francine: china's capital crunch. liquidity fears in the world's second-largest economy. is china the biggest 2017 risk? on hold after a turbulent year, european markets draw breath ahead of 2017. stocks are little changed. commodity producers climb. gold shakes off its trump slunk. crude trades near a 17-month high ahead of planned opec cuts in january. good morning. this is "bloomberg surveillance." i am francine lacqua in london.

we have a great show. joining me today for the first half of the show is a ubs wealth manager. we look ahead to 2017. where will market opportunities lie? then joining us with discussion -- hina is jonathan fendi fenby. here is sebastian salek. seb: russian investigators are studying flight data records of the plane that crashed into the black sea on sunday. all 92 people on board were killed, including members of a wire. disappeared from radar shortly after taking off from sochi. it had refueled on a flight from moscow to a military base in syria. the recovery of the victims' remains is continuing. toshiba has fallen after forecasting a loss in the billions of dollars. the write-down follows the acquisition of a power systems operator by westinghouse last year. there have been arguments over new nuclear projects in the u.s.

toshiba has lost 1/3 of its value since markets return from the holiday break. thee are yet to determine final write-down amount, but it could be as much as billions of dollars, and may affect our earnings. i apologize to all of our stakeholders on this matter, and i would like to ask your continuous support for us. seb: the u.s. secretary of state, john kerry, will offer a comprehensive vision for how middle east he's can be achieved , in washington this morning. the speech comes less than a week after the u.s. abstained on a vote in the united nations condemning israeli settlements in the west bank. journalists and analysts in more than 120 countries -- this is bloomberg. francine: thank you. these are your markets. it is december 28. volumes of trading not as robust as even last week. this is the picture overall for a lot of these stocks. here in europe, they are flat.

the asian markets -- i want to show you stocks they are at -- stocks. they are advancing. food is back up. -- crude is backed up. and you can see the young. with 23 sessions to go, the dollar is on track for the best quarter since 2008. milking dollar begin -- how will the dollar begin 2017? our first guest is with us for an hour. it is jeffrey yu, from ubs wealth management. as always, thank you so much. very good of you to come during the holiday season. markets are quiet. it is a great time to take stock of what 2017 will bring. more dollar strength? jeffrey: that is one thing we are counting on, especially against developed market country -- currencies. we expect dollar weakness against sterling. this is whyncine:

we get you in. wefrey: we take -- geoffrey: take a contrarian view. the u.s. is saying inflation with height -- with heightening rates. seem the this does market is positioned for the dollar strength. are they pricing and everything? the ofy: it depends on ministration. that is the wildcard. given our asset allocation views for next year, we want to be overweight u.s. equities. we would be happy to be proven wrong if you get the big investment boom, so the u.s. can have strong inflation at the same time as good growth and a strong dollar. we are not sold on that yet. it is probably a bit too much been priced in. francine: you are not sold on that because it is difficult to fund it, especially with dollar strength? or you are not sold on it because there is not enough infrastructure to invest in?

it is a combination of not enough information -- we have not seen anything can create from the incoming administration on issues that can be fast tracked. that are to be fiscally conservative. privatecan rely on the sector -- a lot has to happen. francine: how many that hikes next year? geoffrey: i know the dot plot is sliding towards three. will that be enough to make a substantial difference in the dollar? not really. if the dollar is too strong, those plots can be revised lower. only threet is trading days left in 2016. were you surprised? if you look at the dots, one good thing about 2017 is, the market was definitely pricing something else. now the market is much more aligned. we are pricing things better. is that fair? it it is.

there is risk. there are emerging-market currencies, for example. you want to play longer yet on a relative basis. francine: in terms of the markets broadly in the next couple of minutes, where do you see the yen? are talkingu perhaps the most undervalued currency. -- obviously,orms relied too much on the dollar doing the work. i am happy to be proven wrong. francine: everything now relies -- we do not even talk much about the structural reforms. is there anything governor kuroda can do to keep the yen at these levels? geoffrey: i think more stability, clarity.

there is still the experiment. i do not think it has been running long enough to really assess it. it does provide uncertainty. it is what you do with it. asset managers are guaranteed a spread right now. they need to return that money or reinvest that money wisely. most importantly, where is wage growth going to go? not holding our breath there. the u.k. the head of investment office at ubs wealth management, with us for the hour. stay tuned. and shockump, brexit, waves that hit the markets in 2016. we will focus on what next year could hold for investors. plus, with crude oil near a 17-month high, we look at where the most traded commodity could head for 2017. and could china bowls defacing -- bulls be facing a great new year's eve? ♪ -- a grim new year's eve? ♪

francine: this is "bloomberg surveillance." here is sebastian salek. seb: toshiba has fallen by its daily limit after saying it may have to cut the value of the u.s. acquisition by billions of dollars. the write-down following the acquisition of a nuclear construction unit by its westinghouse division last year. there have been arguments over nuclear projects in the u.s. which are behind schedule and over budget. of its has lost 1/3 value since the markets returned from holiday break. >> we have yet to determine the final write-down amount, but it could be billions of dollars and may affect our earnings. we apologize to all of our

stakeholders on this matter. i would like to ask your continuous support for us. bp will pay $1.3 billion for woolworth's network of australian petrol stations. it will acquire 527 fuel outlets , as well as 16 development sites. the deal will cement bp as one of the country's biggest fuel providers. south korea's antitrust regulator has slept a record $853 million fine on welcome. companysion says the licensed its key patents only to mobilephone makers and did not properly negotiate licenses. this is the latest actions that threaten the u.s. chipmaker. qualcomm called the decision unprecedented and unsupportable, saying it will appeal. that is the bloomberg business flash. francine: they do so much. brexit, trump, and the return of

opec were shockwaves that hit the markets in 2016. the consequences will rebound through 2017. investors expect inflation and further political instability. for more on the opportunities, i will get back to geoffrey yu. before we get to the opportunities, what is your main risk? geoffrey: if we are wrong on the dollar call, and we actually have a strong dollar and strong growth, and trump delivers on spending plans, and we get the massive reflation -- traditionally, reflation in the u.s. has not really been timed with the rest of the world. that is something we are watching. francine: give me your best. -- the yen is is depreciating. we like the yen equity market. we like e.m. currencies. whole, if weas a can get past a hurdle, it can do well. expectations are stronger in

select markets. strong domestic profiles. india, for example, i know that market is [indiscernible] policy changes have led to questions. it is predicated on the view that the dollar will stabilize around here, against e.m., and the debt situation. china is a ron kirk. francine: -- china is a wildcard. francine: you also added high-yield in europe. right now, from a technical point of view, that was a trade that no one wanted, for the beginning of this year. it came back quite aggressively. now, with the ecb's new policies , there is a path for corporate's doing quite well. we see political risk. always be aware of it, but do not over dramatize it. there is a good return profile. francine: central banks are

here. geoffrey: that is crucial for support. if you look at the reflation profile in europe, we are in a steady-state, where you would not expect aggressive tightening by central banks, or aggressive unraveling of easing, and i think markets are anticipating in the u.s. at this point, which makes the eurozone attractive. .e are not totally sold on oil energy is probably a take profit opportunity. europe is less exposed on the energy side, compared to the u.s. 15ncine: i feel like we have minutes to go around the world -- 15 minutes to go around the world. it is very jewels firm. this is what we are seeing -- is very jules verne. this is what we are seeing on the pound. this is the average since 1984. this year marks the lowest annual average since 1985. what does it go next year? geoffrey: higher, probably above

130. ,f you really want to be long being short euro-sterling might be a better trade. net, over it is -- net- a ten-year horizon, there is value. there is some volatility. [indiscernible] ultimately, the downside is very [indiscernible] worst -- what is the what are the markets actually pricing and? geoffrey: put it this way. markets are pricing in not much is going to happen. the worst news that could happen is, we go for a hard brexit, and , and brexit takes six or 10 months. is that such a bad thing? you suddenly get the certainty of a starting point. right now, we do not even know what the u.k. starting point is.

trading robustly on the back of uncertainty, but there is value in certainty, did -- regardless of how bad the certainty is. contrarian views on the dollar, but also the pound. up next, the return of opec. while trades before planned supply cuts. we look ahead to what the year. crude. -- to what the year holds for crude. ♪

francine: this is "bloomberg surveillance." oil trading their 17-month highs. crude has been above $50 a barrel since opec agreed to a supply cut, but there are risks to the cartel. we have more on what the year holds for crude. yu as well.eoffrey james, is this rally all opec supply cuts? james: the cuts start at the beginning of next month. people think this is a serious deal. the fact that russia and other producers have signed up gives extra weight to it. people expect supply to shrink significantly next year. francine: i used to cover opec and they always cheated. this time, it is different because they are concerned about oversupply? james: i think so.

there is a lot of political weight behind the deal. vladimir putin and saudi arabia were involved in crafting it. i think there will be some cheating. this is opec. suppliers from every country coordinating would be a miracle. but people expect significant declines. at the most recent meeting indiana, where the saudi minister basically said, we will makeatever it takes to this deal work, it gives confidence in israel. francine: we forget sometimes that these are countries that have huge problems back home because of the price of oil. how much would this help venezuela and saudi arabia? james: it will help them a lot. it does not go far enough to fix the problems of countries like venezuela, which has huge economic problems. need a plan. government spending this higher than the current level. saudi arabia obviously is planning to do an ipo with a national oil producer, aramco.

improving outlook for crude markets helps that a lot. the price outlook for next year will not be high enough to balance any budgets. his is my chart for 2016. we have the blue wti, and here is purple grant. -- brent. u.s. beings in the turned back on. you say whatever happens, there is a cap at this level, $60. james: we would treat it not as a big profit level, rather than look for the next leg higher. it does not mean this is a positive story there. it is one of the reasons that we like currencies. if we believe in reflation, we should believe in the sustainable price story, rather than, $60 and then $30. francine: how much do we know

about what shale gas producers in the u.s. will do? pastrey: they spent the two years becoming more efficient, focusing on the most profitable areas, with the highest yield of oil. they are ready, as you can see from this chart. they were not waiting for opec to do this deal before they started redeploying rigs. there is a chance the production price goes to $60 or higher. we could see much more significant growth in shale oil. opec is aware of that. and so some opec ministers have said they do not want to see prices go that high, because they also fear another shale boom coming and the effect that would have on the markets, the destabilization. they need to get out of boom and bust cycles. francine: you think emerging markets are linked to these commodity prices. i think russia and the ruble. what is your take on the ruble? geoffrey: if you plot the ruble there, ichart their --

think it would look very similar. the start of the year, dollar-ruble was at 82, and now we are down to 60. it has come a long way. we still think there is a strong story, a strong carry. we like a basket of emerging-market currencies, and ruble is one of them. the land, the rupee -- the rand, the rupee, logan dooley developed market currencies. francine: could we see the ruble at 55? geoffrey: if the market crowd into that position. but i would not want to be the last one in the trade position. francine: that is a good way of putting it. james, i have never seen anything before like it. you have compliance, opec people watching. the first results are in january. james: yes, the first meeting is going to be scheduled for january 13 in abu dhabi. they will be looking at everything that we all look at.

tanker loading schedules, pipeline flows -- everything to verify that people are following through on their commitment. it is difficult to monitor, especially with some of these countries making relatively small cuts in their actual production. it is going to be very interesting to see what comes out of this, and to what degree they can verify that people are following through. francine: did i put you on the spot? is this a faux pas? leastey: i would say the likely to cheat would probably be saudi arabia, because they invested so much capital. historically, they have been the ones who have borne the largest share of the cuts and are doing so again. arabia -- the countries who have been less reliable would be the ones with the weaker economies -- venezuela, nigeria. some of the countries that are in a weaker state at the moment, nigeria and libya. that makes it -- that makes

noncompliance slightly more likely. five of those countries can manage to make significant production increases. others in opec would have to make a big cut to actually hit the target they were aiming for. francine: james and geoffrey, thank you so much. next half hour. next, china could be facing a grim new year's eve. we will also speak to jonathan and get more from geoffrey. we will talk about china, renminbi, and whether a u.s.-china trade war is on the cards. ♪

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francine: let's get straight to the first word news. russian investigators are studying the flight data recorder from the military plane

that crashed into the black sea on sunday. 92 people were killed. it disappeared from radar shortly after taking off. recovery of the remains continues. toshiba has fallen by the david limit after forecasting a loss. the right downfall is the acquisition of a power systems operator westinghouse units. arguments over new nuclear projections which are a year behind schedule and over budget, they lost a third of their value. >> we are yet to determine the final write-down but it could be as much as billions of dollars. it may affect our earnings and we apologize to all of our stakeholders. we would like to ask your continuous support for us. >> u.s. secretary of state john

kerry will offer a comprehensive vision for how middle east he's to be achieved. -- middle east peace can be achieved after the u.s. in theed from a vote united nations about the israeli settlements in the west bank. this is bloomberg. francine: it could be a grim start to the year for china, an ,nnual quota to upper the quan there will be a rash to sell the local currency. here is what people have to say. anthe issue in china is economy of that size and complexity, can you make the transition from a heavy industry infrastructure investment led export led economy to a consumer driven, technology savvy, research and development economy

swiftly? >> policy fumbles in august of last year and at the beginning of this year. a failure to communicate intentions with the market about the underlying equity market and currency market. against that backdrop, the economic activity is very good. francine: joining us is someone with plenty of experience. also a chinese expert in london wu.eoffrey if you had to write china's economy, the risk, the problem with the outflows and remember the flowing -- the three do not match. domestically, you have the debt leverage buildup which is reaching the corporate sector particularly at dangerous levels. there will probably be outflows in january, the $60,000 quota,

the government taking measures to stop corporate outflows, they do not want a chinese company to use foreign investment to move money out of the country. we will have some jitters in january over the currency but the main question will be the relationship. you are good -- francine: you are concerned that the policy has been put in place by china will have unintended consequences. geoffrey: if you look at the pricing going on in terms of the market, general collateral, over 30% yesterday, some deleveraging is necessary, when you have a debt of those levels at a lot of it untraceable, some deleveraging is necessary but

what fashion will you do it because if you do it to quickly and aggressively, the system cannot stand that. francine: is that a concern? jonathan: yes, what we had is earliereffect of easing in the year, it takes longer to work through in china, that gave us three good quarters by the government numbers which will start to fade towards the end of the first quarter of next year and the big question will be -- whether the tightening continues and deleveraging continues, supply-side measures continue or whether they think about another easing cycle? asncine: could it go as far mismanagement of debt or leading to some kind of financial crisis? geoffrey: that is where the question is coming interbank is behaving well for now. you could get some transmission into the back, the problem with

the chinese financial system is a lack of transparency. that is where the unintended consequences come through. it is not a good mix. , will we get a strong fiscal stimulus? francine: that is what you expect? jonathan: a push for that run the national people's congress in march and china does not have elections but we are in the equivalent of an electric cycle -- electorate cycle. francine: every five years. jonathan: we have the communists years, that is where he gets his second term if he wants to reshape the standing committee of the politburo and change the rules, he has to have the backing.

the chinese democracy and how it works within the party -- xi jinping has been very risk averse despite his accumulation of power and will want to make sure the congress will work for him and does not want to take systematic risk -- but the risk of a downturn is there. they will play it safe in the next 10, 12 months. francine: same question, when you look at this dilemma, what would be the safer way to stabilize it? if you look at reserves, currency, how close that's outflows -- outflows? withrey: you need to deal shortfalls, some segment the currency go as low but an unacquainted -- unintended maybe 50%, not enough, 16% will be enough --

15%, not enough, 16% will be enough. francine: is there a concern that they get distracted i foreign policy or geopolitics, a trade war with the u.s.? jonathan: this is the possibility, i have no idea what donald trump will do. francine: you did not get the call? i am following him on twitter and he has not sent me anything. [laughter] say, xi: what you can jinping would react pretty strongly to anything the donald trump administration does. the chinese feels that the u.s. they havet of tpc, alternatives to that, they see their position strengthening and now they are the great proponents of free trade and measures against local warming. they can play the good cop.

is serious that the scene to jeopardize his position internally as a strong leader, he would have to react. francine: this is a 50-50 chance, are we underestimating or overestimating? geoffrey: always uncertainty, no assigning probabilities to risk is -- jonathan: it is not a 50-50 risk , it could be a 40-60 risk either way but it depends on how the cycle takes place. who else reacts and what does japan do? francine: the moving parts is what we will focus on next. you, both stay with us. coming up, the finish of the one china i'll see, what the donald trump election means with the relationship with the two worlds

largest economies. with elections in france and germany and then come is this just beginning and could 2017 be the year the long predicted brexit arrives? for more, tune into radio daybreak europe. this is bloomberg. ♪

♪ francine: this is bloomberg "surveillance." -- u.s.-china relationship the seizing of an underwater american drone in the south china sea adds to recent tensions. let's get thoughts from jonathan

fenby and geoffrey wu. tradeked briefly about wars and you were saying we do not know what donald trump is thinking. what does the appointment of peter navarro, you wrote many books on china, he thinks china is cheating the rest of the world because of their surplus, how will the chinese take it? take peterf you navarro fa's fight, it is war with china, he has been given a big job but one of a number of people there advising. it is significant, the most clearest signal we have had from donald trump that he will deliver on some of those campaign promises about china. we half his national security advisor, michael flynn, who is known to believe that isis is a

chinese creation. you have two advisors. francine: how do you take this if you are xi jinping? an opportunity for me to have more influence in the region and creating an opportunity or do you think if donald trump crosses the line, i will retaliate? jonathan: china has been doing a lot of push out into the south china sea recently with the aircraft carrier and a new facilities. that thems to feel southeast asian countries, what they don't want is a confrontation between the u.s. and china at it china can play the reasonable card they can win brownie points but if donald trump goes too far whatever that may be in the chinese view, they will hit back by making life more difficult for american companies operating in china. they will wait then for the

effect to be felt within the united states as consumers begin more expensive because chinese goods are more expensive and the u.s. firms which depend on the chinese market or assembly in china more important will start to lobby on capitol hill against it. there will be a lot of countervailing pressure within the united states. francine: we started off the conversation with you saying that market should not overreact to political risk, is that true for something that could go so wrong, so quickly? geoffrey: i think so, if you look at the incoming administration's appointments, some of them feel a bit ideological, the people are ideological but as -- donald trump is saying, as a dealmaker, is the system an opening gander

to get a better deal for the u.s.? we have to look at the alternatives. man who doesis a feels -- who does deals. he says, i can do it, flies to beijing and goes to the people, setting up they, reality, donald trump says you can have taiwan if you deal with north korea. if i was taiwanese, that would not sit well because there is a danger that now that they have been brought into the equation, they will become a card. we talked about earnings and reflation and the dollar, should we model a possible trade war? the chinese ask u.s. companies to either push back or pay some kind of tax, who suffers most?

geoffrey: consumers. francine: in the u.s.? geoffrey: the -- this helps our reflation view in the u.s. but not one sustainable. jonathan: if there is a fiscal boom in the united states, china is set to benefit from that. if you have a trade war, china could be pushed to aid evaluation which they had evil in. -- which they have avoided which would bring the worst trouble warnings -- donald trump hornets into reality. reality.gs into francine: thank you. months until the first round of voting to choose

the next president of france, is this the big political risk for europe? this is bloomberg. ♪

♪ francine: this is bloomberg surveillance. let's get to the bloomberg business flash. >> give a homebuilder has said delivery will be lower than anticipated amid slower construction this month. the tax profit between 160 pounds and 170 million pounds, they are confident of delivering their plans for the final dividend. -- the london-based energy company acquired 527 new outlets and are currently supplied by caltech australia and 16 development site, the deal will cement bp as one of the country's biggest fuel providers. south korea's antitrust regulators and -- a final qualcomm, they said the company licensed its key patents only

two mobile phone makers. the latest in government actions the mostatens profitable business, qualcomm cause the decision unprecedented and will appeal. less than four months until the first round of voting to choose the next president of the french republic. ands talk to jonathan fenby -- andor of the history geoffrey yu from ubs who has read the book. you write a lot of books on france and china, why france and china, is there a linkage? jonathan: i have lived in both. francine: which is more

unpredictable for 2017? jonathan: france unless china has the trade war. french politics have become incoherent. francine: as opposed to? jonathan: you have marine le pen with 28%, 30% of the vote and the right with the nomination and is off to the races. the polls show that his core support is much smaller than might be expected. francine: because he is seen as too reformist? the appeals to a certain part of the population -- he appeals to a certain part of the population. jonathan: he says he is a french margaret thatcher, will -- on the left,

you have complete chaos with probably four candidates running. bee of who will make it to sick amount of the presidential election and the wildcard, he man u well, the former economics minister, 37 years old and no party, resigned from the francois hollande administration and is between core supporters and some advisors, putting a hit in the polls. it is all very uncertain. francine: give me a prediction. the chances of marine le pen, you give her the first round. jonathan: she gets into the second round. francine: can she win? jonathan: i think not but she can do better than her father when he got to the second round, she will get 30%, 35%, she can't

say i run the biggest -- she can say i run the biggest french party. if someone else wins, the far right will become the defender of the french workers and the french system as it is. francine: the market -- the problem is marine le pen, we can remind our viewers, that anti-euro, anti-immigration, what kind of political friends will we see and what kind of europe will we see an what about the survival of the euro? if she makesl -- it a brexit like a cornerstone about campaign, talking one of the most important members of the eurozone talking about breaking it up, that some people will put trade on the

options market on ahead of time but having been burnt this year, it will not be as sudden as we have seen as the brexit vote. francine: is there a referendum on the euro, which way would the french vote? jonathan: the french are but when youhe eu, ask them if they want to get out, they say no, they regard france as part of the core of eu being part of their heritage. you have to put france in the context, you had the italian referendum, the new government is much like the old government, the elections in the netherlands in march where the freedom party and the far right will finish on top of the pole but nobody will form a coalition with him. different situation and the german elections where the afd is gaining. you have the extreme parties,

none will which power i think but all are a disturbing. francine: that is your weakness? geoffrey: that his physical weakness that will be priced in but the immediate reaction, markets will take a step back, no euro tomorrow, that is when institutions will circle the wagons and push back but we need to see some action on parts of the mainstream in europe. francine: thank you so much. jonathan fenby and geoffrey yu from ubs. we continue, i will be joined by michael and we will talk to jp morgan's asset manager. ♪

francine: china's capital grants, liquidity fears loom in the second-largest economy as .hina is the big 2017 risk

on hold after a turbulent year, europeans market draw breath ahead of 2017, commodity producers -- gold shakes off the trumps love. oil optimism, crude trace their a 17 month high ahead of a plant opec cut in january, is the cartel back? this is bloomberg surveillance. dayse these quieter because there is a lot going on in china and something big happening next week, a great way to take a breath and paused and reflect on the risk and opportunities for 2017. time this year we were optimistic and then china burst into the news in early january and changed everybody's mind. it will be an interesting time. francine: we will get more on the market shortly but first straight to the first word news. turkey and russia have agreed

on a cease-fire plan for syria. the crews would begin tomorrow between rebels and syrian government troops but will not cover terrorists. u.s. backed -- china has made a move seen as a challenge to a donald trump, they have deployed their only aircraft carrier to patrol the south china sea. it is accompanied by five warships. donald trump has antagonized the chinese government would actions on trade and taiwan. the obama administration on the verge of punishing rusher for interfering with the presidential election. the measures could include economic sanctions and diplomatic sanctions. or the u.s. to launch a cyber offensive. some of the steps could be announced this week. romania is firing towards a new political crisis, the president

has rejected a nominee for prime minister from the social democratic party and in return the party says it may start the process to suspend the president, romanian is the second poorest country in the eu but one of the fastest rates of growth. powered by more than 2600 journalists and analysts. this is bloomberg. michael: let's get you started, today could be the day that the dow jones have been the girl at the end of the bar teasing you, we have not been able to grab 20,000 but close and futures suggest we may be heading that s&p futuresow and higher this morning, 2/10 of 1%. relentlesses its move up and if you want optimism about the equity market, look at --ix --, not much v vix. -- a record called

low for the german two-year, something to keep an eye on. romania in the midst of a political crisis like we have not seen in eastern europe and quite some time and their currency against the euro, it has moved significantly in the wake of that. , incine: the romanian story am glad you mentioned it, one of our top watches, a class of new cabinets, sending romania into a new crisis. this is my picture. the one i would watch for is oil , we will spend time talking about it, global equities in thin trading. oil headed for the longest winning streak in seven years and the yen weakening or a second day and the asian stocks, .2% -- .3%.

michael: china is a complicated story. you have the chinese you win fixing and the -- fridays want against thee yuan dollar has weakened significantly over the last year but the basket has gotten stronger and the chinese are trying to keep their currency from getting too weak. donald trump has it backwards when he says they are manipulating for advantage which is causing them to lose a significant amount of foreign exchange reserves which is causing concern in china about what might happen next with a capital flight. we will continue that conversation throughout the show today. francine: liquidity concerns some fears surrounding china. this is what i chose, a simple count chart. .this is chart

on average what it has done for the year and we brought it back to 1985. what this tells us is that this year marks the currencies lowest annual average since 1985. this is the redline. if you take it on average, the lowest on average since 1985, this has a lot of implications for exports and accounts deficits and we need to watch that because we get onto the supreme court decision. andmore on the markets china and brexit, we are with stephen macklow-smith from j.p. morgan asset management. thank you for coming on, always a pleasure speaking with you. china,o many risks, maybe trying to quickly to rationalize orderable allies -- normalized some of their

politics, brexit, is there something the market in what -- has not priced in? stephen: i think 2016 was the -- the outcome of the referendum was not expected given the market reaction here . --t people recognize francine: are we overshooting? 2016 missedn things, mainly political risk but also china, are there pressing too much political risk for 2017? jumping at shadows and therefore we could see an unwinding? parochial, theng u.s. start market recently -- it

has not looked at the footage of pitfalls once the government announces policies. from a european point of view, a ,ot of the risk are overstated people have taken the outcome of the u.k. referendum and the donald trump victory and extrapolate that. populism is on the rise, we will become primelder minister in the netherlands and marine le pen and france and maybe angela merkel toppled in germany. the likelihood of those three things are small. for reluctant are considerable. -- marine le pen are considerable. michael: they did not take much

for the markets to take on these --tank on these risks, do we shrug these off? stephen: if you look at the data points from this morning and the global economy, the important thing is the oil price. if we look to the back end 2015 and early 2016 when oil prices were going to as low as $29, a lot of people said this is because china will experience a hard landing. in fact, china did not experience a heartland and now you see a sigrid nice recovery and growth -- synchronized recovery in growth. grow andcontinues to emerging markets are recovering partly because of a recovery in commodity prices. you have a synchronized move up and global growth and in the

u.k., the reaction to the referendum has not been what we expected and consumer spending has powered ahead which helped growth. you have a picture in global terms were growth is healthy. michael: does it become a synchronized year for banks -- central banks? stephen: we think the fed will continue to tighten, you have a clear indication of that from janet yellen's press conference in december and the ecb will e, itn fairly dovish -- q was careful to characterize it not as tapering. francine: was it tapering? stephen: yes. francine: clever, you do not know, you link to duration. stephen: one of the alternatives

was to stop all qe in march and go from 80 billion 20 but that would never happen come always zero but 80 billion to that will never happen, always likely. stephen: stick around, we will be back with stephen macklow-smith. coming up, we speak with mark chandler. 6:00 a.m. in new york and 11:00 in london. this is bloomberg. ♪

francine: this is bloomberg "surveillance." look at that, beautiful, it is

minus five degrees celsius but it makes it worthwhile leaving the office on december 28. this is the pound. my chart of the year. let's get to the bloomberg business flash. qualcommkorea has find $853 million for antitrust violations, they say the american ship maker coursed people to sign documents. they will appeal. they get most of the profits from the rights to use technology central to mobile phone systems. a report that lloyds banking established a subsidiary in europe if the u.k. leaves the eu without access to the single markets, the financial times says the most likely option is for lloyds to go to amsterdam.

and airlines has canceled an order for boeing planes valued at $4 billion. to buy it will continue 120 boeing 373's. toncine: let's bring it back brexit, next month the result from the u.k. supreme court hearings over whether theresa may can trigger article 50 without parliament permission. david is the chief europe economist at bloomberg intelligence and with us is stephen macklow-smith of j.p. morgan asset management. the supreme court decision in january, do we know what we expect? >> we do not know what the outcome will be but the judges are widely expected to uphold the decision of the lower court

and that is not a huge deal here todo not a -- expect that change the timetable. francine: it has been six months since the referendum happened and we are none the wiser apart from a timeline or what kind of relationship europe will have. that is the theme of a recent referendums and elections in the u.s., you could say the same thing about donald trump, the election is over but not all the clarity on policies that will come forward. largely because brexit is unprecedented. out but a lot to figure they are doing it. marche the timetable of which is still at hand. talking aboutre

how one of the shocks that did not happen was the collapse of the u.k. economy after the brexit vote. can we explain why that has not happened? are you confused by what is going on that you do not know? to thethe largest hit u.k. economy was expected to come from business investment, if the u.k.'s relationship with europe up in the air, we did not wouldf foreign companies want to go to the u.k. and that would never be immediately evident in the data, decisions implemented over a long time and we still may see signs of weakness in the future but when we speak of the u.k. economy having held up reasonably well in the face of brexit, it means the consumers have kept spending and that is largely because the institutions of the country were able to navigate the process well.

there was a transition of power and a new prime minister with no major chaos. francine: it was quite messy, do you remember that, there a shakespearean -- very shakespearean. michael: does the ground make any changes? make any changes even the fact that we have not seen a real change in the economy, do you go back to what you were doing on june 22? stephen: what has happened since then, a rotation come in the beneficiary of weeks selling has done well and house builders have come under pressure to perform relative to the market. most importantly, the day after the referendum, everything had changed but nothing had changed because all the trade relations

were intact. we will not know what the future shape of the u.k. relationship with the european union until we get more details about the negotiations on trade. francine: are you worried that we do not know what the plan at the moment of the prime minister is, or do you believe this is a negotiation, you go to europe, say we want out, we do not want a free movement of people, you cannot have a plan because it is a negotiation? is fair, if you read statements from theresa may and government ministers, she is on record of saying do not tie our hands that if it goes to

parliament, parliament accepted article 50 will be triggered and it cannot stand in the way but they want more visibility regarding the shape of the negotiating position going in. it makes no sense to show your hand early. michael: a question for david and maybe stephen. a chart that shows inflation in the u.k., it has started to turn higher in the last couple of months, when does he get to the point where it is a problem with the pound at a three decade low? how soon does it get to where it changes investment decisions and purchasing decisions? david: the bank of england will be focused on underlying inflation as it looks through the effects of the exchange rate. of recent movements in commodity -- thathich underlines underlie picture has not changed much and we have seen that with the recent decisions of the bank

of england to stand pat and not looking for any moves in 2017. from the point of view of monetary policy, not a huge deal. francine: we will be back with stephen macklow-smith of j.p. morgan asset management. coming up, the pulse of the u.s. economy. that is at 6:30 a.m. in new york. this is bloomberg. ♪

francine: this is bloomberg

"surveillance." time for my morning must-read. out to do withng foreign policy and trade. callroject syndicate, it's , i love the title, how dr. strangelove, learns to love donald trump, talking about kissinger. his message to his sophisticated european and asian college seems to be don't panic, donald trump may look at best and sound strange but he is what essentially american, and american today needs to overhaul its relationship with the world. by this reasoning, trump's unorthodox approach might be just what america and the world needs. is, theern i have economy in the u.s. is doing well and has been for some time, people arguing that this is what

the u.s. needs, a reset in terms of relations and trade to become one. unclear to me what the end goal is. stephen: if you look at how people in america have experienced the recovery, one of the reason is because many people feel they have not shared that in the economy and a lot of jobs have been exported. flatlinedtrade has and i think the emphasis the donald trump administration as i understand it is to rebuild or strengthen the u.s. manufacturing base, not a question of not trading with the world. michael: if that is the case, why are you dismissive of the idea we could see populist movements in the elections in europe succeed in what 17 -- 2017? willen: populist parties

be a strong voice but we need to look at the opinion polls. france, all of the elections in france run on a two round system, what we know from previous parliamentary elections is when the national party gets through to the -- the centrist party unites to bow down the left candidate. michael: we will come back but we have to take a break. pimco, a, tony of conversation at 7:00 a.m. in new york at 12:00 p.m. in london. this is bloomberg. ♪

michael: good morning, new york city. i amwith friend link 1 -- in new york, francine lacqua is an london.

let's get to the first word news. >> in new york, three chinese hikers accused of making more than 4 million dollars in illegal profits by breaking into the service of large law firms. least seven law firms that have been hired to advise in deals they allegedly profited on transaction is in speculation involving pit a most and intake, and intel. john kerry will layout a decision to -- layout a policy to middle east peace. response steps up its to a center in the united nation over west bank settlements. it was not an apology, the japanese prime minister did offer condolences to those who lost their lives in the japanese attack that brought america into world war ii. he visited the uss arizona memorial with president obama and thanked the u.s. for helping rebuild japan after the war.

russia is admitting that officials carried out a -- helpad operation to out athletes in the olympics. it was -- the international olympic committee has opened up investigations against dozens of russian athletes. global news 24 hours a day powered by more than 2600 and was and journalists in 120 countries. -- analysts and journalists in 120 countries. francine: a quota to convert the yuan into foreign exchange assets, stoking concerns it will be a rush to sell the currency in china. we talked to a strategist at a and with us is stephen macklow-smith object the -- of j.p. morgan asset management.

concerned are you about volatility in china in 2017? a weaker reserve or less reserve outflows?er yuan and , inn this environment recent days, the volatility in the bond market is surging to one of the highest in recent years. going forward, 2017, because of the volatility, the liquidity receiving and therefore volatility rising more likely than not. francine: what is the biggest risk? therek about that but is risk that policy is changing and the kind of policy that china is putting in place, monetary policy, about unintended consequences -- will have unintended consequences? >> the first phase has completed a few days ago. in the moneyrate

market has surged to one of the highest levels in recent years. china --ury futures in those suggest that the debt but thes loosening central bank came to rescue so it called the market volatility down a little bit but into the new year, because of inflation pressure that is rising, the policy choices for the central bank is limited and that is the reason why it is too early to be bullish, i like the rest of the market. michael: let me show a chart of the shanghai composite going back a year and in january of how close are we to something like that happening

again even these pressures building up now at the same time of the year, one year later? market, --the bond that is why the policy choices for the central banks are limited and if they raise interest rates, -- raise interest rates, the currency depreciation pressure would go higher. they have to balance many objectives into 2017. delicacybecause of the of policy choices, it is easy to make policy mistakes. michael: there was a report today that there are people urging the government to stop its intervention in the forex market, they do not want the forex reserves to drop so much

that it scares people into additional capital flight and that the chinese corporate world can deal with lower yuan. would you agree with that proposition? >> i think before they close down the capital account, it is difficult to agree with those propositions. we had 4 trillion u.s. dollars and we lost one trillion of those. if the currency depreciation is up, the forex outflows pressure would build up also and that would put further pressure on currency and also on the macro liquidity in china. if china had elections , let's remember for our global audience, we are looking at it policy, what is the one

that officials in china can put in place to make things looser, is it fiscal stimulus? cards.ink that is in the putback inn policies focus but at the same time, i think one of the most effective ways they could control this is due close down the capital account because we are reforming the capital account at a time when the yuan is under pressure and debt does not vote well for foreign reserves and savings we have been saving for many decades. one of the easiest ways to control it is through capital account closure which would stop the pressure temporarily. francine: thank you for coming on. an insider's view on china. we are back with stephen macklow-smith from j.p. morgan.

you are looking at european equities but if you look at the risk around the world, the donald trump under delivering, how do you do with china and possible volatility? stephen: because china is now such an important component within the international china,, volatility in over a ciliated depreciation -- over -- it is difficult to plan for because it is not clear to us it would be in travis interest to allow something disordered to --pen and a half michael: how much exposure is there in europe to china and how sensitive are european markets going to be? stephen: we saw a dry run last year in january and a dry run in

uan was 2015 when the y repaid against the u.s. dollar at a slightly accelerated rate. what you saw was an immediate impact on exporters and manufacturing companies and a re-emphasis on domestic companies in terms of the stock market. have a playbook we can use if we think it is happening again. francine: we will be back -- michael: we will be back with stephen macklow-smith and later the officialn with surveillance hockey goalie. this is bloomberg. ♪

♪ francine: this is bloomberg "surveillance." across the european capitals, including berlin. i am in london and michael mckee is in new york. let's get to the markets in a second but first a bloomberg is this flash. british forecast as the housing prices may rise just a fraction here according to a mortgage lender, prices likely to increase slightly with a blank weaker economic growth for and a pickup in inflation. predict the -- they slowdown in london will be worse than elsewhere. the president of a japanese advertising giant is resigning after a death of an employee based on overwork. a 24-year-old female employee killed herself on christmas day in 2015, reportedly having worked 105 hours of overtime in

a month. that is the bloomberg business flash. francine: thank you. oil trading near a 17 month high and accrued above $50 a barrel for the first time since opec agreed to supply cut. let's bring in james who oversees oil coverage and still with us is stephen macklow-smith of j.p. morgan asset management. opec is cutting production we think or we are told in january and oil going up on what expectations of this supply cut. james: people seem to be taking their place seriously to cut production. hownext question is -- great the compliance is? the opec committee will meet next month and look at various movement and pipeline flow to make sure the cuts are being

implemented. russia has said it will not fill its obligation until maybe april or may that we should see action. francine: will be cut in the oil oversupply? james: most people say yes but unsure how quickly. some see it happening almost seesn a few months, opec it more cautiously, more towards the end of the year. michael: let's go inside the bloomberg with a chart that shows saudi oil production, since 2011, a steady rise up, they are the keepers are in opec, how much will that line need to go down to make a meaningful difference? james: they said they will go down to one million and possibly lower if they need to, their oil ministers said they will do whatever it takes to make the

deal work. have true that they increased production in the last few years come in a way making up for losses in libya, nigeria, other members which is why those countries have been given an exemption from the deal. michael: if libya and nigeria are increasing production, will the saudi's make additional cuts to offset that? am showing how much they have to cut but historically the members of opec cheat, how soon will we know whether or not they are cheating? monthsit will take a few to be sure people are complying. some of them could do it quickly, the saudi's have an efficient oil industry and they could make rapid cuts if they want to and others said they have -- they will do it more slowly. be thelt -- russia will

one to watch overtime, it relies on companies to make voluntary cuts as it described. after saudi arabia, they are the most important component to the deal and it may not be until spring until we see if russia cuts production. francine: what does it do for consumer confidence? stephen: i do not think consumer confidence will be affected by inflation, they say the recovery is taking hold an important for european earnings but a shortfall over the last few years has been in the nominal growth, real gdp wrote -- growth has been declining. nominal gdp growth tracks closely to revenues and revenues gives you operating leverage and one of the reasons we feel more confident in a cure is we see recovery in the nominal gdp growth.

-- in the new year is that we see recovery in the nominal gdp growth. remain around these level, unlikely inflation will get near levels that will threaten consumer confidence. michael: let me ask this cap james, if we get the cuts we are talking about, what will that do to prices? do we know where oil prices will finish up so we can work back to how that affects gasoline prices and therefore the consumer? james: the survey we did of analysts which we published yesterday saw the price at $58 on average for next year. ministers have said they would like to see it go to $60 or $70 but one thing that needs to happen for prices to rise at that level is for the inventory to build up over three years of

oversupply have to be run down which should start happening next year but the lesson is -- how long will it take for the normaloil to return to levels which could allow higher prices? that may not happen until the finish of next year. francine: looking at oil rakes and shale gas producers, we do not know at what point they breakeven because they are so different. james: inme areas -- some places in the u.s., they are more expensive. if prices keep rising and go above $60, we can expect the overturned too much stronger production growth from u.s. shale areas, after two years of damaging, prices began to drop in 2014, a big question for opec cuts comeer if there all they do is lose market share.

michael: thank you to james. an interesting note from james hamilton from the university of california in san diego who calculates the oil price on the $58ctive gasoline, brentwood be $2.20 per gallon and that is where we are here stephen macklow-smith we will be back with an later today on surveillance, on radio, we speak with doug, the fannie mae chief economist at 8:30 am in new york and 1:30 p.m. in london. ♪

michael: i am a michael mckee in new york and francine lacqua is in london, tom keene has the morning off. we focus on financials with stephen macklow-smith of j.p. morgan. in the united states, we have seen financials gained about 18.3% since election day. we are watching financials in london trying to decide where they will be domiciled in the next year and in italy, the banking system upended with the rescue of monte dei paschi./

well the financial industry be the dominant sector in 2017 for good or ill? stephen: the financial sector has been the source of and a norm is number of headlines since the financial crisis, many negative. have said,mentators the europeans were late to recapitalize the banks but the recapitalization is no more or less complete which is a good thing. the one country that has not recap its banks is italy and we are now at the finish line, the government relationship -- it is important because credit -- slow recovering with to recover it was has led to slow gdp growth.

it has been an impediment to corporate activity. italy is by most standards very well banked. consolidate or merge with the company if you do not know the quality of their balance sheet and their liabilities. our sense is that this is the final piece in the puzzle of banking recapitalization in europe and for that reason, we may see future banks if the recapitalization is successful. michael: you look at the euro stoxx 600 banking index and see it has gone up significantly over the last six months, does this continue in 2017, or do people have to wait to see what the ecb does? stephen: one of the things that happened with banks is access to

financing from the ecb at a huge incentive. we are seeing a recovery in credit in most countries. another part of the puzzle, one things that change dramatically last year is the steepening in the yield curve and after investors interpreted a much shallower yield curve as being an impediment to bank profitability to steepening the yield curve as u.s. relieving the pressure on interest and hoping they could lend much more profitably over the next two or three years will be true to earnings. earnings have been under pressure because of write-offs of recognition of nonperforming loans and we think and deadly we are near the finish line. banking, there is over there are these risk, will we see more bank consolidations and year? clear whether it will happen within the next two or three months.

-- if you look at spain, the reforms they put in place in the private sector met private state entities to 11 or 12 now and most of them -- there has been a huge change in the downscaling of spanish banks. francine: where do you see most are you in european equity? stephen: any area that sees an impasse earnings from a recovery companies are benefiting from -- weaker euro, whether that it is much more about the dollar strength to me. there is less of an answer on domestic growth. michael: stephen macklow-smith,

thank you for joining us from the j.p. morgan asset management. in the next hour of surveillance, from equities to currencies, marc chandler joins us. right now, we are watching equities around the world, green on the screen in most cases, will be doubt crack 20,000 today? interesting question. this is bloomberg. ♪

francine: china plus capital crunch. .iquidity scares

is china the big 2017 risk? after turbulent years, european markets draw a breath ahead of 2017. and gold shakes off. oil optimism -- crude trades near a 1-month high. -- a 17-month high. this is "bloomberg surveillance." it is pretty quiet in terms of volume in trading. we can focus on the risks and optimism for 2017. michael: china's back in the news in a number of ways. which just reminds one that we went through this last year at this time. it will interesting to see what happens once the calendar turns and we get into 2017, whether or not we replay the first month of 2016. francine: maybe we look at the polls and the margin of errors -- the margins of error. now let's get to bloomberg first

word news with sebastian salek. sebastian: turkey and russia have agreed to a cease-fire according to a turkish newspaper. -- cease-fire will not turkey puts islamic state and u.s.-backed forces in the terrorist category. the chinese have deployed there only aircraft carrier to patrol the south china sea. the carrier is accompanied by five other warships. trump has antagonized the chinese government with comments on action on trade. according to "the washington post," a measure could include economic sanctions in diplomatic censure. another possible route is for the u.s. to launch its own cyber offensive. moving toward a new

political crisis. the president has rejected the nominee for prime minister from the socialist of a credit party. in return, the party may start to protest the response. romania is the second poorest country in the unit has one of the fastest rates of growth. -- in the e.u. but has one of the fastest rates of growth. 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. michael: it is a light trading week as a lot of people are on vacation. that might lead to some wild swings in the market. we are seeing stock futures in the united states up significantly this morning. we are not showing the dow. doubt futures are up 33 points. the question is, can we crack 20,000? then they question is -- then the question is, who cares, and what is next? if you are looking for some validation for the idea of stocks going up, you can see vix going down.

people are a lot more calm. keeping track of what is going on in china, a new low for the german two-year yield. -- theania lou, the ew -- an l francine: this is similar to yours. this is something that is likely about china. asian stocks have been advancing opec, oil heading for the longest winning streak in seven years. 117.68. michael: let's go inside the bloomberg and get marc chandler all excited this morning. it is a complicated situation for the chinese with their currency, but i break it down into two lines on a graph.

wen, whichchinese has fallen by 7%, 7% weaker over the last year. the chinese are trying to prop that up, and you can see that in the basket of currencies as china launch its his official -- launches its official exchange rate. the chinese would say look at that gold mine, rather than look at the white line, and donald trump pay attention to the bottom instead of the top. francine: this is what i am looking at. i was taking a brexit quiz. i urge all of our viewers to look at because it actually shows how much we know about brexit and how little we know. some funny moments in the last six months. this is bringing it back to brexit. on to my terminal, this is really what i want to show you. it goes to show that the average in terms of pound weakness --

this average on the year -- is 1985?he weakest since there are more questions than answers in terms of brexit, what it does with inflation. those are some of the questions we will be trying to get answers to. on the marketsre and our charts and everything else, we will bring in marc chandler. good morning, marc. about the talking chinese, you saw friend talking about the british crown. what is going to be your currency of the year for 2017? c: i think the euro is the key part because of european politics next year. you have had this wave of populism, nationalism sweeping across the world, beginning in eastern and central europe, then going to brexit, and then to the election of donald trump. we have dutch, french, and german elections next year,

possibly greek and italian elections. if you think about the dollar, we are often thinking about the dollar-sterling, the dollar against the euro, which is of course the eurozone, the largest economic lock in the world. michael: the euro has been moving lower, one point 0431 right now. how low does it go? marc: good question. i am still bullish on the dollar. even though we have a lot of good news on the dollar, there might be some disappointment along the way. but the trend, the german two-year yield is making a new low. the premium between the u.s. and germany is widening out. the 10-year yield is also widening out. right now investors get 200 basis points by investing in u.s. dollars over germany. this will keep the pressure on the euro. big picture, i have the euro going back in 2000, down to

82.5 cents. michael: you can see the euro on the graph inside the bloomberg here. we break parity and we get down to the historic lows. then what happens? , theast time we got there g-20 intervened to prop up the euro. do we see something like that happening again, or do market forces take us through the year? marc: you make a good point. the last two big dollar values -- the reagan dollar value, the clinton dollar value -- the clinton dollar value and should with the g-20 intervention in support of the euro, which was a fallen card at the time. i think this time the weakness of the euro is a good thing for europe and the general strength of the dollar helps rekindle the average demand in the world. the key will be the place. the federal reserve slowed its rate hike it anticipated last

year partly because of the strength of the dollar. that will be the story of the first quarter of next year with the fed out of the picture. francine: what is priced in? it feels that 2017 feels different. we go into it for the first time and what the fed expects the market to do are aligned. there is an expectation about monetary policy. are we mispricing things? marc: there are two parts of it. maybe we are getting ahead of the story in the u.s. part of it is may be an exaggeration about how much fiscal stimulus can be delivered by the new administration. at the same time, there are problems in europe. the german two-year yield is at record lows. that is destructive for investors. to new flows coming and have be adjusted. francine: but when have we not

had problems in europe? saying it as a european, but also we had the greek crisis. marc: i am not saying that the euro is always breaking apart. what has happened, the big difference is the brexit and the u.s. election, which basically has this wave of populism sweeping across the world. europe is more global than other areas of the world. the integration of europe is really the opposite of nationalism. actsrive of nationalism like an acid on the integration in europe. that is what makes it different. there is an existential crisis that is persistent. francine: what is the one thing that is being mispriced? i wonder whether we are jumping at shadows. at the end of 2016 the markets were badly positioned. we are almost overshooting, not only in the u.s. but elsewhere.

for example, financial stocks. marc: i find a true in my career as well, that when trade looks obvious it is probably obviously wrong. i think everybody is on board with this. what will surprise people i think is how durable it is. thecommitment of traders in australian dollar -- people are still long on the australian dollar. a lot of people i talked to take since the of view -- beginning of q4, that is when a lot of these trends began, a the rising ofand the dollar. it seems to me it really began in early october. we are a quarter into it. i think that these kinds of moves in the foreign exchange market are not unprecedented. there is room to go. a lot of people are on board and there has to be a shakeout. francine: marc chandler, thanks so much.

we take the pulse of the u.s. economy with the head of north american and -- the head of north american , william lee. ♪

francine: this is "bloomberg surveillance." i'm francine lacqua in london, michael mckee in new york. let's go to the "number business flash." korea has beenh fined $853 million -- south korea has imposed a record $853 million on qualcomm.

more fallout from brexit. with ayds banking group subsidiary in europe. the financial times says the most likely option is for lloyds -- for 1877'ss an order 787s for- for 18 delta. that is the "bloomberg business flash." michael: kevin cirilli is bloomberg's politics reporter, and he is in charge with covering donald trump for us. with us.dler, also he is the manager to covering the market reaction to all of this. kevin, the president-elect is fairly+++

hours, although he did suggest at one point that the big rise in confidence was due to him. what is he doing down in florida while we all are still here at work in new york? kevin: well, he is down at mar-a-lago. in west palm beach, where i will beheaded tonight to chronicle him over the new year holiday. but i think the bottom line is this. there was a lot of speculation ahead of election day that, should donald trump become president, the markets would have a negative reaction similar to what we saw with brexit. but that has not turned out to be the case. i think if you look at some of the appointees that he has named to some of his top economic whether it is steven mnuchin to the u.s. treasury department, or gary cohen to the top economic advisers.

you are seeing the market responding to top regulatory policies in a positive way. as a result of that, perhaps donald trump is linking that to the consumer confidence. francine: i feel like i am asking you the same questions over and over. this tweet surprised me for a number of reasons. he is taking credit. at the end of the tweet, when he says, thanks, donald, he is really thinking himself for the surge in consumer confidence. how do people view it in america? i feel like ae, big part of being a donald trump reporter is trying to translate his tweets. i think that his style and the way in which he does this is going to continue. look, the folks that i am ,alking with here in washington to republicans and in republican circles, they are crafting

policy proposals for the first 100 days. they are anticipating a lot of executive order actions that would undo some of the policy, economic policy, regulatory policies from the obama administration as early as that first week in donald trump's presidency. the way you look at the signals that are coming from this incoming administration, it is a lot of the regulatory policies that will begin in that first month. is signalingf that help on the way, if you will, for business. francine: kevin, i want to also bring in marc chandler. there is a graphic that we all wish we had done. this is the chart of the day, and joe weisenthal put it out on social media. it tracks consumer confidence, the line in blue, for households over 60 five.

in white is the consumer confidence for households under 35 in the u.s. it shows consumer confidence for young people is diving. consumer confidence for the older generation is actually serving -- is actually surging. can donald trump address this? i think this is one of the underreported stories. think about what happened with brexit. young people voted to stay in. in italy, for the first time in a recent round of elections, young people voted for what ended up being the winning side, rejecting the referendum. voted not for trump. the demographic issue is a real problem. it is college debt, student loans, the price of housing. house prices in the u.s. are

almost back to where they were in 2007. there is a big demographic shift there, a big problem. not so much big deficits, but debt levels. i do not see how this is going to be resolved in the short run. maybe there could be some stuff done with the student loan situation. serious and long-lasting challenge not just in the u.s. but also in western europe as well. michael: i have to put you on the spot with a question here. "the new york times" points out that a lot of trump's cabinet appointments disagree with him on economic policy. he has a loose relationship with the truth. we do not really have a press briefing operation. at this point, how do we know what we know about the trump administration? who speaks for the president-elect? himself ind trump his twitter feed? kevin: donald trump speaks for

donald trump. that is the one thing i have learned from covering him throughout the campaign. there is a more elaborate press operation that is beginning to take shape around donald trump. of course, sean spicer being treasury secretary. i think that apparatus is beginning to take shape, and i would anticipate that the can -- i would anticipate that that will continue. but he is still going to tweet, and i think that the markets are adjusting to that, and i think out,in does go 3, 4 months i do not think twitter will be as new to all of us. michael: thank you, kevin cirilli. you can set up an alert on your bloomberg to get donald trump tweets. marc chandler i am sure has that. coming up on bloomberg television and radio, wheels big

with tony crescenzi of pimco, who has a tweet as well. -- we will speak with tony crescenzi of pimco, who has a tweet as well. this is bloomberg. ♪

michael: good morning. i'm michael mckee with francine lacqua in london. time for a "morning must-read." noah feldman writing in "bloomberg view" on china.

michael: marc chandler, if that happens and donald trump suggest he wanted to happen, what will that do to global markets? marc: it matters to what extent both obama as well as george bush -- they also said they would fight china as a currency and market manipulator. we also know they did not. i think trump is serious about this. it will be seen as a positive sign, as the u.s. getting tough. there is scale -- there is still a scope for china to become a maritime power. athink that it is going to be big problem, but it will be a big thing for investors to have to deal with. michael: what does china do in response? do they pop up their currency

more than they are doing? marc: i think the chart that you had before show that even though we have had a strong u.s. dollar and the dollar has been rising, as the rmb, the rmb is really flat, 6% against the basket that the chinese people -- the chinese want their people to use. i think the problem is how to that they are a minute later. china does not meet that definition. michael: we will continue this discussion. marc chandler, they can for 2017. coming up, william lee of citi research. the timeline for 2017. we will talk about that. this is bloomberg. ♪

francine: this is "bloomberg surveillance." iamb francine lacqua in london. michael mckee is in new york. here is sebastian salek. three chinese hackers

have been accused of making more than $4 million in illegal profits. by breaking into the service of large law firms. they targeted at least seven law firms to advise them on deals. they advise them on transactions and speculation involving intel. one of the suspect has been arrested. plankerry will lay out his for italy with three weeks left in the obama administration. plans middle east peace with three weeks left in the obama administration christians .re shinzo abe visited the uss arizona memorial with president obama. russia isrst time carrying out the widespread --

according to "the new york times," russian officials call this game an international conspiracy him and institutional conspiracy. the international olympic committee has opened an investigation into dozens of russian athletes on doping. britons are holding onto their cash. according to the british bank, national deposits grew at an annual rate of 4.8% in november. apples for home loans fell 9% -- applications for homeowners fell 9% from the year-earlier. 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. michael: following up with what we were talking about with mark chandler, the financial times editorial review --

michael: how big a concern? let's bring in bill lee. he is joining us from washington, d.c. still with us in new york, marc chandler. bill, let's start with you. how concerned should we be about the effect on trade of a trump administration, and therefore the effect on the u.s. economy? bill: much less concerned than most people are saying. one thing we know about trump is that he is in a negotiator, and the china threat, the trade war threat, trump has accumulated a fantastic bargaining chip. what he will do with the to waring chip is not go because that is a lose-lose proposition for everybody. he will bring it to the table so that we have a bilateral deal set up that expands market access for both countries. trump was elected on one campaign promise, which is

maximized domestic resident income and employment. that is what he is negotiating in almost everything he is doing, including trade deals with china. michael: how much is he going to be able to carry out that thomas in 2017 -- out that promise in 2017? bill: he will have to put fiscal policy in gear. right now the markets are overreacting to the possibility of that fiscal policy coming in and possibly boosting the economy. i see the market has gotten away ahead of themselves because the market reaction themselves, the higher dollar, the stronger rates and the stronger dollar, have been restraints on u.s. trade growth. we will see those restraints kick in before the fiscal policy kicks in. theblicans nailing down details of the tax plan that will be passed -- there are a lot of the children are in doubt. we do nothing that will happen until 2018. -- there area lot

a lot of policies that are in doubt. we do not think that will happen until 2018. i think that the markets -- if it is done properly and we start to get the lead into fiscal policy early on so that it starts to ratify some of the market expectations, then i think the market will pay much hold these current levels. unless we get the regulatory release that the markets are expecting, and unless we get the tax reform that increases corporate cash flow as we are expecting, i think it will be very hard for the markets to retain their numbers. the rates market and the currency markets have it right in the sense that most of the rate increases we have seen have been in the post five-year horizon. it is within that horizon that we expect inflation to pick up and growth to the, if we get anything at all. francine: what is the one thing that the market is misunderstanding?

we are getting this wave of optimism that we talk about. is it that it is not based on much, or is it just based on the wrong things? elko right now it is based on a lot of hope and prayer -- on a right now it is based lot of hope and prayer. it takes time to put in place and it takes time to take effect. to take thehave time to build in this notion of stimulus. all that republicans have been talking about for the last five years has not been fiscal stimulus but fiscal tax reform. and keeping the government smaller. those are the measures that will be debated in congress. whatever fiscal stimulus we get is at best a sideshow. michael: janet yellen said in her last press conference that we do not need fiscal stimulus, given to where the economy is now. how do she and her colleagues react in 2017? elko just like the rest of us. --

bill: just like the rest of us. on a terry policy has to be a supporting game right now because fiscal policy has finally been galvanized, finally may be kicking in. these are long-term trends. the anticipation of the markets are that we will see this in 2017. that is where they had gotten ahead of themselves. c, you push back against the notion that the markets have pushed against themselves. marc: this year, unlike last year, i think the market is fully with them. partly even before we get to the fiscal stimulus, which of course might not be in 2017. we are already looking at the u.s. economy that is near full employment. unemployment is now 4.6% or so. we are looking at a core pce inflator, closer to 2%.

the head was on the u.s. economy coming from the inventory site, from manufacturing, from the energy sector. this is giving the u.s. economy a bit of a lift in q3. it looks like it is spilling over into q4. the bond market is responding not just to anticipation. in my mind, the bond market rally began just before the election. maybe it got ahead of itself because it has been a strong quarterly rally. q1,e is a small pullback in but things can still be moving higher, higher yield and a higher u.s. dollar. francine: talking about a higher u.s. dollar, where does the dollar go from here? the dollar will continue to appreciate, 8% to 10% relative to where it was before the election, and most of that will be in the emerging market. possibly we will hit parity with the euro. is controlledth

by the inventory cycle. surprisingly strong growth. and then the exports. we take those things away and final domestic demand and final domestic sales -- it has been in the 1% to 2% range for quite a while now, so there is not an immediate trend, and that is where the markets are misinterpreting a lot of the underlying data. it is a hope and a prayer. michael: let me take you inside the bloomberg and show you the lines that matter to the fed in 2017. that is inflation. these are the various inflation figures, inflation measures. how much inflation do we get in 2017 with oil prices going up and the economy firming? -- does that become think 3 is another hope and a prayer. like they promised before, we will likely get growth

disappointment and inflation disappointment before we get surprise to the upside. the dollar is one of the big restraints right now on inflation, not just inflation but core inflation. the other thing the fed has to worry about is where the slack absorption is in the labor market and the pricing market? because the profit margins are still so substantial, there is a lot of absorption that can take place between wage increases and price increases. i do not think we will see above 2% on the core pc inflator or the pc inflator in the headlines until about 2018 or 2019. we will not get above the fed numbers of the 2% target until 2020 or 2021. the unemployment rate is a crummy measure, and everyone knows that because of what

everyone knows about demographics and retirement. economists out there would only rely on the 1% rate. michael: our thanks to bill lee of citi research. we will be back with marc chandler. coming up on bloomberg television and radio, we speak pimco.ny crescenzi of he has to worry about inflation. that conversation, 7:00 a.m. in new york, 12:00 p.m. in london. this is bloomberg. ♪

francine: live pictures of new york city. an opening shot of -- it is cold but it is meant to

be sunny. london, where it is cold and sunny. some, let's get to corporate stories with the "bloomberg business flash." sebastian: volkswagen is making another move to expand manufacturing. is operating pay by phone. a new forecast says british housing prizes -- british housing prices may rise this year, only increasing 1.4% in 2017. different blames weaker economic growth and a pickup in inflation . the slowdown when in london will be worse than elsewhere. -- quitting work next month. executive held

responsible for the debt. an employee killed herself on christmas day last year, with 105 hours of overtime over a month. has been above $50 a barrel since opec agreed to a supply cut last month. marc chandler is with us. thank you so much for coming back on. the main risks are that they cannot possibly keep up, that they continue cheating on production targets for opec. any indication of what goes on there? >> we will find out next month. that will monitor the compliance for the cuts meets january 15. we will be getting first indications if there is any evidence that tanker shipments are slowing. flows are being reduced.

this has been one of the major problems, that our countries have said they will cut supply, and then they have allowed saudi -- it and its gulf allies remains to be seen if that will happen this time, especially what russia will do. michael: we talk a lot, james, about supply, but the other side of the equation is demand for there is talk of the u.s. and global economies picking up in 2017. how much of a role is demand going to play? could that close the gap even more than a supply cut? james: it will. the demand increase next year, coupled with the supply cut, should bring supply and demand into balance by the middle of next year. that is a point to which all of these inventories that build up, with a sea of oversupply, that

could open the way to even higher prices. francine: what do we know about the shale gas producers in the u.s.? are they all different? it is difficult to call them one. james: there are different , ands in different states they all need to keep making profits. there is one area. other areas, north dakota, struggles a bit more. if prices keep rising toward $60 a barrel, you will see more areas getting to reduce possibly, especially after savings over the two-year price slump. another danger with opec is if they push prices too hi, they might see more production coming on in the u.s., which raises the problem that they had years ago. michael: our thanks to james herron. let's bring back marc chandler.

gasolinechart of prices, the regular gas average prices across the united states of $2.29. we did that a couple of years ago when oil prices fell and gas prices fell, a big jump in consumer spending per now you can see the trend going the other way. do we worry that we are going to see consumers pull back because they have to pay more as oil prices go up? marc: it seems to me that we will change with a mix of the kind of autos we are buying. we still buy the gas-guzzling suv vehicles, and general motors has cut down some of its plants, producing cars because of its inventory. i do not think the rising gasoline prices is yet sufficient to curb the underlying domestic demand created by more people working, getting paid a little bit more per hour. michael: let's come back with marc chandler and talk more about currencies and the global outlook. coming up later today on "what did you miss," a conversation

with bob sinche, amherst pierpont. look for that at 4:00 p.m. in new york, 9:00 in london. this is bloomberg. ♪

francine: this is "bloomberg surveillance." i am francine lacqua in london. michael mckee in new york. can move up shortly, boomer daybreak americas -- coming up bloomberg daybreak: americas. we will talk about trump trade and geopolitical uncertainty. tony crescenzi is from pimco, and he will be talking about trump trade and some concerns he has about productivity growth, and whether it might limit the him side. and then we have a guest from the peterson institute, joining us from denmark to talk about brexit, theresa may's possible political problems next year. and a whole lot more. back to you, mike. michael: david westin, thanks very much. time for the forex report, and we will focus on the currencies that we are talking about all day. the chinese wen still under the

seven mark. -- under the seven mark. -- currencies have bottomed out a little bit. not a lot of movement there, but they have been getting weaker and got a little bit of their strength back, particularly in new zealand. i want to focus on a currency that the whole world pivots on, all those currencies benchmarked against the u.s. dollar. we are back with marc chandler, and in the bloomberg terminal, i have the dollar index. 1.03, a pick out in the last couple of weeks since election day. you go back -- a break out in the last couple of weeks since election day. to 1.22 we get? marc: i think we are back -- i think we are on our way back there. the speculated

uptrend to the dollar. it took us a wild to get going. we had a big up move in the second half of 2014 into the first quarter of 2015. then we went sideways for about a year. and now we will get this next leg up. and 105 onween 95 the dollar index -- the next move will be 110 to 115. it is being driven by and averted between the u.s. and european monetary policies primarily. monetary policy is much bigger than when the fed sets interest rates. it is about the health of the financial systems more broadly. the u.s. has a big advantage there. michael: the shameless plug for your book, of course. you go back to the 2000 highs for the dollar index. that was bubble fuel. that was the tech bubble, and we cure that by having a recession. so what happens in the next year

or two to the dollar. do we see it bring on another recession? it hurts the manufacturing sector so much. marc: with what we had in the early to thousands, it was not because of the strength of the dollar. as you mentioned, in 2000, 2001, we had the tech bubble. now i think there is something else sucking capital into the u.s., and that is this wide interest rate divergence. germany,premium over the two-year, has not been this wide since 2003. i think this is really the driving force. what is going to suck in the capital of the u.s.? it is the interest rate capital. not only the current stock of investment, which needs to be hedged, but the corporate treasure is expecting some revenue in euros. should you hedge that? the portfolio manager, with people contribute more money to

their 401(k)'s, european stocks look more attractive. the incentive structure for those decisions is created by the interest rate differentials. francine: at the same time, if the dollar is too hi, does that not defy the point of the fed? when does dollar strength become the problem for the fed? marc: that is a very good question and a lot of people are thinking about that. we saw that in the first part of this year, where there were foreign rate hikes indicated. clearyellen has been very about that. just like the three hikes that they seems to be putting in now, it is not a promise. i would say to the viewer that the most important thing for the federal reserve's seeming if you would not be the level of dollar -- like you said, the dollar is too high. but the pace of change, a slower pace to allow investors and corporations to make the adjustment to the rising dollar -- it is not the level of the

dollar per say, but how fast it is moving. leveling up in the fourth quarter will help in my case for the fed to be on hold in the first quarter of next year before we get a rate hike probably later in the second quarter. francine: all right, marc chandler, thank you so much. he joins us on radio shortly. "bloomberg surveillance" does continue on radio. inalso talk about the rally commodity currencies. coming up later this week, we will talk to the chicago school of business professor. about european and especially italian risk. that conversation this friday, six ago a.m. in new york, 11:00 a.m. in london with luigi zingales. this is bloomberg. ♪

>> welcome to bloomberg daybreak. i am alix steel. jonathan ferro is off today. here is a very calm and flat market today. session highs go nowhere. but we are positive for the year. the fx market is all clear. we do have a stronger dollar against the yen. up by 2/10 of 1%. the 10 year yield goes nowhere. the boj stops buying as much long-term securities. crude is up again. david: here's what you need to know. with brexit just around the corner, the british are hoarding their cash. companies say they are exploring their options across the channel. americans see the bright side. soaring beyond est