berlin manhunt. german investigations intensify the search for the person behind this deadly christmas market attack. markets rallied. the dow climbs to a fresh record, within 25 points of 20,000. the stoxx europe 600 reached its highest level of the year yesterday, currently trading slightly lower. and lendersbanks may have to give back billions to mortgage customers after a ruling by the e.u.'s top court. i am mark barton in london today

, in for francine lacqua. have a look at what is happening to equities today after hitting the highest levels since the end 2015.ember, yesterday -- the stoxx 600 is trading lower by about 0.2%. the euro is up against the dollar today after falling to levels it has not seen since the beginning of 2003 yesterday. the yield on the italian 10 year is up a basis point today. crude oil, ahead of crucial inventory data, is rising by 0.75%. look at spanish banks. big story. spanish lenders including pchael r -- including banco opolare may have to give back billions of euros to mortgage customers after a ruling by the e.u. santander down by 1.5%.

banco sabadell --all falling on that news. here is nejra cehic. nejra: spanish banks including bbva may haveand to give back billions to mortgage customers after a ruling by the european union top court. judges of the e.u. court of justice ruled borrowers who take too much interest on home loans predating a 2013 spanish ruling are entitled to a refund from the banks. the court says a proposed time limit on the refunds is illegal. volkswagen has reached an agreement with u.s. car owners and regulators to fix or by back about 83,000 vehicles with emissions-cheating diesel engines. the accord covers some luxury models released since 2009, and resolves a significant piece of vw's in missions cheating scandal. both houses of italy's

parliament are expected to vote today on a 20 billion euro bank rescue package, as data suggests the banks need at least 52 billion euros to clean up their balance sheets. speaking yesterday, the finance minister rebuffed suggestions that the financial industry is teetering on the brink of disaster. the italian banking system is not on the edge of a chasm. i strongly refuse this definition. nevertheless, as the government has been saying for a while, there are some elements which have market solutions, but may require precautionary measures by the state. news 24 hours a day, powered by more than 2600 journalists and analysts in more than 120 countries. i am nejra cehic. this is bloomberg. mark: berlin remains a high terror alert is the search for a driver who plowed through a christmas market continues. 12 people were killed. others were injured.

we are joined from the german capital. the arrest was made but the suspect was released. what do we know about the driver of this truck that plowed through people in this west berlin market? matt: well, the problem is, mark, we don't know who the driver was, or where he or she is, or whether or not the driver was working with other terrorists in order to plan this attack. the suspect who was taken into custody yesterday was a pakistani refugee who has been and still is, i assume, seeking asylum in germany. police said later that day, later yesterday, that they did not have enough evidence to connect him to the crime. and so they let him free, let him go, and are stepping up their efforts to find out who the driver is that is responsible for that death and destruction at the christmas market. claimeday, isis has now

it is one of their "soldiers" who was responsible for the attack, although we do not know much more about the connections between the driver and the terrorist organization. chancellor angela merkel spoke yesterday to the nation. how much pressure is she under right now? matt: she is under a ton of pressure. i mean, most importantly because the person who perpetrated this crime is still at large, and therefore could perpetrate another crime. that person is also assumed to be armed and dangerous, because in the hijacked truck, the scandia tractor-trailer used to kill these people, was found the body of a polish truck driver, shot and killed. thee was no weapon found at scene. that means the assailant who escaped presumably has still got a weapon with him or with her. secondly, it is important for

angela merkel politically to get this taken care of, to get it under control. she runs for reelection later next year. and one of the primary criticisms of her tenure so far has been the fact that she allowed in to germany almost a million refugees, almost unchecked. for example, if you are taking in refugees from war-torn syria, why are we getting refugees, the critics are asking, from places like pakistan? that has become a real problem politically not only here in germany, but across europe and around the globe, for angela merkel. if she faces stronger opposition, it would be a more serious problem. miller inmberg's matt berlin. more from matt later. let's get more details with the associate fellow of the russia and eurasia program at chatham house, and oxford economics head of global research gabriel -- gabriel sterne.

how much is chancellor angela merkel's leadership being damaged by the incident at the west berlin market? >> inevitably, it has. the leader of any country is going to be blamed for something they could not actually help. i do not think it makes any difference to her initial policy, which was generous. that some badble people would come in as well, and or there are existing bad people in germany who would try to demonstrate their loyalty to jihadist motives. you say generous. some would say overly generous, especially those anti-immigration. andrew: there is room for argument on this, but it was generous. it was an emergency at that time. to be fair to her, one has to remember that now. mark: electorally, can she survive another attack of this nature, closer to the election next year? but it possibly not,

very much depends who is standing against her. the alternative for deutsche ofd, which is a party critical reaction to these sorts of things, is likely to do better, and that could damage her standing in the bundestag in the future. but i think it is too early to say anything yet. mark: gabriel, but it does do is fuel populist talk as it -- as we approach a number of key elections in europe next year. does it change the picture ahead , and soerman election on and so forth -- the french and maybe the italian? gabriel: i think it is a bit like -- each election is a bit like rolling a dice. you get al a one, populist government. on its own, each one is not to worry them. you cannot help but feel if you roll the dice too many times, you will elect some populist governments in europe at some point, be it on the far right or otherwise. that is the worry for stability in europe. mark: the markets, investors, as

they have done again and again the last couple of years, turkey,g off events in events in switzerland, and events in the west berlin marketplace. gabriel: and i think in a way, the ecb has got you covered. global central banks have got you covered in the sense if you look at not just political risk, that correlation between systemic risk in the banking system and measures of government risk. in italy, that has broken down. i think in an environment of low global interest rates, probably you can, for the time being at least, suppress some of these risks. mark: andrew, it seems the results of the killing of the --sian ambassador to turkey that relations between russia and turkey will not be strained, if you listen to the rhetoric in the last 24, 48 hours. is that what we should take away from what we have heard from

top-level officials in both countries? short-term, in the future at least. it is very much in the interest of both countries. and it should be said that they are both blaming different parties for the assassination. and it is not actually clear at all who -- with the motive of the killer work. it could have just been someone who was generally aggrieved by what was happening in aleppo and was acting on his own. he could have been involved with terrorists in syria. or it could conceivably have been something to do with gulen, although he denies it and that would be slightly surprising. mark: both sides are saying they will renew their push for peace talks and a cease-fire in syria. will anything come out of this? andrew: i could not possibly tell you, because we have been here before. we had the same thing with lavrov and kerry. there will be a radical change

in policy in the united states following trump's inauguration. maybe or maybe not -- we do not know. mark: we will keep talking. andrew would from the russia and eurasia program at chatham house, and graham. they will be staying with us through the hour. the clock ticking for monte dei paschi as the bank looks to raise 5 billion euros before the end of this winter. we had to milan for the latest. the latest. the dow reached a record yesterday. we talk what to expect with gabriel stern from oxford economics. and theresa may sticks to her and rebuffs ae scottish referendum. we bring you her comments in parliament yesterday. ♪

mark: welcome to "bloomberg surveillance." here is nejra cehic. nejra: coca-cola has entered a deal to buy ab inbev, with a stake in africa for $3.15 billion. companies have agreed for the world's largest soft drink to buy ab inbev interests in bottle operations in african nations and central america. a boosted profit outlook in the a bet onrter signals moving more into software and completely away from handset is paying off. shen told bloomberg the firm can improve on its profit margin. john: a normal, growing software company could normally do better than 7%. but it would take a while to get there, but we can do that. nike has posted

second-quarter results that past analyst estimates, soothing concerns the sports brand is losing ground to competitors such as adidas and under armour. was higher than analyst projections. sales rose 6% to $8.2 billion. that is the bloomberg business flash. mark: spanish blanks including ntanderopular and sa are falling after a ruling by the utah court that they might have to give back money to mortgage customers. -- five e.u. court that they might have to give back money to mortgage customers. what was this case about? >> interest rates are low or negative, as we know, more recently. spanish mortgage holders were not benefiting from decreasing rates because the banks were not passing those on. this ruling basically says they are going to have to benefit retroactively, which means banks will have to give them back money.

this is somewhat of a surprise because a few months ago, in july, it was expected the court would rule in favor of the banks. that is why the shares are moving so much this morning. mark: some shares are moving more than others. are some banks going to be affected more than others? we are saying banks might have to give back billions. is there a figure out there that banks are going to have to give back? work out will have to the details, but yes. depending on the types of mortgages the banks were handing out, they will be affected differently. do not forget that some spanish banks are in a stronger capital position than others. suffer more potentially from this ruling. that is what we are seeing this morning. mark: meanwhile, italy is still in the spotlight. the government clearly seems to be moving a little bit closer to a potential rescue of monte dei paschi. where are we in this saga today? lisa: i think we getting

into the final act. go.ou days to the share sale closes tomorrow. you still have business investors. the bond swap is coming to a close. by friday, the government is expected to outline exactly how this is going to work. there is about 20 billion on the table. that much, we know. what we do not know is the aid they will be providing. is it going to be buying equity? much of a hit will some banks stakeholders have to take, in particular the bondholders, which under european union rules have to share the burden of any state aid, in the way of swapping their bonds into equity ? that will come at a cost for them. in italy, that means a lot of households,relied heavily on the retail networks to sell their debt. the hit to retail investors could be -- people are going to

be watching the next few days. mark: we will speak you again later. milan.s in next, we look at russia's relationship with europe and the geopolitical risks in 2017. that is coming up next. for more, tune into "radio daybreak london." ♪

mark: welcome back to "bloomberg surveillance."

let's get more on russia and geopolitical risks. andrew would is with the russia and eurasia program at chatham house. he was formally -- formerly the british ambassador to russia. so many questions. liftthe u.s. or e.u. russian sanctions soon after donald trump becomes president? andrew: i think it is quite possible. i doubt whether they are going andse them in a drastic immediate way, but that will be the russian expectation, that they would. it will depend at least in part whether the then president chooses to make a trip around european capitals before going to moscow, or if he goes to of haste.some sort the difficulty for him though is, there is not really a bargain on offer from russia which would give anything in return for changing the sanctions regime. there is no prospect of the

crimean war to resolve by that means. there is no real prospect of russian interference in eastern ukraine, which they deny any way, using because of that. and there is very little prospect of change in syria. so i am not sure what he gets out of it. mark: what do you make of all this talk of trump getting closer to putin, and dump and putin having this relationship? the nomination of rex tillerson as secretary of state has hoursed a lot of news because of his links to russia. andrew: his links to russia are entirely predictable and entirely understandable. when he was the chief men of exxon, he had, obviously, an interest in being accommodating as far as he could toward putin to get at the oil field. that does not necessarily become the same when you are secretary of state. it is a common experience of u.s. administrations that they start off believing that somehow

making nice to russia will produce results, and discovering it produces absolutely nothing at all, and getting down a path of being much more resistant to russian claims or land issues. mark: you think trump might actually -- that revelation might become apparent to him pretty soon into his tenure as president? andrew: it might. he is pretty thin-skinned. so when insult or two would produce unpredictable results. but i was thinking more of tillerson's experience. he is someone who has, with exxon, always delivered pretty hard bargaining. that is the exxon style, is not to be cowed by anything. so i do not see why that should not translate into secretary of state also. whatsaid, we do not know the trump overall position is going to be toward russia. there has been no sign of anything being thought through

or prepared. the team he has assembled has pretty contradictory experiences of russia, and apparently contradictory experiences of what to expect. mark: what about trump's overall foreign-policy views? he has already shaken relations between the u.s. and china by taking that phone call from the taiwanese president. the whole one china policy has been central. how do we expect u.s. foreign-policy to be conducted under trump? andrew: well, one must hope not by twitter. thing that the first comes into his mind. he says he is a clever man, which may or may not be the case. i have no idea. there are degrees and sorts of cleverness, in any case. one is to prepare the ground and think it through. the other is to say the first thing that comes into your head and you hope it is right. so far, it is more the latter.

but he is still, in some part, on an election campaign. mark: he is not president yet. , associate at chatham house. gabriel stern is back in a second. i want to tell you about monte dei paschi shares. they are slumping today. they have been halted, down as much as 17% today. getting a few headlines. monte dei paschi says liquidity may turn negative after four months. comments on risk are in its prospectus supplement on its website. it is desperately trying to raise this fresh capital. more on central banks after the break. ♪

.

mark: welcome back to bloomberg "surveillance." let's get the first word news. may have to get back billions of euros to

mortgage customers after a ruling by the european unions top court. judges ruled borrowers who paid too much interest on home loans predating may 2013 spanish ruling on so-called mortgage floors are entitled to a refund from banks, the court says a proposed time limit is illegal. berlin police have stepped up behind for the truck driver who attacked christmas shoppers in berlin. an initial suspect released without charge, a 23 pakistani refugee, they fail to commit -- prove he committed the crime. angela merkel visited the scene yesterday and the islamic state said that one of its followers carried out the attack that killed 12 people. vw has recently billion dollar agreement with u.s. car owners and regulars to ask or buy back 83,000 cars with emissions cheating. it covers some luxury models release since 2009 and resolved

another significant piece of their admissions cheating scandal. a powerful chain reaction explosion has ripped through mexico's best-known fireworks market, killing at least 29 people. a huge plume of smoke was sent billowing into the sky, the bustlingmarket was with shoppers stocking up on fireworks to celebrate christmas and new year's. global news 24 hours a day powered by more than 2600 journalists and analysts. this is bloomberg. mark: sweden's bank has extended its qe program into next year. this comes on the heels of the decision yesterday to do nothing opposite -- gabriel is back with us. of 2016, if itg was meant to see central-bank divergence with -- would the fed

hike rates, they thought, the markets did not. boj,was diverging from the the ecb, what will 2017 b when it comes to the big theme for the global major central banks? >> 2017 really will be divergent. hikes in thele of fed next year and very little anywhere else. that has big implications for euro-dollar which we think will hit parity. mark: how soon? >> a few months maybe but it is so close come all it takes is something small, but i think in the second half of the year. then i think it could stay around parity and the euro could recover. at whatstrong dollar, point does it become problematic? gabriel: potentially it could be

quickly in so far as -- you were talking earlier about china, the thing about the strong dollar, it does nothing for the u.s. trade balance and that is what donald trump has as one of his policies to help u.s. manufacturers and exporters which puts more pressure on the terrace that may be him to take a tougher line with china, even if he does not bother terrace on tarif on china, itfs with more pressure on china to scuttle out" essentially and these things are quite connective. mark: are you surprised that the investor viewpoint of donald trump has been let's look at the upside rather than let's look at the potential downside which is trade, protectionism? when might the mindset of

investors change? it is always play should and growth -- reflation and growth. thinkwere surprised but i -- if i think of what bond yield price have moved about 50 basis points we would say an extra to hikes which two fed gets you to 15 basis points so i think there is a disconnect over what bond yield is saying. forward, we can see the infrastructure -- the tax cuts that justifies high-yield but i think the risk probably are two way, the markets could be surprised on the upside or downside going forward. mark: on trade, labeling china a currency manipulator -- >> those are the elements of

uncertainty -- we are a scenario-based firm, i guess what the markets are more focused on is the fear of deflation. post-tax profits for u.s. corporate's makes plain white evicts asgard down but it is certainly a disconnect that puzzles us and many others, he injects a lot of uncertainty does trump. have the move index, the treasury volatility which is high, fx volatility, there is even a disconnect between asset classes, which is good for hedge funds, finally divergence. gabriel: it should be, they can have good bets against each other and winner takes all. mark: the central banks, you fear divergence but many said the boj's pinpointing of the yield curve is a type of

tapering. of its bondoduction buying program, reduction isering, when you say there a divergence, yes the u.s. is clearly raising rates but maybe we will not see looser policy from the boj and the ecb, the policy at best and worst states the same. gabriel: the weaker yen is helpful for the boj and has a big impact on corporate profits in japan. the ecb, we think robust survey , we think europe could be heading to a one .5% gdp growth next year -- 1.5% g growth -- gdp growth next year. maybe what mario draghi did was quite smart, it will be a wild

before they raise rates, a couple more years. mark: has tapering begun? 60y went from 8260, -- 80 to , will be -- gabriel: what i would say, which summarizes our view, we have a net expectation of the amount of over thehe next -- qe next couple of years, that is how i would put it. you, they there, thank head of global macro research at oxford. mark: theresa may says she will be a death reveal more about her brexit plans early in 2017. we will be speaking again to oxford economics in real stern who will tell us what to look out for us in the next 12 month and the entire parliament votes

on a rescue plan, will it be enough? ♪

mark: welcome back. i am mark barton and loaded. that get a market check. >> european equities, yesterday the stoxx 600 hit its highest level of the year, the dow hit a fresh record but a little bit of caution into the markets to date with the stoxx 600 up by 110 -- all by what the other percent. 1%.ll by 1/10 of you have utilities and financials leading the losses, spanish banks some of the worst performers after they may have to give back billions of euros

to mortgage customers after a ruling by the eu's top court. gmm shows cross asset, the eye that down seven cents of 1%. 7/10 of 1%. i want totility -- talk about volatility, i have a great chart, equity markets, especially in the u.s., the bull rally seems to be wiping out the fear and the vix has dropped the tortoise lowest level since 2014 where global fx and treasury volatility have an increase. you see the divergence at the end. a great chart, check it out on the bloomberg. keeping a watch on the dollar, a little bit of a pullback, the dollar index causing after two days of gains which is how it is manufacturing in dollar-yen.

we were at 118 yesterday when the yen reached its weakest since february. weaker dollar, stronger yen. a check on oil, extended its advance, that ati about $53 and brent above $55 after american petroleum institute data showing u.s. crude stocks whilst declined last week, trimming inventory overhang and looking ahead to data which is projected to show a decrease or a fifth week in u.s. crude inventory. mark: thank you. yesterday theresa may told parliament she hopes to trigger article 50 by the end of march be a transition phase may needed and weighed in on the suggestion of a new scottish independence referendum. theresa may: i do not think there is a need for the scottish government to hold another scottish independence referendum, they gave that view

in 2014 that i would go further and make this point -- if scotland, that is one of the points in the paper that the scottish governments have produced on brexit, if scotland were to become independent, not only would it no longer be a member of the european union it would no longer be a member of the single market of the european union or the single market of united kingdom. deal is a transitional looking more likely? it has gained traction in the last week. gabriel: like many negotiations we have seen in europe, you have the path of least resistance on one hand and brinksmanship and the path of least resistance is a transitional deal which means we stay in the -- which means not much change from now. that was inevitable, quite hard to envision this thing could get done in two years given all the

negotiations, the elections in europe going on, i think a transitional deal -- mark: you only talk about the transactional deal once you have the meat and bones sorted out? and come upexit with some sort of new relationship with europe. what will that new relationship look like ultimately? gabriel: we are fans of running complicated scenario trees which gives you various degrees of accuracy that at the moment i think we had something like 37% on a free-trade trade agreement and that will probably go up because once you get the transitional deal it seems more likely. mark: that falls into hot, cold, hard, soft, red, white, blue brexit, go on, give us the analogy. >> closer to --gabriel: closer to harden them soft -- mark: you are leaving the single

market but striking a free trade deal? gabriel: the one thing that came out of the referendum was sovereignty of migration policy and the best you can hope for if you were going for that is a free trade agreement. u.k. isonomically, the weathering the host -- post-brexit referendum time better than many had imagined it would. does the true pain start to be felt and 2017? gabriel: probably not, especially if you get these transition agreements. you get the benefits of a lower pound a long way before the pain starts. it could be another year where things go on the outside slightly, 1.3% next year which is pretty close consensus. mark: what were you on june the

25th for next year? .5? gabriel: well above consensus and we have not moved that much that have gone up a little bit. on the basis that the costs come later, they were never likely to be as big as the chesler was saying, we were thinking somewhere between 1% and 5% of gdp in the long run. definitely negative but not as big as people were saying given the impacts on sterling. if you delay things, should sterling recover because it is pricing in something further in the future. mark: we have seen the lows for sterling against the dollar? gabriel: probably. we will see modest recovery going forward. mark: do we need anything else from the bank of england or not? gabriel: they are likely to stay for a while. mark: after the six months of tv

is over -- qe is over? done from the bank of england's perspective, an increase -- maybe mark: a fiscal boost in the spring budget which is the final spring budget. gabriel: what i would like to from the populace, low rates means more infrastructure investment, what populist economist like, we want more infrastructure investments, i do not know if we will see it, some institutions around the world are not exploiting the low bond yields that they should be. mark: we will talk more about that. stay with us. up next, what is in store for next year as the world order. ♪

mark: welcome back. i am mark barton. let it be bloomberg business

flash. -- the companies have agreed for the world's largest soft drink maker to buy ab inbev modeling interest in five african add to central american countries. fedex shares fell in extended trading after second-quarter profits those short of analyst estimates as the operator of the world's air freight character desk area boosted investment. blackberry has boosted its fiscal 2017 profit outlook and made a profit in the third quarter, signaling the company bet on moving more into software and away from handsets is paying off. the ceo told us the firm can't improve on its profit margin. can improve on its profit margin. >> it can do more. ke has posted

second-quarter results that surpassed analyst estimates, the brandoncerns that is the brand is losing to competitors. billion.e 6% to $8.2 closing a company after it lost 24%, it allocated money among a group of 11 portfolio managers lost 6% last month, a short-lived experience for blackstone which started the company in 2014 as its first in-house multi-manager funds. mark: thank you. gabriel stern is still with us. we were talking about populism at its impact on global fiscal prospects. what impact could and should and

might it have? gabriel: donald trump surprises negativey we read in aspects of populism but the markets have shown there are positive aspects. pressure on fiscal policy is one where i think would be very good for the world. a question is whether it could be replicated elsewhere? i think the history of populism is that, although a populist rarely gets elected their policies impinge on the governments of the day. that is one thing we have looked at. most of i think that the populist around the world are not really focusing on fiscal policy the way that maybe i would have hoped as an economist. our study is coming down -- there is a chance a private list get in and take the path of least resistance. overall, i think there is not

too much to come. mark: not much from europe? gabriel: probably not, the big country that should be doing more on fiscal is germany, very little populist sentiment towards stronger fiscal policy and in other countries in europe, france, italy, spain, ofre populism -- the focus five star and le pen has not been on fiscal policy but on other things. mark: 2017, give me some outlandish frictions? if it was feared donald trump and brexit, can we match it for shocks? gabriel: it will be the year of donald trump and brexit also. i were bad time is that from towers over global risk -- trump towers over global risk which i

think is still the case and you could fake scenarios in which donald trump does what he said he would do in terms of tariffs and full expenditure which would have a big impact on global imbalances, it might endanger free trade globally. are some good aspects of donald trump which is getting the world away from this deflationary risks but at the same time it could be a situation where you are back to the 1980's in terms of reaganomics stoking the imbalances. donald trump is the fiscal engine and china the fiscal shock absorber because there is not enough demand elsewhere in the world, so you have two big economies, the good news is they are both on the side of physical expression but the bad news is they have their own imbalances. mark: we will see you in 2017. thank you, good to chat with you. and of global macro research at

oxford economics. how scottish banks are trading after that ruling, they may have to give back billions of dollars to mortgage customers after a ruling by the utah courts. -- eu top courts. bbva down 6.41. guy johnson and tom keene will speak to a top economist. this is bloomberg. ♪

tom: it is that holiday field this wednesday, markets churn and the dollar is resilient for the fifth day, pound sterling cannot find a bid.

can italy get the transaction done? what will be the price extracted by cutter and company? in berlin, authorities search for an isis soldier. this is bloomberg surveillance, i am tom keene with guy johnson in london. angela merkel visiting the site near the church, pictures a short very. : the absence of a suspect is unnerving the germans a great deal. they do not know who did that, isis claims responsibility but the person they are looking for, they do not know which is destabilizing the german psyche. tom: yesterday was originally berlin.ara, zürich, and to our first word news. the city of berlin under a

terror alert as authorities look for the truck driver who killed 12 people at a christmas market. an initial suspect released without charge, they fail to show he had committed any crime. scene merkel visited the yesterday and pay tribute to the victims, the islamic state set one of his followers carried out the attack which left dozens of others wounded. spanish banks may have to return billions to mortgage customers after a ruling by the european union top court, judges said borrowers pay too much interest on home loans predating a ruling. saying they are entitled to a refund, the proposed time limit on a refund is illegal. a powerful chain reaction has ripped through mexico's best-known farmers market, killing at least 29 people. scores more injured as smoke bellowed into the sky.

on the northern outskirts of new -- mexico city were stocking up on fireworks ahead of christmas and new year's. united nations secretary-general is sending his strongest signal that he could run for president in his native south korea. he says he would enter the politicalhe says he would entere political fray in his decade-long experience at the u.n. can be of help to the country. he is planning to return home in january after two terms as you in chief -- un chief. this is bloomberg. tom: thank you. let's get to a data check. nothing going on in equities but we creep higher. how silly yesterday, the dow at 399.0 here in the euro 1.0

the dekes showing -- the next 11.39. -- vix, sterling 12345. if i am in london next week, maybe i can afford dinner. guy: we were calling out the -- we will rename it. me, aa painful trade for great trade for you guys, great restaurants over here. the euro stock e*trade, big move , down 6/10 of 1%. the negative rates story is beginning to run out of steam.

paschi now trades on a book value of 0.05. jpmorgan trades on 1.4 or 1.36. tom: we will talk about that in a little bit, unimportant story on this wednesday. -- and important story this week -- wednesday. here is where american consumption was 30 years ago, 40 years ago, jfk and lbj are here and here is nick's and and clinton. and clinton. the 1990's a weaker recession, the 1970's recession. we have come up but we have barely got up to these recession levels. it is an interesting overall consumption in america, even though dana talks about a boy of retail in the holiday season --

buoyant retail and the holiday season. guy: it has symmetry to my chart, the u.s. german teen years fred -- 10 years fred. -- year spread. spreada sensational across the atlantic in interesting impacts in terms of what will happen with the currency, etc. or will it? the bond market, having a low with yields in germany and remaining stable in the united states. , does that goew wider? >> may be that much of the widening has happened, the market is pretty much pricing in everything donald trump can deliver. the market is pricing in significantly more u.s. government borrowing whereas the german government is named down debt. -- paying down debt.

there is not another big move like that to come. guy: does it come down or stay? >> ted probably stays elevated for a while because a difference between a country that wants to have a significant stimulus and eight fiscal deficit and germany which has a little fiscal stimulus year by year and running a fiscal surplus at the same time. guy: you sound unconvinced about what the americans are about to embark on. is the view from germany that the americans are making a mistake? >> the view from any economics textbook is you do not need a fiscal stimulus when your economy is growing and the u.s. is growing at 2% which seems to be cruising speed. , in thelook for proposal before congress, how much is there in a progrowth reforms? how much is this tax reform element in their?

if the u.s. raises its supply potential through a much better and much more rational and simpler taxation of business, that would be great and the u.s. could afford the extra spending. if the impact is more on let's spend more money without doing anything about u.s. supply, i would say textbooks would suggest that this does not make sense long run. tom: when i look at the donald trump reflation it is about confidence, will that translate to europe and the many different parts of europe? >> if there is a significant confident effect in the u.s., if there is something coming out, something positive coming out of donald trump economics, that will translate to europe but not a big effect. europe gets a little kick from the exchange rate, a little kick

from u.s. domestic demand if it goes up with probably it will but i do not think it will be a huge one. tom: we will talk about italy later, you made important comments on germany in how germany adapts and adjust to the new europe the last time you were with us, does the terror attacksf -- terror change the calculus for chancellor merkel in germany? >> these horrific attacks probably do not change the calculus in germany very much. as to economic policy, there is not much of an impact. eating up its spending on external and domestic security anyway. -- beating up its spending -- speeding up its spending on external and domestic security anyway. the elections next year, what we

would have to seek to cloud the outlook for angela merkel is a shift of votes from her party to the only sort of conceivable alternative to her which would be an alliance of left of center forces. thisere is an impact on terror attack -- from this terror attack, it may be short-term a little shift towards the ultra-right, anti-immigrant right but that would not strengthen the left-wing forces in any way. probably be political outlook for angela merkel is more cloudy but she is still likely to win the next election. but first,come back, joachim fels will join us from pimco with a view towards next year. from london and new york, this is bloomberg. ♪

♪ guy: i am a guy johnson in london with tom keene in new york. let's get a bloomberg business flash. >> an italian lender says it's liquidity may run out more quickly than expected. the bank said it could turn negative in four months and worsen from their. last week, it's a liquidity would be exhausted after 11 months. their efforts to find private capital are quite discouraging. vw has reached a billion dollar agreement with u.s. car owners and regulators, they will take for my back about 83,000 audi, vw, porsche vehicles with emissions cheating's bid -- details still being worked out, the judge has ordered lawyers to

report back on thursday. that is the bloomberg business flash. guy: the dow hit a record yesterday fueled by bets on the incoming u.s. administration. imco is sticking with its new neutral forecast for modest growth and low interest rates despite expectations for change under donald trump. more from their global economic adviser, joachim fels. on the distribution of outcomes in 2017, getting faster and faster, how much of a black box is 2017 in terms of economic forecasts? >> a black or box than ever -- ever becausehan the tails of the distribution of outcomes have to come faster with the u.s. election, the markets only focusing on the right tail which has been fatter

but always a fat left tail for the outlook for next year because a lot of uncertainty about the actual policies we will see from donald trump. it is interesting that the donald trump recession is quite possible over the next four years because every republican president since world war ii has presided over at least one recession in his term. guy: let's put our predictive hats on, how far away do you think that is? a long cycle but some elements missing from the cycle and there may be more. how long will this economic cycle be? it will soon be the third longest economic expansion since world war two, next march it will become the third largest. inre are no big imbalances the economy so in that sense donald trump isn't a better position than ronald reagan was, richard nixon was, or the bushes

because he is not inheriting an unbalanced economy. it has further to run in that sense but there are a couple of risks, the first one is he overplays the protectionist card , that he really gets tough not only on mexico but china. you get a retaliation and a trade war. the second recession risk is that -- this may be more towards the end of his first term, the fiscal policy that he wants to implement overheats the economy in 2018-2019 and the fed may have to raise rates aggressively in 2019 and could create a recession in 2020 at the time of the next election. tom: help me with trump reflation in negative rates. i guess it is optimism and confidence to the rescue but i do not buy it, german tenure and white and german two-year in yellow, for those of you on radio, negative rates in the 14, down we go and

roll over the two-year german negative rates worse, do you assume trump reflation, negative rates go away? >> i do not think a negative rates in europe go away soon, what happened with the ecb decision this month, they implemented a stealth rate cut because they removed the deposit floor for the bond purchases of the national central banks which means the bundesbank can buy bunds -- bots that yield less than 40 basis points. we are back to the currency war, the cold currency war rather than an open one and it has had the effect that the euro has depreciated. tom: i have to steal that phrase from you, i am sorry, i will be using the phrase cold currency war. joachim fels who came in from the cold. when i look at the cold currency war, part is the left it risked you were talking about earlier. if you have a probability

distribution, everybody focuses on my right to instead of the negative, when you combine negative rates in the distortion of the bond market, how will that play out on that let's live -- on that left side? i think the cat is -- if you look -- pat is, if you look at the u.s. side, the fed will probably raise interest rates more or faster than they did this year and last year, we see two rate hikes or three rate hikes which 10 to put upward pressure on bond yields, the market is now priced for 2.5 rate hikes that may start to price in more. of boardd put more pressure on the dollar and downward pressure on the euro and yen. on the other side of the atlantic, in europe, higher bond yields in the u.s. dragging up bond yields in europe at least

in the longer end of the curve. there was a stealth rate cut by the ecb, the bundesbank buying at the short and intermediate in but at the short and you will continue to see negative interest rates and the net effect is that the yield curve will steepen. , over theer element weekend, i think it was a wall street journal interview, they talk about shrinking the u.s. balance sheet which is probably a bigger factor for 2018 but if they start selling down the balance sheet instead of reinvesting, where do bond yields go? >> if they start selling bonds aggressively, -- we may be talking about another 52 100 basis points on the german-u.s. spread. the need for selling the u.s. bond portfolio. what we will have is the ratio of the fed balance sheet to u.s. gdp come down anyway simply

through nominal gdp expanding somewhat faster in the future. i did not see the need to normalize the fed balance sheet through significant asset purchases. if so, that would be a potentially disruptive surprise for markets. tom: thank you so much. joachim fels, we appreciate your attendance, he is with them go. -- pimco. roach next hour, stephen on the fed, on american conception. this is bloomberg. ♪

guy: i am a guy johnson in london with tom keene in new york. the italian parliament has been asked to approve up to 20 billion euros for a precautionary fun to rescue troubled lenders. according to data, the country's -- the- they need 52 economy and finance minister says the situation is not as dire as some are suggesting. the italian banking system is not on the edge of a chasm, i refuse this definition. as the government has been saying for a while, there are some critical elements which have market solutions but that may require precautionary measures by the state. more.et's get

book of monteice dei paschi. the market has priced it to nothing. the finance minister talks about the banking system not being on the edge of the chasm but the market disagrees. becausee some sympathy the market is saying monte dei paschi is not a problem in itself. if we can have a back like this and still a functioning banking system that is good but it is embarrassing on the other hand it -- on the other hand. they have not fixed the problem, a very big ballots she and small-market cap -- balance sheet and small-market cap. we're still talking but this from last year when they tried to do a rescue bond which would try to fix the system, i do not

think this is the last time we will talk about this. guy: that is what the market is signaling, it does not want to give more money, every time you put more money in their you are diluting it again and again which is the market is signaling, it sees no solution. where does this take us? pass the italian banking system its arms around the breadth of the problem? >> not yet, the monte dei paschi plant is heartening and it was targeting the specific problem, trying to get the value pin down , trying to find an appropriate discount to sell these loans. that is what we need. but you have to mark them down to a price the market finds believable, we are not there yet. tom: i will bring up a chart i rarely use on tv. this is a chart i use, a little , this ishard to read

one of the ugliest chart i have ever seen. it is the having of monte dei paschi, we do not have time to talk about all of it, come back in the next hour to talk about the absolutely surreal process i see going on in italy. they are not playing by the same playbook as the germans or british or americans with any given bank. we will do this later if he has a schedule to do it. jones of theville united kingdom on brexit, sterling weaker the last few days. this is bloomberg. ♪

tom: wednesday. guy johnson in for francine lacqua in london. let's go to our first word news. >> the end of u.s. agents against vladimir putin was once

part about it but now all but certain for a majority of economists. percent say the u.s. will start using penalties during the next 12 months under donald trump. up 10% from october, sanctions in moscow and posed over the showdown of ukraine in 2014. china: four better coordination in curbing emissions. after a six-day of have -- heavy smog and gulf much of the country and spurred the years highest alert. it is more 16 times the level the world health organization continues that considers dangerous. settlement with former students claiming he was defrauded by his namesake university has won preliminary approval, u.s. district judge set trump university settlement was fair and adequate, will reimburse student for half of what they paid for seminars

unless refunds were already received. this is bloomberg. guy: thank you. behindpolice stepping up for the truck robber who attacked christmas shoppers in berlin. after the initial suspect was released without charge. let's bring in matt miller with the latest. matt: it is a federal police force, the local police handed off the investigation almost immediately. what they are working off of now from mediatand sources in germany that 500 crews including photographs and videos taken -- clues including photographs and videos taken at the scene and dna and fingerprints and other evidence including papers taken from the cab of the truck. bild reporting they are on the

trail of a man from tunisia between 21 and 23 years old and that they are planning to raid areas in an area in the northwest area of germany to try to take this man into custody. initially, they had someone from pakistan in custody who was looking for asylum in germany but he denied involvement and police later released him saying there was not enough evidence to tie him to the crime. guy: what is the mood like? we were talking earlier about the front page of the newspapers this morning, bild's headline and cap pulling -- and cap leading the way they feel, fear. absolutely, whoever committed this crime, if it was not the pakistani let go

yesterday by the police or even if it was, they are still at large. she --cked a truck -- or from a polish truck driver who was shot and killed, they found his body in the truck. no weapon has been found which means the perpetrator is at large with a weapon and could strike at any time. it is christmas time in germany like everywhere else, christmas markets, other than the one closed are open, thousands of them around in germany and people are afraid that this could happen again. guy: we will leave it there, thank you very much, matt miller covering the story out of berlin. joined by pauline neville-jones and holger schmieding is still with us. where does the failure lies in the fact this attack was allowed to take place? pauline: we were discussing

degree of access that heavy traffic and have near a crowded place. i think that we are in a situation where the bigger precaution are being taken at the moment to control access to these private places which is a real priority. there is a question about the extent to which the truck could get so close. tom: you have a history of knocking heads within british politics, our reports on this show, a german security is a little bit lacking ursus what the french and british have learned and even how belgium has adapted in the recent years. what does germany need to do to make their security equivalent to what you have experienced in the united kingdom? pauline: every country has its own way of controlling and policing public events. i think that the french have

used their military a great deal. in the u.k., we have not done that, we have used a great deal of police forces and we have a large group of police forces and we shifted them around to control a particular area. i think probably -- i do not know how many armed police go we increased our armed element in the police force. we have policing by consent in the u.k. at our normal police force is not armed but we have increased the number of armed police and make them visible. it is a combination of technique. you have to have good intelligent and your police need to be linked in with your agencies and they need to have up-to-date information and to the following social media so that they have a very good sense of the elements surrounding an area which they are responsible for policing.

tom: to our european viewers, distinctions there -- in nations between intelligence, not a superiority but within your experience including cyber that the british or french do it better? who is the one everyone including germany has to emulate? pauline: one thing that needs to happen is we need to help each other. there has been an effort to increase the degree of coordination and exchange of information inside europe. the forces are cooperating more closely. one would have to come to the conclusion, there are things german police can learn from the british and french. guy: does european security cooperation start to fade with a

-- in and a breakdown and the lines of communication with communication appearing to be the most critical element? pauline: we are not talking about the breakdown in the coordination and security, the u.k. regards for relationship with her continental european partners as part of her own security. the u.k. has a strong interest in continuing the corporation as we are a valuable player, we provide a good deal of input into the common security of the european continent. partnersope that our when it comes to the negotiations which we have not started, that this area will be regarded as a priority for cooperation. i hope there will be a return in other areas, not a one-way street. security is one of the things

most likely we will be able to continue as now. guy: let's talk about the economics, security costs money, donald trump has a view on europe and its spending priorities when it comes to how much money is spent on defense but let's talk security, the french have increased spending on security and the germans would like to run a balanced budget. is the politics and terrorism threat, as it becomes greater and the to intermingle, germany has the capacity to spend significantly more on security, is it capable of doing it from a societal point of view? holger: a first point is the scene in berlin, around berlin there are dozens of these christmas markets which makes it very difficult to have tight security everywhere. guy: pieces of concrete may help. holger: with all of these markets in many neighborhoods, this was not the most prominent of the christmas markets come it is very cold.

lessons will likely be learned and more security. yes, germany does have the will and the means to spend more on security, it will do so. germany is probably running this of a halfget surplus percent of gdp and in seeing to it and we will probably see more that part of it gets spent on security. this is a process over time, you cannot say we have 20,000 more police, where do you get them? it is a process that takes time, the spending will take time but it is on and upward trajectory or internal and external security and with the german fiscal position being comfortable, expected germany to stay on this path of spending more on military and domestic where asfor long time in other countries, we do not know when the next fiscal cuts will need to be distributed. tom: let's come back.

guy johnson in london and i am tom keene in new york, bloomberg surveillance on radio later, the council of economic advisers, alan krueger. ♪

guy: welcome back, you are watching "surveillance." eu's top court said u.k. rules requiring internet phones and phone operators to store companies information in some cases violate current law. with brexit on the cards, what will happen to data protection when the u.k. leaves the eu? pauline neville-jones and holger schmieding are still with us in

the london studio. a small blow this morning to go we call the snoopers charter, about daters for church and -- series ofction, a lawmakers that brought a challenge against the government. before the break we talked about german security and where it sits. more money needs to be spent at the u.k. to bring security up to where it needs to be? pauline: i do not think it is a budgetary issue in the u.k., a budget -- a capability issue. guy: legislation issue? auline: the legislation that only went through parliament recently was looked at in great detail and gone over i cannot tell you, line by line, particularly in the upper house

and i think we have had great resistance in the government to unending that legislation. there has to be the detail of the judgment. storage data imported, a source of information -- important, a source of information, the government has to produce a detailed warrant to get access to it. it is a legal process, they cannot just go along and say i would like some, they have to demonstrate what they need and why they needed. -- need it in front of a commissioner that will in -- it will go through a legal process. -- theis regarded government will want to hang on to it because it is data tomunication that is crucial

the capacity to discover what is going on. tom: help me with a quiet idea of five days of sterling weakness. let me bring up trade weighted chart that bears witness, a huge plunge in sterling off of the lehman crisis, the headline is sterling is on a trade weighted basis, pretty much where it was at the lehman low's, here is brexit showing trade weighted weakness. sterling next year? be at riskrling will year because the start of the brexit negotiations could be pretty tough. britain is drawing of a wrist -- wish list. the eu is not in any mood to grant any of that. touch start of the negotiations may be currency negative and then it depends on how fast written gets real about

its position in europe. tom: critical here is does currency drive the debate? if i get the motion of a 119 sterling -- emotion of a 119 sterling does that change the debate or politicians immune to what the market say? holger: from my view i do not think they are immune but this is a matter which goes far be on what could be called potential shirt -- short-term market moves. it would have to be a market move triggering a sense of crisis which i do not think what happened to really have a serious impact on the debate, probably this is for the markets have to follow the politics, not where the politics will be swayed by the market. tom: let's talk to the politician, if i get a 119 sterling sustained, if it drives to a 110 sterling, you have to be kidding me, a change of the debate, isn't it? government cannot

ignore the value of sterling. you have to pay attention to the economic consequences in -- consequences of the political positions you take. the government is trying to come up with a reasonable package but if the european union decides what they are interested in is the amount of money the u.k. it does not gain to negotiate a package. it is where we will have a problem. 2017 two -- promises to be a difficult year. guy: i am sure you play a mean hand of poker. is theresa may right to keep her cards close to her chest? pauline: what the government needs to try to do, it has to work out what the economy needs and then develop a negotiating hand.

that is a difficult process and there is a big consultation in the country going on. talking,there is no there is a great deal of conversation with business, with various federal trade organizations in order to develop an understanding of economic consequences first of all of potential options of brexit. then developing negotiating hand. it is fair enough for the government not to do that right out in the open. i belong to those who think the government has to tell parliament, this is a democracy, what its position is going to be. whatever the government thinks, parliament will take a view. there will be a parliamentary opinion, the select committee, probably a vote. tom: we will have to leave it there.

thank you so much for your time, look forward to seeing you on our next visit to london in january. we will continue with holger schmieding. coming up, the mixing of it all into the markets. from london and new york, sterling weaker. this is bloomberg. ♪

♪ tom: good morning, everyone. guy johnson in fort francine in london and i am tom keene in new york. let it to the bloomberg business flash. bed, a-cola inquiry in 55% in coca-cola beverage africa at about $3.2 billion, coca-cola will buy a be in debt in bottling operations in several african and central american nations. the drink maker is planning to hold the territories until they can be re-franchise to other partners. two of australia's biggest banks say they will toughen oversight of their foreign exchange practices, after a regular found

inappropriate conduct in the currency trading divisions. the commonwealth bank of australia and national australia bank will each pay $1.8 million ,o the financial literacy fund agreed to make changes in foreign exchange system, controls and supervision. tom: thank you so much. it is an appropriate time to speak with holger schmieding about the contagion of donald trump reflation, maybe a simplistic statement but it is under consideration by every nation and certainly every market. holger schmieding, bring up the chart, anthony, i am loving this chart on the bloomberg, the idea of u.k. inflation, a great reflation of a previous decade, some of the emotion high above 4% inflation. down we go in the great deflation of the last number of years. that is the brexit belts let's call it -- bounce let's call it,

how will donald trump change this chart? holger: he is not the major force to change the future of this line but he probably will have an effect through the exchange rate on british inflation. if there is any place in the western world we have to watch the upside inflation risks over the next two years is the u.k. because it is having the brexit impact and like everybody else having the end of the oil price effect, depressing inflation and having a tight labor market. it is thinking about slowing down immigration, taking an attitude which is seen is immigration friendly, potentially creating labor shortages, yes in a way the u.k. will be the test case as to whether inflation might come back, even more so probably been the u.s. which is a big and more closed economy. tom: i love the idea of a test case. bring up sterling, stay with me,

i am sorry, all you need to note that is if i was teaching a course on moving averages and i do not believe in all this death cross malarkey, this is called the kiss where two moving averages meet, even better double, and incredibly elegant short chart in june of last year. holger schmieding, if sterling breaks down, what does external -- what does it signal for a -- inflation in the united kingdom? inflation -- if inflation were to go down, a time of sustained above 3% inflation in the u.k., that would be an impact on real income and would be the cost of brexit becoming rather visible. we have to see whether it goes that way, i hope it will not in the u.k., the upside risk to inflation with supply constraints coming out of brexit

and a tougher attitude on migration, plus now a general reflationary global climate and they week currency over here, the ingredients for an upside inflation are mostly there. tom: thank you, holger schmieding, greatly appreciate it. i will do more on this chart and have it on facebook live and maybe featurette on bloomberg surveillance television, and elegant chart on short sterling. in the next hour, stephen roach of year university will join us on drones and china. and we will talk about fx. this is bloomberg. ♪

it is that holiday feel. this wednesday, markets churn.

the dollar resilience of the fifth day in a row. found-sterling cannot find a bid . it is kind of like the end of "free willy." in this hour, stephen roach on the next china, the next president, and bluff and bluster as foreign policy. and 50% off, come on down. there is desperation in american retail and consumption. good morning, everyone, this is livemberg surveillance," from a world headquarters in new york. i am tom keene, with guy johnson in london. people he has talked to do not feel fear in germany at the moment, but there is still a person, persons on the loose. the german authorities do not know who that person is. very difficult to get a handle on it if you are a member of the german public. tom: and the news flow, ankara moving forward.

here is sebastian. sebastian: the city of berlin is under a terror alert. on the hunt for the truck driver who killed 12 people at a christmas market. an initial suspect was released without charge. chancellor angela merkel visited the scene yesterday and pay tribute to the victims. islamic state claims one of its followers carried out the attack, which left dozens of others wounded. banks may have to return billions to mortgage customers after a ruling by the european union's top court. judges at the e.u. court of justice said that borrowers who paid too much on home loans are entitled to a refund. and a powerful chain reaction explosion ripped through mexico's best-known fireworks market, killing 29 people.

scores more were injured as a huge plume of charcoal-greg smoked -- of charcoal-gray smoke billowed into the sky. they were stocking up for fireworks ahead of christmas and new year's. and ban ki-moon is sending the strongest single death the strongest signal yet that he could run for president in his native south -- and ban ki-moon is sending the strongest signal yet that he could run for president in his native south korea. the 72-year-old is planning to return home in january after two terms as u.n. chief. global news 24 hours a day, powered by more than 2600 journalists and analysts in more i am120 countries, sebastian salek and this is bloomberg. tom: let's get to the data check. equities, bonds, currencies, commodities. looking at down, 20,000. the curve is flatter this morning. euro was at 1.03, a little bit of balance strength.

"bounce" is the word of the day. complacency,eater 11.36. maybe there is some holiday chat in there. sterling weaker, that is a big , al with the euro-swissie stronger swissie over the last three days. guy? guy: look at what has been going on with euro stock this morning. the brics bank indicating today, let's pause, but there are signs of dissent within the brics bank ics bank. beginning to get to the idea that he needs to price in. monte dei paschi incredibly volatile today. tom: china is in the news. this is a good time to catch up with stephen roach. the next asia was an important

book a number of years ago. he was at yale university, and for years with morgan stanley. stephen roach has always been visible about getting it wrong. nowhere has stephen roach screwed up as much then with the election of our president. he joined us on the set in the glow of our election, and you thought it would be a different outcome than it was how surprised were you, and how has the transition gone for stephen roach? stephen: i am still in recovery, tom. it will take a long time to get over. there is no victory tour that i am on. i am trying to grade papers and be fair and honest to my students at yale. with theyou impressed many people it on the transition team over to economics? do they have a grasp of economics that --

stephen: can you name me one who does? tom: i am asking you. it will be interesting to see -- stephen: it will be interesting to see. tom: we want to get your perspective. this is these stephen roach chart, folks. this is an important chart. people will tell you the american consumer is great. stephen roach even at morgan stanley and that yellow has been adamant. the green lines where we were. here is jfk and lbj down here. here is clinton-reagan right here. span, this is american consumption. it ain't happening. the good recovery we have seen in consumption gets us back to just above recession levels. is it still in american consumer struggling? the numbers are pretty clear. we have had over eight years of 1.6% average annual growth in

real consumption, two points below the trend of the preceding 12 years. it was a balance sheet recession that occurred in 2008, 2009. out of adigging horrific hole. the debt income ratios are down. the savings rate is low but higher than it was. there is still more work to do, so it is key to focus on balance sheet repair in the quarters and years ahead in the new administration. will donald trump make the american middle class great against? guy, he would certainly like to. but it is going to take more than just a politician to transform the rough dynamics that are bearing down in the american middle class. the president-elect is focusing, to his credit, on jobs.

but to get jobs growing again, it is going to take more than a phone call, more than a threat to bring workers back from offshore. we have had fundamental problems that have been bearing down on the manufacturing sector and other sources of job creation for a long time, and for an administration that wants to now be muscular in using trade home, to bring jobs back that could really backfire "protectionist" at a time when our budget deficits are going to get larger and our trade deficits are likely to get bigger, that is a big disconnect that could have significant implications for the u.s. guy: do you get a sense that the policies being talked about thus far are regressive, progressive? of the the mix in terms way income distribution is going

to be during the next four years? stephen: income distribution is ive consideration by the incoming trump administration. that was characterized rightly or wrongly as one of the flaws in the obama administration. they are going back to classic trickle-down supply-side economics, with tax cuts skewed more to those who they perceive to be at the heart of job creation. on: what is the roach report job theory? on trickle-down? stephen: it did not make much of a difference to the median income worker, whose wages did not grow at all. tom: i want to talk about this as a domestic issue. you have a great quote, classic roach -- "a bilateral fix to a

multilateral problem." stephen: no such thing. tom: our president-elect is a dealmaker. he loves to do deals. we can all agree on that. a deal maker does not do multilateral, do they? if a deal maker does time, one transaction in one transaction, one partner at a time, it affects a world economy. tom: guy, we have important news on a beleaguered italian bank. really the italian banking sector at large, tom. what is happening is that the italian senate has approved within the last few minutes a government debt boosting plan for the banks. it is going to boost the debt for the government, not the banks. that is the plan here. the mess that we are doing here at bloomberg seems to suggest that 20 billion is nowhere near

enough to get the italian banking sector where it needs to be in the short term. so, yes, the government is at least doing something. but they monte dei paschi news, there are people talking about this bank really struggling to raise the money. we will have more on this story as we work our way through this morning. it is a busy story for italy to deal with. this is bloomberg. ♪

guy: i am guy johnson in london. tom keene is in new york. let's get a "bloomberg business flash." sebastian: deutsche bank is beefing up its equity derivative units.

this will be the sixth person under the region of james boyle. deutsche bank hopes to capitalize on the next expected corporaterategy from investors. volkswagen has reached a billion-dollar agreement with u.s. car regulators. it will fix or buyback a to 3000 bmw. details are being worked out. the judge has ordered lawyers to report back on thursday. that is the "bloomberg business flash." tom: stephen roach is with us from yale university with his perspective on china. it is looking glum over here because kevin cirilli, announced by martin schenker yesterday in washington -- fireworks in washington. kevin cirilli will cover the white house, this after the

punishment of covering the trump campaign. what is it like to walk into a white house where you follow ?his guy for 18 months what do you expect the first day you are on the be january 21 -- on the beach january 21? kevin: i have learned to expect the unexpected, so i am ready for anything. tom: do we expect news today, thursday, as he goes to florida to hang out? kevin: this has been somewhat of a slow week, but i anticipate more developments in terms of staffing announcements over the next weekend at half. he will be in florida with members of his family. in washington, d.c., has turned into a who's who for the washington crowd, and there has been everyone from sightings of ted cruz to steven mnuchin spotted in that lobby in the past couple weeks. why don't you put me?

is why don't you book me? and be thell kelly press secretary? kevin: we have heard her name, as well as sean spicer and some other folks. i look at sean spicer as someone who could get that gig. guy: is that gig going to be the most redundant in washington, though? presumably donald trump continues to communicate by twitter. kevin: i think that when you look at postelection and even in the months leading up to election day in terms of a communications strategy, you have seen the communications effort reach out in a broader effort on capitol hill to push policy initiatives, and i think that will become more important as the president-elect becomes the president and looks to unravel things like obamacare

and the trans-pacific partnership. they are going to be in charge of laying out the agenda in terms of the communications strategy that is a bit more global, particularly in the first 100 days. guy: do you think the people he is picking for his cabinet will remain on message? will have tok we wait and see, but in terms of the rollout, i would think that the argument that especially in the case of rex tillerson and even steven mnuchin as well and gary cohen, i think there has been somewhat of an elaborate rollout. in the case of rex tillerson, you have coordinated statements that were being released from everyone from condoleezza rice to dick cheney, and i think that that shows again that more elaborate, more nuanced communication strategy that is a bit more beyond what we saw during the campaign. tom: i was talking to one of the offspring last night.

carloslecturing me on slim. help me here with the idea that anybody, including carlos slim, the financier of mexico -- help me with the idea that i hate, then sevenhim, and weeks later i love, love, love him. can the president elect just keep doing that? kevin: if you read "the art of the deal," all of that is in there. we saw this time and time again in the case of the primaries, where he was able to get the endorsements of people like rick perry and some of his biggest adversaries, including ted cruz. in the case of mexico, that traditionally has been where the president goes on his first foreign trip through that was one of two foreign trips that trump took on the campaign trail. the other being scotland. the mexican dynamic is something to watch, especially as trump

tries to push through an immigration policy that was the crux of his ability to win the republican primary. so that is going to be a really interesting dynamic, especially as we get into things like remittances, should he use that leverage and the immigration proposal. tom: kevin cirilli, thank you so much. congratulations on your new duties at the right -- at the white house. some thing i -- have been talking about, his adjacencies. -- theition sees adjacencies of any given country, canada, mexico, are important. stephen: the weakness of the peso is a reflection of trump's about promise to renegotiate nafta and build a wall. again, this is an example of a president elect who is trying to do policy country by country,

yet the numbers are pretty clear. last year, 2015, the u.s. had trade deficits with 101 countries. so if you close down trade with china and mexico, deficit numbers 1 and 4, by higher math, that leaves 99 countries we still run deficits with. that is an example of a multilateral trade imbalance, which is a reflection of our savings problem, not a reflection of unfair practices. roche with us. we will talk about the bilateral fix, given a multilateral reality. we will do that on china next. coming up on bloomberg radio, alan krueger of princeton university. this is bloomberg. ♪

tom: we digress to our waistlines. guy johnson in london. i am tom keene in new york. shelly banjo kills it on "bloomberg gadfly," with one of the cultural moments of 2016. you talk about critical mass. she goes to valentine's day, which i get. restaurant traffic has been pushed down 3%. guy, i guess you have

deliveroo in london. the same idea -- digital takes over. guy: absolutely. you think about the way the whole labor force is being restructured because of this -- is it good for the workers or bad for the workers? it depends on where you are. changing sonomy is many industries. you cannot drive around london without coming very close to a deliveroo rider. membert on the digital -- not on the digital menu is alcohol. you and i are drinking more at home. shelly banjo is not, but you and i are drinking more at home than we were predigital. guy: absolutely, and it will change everything with regard to the kind of structure in the way shopping,e with consuming.

you think about the big things that are about to happen in front of us -- christmas. i would be fascinated to know post-christmas how many people ring up over the christmas period and order in. tom: this is the creative destruction of a given part of a lot of what we do. stephen: the technology disrupts the traditional activities from buying books to what you just delivery.digital meal again, this goes back to one of the key issues that you alluded to earlier. how do we get more jobs out of this? what kind of jobs are they and what kind of benefits are that? what is the benefit package? are these contract or permanent workers? what is their perceived sense of economic security or insecurity? what is -- tom: what is your record papa john's pizza order at the

roach house? stephen: that is classified information. tom: there you go, stephen roach, a "surveillance" exclusive this morning. release the that, taxes. stephen roach with us. seriously, we will come back on the important conversation of china. coming up from deutsche bank, sebastian galli will link .tephen roach's analysis from london, new york. i am hungry for pizza. this is bloomberg. ♪

tom: "bloomberg surveillance." economics, finance, and investment, international relations -- we did too much of that yesterday. right now, "bloomberg first word

news." sebastian: the end of sanctions against vladimir putin's russia is now all but a certainty for a majority of economists. 65% say the u.s. will start easing penalties. the sentence imposed since the ukraine situation in 2014. smog a six-day of heavy and gulf much of the northern part of china, the year's highest alert. the level of toxicity is up more than sifting times what the world health organization says is dangerous. -- 16 times what the world health organization says is dangerous. the u.s. district judge said yesterday that trump university university's --

the president of the philippines does not have a friend in american singer james taylor. in a post on his website, taylor says that the summary executions of offenders without due process is unacceptable to anyone who loves the rule of law. global news 24 hours a day, powered by more than 2600 journalists and analysts in more than 120 countries, i am sebastian salek and this is bloomberg. tom: we want to get the currency in china, but let's take a break with mr. taylor. dr. stephen roach is with us from yale university. the south china sea -- what did you learn on your trip to china? james taylor watches every once in a while. how emergent is this next year he?

stephen: the south china sea right now continues to be a source of ongoing tension between the u.s. and china. does it fester, or will there be a catalyst toward bigger problems? stephen: the taiwan issues dwarf that in order of importance. taiwan, territorial certainty for china is the ultimate tripwire for escalating tension between the united states and china. the trump administration is on course to play that one as hard as they can. in: let's come back to this a moment. right now on the dollar in china -- the director of foreign exchange strategy at deutsche bank -- bring up the chart right now. this is the strong dollar. this is the bloomberg dxy index. it looks like a strong dollar rally to me. do we have a strong dollar policy? default, because everybody else has been putting in a negative interest rate, the u.s.

economy is doing well. dollar policyng and the incoming treasury secretary has not said anything about it and probably cannot do much about it. the dollar still has some significant -- tom: we had a wonderful phrase in the last hour from jacob fells -- from joachim fels. currency war? that we are going to have? sebastian: you have not too much growth and a lot of people trying to compete with it. levels of taxation and levels of currencies -- u.s. economy is doing so well. unfortunately there is some four to competitive devaluation that has happened. in asian economies, they can barely contain their devaluation. they have a problem. they need their currencies to be weak, they just cannot afford it

in the short term. it is a strange war, but one that will continue in the years to come. guy: a question from london. the u.s. spread right now trading 2.3, 230 basis points. we were hearing earlier in the last hour that the banks did go wider. tell me what that means for the single currency versus the dollar in 2017? it tells you that the euro still has some way to go. lag in seen the currency the move for different currency, whether it is u.s. treasury or what is happening in europe. that movement is going to continue to happen. if you continue to see decent growth in the u.s., currency should continue to steepen. we have a forecast of 3.10 next year. if that happens, it will drive the spread wider.

guy: is that a one touch below parity, a sustainable solution that we are dealing with europe 's economic malaise at the moment? give us the more median story. once we are down there, do we stay down there? economyn: the u.s. and -- the u.s. economy and others are starting to do better, so eventually we will see some tightening. but little relative to what the fed doesn't the big question is whether the u.s. growth spurt is relative is -- but the -- but little relative to what the fed does. the big question is whether the u.s. growth spurt is one which is able to maintain a pace of growth for the next four years. the jury is very much open on that one, but for now the market believes that somehow the trump administration will be able to cheat that for the next four years. guy: jim bullard of the st.

interview inan "the wall street journal" says the fed should start thinking about reducing its balance sheet. what with that due to u.s. bond yields? how would that ripple out across the world? sebastian: it would drive yields higher. they would be selling the entire curve it, and therefore, what would the demand be? the people who used to buy this in moderate to hire yields where reserve managers. reserve managers are seeing a petroleum outflow. if that is no longer going to be there, that means more volatility. tom: what you brought up is so important, guy. that is james bullard. mr. bullard says the paper needs a lot more work. stephen roach, bullard's paper this year on regime change -- is

that what we are in right now? did bullard get it right, that on the x axis of how a central ank acts, that when you have regime change and have to reset -- is that what we will do in the next six months? thehen: he is raising fundamental question that a lot of us have been asking. tom: this is true. i will give you that. stephen: thank you, tom. once the emergency that led to the creation of qe, balance sheet expansion, zero, slashing negative interest rates -- once the emergency is over, what is the trajectory of going back to a more normal monetary policy to set us up to deal with more normal economic conditions? he is raising a number of issues that need to be addressed in answering that critical question. tom: here is the chart. this is the asset sheet, the balance sheet. in white, the fed. in blue, the ecb.

in red, japan as a percentage of gdp. if we stick with europe and the fed, do you presume there will be a point that they act within a regime change, or do they let it fester and run on forever? stephen: if they do, they run the risk of financial instability. look at the red line, for example. doubled-- they have as a tripled down on qe share of gdp, and yet the growth rate has gone the other way. it has been weaker post abenomics then it was pretty abenomics. -- then it was pre-abenomics. yen everyone focused on the is the pressure valve, the pressure cooker. do you presume a weaker yen given this massive distortion of their balance sheet, and frankly, their whole system? sebastian: it is continuing to expand for you can imagine a weaker yen, but it is really

what the fed has been doing. tom: this is critical. the boat the fed drive of all we are talking about next year? is the fed the catalyst for every other conversation? stephen: i don't think so. in fed has played a key role its approach toward unconventional monetary policy and low interest rates. but there is a time and place for everything, and the fed did a great job in addressing the aisis, but it also did disproportional role of getting us into the crisis in the first place with their reckless toetary policies from 2000 2007. so there is a distinct possibility that we could be headed in a comparable direction in the future.

guy: sebastian, how much of a gravitational force will u.s. policy exert over the rest of the world? if you are sitting in frankfurt and watching u.s. treasury yields go higher, you would there that at some point will be catch up. do i have to lean in on that before i marry a draghi gekko sebastian: you may -- a miry a draghi? sebastian: you are going to have to. if things improve over the long-term, measuring the 10-year -- the 10-yield, the five-yield. as a u.s. curve steepen's, it does not necessarily mean that the boom curve will steepen forever. it will steepen mechanically because people trade the spread. it will also settle down to long-term execution of growth. they might have to do something,

but it is too early for them to do so. it is really going to be in the periphery, trying to cap the potential for upper move -- for upward moving. galy withtian deutsche bank, who will join us surveillance" on radio this morning. coming up, ellen zentner of stephen roach's morgan stanley. ellen zentner on the path forward for chair yellen. from london and a beautiful new york, this is bloomberg. ♪

guy: london, more drizzle then

fog, which is good news for tom keene's travel plans. i am guy johnson in the british capital. tom keene is in new york. let's get to the "bloomberg business flash." stefan ingves does not think that -- he spoke with bloomberg.com earlier today. >> given that we are buying bonds, it is obvious that there will be a shortage of bonds compared to a couple of years ago, while on the other hands in terms of liquidity, we have not seen that. it certainly is possible for us to buy more if we feel we have to do that. sebastian: he also said he is currentppy with the level, and it would be fine if the swedish currency appreciates slowly. that is the bloomberg business flash. tom: we want to bring lean all thend back -- to talk about italian banking and the history of monte dei paschi. this is a thousand euros, and

then 200 euros. and then 100 euros, and we are down here at 18 right now. there has been a total collapse of this bank. what i am frustrated about is, i have not seen one iota of discussion about what it is going to cost, the price of this transaction, whether it is the price of bond to equity, whether it is the yield taking on some form of bond, or whether it is the actual dollar-euro figure that is going to be happening. is there any price being discussed? >> that is a good question. look, the difficulty here is that all italian banks have taken losses in capacity. the change that you mentioned, we do not even know -- investors do not even know what the balance sheet is worth. even the appetite for equity at

atse incredibly cheap levels 0.1 times has not attracted investors. youillion euros could get 30 monte dei paschis. it is unclear what you would spend the money on. right now it is really a complete lack of faith in these balance sheets, in these valuations. our global audience, particularly in london and in new york and washington -- this is beyond odds. are there outside institutions coming to bear upon an original italian dialogue and discourse? i am skeptical. i really wish there was, but i feel like we were here at the start of this year, we are here at the end of this year. 20 billion euros -- again, you could do a lot to you could buy unicredit with 20 billion.

i feel this is now political and this whole discussion will be about whether you can avoid investors, ready can get a political solution to kick the dan -- to kick the can down the road. it will require something with germany, italy. we want to fix this solution. what would i have to do to get some degree of clarity on a bag of assets that i made buy from one of these institutions? how difficult would it be? it is difficult because so much goes on. you do want to get some value and work on how you can get that kind of value that takes some security of getting those cash flows. guy: in tuscany they have all kinds of buildings on their books. -- they have all kinds of things on their books.

these flows have been kicking off for 10 years. you need political reform to actually get the infrastructure behind getting the cash flows back. there is appetite there, absolutely. it is starting to change, but in terms of the discount you would have to apply to get some kind of certainty to get those cash flows back, it remains a big question. laurent onor lionel european banking. coming up, steven wieting of citibank and their private bank as well. coming up, stephen roach on china from london, from new york , this is bloomberg. ♪

about a sterling foreign-exchange report? sterling weaker five days in a row. the euro, 1.03. the swissie has been strong the last few days. a 103e sterling with handle as well. tom i think the fact that is pushing this is interesting given the fact that he is coming

over here. just making a point. americas" is coming up. david: we will be talking about the situation coming up with european banks. we will talk with the banking expert about what the ramifications are per the other big story, what is going on with the market? will be dow hit 20,000 -- will the dow hit 20,000? we will talk with david leibovitz of jpmorgan. tom:, you will be turning next to china. tom: stephen roach is just back was halfa, but he breaking on the study of market economics. let's bring up a chart, dr. roach, on china and the ending of gdp. you have been the most critical economist on the concept of hard

landing. that is not a hard landing, is it, moving from 7% up to a bloomington percent, and the five-year -- up to a booming 10%, and the five-year moving average. that is not a hard landing, is it? stephen: know, it is a rebalance high-growth to more moderate growth in service led consumption. are successful, growth will slow further. but it will be more sustainable, more balanced, and it will set them up for a much stronger economy in the years and decades ahead. tom: what is the gloom crew? what do the roach critics get wrong on china? stephen: they are looking through a western lens, a debt crisis ala japan. they have been on a huge debt binge, and the need to wean themselves from debt-intensive

growth. they have double the savings rate that japan has, so they oh the debt themselves. they need to make certain that the long quality of the banking system gets addressed and that they progress ahead in managing this transition. tom: jonathan spence of yale university -- china is a continent. the mass and scale there is there. what is the partition of particular -- what is the partition of pacific rim china from the rest of china? is it coalescing, coming together, or is it ever apart? development inis eastern coastal china, but they have been spreading development out into central china, especially gigantic cities like john chang and chengdu. and growth is taking advantage

of cheaper labor and greater conductivity. they have infrastructure that connects central china to coastal china that we would die for in this country. i just suffered whiplash coming down the east side drive to see you this morning. guy: stephen, does the next generation of politicians see the same china as the current generation of politicians? stephen: the next generation, guy, in china? guy: in china, because next year will be pivotal for the chinese. stephen: it is, but the next generation of politicians in china is the current generation. goingping is not anywhere. he will bring in a new leadership team, but they are tightly aligned with his thinking on the rebalancing on the consumer led economy and services. i do not look for any

fundamental shifts in policy with this next party conference -- with his next party congress. tom: should mr. trump travel to china? stephen: he needs to get a deeper, more personal appreciation of the challenges. i would welcome the chance to have the president-elect make a trip to china and see what is going on elsewhere in asia. tom: let's continue this discussion. dr. stephen roach will join us on radio. you, guy appreciate johnson, sitting in for francine lacqua. of theo, the president ther of the president -- chair of the president's council on economic advisers, alan krueger. this is bloomberg. ♪

jonathan: good morning, and welcome to bloomberg daybreak on this wednesday, december 21.

i am jonathan ferro alongside david westin. futures marginally positive. we are looking at the dow. we trained writer -- water -- tread water. treasuries,market, yields unchanged after hitting a 14 year high on the dollar, the dollar-yen coming back. david: here is what you need to know at this hour. italian banks either at least $54 billion to clean up their balance sheets, much more than the $21 billion the italian parliament agreed to provide, and monte paschi may be running out of money faster than we thought. spanish refund, europe's highest court orders spanish banks to refund billions of euros to mortgage holders --