting any more multiple expansion out of the u. S. Equity market and think it has to be earningsdriven from here. Alix the estimates you mentioned doesnt feel like its reflecting that kind of thesis. Come inside the bloomberg and im comparing a european to u. S. Equities earnings, and you see the power. The blue line is u. S. And the white line is european equities. If we ran too far for expectations and once you factor in inflation, can we say the same thing about europe . Andrew europe is in a better place two reasons. The first is to the extent that youre worried about rising bond yields, undercutting the Valuation Case for the stock market and clearly in the u. S. Thats a major debate, i think europe is just a very different place when it comes to that. Bond yields are lower and earnings yields are higher. That gap between equities and ones are bonds are significantly lower and theyd really have to rise to cut the record pace. On earnings, it is quite interesting. You have as you precisely mentioned a huge upward division to earnings due to recent tax policy but that upper revision has happened and its in the numbers and arguably in the price. Whereas in europe its a little less appreciated. That there are pretty powerful long term earnings foster in the e. M. Section turning up and might be less influenced by some of those more oneoff factors like you see in the u. S. Alix how do you construct a portfolio based on this thesis. Andrew theres a couple things trying to keep in mind. First, we think europe is a pretty attractive Global Equity market here. We think it will have strong Earnings Growth the next year and less exposed to the challenge of higher bond yields impacting the valuation story because the overall gap is already rather high. I think its also a case where given that the correlation between bond yields and equities has been shifting, i think we also need to think about looking at different as sets assets for diversification and bonds wont pride the portfolio counterweight to balance it as it has before and the reason we like the japanese yen because its a chief asset with negative correlation and diversifying properties to Global Equities as well as other fundamental reasons we think support the call. I think it is going to force Portfolio Managers everywhere to look at different ways of finding diversification. Alix you expect at some point when this turns youll see the positive correlation continue for equities and bonds and will fill out the same time so those risk parity portfolios are not going to work . Andrew thats certainly a risk. And if im thinking of that trend in real rates, a scenario that would involve bonds and equities losing at the same time would be a higher real rate environment and mathematically hurt the bond market but higher real rates, almost force a higher discount race for equities in almost everybodys equity model. So i think that as you rightly mentioned, thats a problem for all sorts of portfolios, not just risk parity but anybody with a 60 40 portfolio obviously has benefited quite a bit over the last 510 years with bonds and equities doing well and obviously would be exposed to a scenario that relettersed. A lix thanks for joining us, andrew sheets, from Morgan Stanley, chief cross asset strategist. David who better to ask about volatile equity markets, we welcome the g. M. Talk about what youve been talking about, volatility in equity markets. You have a window into this and how do you see how they are right now and how is your bank faring . Im not commenting on the beginning of the year but were in better market conditions. We suffered from low value and Interest Rates, the Global Markets were not good. Were probably entering into Something Like progressive nomenization and might take some time and with the normalization of the monitor policies of the central bank we are exiting the very low environment. David in light of that how do you position your bank without undue risk . Frederick they are sharp line describe and have equities in particular two activities of products for investors and theyre not that sensive to volatility and are fundamentally meeting supply and demand and then the flow business, the volume business and divorce in volatile environments you see better volumes. Alix taking on more risk . Frederic its a driven business and volumes again on the execution size. Alix you value at risk . Frederic we have so much constraints, less of a crisis has been drawn but we dont increase the rates, fundamentally we are developing a client activity. David is that a good thing for your bank or too severe, the regulations, is it constraining you too much moving into a more normalized environment . Frederic we have no choice and have to live with significant regulations and not just on capital regulations but in europe there are the regulations on that test. The most important thing for me is beyond that in europe are the Financial Markets and we probably are going to complete the Banking Union and see deeper Capital Markets. And we can take advantage of things. On top of this, the Economic Activity is good in europe. We have growth rates that weve not seen for the last maybe 10 years. Across the euro zone. Thats a possibility for banks and hopefully we see also rates rising. We suffered dramatically from negative rates. You did not have that in the u. S. Its painful i can tell you. And progressively we have a little bit more inflation and the exit of Monetary Policy where we see a much better rate environment. Alix its not just a steeper curve but you need out of the negative environment . Whats your plan for that . Frederic in 2019 well exit the negative rate territory for the positive rate. You know with growth rates at 2. 4 in the euro zone the next two years, normally shoe see progressively lower Unemployment Rate which means also higher inflation on wages. And i think that the outlook is much better and that the monetary Central Banks would like to exit the monitor policies aggressively to avoid any asset bubble and disportion on prices. David you look to the Banking Union, does that mean vocgen has to get bigger and talking consolidation with france . Frederic the completion of the Banking Union will be top of the agenda with the governments and once we have effectively the german governments, there will be discussions on what the next step for the euro zone, in particular on the Banking Union. Long term, yes, i think youll have less banks. I would say the priority short term is to fundamentally transform the businesses in light of the new technologies. In 10 years time youll have it as banks and we said that in all sorts of predictions and want to be in position of strength to size up the possibilities if any. Alix for your business in particular, your National Retail division was central to your Growth Prospect . Do you need to be an acquirer and if so how and where . Fred d. Eric in french retail the market is consolidative and there are tore markets in europe you need more domestic consolidation and on the outside we have interNational Retail activities outside the euro zone which are driving going very well with strong growth and led merchant markets. We do not need to make acquisitions. Its more around the transporme nation of transformation. Alix even domestically . Frederic no. No