investors asord to deutsche bank says the lender feels the need to reassure shareholders that it can cover them. will it be a seventh day of losses? they are showing signs of stabilizing after the selloff that sent it to the strongest level since 2013. regardless lose 70% of what happens. this is "bloomberg surveillance." i am francine lacqua in london

and tom keene. we are trying to understand the markets, especially the fears around the deutsche bank. tom: not only the fear and the crisis and the charts but exactly what is cocoa? think an explainer is in order. maybe by the end of morning we will be a little bit smarter s.th these odd derivative francine: crucial, we will find out more throughout show. let's get straight to the first word news with caroline hyde. the first votes have been cast for the first presidential primary in the united states. these old-fashioned paper bernie showed that sanders got all four democratic votes.

john kasich got three and donald trump got to. bernie sanders is beating hillary clinton by double digits in some polls. in the republicans, the polls show donald trump well out overhead. later today on bloomberg, a two-hour new hampshire special on with all due respect starting at 5:00 p.m. eastern time. in germany, to commuter trains collided. more than a hundred 50 were injured. the area is not easy to get to, making rescue efforts difficult. kong, the lunar new year celebration turned violence. police toldrns -- protesters. 90 police were injured. 54 people were arrested. more new report says that

than one million syrians are trapped in areas that are under siege. that is a challenge to the united nations. -- has been accused of downplaying the crisis in syria. global news 24 hours a day. i am caroline hyde. tom: thank you. we say good morning to all of you. let's go to the data check. there is a lack of a series now unlike 8:00 last night. the futures are much worse in the asian trades. the curve is flatter and the euro is not much. nymex crude had a 29 handle. showing the tensions of yesterday. had been trading last night, it would be a 29 or a 30.

is stunning. typically, a little bit of curve flattening. -0.52, at is a wow statistic. francine: it is a great statistic. we have trimmed off a lot of the selloff. tom: look at the 10 year. francine: yes, it is below zero. and i want to show you japanese yen. deutsche bank, i put it in nine, yesterday it fell .5%. and the stoxx 600 and they are showing little signs of stabilizing. it is a new world. let's go to the bloomberg and show you the polarity of the new world.

how about diamond? we have done this chart before. it is unfair to deutsche bank. deutscheorgan first is bank in dollars. up and up we go. fire are up since the beginning of the u.s. crisis about 12 or sent all in all. upwards, excuse me -- up 28%. with ae bank is down recent rollover. it shows the recent cap the america and what we see in europe. we need to begin a considered conversation on these events. let's do that. let's talk deutsche bank. it had to reassure employees and shareholders that it had enough money. let's bring in christopher wheeler and david stubbs is also here. let's go through what we learned

from them yesterday. he fears yesterday were triggered by credit sites that questioned deutsche bank's ability to pay off cocoa -- a goes badly,that is it is converted into shares. but there is nothing significantly difficult. -- significantly different. >> it is amusing in a way, because it was allowed to be converted into equity if it falls below 5%. so i think this was more about cash and the bank running into genuine financial difficulties. it was a matter of whether they had the cash flow. i was getting calls from people saying, are they going to waste more capital? tom: let's go to the article from michael moore in new york. the is the basic quote --

contingent convertible bonds, also known as cocos -- we call puffs -- have turned in a similar performance at the cost of protecting the company subordinated debt from default for five years using credit default swaps more than doubled since the end of 2015. this is a bloomberg article. let's go to the chargrt which shows a little bit more emotion. this is an extraordinary test -a similar performance at the cost of protecting the company subordinated debt from default for five years using credit default of the derivatives. what youly don't know to when you convert one of these puppies, do they? >> i think that is true. the fed will not allow these is capital. they put it into preferred stock because they feel it is more understandable.

this was something that came out of the crisis. and just like the total loss absorbing capacity at mr. kearney has come up with, we aren't sure how this works when we go into a bankruptcy. francine: what kind of world do we live in? triggers a cell up of 9% from the european bank? it is indicative of the fear that is driving the bank down at the moment. at the end of the day, it is a lot of unknowns. we have low loss to visions of corporate's and we have situations around interest rates. a whole bunch of things that haven't happened yet. why be in high-risk investments if you don't have to be? david: one other thing about the structure of cocos, if they

don't just convert at the threshold, you can extend payments. and the ability and decision is very complex and it is not determined by a central authority so it is a very concave decision of the yields of these things. but firstly, these instruments are allowed as capital here, they are not allowed in the united states. and there was a whole range of things such as goodwill that was classified as capital now that it is not allowed no. is there anything that ceos can do to calm investors? to they need to diebold what they have in their books? christopher: i think most of them have type of that. no bank sits there and talks about transitional ratios. i don't think there are any secrets there in terms of what

they look like a sans today's calculations. after the meeting yesterday, i thought the market would be spooked because it shows the bank has to come out and show this. it makes people think that we have a problem rather than, perhaps, we are fine. tom: i don't want to get you in trouble here, i don't want to get david stubbs in the timeout chair, but christopher wheeler -- how much cash on the going to have to come up with whatever the outcome? whether it is through a street equity offer -- there is a not that they will have to pay. is it as large as $15 billion? christopher: what a question. they have been through three ipital issues since 2010 so

don't think they want to come back to the trough if they can avoid it. it depends on how much more litigation they have to deal with and whether or not they can make core earnings in the investment bank. at the moment, the climate isn't so great for that. we have to go down this shocking route to come back again. this is a critical point in the extended conversation with michael moore last evening. this is what he said. the unknown is the litigation bill that deutsche bank has. is,cine: and the problem there are so many unknowns. we are still try to figure out china and the impact on commodities. so you have litigation and ceos going through a massive overhaul of security. this is what crushed credits we's last week. how much pain do we have to go through for the european banks

to feel better? that is an unknowable question. you could sound a little bit more positive about this but pointing to the growth in the eurozone that looks a little bit at her. look at the bank conditions survey which showed greater loan demands across a range of different categories. you like to think those banks could make more loans. we have already taken a lot of pain. christopher: jurrjens on 30% to book at the moment. that is the problem. david: yes, but there have to be some bargains. that is why we love to have christopher wheeler and david stubbs on. we will continue this conversation with these two experts and we welcome all of faces somesche bank

critical at delicate hours and days ahead. we will continue the discussion in our next hour. we are still to bring you charles peabody with his linkage of american banking to deutsche bank. stay with us in london and new york, "bloomberg surveillance." ♪

francine: welcome back, this is "bloomberg surveillance." still with us is christopher wheeler, a j.p. morgan asset management strategist -- david stubbs. chris, you were talking about deutsche bank. we have a charge made, looking at european banks. most of the lenders in europe trade for less than book value,

this indicates they don't believe their balance sheet. will it change? christopher: at the moment, they aren't turning a turn on equity that is close to the cost of equity. so if you have a cost of equity on 10% -- you should say it is book value. most of these banks come in with fives or sixes or negative values as they go through further restructuring losses because they are still going through this post crisis adapting to the . -- adapting to the new paradigm. francine: there are fears that we are looking at a 2008 kind of thing. david: i don't think that is accurate at all. i don't think you see the level and spread of security being deemed safe, which now have the security question in the way that 2008 was. when you had over leverage in the community sector.

and there are a lot of policies that are very loose so i don't think we are in that place but you can generally question the transition of major banks globally from the precrisis era to the post crisis era and it is not over. maybe another way to look at this is that this is a center that is under a lot of pressure and the winner is the client. and that helps service the real economy. we are parallel to oil here. oil was not competitive when it was rigged to opec. now we have brought the cost down and it is aiding the economy. so the two key parts of the economy, finance and -- it services it more. tom: the continued turbulence that we see, let's go to the

chart on turbulence. this is one measure that people like and some people don't. i keep going back to the lehman low, the red circle of effervescence. christopher wheeler, how does to the tensions we saw with lehman? christopher: given that i worked for both houses, that is an interesting question. francine: -- tom: that is the only reason you are on. [laughter] christopher: most of these banks had two or 3% before the crisis. in addition, the assets against which that is measured are high, particularly around trading books and derivatives. so massively stronger than that.

the important thing here is the u.s. stress test, it will reveal what is in the balance sheets. and i was following ubs they told me in the middle of i had no idea-- what they were talking about and i could look at wikipedia. betterwe have a much balance on the balance sheet. tom: i like the idea that we are perhaps a little bit smarter. the putting out on twitter must read this morning if you are engaged in global wall street. coming up in our next hour, we will link this in with charles peabody, and also joining us is jonathan golub. did you not there are other stories out there besides deutsche bank? stay with us. ♪

francine: welcome back. i am frenzy in tom keene. it is time for our morning must-read. -- giving lessons to deutsche bank's john cryan. number one, you get clean. make peace with the attorneys. lesson number five is keep morale and your head high.

no one wants to buy cars from a sad loser. let's bring in hans nichols. what we forget when we talk about this bank is that it is also full of german emotion. this was the crown of a german industry. christopher: and when you talk -- and when you talk about the german industry, this is a subtle difference about what's german industries want. we could have an argument on whether the german government would ever rescue deutsche bank if needed that there is a sense that they would have done that for the auto companies. lot ofo companies get a support from the german state. it is unsure if they could transfer an equal amount of support to the banks he way they did for the autos. tom: tell us the relationship of deutsche bank to the german

people. , they worktsche bank in germany, we know they have a qs platform. forget about that. what is the relationship to the people of the nation? probably not as strong and as closely connected as the other banks. a lot of the savings banks that people do at the post office. it is thought of as a global champion that can go out there and block and tackle and raise funds for german businesses. debt markets are much less developed. if a company wants to raise money, they have to go to a bank like deutsche bank. commerzbank may be a little bit a lot of thed and local savings banks may be more associated with the german mitchell sent then deutsche bank. nichols, thank you so

much for your perspective from berlin. gilbertext hour, martin -- look for that on bloomberg at 7:00. we are francine mccall and tom keene. the futures were worse earlier. we have a little curve flattening earlier in the united states but some stability all in all within the markets after again -- after the yen with a 1.14 handle yesterday evening. stay with us on "bloomberg surveillance." ♪

tom: "bloomberg surveillance." markets are stable. that is the message right now. night, the initial

print was a solid 1.1 -- solid 114. a little bit of curve steepening in the last 20 minutes and that is good for the markets. it is also good to have the first word news from london. caroline: voters in new hampshire have already started casting ballots in the first presidential primary. night, votersst participated in a tradition that goes back half a century. john kasich got three republican votes and donald trump got to. polls indicate that donald trump should easily win the republican race. bernie sanders is the democratic favorite to win. he beats hillary clinton by double digits. , aer today on a bloomberg two-hour new hampshire special on with all due respect starting at 5:00.

germany, two trains collided head-on. at least eight people were killed and another 150 people killed. authorities say the accident is makingmote and it rescue efforts difficult. three hours after the crash, there were still people tracked in the wreckage. canada will send more troops to fight the islamic state. but at the same time, he says he is withdrawing air force flights. the federal court has rejected the state of texas's request for a quarter order blocking the resettlement of syrian refugees. commity some might terrorist attacks but the judge says the decision is up to the federal government. global news, 24 hours a day. i am caroline hyde. thank you so much.

we talked about deutsche bank and some fears in the market. 'st's get back to our guests christopher wheeler and david stubbs. we talked about how this will be a hard walk for the banks. we also see nonperforming roles and again, they are at the forefront of investor banks. we going to see consolidation at all? there will be more consolidation but it won't be at the top end of the market. the big banks are comfortable with that. " soclue is in the "too big it is perfectly feasible but amongst the big banks, it is highly unlikely. christopher and david, let's bring up this chart, it is a long-term chart on deutsche

bank. forget about derivatives and cds. there is the stock. what does mr. cryan do? he has to cut costs but who is he going to sell parts of this bank to? christopher: he has already talked about that. postbank big the retail -- it will be sold off or spun off. he sold the chinese bank stake and the wealth management business in the united states, as you mentioned. and he is trimming the large network in germany. that is why we have such high restructuring costs. we spoke with -- yesterday and his expertise on italian politics. he had concern about italian banking. francine look walk has concerns about italian banking. christopher: the problem italy

has got is that it has all of the other uncertainties but in addition, it has been a growing field about the nonperforming lows of the italian banks and how the government deals with that. i don't think this has ever gone away as an issue. things have marginally improved around the markets since the crisis and people have focused on other issues that that is what is impacting the market. too don't know if i prefer tom keene is talking about banks or fashion. you were talking about banks and there is no correlation between what the economy is doing and he banks and how they are performing. and we have never seen such a difference. this is unprecedented. what does it mean for the future? is the economy going to get worse or the banks get better? david: absolutely.

if that source to feed into a reduction in the activity in the real economy or in the capital markets, absolutely -- it will have an effect on the real economy itself and that takes away one of the planks of optimism for people about the eurozone economy. that would be strange to me though because you have a rising credit demand. we have banks that have idiosyncratic issues but we do have rising demand in that part of the world. this is a situation that needs to be monitored very closely. this asused a look at libor. let's preview the single best chart this morning on the latest failure and policy down in flames. you will see this at 6:00, an important charge with charles peabody. ,hey want a weaker yen in japan they have gotten the absolute

opposite of that. ithas rolled over to 115, even through the blue line. what is the tension that the bank of japan has at this morning? said, they don't want to see this currency strengthen anymore. months, the last 6-9 they have been in a no man's land. politicians told constituents that they didn't want the economy to go lower because it is making thinks more expensive and is hurting the real income. they want to keep it where it is. this just shows where global risk is rather than what the bank is doing. the negatived with interest rate and it is going the other way. it was just that the bank of japan would be forced to do even more. -- ave heard a lot of it lot about how it allows them to go extremely negative. i see no reason why they won't do that. francine: what does that mean

for japanese financials? they fell more than 8% and if you look at the companies -- they are trading at less than half a book value. negative rates have unintended consequences. christopher: absolutely. the biggest debate we have had, it is what deuce -- what does negative rates mean? i don't think people have clarity of thought at the moment about how much further deposit rates can come down. personal anddo to corporate lending? i think personal lending is less but corporate's take advantage of what is going on. we are going into the unknown. tom: what will you look for this morning. when you go back and you tap into your three bloomberg terminals on your desk, what do you look for this morning. christopher: i thought it was

interesting that deutsche bank popped up 5% at the open and then came back. as i thought that announcement might not be taken well by the market, more of a concern about what could happen next. i'm hoping that the u.s. banks start to show some strength again because i keep coming back to the fact that jpmorgan -- i think he will make $24 billion this year. and i'm thinking, how much can we dent that? it could be hurt but will it be 10% or 20%? i doubt it. it doesn't seem quite right and i think it is the same for a lot of the big banks. christopher wheeler, thank you so much for joining us on short notice. tomorrow, we will probably not mention european ranking directly. we have testimony at 10:00 a.m. to a fractured house.

el-erianay, mohamed will join us extensively on bloomberg radio on european banking and deutsche bank. and on his celebrated new book as well. stay with us on bloomberg surveillance. ♪

tom: in a bloomberg surveillance, most of the people listening to bruno mars and beyonce -- there are seven people on 7th avenue listening to coldplay this morning. we will discuss the super bowl halftime report today. -- is back after trying to convince peyton manning to not recover. football doesn't

translate but beyonce does. the markets are ugly and they have been ugly for at least six trading days. piccoli.to wolfango he is from a j.p. morgan asset management. there has been a big political bement when it comes to tensions that we have with the refugee crisis and the whole and angelaxit merkel. every going to find a solution? if you look at the fears, it is because there is a lack of optimism. so this to be the perfect time for europe to come together on something. difficult to see that happening anytime soon, especially on the situations like the migrants where it is going to get worse. well.nks and greece as

i'm afraid there is not much optimism here. francine: we are worried about greece, right? they took a beating yesterday. are we going to talk about the eurozone raking up? we see this in the portuguese budget. if that also happens in spain then we are in trouble once again. the talk will come back on the agenda. grexitse field is that is not going to be the immediate agenda as it was last year. it is clear that the conclusion of the first review will take longer than initially expected. there is already noise about the election. there are talks about when the migrant crisis. biting into support in greece. that is why the greek banks here have been off since the end of

the year. --: you have in your note 391 people are dead or missing already this year, attempting to cross a frigid mediterranean. angela merkel has to go to turkey, which i find remarkable. , howrkey went to germany would they be greeted? not very warmly, especially after the leak of the with the president of the european council. -- unleash the refugees by opening the border with greece. in theually, back migrants so clearly they are not playing in a comparative fashion. that they feeling have been abandoned because turkey has been clear that it has been dealing with more than

2 million refugees for quite some time now. and now they're asking everyone to curb the flow. but it is difficult, especially ,ecause the other way around they are doing everything possible to actually increase the refugees by striking against. novel,is sounds like a or the reality of henry kissinger's geopolitics. that is great but let me ask the direct question. who has angela's back in europe? wolfango: i don't think -- i this angela merkel at point, her popularity is at risk . simply because there is no alternative. germanyooking outside for european leaders. her popularity is declining.

she is facing significant challenges. regionalcing a election at the end of march, that is why she asked turkey to do more. because there is the pressure from the election. but she remains unchallenged in the german context. francine: ok, give us a little bit of a break from the doom and gloom. day, we aref the still consuming and the economy is not doing that badly despite the crisis. david: it is the other way around. you could point to, in this year so far, all of the gloom but positive things have come out of europe. market where the labor has gone, positive figures there. of course, it is a big beneficiary of the oil. you have very aggressive stimulants as well. so there are things to invest in

in europe but we know that the market is not the equity market. there is a bigger wage on emerging markets that people believe. plus, the systemic question is the question about the banks. francine: given the bank situation and the immigrant merkel isand angela not coming loose -- what does mario draghi look at? you are mario draghi, are you stuck? a lot of it is priced in and you can't be seen as doing too much. at this point, if you look at where inflation expectations have gone, i think they have to ring the deposit rate down even further. if that will be in response to the bank of japan as well. he has a job to do. and his key metrics are showing they're not doing enough that the moment. he is more fragile because of

the german influence on the ecb. i expect more action before the middle of the year. tom: david stubbs with us, thank you so much. wolfango piccoli with us as well. -- theup next, the port idea of oil. will get an update from citigroup. we have a fragile handle yesterday. stay with us on the "bloomberg surveillance." ♪

tom: there is one bar in new york city looking at six nations rugby. exactly one bar, it is on 1st avenue at the boston at bowery. one of the reasons caroline hyde is in london, she is our bloomberg is a splash. she is getting ready for more six nations rugby. caroline: goals is rallying for an eighth straight day. sinces the first time june. demand for gold has risen. the european union installed record wind power capacity last year. wind powert the

leapfrogged hydropower to become the first in the area. tesla have fallen to a two-year low. there are concerns that cheap gas is hurting demand. they will report fourth-quarter earnings after the bell tomorrow. and that is the bloomberg business flash. francine: thank you so much. had the last 1.5 hours, we breaking news saying be global oil surplus is bigger than anticipated and this is because members iran and iraq bolstered production while demand growth will slow. let's get to david stubbs. piccoli.ave wolfango we were talking before about the fact that there was a -- between the european economy and the real economy.

saying had this report that there will be a lot more oil than we thought. what is the level where it will have -- it will hurt demand by so much that we won't see it fall? david: the important thing that we saw is that demand will be softer as well. weak, for a number of reasons. the other things are because of the slowdown in emerging markets . that is why you are not getting the big ramp up in demand because of the price. but i think we must be closer to this fall in the beginning, just mathematically. the bottom ishere specially will be dealing with the shadow of this decline for quite some time. in terms of reduced dividend payout. it has been working on the economy for more than one year. francine: wire markets following that so closely? they get freaked out. david: i don't have a good

explanation for why. measureinflation expectations. supposedly, the gold standard of what inflation will be in the term but trading very close to the price of oil. and that goes to the? of the market's ability to predict what inflation will be five years ahead from now. what will oil be a couple of years from now. the market has proved that the it doesn't know where these things are going. tom: how do institutions in europe respond to these market shocks and these aggregate demand shocks? wolfango: in the past, they have been doing one simple thing. they let mario draghi deal with they are simply not in the position to deliver on this front. they don't have the mandate or the speed and the expertise at times to deal with this. reason, i think

we will go back to knocking on mario draghi store. and then we will take it from there. that is where we are in terms of the euro. the has really changed. and if you look at mario draghi since 2000 12, he has been calling on european leaders to improve progress domestically and none of them have done much at all. because of the market pressure. that is the ultimate dilemma he is facing. tom: to get us ready for the next hour, does the ecb tell the bund is bank what to do? i think that is an ongoing conversation between the two organizations. ultimately, if you look at the big picture, you have seen the forces inside the ecb who want to take unconventional measures -- they win the battles and overcome resistance to the kind

of measures that have been in place in other central banks for years. and i think that is going to continue. elementse conservative , all they can do is slowdown the train but ultimately the ecb will be forced to do more. not just by the situation at home or the commodity market but also by these measures of other banks around in switzerland and in japan. so: gentlemen, thank you much. we will continue this conversation in the next hour when charles peabody joins us. and later today on bloomberg onio, mohamed el-erian european banking. stay with us. ♪

tom: this morning deutsche bank considers the many contingencies and outcomes of a loss of

confidence. their chief financial officer urges calm. markets caliber to global slowdown. the yen strength and spirit how will the bank of japan react? and how will new hampshire voters react as candidates react to the new american anger? we are live from our world headquarters in new york and london. i am tom keene. francine likewise with me. what is the single feature you have learned from 6:00 p.m. last night about deutsche bank? francine: when i look at deutsche bank, it tells me more about the models for the european banks, that the signs of financial stress levels are not close to levels that were hit back in 2008, and yet these business models for european banks seem to be broken. tom: holding onto a fragile bid this morning as well. the divide that is known as the atlantic ocean. bloomberg get to

first where news. here is caroline hyde. caroline: the votes have already been cast in the first u.s. presidential primary. new hampshire used old-fashioned paper ballots. got three republican votes, donald trump got two. for the republicans, the latest polls show trump out in front. the latest fight is for second, between marco rubio, jeb bush. watch "with all due at 5:00 p.m. eastern time. trains collided. the collision took place in southern germany in the state of bavaria. authorities say the accident ,ite is in a remote wooded area

making rescue difficult. there were still people trapped in the wreckage hours after the crash. in taiwan, rescue crews are in a race against time three days after a killer earthquake. they are trying to find more survivors in the rubble of a high-rise residential tower. at least 41 people have died. director of national intelligence is warning of the threat posed by homegrown terrorists. also cited was iran's terrorism threats. and congress wants to in a hobby richest u.s. colleges are spending their money. two congressional committees have e-mailed 56 private schools -- ave global news 24 hours a day powered by 2400 journalists in more than 150 news bureaus around the world, i am caroline

hyde. tom: thank you so much. we saw chesapeake yesterday. there is a mating within the energy service area. this is not the european bank, this is fortis energy. these are those high-powered lines of the big single things like if i want under there i will lose my hair, that kind of thing. this is transmission lines in newfoundland, across much of the united states and canada. this is $11 billion. much on that through the day. equities, bonds, currencies, commodities. we need to race through this with our wonderful guests. nymex gets a bid, a little bit of a bid, a fragile bid to the markets. onto the next screen, the big showing, the angst of yesterday. that would be 29 off of what we saw at 7:00, 8:00 p.m. last night. we have a little bit of curve steepening in the last hour. francine? francine: you had it on your

board and i put it on my, the end strengthening past 115 per dollar for the first time this year. and the 10-year yield falling below zero. the stoxx 600 is lower, now stabilizing. tom: when they get to bloomberg right now, to show the difference. this is the charles peabody chart. 20-some percent. deutsche bank actually holding on, rolling over with a vengeance. this gap in percent change back to august of 2007 is jaw-dropping. jpmorgan versus deutsche bank as well. we need to continue this discussion. our goal is to make you smarter on global wall street about the nuances of european banking, folded into the equity markets. jonathan dollar -- jonathan golub on the contagion of folding into the equity markets. excited to bring you

charles peabody, who is not on the show nearly enough. americanto him about banking. here is the article last night. michael moore, they comfort -- here is your article off the bloomberg, contingent convertible bonds, also known as cocoa puffs, have turned into similar performances as the cost of protecting companies that protecting the company's subordinated debt from defaulter five years using credit default swaps more than doubled since the end of 2015." there it is off the cliff, call it six standard deviations. we go from part 100 down to the 70 level. charles peabody, calm us down now. this is what the market is saying to the cfo of deutsche bank. how does he respond? charles: if debtould go back to your

chart that you just showed, the market is saying u.s. banks face and ernie recession, but european banks face a balance sheet recession. there will be an impairment of their capital structure. tom: what is so hard for european banks to clear the markets? you were an expert five years ago of picking the winners and losers of how we cleared banks in america. why can we do the same thing? charles: they were much slower in rebuilding their capital structure, dealing with their bad loans. they still have a significant litigation risk. the combination of those variables and the tough earnings environment make it more difficult for the european banks to earn their way to improve their capital structure. the -- that was in the note from credit sites as well. francine: the concern surrounding deutsche bank came

from what you were mentioning. banks areuropean slower. we have a lot of problems that the u.s. has dealt with in the past. however, now there is also a china unknown and the exposure to commodities for a lot of these banks. that hits banks globally. charles: it does, but the u.s. banks, if you look at their commodity exposure, their energy exposure is maybe 2% to 5% of the balance sheet. thes not big numbers for u.s. banks. so we are really not fearful of a balance sheet impairment in the united states. francine: are we going to see more consolidation? this is one of the themes we tried to explore in the previous hour. if you do see consolidation, it is more likely u.s. banks buying part of european banks, or securities. charles: i think we have seen the u.s. banks take advantage of the european banks' weaknesses.

consolidation in the united states will be difficult to come by. tom: why is that? charles: you have a disconnect between the markets and prices. comerica, which trays around 32, book value around -- which trays around 32, book value around $40 -- which trades around 32, book value around $40. you cannot go to your board and say i think we should sell at book value. you 11.5 times look, which will -- you want 1.5 times book, which will -- there is a dissonance between markets -- tom: you cannot talk about financials in general. here is the deutsche bank bloodbath. short-term view of deutsche bank

in the recent data -- it is not a long chart. it looks like a long chart. this is ugly. value opportunity, or am i under the desk hiding with you? -- youmarket is really are almost looking for an excuse to be concerned. interest rates are down. it is an issue. i think charles hit the point are overlyhat people concerned about the negative impact of oil on loan books to banks, and that will -- now is probably a good time. tom: charles peabody, what is your best by this morning? charles: i like citigroup. i am buying value as opposed to rates, and value is the deep discount to value. the value is stable. some of the things that have buffeted over the last few years are starting to change.

the dollar, which has been a headwind to value. i think the emerging markets, believe it or not, are starting marcuserform developed -- developed markets recently. even oil looks like it is fine stability -- is finding stability early. he was peabody be gloomy, francine. now he is buying citigroup. i am in awe. francine: does deutsche bank survive, or are they about to get a big new shareholder in the form of the german taxpayer? charles: we do not have a formal rating on deutsche bank. guess is the shareholders some sort of delusion in their capital structure. the other question is, what is the value that you are looking

at in terms of -- the valley that you are looking at in terms of the recession? is it a deep valley? tom: i want to come back with you. are you long on the market this morning? do you have an enthusiasm for equities? jon: i do. we just did a research report. if you buy stocks with the vix over 25, you get a better return. tom: we will do that with jon golub in a moment. i urge you to go to bloomberg news and read michael moore and necklace comfort's -- nicholas comfort's work on the complexity of the instruments of the european banks. "bloomberg " will continue the conversation. martin gilbert will join them. stay with us. with charles peabody and jonathan golub, from london and new york, this is "bloomberg surveillance." ♪

francine: welcome back. this is "bloomberg surveillance ," and this is your data check. 115,en strengthening past but falling in an unprecedented the climb toward the euro. european stocks are paring their declined let's get straight to the bloomberg business flash with caroline hyde. caroline: thank you. -- 21st entry fox is low hearing its guidance. the strong dollar will reduce 350 million dollars. chipotle is trying to bounce back from the e. coli crisis that took a bite out of the

company's sales. the restaurant chain is starting a $10 million program helping suppliers maintain safety standards. yesterday chipotle outlets opened late so employees could attend a meeting on food safety. goldman sachs is hoping the oil $20 a can lead below barrel. west texas intermediate is trading around $30 today. between $20 tog $40 as supply and demand is rebalanced. that is the bloomberg business flash. tom: let's look at the overall view of the shock of european banking, what we witnessed in the last few days. let's go to the long-term chart on deutsche bank. it is beyond ugly. charles peabody is with us, and jon golub. jon, you have to convince me i need to be in the markets and long when i see any chart. this could be twitter, frankly,

and whether it is deutsche bank or twitter, there are some challenges out there. why do i have enthusiasm? jon: for all the field and earnings are falling off a cliff, when you put aside the energy sector and related stocks that are doing quite poorly, earnings for the majority of the market are up in the 5% range, and companies are beating by 4.5%. if you look at how the market that's a responding, when you do have earnings, the market is responding in a healthy and normal fashion. second, all the economic indicators are a weak economy but no reception. the opportunities as you brilliantly say good copies trump that -- trump -- mpanies you are out in the bushes looking for good companies. where are the good companies? jon: if you look at, largely growth kind of sectors, but if you look at what i will call

secular growers, companies that do not need a good economy to deliver good earnings -- health new, new tech companies, discretionary sectors -- those are doing well. also stable growth companies, business services. tom: always there. jon: these are companies that do waste removal that are quite healthy. francine: a good economy is always helpful. you are making a difference between the companies that can survive, and then today you have a senior adviser to the ocd office saying central banks losing monetary policy is putting the economy at risk. have we factored in the unintended consequences of negative rates or ultra moves to monetary policy? jon: if you look at what has happened to the velocity of money as central banks are printing, it has collapsed. it is not having the kind of effect you would want it to have

on stabilizing inflation and promoting economic growth. yet it is creating volatility in currency markets, it is creating volatility in oil markets. i think you are absolutely right that central banks could very well be, in their effort to do good, maybe the cause of the volatility we are currently is notncing, or at least the primary cause, contributing to it. charles: i think corporate earnings can go down 30% between now and the middle of -- tom: why is that, because the revenue line is not there because of nominal gdp? charles: that is a factor. but a lot of the corporate earnings came through financial engineering, which was through the central banks' easy monetary policies. corporate margins dropped 30% in a recession, and i think there will be a recession by 2017. you will see double-digit real rates of interest where there is no inflation, so you have no

pricing power on the low revenue side, but you will see debt 15%,ds widen 10% to particularly in the junk area. you will have a tough time carrying that debt burden because you will see defaults. tom: we will carry forward with this collegial discussion, so much of it having to do with negative rates or at least the fiction of our fixed income market. that will be one of our themes coming up from pimco. el-erian.d look for him in the second :00 .- in the 7:00 hour in support of his wonderful new book. stay with us. bloomberg surveillance. ♪

tom: good morning, everyone. away from global finance and the challenges of european banking, i believe there is a vote in new hampshire today. megan murphy joins us, our washington, d.c., news bureau chief. what is the distinctive feature this morning as candidates lineup final votes? megan: the snow and the weather and whether they will be able to get there. new hampshire is a different state in terms of how people turn out to vote and how they turn out in the primary. this is a different state than what we were looking at a week ago. be -- is it to going to be rubio? donald trump? i think people think donald

trump is going to take the space, and that will be a defining factor in this election. tom: who has 24 hour momentum that will change votes? is it governor christie, governor kasich? megan: i think casey has a lot of momentum. it is jeb bush as well. -- i think casey has a lot of -- kasich has a lot of momentum. you may see donald trump take the election in terms of winning the primary, but will -- but what people will be talking about is who will have the momentum in south carolina, that people are really going to be looking at coalescing behind one establishment candidate or it francine: i think we are seeing life pictures of people starting to vote. your polls seem to be starting very early. in the u.k. we wait until at least 8:00 a.m. give us a sense of how many

people pull out of the race after we have the new hampshire? megan: i think we originally thought new hampshire would be the ending ticket, and now we are acknowledging that it will be the starting ticket for many people. this race has developed very differently than most people thought. i think we thought maybe we bush, johny see jeb kasich, chris christie after tonight. if you turn in a credible showing here, you may have another several months to run. whether it will be a war of attrition in some parts of the party. tom: if you had to go to one soiree tonight, which room would you be in at 9:00 p.m. tonight? megan: i think i would vote for hillary clinton every time. we will be watching to see how much bernie sanders closes the gap with her tonight. she is still the candidate to

beat tonight. that is the room i want to be in, and i want to see what her people are saying and what they are telling her in terms of whether or not she could be the dominant factor in the campaign. tom: megan, next week you get five hours' sleep third megan murphy, trying to get through the new hampshire primary. we will have more coverage on this tonight, a two-hour special "with all due respect," at 5:00 p.m. tonight. stay with us. ,harles peabody and jon golub the challenges of european banking and investment. this is "bloomberg surveillance ." good morning. ♪

tom: it is deceptive, a quiet in the markets. with aare pretty stable little steeper yield curve. nymex crude, 30.29 per barrel.

intraday yen, 14.21. a shocking number as the yen is trading near 115. caroline: canada is sending more troops to iraq to fight islamic state. a new report says more than one million syrians are trapped in areas under siege. the study from researchers in the u.s. and the netherlands is a challenge to the united nations. the u.n. issued a much lower estimate, accused of downplaying the crisis in syria. in hong kong, the lunar new year's celebration turned violent. there was a crash -- there was a clash with fires being set. police fired warning shots. 90 police were injured and 54 people were arrested. a federal report has rejected a

request blocking the resettlement of syrian refugees. there are fears that some might commit terrorist attacks. a judge says it is up to the federal government to decide whether there is a national security threat. global news 24 hours a day powered by 2400 journalists and more than 150 news bureaus around the world. tom: we welcome all of you as we look at european banking. of what we sawwe with deutsche bank in the last 24 hours. you speak with charles peabody and jon golub. jon golub, you'd heard charles peabody with a much more cautious yield and fundamentally about the global economy in the spread environment falling over on to your equities base. when you are -- you are more optimistic.

why will spreads not affect equity valuations? jon: you have a troubled trading environment. the volatility in the market is negatively impacting banking activity and lower interest rates are the problem. the question looking forward is, where does that go from here? if you think interest rates will 1.74, 1.75 back over 2%, then you get easing in the banking environment. if you get volatility to come down, investment banking activity comes back in, and the highering with slightly oil prices. yes, things are stressed. are we looking at something more constructive in two or three months? i think absolutely. tom: charles peabody, as you mentioned in your writing, it is the balance sheet adjustment as well. much do they have to adjust the balance sheet? how much do they need to write-size their good or bad

will? charles: you saw a number of banks in europe writing down bad will with regard to restructuring businesses. that has yet to happen in the united states, and when we looked at the u.s. banking system, bank of america had the most goodwill at about $70 billion, and it represented 70% of their equity. i think those write-downs are coming. tom: that is in the mix here with the collegial disagreement between mr. gall of an mr. -- mr. golub and mr. peabody. ofncine: that is on the back the credit note yesterday, the share price going down to 9.5%. we spoke to chris wheeler of atlantic equities, and he said there are fears on the market, but deutsche bank, he believes, is not running into genuine financial problems. chris: what we call a additional tier one capital, they convert to different equity.

at 11% at the moment. this is more about cash than the bank running into genuine financial difficulties. it was a matter of, did they have the cash flow to pay these? i was getting calls from people saying are they going to raise more capital? francine: chris wheeler is saying they are not in genuine financial troubles, but there is still fear out there. charles, you said that book value, the return on equity has exceeded the bank cost in europe. when will that change? i think it is going to take time. we still have an earnings recession to go through. i was not just talking about tanks, i was talking about corporate america. wasre looking about -- i not just talking about banks, i was talking about corporate america. i think you are looking at double-digit interest, not just in banking but in corporate america.

you are already there in metals and mining. jon: the point you're making is predicated on the fact that we are going to have a recession. street economists are predicting 2.5% gdp this year, and even your comment about march is -- charles: if you build up a junk bond spread, you start with a 3% risk premium, there is another liquidity premium, and then you add the default rate the default rate will rise three point 9%. the long-term default rate for corporate america is 4.7%, and it goes higher than that in a recession. used a building that with 300, 400 -- jon: how much of that is the energy sector materials or the industrial sector going directly into that? if you look at high-yield spreads, loan delinquencies and theults and the like in nonenergy commodity related part of the economy, and maybe the

answer is semantics, which is we have two markets, one which is healthy and one which is -- charles: if you go to the bloomberg ratt, the ratings function, you can see there are more downgrades and upgrades. notice printer industrials, health care. tom: charles peabody, i want to bring this over to georgia bank. -- two deutsche bank. over tot to bring this deutsche bank. they have constructed a notvative strategy available in the united states. state why american bankers and regulators said we are not going the cocoa route. theles: i do not remember exact details, but there was regulatory resistance to allowing cocoa in the united states. there was also investor resistance. a lot of banks pulled the investor community and they did not like it. tom: michael spence has been

great on this. the idea that the derivative strategy has two outcomes -- one that you have to do more equity and the other that you have to take a right-down, which is two bad outcomes. francine: you have the volga rule, an inch -- the volcker rule, and in europe we have other rules hampering efforts of deutsche bank and also credit suisse. are we getting regulation wrong in europe? regulation seems to be more on message. youles: i do not know that are getting regulation wrong, but the regulators do not care if the banks earned one dollar, two dollars, or five dollars. they care about the balance sheets, and that is what they are protecting the back -- protecting the investor from. lasti want to give you the word. formally state your equity market view right now. we have been over the talks -- within the talk and the collegial debate were having, word?s your last

jon: the volatility in the market will be substantially lower than it is right now. in the near term, go into that. the important thing is we are in a non-recessionary but slow growth environment, and you invest differently in that, and growth investing is a winner. tom: when we invented "bloomberg surveillance," this is what we wanted, two really smart people finance andate over investment. citigroup has led with terrific research capabilities. eric lee will join us on oil. oil with a 29 print briefly yesterday, $30.26 on west texas intermediate. stay with us on global finance. "bloomberg surveillance." ♪

tom: good morning, everyone. futures deteriorate, negative nine, -75. there is stability in the markets, but it is a little bit fragile right now. here is caroline hyde. caroline: thank you. chaseer j.p. morgan executive was fined one point $2 million for failing to tell authorities about concerns he had for the bank's activities in the so-called london whale case. the head of the cio international for jpmorgan failed to inform regulators about concerns about lenders credit for folios -- credit portfolios. shales of tender have fallen to a two-year low. record -- report fourth-quarter earnings.

and an american international funds.lans to exit hedge -- insurer has more that is the bloomberg business flash. tom? tom: caroline, thank you so much. we digress from a discussion of european banking and the knock-on effect to your american markets. our guest joins us this morning. erik, you took basic economics at lsc. give us an update. is there demand destruction, and are we being adults buyout -- adults about oversupply? think we have great oversupply in the market, and the single greatest disruptor has been shale. am: where is your target from 29, 30 yeah cap jeff currie was

on bloomberg from goldman sachs earlier. give us an update on the down of the downside. ic: earlier this year we saw lows as 26, 20 seven dollars crude benchmarks. we have a view that we are now stabilizing in a range, so we think we could touch that range again, maybe the mid-20's up to the mid to high 30's. tom: what is the exhaustion is shocked that would approve the embodiment of oil or look for lower oil prices? eric: a geopolitical supply disruption, something like that. tom: russia? eric: or a couple of other places. capex cuts and supply cuts are taking place. tom: please, jon. jon: with all the discussion about all the additional supply, if you run a chart of oil and

look at the trade-weighted dollar, it looks as if this is a currency central-bank trade and not all about supply. how do you think about what is going on with central bankers, how they are affecting your market? the u.s. dollar move, and particularly the high correlation between oil and that and other asset costs certainly is indicating there is a lot of risk-on, risk-off moves driving oil as well. clearly lower oil prices on one hand are a boon to consumers, but the concern seems to be the hit to producers, which we are feeling today. i wanted to back it up a bit because you were talking about the fact that exogenous shocks come from lower investment or less investment in oil production. this can take 18 months, even two or three years. what is the likelihood of russia and saudi arabia sitting down,

cutting down production, and would that even have an impact on the price of oil? eric: i talked about the supply as an dodge in a shocks. as far as exogenous shocks, there has been some view about this. it is unlikely in our view that these producers get together and thisble to coordinate production cut, and secondly, even if they did, that it would have a long-lasting effect. francine: because there is just too much oil out there, or you would have the likes of venezuela and others coming into swing it back to too much production? eric: there are two problems. within opec or any producer group come you have iran and iraq still growing this year pretty much regardless, so within their own ranks they would have some problems. otherwise, the issues with u.s. shale. this goes back into your

world about what do you do with a value trap of hydrocarbons. is it a value trap, or do you get enthusiastic? jon: if you look at the areas where you have high conviction, it is so hard to have high conviction with oil than in an industrial company or where there is more clarity. tom: charles, you mentioned high-yield energy before. he is in banking, you are in economics. tell me about the high-yield risk of a workout within the energy markets. charles, jump in. charles: i am intrigued by the base metals and the copper here. when i look at spreads of copper versus energy, energy prices have come down much more aggressively than copper prices. i'm trying to figure out if energy is a big input into the mining industry. does that help their

infrastructure going forward? the fuel needs to run equipment at times. when we look at energy and the whole of commodities, when we have been talking about the downside of the commodity super cycle, cheap energy for a while is part of that story. tom: eric lee will continue with us on "bloomberg surveillance." francine and i will take a break for the next 18 minutes. don't forget, janet yellen in conversation with capitol hill. that will be sporting, to say the least. stay with us. from new york and london, "bloomberg surveillance." ♪

tom: so much to cover as we finish the hour. look at dollar-yen. 114.94. a stronger japanese yen is all you need to know about foreign exchanges this morning that is a stunning number for abenomics and the bank of japan as well. right now we need to go to david westin as he looks forward to

"bloomberg ." tom: on a day when markets royal -- david: on a day when markets are have mohamed- we el-erian and we have david stock on, former head of the lmb. they will join us and help us to sort through it all. for "bloomberg ." let me do my single best chart, --ch dovetails nicely into the green line -- stronger is down, so what the government does not want is that moved down to the left. these are beware of the unknown unknowns, ever stronger japanese to 114. that is decidedly what they do not want. john golub is with us from rbc capital markets. backes peabody -- let's go

to deutsche bank. these are global issues which center on struggling banking. how much of deutsche bank's challenge is banking is lousy right now? probably 100%is of the challenge. banking is lousy right now. we are seeing the inflection point of the credit cycle, so credit costs are going to rise. we have seen probably peeked margins -- we have probably seen peak margins. you have done as many restructures as you possibly can do with more on the go. cryan, cap strength, rich positions rocksolid. he comments this in a memo to staff. all that is fine. how far behind is john cryan from brian moynihan in terms of restructuring toward the modern utility bank? is going tohink it

take another year or so for these banks. tom: bring up the chart. i love the idea of charles peabody telling us we can be adult and go one more year, but the fact is the markets are not cooperating with a one-year strategy. charles: we have to keep in mind that not all that is going on on the tape is -- we wrote a series of pieces last year called beware of the margin clerk, and redemptionscipating in a lot of different areas. we saw a redemptions in the etf's, which are heavily weighted. there is a 16% weighting in financials. are vanguard,s black rock, and state street. francine: we are also hearing from the deutsche bank ceo, don crying, saying everything is rocksolid. he is thinking staff. is there anything that ceo's of

banks need to do? is there any more disclosure or anything they can be more transparent about so that the markets calm down a little bit? charles: i think it is a path on the capital front. how do you raise the capital internally? that is what deutsche bank was promising three or four months ago, that they could raise capital in turn away. now with the earnings picture changing and the capital markets changing, it is tougher to see a path toward doing that. francine: we spoke to the deutsche bank cfo days ago and he has already said this. our markets just testing, and will a test until something happens? charles: in terms of pushing stocks down? francine: exactly. are they testing the ceo's resolve to make sure they do not need to raise capital jack ma i am talking about deutsche bank specifically. the markets are testing the ceo's. one thing we hear quite

frequently from investors in european banks is when are the ceo's going to step up and buy stock? if you look at citigroup, both o'neill and corvette bought stocks, but ryan has not bought stocks. chart.ve me the cocoa this is a derivative instrument. i put out on twitter the bank of international sentiments. , on, charles. i do not care what you say, the output of debt into equity is equity dilution or some form of major right-downs. he can do major cost cuts until the cows come home. none of that matters. this is the balance sheet and needs to be adjusted, right? charles: absolutely. when the balance sheet is adjusted, you will see the ceo's step up and buy their own stock. tom: where are we in the united states? will balance sheet a just as well? jon: in the near term, the issue will be concerned about

contagion and the like. as long as this is hanging out there, it is an issue. but u.s. banks are in healthier shape. they got way ahead of their issues, but as charles was saying before, when interest rates are really low and there are other issues facing the banking market. you guys have been great. can you two come back together and argue again? absolutely fantastic. viacom is out with a earnings. speaking of soap operas, they will have more on that through television and radio through the day and on "bloomberg ." coming up on bloomberg radio and later, martin gilbert. we will have mohamed el-erian later. stay with us. ♪

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david: growing concern about europe's biggest banks. tells investors of course we can pay your riskiest debt. ,anet yellen in the spotlight

the five most important things for congress to ask the fed this week. mohamed el-erian tells us. energy sector,e chesapeake stock falls the most in 23 years. we see if that tells us anything about the rest of the industry. ♪ stephanie: there's a lot to cover. you are watching "bloomberg go." inis tuesday morning, we are new york city, and stephanie ruhle. david: i'm david westin. there's a lot to cover. el-erian, andd aberdeen asset manager at ceo martin gilbert. welcome back. it's good to have you here. stephanie: when you talk about global markets. yesterday alone we saw $900