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 who were noters --

allowed to benefit from lower interest rates. stocks hitting fresh record highs as features signaled out 20,000. economists and investors are half-full, buts mohamed el-erian says it is time to build cash. jonathan: let's start with the top story in europe. two of the financial capitals, milan and madrid. joining elisa martinuzzi and charles panty in major it. with you thisn court case that has come out of spain. what is the ruling and how will it impact spanish lenders? the top a decision by european courts to strike down the loose by spanish banks of making an amount -- making minimum interest rates for

millions of homeowners. this comes as a bit of a shock. we have seen bank stocks fall sharply. the reason being, they are going to have to stump up more provisions to cover the retribution to pay to their mortgage holders for excessive mortgages. which banks will be most effective and how much of an issue will this be? charles: there are banks that have said they are exposed to this. the banks that are falling the most in the market today, we , many of thea banks have stopped this practice. there were also some provisions as far back as 2013, which is when a court hearing in spain actually kind of said they would payments back to

that date. , it makes theoday decision fully retroactive. jonathan: first spain, a lot of spain, a lot of work has been done for the financial system already and in italy the work begins. both houses approving the plan to increase the public debt by 20 billion euros. are we expecting that to be put to work eminently? case ishe big test monte paschi and time is running out for them to raise funds privately. they have until tomorrow to sell stock, and we were hearing yesterday that that attempt is on course to fail. that will mean that in the next few days potentially it will become official that the government will step in with funds. we know the total amount italy is trying to line up but we do not know exactly how it is going to be deployed, and that is

important because it will affect bondholders. in italy, many of them are householders, and how big a hit will have to take to share the burden of the state coming in, that is what we should be finding out over the next two to three days. jonathan: the stock down 19% at one point in italian trade. the market has reacted to this. the 20 billion euro number, is that enough? elisa: there is obviously some concern that it may not be, and if you look at the provisions that some of the bigger banks are making on their own books, take unicredit, and translate that across the industry, that some that in delete is coming up with may not be sufficient to cover all of that. going to beentially more money on the table as investors feel more confident that italy is turning around, and dealing with its banking issues.

he have to weigh it ahead on the scale if you look at the coming months, unicredit is out on the market with potentially 30 billion euros and they are setting up to do that on their own without resources from public funds. jonathan: ely said charles -- elisa martinuzzi and charles panty, thank you. not get it do cleaned up in a short order, and we're going to talk about that charles peabody at compass point. the united states went through a process of recapitalizing its banks after the big crisis of 2008. is this similar to what italy needs to go through now, and what lessons were learned that can be applied in the italian situation? charles: i think in october i suggested at the end of the day it was going to have to be some kind of government bailout that was going to help the banking system. the distinction i want to make

between italy and spain, in spain the issues are an impediment to capital generation. it will be a hit to capital on the order of 10 basis points on the low end to 40 points on the high and. banko popularity being the most effective -- bingo popular -- banko popular being the most affected. jonathan: how do they address the solvency issue? real plan on the execution on how to deploy that cash. how would you deploy that cash? charles: this is in the political realm right now, so it makes it very unpredictable but there is going to have to be government involvement and a bail in. the question is, what degree do the bondholders pay? i think that is going to be, affect how the market street. are acting markets

incredibly complacent around what is developing. senior cbs swap spreads fords swap european banks, we are way below what we were in brexit and back in january and february. we have removed the market discipline from the process. jonathan: why do you think that is? this complacency around the central banks and governments will make it all better, so there is no market discipline anymore. will the european union allow them to make it better? there are constraints on state aid. they do not have a free hand. charles: they do not, but i think the attitude is that they are going to find a way to enron the e.u. rules. jonathan: it is isolated. i see it in the assets of the bank at the monte paschi, in the debt, it it is down about four

cents on the session. a record low. the equity has been hammered and it stayed low forever now. we are down 85% over one year. is it that the complacency may be there for the individual market but it might be zooming into the banks? charles: it is going to be interesting to see how the government gets paid back for their bailout. in the united states, we had this mortgage debacle and afterwards the big banks were asked to pay for some of the crisis. deutsche bank helped monte dei paschi hide some of its problems through various derivative structures. italian government go back to deutsche bank and asked them to pay some of the cost? deutsche bank is facing its own capital issues around this doj settlement. david: in the united states, there was a defined set of deals

that had gone bad. we need to get them off the balance sheet and fix them. do we know there is a bottom when it comes to italy? can you put a ring around the bad loans and then go forward with a really strong business? charles: i think the extent of the loans have been identified. it is now, how do you resolve them, and that is what europe has been very slow at versus the united states. david: that is charles peabody at compass point. tomorrow i sit down with brian moynihan, bank of america chairman and ceo. emma chandra is here with bloomberg's first word news. emma: investigators in germany are searching for a tunisian man in connection with a truck attack that killed 12 people at the berlin christmas market. german media reported the unidentified man documents were found inside the trucks cap. berlin remains under eight

terror alert. angela merkel visited the crime scene yesterday. islamic state claimed one of its followers carried out the attack. a chain reaction explosion ripped through a mexican fireworks market yesterday, killing at least 29 people. many more were injured as smoke billowed into the sky. the market was filled with shoppers stocking up on fireworks. donald trump's $25 million settlement to former students who claim they were defrauded has one preliminary approval. a u.s. district judge in san diego said the trump university settlement was fair and adequate and will reimburse students about half of what they paid. global news 24 hours a day, powered by our 2600 journalists and analysts in more than 120 countries. i am emma chandra. this is bloomberg. markets, futures

pretty much unchanged on the session. in europe, 17 out of 19 industry groups trading in negative territory. abigail: one of those industry groups that is trading lower in europe, travel and leisure. the stoxx 600 travel and leisure index trading lower today in a delayed reaction to the berlin terror attack. down today in line with its year-to-date losses. one group that is being hit a little bit more underperforming, some european hotel companies. both of these companies have properties in germany. a core has 345 properties in germany. revenue, one broker saying this could affect nh hotel groups fourth-quarter. carnival trading lower in london after yesterday's pop higher

after fourth-quarter earnings beat surprise. this morning we have the shares lower and could reflect the fact that management indicated rising steel costs could affect 2017 profitability. david: the dollar taking a rest on it upward climb, and some investors warned of more ahead. and fx strategist will be talking with us about that next. ♪

jonathan: from new york, this is bloomberg daybreak. i am jonathan ferro. we were 26 points away yesterday's close from doubt 20 k. dow futures up about 6%. with stocks sitting at all-time

highs and the optimism building for 2017, the euphoric nature of conversations took a dent yesterday when we caught up with the pimco cio for global credit and mohammed el-erian, who said maybe it is time to go to cash. cash have increased our probably 5% or 6% after the election. we have been selling energy and also a lot of our riskier high-yield bonds. we have been selling emerging we have beenys -- de-risking our credit positions at pimco. >> it makes sense to take money off the table and the position for two-sided risks. we have priced in no policy mistakes, no market accidents, and have ignored all sorts of political issues. part of the reason why the markets are reacting so well is because we are getting a political disruption in the u.s.

that seemed to be positive because we are going to unleash congressional action on key issues. also getting political disruptions elsewhere that are not so positive. and whathat mark said pimco is doing sense. jonathan: joining us now, the silly sarah. -- vassili serebriakov. pricing in almost no policy mistakes, maybe time to go to cash. what does de-risking look like? vassili: it means positioning long dollars but you have to be specific which currencies. it was mainly the dollar against the japanese ran -- japanese yen. longink it is -- the dollar versus the australian dollar, all of those currencies that tend to underperform in a risk off target.

sometimes and we saw this last year, equities could stumble. jonathan: equities, everyone is staring at dow 20 k. tom keene is clearly really excited. the fixed income guys are saying, it is time to sell into some of the strength. look at the bank of america merrill lynch survey. populism, one of the biggest concerns, the high-grade credit investors for 2017 to about 30%, up from 9% in october. the irony, the contradiction is that it is populism that has taken the equity market to an all-time high, yet the high-grade guys are worried. has been a difficult factor to incorporate into foreign-exchange markets and other markets. the repercussions of some of the election outcomes or perhaps different than we expected.

if anything, we are seeing a bit more optimism and even some kind of revival of animal spirits of entrepreneurial's dish entrepreneurs. .- entrepreneurs things like sentiment is picking up little bit, so i think you have this contradiction between on the one hand, populism is something that markets typically do not like, but on the other hand in terms of what transpired recently, it has not been that bad. we agree that next year, especially around the french residential elections, you have to incorporate that into your forecast. david: what does that mean for the risk on versus risk off with euro-dollar trade? what does that say for the euro with respect to populism vassili:? vassili: the euro has tended to trade very well in risk off environments. european investors tend to repatriate, so being a short

euro-dollar is not absolute best way to position for european political risk. i think you would probably be better off in more straightforward risk off trade, either being long treasuries or short in emerging currency. that is why i think a lot of people also like selling some of the asian currencies. strong of gives you a dollar story but it also gives you a little bit of the potential risk off. jonathan: you start thinking about the euro and the way you thought about the yen the past several decades, and i wonder whether the swissie is the trade to place. vassili: i think it could be a protective trade. obviously, ever since we had the big drop of the floor and that move in the swiss franc, i think the liquidity and the size of the market has not been there in the swiss.

european currencies are interesting. jonathan: the liquidity situation, yesterday treasury futures about 60% of average. what do we make of that? vassili: it happens every year. this is another reason to be a little bit more defensive in your positioning. liquidity tends to sin out and out and have -- thin you will have choppy moves. that is why i think rotating from long dollar-yen to short aussie-usd work kiwi-usd will make sense. jonathan: next up on this program, china's renewed efforts to curb declines in its currency are doing little to persuade you and bears. from new york, this is bloomberg. ♪

david: this is bloomberg, im david weston. the u.s. dollar has been moving ever stronger which has caused theyou want to fall despite efforts of the chinese central bank to question the fall. -- do you agree with the yuan there's -- bears? 720 yearwe do expect in terms of dollar-cmy. we think it is an interesting way to be long dollars with some hedge against geopolitical risk. we have not seen any repercussions of some of those international tensions that perhaps have been rising recently. to be long dollars in the risk environment, -- if we have especially some trade tensions and tariff barriers

against china, that is a scenario where the dollar will go higher. heid: donald trump has said is really concerned about the yuan being so low. if it goes further lower dozen that up the chances he will take some sort of action? vassili: i think that is absolutely the case. we have talked about this yuan has measured against the baskets and china is trying to not appreciate the trade weight of the want. the dollar is strengthening everywhere else. i think if you think the combination of protectionism and the strong dollar, is not a very happy one. if the dollar keeps getting stronger, the u.s. trade balance is going to suffer. does that run the risk of protectionism? i think it was jpmorgan that pointed out the same people forecasting a

recession in the united states at the beginning of this year are forecasting a golden era through 2017, on very little. this 720 call just screams at me. we were trading 650 earlier this year. if i told people 720 was where we were going to be next year and the aussie was still trading north of 70 compared to the dollar, why? vassili: you picked up a correlation or lack of correlation. we would expect the aussie dollar to be a lot weaker. in the neware environment since the elections, we just have to admit that. nobody expected dollar-yen to go from 100 to 120. there have been significant moves in the currency markets, but we agreed next year you have to still be bullish on the dollar and expect another 4% or

5% on the trade weighted index. you have to be selective against the currencies you want to be long dollar. david: has the mexican peso gone as low as it will go? it has certainly priced in a lot of the bad news but there is not a lot of good news to price in so it will probably stay where it is. jonathan: what is more important to main street, the dow hitting 20 k or yield on the 30 year spiking and driving up interest costs? this is bloomberg. ♪

, i know: from new york some of you are racing toward 20 k on the dow. you keep hearing about it. we are up four points in the

futures market, 26 points away. we tread water across many of these equity markets, volume lower and in bonds as well. this is what the bond looks like. yesterday, the big headline in the fx market, the dollar index reclaiming the 14 year high. we retrace some of that move now. david: here is what you need to know at this hour. italian banks need at least $54 billion to clean up their balance sheet, such more than the $21 billion parliament agreed to provide, and monte paschi could be running out of money sooner than we thought. refund, europe's highest court orders spanish banks to .efund billions of euros stocks fall, taking equities down with them.

stocks hitting fresh record highs as futures signal dow 20,000. mohamed el-erian and his former colleague say it is time to build cash after recent market gains. jonathan: let's turn to our morning must watch. there is two signals from two different asset classes. signal from main street is clear -- things may be good next year. the signal from main street is clear, your mortgage repayments are set to go up. what is most important to main street? el-eriann to mohamed who answered that question yesterday. >> i think the 20 k is going to have an influence because we are getting higher rates for their right reasons, because people are pricing in higher nominal gdp, so the 20 k will be a

signal, and the higher mortgages will say, that is not great but it is coming because we are going to get more impact -- income, jobs, and growth. is, what the question is most important to main street? >> has become economists, we look at economic data and economic data are telling us that sentiment has been rising along with the market sentiment. if you look at consumer sentiment indicated, all they have been doing its rise after the election. this is not yet reflected in retail sales. if you look at industrial production, it has been declining even though different manufacturing services have been showing us that sentiment is rising in the sector. confidence,nsumer you do see a disparity between republican voters and democrats voters and how they feel about the economy.

yelena: overall sentiment, despite the differences, it has been growing and growing because the stock market is rising. people see this hope down the road. this might be not a story for this year. it will take time for taxes to decline. it will take time to legislate that, so it might be more of a 2018 story. jonathan: in the short-term term, doubt 20 k mean something for the consumer. compares mortgage applications to the average 30 year fixed mortgage rate. that redline on the far left is the taper tantrum in 2013. yields spike, or gauges go up. what is it going to look like past the red line to the right side in the months to come? yelena: we have existing home sales to be released, and what happened back in the taper

tantrum, the mortgages rose one percentage point. back then, existing home sales fell 10 percentage points. -- it did not happen over one month. it took several months to evolve, but back then they saw home sales to client and subtracted almost a percentage point from gdp growth in 2015. how elastic is consumer demand to rates? sideust on the mortgage but on the auto side. yelena: i do not think we are there yet so the increase in rates is not probably going to hurt consumers that much. we are saying it because this time, we actually see wage pressures. we are going to see wage

pressures going into 2017. income is rising and consumers will feel better overall. that will probably be a story next year. jonathan: thank you very much for joining us. if my mom was watching this and i said your mortgage payments will go up, she is going to care about the mortgage repayments. david: that is what my mother would have reacted to. now we are going to turn to oil. oil futures have hit their highest in five months as opec and non-opec members continue to be priced in the market. these cuts are not exactly as they appear. going to behere's around a million barrels a day out of the 1.8 million that has been committed in terms of real enforcement. a significant amount of this 1.8 million is what they are calling in a funny phrase managed decline.

like mexico that are contributed something that is already taking place and already part of our understanding of the margins going forward. the cuts are something considerably less than what appears to be on paper. david: joining us is michael cohen. take us into this, he focused a lot on the supply issue. let's add one more element which is inventories. there are numbers out that u.s. inventories declined as u.s. oil prices went up. in tankslready sitting as opposed to futures? michael: this is one of the most important drivers of oil prices. it is not the absolute level of inventories but the speed of the of the decline of oil prices. not necessarily

the absolute price, but the way in which the curve is structured in the first half of the year is likely to change as inventories draw down. what opec has done is given the market and incremental signal by saying, we can say with some level of certainty that inventories are going to draw given the state of the oil market balances into the first half. on a global basis, demand is going to be in excess of supply and that will lead to inventory draws through the remainder of 2017. on theat adjustment margin could have a significant effect on prices. how significant? yelena: we think prices are -- michael: we think prices are likely to average $60 next year on brent. i think what we are going to see is in the first half, you will see refinery runs increase so demand for crude is going to increase. at the same time, crude supply

will remain pretty level so you will have this big bump up in demand and level supply that will result in a decline in inventories. arguably there will be places around the world weather in asia or the u.s. where those inventory draws will be quite some -- quite severe. jonathan: the floor at the moment is this opec deal. ift is the guide for 2017 you do not have access to the bloomberg and cannot monitor the ships coming in and out of ports , cannot monitor what is going through the pipelines, what is the guide to understand if they are being compliant with the cuts? drinking a you are bottle of water out of a plastic cup, you are not going to see much of a change for your bottle of water. as a retail user of gasoline, you fill up your tank at the pump and you are going to see a retail price bump, not only

because of what is going on for gasoline but also we are going to be facing a colder winter than normal compared to last year. heating oil, fuel oil, all of that is going to show up and increases we are talking about is going to show up in disposable income, where that disposable income ends up because your prices are higher. jonathan: saudi arabia considering increasing prices for the second year in a row. what is the signal from that? michael: is all part of the broader story, and the reason they came back to the table. for two years they believed u.s. supply and other price-sensitive supply would adjust more quickly and after two years, they said it did not just as quickly as we thought and we have a problem in yemen and all over the middle east. we have a vision 2030 we want to

implement and we have concerns about social unrest. they took actions last year to decrease fuel subsidies. this is another step along the path of reducing the burden of the government to actually pay for this social contract they have with the people. is $57 and a half to accomplish what the saudi's need to accomplish? is it enough to trigger more shale production? michael: these are the two important questions. i think saudi arabia believes that mid 50's and something more certain, they are more comfortable with them prices fluctuating between the mid-30's and high 40's. from their perspective, it does help. they do have a lot of different measures at their disposal that some of their more at risk opec members do not have. on the other side, it is a big risk they face because if rice's

move into the high 50's or low prices we project -- if moved into the high 50's or low 60's as we project, that could lead to a more robust u.s. shale response than opec is anticipating. they are essentially cutting off their market share retention, or their ability to retain market share down the long-term. jonathan: we have a survey from bank of america merrill lynch. what is the biggest risk or concern for next year? michael: i think china is front and center. i think the other risk is the issues concerning demand generally. as macro economic concerns related to china have a domino effect in the rest of the world, have an effect on trade, the protectionist policies of a trump administration could also

conceivably lead to less demand trade, and have long-term implications for global macro economic growth as economists have highlighted. i think the demand side is one of the biggest concerns that we have. the other concern for the oil market is the fact that you have some disrupted supply right now in the neutral zone. that is half a million barrels of oil that is off-line and could come back. libyan production is on the verge of coming back. we do not think it is sustainable, but that is a risk that we get this influx of a half a million to 800,000 barrels of supply, and it completely negates all of this opec cut rhetoric we are seeing from those countries. jonathan: the barclays head of oddities research, on the latest research.ties it seems investors are now thinking about what could go

right next year. we will bring you the commentary from everyone from pimco to ray dalia. as we count you down to a market open, futures up about eight dow after closing 26 points of down 20,000. equities treading water in new york. from new york, this is bloomberg. ♪

emma: this is bloomberg daybreak. i am emma chandra. coming up, megan greene. she is sounding a note of caution amid dark it from euphoria. -- market trump euphoria. david: this is bloomberg, i am

david westin. say goodbye to be rational despondency. as 2017 approaches, a growing number of investors and policymakers see better times ahead. in d.c. todan moss tell us about the tilting economic risk to the upside. what has got everybody so exuberant? dan: it is the promise of a more robust fiscal policy. the idea, and we started seeing it building this year, that wages would start to pick up. there does seem to be the sense that the worst of the deflation/disinflationary trend has abated. you can see that in what the world's central -- many central banks have done. projecting three hikes next year, the boj has

moved to a more sustainable policy, and the ecb is not doing 80 billion month, it is doing 60 . the boe ready to go either way, so there has been a shift in terms of what people expect economically and what the central banks seem prepared to respond. nothing actually has happened yet. we do not have fiscal policy from the united states and we do not have a president in. said with thean markets are doing is taking all the good and disregarding the bad. is it possible people are overreacting? dan: there is something to that. assertions from the campaign trail need to become policy, and policy has to pass. god knows what it is going to look like when it comes out of capitol hill, but there does seem to be a directional or

perhaps vibrational change. this is not just about the u.s. take a place like japan, there is a sense that japan, a place which has been beaten up could be ready for better times. it is not based entirely on the u.s. jonathan: how many times have you heard the term "animal spirits" in the past months? will it be self-fulfilling in terms of getting traction for the u.s. economy? dan: sure it can, just as the irrational despond and see was. we have sat on this program and yields, negative bond how inflation is below target, talked about secular stagnation. one thing is for sure. fewer people are talking about that now. that does not seem to be the message that many people are taking. it is not unanimous.

it is a change in the way people are thinking. , there areubtle caveats, but the mood change is there. david: it is not just the united states. this attitude permeates the western world. can the united states pull up europe and asia with it? dan: you are really getting into the discussion about whether pax americana still lives economically. what is interesting, for all of the talk about u.s. decline is him, it is what is going on in the u.s. that is making people optimistic about japan. pushed yields up globally, which makes the boj's task in combating inflation much easier. david: that is dan moss reporting from d.c. it is time for other stories making headlines.

emma: blackstone group is closing its two-year-old advisers hedge funds after it was 24% last year. the $1.8 billion fund which allocated money among 11 portfolio managers, lost 6% last month alone. it was started as the first national fund.- coca-cola will by ab inbev's several in bottling in african nations. has increased its borrowing capacity under two credit agreements, by about $500 million. elon musk tweeted that raising desk -- raising debt would not be necessary by the end of the year. teslanalysts are saying

might soon need up to $2.5 billion to cover the ambitious plans. that is your bloomberg business flash. david: coming up, volkswagen agrees to a $1 billion settlement in its cheating scandal. where does that put it on its path to recovery? this is bloomberg. ♪

jonathan: shares of volkswagen are getting a little bump in european trading. carmaker taking another step of digging itself out with $1 billion to settle lawsuits. matt miller joins us from berlin. theyjumps out is just how sold a certain amount of cars in the u.s., not very many, and then sold millions a year in time of funds out

of the u.s. and not much out of europe. what is going on? matt: it seems the german federal government has ring fenced volkswagen as far as its liability goes. they happen to have slightly different regulations in germany , not as stringent as they do in california, so they are able to fix certain cars and they do not have to fix others that they would have to either a place in the u.s., or would have to somehow find a fix for. we have to keep in mind, there is two issues. the two liter engines that have the actual cheat on them, and the three liter engines that have a slightly different mechanism that was not necessarily cheating, but was not necessarily allowed unless reregistered by u.s. officials. you are right, they only sold i think 400,000 cars a year in the u.s. and $16 billion in funds.

18 billion cars here and they have not paid any egregious amounts of money. jonathan: you mentioned the billions in fines. where are we as a result of the scandal? matt: they have the civil issue behind them from the department of justice. engines, abouter $16 billion in fines. for the three liter engines, about another billion and let's throw in another billion from canada. now they have to deal with the criminal issues in the u.s., and i do not know how much that could be. volkswagen obviously hopes to keep it low, and i do not think that department of justice wants to bankrupt the german automaker. they are pretty much done with the finding issues here, so that is going to be the total they get the criminal investigation

out of the way, and then you have investor lawsuits that will drag on for years and years. jonathan: bloomberg's matt miller out of berlin, thank you for joining us. this program, have markets gone too far too fast and what is the impact on the global economy? megan greene will join us. the markets about one hour 34 minutes from the cash open. futures up 10 points on the dow. we tread water across much of the benchmark markets globally. yields lower by a basis point. year, 1.17 on 10 dollar-yen. ♪

jonathan: good morning. welcome to bloomberg daybreak on this wednesday. i am jonathan ferro alongside david westin. the penultimate trading week of 2016. this is how the stage is set. treading water across most of the major equity markets in today's section. yields, pretty much unchanged through most of the day, down a single basis point and 2.55 on the u.s. 10 year. we retrace some of that move. david: we take a little bit of a breather today. shortfall. 's $50 millionnk to clean up their sheets. be running out of money faster than we thought. the stock coming off of a record low. spanish refund. europe's highest court orders and is thanks to refund billions of euros to mortgage holders who

were not allowed to lower interest rates. taking european equities down with them, too far, too fast, stocks hitting fresh record highs as the dow inches closer to 20,000. investors are seeing the half full part of the last that isamed el-erian says this time to cash after recent gains. jonathan: for more on the italian and spanish banks we had to europe in milan and madrid. joining us now our bureau chiefs. i'm looking at the ibex see bank of popular -- banko popular down . walk me through the court case and what this means for some of those individual lenders. >> that is right. basically, this news is all about spanish banks charging too much for the mortgages in an

environment where my interest rates have fallen so sharply. clauses were into millions of mortgage contracts and basically set minimum interest rates payable on those mortgages and those were struck down by europe's top court. jonathan: we've got to gauge a grip around the numbers at this point. >> we have had a bank of spain official put a number on it. the amount of mortgage flaws affected by this ruling is about 4 billion or slightly more than 4 billion euros. some of the banks have already been provisioning ahead of this ruling. dan, jonathan: the italian banks are putting a number on what it could take. it could boost the public debt by 20 billion euros. is that going to be enough and how is it going to be deployed? >> good question.

some analysts say that it is not enough. they are doing calculations that show that the provisioning that should be done is way too conservative and hasn't been carried out thus far in the number actually can be closer to 15 billion -- however, at this point the italian government has authorized bringing the public debt up another 20 billion euros. the next step is that on friday the italian cabinet will put some meat on this and described exactly, outline, hopefully, the ideas -- the details of how they are going to apply this. are they going to take what is known as the temporary recapitalization or are they going to use some other mechanism? all of this has to be approved by european authorities. jonathan: the financial capital looked down towards rome about what the plan will be.

the equities are down 10%. the debt is down four cents on the euro. we are talking all-time lows in those asset classes for those particular securities. what is that bank going to do? ?ow long does it actually have how long has it got? >> they disclosed some more figures on their liquidity situation today in the prospectus, the information document they provided online, relating to the debt for equity swap underway. they say the liquidity situation is actually worsened since the last report they made last week. it could be as short as four or five months before their liquidity runs out. so the clock is ticking. we will probably know in the next 24 hours when this offer --cludes, whether this

whether there is some hope that this can -- this plan is going to succeed. it will need some sort of state support. jonathan: we thank you very much. with some of those european lenders. david: from europe, back to the united states, dow futures are up as markets hit record highs despite mounting uncertainty in europe and asia. we spoke with mohamed el-erian about what it would take to sustain this rally. is it all in the hands of the united states? what isis with -- desirable is that governments stepping with two things. structural reforms and in the case of germany, more fiscal stimulus. if you get that, then you get a rebalancing. you can maintain the equity rally. you don't get too much pressure from the segment.

>> joining us from boston is megan greene, annual asset management chief economist. welcome back to the program. let's talk about whether this rally can continue. we heard what mohammed had to say. he said that the markets were overreaching on the upside but there was a downside to take into account. where do you stand? >> i would agree. the markets have gone too far and a correction will eventually come. the real question is when and what the trigger my the. that will depend to a large extent on donald trump actually being inaugurated and starting to provide details on some of his programs. the markets have rallied off the back end i don't tend to believe in confidence unless they are backed up by economic fundamentals which they won't be in this case. they tend to peter out. david: what do you project in terms of gdp growth?

what sort of gdp growth projections are you making? >> for the u.s. we have not actually changed our growth projections for next year, much at all. i don't think many of the tax cuts or spending programs that trump had mentioned in the campaign will possibly come through and support growth in 2017. that will start in 2018 at the earliest. mohamed's point, what we really need is a global system that supports growth. he highlighted meeting germany to provide a fiscal stimulus. i'm actually pessimistic. the german government genuinely don't see why they would need to provide a fiscal stimulus. in their view their economy is doing great even though they are hardly growing. why would they provide a stimulus and then give up their pretty stellar looking budget at the moment in order to boost

demand domestically or across the region? that piece of the puzzle we are just not going to get. jonathan: let's talk about the economist. there is not much spare capacity. if you are going to push stimulus, how do you generate do you real growth or just generate tons of inflation? >> this is a point that janet yellen herself brought up at her last press conference. isn'tscal stimulus created equal and what we need is a stimulus that will boost long-term productivity. that could include infrastructure spending but, in particular, building schools and roads. those kinds of projects are not particularly profitable so what we do know is that the trump administration is hoping to provide tax credits to companies involved in these infrastructure programs. it is unlikely that they are actually going to be involved in

these kinds of long-term productivity boosting projects. it is more likely that we will get the fiscal stimulus that boosts growth for a little bit and boosts inflation for a little bit but it is only going to work on the margins and be temporary. a lot of analysts are calling the time of death for secular stagnation and i don't buy that at all. david: let's get practical. what is your view of the world and the u.s. economy telling you about where assets should be deployed? are you resisting the rotation out of debt and into equity? a benefit to this slow growth model that you project. we have called for the great rotation a number of times over the past couple of decades. often, it is a false alarm. this is another case of that. from's plan will be mildly inflationary. growth might pick up a little bit from 2018 to 2019 that it won't be the same. i don't think this push into

equities will be sustained. i should say inflation would actually peek next february off the back of the year and oil prices. months continue a few more but that it should start to peter out and we will see a correction. david: that is megan greene, manual life asset management chief economist. us.will be staying with for headlines outside the business world, we turn to emma chandra. >> investigators in germany are searching for a tunisian man in connection with the truck attack that killed 12 people and wounded dozens at the berlin christmas market. that therted unidentified suspects documents were found inside the truck's saysnd the washington post he is an asylum ceaser -- asylum seeker. angela merkel visited the site and patronage of the

victims. the islamic state claims one of its followers carried out the attack. china is calling for better coordinations to cut in missions including halting industrial production and banning cars from roads. high,fter a six-day spurring the highest pollution alert. the coccyx haz -- the toxic haze is six times the normal level. the president of the philippines does not have a friend in james taylor. inhas canceled a show protest over extrajudicial killings. taylor says reports of summary executions of suspected drug offenders 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 emma chandra. this is bloomberg.

if jonathan: you look at the markets as far as equities are concerned, a marginal move to .he downside in the u.s. let's get out to abigail doolittle. >> we are looking at a tale of two stories. the winner, nike shares are trading higher after nike did beat second-quarter estimates earnings by 15%. .hey made 15% per share consumer demand was stronger than expected and this is easing concerns. finish line, shares are actually plunging after a big third quarter miss. they missed revenues by 10%. they guided the full-year outlook down by about 17%. year oningly, on the the close, finish line was up more than 25%. nike denim more than 15% but they may come close to the other. next to fedex, trading's -- .hares are trading lower they may $2.80 per share and

this will reflect higher spending on ground delivery efforts, something that the cfo says will help over the long-term. by 30% and nicely citigroup says you want to get in on the stock that is up nicely. david: coming up, every republican president since world war ii has been in power during at least one recession. did donald trump. a slump? more with megan greene, that is next, this is bloomberg. ♪

jonathan: this is bloomberg daybreak. let's get you up to speed on the markets. futures positive on the dow. marginally. it 10 to 1%.

yesterday, 26 points short. across europe, equities trading warmer on the dax in london and frankfurt. one asset class that has done anything is trans water. back to $1.04. the dollar yen is trading lower to $1.17. we retrace some of that move. the president-elect, as he prepares to take office, every republican president since world war ii has been in power during at least one recession. ," global economic advisor spoke with bloomberg earlier about whether the risks -- about where the risks lie. >> the first is that he overplays the protectionist card and he gets tough not on mexico on china and then you get a retaliation and a trade war. is second recession risk maybe towards the end of his

first term. maybe that is the fiscal policy that he wants to implement in 2018 to 2019. then the fed may have to raise rates aggressively in 2019 and could create a recession in 2020 at the time of the next deal. jonathan: in boston, is megan greene, manual life asset manager. and story of recoveries cycles, they don't die of old age. they are often murdered but murdered by what. it is a discussion we usually have. what is the risk of this cycle rolling over? >> i think there are two risks. one is that there is geopolitical risk, the hardest to forecast in terms of events and timing but that could certainly pitch the u.s. into a recession. i think the other risks have come from the central banks. quicklye rates much too and by too much.

that has been the biggest risk for the u.s. economy throughout this recovery. it remains such even under donald trump. if we do get the fiscal stimulus that donald trump has promised -- i don't think we will -- but if we were too, there would be concerns about inflation running away. they could kill off the recovery that way. david: let's take the first one first, geopolitical risk. it is always looming out there. it could send us a recession but does it strike you that the markets have been remarkably resilient and face a fair amount of geopolitical events, whether it is brexit or donald trump or the attacks in berlin and ankara , are we getting >> a false sense of complacency? i think we are. >> especially over things like brexit and the trump presidency. in terms of brexit and a trump

presidency, neither has actually happened yet so both have been buying opportunities so far but i don't think that will be sustained in the brexit case. in the u.s. we will get a bit more inflation, slightly higher i don't think everything will be as buoyant as the markets seem to expect. i will mention that you aghlighted that may be republican president will once again preside over a session. cycle ishe business much longer now than it was in the past because the central banks keep stepping in to reprice capital goods and labor. may donald trump will get some reprieve. jonathan: one of the words of 2016 is "populism." bank of america has results on the screen. 30%, the dominant risk for next year, populism up from 9% in october. populismnic because

seems to be driving the equity markets an all-time high on hopes that we will get some of the policies out from a truck administration. what does this mean for financial market participants? >> i think populism is a huge risk for next year. it is because europe has such an incredibly busy election scheduled. we have elections in the netherlands and italy and greece as well. populist parties are doing pretty well. france is the real risk. the markets are underestimating the potential for the victory coming in. -- has said that she would like to take france out of the eu. that would pose a threat to the european project and cause volatility. jonathan: thank you for breaking down your thoughts. david, to pick a country that has not got an election? david: that is right. we are talking mergers and acquisitions.

dealmakers are about to have their third-best year in a decade that 2017 could actually top it. we explain why, next. this is bloomberg. ♪

david: this is bloomberg. i am david westin. this year had all the markings of a disappointing year for m&a but we still saw global spending at $3 trillion on facebook's third-best year in the last decade. it may even improve in 2017. this as energy and financial services stabilize. from london, welcome. you have written this piece. tell us why, by and large, they are pretty bullish. >> thank you for having me on the show. we have spoken to a lot of dealmakers as the year was rocking on and -- was wrapping in 2017, it should be a

year of more dealmaking activities. some people are a little bit cautious, even in 2016 with a choppy start to the year. but definitely, the end of the year was so active that people are quite optimistic into next year. david: they were sort of obsessed with the trump trade. of 2017 is tied into expectations of real fiscal stimulus out of the united states? >> that is a great point. people are trying to figure out what the impact is going to be. it is a little bit too early. we saw companies like j&j trying to move into a big opposition with excelling on, actually in part because of taxes. but decided to walk away now it sounds like the conversations start with france.

we will see how that deal plays out. year, companies and ceos are trying to figure out what the playbook might be in terms of the attacks. david: you did find some caution, as you suggest, particularly from barclays. where does that caution come from? >> we have to take into account that we had a very uncertain. period this year. people started to think about .rexit in the u.k. markets were on a roll and then the u.s. election -- so it has been quite a choppy year. optimisticcautiously because of, mostly, those geopolitical actions taking place. let's see what happens next year

with economic recovery may well feel confident and take more bold moves and transformation. but still, as you mentioned, it is optimistic. david: great to have you on the program. do analysts get into the sea suite? jonathan: and whether they actually deploy cash to do something productive to buy back some boosted dividends. coming up, market stocks have been largely left behind in the u.s. equity rally. geoff dennis joins us with his outlook from new york. this is bloomberg. ♪

>> this is bloomberg a break from u.s. worldwide. i am jonathan ferro. let's get a check of the markets. all-time highs on the dow. 26 points yesterday short of a 20,000 marker.

the futures are treading water. in the other asset classes, the fx market more precisely, specifically, dollar dominant. dxy climates were 14 year highs. too-dollar climbs back up $1.04. the bond market yields of the basis point, 256 is how we trade on the u.s. 10 year. david: shortfall. italian banks set to lose $50 billion to clean up balance sheets. more than the 21 billion the tolerant -- the parliament agreed to provide. stocks coming off of a record low on news of a $21 billion on the way. spanish refund. europe's highest court orders spanish banks to refund billions of euros to mortgage owners who were not allowed to benefit from lower interest rates. too far, too fast?

stocks hitting fresh record highs as the dow inches closer to 20,000. investors are seeing the half-full part of the glass but common el-erian says it is time to cash. now we turn to emerging markets. emerging stocks have largely been left behind in the u.s. equity rally but there are some indications that might just be changing. options traders are now betting on e.m. stocks to gain with bullish contracts such as we see on this bar chart on the msci emerging markets, ups reaching their highest level in six months. dennis, head of the strategy, joins us from austin. -- from boston. >> david: good morning. take us on a rotation back to e.m.. >> it has had a rough period since the u.s. election. we have no underperformed the

developed markets by about 900 points, 900% since the u.s. election. host of that occurred immediately after that. they should think about rotating back to e.m. but that call hasn't worked yet. ourargument here is that view is that it will be very hard for the new administration to get the u.s. economy growing strongly in the near term. there will be some disappointments. we have not raised our forecast .ostelection, from 2.4% that brings us to a bond market were yields don't go up and they are set to trend a little bit lower. all of those are decent liquidity conditions for emerging markets. think we gotat we a little carried away with the excitement about the u.s. economy and also, worried about

the bond markets which are to bullish about the dollar. is ahan: how critical weakening dollar to your approach? basically, around the world, there is an optimistic view towards the markets in the developed world but not so much in the emerging markets because of the strength of the dollar. you project that to turn around. david: it is a long-standing relationship. >> we typically do well when the dollar is weak and badly when the dollar is strong. when you have a weak dollar, money tends to look for yields in emerging markets, making it riskier. the dollar euro goes to 1.13 at the end of 2017. the trend is a little bit against us what we think that is going to be the case because of the european surplus. also because of our sense of long-term equilibrium values. is a critical part of our view on emerging markets. that is a very important assumption.

jonathan: let's get specific about countries. david: you have a list of countries you are interesting in. some are not surprising like korea and taiwan but you have turkey on this list. turkey is much in a news, not just this week with the assassination of the ambassador but more with terrorist attacks in syria. how confident are you geopolitically? it is alwaysally tough. toare expecting the market be extremely cheap market in turkey, well below the total average. the impact of the coup attempt in july and the crackdown has hurt the economy. the economy is going to grow around 3% at this point which, for non-agm is not bad at this point. frankly, the rest in turkey are worse than geopolitics which by

definition is hard to predict. at the risk in turkey is oil prices putting the account onto more upward pressure. it for nowck to because we just think the market is cheap and some good companies are there and it has been a very bad year. jonathan: one of the critical -- the pivotal correlations is the relation between treasury yields and broader asset classes. around theu sit table with the bonds team, how was that situation going to resolve when you've got a market that is very bullish on the dollar and bearish going into 2017. >> that is not our base case. clearly, the recent trends could extend for a while. we accept that. we basically think bonds have run towards the top end of their trading range. we think they are more likely to yield as we called -- as we pull

back on a 6-12 month view on the dollar. that is critical on the outlook for emerging markets. we like to do scenario analyses end ofand before the next year, not our forecast, if that were to be the case that would be very bad for emerging markets. on ant to base our views sluggish growth environment and we have to base our views on some of these big macro calls in global financial markets. that is where that call comes from. .> let me try to join the dots in 2013 we talked about the dog wagging the tail. are we talking about the tail wagging the dog next week? the e.m. could happen. the base case is bonds continue to go down in the dollar continues to go up. you have a situation where the route begins to dent the rock -- the markets.

>> if that were to be the case, the dia would out perform the merging -- emerging markets. we are down about 5% since the u.s. election. we had a better performance in the face of sharply higher bond yields than we had in 2013. the fundamentals have been better in e.m.. i don't think you get a rout in that environment. stronger growth globally will at least be a benefit. i think we get softness for sure with underperformance. i think where the dia risk will come from is when the u.s. market simply gets too expensive. that is the big risk to the u.s. market. david: let's assume for the moment that the dollar does continue to strengthen, contrary to your assumption. is there any em investment that is resistant to that move? a better move than others might be?

>> the most risky markets would come at brazil or south africa, possibly even russia. we are very bullish about the price of oil, going to $60. the defensiveness would come from areas like central europe which is tied to the euro. unless you have a big surge in the dollar, parts of asia would hold up quite well. i think india will be fairly defensive. i think the markets into thailand and indonesia could be perhaps less so. in latin america, possibly chile for example. there are not many places that will resist to any great success a big surge in the u.s. dollar. our call is absolutely that the euro-dollar did not go through parity. for 2017, under severe pressure. david: thank you so much, jeff. that is geoff dennis, president

of emerging markets equity strategy. jonathan: we turn to today's morning meeting where we look at anthony when joining us from his office in new york. reduceagreements to reduction -- production could increase prices to $70 a barrel next year. i go outside at the moment, i am freezing. it is the first-day winter. how significant is that? demand inting oil parts of the u.s. and in europe, but also if you look at the heating demand and how oil is used, there are some other locations where propane and other products would be used for heating as well. jonathan: does that really pumped up demand in the longer term? or is that just a volatility story? story where is a you need demand growth in those locations as well.

jonathan: let's talk about the transportation side. let's talk about the supply that may come around. we talked with the big men over at city about what a trump presidency could mean. take a listen. >> a change in the nature of regulations could make it easier and cheaper to build pipelines as well as to produce oil and gas. i think that is where we can see through looser environmental readings of the regulations. pipelines, natural gas out of the northeast, bringing supplies to the market that would almost certainly have an impact on the pricing side of things, bringing lower prices to the u.s. market and lower prices to the world. it is particularly the case on the natural gas side.

jonathan: this structural story, the infrastructure, is that involved in the coming years? what does it mean for prices? >> i think it means two different things for oil and gas. on the gas side, because more instructions are needed to get the natural gas down to the gulf coast and the rest of the country, the more pipes that you can build the more that you can normalize prices within the country. therefore, prices lower. on the oil side i think on the nearing of the differentials, where you get the pipelines andt across the keystone all the parties, so you can get global prices on the oil side, it may not necessarily have as much of an impact as gas. ultimately, producers here require certain prices for them to make economic sense to produce. this pipeline construction really is down to differentials.

there is talk about the border tax adjustment that might help bring the price higher. prices may not be going up that much. jonathan: $70 on the table for next year according to citi. what kind of supply levels do you need to see from that opec agreement to get there. >> the $70 case, where you have strict compliance by saudi arabia and the rest of opec and managing effort decline globally, what we will be seeing is that supply might be tighter and demand, given the gradual improvement in macro conditions, you have a tighter market by the end of next year. jonathan: great to have you with us on the program. city global commodity strategist, thank you very much.

david: now, coming up, volkswagen agrees to a settlement in the attempt to resolve its cheating sandal -- scandal. that is next. this is bloomberg. ♪

>> this is bloomberg daybreak. i am emma chandra. coming up in the next hour, david lebovitz, global market strategist. jonathan: shares of volkswagen getting a bump in european trading today. they have been digging out from the emissions cheating scandal by reaching a $1 billion agreement to settle lawsuits. over tainted diesel engines.

matt miller joins us from the heart of germany, berlin. just lay out this investigation with germany and the emissions cheating scandal. what does this settle and what is next? ofit is important to think the difference between the engines that volkswagen has had issues with. that gotiter engines into trouble for cheating in alifornia were dealt with by $16 billion civil settlement with the doj last year. now you've got the three liter engines in the porsche models like the cayenne. the $1 dealt with by billion settlement, with those two fines and another 1.6 million out of canada, they have dealt completely with all of their u.s. civil issues. now the department of justice will move on to criminal charges. a lot of people notice

the difference between the treatment of germany of volkswagen and the treatment of volkswagen in the united states. when one is quite clearly a bigger market, europe more specifically than the u.s.. . >> in the u.s., you are right. they sold fewer cars than subaru last year so it is a very small amount that you are dealing with. the u.s. took harsh measures because they wanted all of the owners of those cars to be compensated. they have been or they will be. in germany it is different. they don't have the same kinds of restrictions as california as far as the epa side of things are concerned. are, remember, there 400,000 volkswagen employees in this country. the germans don't want to destroy that industry so they

volkswagen ined europe and you don't really see big fines for the company even though they sell almost 10 million cars here and fewer than half a million cars in the u.s.. jonathan: almost 10 million cars in europe but get us up to speed in terms of market share because when those markets came out ever since this cheating scandal emerged, we looked at it dropping down and down and down. you did see market share turnaround. so finally, in european auto sales for the month of november, volkswagen is climbing again. the market share that it has lost. this is a brand that had controlled a quarter of the market when the scandal hit in september of last year. it just felt from their. aey still have about jonathan: fifth. that is matt miller out of berlin.

david: it is impressive that these companies bounceback. time for a stories with emma chandra with bloomberg business flash. >> blackstone group is closing its two-year-old hedge fund. it had lost 24% last year. the $1.8 billion fund that allocated 11 portfolio managers brought 6% last month alone. 2014, it has its first in-house multi-manager fund. spain's economy probably maintains the current quarter internal by brazilian demands and intense job creation according to the country's which the gdp shows an increase in output of 7/10 of a percent in the fourth quarter. that is unchanged from the prior three-month period. the largest bank will oversight afterir practices inappropriate conduct in their currency trading divisions.

commonwealth bank of australia and natural australian bank will pay $1.8 million to the financial literacy fund. they will make changes to foreign exchange systems. that is your bloomberg business flash. i am emma chandra. david: coming up, volatility is down as the year comes to a close. what does 2017 hold for investors? battle of the charge is next -- battle of charts is next. ♪

jonathan: from new york, this is bloomberg daybreak. time, usa.m. eastern home sales will be released. crude inventory data comes down. guy: it is time for battle of the charts. we have joe weisenthal taking on abigail doolittle. >> we know that there is a lot of uncertainty in the world, geopolitics, politics, lots to be concerned about that volatility as measured by the vix is pretty low. that doesn't mean people aren't concerned about the state of markets. this chart was sent to me by patrick hennessy. vix, theratio of the v vix of the vix. it is at one of its highest levels in a long time. it has rarely ever been higher. what this indicates is that

people are paying up quite a bit for volatility on the vix. they are betting that the vix is going to rise. they are not willing to make best that the market is going to go down. everybody is very exuberant. if you are paying for broad downside protection they are .aying for the meta-volatility they think that volatility is going to pick up. everybody thinks it. is not really showing up in markets. not that people are ignoring these concerns or that the market is going to necessarily be totally complacent, it is showing up in an unusual way, people betting on expected volatility but just not volatility itself. david: there is uncertainty about how uncertain it is going to be. abigail?

>> that is interesting and that will give our viewers some comfort around the charts that we are going to take a look at here. in purple we have the vix. it is trading near record lows. investors are complacent and not caring about the fact that stocks are record highs and there are global issues. amplifies this complacency is that in white, we have a global measure of uncertainty based on headlines. we see this massive divergence. what is actually happening in the real world, lots of uncertainty. muchstands out is that for of the fed's extraordinary policy and the policy of the central bank these two tracked each other very closely. in the central bank policy they start to diverge so central banks are giving investors a push in but it is interesting to see whether or not it can last. this real-world uncertainty starts to creep in. david: this one book explains and reinforces your chart and

also peaks at the same time yours does with the v fixed. i going to give it to abigail. very good charts, well done. jonathan: coming up in the next hour is david lebovitz. global market strategist on why the recent market rally might be different this time. we have heard that a few times. we are 34 minutes away from the cash open. futures positive on the dow, up 11 points. negative on the s&p 500. this is bloomberg. ♪

>> good day to you. it is wednesday, december 21. we are 30 minutes from the cash open. futures up 11 points on the dow as we march towards that landmark of 20,000 points. futures on the s&p 500 up a single digit. we tread water in europe. the bond market gyrating, going nowhere. yesterday, the headline, the dollar index at a 40 year high. today, we erase some of that. italian banks need $54 billion at least to clean up the balance sheets. much more than the italian to provide.greed the stock coming off a record low on news of the 21 billion dollars on the way. spanish refund, europe's highest court orders spanish banks to

notnd to those who were allowed to benefit from lower interest rates. spanish stocks fall. too far too fast. ascks hitting record highs the dow inches closer to 20,000. investors are seeing the half full part of the glass. to build cash now after the recent market gains. that is what you need to know at this hour. we go to abigail for movers. fix we have movers on the premarket. beverage trading higher. he sees nice growth ahead. 25% upsidee than potential. the ammo sees more upside

potential for their shares. as for the downgrade, we are looking at jet blue downgraded. .iting concerns angie was cut to a hold. multiple negative including currency headwinds and a belief these shares will be range bound. there isook at --, some reason to think the shares could remain range bound. see this massive trading range of uncertainty. it appears the shares could trade closer to the bottom, closer to $70 in the year ahead, maybe on the uncertainty that -- is citing. excitement peaks and we head towards what is another milestone for that particular

index. to do you risk? we spoke to mark and mohamed el-erian, who both said maybe now is time to cut cash. critics we have increased our cash since the election. we have been selling energy and a lot of our risky high-yield bonds. over the last month, we have been de-risking our credit positions. >> it makes sense to take money off the table and be positioned for two-sided risks. we have priced in no market accidents and ignored all sorts of political issues. the reason the markets are reacting well is because we are getting political disruption in the u.s. that seems to be positive because we are going to unleash congressional action on

key issues. you're getting political disruptions elsewhere that are not positive. what code is doing makes sense. , david.ning us now a lot of excitement about 20,000. reality bites and you hear from them and they say it is time to sell into the strength. your clients have been calling you up again and again. what do you say to them? it as apoint to milestone. in the long run, stock prices go higher. would agree with what some people have been saying, it feels like there are some risks brewing in the market. it is easy to get excited. running wilds are now. if you look at volatility, it is high.

if you look at volatility in the bond market, it is very high. i wonder if there are risks out there. does the stock market not get it? >> i think the stock market has aiced in donald trump bowling 300. they assume we will get inflation, but not too much. they assume deregulation will be a good thing, fiscal stimulus will create a risk to the upside. that is a nice story. far-fetched and too optimistic. we are still dealing with washington and it is not perfect. jon: goldilocks is something you read to kids to help them sleep at night, how do you position for that if you don't think we have a market set up in terms of equities? isthese are the times it important to stay balanced.

we see further upsides in risk balance. it will not come to a screeching halt, but the drivers of the rally will need to be change in it will be about earnings. your return from stocks can be 5% to 7%. maintaining exposure to equities and high-yield bonds and keeping the ballast in portfolios to protect on the downside. itid: if there is upside, will be the underlying earnings that are coming up. if you get 3% to 5%, what does that justify? like to throw numbers out there. we try to stay away from that. the bottom line is when you look at the economy in the second wereof this year, things gaining momentum before donald

trump got elected. earnings were positive in the third quarter for the first time in over a year and a half. we were seeing a warming from an economic standpoint. that supports modest earnings growth next year. david: aside from general earnings growth, do you think donald trump will affect which sectors are more likely for the earnings to grow in? >> that is key. when it comes to equities, you need to look beneath the surface. you are seeing dispersion rise, correlation fall. both of those are good for active management. we like materials, industrials. these cyclical parts of the market should benefit from progrowth policies from washington. dividet's talk about the between wall street and stocks at an all-time high and menstruating -- and main street does not feel it.

does that mean my mortgage repayment or staring at the dow and saying stocks only go up. income, interest income as a percentage of disposable personal income was at a 30 year low. mr. and mrs. smith are not getting money from their savings or their bank account. that hurts the average american. the rise in rates could be stimulative. where consumption accounts for 70%, more money in pockets is a good thing. back of higherhe rates would be positive. david: where do they spend that money? where do you look forward in the stock market that would benefit from that? >> discretionary benefits more than staples. unenthused bye staples in general, but you have

interest risk that if rates continue to rise on the back of stronger growth, you will see returns there which are disappointing relative to the broad market. the more cyclical parts of the market is where we are seeing heading into the next year. david: thank you for being with us. for an update on news outside the business world, we are going to go to our reporter. a tunisian man is wanted in the truck attack that killed 12 people and wounded dozens at a berlin christmas market. the unidentified suspect documents were found in the cab. the washington post is fighting a senior -- says he is an asylum seeker. they will not confirm or deny details published in german media. syrian rebels have reached a

deal with a government in damascus to resume in the actuate and from the last rebel territory in aleppo. opposition forces agreed to surrender last week. a dispute has delayed the final round of evacuations. north carolina lawmakers are holding a session today to repeal a law that limits protections to lgbt people. the law limits which bathrooms transgender people can use in public schools and government buildings. this is a bloomberg. -- david: thank you thank you. what is ahead for oil. upther -- will bring prices and by how much. nike has been struggling, but

the analyst estimates. what is behind the numbers? we will find out. this is bloomberg. ♪

jon: this is bloomberg daybreak. let's whip through the markets. are going to get the cash open for you. future set up 18 points for the dow. we are about 20 points away from yesterday's close. what we break that? we will find out.

of a percent.1/10 the dax unchanged. periphery.e switching up the board, in the bond market, 255 on a u.s. tenure. near 2016 highs. the low of around 140 back in the summer. bid yields come in at a basis point. dollar dominance back on the table. king dollar in a big way. 14 year high on the dollar index. some dollar weakness out there captured by dollar-yen. the euro climbs back to $1.04. there is a contradiction in this market. reflected in an equity market at an all-time high. it is also one of the big concerns. what you see on the big screen is the bank of america, merrill lynch --.

populism up from nine in october. david: populism might lead to inflation and stimulus. it is not just donald trump, also brexit. it is not clear how populism plays out in the workplace. some of these risk events, brexit, if you have the brexit vote right, not many came out and said go long u.k. equities. many said go short. david: blackstone closed a hedge fund yesterday. they bet against the equity markets against trump. jon: they should have done what carl icahn did.

futures in focus, we are going to turn to crude. .e spoke with michael cohen he gave a bullish outlook for the first half of 2017. --prices will average dollars. on average higher in the first half than the second half. what we are going to see in the first half of the year, you will see refinery runs increase. demand for crude will increase. at the same time, crude supply will remain level. bob.joining us is a bullish outlook out there. what kind of a market do we need to see to get us to $70, about $20 from where we are now? bob: that would be a utopia of demand to get to 70 dollars.

we are pricing in a rosy view on demand. how much stimulus, if any is given back to the oil companies in terms of tax breaks on a general basis, or anything that would be energy specific. the demand side won't play out in 2017 until late in the fourth quarter. a lot of talk in the production industry about china building a strategic reserve. arele i talked to say they done with that. we might have demand surprises. supply-wise, you will see a wash in supply in q3. have plentyducers of room to hedge, but you see some pockets of backwardation.

august since september has flipped. there are a lot of things talking about supply coming to the market and the access returning. a futuree and supplies, boosting supply, talk to me about whether we are likely to see a boost of production in the united states. they are looking at crude with a $55 handle. bob: i am looking for a short-term bullish scenario. are talking 12, 16 months ago about show producers turning the spigot's on, they were not able to do that. they had huge salaries to pay out, capital investment to work through. some estimates i have seen in terms of cost per barrel between technology and cost price

production cuts they have made per15% to 20% lower cost barrel. some shale drillers can make money at $28. we are in a position for the current wells and we have seen a steady rise in wells that have been open. we will see a steady increase in production. the current shale drillers can turn production back on more quickly than they were able to 18 months ago. jon: great to have you on the program. upthe crude market, we are about 4/10 of a percent. up, we start looking at stocks in a pre-market. night shares up 1.5%. what does that mean for the largest sports brand and its battle with adidas and under armour? futures for to much unchanged.

muchtures pretty unchanged. this is bloomberg. ♪

david: this is bloomberg. nike shares are up after beating earnings estimates yesterday. the company is the worst performer in the dow so far. for more on what is going on, jay joins us. thank you for being here. let's dig into these numbers. let's start with north american sales. that is the largest market for nike. there are concerns that is not growing as fast as they had been. it is taking them longer to fix their north american business. futures were down 4%. that is an indication business

is slower than expected. there is a strong product pipeline which should help improve the north american business. david: how much of this is due to market share? are they losing share to adidas and under armour is the overall share in market declining? things are happening. the one they are losing market share to is adidas. the industry growth rates have slowed. both are impacting nike. -- itnot fair they will is not clear they will continue to lose shares. china.talk to us about can they make up for what they are losing in north america over in china?

what we see from the chinese retailers, they are continuing to report strong things to our sales. they have a lot of different .ays to offset weakness china is a strong, solid point for nike now. about the celebrity endorsements. they have big names, like westboro. you just need the biggest names? athletic apparel has been that way for hundreds of years. nike has the biggest collection of athlete celebrity endorsers. that is the thing that helps them establish what new products are cool. that is a huge advantage for nike. it will help them get back on track.

david: where are you on the stock? a $56 price target. fewhink it will take a quarters for the stock to migrate up to our stock price. david: thank you. jon: thank you. the opening bell coming up next. let's get you set. .utures up 15 points close at's close, we an all-time high. futures on the s&p down marginally by about half a point. the ftse in london down. periphery,n the brutal for spanish and italian lenders. bondis how we sit in the market. yields lower by a basis point at 255 on a u.s. 10 year. has been.rney it

record lows and bouncing back to two and three year highs in the united states. big move yesterday, dollar index at a 14 year high. we reached tres some of that move in the session today. dollar-yen coming down to 117.31. euro-dollar getting back to one dollar four cents. next up, we catch up with stephen. what doubt 20 k means for main street. ♪

jon: this is bloomberg daybreak. counting it down to the cache open. this is how the stage is set. futures positive about 15 points.

advance towards 20,000 points? the opening bell rings in new york. the bond market looks like this. it has been choppy so far. dollar story captured by the dollar index, down 4/10 of 1%. the open, let's get this back over to abigail doolittle. we are looking at unchanged but mixed open for u.s. stocks after yesterday. the dow came within 25 points on the close of that milestone. are stillse enough we on record watch today. a little bit of red today. let's see if it reverses. the day is young. we have some earnings losers. the company has put up a horrible third quarter. earnings thate

looked down. another stock down on earnings, fedex. they missed earnings by 4%. the cfo is saying over the long-term, the reason the it is a are down, positive. we look at the year to date we see tremendous outperformance in fedex in purple, and outperforming the broad markets. jon: the bowl is getting excited about hitting 20,000 points. ll is getting excited

about hitting 20,000 points. at allity market sitting time highs. we caught up with mohamed el-erian yesterday. the 20 k will have an influence. we are getting higher rates for the right reasons. higherare pricing in nominal gdp. the higher mortgages will see yes, that is not great, but it is coming. morell get more incomes, jobs, more growth. all-time highs on the dow used to mean more to main street than

it does now. how important is that on a psychological level? >> i wrote a piece called wall of hope. the psychology of the market has changed. people are looking beyond their nose to say 2018. we get the deregulation impact on the economy. growthrt to see economic accelerating. inflation picks up a little bit. street gdp is what main eats. to three,ates going where are we on the tenure? creep up a little higher, finally, main street earns money on their bank accounts. all of those baby boomers, who have not been able to get

, pension plans can lower or raise their discount rates. are good things that happen in the first move up. to doubte is a lot from that answer. people are beginning to look past their nose and out to 2018. i wonder if they think all of than maybeing sooner you think it is. >> the market is looking out to 2018 for the first time. if you look at the earnings numbers here, we will be at the and of the year, around 115. maybeear, may be 125, 130. the impact of the trump reforms are not going to be felt until 2018. if you look at where the market

is now, we have a 2500 target on the market between the next 12 and 18 months. we have not moved our multiple. we think 18 is a reasonable multiple on equities. 18 times 140 is 2500. we think 140 is where earnings are going 18 months out. it would be good for the equity markets. normally, these rallies don't die of their own. something kills them. often it is monetary policy. what is the risk it could get fed has to and the raise rates faster than we anticipate?

we will see whether the market is beginning to sniff this out. the same guys who thought donald trump could not win. they reference fiscal stimulus. we have been through a period of 20 years, where the economy was not growing. appliedlan segment stimulus. full employment. trump is talking about fiscal reform restructuring. if you look at what he is really talking about. infrastructure bill, everyone is trying to figure out how many billions this will be to stimulate the economy. is thinking about improving the bones of the economy so the economy is more efficient longer-term.

deregulation is a form of making the government and the private sector more efficient. if you think about his plans of structural reform, bond barriers -- it makes the economy more efficient and stimulus does not create high levels of inflation. david: are the markets hearing that? if you went to the markets now and said -- there is not going to be any money for infrastructure, but we are going awayform, take regulations . how would markets respond to that? i am not sure favorably. >> the market is feeding on itself. things.a few more gradually it will dawn on people that the private sector get sick, corporate businesses get it. you see confidence levels. i built it,y are --

i get to keep the returns, even at a lower tax rate. what we gethis is through the course of next year. we see the economy picking up and inflation does not go through the roof. jon: you forecast growth with a potential of four or five? toi have five and a half six. jon: that is going to mean -- >> equities eat nominal gdp. jon: let's talk about what it means for the bond market. if you are going to force feed thatminal gdp, what does mean for treasuries? >> we think we can still hold treasuries in the three and a half range. if you look at pressures around the world, we are still down at 25 basis points on the german bond. that moneynt

pressures back into treasuries. global rates keep a cap on us and if inflation rates, we have inflation going to 2.5, a 3.510 year is a -- over inflation. , no policy mistakes over the next 18 months, you have 2500. here, howard from much is currently priced in we arewhat you think going to get? i am trying to understand where we are versus what will come down the pipe. how can you be more bullish now? for a we are due pullback. we have had a straight move up.

the pullback is likely to be shallow and short. not --e, we are ourselves on equities here. a wild tot will take while to00 -- take a get to 2100. am i in a secular bull or in a trading range. a secularack into bull environment. 2500 may be a way station. jon: i am not against it. it works. david: thank you for being with us. coming up, mortgage applications rose 2.5% from a week ago.

could this turnaround if rates keep rising? that is next. this is bloomberg. ♪

>> this is bloomberg daybreak. later, morgan stanley's global head of interest rate strategy, matthew bourne back. hornbach. manager jailed

for insider trading, mark little son -- littleton. he pleaded guilty. ahead of news about a proposed takeover. the ex blackrock manager jailed for one year over insider trading. he would pay 230,000 pounds. breaking news in markets. equities down, off by nine points in the dow. negative two points in the s&p 500. >> dragging on the markets are the financial shares. take banks trading lower, including bank of america, citigroup, and goldman sachs.

believes the recent momentum in this sector, up 18% since the election, is likely to carry through into the new year's as rates rise. to awngraded goldman sachs neutral, raised morgan stanley to neutral. the sector is down despite upgrades. we have some choppy trading for bonds. this is the 10 year yield in green. rates are going down slightly. bonds trade in verse to yield. the bigger question could be whether or not the big move up in rates does continue. we are looking at a 70 basis points move higher out of the election. this chart may suggest we are about to see 10. -- see consolidation in the 10 year yield. white, we have the five-year

inflation swap. in blue, the 10 year yield. from our bloomberg strategist. he says historically, swaps lead. orange circles show 10 year yield has shot up. it follows the swap back down. it looks like inflation expectations have gotten ahead of themselves, suggesting we could see consolidation in yield in the new year and that could weigh on banking shares. about let's talk mortgages and the 30 year. more people are buying houses and taking out mortgages to pay for them. at what point will higher rates turn that around? answer the question. at what point do people stopped buying houses? of months a couple

still. rates started rising after the election. the following week, mortgage rates rose. mortgage applications jumped on the back of it 19 percent on the following week. that might be due to people rushing to lock in mortgage rates before they go higher. we might see this happening before we see home sales get affected by high mortgage rates. are there rules before you see a material decline? yelena: we saw mortgage rates rose by one percentage point. see a material impact. sales declined by 10 percentage points. growthat a dent in gdp

for 2014. let's go to the short end of the curve, auto loans. what effect might it have on auto sales? we heard from automakers that they will be idling their plans next month due to the lack of demand. lack of demand going forward in the next couple of months. the story for 2017 will be growth a higher income based on high wage growth will help consumers. upset the weakest story from higher rates.

david: people will have more money in their pockets because of wage growth. it has been moving up. seen a we have not pickup in income growth so far. we are still expecting that to happen. we are getting close to full employment and we see that in the numbers. the reserve of available people who can get into the labor force is getting smaller. we are going to hit full employment and this will drive wage growth up. this is not comparing apples to apples. jobs that would be filled otherwise is being taken over by automation. the jobs people are getting are based on lower tech and lower pay. what are the dangers that the

model is out of date? it is important for the new administration and congress to look at that and take advantage at this point in time and think about education and productivity. we need to invest in higher that wevity and jobs -- have competitive advantage in. jon: want to recap the breaking news. the x blackrock manager jailed for one year over insider trading. mark littleton was sentenced to one year in prison for insider trading. the latest high-profile figure to face jail. up, bloomberg markets with mark barton. mark: we will focus on this next

blackrock manager story. a big win for the regulatory body and its fight against insider trading. we have liquidity drying up, concerns mounting it is going to fail to raise enough capital by the year end deadline. spanish banks losing the mortgage interest payments. estimateseries italian banks need an injection of around 40 billion euros. can they year and rally last with only a few days left in 2016? a busy show. we will see you in nine minutes. jon: that is coming up. on this program, the bulls are on parade.

are some of wall street's top strategists getting ahead of themselves? from new york. this is bloomberg. ♪

david: this is bloomberg. for the third year in a row, every strategist surveyed by is buerg is polish -- llish. right, you can see the spread between the highest and the lowest predictions is the narrowest it has been in history. back toata we have goes 2007. it is 200 points. what you see between the furthest to the left and the orange line, this is pretty rare.

everyone is in consensus here. they are accepting -- expecting a bullish year going forward. estimates of a double-digit gain next year. jon: what is bearish these days? >> 2300. bearish is not bearish apparently. farther in you go, the less certain you are on where it is going to go. it is getting nearer. what accounts for that? >> who would have thought we would had seen the gains we did after greg said, after the election of donald trump. these bulls were validated. theives everyone opportunity to look at their models. we saw this tug-of-war between the bulls and the bears. the bulls have won.

accounts for more people jumping on the bandwagon. people start calling and saying why and you are almost pressurized to list your forecast from 2300. david: i get nervous when everyone is in the same place in a trade. >> people are buying quickly. been great toas have you with us. a big interview tomorrow. david: i sit down with brian moynahan. jon: 27 minutes into the session. hold your breath. we are going to take a little bit longer. equities down 14. this is bloomberg. ♪

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julie: we are going to take you from new york to london to madrid in the next hour. of course, we are monitoring for breaking news. november existing home sales million, and one that is a month over month gain of .7%, better than estimated. 5.5 million was the average economist estimated existing home sales the largest portion of the u.s. housing market, coming in a little better than estimated. also, by the way, that level is the highest since early 2007. perhaps people getting in notes of home closings ahead of the further increase in interest rates. 18.2% before the seasonal adjustment from