>> bonuses. wiping more than $2.5 billion from bankers' bonuses. and bonds are set for their biggest monthly loss and the dollar strengthens. will multinational -- this is bloomberg surveils. i'm francine lacqua. tom keene is in europe. -- is in new york. and euro area august exits

unchanged. if we see deflation narrow pressures -- it puts more ressure on drogey. tom: sterling really shows what a remarkable august it was when you and i witnessed what happened on the morning of august 24th. francine: yes. and we stabilized. tom: oh! the month of august! francine: yes. even the prime minister takes whole month of august off. here's francine rigs. >> a person entered a secure area of the airport before security checks were completed and that ordered some passengers in terminal one be re-checked. the airport called ate precautionary measure. it's expected te

to result that -- over allegations are you receive used accounting tricks to hide he size of the definite. and typhoons triggered floods and killed at least nine people in a nursing home. donald trump puts the spotlight on immigration today. the republican presidential candidate travels. he will also give a speech in oenix and he has described mexican-americans as remainests shipping them all out of the country. and hillary clinton enters the last two months of the

presidential campaign. journalists and analysts in more than 120 countries -- this is bloomberg. tom? tom: i want to get to bloomberg before we get to the deutsche story. edward morris of citigroup at the top of our next hour. for the yen, weaker. 103.15. that's that blended dollar index, d.x.i. 94-95. stronger -- over a stronger number of days. >> i kicked it off with u.s. treasuries. fed hawks also reviving dollar strengths. that euro dollar 1.11 and the crude oil down below $47. tom: two-year yield.

all the fed meetings back 18 months. there's the trend of 2015, the huge disappointment, the rollover of the middle blue circles and notice how we have legged up pretty much near the tendency which is the green circle and it will be fascinating to see where we are. what we can say francine with absolute certify attitude we are nowhere near an overchute on the two-year trend. francine: yes, and tom we did have that inflation and it did underschoot the forecast of the e.c.b. and we are just ahead of when the e.c.b. meets. i did this for you, tom, something called the vicks index, i brought it back 12 months and you can see the red box was the volatility largely

due to the currency moves about china and i spoke to on that knowledge of citigroup and he aid the flels general are low. tom: i would think that leads right into our lead story this hour, francine, this idea of the quiet on global wall street is tangible to executives. grip yes, and i would quantify quiet ahead of go 20 and quiet ahead of article 50 that triggered or that we may have more access to markets and quiet with so many risks out there. o john was talking today saying germany's largest bank was looking to shrink in size and looking to merge with commerce bank. what a day to have you on.

john cryan. this is what tom keene has been about talking about for two years and i said no, they are not going to consolidate because nobody wants a bigger bank. are they wrong? julie: well partly. francine: you can say yes. >> well, the german middle size companies, but i think the important thing is there can be smoke without fire. the big banking business they have they could want to get rid of those issues and the capital issues and thinking with commerce bank. where they get it off the balance sheet, maybe get it 51% off and effectively in growing a much bigger retail bank

rather than obviously a complete merger. francine: but this would be a bigger bank, the so-called healthier bank with the bigger ones trying to help the smaller ones. >> yes. but jen laid it out and jones followed it through in terms of improving considerably the ratios. both of which would be helped considerably. but it's a very low, it's got very low returns post bank. o i.p.o.ing it is a tough call so they have very limited option. tom: i think a lot of viewers don't industrialize train wrecks these are. and yo, for a minute believe this is ill timed. you know this with your work at barclays over the years working within the bank, this is where

you do your year ahead planning. is what this discussion really about a total pipe dream of profitability that is just not going to be there? >> i think that's an important factory. letting out a strategy in april and being advised when we had a new c.e.o. in. so it is a matter of saying my goodness next year doesn't look a lot better than where we are at the moment. tom: perfectly stated. what will be the shrinkage of deutsche bank and far matter what will be the -- they have to deal with the negative interest rates of each nation and they have to deal with major central bankers saying they like negative rates. john crine doesn't like negative railts, does he?

>> i've been talking to a number of u.s. banks, the smaller banks. and we come back to the fact that in most cases people true facts that in the scenario the corporate -- tom: thank you. >> and you don't really want one group subsidizing another. and that makes life incredibly visible. and we have talked about this endlessly. so you're back on the old bandwagon. tom: what mr. wheeler said there folks is absolutely ideal that the big people subsidize the little accounts because of the unequal application of negative rates. sheer stan fisher yesterday in washington. >> we've learned that the central banks that are implementing them. there are four or five of them

that basically think they are quite successful and are staying with that approach possibly with the exception of japan and well, they are thinking it through and they have perhaps said they will come back to try and make egative rates work better. tom: so there's that dreaded crosswind at the frankfurt airport. what does john cryan do living in stan's world? chris: i think he has just such an enormous job, he can only keep having smaller victories. you just want to have more and more smaller victories to fill your back end in the right election, and i think that's what he is going to have to do because the big picture tells you he has to most enormous job

but still maintaining a strong investment flow through his investment bank. tom: you and i are going to remember this day how cryan is saying this is the reality. francine: you're right. and i wonder if it has any influence and whether bigger banks listen to that and say maybe i need change my thinking or tweak ate touch. coming up, the banking conversation continues weaned speak with ing's -- talking about bonuses later in the show. roland boekhout. ♪

>> this is "bloomberg surveillance." i'm francine lacqua with tom: announcer: new york. >> wiping out more than $2.5 billion from devalued shares that were paid out as bonuses. the biggest affected were credit suisse bankers. and they pressed the u.s. to do something about its own tax system. they had more than $2 million in cash overseas. and they wanted to induce companies to bring those earnings home at a reduced tax rate. francine? francine: thank you taylor. we are joined by rbs' adam cole. christopher wheeler. adam, when you look at f.x. i know we need to mention tom's

great interview yesterday. but euro area inflation undershooting the e.c.b.'s own forecast yet again. what are we going to hear from mario draghi? is it more of the same? vigilant lent, we need to be careful and there's downside risks? adam: not through any further introduction in interest rates ut some modification of qe parameters and opening up the scope further going forward from here. so we see some negative risks for the euro on the back end of that in the short term. francine: everything goes back to the fed so if the fed hikes once or twice, it does make mario draghi's life that much easier. >> adam: it would and broad dollar strength would help through the exchange rate.

aggressive -- but the fed hike pretty much 85% into the future would have done most of its work. tom: adam, i want to talk to you about the dispersion or movement of other currencies versus dollar. f we have a one-way bet of the euro going weaker, the euro sterling by the assumption by an upper it move to stronger euro and weaker sterling? i'm confused as you just noted as i described the chart. what's the euro going to do? adam: so i think timing is critical. the independent sterling witness story i think will play out, but i think equally we are likely to have three or four

months with very little news drive that and very little to spill out toward euro. we need to look over next year before we start to see clean leads on the referendum. equally that's point where the politics start to heat up again. we are likely to see calms for a while. tom: i think that's beautiful as far as an early analysis. but -- adam: i think there's an element of spillover but i wouldn't state how much it is. euro has its own political issues which is a catalyst for losses but the risk of anything of the magnitude of the -- laying out is limited and so

our buyers would be that the market would place to but we are talking two theory figures on the exchange rate not the 10%-15% move we saw with sterling. francine: how much are you expecting the dollar to strengthen from here? adam: to a limited degree and cross occurrenceys the bigger move we have is against sterling, as you mentioned, but ultimately that's a sterling move rather than the dollar move. we think the dollar will actually weaken against yen. so moderately and in a very inconsistent pattern across currencies. so very important how you play the other side of that story. francine: chris, if we transfer ese into your fx world, we see low vol yumets and volatility, what does that mean for the banks?

chris: i think low volatilities are very bad news. we were talking about that but one of the goods for the investment bank versus retail bank is about getting a little bit more movement so the -- it's not just keeping the moving so you have the opportunity to take advantage of that and of course you have to do more hedging so in this sort of low volatility market, it's difficult to make money but we're going into september, late next week. so it's going to be interesting as to whether we see a lot more equity and then starting to spawn a lot more transactional activity day-to-day. tom: yes. it gets you to september 15th before you set into a more -- greatly appreciate it this morning and in our next hour

edward morris, we see a discussion on -- edward morris on the immense challenges that saudi arabia faces. really looking forward to that worldwide. this is bloomberg. ♪

francine: this is "bloomberg surveillance" i'm francine in london and tom is in new york. i wanted to pick out snag went european politics because

mr. ian i can't call decided yesterday to resign. he stopped short of saying he wanted to be president. lease zeus transitionlation. e said emanuel macron is positioning himself for the french elections. i listened to his press conference and he is considered a reformer, 38 and extremely popular and the last popularity result put him at 48% and he aid i am a fresh face. you want something new. hat's all we know. tom: where is it here? come on row seta stone we have n control room row seta stone. [speaking french] >> that means it's a crazy bet. tom: that clears it up

completely. so help me. we are focused on italy and brexit and i suggest as you know, francine, this is a really, really big deal. let's start with o'lon. we don't know if he is going to run for another term, do we? francine: right. but 14%-16% when you've been in charge 4 1/2 years is quite weak and that's just an independent thought. stephan: macron on a different side than saar cozy? francine: well everyone is trying to find their ground. it's very clear where you have press conferences that saar cozy is moving into the realm of that and hard on islamic kul occur or hard-lined for terrorist concerns in france. trying to -- well

ma acron looks so young he would be carded in new orleans. francine: well if you look at the political land zphape france there's not much fresh faces, tom. he is 38 but he is a fresh face. i'm not an analyst. magnnific. francine: you're very good in french. we will be back with chris wiehler and we will speak with ing diba c.e.o. roland boekhout. ♪

tom: good morning, everyone. "bloomberg surveillance." thrilled you're with us worldwide. in london francine lacqua and i'm tom keene in london. -- in new york. here's taylor rigs.

taylor: running out of money to look into the zika virus the c.d. said the cupboard is bayer. japan's defense ministry is seeking a record budget. pressure s increasing from china over the islands in the sea. prime minister has been boosting military spending since taking office in 2012. prime minister teresa may will meet with those who will leave the u.k. out of the european union. and so far they have chosen not to discuss in public what they will be seeking in the break with the e.u. and they are warning the u.k. that brexit will not wipe tout -- they suggested britain shouldn't be

allowed to stop paying for the things it got when it was a member. and british consumers are showing some eagerness to stand after holding back in the wake of the brexit vote. g.s.k. says its household confidence index made up nearly half the ground it lost in july and also making purchases also improved. powered by -- more than 120 countries. i'm taylor rigs. francine? francine: taylor, thank you so much. john cryan said deutsche bank is looking to shh flink size after it suggested merging and he german bank online c.e.o. he is ing diba c.e.o. roland boekhout. i know you were at the

conference when you heard john cryan and give me a sense of how your business is going. you're online and sit tougher ow than it was six months ago? roland: yes. it continues to grow. as a matter of fact, you see a lot of movement coming into the market and you find often times it mobilizes customers and leads to an increased growth number on our site. francine: what exactly are customers doing by adjusting their behavior or they are just hoarding more cash? roland: i beg your pardon? i couldn't hear your question very well. francine: i wanted to try and understand what your customers are doing. are they changing your habits? are they sitting on more cash? roland: well, first of all,

they are -- there are still options in the market so it's not necessarily that they are going leave the market all together. secondly, we do see a smaller growth investments where they look to make some return on the savings but most of them as we see very often in lethal markets, they do not in mases move. they slow and wait so they accept for now accept low interest margins on their savings. tom: i wanted to congratulate you on 40 or 50 years of excellence. your bank has grown and grown and grown, but you did it without negative interest rates. we talked with vice president fisher yesterday about the effects of negative interest rates. from where you sit with the success of ing, what's the affects of interest rates away from the big banks and what's

the effects on the other middle nd smaller banks in germany? >> i think the biggest challenge that they have is that the first line of defense against the very low interest rates with pressure on the interest margins is on the cost structure. it's a painful route and it takes some time to do that so, rather than to do that, the first line or action they tend to take is to look for ways to compensate through peace. however, that's also one of the biggest dissatisfier in the consumer perception and therin threes challenge. to where as at the same time it's an opportunity. tom: i agree, but do you onsume for 2017 particularly -- german banking?

roland: i think 2017 will be a very short term but not ban secret i've been saying for years a consolidation should be taking place. it's a topic today at today's conference and colleagues from other banks are mentioning it and it's nothing new and something the german banking bronze has been waiting for, for probably over 30 years. but it will take years before it will actually happen, but it's unavoidable. francine: how long will negative rates stay? and do you think they will go deeper into negative territory, and how much of a hassle will it be for you? roland: i'm sorry. i could not hear your question. francine: the question was on negative rates. how long will we have negative rates? and how much of an inconvenience is it for you? roland: i have no idea how long

we are going to have negative rates, but i think any wise person should prepare themselves for an extended period of time with negative rates. for us, it's going to be a challenge just like any other bank. the advantage we have are two. one, we have already more efficient cost structure which allows us to withstand this storm longer than others. that's one. and secondly, i think we are a step ahead when it comes to a more innovative environment that will allow us more efficiency gains and faster developments of traditional and new services for customers. customers willing to pay above-market quality service market so we have both flexibility on the cost structure and two, the ability to generate further revenues other than interest margin. francine: thank you roland boekhout. the ing diba c.e.o. now let's bring in chris wiehler. chris, it's tough, and we were

talking before we went to the c.e.o. of ing that this is a bank that's been online and because they started so much earlier, it's a bank that works in germany and yet they struggle longer with negative rates. chris: yes, to confirm what i'm hearing is there's two ways of dealing with this. one is cutting costs and the second is increasing income but as he pointed out, clients, specifically those clients don't like that. tom: what i found interesting in his comments is once again, germans feeling like they have got to once again forever clear markets. i don't buy it. that's not my reading of history. what will be the catalyst to jump-start european bank consolidation. chris: john cryan was saying earlier there's got to be --

how many listed large german banks are you familiar with, tom? two. most sit in the public sector. the landesbank and cooperative banks. getting those to merge is massive political issue because unfortunately a lot of politicians sit on the local savingsing banks board. getting those to merge is difficult indeed. tom: i agree with you but will we see a balance sheet shrinkage due to a negative rate milieu? chris: absolutely. because there's very little -- yes, of course, in terms of oplation leverage but in terms of scale all the banks are pulling back dealing with the new paradigm that we are having to face. francine: do the regulations need to back off? maybe what i'm saying may be unpopular. maybe popular with the banker but do we need to make sure we

have a healthy banking system, sure but not one that's destroyed so if they take a back step for a couple of years, then we may have more winning banks? chris: i think the banks have accepted what needs to be done it 've -- i may have said before but to cut cost and compliance may be it. now we are actually smarter. we still have strong compliance, but we can be more technically driven by it and just changing the way we do business. so it's a very difficult one for the banks but likely population doesn't win across the market. tom: those of your ilk in america for the most part have an optimism about the american big banks and their ability to distribute cash flow 18 months and 24 months from now. can you share that same optimism about english and

european banks? chris: no. actually not. i spent most of my life looking at the u.s. banks and you're absolutely right. over the next 18-24 months the fed will finally glean on the especially two fwoig fail banks and that will see a lot of banks coming back to the market and one or two new york much better shape. but there's not the call for capital repatchlation that there has been in the united states because i think everyone wants to see things in europe settle down first. tom: terrific. in our next hour the debator austin gules bi, of course his service with proshe. now he is out front in his service to secretary clinton. austin gules biwill join us. economist will talk to us about the state of american economists and a shoutout to

the chilly dogs at regan. ♪

francine: the millennium bridge overlooking the bottom of st. paul's to the take modern, tom. look at that. it's a gorgeous august day. tom: francine, did i ever tell you about the italian place to the left side as you walk towards church? we've got to go there some time. francine: again, i'm italian. so we'll defer judgment and talk about i want offline. the day when the big u.s. multinational companies could easily fight tax bills are coming to an end.

it requires tech giants to pay $14 billion in back taxes. great to have you on the program, austan, because i've read anything and everything and this is meaning we are going to lose billions and ireland fighting the commission and pitting the u.s. and the e.u. against each other. where's the truth from what we have found out in the last 24 hours? > so just to take your first point first and will this have a chilling effect on the u.s.? this morning i spoke to the c.e.o. of fit bit because they are opening an office here with about 100 jobs. and in the u.s. her smart enough to look through these and see what's going on so help

didn't seem to have that much of a concern so they are not too concerned but obviously they will watch the process with interest. francine: lit have an immediate impact in ireland and ireland doesn't really want the money back, because they think it will hurt them longer term. does it have an immediate impact on g.d.p. in the next two years? >> no. because if the money is paid over, it will be held in an escrow account. today i thought that the tax official he said the figure could be as high as $19 billion including penalties. so the numbers are growing and growing so we are looking closer. later in the day we will learn if the cabinet agrees. if they are a bit uncomfortable with helping the world's

richest countries in the world they are going tie appeal this. tom: here's one of the many quotes yesterday. he really went at it versus europe. i'm sure you ever seen it. we now find ousts in the unusual position of being ordered to retroactively pay a government taxes to a ghoovet says we don't owe them anymore than we've already paid. i mean can ireland just tell brussels to go to hell? >> absolutely not. if the commissionrd orse to collect this money we have to do that. but in the meantime we can appeal and put the money in an escrow account and lit rest in there in a few years but ireland will have to collect this money as there's no doubt about that and how much could it be $14 billion-$20 billion? so the money will be collected but it won't be spents.

and to actually get the government to say this money could build hospital answered roads. overall i think they will appeal the decision but we have to wait before we hear that for sure today. francine: and we've to look at amazon and starbucks who may instructions and you say the commissioner is doing this just to get back at the u.s. because of the amount they fined b.h.p. and other european countries in the u.s. tom: let me ask my dumb question of the day. is islanders a tax haven? are you guys like the grand cayman islands or some other place i don't know off the coast of england? >> well, what a question. i would say this. i would point this to you, tom, this has nothing to do with

ireland's corporate tax race. levied tax rates are at 12.5%. but what this is not about is our tax rate. and that's the key factory that draws companies like am adone, google, facebook that we have a very low tax rate. it's about the alleged sweetheart deal the irish government granted to one company. you say tomato. i say tomato but it's not about the cooperate tax regime. the 12.57 tax rate is here and it's not going to change. francine: so you could say it's brexit positive. or britain would re-invent themselves as sort of a tax haven but then it would still be taxed by the eu or the eu is all powerful so they could go at u.s. companies like bowing.

>> while it's all well people can say this is great. we can change our tax regulation and back bigger version of ireland and sort of the law of unintended consequences which suggesteds to me it's going to be very difficult to do that along with many of the things people think can come out of the brexit. francine: thank you. again, it's important what he said that this is partly because of shell companies. chris wiehler of atlantic equities stays with us. we will talk about other european banks including the french one. this is what i'm kicking off with because it's off of the great interview tom did with stanley fisher. this is bloomberg. ♪

tom: gotham. cat woman list off to the right. it's a dark and stormy lexington avenue. the chrysler avenue. madison avenue off in the distance. it's dark. it's gloomy. unlike london.

francine lacqua is in london. good morning, francine. francine: i was going to say, unlike bonuses or are bonuses being burnt? i like it. tom keene is going all gotham city on me. bonuses getting burned at investment banks. a route in stocks means they wiped more than $2.5 billion from bankers in bonuses. let's hear from christopher wheeler. basically it goes back to the pay structure so this is not strictly a bonus story. but the pay structure because now it's sold into shares. if the share price goes down, you're paid less. is it going to be more difficult for european banks to attract talent and is everyone going to move to dark and stormy new york? >> well all the shares i was give than i didn't get i sold to jamie dimon for $2. it's money you haven't got and

part of a bonus that's deferred and at a share price at the time the award is made so when the share price falls suddenly you have a little net worth statement you can pull up and suddenly you're lets well off but you never had that money in the first place. more importantly, if you're still there and you were to get a bonus this year you would get it at the share price. does it help morale? absolutely not because people are saying what is management doing? our net worth is going down. it is bad for -- francine: talk to me about the psyche of ooh banker. do they jump ship or are they alan: for a couple years even if it's going badly? chris: i think it depends on how successful they are. so people want to be bought out of the shares they have bought a previously. so you're only going to get bought out at a much lower

level. so you're taking the chance the slares not going up but down in your new bank but the reason they do well in london is because of course sterling collapsed. i used to get paid in dollars by limaen brothers and sterling. t it's not the case with credit suisse or deutsche. tom: i'm going to assume there's 240 key employees. how do you retain that talent given the bonus gloom? chris: it's very difficult. i mean, you have to have high quality management that can paint a picture of the direction the bank is going in. what's the most important thing when you go to a company? it's management. i could argue the second most important thing is the client because without the client you've not got a business. we work with our clients and if

we continue to do a good job, they pay us. if they pay us, we pay you. off plan, guys, this is how we are going get back in health. they may say john, we like you but we are going to put our money somewhere else. tom: chris, thank you. front and center in the future of german banking, mr. wheeler s with -- when edward morris speaks on high drove carbons the room is dead still. we will get an update on saudi arabia supply and demand. this is bloomberg. ♪

tom: john cryan of deutsche bank speaks the unspeakable. there are too many german banks.

.here is no urge to merge commerzbank. edward nourse of citigroup. and mr. trump -- we go through mexico, then he gets out the block and tackle, skills the wall back to arizona. good morning, everyone. i never thought i would say that. this is "bloomberg surveillance ," live from our world headquarters in new york. the final day of august. francine, good morning. deutsche bank, remarkable news on german banking. francine: yes because everything felt -- yes, because every thing fell into place. deutsche bank was looking at possibly merging with commerzbank. the ceo was speaking at a conference in frank, saying that is not the case, pouring water on that merger report. tom: they are all going to merge

with citigroup. let's get to bloomberg first word news with taylor riggs bid taylor: there was a brief scare at the airport and frank for today. a person entered a secure area before security checks were completed. that probably german police to order some passengers at terminal one be rechecked. the airport calls it precautionary. a fire -- a final vote on dilma rousseff is set for today in the senate. it is expected to result in her purse minute -- in her permanent ouster. over allegations that she used accounting tricks to hide the size of the budget deficit. in northern japan, a powerful tycoon -- a powerful typhoon turned deadly. it triggered massive flooding and killed at least nine people in a nursing home. 9000 people were ordered to leave our homes, and japanese troops were called in to help with rescue operations. donald trump puts the spotlight on immigration today.

the republican presidential candidate travel to mexico to meet with president and rick and pain yen yet so -- with president enrique pena nieto. newly discovered e-mails from hillary clinton will be reviewed for leaks. a federal judge has given the state department a week to look over the messages from clinton's private e-mail server. clinton has been trying to move past the issue as she answers the last two months of the presidential campaign. global news 24 hours a day, powered by more than 2600 journalists and analysts in more i am taylorntries, riggs. this is bloomberg. tom: right to the data check. not much going on. you would expect that in august. nevertheless, shocks here and there euro-dollar, 1.1147. 101, 102,aker,

103.15. out above 98 would be a breach of resistance. we are nowhere near that at this point. francine: this is my asset check, similar to yours. signal a loss. the two-year treasury yield climbing by the most since november of last year. euro-dollar, 1.1146, crude below $47. tom: this is the acclaimed lollipop chart, showing fed media going back a year. in the middle of the chart, the curve over, four fed meetings in a row. we are almost back to a setter tendency of a higher two-year

yield. three fed meetings down to the right. we will push those circles higher beginning september 21. francine: i have chart nv. mine is ok but it is not as pretty as yours. this is the vix index. i brought it back to august of last year. in terms of volumes and volatility, it is quiet. you can look at bonds, equities, look at fx. last year, of course, it was the august ground for china. however, it is a lot of hedging. markets are better prepared for this august. back to the markets, back to some banks. deutsche bank chief executive officer john cryan says deutsche bank is looking to shrink inside. is when there was a media report that it may merge with commerzbank. jonathan tice, great to have you on the program.

john cryan was very clear. he says he is not going to merge with commerzbank. it is unclear if they thought about it at some point. are we going to see consolidation? jonathan: if you look at germany specifically, the legacy problem is that because they are not run for shareholders, the mutuals in france over here return to low. do we think deutsche bank and commerzbank would merge? absolutely not. would the be required to resolve some of the low probability problems across the system, i would be very surprised. deutsche bank is being consolidated at the moment. there is a lot of work to be done. whether that would involve -- francine: if you consolidate, how does it help banks? is it because they need to keep less capital, the buffers that help with regulation? doesn't help with anything else?

inathan: it is the same france and italy, a function of the way the bank system grew up. cost.a bad i do not think you are going to used tosche bank being a the german banking problem. tom: is mr. cryan telling deutsche bank what to do, or is the german government, german regulators and the management board of georgia bank telling -- of deutsche bank telling him what to do? jonathan: john cryan is telling the board of the bank the best way forward. he did a good job at ubs. i think he is definitely still head of the table, and i think when you bear in mind how the environment has changed, he needs to begin more time to solve a bigger problem that ubs, given the environment. tom: what do you expect to see

by the end of the year and into next year? one thing you will not see is profitability, right? jonathan: underlying profitability -- people are still looking through. more probably will be headcount reduction, and they are already taking charges -- that may cost more as well. as a retail bank, it is only returning 4%. profitability, we're still a ways off. this he need to keep cutting? tom: jonathan tyce, thank you for the briefing this morning, with bloomberg industries, on the sportive german banking. the sportive oil, we must meet with edward nourse of citigroup. we speak with him about the certitude that he sees, which is in either/or world. i love that phrase. either/or or i-ther/or.

right? ais going to be lot of the focus is on opec or in supplyhe rebound and therefore -- tom: over to the brent crude chart with a 200 day moving average. thatvely range ground range bound with a flat line. what is the citigroup call? edward: 48 for this quarter. 2016.nt by the end of tom: so it works higher. francine, jump in, please. morse, great to speak with you. does that mean there's no cap on the price of oil? we talked about 50 is the cap where they turn off the tabs. is that a false analysis, or is

there a change if you see brent at 65 five years from now? edward: there is really a moving target that has to do with one of the things we do not talk about all the time, and that is how much it costs to produce oil in the united states. that number keeps going down. how much does it cost to produce oil in deepwater? that cost keeps going down. we have never really been in a situation where we are in a cost-deflationary area and we have u.s. shale. francine: given that, that is why i do not understand why there is not a cap. if you see brent at 65, it means oil can break decisively above the 50, which can be, at the moment, made up. but if the price of extracting oil goes lower, the price of oil will be capped. will beng? edward: it capped but we do not know where the cap will be.

the initial $50 target leads to the completion of wells that have been drilled but not completed. the $60 number is associated with a big kick in drilling. we have seen a modest kick up in drilling. we have had almost two months of the drilling level increases in the u.s. are at a low level. now it is tapering off because the price movement is not there to allow the drillers to go back. we had a bunch of broken producing countries. we have libya, nigeria, venezuela, where production is on the slide, and it could be on a big slide. the difficulty of calling a cap is we do not know what happens at a time when saudi arabia is putting it all out and it limits their capacity. what if we get 2 million barrels of loss production in nigeria or venezuela? opec go -- here is total output and the leg up.

there is a little bit of convex city there, -- there is a little bit of convexity there. to the red line, 36 million barrels. edward: i would have that redline lower than you do. a lot of what you probably count in that delta between the number and the red line is capacity from places that have not been producing, like nature area. tom: i will go with that, but the bottom line is, do you see any lessening of supply out there? i do not believe i hear that from you. edward: i think opec is close to capacity. we have iraq, which has gone almost full out. iran has gotten back to where it was pre-sanctions. saudi arabia is a hair under 11 million barrels a day. tom: francine, you showed the hockey stick chart on iran the

other day. francine: i want to talk away from opec. there is something significant which our less oil-savvy readers do not know. u.s. exports of crude oil also rising. that could be at a record in september. u.s. exporting as much as one million barrels of crude. when will that happen? edward: the one million barrels will await a rebound in production, but we are well above that half a million barrel a day number. we have had this ironic situation where crude exports are growing. they are growing. they are going to the far east into china, into venezuela, of all places, and into europe and israel. meanwhile, because of the impact regaining market share in europe, we are seeing a lot of crude oil from iraq, russia, -- that used to becoming from iraq, russia, now coming from the u.s. continue this with

citigroup as well. lots to talk about. coming up on bloomberg radio, on the election, he served the president. austen goolsbee, the former chairman of the council of economic advisors. this is bloomberg. ♪

francine: these are live pictures from the city of london. it is august 31. theresa may is back in the game. we have to talk brexit, because it is the first day where the cabinet will resume. , andwill talk about brexit theresa may has not changed her

stance since she was in switzerland and she says the government must get tough on big business. she also believes that brexit means brexit and that there will not be a second referendum on brexit either. tom is in new york. i am francine, in london. let's get to taylor riggs. taylor: deutsche bank is shooting down a german media reported considered merging with commerzbank. the ceo, john cryan, says germany's largest lender is looking to get smaller. he has been restructuring deutsche bank in the past year. he has sold assets and cut thousands of jobs. jetblue makes history today per the airline is making the first commercial flight between the u.s. and cuba in more than half a century. a jetblue plane will fly from fort lauderdale to santa clara, cuba. in the past, people traveling from the u.s. to cuba used expensive charter flights. that is your "bloomberg business flash." tom: ed morse is with us from citigroup. we will continue our discussion

on hydrocarbons in a moment. , wells fargo had a strategy. what i know as the vice-chairman of fed -- what i know is that the vice-chairman of the fed is more than concerned. i was thunderstruck at the economic analysis at jackson hole that ignore the banking and fixed income system. is it normal that the economists forget about the ramifications of fed policy, ecb policy, on your world? >> i think the fed specifically rarely mentions financial conditions, which is directly -- a direct target of the fixed income markets. when they do, it matters. when janet yellen mentioned the constraints in financial conditions back in february being a headwind to growth, a challenge to growth, that was a direct, targeted message to the

capital markets. in doing so, that was really the opinion, that they were ready to get much looser in their policy rhetoric. the fact that she did not really mention it all that much in jackson hole means that they are ok with kind of financial conditions in general, and they are much looser than they were at the beginning of the year, not nearly as loose as they were -- tom: i will go there, but to fill about her possible was -- but to willem buiter's analysis, all of a sudden a lot of the opec nations have to go to the fixed income market. is there instability in your world that could lead over into the fixed income world? edward: there is a big unknown. we will have the largest chunk of sovereign borrowing from opec countries over the next few months. that is going to be a test of

the markets. reale: it is going to be a test. capital markets are wide open right now. the u.s. corporate bond market invests on track for another record year, probably about $1.3 trillion of debt issued this year. it is a staggering number. it is the third consecutive year of well over $1 trillion. and it is critical to the health of government and corporate to be able to tap those markets. francine: george, this goes back to -- we had a great conversation on banks and how they deal with negative rates. you are talking about the frustration of some of the credit investors, saying they are increasingly frustrated, where there are chronic low bond yields. as long as the central banks do not listen, we are not sure what the fixed is here. even if you are frustrated, this is the current market environment they need to deal with. nothing is going to change anytime soon. george: that is absolutely correct.

when i talk to our core investors, they are frustrated. yields are low. it is difficult to find what we would call traditional value. it is very difficult to find some current income in a fixed income portfolio, and nine u.s. investors are coming to the u.s. yields are relatively higher here, but they are still quite low. that challenge has not gone away, and it is the world we live in. it is unlikely to reverse itself anytime soon. the fed is talking about potentially raising rates. 45 basis points might help, but it does not quite yet us there. it does not reverse these very powerful global trends of a lack of yield, and the yield for investors around the world -- and the need for investors around the world to incorporate yield into their portfolio. tom: how about a quick data check here? we have been watching oil.

it is soggy, to say the least. 47.87 on brent crude. this is bloomberg. ♪

tom: good morning, everyone. let's get a briefing for ourselves and for edward morse of citigroup. oil debt in the united states -- it has been an interesting ride, from 100 30.

what is the state of oil debt? is in an opportunity? edward: the good news is that the companies needed -- become it is that needed to devolve have done so. we are in a restructuring period, the low rated companies, the ones that have balance sheet pressures. they are shoring up liquidity, and that is helping them. the real at-risk companies have fallen by the wayside. that is happening at the lower end. tom: what is a coupon i can get with his garbage in ed morse's world? george: for some of the more deeply distressed names -- tom: seriously? i was making a joke. george: 6% is at the higher coupon level. for the bigger names, it is 2%. thin, andl relatively there is a sharp dichotomy between what is happening at the lower end of the rating spectrum where there is a lot of balance sheet repair, and at the upper

end with big diversified companies -- huge cash flow payouts. tom: keep ed morse in business. -- georgese and morse bory, wells fargo, thank you so much. tomorrow on oil, he knows every valve, every pipe. really looking forward to speaking with stephen schork about the distribution of hydrocarbons across this great nation. london, from new york worldwide, "bloomberg surveillance." ♪

francine: "bloomberg surveillance" in london and new york. let's get straight to the bloomberg first word news with taylor riggs. taylor: the u.s. agency leading

the fight against the zika virus will run out of money to do so in the middle of next month. the head of the center for disease control and prevention says the cupboard is bare. republicans and democrats in congress have been unable to agree on a zika-funding measure. japan's defense ministry is seeking a record budget for the next fiscal year. japan faces pressure from china over disputed islands in the east china sea. the defense ministry wants to develop longer-range anti-shipment goals. shinzo abe has been boosting military spending since taking office in 2012. riddick consumers are showing eagerness to spend after holding back in the wake of the brexit vote. the puzzle confidence index rose and the measure of how willing consumers are to make purchases also improved. making aump is surprise trip to mexico today. the republican presidential candidate will meet with mexico past president nieto.

a few hours later he will speak on immigration in phoenix. in the past, he he described mexican immigrants as rapists and said that he will deport undocumented workers. global news 24 hours a day, powered by more than 2600 journalists and analysts in more than 120 countries, i am taylor riggs. tom: one and done is what we heard from vice-chairman stanley fischer today, but the real headlines are negative rates. here is my conversation, a bit of it, with the vice-chairman. er: we have learned that the central banks implementing them basically think they are quite successful and are staying with that approach, possibly with the exception of japan. and they have said they will come back to try and make negative rates work better. tom: stanley fischer on negative

rates. ed morse is with us from citigroup. also, martin hegarty. this is your sweet spot. i get the economics of the vice-chairman totally that it is a great economic exercise, but then it has to filter down to the real world of martin hegarty. how is it going? martin: the negative rate phenomenon globally combined with the ecb and the bank of japan situation is commencing -- is crating a tremendous amount in the nominal yield curves, particularly in the u.s., where we are seeing a congressional -- a compression of term premium out there which is having a negative impact on inflation expectations. there is no natural demand, particularly in the u.s. and from particular investors. japanese investors, their domestic experience precludes them from having an interest in

the space. tom: here's the five-year, five-year, and you can see the stability, the crisis. then we rolled over. this is the money question, martin. when we refer to some form of normal, do we do in on stable tests, or do we do it with junk conditions and significant instability? martin: the longer we stay with volatility low, the greater the probability for a violent move to the upside. when i look at the chart you just showed, there is a combination of factors that has driven us down. had a tremendous amount of the increase in tip supply taken down by foreign investors. we now are in an environment where those end users do not necessarily have their reserved firepower that they had to participate in the market. repricing of

inflation expectations as energy prices have drifted lower. if you sayartin, that there is a violent move to the upside, then people have the time to see that coming and they will try to do everything in their power so that it does not happen. am i being too naive? martin: you are not, but there is also an opportunity cost of not being invested in the fixed income market. you are seeing a persistent stretch for yield, and the longer you're not invested, the greater the potential for under performance. so you not necessarily seeing investors prepare for a move to higher yields or a rapid repricing of inflation expectations. francine: that is the job of who to reprice that? is it central banks? we see certain central banks trying to reprice markets. or does it have to come from someone else? martin: i think the central banks have been attempting to do that, but i think it has to come

from the inflation data itself. where we have seen core inflation in the last six to 12 months reach 2%, now settling at around 2.25%. we are waiting for an opportune -- an upturn in headline inflation. tom: are we going to get your world, dr. morse, to boost up inflation to make stan fischer and martin hegarty happy yeah cap edward: if you can tell me what is happening in venezuela and nigeria -- tom: i can do that. see headlineto inflation depressed, come back up to where it is, or versus the other way around? edward: we expect that but not in the next year or two. it could in the 2018 environment, or it could happen

in the core commodities that are critical for inflation around the world. food and fuel -- both of them could be poised for significantly higher prices at the end of 2017, early 2018. francine: if you look at central banks and what they are trying to do, how difficult is it for them for inflation, unless they forget the 2% target? inflation in europe today is nowhere to be seen. martin: i would beg to differ on that inflation is nowhere to be seen. when you look at the construct of the number, the services component of that core number is running at 1.1. when we parallel that to the in theervices inflation u.s. is running at a relatively healthy clip, even when you include the negative contribution from energy services. in the developed world, the services component of these indices is the bigger contributor. where these services measures go tend to be where the cpi follows. francine: ok, so we are seeing a

little bit of inflation, but it is nowhere near the 2% target. mario draghi has met that 2% target almost every quarter. martin: we are nowhere near the target. there is a tremendous amount of spare capacity that still exists in europe. when you look at the u.s. relative to our inflation target , the fed inflation target we inflation,ber is pce headline pce inflation. the fed attempt at delivering 2% over the last decade or so, prior to the crisis, we averaged a pce run rate of 1.96%. if you look at the core number, it was a little bit lower. i think what the fed will probably need to do, at least in the interim to re-anchor inflation expectations, is to allow inflation to drift above the 10% target. tom: are you reading my script today, martin? this is a chart on irving fisher and stanley fischer.

the overshoot is the yellow circle. the red line is core. the white line is cleveland cpi. yes, the white line is an elevated cleveland cpi. that is another core statistic. ed morse, there is that core inflation. we get that overshoot with your $65 oil, don't we? edward: martin was talking about the services sector in the u.s. boundl services sector is to see significant inflation when we get a drilling rebound. tom: let's go back to the overshoot. bring back the chart. martin, help is here. what is the probability that we cheriantanley fis overshoot. the only one who got my pun was dr. morse. thank you. thein: we like to look at

inflation data at the low volatility and high volatility component. the low volatility components are running north of 3% right now. i am not necessarily sure we need oil or energy prices in the middle 60's to deliver that. i would encourage listeners or viewers to look back at a piece that janet yellen released at the end of 2015, which looked at pcemyths relative to the 2% target and where that was coming from. the myth at that point of time was 1.5%. half of that was coming from relative import prices, so weakness in the dollar, strength in the dollar, operating at a lag. the strength was coming from the commodity price decline. if we assume commodity prices are flat going forward, that 70-basis point drag -- when we look at the relative input price differential, the trade weighted dollar appreciated 15% to 20% at

the end of 2015. we have subsequently given up 5% to 6% of those gains. if we help the dollar confident -- if we held the dollar constant, -- what has happened is the dollar has weakened, so what may have been a flat contribution will probably be slightly positive going forward. tom: martin hegarty, thank you so much, with blackrock. on bloomberg radio later today, in support of secretary clinton, austen goolsbee, former chairman of president obama pod council of economic survivors. worldwide, this is bloomberg. ♪

francine: this is "bloomberg surveillance." let's get to the bloomberg business flash with taylor. taylor: housing prices in the u.k. rose in august by the most in five months. prices were up five points of percent from one year ago. that is according to nationwide building society. demand for housing in the u.k. cap prices rising. the hottest property market in china has imposed new limits to cool off prices. will not be sold to local buyers who already own two homes. home prices have risen 38% in the past year. that is your "bloomberg business flash." francine: thank you so much. the apple tax -- apple will have

to pay $14 billion in back taxes to the eu. let's get more from bloomberg news. outt too soon to find repercussions from what we heard yesterday? too soon.se it is they are going to appeal. the island and apple said they will appeal this judgment against the u.s. company, and that will tie things up for a couple of years at least in the courts. in the meantime, people are still looking at the wording and what the commission said exactly to see how it is going to affect other companies trying to operate in europe. francine: there is a political spat between the u.s. and europe, between ireland and europe. how much do we know about where the money is going to leave? this is not about the low tax rate, this is about shell

companies that apple is constituting in ireland. jones: i did not think they use the words "shell company." to close theseg loopholes that all companies have been trying to use for years now in order to get a lower tax rate, and a lot of the u.s. companies have been caught up in this investigation that has now been going on for three years and is going to continue. tom: i would suggest most americans are absolutely baffled by this discussion and this debate. is this the united kingdom's benefit? does the united kingdom with brexit become the new ireland? jones: they certainly seem like they are in a good position to do that. if they are out of the eu and out of the reach of the european commission and its tax regulators, they certainly can say, come on, guys, we are a much nicer place to be. we welcome your investment and

we welcome the jobs. ireland is saying it looks like the eu is pushing back against that. in brusselsayden this morning, as we look at apple. esther cook's state that mr. cook's statement yesterday was really something. summer is over, and into the winter we go looking at the data right now, equities, bonds, currencies, commodities -- the yen weaker, 103.26. brent crude, $48 a barrel. this is bloomberg. ♪

tom: good morning, everyone. francine is in london. i am tom keene, in new york at how about a forex report? the weaker yen is what we have been looking at all in all. euro, 111.43. sterling with a bid today. that is interesting. august,the shock of strength in sterling. francine: coming up shortly, "bloomberg ." caroline hyde is in london for the week. i know you have a packed show. caroline: u.s. treasuries is

where we are focusing because we have some great guest on the outline of it. today you are seeing yields push higher, overall we have buy signals, humming from morgan stanley in particular. the morgan stanley head of interest rate strategy will be joining us. he is saying, hike? what hike? they are so bullish, they are seeing 10-year treasuries sub-1% overall in terms of yield. we also have buying coming from jim mcdonald, the chief investment strategist at northern trust here it he, too, seems to be thinking a picture hike could possibly becoming as early as next year. caroline hyde, thank you so much. with us, edward morse of citigroup. i want to open this up to a discussion, the future of the rapping with

international relations. united arab emirates, i believe it is five principalities. i would job he with money in the -- abu dhabi, with money in oil. they are all the holton to abu dhabi. but the chemistry and the calculus changed because of saudi arabia. of abu the relationship dhabi with riyadh? edward: it is closer than it has been in my recollection. inhave a young crown prince one country, a young deputy crown prince in another who emulates what the crown prince in abu dhabi is doing. this is a new generation of young people who have decided they have got to prepare for a world beyond oil. they are very serious about it. abu dhabi has a leg ahead because they have been diversifying for the last two decades. services a financial sector, a tourism that the -- a

tourism mecca. tom: christopher davis wrote two important books on this. these were tribal entities that have matured into real nationhood. do you look at uae as a strong nation that can buttress up against japan -- against iran, kuwait, saudi arabia? do they have a real independence? edward: clearly they rely on u.s. security. aey cannot stand up against country that is larger than them, as iran is. what they are a protected entity that can flourish, doing what they do to further the economy. francine: we have been reporting about the increasing difficulty of saudi arabia, spending cuts hitting the middle class. do they still have plenty of cash?

that is the bottom line, only if they have plenty of cash, that this new generation can actually stir the economy into something else. edward: so far the spirit behind oil seems to be working. glass is more half-full than it is half-empty. gone into the markets to issue debt. it looks like that will be successful. they can reach their targets. they had done some interesting experiments. they have started charging for gasoline and diesel at close toy -- at levels world levels. they are charging for electricity in a meaningful way for the first time in history. that has gone down relatively well. when it came to water, it was a different matter. last year they raised tariffs on water, just as they did electricity. that was a step backwards

because it did not work. they are moving to diversify the revenue base. they are likely to add a tax revenue source for the government, and they are clearly moving to have the government cease being the employer of last resort. francine: we fully understood saudi arabia up a position ahead of that opec meeting in algiers in september. we seem to understand where iran is -- where iraq is, after yesterday. they support freezing. where is saudi? edward: let's get back to where we know iran or iraq is. the word from both countries last week was that they were going to be increasing production. today's conversation out of iraq is very different than it was two weeks ago. iraq is notare that going to do very much, and why would they? they see the markets coming back

into balance with higher prices ahead. tom: the signal in your either-or world is the price of oil. what price does riyadh or abu dhabi needs to provide stability to the regimes, their governments, and their people? is not 100, is it? edward: it is not, and there are interesting ways to look at their budget. tom: what is your number? edward: my number is below 70. tom: so they are really in reach of a stasis that will allow them fiscal comfort. award: military spending is big chunk of that number. a lot of that may be looked at as discretionary. is the oned, what thing we misunderstand about the markets? i wanted to ask you something about mexico, about their hedging. is there something that the market is missing, the canary in the coal mine? edward: did the short-term mover in the market's financial flows. people thought when this big mexican hedge was coming into

the market that there would be distortion, that there would be a weight down on prices. we did not see prices moving out of a relatively narrow range, when mexico put its hedge into the markets. the financial markets can absorb a lot of things that we thought they were not able to in the past. the financial markets cannot absorb all the things they used to do because there is huge growth in open interest in oil and other commodities, but there has been a shrinkage in open interest in deferred prices in the short run. that is where the speculators are. tom: dr. morse, thank you so much. we will continue with ed morse on bloomberg radio. nader today, austen goolsbee, the former chairman on the council of economic advisers. this is bloomberg. ♪

thanks fill the pressure.

the ceo of germany's largest lender is shooting down reports the bank looks to downside. stock knocking out more than $2 billion in bank bonuses. >> immigration push. a privatemp heads to meeting with mexico's president on the same day he is slated to make an immigration beach in arizona. a welcome to you. i am alix steel with caroline london.ning me from david westin and jon ferro are off today. it is wednesday. all heading towards that job friday. federal confusion is the theme this morning. caroline: voices coming out from the fed. are they now seeing raining back in terms of hawkish terms.