francine: out in the cold. obama imposes sanctions on top russian officials as the u.s. strikes back for election interference. oil's first yearly gain in three years, after an opec supply cut. the last trading day of the year. and a glitch in the markets. the euro surges 1.6% against the dollar as an algorithm generates a rush of orders. this is "bloomberg surveillance." it is always the end of the

year. we have one trading they left and a lot of news to cover. geopolitics with russia and the u.s., but also market movements and volatility in currencies in 2016. first, let's get the first word news. here is sebastian salek. seb: a cease-fire agreement came in effect in syria overnight after russia and turkey announced he had brokered a deal they hope will pave the way for a peace settlement ending the civil war. the move sidelines the u.s., which had led peace efforts without success. but most recently, a similar cease-fire negotiation collapsed after a week in september. the bank of italy has said the rescue of monte dei paschi will cost the state 6.6 billion euros. that comes less than a day after the european commission approved a liquidity support program for the world's largest -- oldest bank. under the rules, banks could not benefit from general support schemes, so they had to green light a special decision. the euro surged as much as 1.6% against the dollar in asian

trading overnight after a rush of computer-generated orders caught traders offguard. the move started under $1.05 and surged above that level, causing what little liquidity there was on the last day of trade to vanish. europe's single currency jumped to a high of 1.0653, forcing some traders to take losses to cover positions. the outlook for britain's labor market is fairly bleak amid the uncertainty surrounding exit and the productivity, according to the institute of personnel and develop. it says there will be major challenges for the government over the next 12 months. the body warned that companies could be faced with a shortage of workers from the e.u., and insists that clarity is needed on the status of use citizens in britain. powered24 hours a day, by more than 2600 analysts and journalists. this is a picture for your markets. there is quite a lot of volatility that is not there,

because volatility comes from trade. we have been telling you this all week. the euro story that set -- that seb was bringing us, the 1.6% jump that was very fast -- algorithms jumped in. in very, very thin trade. the euro spiking higher. we are not sure whether that is a technical blip or an algorithm. we will keep an eye on it. yen, 117.10. the japanese index was down right before the end of close. that it actually capped its first annual loss since 2011. crude oil probably the story in the first half of 2017. 54.01. will opec cheat or not? it is three weeks until the

inauguration of donald trump as the 45th president of the united states, but the new white house is set to face an early dilemma over the issue of russia, following president barack obama's newest and position of actions over hacking of the u.s. election. trump will have to decide to reverse the measures or risk his promise to improve relations with putin. let's introduce our guests. lisa mcdonald's chief investment officer of investment at aliens. -- allianz. , the markets,ic politics, and investment. it were theng if sanctions yesterday? were they all must put in place as a kind of extra pressure on donald trump? he gets inaugurated on january 20, and has to do with russia. >> there are two angles to the sanctions. the first is a proportional response to vladimir putin's direct involvement with the hack that influence the u.s. election.

and this is a warning shot to say, don't do this again. i think there will be further covert action. president obama said as much in his remarks. the second is to paint trump into a corner and drive a wedge between him and establishment republicans, who view putin very negatively. senators like lindsey graham and john mccain want more aggressive sanctions, not less, and trump is talking about lifting sanctions. this will drive a major wedge at a moment when trumped's secretary of state nominee is under fire for close ties to russia. rex tillerson, ceo of exxon mobil, has been awarded the order of friendship, the highest civilian award, by vladimir putin. as will drive a major wedge that will potentially define the first hundred days of trump's presidency. i think putin will probably respond and is not going to stop. this is an adversary of the west for a reason. they are working to undermine the liberal democratic order in

the west. it would not be out of the question to imagine they will try to middle the same way in the german elections that are upcoming. it is evidence this is already underway. inthe linchpin falls germany, we are in bigger trouble than we already are now. francine: before we get to lucy, lets the to bloomberg's politics reporter in russia. how is the russian media reporting on the sanctions today? reporter: of course, there is a lot of negative coverage of this event. television has called the sanctions "unprecedented," and there is a lot of coverage of the difficulties of the russian diplomat's who had been expelled, who are coming back home, and their alleged harassment which they are facing. we are bracing for the russian response. there is a dilemma. on the one hand, they have to respond in kind. they also do not want to torpedo

the chance of an improvement in ties they have been hoping will happen under donald trump. francine: henry meyer, bloomberg politics reporter, in moscow. or five years ago, you were more immune to figuring out what foreign policy meant for your markets. now, the world is vastly more complex. it could have a direct impact on markets. could it? politics as a full certainly came. we have seen that over the last year. it means a higher risk around various scenarios that you look at. you could have less certainty about any forecast. and it certainly means that you need to make sure you build a risk premium into sectors or regions where you perceive the most volatility coming up. that looks like it is going to be in the developed world, interestingly enough. francine: does that mean you buy but you have to hedge more

than in previous years? lucy: you are looking for putting risk premiums into the evaluation of the stocks for the countries you are investing in. that is a valuation question, a risk question. francine: how much do we know about what donald trump will do, or -- we understand he is a businessman, not a demagogue. does it mean he could reverse on russia? how do we think about a president trump on it comes to foreign policy? brian: i think there is a lot of risk, going forward, and a lot of risk that in both the global order. i think a cozy relationship between moscow and washington would be something like that. it would not only change relationships between those two countries, but with signal to the rest of the world and the developing world that authoritarianism is not a dealbreaker for western foreign-policy. withest has deals authoritarian governments around the world, but this is a new frontier in moscow. --is also something where something that is troubling to

me, personally, when i look at this, is seeing the false equivalency and the loss of the moral compass in western support for vladimir putin. i mean there is a poll that went out of random supporters, and 35% said they saw putin favorably, compared to 9% who saw obama favorably. partisanship when we are looking at foreign adversaries who are meddling in elections more favorably than the sitting president is a risk to politics and the global order. francine: it seems that what you said overall is it is really the gop who are the guarantors at the moment. if he goes too far and being friendly with vladimir putin, speaking of donald trump, will the gop make him pay for it in one day or infrastructure -- in funding for infrastructure he wants? brian: he needs congress to work with him. if they do not pass bills, he cannot sign them. if this is a wedge that drives them apart early on, it might be

difficult to have a working relationship. what i think it will find common ground on is the stuff the base of trump supporters do not support -- erosion of the social safety net and the regulation of wall street. the idea of draining the swamp was something that brought many voters to the polls for trump, and yet a lot of those people from the swamp have been drained into his cabinet. as a result of that, there is volatility going forward in terms of populism becoming even more out of control, by people who feel abandoned by this person they put their trust in. francine: ryan and lucy, thank you so much. lucy mcdonald at allianz, and brian klaas at the lse. 20 coming up, including the $2 up,lion soft -- 20 coming including what 2017 means for the markets. plus, positioning for populism. how should investors prepare for the unexpected as europe's leaders face elections in 2017, and newly released papers that

shed light on margaret thatcher's resignation. what we should learn from one of the most romantic events in recent political history -- dramatic events in recent history. ♪

francine: this is "bloomberg surveillance." let's get straight to the bloomberg business flash with sebastian salek. nomura holdings has announced a three-year campaign to eliminate waste and increase cost-effectiveness. the seal -- it is codenamed the wolf lion project. he says a ship will eventually think if it takes on too much luggage. the restructuring and the u.s. and europe has triggered $700 million of expenses. a tough year for chinese stock traders, apart from those who

to get a slice of an initial public offering. mainland equities surged in the first month after listing and 2016. that is the best return since bloomberg began compiling such data in 1994. covered by regulatory price guidance that suppresses high valuation, newcomer sword as the shanghai composite index fell by 12%, set for one of the world's biggest declines. oil is heading for its first annual gain in three years, head toglobal production cuts reduce the glut and stabilize prices. crude is seeing its biggest for your rise since 2009. u.s. stockpiles remain at their highest seasonal level in more than three decades. opec and 11 independent producers have agreed to start cutting output from sunday. that is the bloomberg business flash. the election of donald trump is the next president of the united states sent a $2 trillion shockwave through the markets. investors rotated out of bonds

and into stocks on expectations of fiscal stimulus and accelerated rate hikes. will these be the new market dynamics for the next president, or the next president's charm. i am joined by lucy macdonald and brian klaas. the question a lot of investors have been asking is, how much is priced in? if the markets are already priced in, and if donald trump disappoints because he is delayed or cannot spend enough, or does not have enough infrastructure spending, are we going to see a correction? the improvement of growth we have been seeing have nothing to do with trump. it is to do with the recovery in oil and. it looks as if that is going to be running out of steam toward the second half of 2017. the could also coincide impact of high mortgage rates into demand. it looks as if there could be

enough in the first half of next year. could be slower. at the same time, we are seeing inflation on a similar trajectory. that is because of oil again. francine: could he do something to spur the companies you cover to start spending again? -- you get in a second repatriate this amount of money, part of a tax change, but you need to spend it in projects in the u.s. lucy: tax reform overall could be the spur which gets growth continuing beyond that point. effectively, be affected by incentives toward a particular capex. capex has been slow as a .ercentage of gdp

it could provide the leg of growth in an extended growth cycle. we should put a relatively high probability on that happening. repatriation is likely to happen. investors see that. i am looking at instagram. donald trump tweeted he has rules he wants to govern by. it links it to his instagram account. american and higher american, #usa." stance a protectionist or is it good for the animal spirits in the business community? brian: it is difficult to tell, because the u.s. government has to hire american citizens. you cannot hire foreign workers for government jobs. that is something presidents have been doing forever. it is a great slogan. it is not new. one could becan

signaling trade. it is something where trump's transition has talked about imposing an across-the-board import tariff, which would be terrible. it is a good populist message for some of his base voters. it is difficult to see how it plays in relation to his business interests, chris's business is not only global, but he pays for guest workers to come work for his companies, and a lot of his ties are made in china. bring more light on to some of his business operations and how they do not abide by the terms he said his presidency will. francine: quickly, do you think there is anything in the rhetoric we heard? he is a leader. i do not know if he is a good or a bad leader, that he spurs people. he spurred people to go and vote for him. that may mean something happens to the american economy that means it gets better more quickly than otherwise, had he not been elected. brian: i think he will try to

her early victories in the economy. i think those are very important to him. how we'll those are in terms of new changes is suspect, because for example, yesterday, he announced that sprint was going to create 5000 new jobs as the result of a phone call he made. you do a little bit of digging and see this was announced in october as part of a pre-existing package before the election. so whether this is actually helpful to the economy remains to be seen. also, i do not think it is a good idea for the president to be picking winners and losers at the company-specific level. i do not think he should be giving tax breaks to a specific company. it creates uncertainty in the markets. francine: brian klaas and lucy macdonald stay with us, and we more thoughts. up next, positioning for populism in europe. which sectors and stocks stands to gain in 2017? this is bloomberg. ♪

francine: this is "bloomberg surveillance." let's talk about positioning for 2017. which sectors and stocks stand to gain from trump's presidency and european populism? i'm joined by lucy macdonald and brian klaas from the london school of economics. thank you for sticking around. how you navigate 2017 -- what is one thing you know for certain?

is it dollar up, volatility, or we do not have a template? lucy: we can see already that the earnings momentum and the macro cyclical picture is better, going into 2017. that was happening before trump was elected. trump may have some impact through tax. short-term, the cyclicality looks like a more favorable exposure to have. the way we are getting that exposure is through some of the industrials and to a lesser extent in cyclicals. at the same time, we need to be aware that the overall picture is still one of excess debt in the system. and that is everywhere. ,ebt to gdp has been rising still. and that is going to be a constraint on the amount of overall growth that you can get. although we are talking about a --lical pickup of maybe 3%

you are not talking about excessive growth. you need to be aware of that. you want to still have good exposure to structural growth areas -- technology. these are trends which are going to be happening, whatever happens. francine: on politics, do you say the u.s. gross or is getting -- grows, and i sell the rest of the world? lucy: no, because i think some of the relative growth is already priced in. he said earlier, what is priced in? i think a certain amount of beneficial recovery in growth in the u.s. is priced in through the rising valuation of the u.s. against the rest of the world. case thatalways the if the u.s. is recovering, the rest of the world will benefit from that. at the same time, the u.s. companies, multinationals, are suffering from the stronger dollar. that will be hurting their earnings, relatively. i think investment growth will help the rest of the world as well. companies inome

europe are looking quite interesting on the back of that. francine: do you buy vix? volatility? lucy: no. francine: are the currencies volatile? lucy: it looks as if the most volatility is there. francine: we will get back to geopolitics and talk about european politics shortly. with me is lucy macdonald, from allianz, and brian klaas from the lse. china will abandon its 6.5% growth goal according to societe generale. will there be a slowdown in the world's second-largest economy? that is what we will be discussing and debating. ♪

francine: this is "bloomberg surveillance." i am francine lacqua. let's get to the first word news with sebastian salek. seb: a cease-fire agreement came

into effect in syria overnight after russia and turkey announced they brokered a deal they hope will pave the way to a peace settlement ending the civil war. the move sidelines the u.s., which had led peace efforts without success for years. a similartly, cease-fire negotiated by russia collapsed after only a week in temper. the bank of italy has said the rescue of monte dei paschi will cost 6.6 billion euros. that comes less than a day after the european commission approved a liquidity support program for the world's oldest bank. under e.u. state aid rules, takes of a capital shortfall cannot benefit from general liquidity support schemes, so the commission had to greenlight the program in his little decision. -- in a special decision. the euro surged against the dollar in asian trading overnight as a russian computer-generated orders that caught traders often hard. algorithmic orders -- caught traders offguard. algorithmic orders caused liquidity to vanish.

europe's single currency jumped to a high of 1.0653, forcing some dealers to take losses to cover positions. the outlook for britain's labor market is fairly bleak amid the uncertainty surrounding brexit and low productivity levels, according to the chartered institute of personnel and development. it's a slower growth at lower real wages will mean challenges for businesses over the next 12 months. the body warned companies could face a shortage of workers from the e.u. and insists clarity is needed on the state of you citizens -- state of e.u. citizens in britain. i am sebastian salek, and this is bloomberg. francine: in the last 20 minutes or so, we actually had a press release from an ecb government councilmember, one person who is working on december 30. he is -- he says governments should use periods of low interest rates to consolidate budgets. this is something mario draghi has been saying for quite some

time. he has been saying it for three but we have seen to what effects he has been listened to, which has been not much. the memo says he's a tire inflation rates in 2017 because of energy prices, and is saying overall that central and eastern european show strong dynamics. you can see euro-dollar. the other story which side was just talking about was the fact that there has been a blip in the algorithm which means that a lot of traders of the euro currency in asia had to cover some of their positions. we will get back to that shortly. now, let's focus on china. china is actually poised to abandon it 6.5% growth target sometime in the next two years, if you believe societe generale. has reduced the weight of the dollar in its exchange basket. joins us from hong kong. what are the reasons for the socgen prediction?

is a matter of shifting priorities. socgen is saying the focus on the economic growth target has distracted china from what it which is to contain asset bubbles. in chinese markets, there are signs of shifting priorities. characterizing the monetary policy stance as neutral. china might be focused on deleveraging now. francine: this move to degrade the dollar, why is it being done now in the trade weighted currency basket? : we know there has been concern about depreciation against the dollar. what pboc wants to be able to say is, do not just look at the dollar-yuan rate.

the index has been stable. where the dollar is strong, if you degrade the dollar within that basket and the greece the weightings of that currency, that could help china maintain a steady yuan, in terms of the basket. francine: thank you so much. lee in ali-- justina hong kong. , do we need to look -- we will get onto a little bit of foreign policy and trade in a second, but what is the biggest risk? is it a trade war that turns ugly? or just the fact that they have a trilemma of reserves lindley, outflows, and the currency dropping, and it is difficult to stabilize those three at once. lucy: it is very difficult. i think that is a dilemma, a we have been looking

out for years. we have been able to understand what the constraints are and see pans out, so you have reformed on one side. been what we have been watching over the last few years. trade wars would be something completely new. there is a risk we would have to price it as it develops. on that, it has to be a high risk. francine: is there a concern -- the biggest risk, we talk about trump a lot. we talk about politics. is the biggest concern in china? we have not really focused on the negative connotation for at least 11 months. in twoe will be there weeks, focusing on it at our investment forum. you are certainly right. it has not been the main focus of markets the last year, because we have been looking at europe, and we will continue to look at those things. china, there has been the

rise in debt i mentioned earlier. we are seeing debt to gdp rising in china faster than anywhere else. the size of it is having an impact on debt levels globally. so we really do need to focus on that. although much of that can be contained over time, and the bad debts which are now coming up to 25% are manageable because of capital controls, it is still getting to a size where you need to watch it very carefully. as far as the trade is concerned, as i said, that will be a new risk. francine: that is huge, but how can you quantify it? 50/50 chance? we all heard trump has set on it. people say once he is in power, he will tone it down, and yet he still appoints someone who firmly believes china's is cheating. brian: during the transition -- if this was going to go away after the campaign, the transition would not be doing

behind-the-scenes trial balloons of ideas like tariffs. they floated the idea of a 5% import tariffs, and then said, we are looking at 10%. this is not only a risk of domestic gridlock, because republicans do not agree with this approach, most establishment republicans who are free-trade supporters. is auch more globally, it huge risk, because china is a sleeping dragon in asia that some worry about its economy without thinking about politics that much. they tend not to be as aggressive as russia on a global stage. trunkdom pokes -- if pokes the sleeping dragon and they wake up, there could be trade wars, geopolitics, and nuclear security. inh the one china policy taiwan, in a single tweet, trump reversed that. this is something beijing really cares about. it is not going to go away. they are not going to let this slide. if condom continues down -- if

path,continues down this it could be erratic. francine: u.s. companies in china -- there is a supply chain. brian: we do not know for sure. we know china has a huge amount of economic leverage over the united states. i think this is where trump's braggadocio is misguided. you can fire off a tweet very easily, but if the ramifications go off into u.s. manufacturing, or u.s. debt, there is a lot of leverage the chinese government has over the u.s. economy. it should be approached through carefully, going forward. francine: is it a bigger risk? what is priced in, in a possible trade with china? lucy: i do nothing much is priced in. think much is priced

in. supply chains -- that goes into most industries now. the companies themselves have been thinking about that, and looking at outsourcing in other ways. but you cannot move your whole supply chain when you do not know what is going to happen. francine: lucy macdonald from investors and brian klaas from the london school of economics stay with us. coming up, banks and breaks it. i'm interview with douglas flint on with the e.u. referendum means for his company. and resignation files. newly released papers unveil kissinger's emotions in response to the prime minister's ousting. netanyahu looks for a fresh start with trump. what kind of reset does 2017 hold? in-- tune in to bloomberg radio.

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francine: francine lacqua here in london. if one event stood out for investors in europe in 2016, it was a decision by british voters to leave the e.u. it triggered a huge selloff in the pound. the ftse has since recovered ground. more uncertainty remains about the path forward, as theresa may prepares to trigger article 50 by the end of march. a few weeks ago, i sat down with the chairman of europe's biggest bank, douglas flint. well.eathered the shock flint gave us his thoughts on the situation. douglas: you can model almost every option that you think might happen.

the sooner there is some clarity and direction of travel means you can discard some of the options and get on with prosecuting the other ones, to make sure for our clients and our staff that are impacted, they can begin to plan their affairs, and it can be business as usual. so the sooner we can get to some element of clarity -- francine: what kind of clarity? a buffer? mark carney has been modeling a buffer or transition agreement. with that be the most hopeful thing for banks? douglas: it would be helpful to know if that is in the planning. in thek it needs to be, sense that when you think of the regulatory reforms we have been through, when the reforms are finalized, there has been usually a two-year period of implementation so people can collect the information and presented it in the way that is now required. it is difficult to think that something as significant as changing the relationship with

europe, that you can say on day zero, we are moving from that system, and on day one, you can accommodate everything that has changed within your system, and importing, and so on. i think there has to be some period of transition. in terms of the planning, if there is not a belief that there will be some period position, you have to think there might be non-and accelerate decisions. francine: have you not gotten any assurances from the bank of england or the government that it is the case that have a transition area phase they are planning for? douglas: nobody has clarified that, but everyone recognizes the importance of making sure the arrangements on both sides of the equation are as smooth for customers as possible. it is not about the financial system, per se. we are a reflection of what is happening to our customers. if our customers find things awkward and ugly, that will affect economic activity. that is no good for the economy.

it is in everyone's interest to make it as smooth as possible, such as a longer transition, which we think is necessary. francine: that was douglas flint, the chairman of hsbc. former u.s. secretary of state henry kissinger rang margaret thatcher's office after she resigned as prime minister. the newly released files from 1990 shed light on a dramatic era in u.k. politics. they have surprising relevance for soft today's big issues. before brexit, thatcher reflected she would miss her encounters with other e.u. leaders. a medal from 1979 referred to the difficulty of gaining public acceptance for a new airport runway in london. that was 30 years ago. the airport under discussion was heathrow, an issue still being debated today. let's bring the discussion back to the present day. still with me, brian klaas, fellow in comparative politics at the london school of economics, and lucy macdonald from elian's global investors -- allianz global investors.

this could be a change in diplomacy. my donald trump communicate with the press, with other states, through twitter -- does it change the way we will see and look at politics? always world leaders spoken like this, but behind closed doors? change, a big a change. the way donald trump tweeps is damaging for diplomacy, partly because of how much nuance is needed in sensitive situations. that is extremely -- it is impossible to do in 140 characters. as people begin to take donald trump's tweeps less seriously, it will take away from the foreign policy arsenal. people start to think trump is not serious. next president will no longer be able to make credible commitments to allies. that is really damaging, long-term. long-term, there is foreign policy signaling we could lose as a result of it. francine: how does theresa may navigate this policy?

do we think 2017, she has an advantage because of the trump election? it means she is a more valuable theer of europe in terms of anglo-saxon method. how is she going to manage this transition? it is looking relatively impossible at the moment. placedprobably as well and experienced to deal with it as anybody else, but, you know, the timetable which she has set out, which is defined by , looks to be, currently, very, very tight. anywe have no indication of transition period at all. so there is a very tight timetable, no clarity, and it like a hope something will turn up before then. francine: are you invested in

u.k. stocks? lucy: yes, we do have some. and using volatility around it to some advantage. to grow the companies themselves, for us investors, we need a bit more clarity. francine: this is probably my chart of the year. it is the ftse. we normalized it as of today. it is a 12 month chart. the white line is what we talk about every day. it is in pounds and finished at a record. if you change it in terms of the currencies, it is a different story. the ftse in u.s. dollars is this one here in blue. and in purple -- instead of going long on ftse, as kit juckes of socgen just tweeted to me, you would have made more money had you been very short on pound. is it going to be much of the same next year? lucy: you would have made money being anywhere, really, outside of the u.k., as he u.k.

investor. having a good exposure to global equities will continue to be a good thing. and having diversification in your investment portfolio is going to be even more important. diversification over currencies, regions, sectors, and stocks is going to be that much more valuable to have, as an investor, and particularly a u.k. investor. francine: one word of advice he would give to -- one word of advice you would give to the prime minister in the u.k., the negotiation, as you go to the table? for example, i want to keep immigration under control. does she need a good plan? brian: she does, and she needs to be quick about it. if they go to the end of the negotiation, the leverage goes back to the e.u. they can pull the plug on the us as a say, deal with wto member. that would be a catastrophe. the longer britain waits, the more leverage goes to the e.u. francine: a spirited

conversation with lucy macdonald and brian klaas, a fellow in comparative relatives at the lse. up next, the new oil order. wti looks set to change of the year with its first yearly gain in three years. we talk about the cartel and crude, next. ♪

francine: this is "bloomberg surveillance." let's get the bloomberg business flash. seb: shares in german industrial aker are surging higher after statement u.s. government authorities cleared a planned purchase. midea is already the largest stakeholder in the business. the deal is closely scrutinized by lawmakers. long world holdings has announced a three-year campaign to limit waste and improve cost-effectiveness. the plan is codenamed the waterline project, which he likens to the way a ship will ink if it takes on too much luggage. year has beenhis

expensive. it has been a tough your for chinese stock traders, aside from those who conquered one in 2.5 thousand -- one in 2500 odds to get an initial public offering. regulatory guidance suppresses ipo valuations. newcomer scored as the shanghai composite sunk by 12%, set for one of the world's biggest declines. that is the bloomberg business flash. wti is headed for its first annual advance in three years, and its biggest gain since 2009, as opec and other nations agreed to cut production. to discuss what to expect in the year ahead. will opec chief? that is the question that will ride the markets for the first quarter. be bigthere will questions in the oil market.

compliance is certainly one of them. we expect saudi arabia to do what they promised, maybe go a bit further. alice will do the same thing. beyond that, opec does not have a great history of compliance. to me, the interesting question is russia. one of the big surprises was russia committing to cuts for the first time. people did not see that coming. unless they rip -- if they really follow through, that will be a significant effect. it brings a whole new dynamic interplay that we have not seen before. francine: why would they follow through? is it because they need higher oil prices? will: yes, i think the economics are compelling. they make a modest reduction and it underpins higher prices. we should or member how far the oil markets have come. in january, we were at $27 on brent. we are $30 higher today. a huge improvement for countries like russia and saudi arabia. they probably think, in economic

terms, it probably is worth complying. but we do not know. we will see. francine: with the new regulations that donald puts in place give opec a bigger headache when it comes to show producers? will: compliance from opec and russia is one dynamic. what happens in the u.s. shale patch is the other. there is a lot of expectation that the shale industry, which has used the last two years to get more productive, much leaner, will pull back into the market, which will cap the impact of opec cuts. when you add in new regulations on u.s. shale producers, that only accelerates that trend. francine: thank you, will kennedy. ♪

francine: the u.s. strikes back.

obama sanctions for the u.s. election hacking. how will russia react? the dollar weakens for a second day as oil and gold advance. blip, the euro surges as much as 1.1% against the dollar. this is bloomberg surveillance, i am francine lacqua in london with michael mckee in new york. it is the last trading day of the year and it is a great time to talk about foreign policy and russia. michael: it may be the last trading day of the year and everyone may be on get out of town mode, but 2016 is not going quietly. francine: absolutely. also in terms of volatility we saw in the currencies. that's get the bloomberg first word news. taylor: we are starting with russia, and the next move is up to them.

moscow is promising to retaliate after the u.s. imposed shank stands -- sanctions. president obama expelled 35 diplomats in connection with cyber hacking and released technical evidence. according to cnn, russia has taken several steps. it has barred access to a u.s. embassy vacation house. a cease-fire has taken place in syria. russia and turkey rocard the deal and hope it leads to a settlement, ending syria's settled just civil war. -- civil war. to play aill demand leading role in europe's intelligence sharing agency after brexit. a centralll push for role in euro poll as part of brexit negotiations. theresa may agreed to the euro poll rules in november.

citizensts overworked to start weekends earlier. businesses and government are asking workers to finish early on friday every month -- on the last friday every month. global news 24 hours a day, powered by our 2600 journalists and analysts in more than 120 countries. i am taylor riggs. this is bloomberg. michael: thank you very much. here is where we are on the last trading day of the year. it looks like an up day, at least an up open for u.s. equities. we can say the same thing essentially for u.s. bonds with yields rising. the interesting number on that board is oil, we saw a rising inventories but while prices were down earlier in the day they are back up again. the euro flash crash, you can see the impact not only in the

euro-dollar pairing but the euro-yen pairing. we have been watching for a couple of days with the sanctions on russia, the ruble almost 2% lower on the day. the russian stock market finishing a little higher. i threw in the dow futures because if you are going to get to doubt 20,000 by the end of the year, you have got to get it done today. francine: you certainly do. this is my picture for stocks, overall stocks. oil rallying. if you look at japanese equities, it is a topic from today and it is flat, but on the year is the first annual decline in five years. the euro spiking up a little higher. there is something that happened with the algorithm. the bigger picture is the dollar rally is continuing to fizzle, and oil advancing in thin end of your trading. michael: let's talk more about

the flash crash, although it was not a crash. it was a flash strengthening for the euro, 1.6% in less than a minute. that reminds us of the flash crash we saw in sterling two months ago. traders say the same thing happened, thin liquidity needs a flurry of orders that were algorithm driven. it is not just the flash move that took place, but look at what happened in the last half hour or so. traders are ratifying that move. those calling for euro parity, we are moving further away. francine: the chart shows the brutal move its caught many asian traders by surprise. here is my chart. i changed it at the last moment because we need to talk about russia. showsasically just investors are increasing their bets on russian equities, pushing the number of shares outstanding in the biggest

exchange traded fund to a record. you see that in red and it is an interesting way to look at the market since we are talking so much about geopolitics. chris weaver joins us on the phone. also here with us, david stubbs. thank you both for joining us. , i guess the two problems we heard -- two problems we heard last night with extra sanctions as we do not know how russia will kind of means it donald trump has a much harder and more difficult choice to make in his first three weeks. chris: i would expect russia to retaliate in kind, in other words, something fairly similar. escalateexpect them to reaction,crease their

but stick more or less with retaliation, simply because they are now looking at the change to the trump presidency in later january. they essentially are putting these actions down to the dying trolls, if you like, of the outgoing administration. tat there will be escalation. it reminds people there is very limited room for donald trump. even though he has spoken more pragmatically about russia and wants to improve the relations, he really does not have that much room to maneuver. partly it is because of actions like this, but the main reason is because he still have a very anti-russia congress led by senators mccain and graham, people who are very anti-russia. the president, for his abilities to take any early actions on the

sanctions or lift some of these actions that have been imposed, he will not be able to do that because he will not be able to .ppose congress he will have to horse trade on other policy issues. the best you can say about the change is it is not going to get any worse under president trump. any suggestion of a rapid improvement i think is unrealistic. francine: why would russia retaliate at all? with three weeks before donald trump's inauguration, they could just say president obama did not like us and we will not do anything. that gives a little bit of basic support to donald trump. chris: i think you are exactly right. the smart thing would be to do nothing and wait it out, but they have already made clear they will retaliate, and it is very much the russian way. this expression, prodding the bear, you will get a reaction. i definitely think we will get

sanctions from u.s. diplomats -- reactions from u.s. diplomats. michael: we had a series of sanctions announced in 2013 after the crimea that hurt the russian economy. if you look at the ruble, almost 2% weaker. is this going to have a lasting impact from a market point of view? is this going to hold, this weakening? is it going to have an additional impact on the russian economy? chris: the momentum in the economy is toward recovery. the only thing about the ruble this is the last trading day and the russian market and it means the banks are closed until monday, january knife. dutch nights. h. you always get a spike a spike inency -- the demand for dollars and euros

in the last day of the year. we will not get a proper sense of where the ruble is going to trade and what the reaction is until the banks real open on january 9. certainly,s, it is sanctions is a factor along with .il and other geopolitics as it stands right now, we have seen the economy drifting out of recession. we expect maybe a 0.6% decline, but next year indications are that we will see growth, maybe .% or one and a half percent the importance of sanctions is it affects the perception of russia risk. we have heard so many times companies they would like to invest in russia but they are holding back is of political risk, and they are all very focused on financial sector sanctions. francine: we're just hearing from interfax, the russian news

agency that the foreign minister sergey lavrov is proposing to expel 31 u.s. diplomats from moscow, and four diplomats from st. petersburg. same amounts,the the same number of diplomats that russia was to expel that the u.s. expelled yesterday. to expel thats the u.s. expelled yesterday. the world is more uncertain in 2017. does any of this relate to your portfolio management directly? chris: i think it is a rind or that political -- a reminder that political risk is always a challenge. i do not think this actually changes what is the bigger picture in russia, an economy that has adjusted to the lower oil price. much better macro economic

management than we have seen in previous years, irresponsible central-bank policy. russian equities earlier in the year got to extraordinarily cheap measures and i think it is one of their best performances in emerging markets since 2007. although we have to wait for the details on sanctions, i do not think it takes away what is actually a fairly good opportunity in russia over the next couple of years. michael: let me go back to chris, we do not know what else the u.s. might have done. u.s. officials suggest there may have been some sort of cyber responses well, but from the surface as far as what we know, tit for tatd the retaliation? chris: from what we know publicly, the damage is quite limited. expelling diplomats really does not have an impact on the economy or on the investment

case so people shrug their shoulders and will pass this off. and there with this is no further escalation, and i think you really can put this behind us and look forward to the start of the trump administration. but in particular, the start of the role of rex tillerson as secretary of state, i think that will be much more important if he is passed by congress because he understands russia betty -- better than any of the secretary , and he has a personal relationship with president clinton. at least -- putin. at least if he takes that role we can expect more pragmatism and fewer of these distracting disputes we have had recently. francine: chris, thank you so much. we will be back with david stubbs. luigi up we speak with

a.m.,allas at 6:00 talking about the italian politics, italian banks, and foreign policy. ♪

francine: this is bloomberg "surveillance." francine lacqua in london, michael mckee in new york. taylor: for a second day, investors say a settlement may be near involving japanese airbag maker takata. the wall street journal has reported they are close to a settlement with the u.s. that led to the biggest recall ever. any reports is the outlook for the british labor market is fairly bleak.

according to the chartered institute of personnel and development there will be lower wages and increasing uncertainty . brexit could also lead to a shortage of workers from the e.u. likely tout today is show inflation in russia at a record low. -- it is these lowest in russian history. the russian central bank has maintained interest rates while the country has been stuck in its longest recession this century. that is the bloomberg business flash. francine: the euro surging as much as 1.6% against the dollar. a rush of computer-generated orders caught traders off guard. .avid stubbs is still with us a flash crash, it happens. we sought with the pound back in october, or the end of september. what does this tell us about the state of the market? is it just

that it has been trading or algorithms are dangerous? david: they certainly are a volatility generator, and -- but i think it tells us something about the short-term positioning in the markets. the algorithms are programmed to sense concentrations of positioning, markets stretched too far in one direction. if you look at the history of other flash crashes like the pound, it ended up although it recovered in a few moments, a couple of months later it was lower. i think we will probably see is a recognition that the dollar surge went very far, very fast. expectations and the bond market really got stretched before christmas, and they have come back a bit. i would not be surprised if this

continues as we get a recognition that nothing has actually changed, and this is a tightening of financial conditions. we have had the dollar go up, the interest rate rises. growth may be a bit weaker in the first quarter. look at the trade balance from yesterday, for example. i think it is going to be stronger at the end of the year and the u.s. markets will define , but we are vulnerable to downsize surprises and economic data. francine: parity or no parity? david: i think as you go to the middle of the year and the focus of political risk in the eurozone around the presidential election, i would not be surprised if we get close to parity. michael: in the united states we have moved on from the fed to fiscal policy. is it politics that is going to drive the euro and drive trading in europe in 2017 as opposed to the ecb? david: i think the market is

absolutely going to be focused on the political risks almost relentlessly through the first nine months of the year, everything from article 50 being triggered to the dutch elections to the french elections. i think we know roughly what we are going to get from the ecb next year. they have pushed their qe program deep into next year and the rhetoric is very solid, not backing down saying what they are doing is working and they are going to fulfill their mandate. i think we also know what we are going to get from some of the government in terms of fiscal policy, it is a little bit of a looser stance. that is good for markets. the difference about the political reality of europe in the next six to nine months, a lot of the political tension is focused on the currency itself. that is the rallying cry in italy and the rallying cry of the national front in france. even if these things do not come to fruition, the market will

have to price in a euro breakup premium into the currency. francine: david, thank you so much. coming up on tuesday, bloomberg "surveillance is quote takes a top at eurasia group's risks in 2017. this is bloomberg. ♪

francine: this is bloomberg "surveillance." francine lacqua

in london, michael mckee in new york. megan mcardle wrote in a bloomberg view article talking about prediction of forecast and that predictions matter, even if they are the wrong ones. she finishes the article by the record of my past to note forces me uncertainties carefully and to remember that in the end i can only make educated guesses about a world that is under no obligation to live up to my expectations. the problem is that 2016, be it brexit or donald trump our base assumptions have been challenged . if you are a foreign-policy expert you can almost gamble but if you are managing portfolios you cannot. how do you do predictions for 2017? david: i was smiling because of this column. alwaysn this game is

dangerous. we are forced to make our clients'money work in an uncertain world. the uncertainties we are seeing this is a take investors to take a new approach to risk management. managers can do things to stable your test stabilize your --tfolio with things stabilize your portfolio with things they had not been able to do before. when i look forward to next year, i think even though the politics grabbed the headlines, huge changes happened to markets. first, the commodity crash is over. i think it has been confirmed this year we will be in the volatile trading range going forward. the other thing that is changed is where the financial systems are in the anglo-saxon economies . m2 and m1 growth are back and you are seeing the banking

sector lending again in the high single digits, and we have not seen that since the crisis. the oversupply be ended in some parts of china, i think we are in a very different world since the crisis. michael: david stubbs is with us . next we are going to take a look at the controversy over the u.s. and israel with dennis ross from the washington institute. he has played a pivotal role in middle east talks for years. this is bloomberg. ♪

michael: good morning, i am michael mckee in new york, francine lacqua in london. taylor: russia is striking back

at the u.s. according to the interfax news foreign minister says russia plans to expel 35 american diplomats from moscow and st. petersburg in retaliation for president expel 35 russian diplomats. says the u.s. moves are aimed at undermining the foreign policy plans of the trump administration. lawyers in the climate change case to question donald trump's choice for secretary of state about what he knows. exxon ceo rex tillerson's testimony is set for the day before the inauguration. the suit was filed by teenagers claiming that government failed to protect the environment. in south korea, the constitutional accord promises to make its decision swiftly against the president.

the court has 180 days to roll whether the motion is constitutional. a ruling in favor would roll back power and lead to an .lection in 60 days in japan, prime minister shinzo always popularity has risen to a three-year high -- shinzo abe's popularity has risen to a three-year high, up six percentage points to 64% from a month ago. global news 24 hours a day, powered by our 2600 journalists and analysts in more than 120 countries. riggs.ylor this is bloomberg. .ichael: thank you the cease-fire that was brokered for syria has come into effect as the assad regime and rebel groups agreed to the deal brokered by russia and turkey, hoping a peace settlement will and the civil war desk end the civil war. .- end the civil war

we see reports there are violations of the cease-fire beginning so we will see whether that hold. the middle east, always complicated, more complicated by the dispute between the u.s. and israel over a u.n. resolution that condemns israel's settlement policy. joining us now, ambassador dennis ross, a fellow at the washington institute for near east policy. he joins us from tel aviv and is the author of "doomed to succeed." this seems to be the latest setback. the take away from your book is that nothing happens in isolation. there is a long history. can you give us a little bit of context about why this vote mattered? dennis: i think what is significant about this vote is first of all the has not been a security council resolution explicitly on settlements in this fashion since 1980.

that was the last time you had a condemnation of settlements, so you go back a long ways. number two, there is some problematic language in this resolution. if one of the things that we are trying to do at some point is see a negotiation between the israelis and palestinians, what we are going to have to do is come up with a resolution of the borders. since camp david in the year 2000, a formula of 1967 of mutual swaps was developed, based on a premise that you would have settlement blocs which would accommodate about 75% of israeli settlers in 5% of the territory. if you have settlement blocs you cannot make settlements illegal. having just adopted a resolution at the security council that makes settlements illegal, it will be somewhat more difficult to come up with a resolution of the borders if you are saying

that settlements themselves are in illegal. that is one area where i would say this resolution creates a potential problem for the future. michael: john kerry suggested it is about the settlement blocs in that there are factions in israel that do not want a two state solution. so if you build settlements everywhere you cannot divide up the land. tom friedman and the new york times a great with that analysis yesterday. you agree that that is part of the politics underway? dennis: absolutely, i do agree. again, i think there is an interesting contradiction in the obama administration position, and i am saying this as someone who served in it. if you are going to have settlement blocs consistent with a two state outcome because they are only about 4% or five cent of the territory, then you have to be able to rationalize the idea of settlement blocs. that means you can build in

settlement blocs but not outside you'd the current israeli government is building both inside and outside the blocks, and that is not consistent with a two state outcome. the obama administration has adopted a position that treats all settlements the same, whether inside or outside the blocks. one thing secretary kerry emphasized, there is a danger we are drifting toward a one state outcome and i think he is correct when he says that. if that is a major preoccupation, if we could come to an understanding with the israelis to build only in the blocks, even if that is not going to solve the problem with the palestinians right now it preserves the possibility of a two state outcome. i would have liked to have seen the obama administration draw a position that adopts a distinction between building inside and outside the blocks. francine: was the u.s. abstention a betrayal? kinds: i think that is the

of language that really does not fit in the relationship. the fact of the matter is that this is an administration that just not too long ago concluded a 10 year, $38 billion security package for israel. that is hardly the sign of an administration that is betraying the israelis. this is not an administration that has betrayed the israelis but they have not been reluctant to criticize the israelis in public, and that unsettles a lot of people in israel. there is a perception that there is a very quick readiness to criticize israel but never the palestinians. i think unfortunately that has been a bit of a pattern with the obama administration. francine: do you believe the u.s. should focus a lot more on syria and what is going on in aleppo? well syria be the biggest thing on president obama's legacy? dennis: unfortunately i think that is true.

you have a conflict that has produced half a million dead, 12 million displaced. . country that is devastated it is really a blight on the international conscience, and i think history will record this is probably the greatest failing of the obama administration. there was a reluctance to be involved for reasons that are understandable, given the nature of the conflict and the emergence of it in the aftermath of iraq, but not every situation is the same. i think when president obama looked at syria, every time he saw iraq and feared being sucked into a quagmire. the net effect of being involved, we helped contribute to what is a humanitarian catastrophe. it is not just a blight on the united states but certainly internationally. i am afraid it is not just a humanitarian disaster but also a strategic one. michael: one of the interesting

points you make in your book, and i urge everyone to read it, is that for many arab states, the israeli-palestinian issue is not the central defining factor of their relationship with the united states, or each other, that they are more concerned with things like syria and the clash of the various factions in islam. dennis: there is no doubt about that. one of the things i tried to show, because i obviously go through every administration from truman to obama, there has been a set of assumptions that somehow the defining conflict in the middle east was the israeli-palestinian one and yet, what we have seen is if you look at the region today, most of the countries and leaders in the region are preoccupied with every conflict other than the israeli-palestinian one. the syrian civil war, the war in ,raq, the proxy war in yemen

the challenge that egypt faces today, what iran is doing throughout the region, these are all the factors and conflicts that are preoccupying the countries in the region. and it fits with what i show in throughout the last 70 years, the preoccupation has been primarily of arab leaderships of those other regional countries that are challenging them. if you go back to the 1950's and 1960's, saudi arabia was preoccupied with the threat from egypt and today with the threat from iran. saudi arabia is not preoccupied with the palestinians. notoes not mean it does matter but it is not the defining conflict in the region. the twitter elect of the united states has made it clear that things will be different after january 20 in the middle east, as far as the u.s. is concerned. how do you think donald trump changes the equation? dennis: it is very hard to say

because we do not really know what his priorities for the region are. if you listen to what he says in terms of priorities, the one conclusion you would draw is that isis is his preoccupation. he has talked about wanting to , and i with the russians think in a sense the message he is sending is that his focus will be in that area. .hat raises a basic question one of the things the russians have been doing in syria is effectively empowering the iranians. you have the head of the cuts for shows on the ground -- forces on the ground signaling that iran has a great steak and they are shaping the realities. russia has in effect been abetting their power. if you look at the saudi's, many of the sunni leaderships, their main preoccupation is the threat from iran. if in fact you want to counter

the iranians, and if you want to do with isis, you need the sunni leaderships, and to the extent which it looks like you are abetting iranian power you are going to find you will have a problem with them and will not have them as your partners. what we have seen from the president so far in terms of what he has said does not reveal a lot about what he was actually do in the region. i think with someone like his secretary of defense, james mattis, he knows what are the threats and conflicts in the region. he knows what drives the sunni leaderships, and i suspect his advice will sound different than some of what we have heard coming out of people around donald trump until now. francine: ambassador, thank you so much. tuesday, on surveillance takes a look at eurasia group's top risks of 2017, joined by mr. doom and

gloom. look for that. this is bloomberg. ♪

francine: this is bloomberg "surveillance." francine lacqua in london, michael mckee in new york. the dollar weakening for the second day as oil and goal advance. everybody knows what january 20 is, possibly a colorful inauguration of donald trump. we are back with david stubbs. at 2017, there are many risks and uncertainties but what does it mean for the markets? do you flatly buyout volatility? dennis: i think we are certainly

facing a wide dispersion of outcomes next year. think from sitting in europe that the main risk is the continuing strengthening of the u.s. dollar. you are forced to hold on hedged dollar positions in whatever asset classes you choose. at the moment i think the u.s. equity market is something we , even ife exposed to it is quite far already. still seemsfocus sensible, and i like the technicals within the u.s. credit markets. i think we will see less net issuance out of the investment grade market, and if you look at the technicals in terms of the lack of refinancing risk in the i believe i had on this program something yesterday that we checked out. less than 10% of u.s. high-yield is being rolled over in the next two years. the question for me i think

still remains emerging markets. how much will this january 20 affect the mix? i personally do not think it will affect the debt markets that much. i think local currency debt is one of my clear out performers of next year. us --g question is on in dmf. -- emf. francine: in white is the one we look at every day, in pounds and it was at a record yesterday. in blue is the ftse 100 in u.s. dollars and it has been underperforming, and this is in euros. this is not equities going up. ons is basically if you bet the pound the right way you would have made a lot of money. seen a lot ofe sharp moves and currencies around political events. the emergingt

markets with the mexican peso and the brazilian rail, absolutely. and pound terms, the ftse has performed well. i think a lot of british investors are liking what they see on their statements even if they do not fully comprehend the has been a loss of wealth. u.s. investors do not actually allocate separately to the u.k. versus europe. be a fantastic trade in the second half of the year after a lot of the political risk gets out of the way and hopefully does not come to for russian. you have a large dividend yield and a big equity risk premium in europe. potentialicy and the for growth to be coming through to europe. you are brave to buy now. i would hedge the currency if you are buying it from outside the region, but i speak to a lot of clients who are looking for

aggressive ways to play europe going into the summer. sensing an opportunity to allocate. if we look within developed markets over five years it is hard to find a place with greater upside potential than the european market. michael: let me take you around the world. the other big emerging market that will be influenced tremendously by politics is china. how is that going to affect the markets? last year at this time we did not see it coming, a big crash in chinese markets affected the rest of the world. dennis: indeed. i think china is still going to be a focus of people's concerns. i hope the new administration's rhetoric does not get in the way of one of the most positive things we have seen with china the past couple of years, the market getting comfortable with you one depreciation. the depreciation -- yuan

depreciation. we started to see it come down the last couple of years in the market. if that continues i think the macro economic picture in china can stabilize. i hope they would revise their growth target down and there is some speculation that will happen this year. hopefully that will remove the imperative for this credit buildup. thisncreasing opacity of chinese banks is a real concern. i am happy within a broader emerging market equity exposure to have some chinese names. i am certainly not betting all of my e.m. chips on any nation at all. i like the high dividend yielding, emerging market equities at the moment. i think bond yields are not going to go to the roof. realize that e.m. growth is not going to be upset by a trump residency and look at

the adjustment in the current accounts and currencies they will go off of their high-yield insecurities. francine: thank you so much. we will be back with david stubbs. coming up on tuesday, surveillance takes a look at eurasia group's top risks for 2017. we will be joined by larry summers. 6:00 a.m. in new york. this is bloomberg. ♪

francine: bloomberg "surveillance," i am stressing the clot with michael mckee in new york. italy has come to the rescue of monte dei paschi. at comes less than a day after the european commission approved the liquidity support program for the world's oldest bank. still with us, david stubbs. the question that people want to see is whether the town government sticks to the e.u. rolls or not. -- rules or not. dan: i think we can answer that question. that particularly

after yesterday comments by the italian prime minister, they are definitely interested in discussing with the e.u. and the thiso make sure that rescue is done according to e.u. rules. he stressed that several times in a press conference. the significance, this number the bank of italy came up with is a number that has been floating around. this is the first time it has .ort of been official-ized the bank of italy as part of the european central bank network and that is why it took it upon itself to try to explain how the math was done. the european central bank really cannot comment directly on individual banks. they stepped in and try to get some clarity to this. michael: in various ways they have been giving you aid to monte dei paschi for some time. is this going to be the end of

it or does the bank become a going concern? dan: a lot of people hope so. i think the reason the european central bank came up with higher numbers applying capital buffers really strong, is because of that very issue. they do not want the country to have to have to put together yet another rescue. as you said, this is probably the third time it is going to be needing state aid. i think retail investors, institutions just do not want to have to come up with another plan. francine: danley green, thank you so much. iefgreen. much -- dan l >> i think everyone just wants enough already. sums of moneyl

required and mechanisms to deal with it. if we look at the importance of banks in general in europe to equity investors, a very large waiting for most of the indices. if we can get this out of the picture it is bright. -- we have ag is recognition of what ultralow rates can do to banks, and changes from the policy side. i think this can be a positive picture if we get back this -- past this. francine: david stubbs, thank you so much. coming up we speak with luigi zynga alice. we will be asking him about monte dei paschi ♪.

francine: the u.s. -- obama has

russia retaliates. reassessing asset moves. the dollar weakens for a second day. moneyvestors reallocating ahead of january 20 yeah go and the euro surges as much as 1.6% against the dollar as a rush of computer-generated orders catch traders offguard. this is "bloomberg surveillance." francine lacqua and london. michael mckee is in new york. there is a lot going on in terms of foreign policy. we thought this week was going to be quiet. it certainly is in terms of there is this situation between the russia and the u.s. michael: we are getting all kinds of news, and 2016 is not going quietly. francine: let's get straight to "bloomberg first word news" with taylor riggs. are starting with the

foreign policy in russia story. russia is striking back at the u.s.. foreign minister sergei lavrov says russia plans to expel 35 diplomats from russia in st. petersburg as retaliation from president obama's decision. two compounds are being shut down that were used for intelligence related purposes. a cease-fire has taken effect in syria between government troops and rebel forces. russia and turkey brokered the deal. is the way to a settlement to end syria's civil war. demand they play a leading role in intelligence sharing after brexit. britain will push for a central role in europe all as part of

brexit negotiations. it kept the u.k. being asked to pol.e euro the japanese government and business groups are asking companies to let workers finish on the last friday of every month. the goal is to curb excessive work hours and to get people to spend money. global news 24 hours a day, powered by more than 2600 journalists and analysts in more than 120 countries, i am taylor riggs. this is bloomberg. francine? michael? michael: may i just point out, taylor, this is the last friday of the month. we should all go. taylor: we should all go shop. who cannotr those leave early as the trading books moved to the united states, here's where we are. futures point to a higher open. it is the last trading day of 2016, so get your books in order.

not a lot of movement in the bond market, but we have a rebound in oil. fran mentioned the flash cash. fact not having just in a -- the u.s. on the and russia do a tit-for-tat real palliation -- a tit-for-tat retaliation. dow futures -- if you are going to get to doubt 20000 and 2016, you do not have much longer to do it. data.ne: this is my for the stocks are set best year since 2013. oil has been rallying, but this is the picture today. the euro spiking higher, the dollar continuing to fizzle a touch. the last 12ook at months instead of the last 24 hours. michael: let's take a look inside the bloomberg.

ofwas a flash strengthening the euro today. 1.6%, as you mentioned. traders say it was basically attributed to thin liquidity, meaning a flurry of orders that were out a rhythm driven. happenedomething that a couple of months ago with sterling. a lot of people are saying we will see this a lot more as computers take over much of the thinking for human beings. francine: i like that chart. this is what i decided to do in terms of my chart. this shows appetite in russian etf's. what we are seeing between vladimir putin and president obama has been more investors increasing their bets on russian equities. this is the country's biggest exchange traded fund. for more on russia and u.s. foreign relations, let's get to foreign policy

reporter, who joins us from d.c. with us in new york, luigi zingales. you know a thing or two about foreign policy. how will this be end the? the policy -- how will this end? does this put donald trump in hot water? does lookertainly like there was an effort to box donald trump in, so laying out a series of measures against russia that would force donald trump to make a choice. does he continue with his plans to improve relations with russia, or does he do what the obama administration wants an double down on punitive measures against russia? the key measure yesterday that the obama administration put forward was a lot of evidence explaining how russia was involved in the hacking of the u.s. election.

so donald trump will be forced to respond to that. francine: what does it mean for gop? how do they support or not support donald trump in what he wants to do with russia? nick: this is one of the most interesting elements of this narrative. you would have expected this would fall cleanly among -- cleanly along party lines, democrats versus republicans, but donald trump faces a great deal of resistance from within his own party. members of congress are deeply suspicious of his desire for better ties with russia. they say this is not a country we want to be friends with right now, and in fact they are pressing for even firmer sanctions against russia and much broader investigations into the allegations of hacking in the u.s. election. michael: speaking of further sanctions and the whole idea idea of,- the whole -- was aredicare 35

any retaliatory hacking? nick: the administration on a background call yesterday basically went right up to the line and sort of with a wink and a nod said that there were other .hings going on obama and his staff have made clear there would be a public response and most likely a covert response. we have definitely seen the public response now. there are a lot of things that they can do from a covert perspective, whether it is exposing where hackers work on the dark web, whether it is deleting their hard drives or deleting their bitcoin accounts if they use the digital currency. there is a lot they can do that would not get noticed. we do expect that would be part of this response. michael: you said the senate may want to do more. what about the administration? as far as they are concerned, is

this it? nick: we would expect there to be some retaliation from russia. they announced today that they will expel 35 american diplomats. the question is, where does this go next? if the obama administration response with some sort of cyber action, what does russia do? the administration says russia's hacking did not stop with the admin is -- with the election. one of the things we will be tracking is whether this escalates into a full-blown cyber war, which is a frightening prospect between two major powers. for your francine thank you insight. ,et's bring in luigi zingales university of chicago professor. when you look at 2017, the biggest uncertainty is foreign policy, whether that will lead to trade wars, whether that means president donald trump when he gets inaugurated becomes

less legitimate. what angle do you think we should be looking at in the first 100 days of his presidency? luigi: first of all, where he positions the united states in the global war. that there is a peace talk in syria that does not include the united states -- maybe because we are in the position phase. it is the first time there is a decision the middle east that the united states is absent. first concern. second, whether trump will do something about his talk about protectionists. so far there is a lot of talk and very little practical proposals. i suspect this will remain the case. i think the world is worried ties will be reimposed, some sort of foreign control, or what else. that will be disruptive. and of course there is also the

tension with the involvement of russia in the election, the meddling in the election. something, that the united states which elliott with a tit-for-tat and they .evealed some stuff about putin we know that putin has a lot of business dealings that are not transparent. if they meddle with our election, we should do the same with their political process. the best way is to start exposing the problem of putin. i do not know why this was not done. i hope it is not because we do not have the means to do that. francine: at the end of the day, is this a new world order that we are seeing? i want to go to one of my most interesting articles that i read this week. a better sensee of dictators that will allow

some of them to reach a level of accommodation. unfortunately, making deals will be popular with his core constituency." inseems like the real check terms of checks and balances in the u.s. will be his own party, and possibly the only check and balance. luigi: i agree with that. the charges of the cabinet of trump has mostly been sort of on the conservative side of the gop , so i think that the gop will carry some influence. but we should not underestimate trump independence, so we are in for sort of a new world, i think. balance inat is the terms of influencing the markets between politics not just in the u.s., but we have a lot of elections in europe, and the fiscal policy in the united states? luigi: in the united states, the

fiscal policy would be the main driver. in europe, we have a combination of two things -- the trickle-down effect of the u.s. policy,- of the u.s. which i think will be a high interest rate in the united states, and high interest rates in europe as well. we know the situation in europe is fragile to begin with. a high interest rate could make it more fragile. and two or possibly three major elections in that area can be traumatic. staysl: luigi zingales with us. remember monetary policy? we will discuss the fed's changing rates headline. this is bloomberg. ♪

michael: good morning. i am michael mckee in new york. francine lacqua in london, the last trading day of the year. for the last five years, we have talked every trading day about what the fed is going to do. +++

to capitol hill. you can see the fed is still sticking to its forecast, three rate hikes next year. the market is still sticking to its forecast that the fed does not know what it is talking about. larry, -- lara rhame from fs investments, and luigi zingales is still here. this has been an ongoing debate for years. the fed is more optimistic about the where the economy goes than the markets. even though the fed says we do not have any idea what is going to happen under donald trump. where do you think they go, and how fast do they get there? market'still like the perdition better than the fed. regardless, we need to take some perspective. -- i like the fed -- i like the market's addiction better than the fed's. regardless, we need to take some perspective. there is a lot of talk about this extreme bond move. let's be honest, looking back to the length of history, we are in this low interest rate environment and we will be there for a long time. michael: you are too young to talk about history. but when you look at this, we are historically at low you at low levels. we have seen mortgage rates rise, and even though they are historically low, they seem to psychologically hit people. if the fed is raising rates and market rates go up, could that

have an effect on the u.s. economy? lara: look at the employment numbers. they have been so strong. by almost every measure the economy seems to be at potential growth, even above that. we see the consumer sentiment numbers being really strong? the economy next year will look similar to the economy in 2016. mostly driven by the consumer. the housing sector being positive but not on fire, nothing like it was back in the bubble years of the early 2000's. in the end, what we do focus on his business investment, whether that can pick up and make overall growth more balanced. francine: this is the million-dollar question. will business investment pickup? they are sitting on cash, so these companies have cash or they just need to make sure that if they put it to good use, they have returns on it. --hael: we're having trouble

fran is asking, do we see businesses put catch forward, and will they get enough of a return? lara: that is a real issue. we are seeing companies facing a lot of uncertainty. when we look at the weak business investment that we see since the recession began, a lot of it has to do with uncertainty. we see the corporate profit numbers,- hide bps higher earnings per share -- hire eps numbers, higher earnings per share. companies see this. they see potential growth is relatively low, and they understand that there is still uncertainty out there. they have been reticent. as we get rates rising, it will be important to see whether companies can engage in investment or whether they get pretty quickly turned off by the fact that rates are rising and they are heavily indebted. francine: luigi, where do you see these animal spirits going?

luigi: the most important thing in 2017 will be fiscal policy. cappinge a policy of taxes and increasing spending, military and infrastructure spending, i think we will see a higher rate of growth in the economy, at least a continuation. i do not see any other option for the fed other than keep rising interest rates. michael: let's continue our conversation. oez zynga alice -- luigi zingales, and lara rhame's. get ready for 2017. former u.s.d by treasury secretary larry summers. 6:00 a.m. in new york, 11:00 in london. ♪

michael: good morning, world. i michael mckee, along with francine lacqua. we are starting with a morning must-read from simon johnson, the former imf chief economist, now at m.i.t.. she is -- he is writing at project syndicate about donald trump's plans to perhaps impose tariffs on other countries around the world. he notes -- michael: we are back with luigi

rhame.s, and lara if we do get tariffs from a u.s. economy point of view, simon makes a good point that what we would be doing is trying to trade job creation, if you can create jobs through an additional tariffs, for higher prices for all the imports we buy. interesting -- it is interesting since the election market seems to have priced in all the possible good news that could come from a trump presidency, like fiscal spending, and ignoring some of the policy uncertainties like a fed trade war with some of our trade partners. the implications if we have severe protection measures could be challenging for the u.s. economy. it is.t know what markets seem to be latching onto the policy. we are in high policy certainty times. michael: luigi, --

francine: luigi, what do you make of this possible protectionist measure? i suspect that trump will not follow up with this. i think he is very sensitive to business interests, and business interest is not for attack like that. i would be surprised if he goes in that direction. i think he prefers to get jobs back in the united states through deals. we have seen the carrier deal. not so sure it is great for america, but it is great for his popularity. i think he will go more in that direction rather than a broad tariffs. michael: what do we get out of inflation in 2017 is this is -- if this is an issue? lara: inflation is a huge

question mark. we have the dollar rising on inflation pressures in the u.s. time, if we get trade tariffs, we could have a huge upward shock in import prices. that is something the interest rate market will be watching closely. we have had interest rate expectations creep up in the is very but it contained close to where the fed would like to see it. michael: something we will be watching as well. we will be back with luigi zingales and lara rhame. coming up on tuesday, "bloomberg surveillance" takes a look at eurasia's group -- at eurasia group. look for that i 6:00 a.m. in new york, 11:00 a.m. in london. this is bloomberg. ♪

michael: good morning, i'm michael mckee in new york, with francine lacqua in london. let's get to the "bloomberg first word news." taylor: russia is retaliating

from the u.s. decision to expel ofdiplomats over allegations interference in the 2016 elections. the kremlin will expel the same number of american diplomats. asked vladimir putin to approve the tit-for-tat move through the u.s. says they are used for intelligence related purposes. in return, russia will ban u.s. diplomats from using the recreational sites outside moscow. lawyers in a climate change case want to question donald trump's choice for secretary about what he knows. rex tillerson's testimony is set for the day before the inauguration, january 20. it was filed by teenagers claiming the government failed to protect the environment from go global warning -- from global warming. in south korea, the constitutional court promises to make a decision swiftly on the against themotion president.

a ruling in favor would remove her from power. 's popularity in japan has risen to a three-year high following this week's trip to pearl harbor. his public approval rating is up six percentage points to 64% from a month ago. global news 24 hours a day, powered by more than 2600 journalists and analysts in more i am taylorntries, riggs. this is bloomberg. michael? francine? francine: the bank of italy has said the rescue of monte dei paschi will cost the state 6.6 billion euros, and that comes less than a day after the commission approves the liquidity program for the world's oldest bank. we are back with luigi zingales of the university of chicago. when you look at the italian

banks, you have been critical of the government handling of the plan so far. do you believe that the finance minister will stick to the rules when it comes to -- will stick to the rules? luigi: italy has to stick to the rules. the question is how flexible those rules are at how fast italy falls into play. italy has been dragging its feet in the decision of what to do, and i think that the plan implemented now is, in my view, too little, too late. francine: what do you think happens next? luigi: first of all, we need to see whether this money that keeps creeping up is enough, because the ecb is reviewing now the good loans of monte dei paschi. given how long this bank has been in trouble, i suspect there

will be some ever greening of loans, and that some of these loans turn out to be not so good. how big the price tag is, i don't know. maybe we need to add something else. then the government needs to banks, and wetwo do not know what the price tag's of those will be. and then there are other banks that can fall into the situation. -- i think that we need sort of a turning point. we need an intervention that is larger now, that people say we are turning page and it is a new world. we are not there yet. michael: i want to ask both of you a political question. you look at the european union logo, and in tiny letters it says, "our motto is extend and

pretend." they are going to work around the italian bank rules. do we see a resolution in 2017 that moves us forward? we have all these elections coming up. are we going to be fighting the same battles over immigrants, over the banking system, over countries that are not living up to their financial obligations? it is toohink that easy to make fun of the european union these days. i think that the rules for bank intervention and bailouts, etc., are not that crazy. in fact, the preemptive recapitalization of monte dei paschi is in the rules. it is a good thing to take place, taking place in early. -- i think the italian state will drag its feet even longer, and the price tag will be even bigger.

in that respect, it is ok. my big fear is if one of the major countries will go in the similar situation as italy, will the rule remain in place? europe is very good at enforcing , but less so in core countries. michael: do you think that we get any kind of economic effect from that around the world, or just some volatility? lara: one of the themes we have been seeing for years is this global coordination of monetary policy with almost every developed central-bank cutting it, nativeemely measures, quantitative easing's. fray, the fed to seems to get traction and talk about the taper ending in europe . i think that will be a big theme going forward.

we will start to see markets diverge. we have had this rising tide lifting all ships on the asset front. the economic impact for the u.s. would be more muted, but globally we could have more of a fallout. francine: luigi, is there any doubt that the eurozone will not stick together in 2018? think -- i always think there is a risk that the eurozone will fall apart, whether this will be in 2017 or 2018, it is very hard to predict. my view is that as it is currently structured it is unsustainable. when something is unsustainable, it eventually it will not be sustained. this is not particularly deep, but when it will not be sustained, that is very hard to know. francine: what is sustainable? we were in rome together covering the italian referendum.

people say the best option for the eurozone will be to have the strongest countries in it. saying you need to take germany out. what kind of reality will we see in five or 10 years from now? luigi: if you look from an economic point of view, in order to sustain a common currency, we need more common fiscal policy, starting with the real banking union. let's remind the viewers that it insurers of the policies at the european level. that is what makes this crisis in italy so dangerous. the second is, the form of unemployment insurance at the federal level, it is like the united states. this is what the economy demands in order to work well. do i see the possibility of this happening in the next five years? i think the answer is no.

it was not particularly strong a couple of years ago. it has become weaker. as we go along with 2017 with elections in france and germany, i do not think anyone is ready to concede power to a federal state. that is the tension. is an irresistible immovablehing against objects, something has to happen. we do not know exactly what. but something will have to happen. michael: in the last five years or so, the beginning of a new year has been greeted by some sort of crisis in some sort of european third world country. let me take you to the bloomberg and show you the italian all shares bank index. despite everything we have been talking about from monte dei paschi and the italian banks, investor sentiment remains strong. rubicon,rossed a

england that the global economy, the u.s. economy, are strong enough that when we get these disruptions they no longer tip us back into stagnation or contraction? have you markets would believe that. it has been extraordinary how in 2016 we got shock aftershock, news headline, unexpected events, many unexpected market events that the market shook off and kept trucking higher. that gets a lot harder when you have central banks starting to raise rates more meaningfully. it also becomes an issue when you get this divergence in global monetary policy. people have underestimated the risks going forward. it is almost like there is this uncertainty fatigue. people are tired of uncertainty and markets are shaking it off. i actually think we can see that emerge in 2017. michael: we elected a man that

does not have any policy yet. in 2017be interesting we will be back with lara rhame on bloomberg radio ahead. luigi zingales is staying on "surveillance" now. we look at the top eurasia group risks in 2017. look for that at 9:30 in new york, 2:30 in london on tv and radio. this is bloomberg. ♪

michael: good morning, new york.

dawn is just beginning to break over the big apple. i am michael mckee in bloomberg world headquarters in new york. francine lacqua is in london. taylor riggs is here. taylor: brent oil is said to post its first -- 46% from a year ago. opec and other oil producers have been agreed to cut supplies to reduce global inventory. donald trump us victory has driven up the expectation for higher bank profits. analysts at morgan stanley say that will not keep wall street from cutting more jobs next year. they say the banks will keep chipping away at costs by using technology to replace traders and branches. a new report that china is ready 6.6% -- its 6.5 percent growth target by next

year. china could lower its growth to a range as low as 5.5%. that is your "bloomberg business flash." michael: thank you very much. i want to take you inside the bloomberg two seconds while i get this update to show you. sterling -- there was a major event in june. the brexit vote that reset everybody's expectations for the british economy and for british markets. for more on what happens next in the u.k., we bring in making green. she was in london for 10 years. is one of our brexit experts. also with us, luigi zingales, the university of chicago professor. when we saw the sterling drop that the u.k. economy was headed into the tank, it did not happen. finally, ors it will the u.k. defy everybody's forecasts?

>> it did not happen, but neither has brexit yet. nothing has fundamentally changed except sentiment. we will start to see the implications of brexit once article 50 is finally triggered, probably in 2017. we are starting to see some effects of brexit already. we saw that employment data fell for the first time in the most recent months. once people feel that unemployment is going up, sentiment will shift quickly in the u.k.. there is a ton of it anecdotal information suggesting -- there has not been capital flight, it is just that no new capital has gone in because no one knows with the regulatory environment will be like. we have some evidence in the housing market, particularly in london, that it is starting to cool. the u.k. has a long history of propping up its economy by supporting the housing market. if you saw the housing market startproperty companies

going under, that could have a huge impact on the economy. for the most part, demand has held up. that is because brexit has not actually happened yet. thatit does, we will see start to fall. it will not be as sharp and short a decline, it will be more longer -- it will be longer and more drawn out. michael: we have seen the big fall in sterling. at some point, will we see that start to hit inflation and bring the bank of england into play much sooner than people might have thought? megan: we are already seeing that. the bank of england is finding itself in a conundrum because they expect growth to tail off. they are going to have to decide which to support. in the past, the bank of england has been in a position to support growth. we will probably see that this time around as well. francine: what happens to pound from here?

megan: i think the pound will weaken when we finally have article 50 trigger. i think there is some weakening left, though we have seen the bulk of it already. francine: let's get to luigi zingales. how do you see brexit? does the donald trump presidency give theresa may more to negotiate with when she goes to the european union? luigi: i am not so sure this will make a dramatic difference. the problem is whether theresa implement brexit or not. so far she has been very good at playing on both sides. eventually in 2017, she needs to make a decision. that is still a part of the u.k. -- there is still a part of the u.k. that thinks maybe brexit will not happen. i think once article 50 has been triggered, once people realize that it will happen, we will start to see more of an impact. michael: let me ask megan --

what does theresa may want? it looks like she was going for the hard brexit idea until parliament and the courts stepped in. we are running for the supreme court decision. does she want to cut the u.k. off as dramatically as it seemed a couple months ago? unfortunately, i think that is what will happen. but that is not what theresa may wants. government british would like to leave the single foret but maintain access financial services. they would like to choose which of the four freedoms they would like to implement. even the choice every e.u. country -- given the choice, every e.u. country would like to get rid of some of the four freedoms. the u.k. will end up with a hard brexit. they will have to come up with an interim agreement. cane is no chance the u.k.

negotiate or renegotiate its relationship with the e.u. and the rest of the world in the two years allotted by article 50, so they will come up with some kind of interim arrangement. there is talk of a customs union. that only covers goods, and most of the u.k. economy is services. it is likely the u.k. will follow the canadian trade deal model and add some services. all of that remains to be seen. it does not seem like the government has a better sense of that than i do. michael: megan greene, thank you very much. luigi zingales stays with us. we will be back with megan next friday, january 6. we are taking this show on the road to boston. tom keene putting on his snow boots, heading up to beantown. francine will be in london next friday, but tom and megan will join you from boston, on bloomberg. ♪

michael: let's get straight to our foreign exchange report. the big story of the morning, the flash move in the euro, 1.6% . i put that up to show you, not only has some of the gain held, but it has affected euro pairs

around the world. we are seeing the euro move against the japanese yen and the swiss franc. .t the bottom, the ruble the u.s. imposing sanctions on russia, russia imposing tit-for-tat sanctions on the u.s., the net result is the ruble weaker against the dollar today. francine: coming up shortly is "bloomberg date -- coming up shortly is "bloomberg daybreak: americas." magnus will be joining us to talk about geopolitical risk overall in 2017, and specifically about china and what it has in front of it. our other guest wrote a piece in "the wall street journal" about the lack of hispanics in the trump's cabinet. talk with him.

up. is what is coming happy new year. michael: have a new year to you, david westin. friend, i loved this column so much. i will show another. michael: she is obviously referring to the fact that nobody saw donald trump coming as president of the united states. when you see something like that happen, and the surprise we got with brexit, people pay you to tell them what is going to happen. it has to be tough to make any kind of productions about what kind of world we are going to see. luigi: it is even tougher the fact that the media in general seems to be less influential than they used to. -- it is not only that

they failed the fiction, it is the that the suggestion, criticisms do not seem to stick. donald trump was able to reach sometly to twitter, and at level i think the trashing of trump hurts trump because the media is so entrusted by the population that everybody goes after trump. trump gains popularity. the major reflection is, we need to think about how the world is going to be different in 2017 and how we need to be more in contact and more credible. francine: i am going to put you on the spot. what are the chances of marine le pen becoming the french president? luigi: i think they are not trivial.

i would say 30%. i do not think it is the most likely scenario, but it is a possible scenario. michael: luigi zingales, thank you for joining us today on "bloomberg daybreak "bloomberg surveillance -- on "bloomberg surveillance." coming up tuesday, a look at 2017, eurasia group's top risks. nouriel roubini of roubini global economics, and larry summers, former u.s. treasury secretary. you cannot miss that. this is bloomberg. ♪ .

>> welcome to bloomberg

daybreak. we made it to the end of 2016, happy new year. here is where we trade on a last trading day of the year, a mild rally in the s&p and dow futures with the dax off 1/10 of 1% and the footsie closing in 30 minutes up 3/10 of 1%. the ftse for the year up over 13%. in the fx market, a fascinating story with euro-dollar, bureau of 6/10 of 1%. , bothght, asian trading currency spiking 1.6%, calling it a flash rally on bloomberg daybreak. oil goes nowhere. david: spy vs. spy. president obama expels 35 russian diplomats for spying on the election. russia kick