francine: tightening up. potential candidates to head the fed suggest monetary policy would not be so lose if they are in charge. volatility continues as the offshore currency tumbles for a second day. a pboc advisor tells us that more efforts to stem capital outflows are unlikely. >> at the moment, things are stabilizing. they took some measures and the measures became effective, and i think the market started to respond.

from that point of view, i don't think they will go further on that. francine: sterling slides again as theresa may signals that regaining control of immigration and lawmaking are her brexit priorities, even if that means quitting europe's single market. this is "bloomberg surveillance ." i'm francine lacqua in london. happy monday. lots to talk about on the show today. joining us, mike bell, strategist at jpmorgan, and bloomberg gadfly columnist marcus ashworth. plus, as london struggles to get to work with the strike by public transit workers, we will focus on a more agreeable form of travel. the ceo of sun seeker international joins us to talk brexit, exports, and the future of the marine leisure industry. first thing's first. this is a picture overall for a lot of these european equities. the one piece of data we have,

it wasn't great, but gives us a little more of that buoyant german economy. german output climbing. economic strength in germany is standing firm once again. dollar strengthening. pound-dollar, 1.2882. the pound extending its declines from friday. offshore yuan, 6.8792, its biggest two-day drop since june. european shares pretty mixed. u.s. equity futures pointing higher. let's get to the bloomberg first word news. here's sebastian salek. sebastian: the chairman of ubs has warned that political risks are set to impact markets and the economy. what we're seeing around the globe is a large number of political uncertainties materializing. if you look at the united states, an outlook for a totally different china policy is a risk

for u.s.-chinese relationship, and for global economic relationships. i think what you are seeing is a bumpy road, and more risks than we are used to. that is going to shape markets and economics more than it has in the past. sebastian: senior republicans have warned donald trump that he faces a rift with his own party if he doesn't punish moscow for hacking the u.s. election campaign. in interview with nbc, senator lindsey graham said he and senator john mccain plan to introduce legislation for tougher sanctions against russia. he says the measures would hit the country in the financial and energy sectors. mcdonald's has agreed to sell operations in hong kong and china to a consortium in carlyle group. the deal which includes franchise rights will value the businesses at as much as $2.08 billion. the conglomerates would jointly

take a 52% stake while carlisle will hold 28%. the pound has weakened after theresa may signaled that regaining control of immigration and lawmaking are her brexit priorities, even if that means quitting europe's single market. may told sky news that leaving the european union will be about getting the right relationship, not keeping membership. u.k. foreign secretary boris johnson has met with some of donald trump's top advisers. sessions involved trump's chief strategist, steve bannon, and jared kushner. johnson then traveled to washington to visit congressional leaders. britain looks to build ties with the incoming administration. workers in london's financial center are facing a tougher than usual journey into work as thousands of underground workers strike after their unions rejected a last-minute offer to avert a walkout. transport for london has warned commuters to allow extra time to

travel. on peaked days, the two carries as many as 4.8 million passengers. global news 24 hours a day. i'm sebastian salek. this is bloomberg. francine: thank you so much. potential candidates to head the fed have suggested that monetary policy would be tighter if they were in charge. glenn hubbard from columbia and john taylor from stanford criticized the central bank for trying to do too much to have an economy struggling with problems that monetary policy can't solve. the three are seen as among the candidates should donald trump decide not to nominate janet yellen for another term. dallas fed president robert kaplan told bloomberg he supports raising rates this year. >> i think a higher fed funds rate in 2017 is going to be more appropriate. the thing we are going to be debating is the rate at which we should be removing accommodation. inhink the sep that came out

december gives you a sense of where we are, gives you a sense of my views, and i think we should be removing accommodation. i still think we can do it in a gradual and patient way. francine: let's bring in mike bell, global market strategist at jpmorgan, and bloomberg columnist arcus ashworth. thank you for joining us. all, i know you took like five automobiles, a couple of trains, to come here in the studio. thank you for joining us. fed policy, how much do we know about what donald trump wants? mike: i think it is unlikely that yellen is going to stay in place once her term ends. you could see a change leading perhaps slightly tighter monetary policy. i think even under yellen, you will see policy tighten quite meaningfully.

we think it is possible that you see further output to the dot rate with as much as four rises this year. francine: marcus, we talked about it last time you were here. people say, i want tighter policy. i remember when we heard it from donald trump. i was with the former chief of staff to george osborne. he was telling me that once you are in power, the last thing you want, no matter what you say, is tighter policy. marcus: i think donald trump may not want as much as he seems to think he does. everyone is expecting minimum two, more likely three, this year. i don't think the report was strong enough to suggest we've got one nailed on for march just yet, but we've got another decentpaleo report -- payroll report, then march becomes a certainty. any chance we've seen of any

weakness, yellen has always yanked the handbrake on. i don't think that is going to change. i don't think she's going to do another term, but i don't think she wants to anyway. of the three mentioned, i think kevin walsh is the more likely one. francine: what do we know about him? does an appointment by donald trump mean that the central bank is less independent? not necessarily. he's served before. he's a very intelligent young man. i think he's got some interesting things to say. he's one of many people who could possibly be. i think he's quite different in the way he looks at things. he obviously wants someone who is going to link in with the where policy, which is the economy needs to be led by, more than monetary policy. francine: mario, at every press

conference, at least 25 times, mentions the fact that we need more action from politicians. donald trump will and has said he wants to spend $1 trillion. even if he gets 15%, it is not in his hands. it is congress. what can the head of the federal reserve do? mike: nothing really. interesting what you said about draghi. in europe, arguably, some fiscal stimulus would be helpful. you've got a high output gap. yet it seems unlikely that you're going to get any meaningful fiscal stimulus in the eurozone. in the u.s., the output gap is very close. if anything, we're already at full employment. it is pretty unconventional to stimulate the economy with fiscal stimulus at this point in the cycle. you risk overheating the economy. marcus: with average hourly earnings running nearly a full percentage point above inflation, we may have a

situation where the fed gets forced into things which it doesn't want to do. francine: mike bell from j.p. morgan and bloomberg columnist marcus ashworth. let's get the bloomberg business flash. your sebastian salek. sebastian: the u.k. government is no longer the largest shareholder in lloyds banking group. it stake has fallen below 6%. blackrock is now the biggest shareholder. lloyds received a 20.5 billion pound bailout in the wake of the 2005 financial crisis. the fbi has arrested a former volkswagen executive who faces charges of conspiracy to do from the u.s. that is according to "the new york times. , who ledliver schmidt vw in the u.s., is expected to be arraigned today. the paper says vw, the fbi, and the doj declined to comment. donald trump is facing some pushback against his america

first policy. he's been putting pressure on the u.s. auto industry to stop making cars in mexico and bring jobs back home. general motors ceo mary barra says she won't change production plans simply because the president-elect since critical tweets. gm is shifting production to mexico from canada. you can see mary barra's first interview of the day from the north american international auto show at 1:40 p.m. u.k. time. that is the bloomberg business flash. francine: thank you so much. china's foreign currency reserves fell in november as the yuan posted its steepest annual slide in more than two decades. reserves decreased to a fresh five-year low. the state administration of foreign exchange said the pboc's effort to stabilize the yuan was the main reason for last year's drop. an advisor to the central bank told bloomberg that new efforts to stem capital outflows are likely. >> at the moment, things are

stabilizing. they took some measure and the measure become effective and i think the market has started to respond. from that point of view, i don't think they will go further on that. i don't believe they will totally drop the measure, drop the intervention. francine: the president of the china-led asia infrastructure investment bank told bloomberg that china can handle its issues and weighed in on the yuan. chinese debt basically is domestic debt. china does not have external debt at very high levels. it is easier to handle. solve somerowth can of these problems. chinese government would be able to address all these issues step-by-step. what is most important is to make sure that we in china will

go ahead, adhering to the fundamental issue of restructuring, and to address some of the structural issues. question of capital controls that we've seen rolled out, does it suggest that the imf was premature in including the u.n. in its sdr basket. >> in my view, chinese government would adhere to the principle, and keep chinese currency as a convertible currency. dealing with the hard money flowing in and out, some measures to address this issue, in my view, probably is necessary. things will stabilize very soon. some kind of panicking on the part of investors would

disappear. francine: let's get more with mike bell, global markets strategist at jpmorgan, and bloomberg gadfly columnist arcus ashworth. when you look at the new role of china, and we talked about this before -- we were talking about the trade wars, the possibility that the chinese economy is less stable because of regulation mishap. what worries you the most regarding china? mike: i think you are likely to see chinese growth slow a little bit this year. fixed asset investment has been slowing for some time. last year it was offset by an increase in public fixed asset investment. that won't provide the same sort of support you saw last year. if you look in the tier one housing market, prices have been going up fast. authorities want to bring that under control. that means that chinese growth will be lower this year than it was last year, but still probably comes in with a number

somewhere north of 6%. marcus, the problem is they have to contend with outflows. they are contending with a falling yuan, which they are trying to address, and they also have these reserves. it is not easy managing this massive economy. marcus: we saw the deputy governor come out and calm everybody down, which they needed to do. this time last year, they got it badly wrong. coming up to the chinese new year in a few weeks, they want to control the situation and not get out of control. it looked like it was getting a bit of a speculative one-way thing. they've made a big bang on the table and everyone has listened and now the messages through and they can let things calm down a bit. they are de-emphasizing the fx reserves, but clearly they are going to go below 3 trillion.

and idirection of travel think everyone is conscious of the outflows that they need to control. it looks like they are doing their best. they are looking at controlling things. something has to give. it will probably be the growth rate, a little lower than last year, but nothing too crazy. much onasis is not so -- [indiscernible] francine: should we worry more about growth? if you look at the direction of travel, is it the fact that growth will be below 6.5% or that they are trying to keep it stable? it doesn't matter if it grows at 5% or 6%? mike: i don't think it makes a huge difference. 6%,rowth comes in north of that is still adding a huge amount of nominal gdp to the economy. whenever you see some weakness in china, you get a lot of

headlines about how there's going to be a collapse because of all the concerns around the bad debt situation. growth in 2017 you see slow a little bit, but it is not a major cause of concern. francine: what happens if donald trump labels china a currency manipulator? mike: not a great deal. the bigger risk is if he puts some kind of tariff on china. if he labels them a currency manipulator, it starts discussions. obviously the big concern is that you get significant protectionist measures, which could trigger a trade war. that is really the big risk for this year. becauseit is unlikely of how that an impact it would have on global growth. francine: mike bell from j.p. morgan and bloomberg gadfly columnist mark as ashraf both stay with us. could the u.k. be heading for a harder brexit? this is bloomberg. ♪

francine: this is "bloomberg surveillance." bloodhound is trading below 1.22 against the dollar after the u.k. prime minister signaled regaining control of immigration would be prioritized over remaining in the single market. in her first televised interview of the new year, may told sky news that leaving the european union would be about getting the right relationship.

the u.k. foreign secretary, boris johnson, met with some of donald trump's top advisers over the weekend as the country looks to build ties with the incoming administration. mike bell from jpmorgan and bloomberg gadfly columnist marcus ashworth are both still with us. mike, what have we learned about brexit and the prime minister's plans? mike: don't think it is particularly new. she said at the conservative party conference that they were going to privatize immigration and not being som subject to the european court of justice. they are going to prioritize these things over single market membership. a lot of people were optimistic, saying surely they wouldn't do that. surely they realize that membership of the single market matters. apparently not. francine: maybe the markets have underestimated a little bit. theresa may gave a big speech at the party conference in october, september, where she laid out her vision.

because she criticized the bank of england, these global citizens, people thought, does she really mean it? do you take that as the basis of your brexit model? that speech? or do we need her to re-say it almost to legitimize it? mike: it looks to me like she means it, like we are heading for a hard brexit. they want to renegotiate a completely different trade deal. i think the best case outcome in that is that you get free trade in goods, but limits to trade in services, which has significant impacts on london. marcus,: and therefore, i guess we need to have a transitional deal, which we haven't heard about yet. marcus: we won't for a while. this is all in negotiating tactic. we've had some strong expressions from europe about 60 billion and we can't cherry pick -- what did you expect the

negotiations to do? reality of what the u.k.'s stance has to be. the single market doesn't work for what the government plans are. the european court of justice and controlling immigration are what is going to win an election. the main goal for the government is to remain in power. they have to do something which they think they can hold. we saw the mistake cameron made by trying to go with a half deal. clearly no quarter was given to him in europe. they are getting that message back from europe. in any negotiation, you have to be firm, then you negotiate from that point. -- we know it is supposed to be done by the end of march anyway. francine: does it have a significant impact on pound or is a lot of the hard brexit, as

we call it, priced in? and what does it mean for banks? mike: it is not good news for banks. some banks probably have to move staff out of london as a result of hard brexit unless they can pull off the most fantastic negotiation, which seems unlikely. in terms of the pound, you can probably see some further downside for sterling, but you have to take in mind the fact that the pound is already very weak. twohink we're already about standard deviations cheaper against the dollar. i wouldn't be surprised if you saw us heading down towards 1.15, but i think at that level it starts to look very cheap. what happens to the current account? it is the main concern, right, which we haven't talked about enough. mike: in time, you would expect a weaker currency to feed through into some improvement in the current account. effect get this j curve

am aware it initially hurts the account. that is what you're seeing at the moment. at first it is a negative impact, and in overtime you would expect it to benefit. the current account at the moment looks pretty shocking. with all the concerns around brexit, that is one of the key factors. francine: mike, thank you so much. mike bell from jpmorgan and bloomberg gadfly columnist market shot worth -- marcus ashworth. up next, we will talk brexit, manufacturing, and the future of the marine leisure industry with the head of sun seeker international. this is bloomberg. ♪

francine: let's get straight to the news. top >> the chairman said political risks are set to affect

economies. we talked exclusively to bloomberg. >> what we're seeing around the globe is a large number of political uncertainties materializing. if you look at the united states, it's a new policy and is a risk for chinese relationship and for global economic relationship. what you're seeing is a bumpy road and more political risks in the global economy than we used to in recent years. that will shape economics more than it has in the past. >> the republicans have warned president-elect donald trump he faces a risk with members of his own party if he doesn't punish moscow for hacking the u.s. election campaign. in an interview in "meet the press -- ened an john mccain plans to use legislation and it would hit the country in the financial and energy sectors where they're the weakest.

china's foreign currencies fell six months as the yuan posted the steepest klein in two decades. 3.01 trillion dollars was the lowest. and the foreign exchange said the efforts to stabilize the yuan was the main reason for the drop. an advisor to the central bank told bloomberg new efforts to stem outflows are unlikely. >> at the moment things are stabilizing, they took some measure and it measureed and the market is starting to respond. so from that point, i don't think they will go further on that. but i don't believe they will totally drop the measure, drop the intervention. >> mcdonald's has agreed to sell 80% of operations in china and hong kong to a consortium including the carlisle group.

including the rights and would value the business at $2.08 billion. the chinese backed conglomerates insist the partners will take a 52% stake and carlisle will hold 28%. workers in london's financial center are facing a tougher than usual journey into work. thousands of undergroundworkers strike after their unions shifted a effort to for a walkout. commuters are told to relax. and on peak days carrying 2.8 million passengers. lobe news powered by 2,600 journalists in several countries. francine: later today angela merkel will give her comments of 2017. the speech on the future of europe comes as germany, france and the netherlands prepare for crucial elections. let's get more from mike mcdonald and marcus ashworth. marcus, when you look at the

various selections, it's unclear whether now we're overcompensating because the markets got trump wrong, because the markets got brexit wrong by talking too much about this populist movement? mark just: no, i think there is more to come on that. it's a two horserace in the french election which is probably the most important one. and it's been national this weekend for claiming to have invented the internet and things like that, so we're far from a certainty there. i think as we get closer to the actual elections, you know, there will be nerves. and the current thinking is it is highly unlikely she can get through france as they rally around a more central candidate and is still the likelihood and we'll get volatility for that. the dutch election coming up will be an interesting one. t the most popular party

won't be able to rule. so of course if things go badly as they have done recently, towards the end of the year we have a potential upset. but we shall see. there's a lot more to go on in these elections. francine: is the market focusing on the wrong things? yet nothing is priced in. you have such bad unemployment figures in these countries, i'm thinking of france and italy and greece. unless we find sustain able development path for these economies, something ugly at some point will happen. mike: it matters more is the change in unemployment rate. what we see is in many economies, the unemployment rate is continuing to fall and it actually started to follow the slightly faster pace as well. that's actually a positive and there's support for the european equities and the

political back drops, certainly there are risks but they're relatively small risks and certainly high impact risks but the probability of any of the populist eanlt euro parties coming to power this year, i think it's pretty small. francine: what are we mispricing. you're a market strategist. again, a lot of the bad news that won't come to fruition priced in or still to be priced in? mike: i think the market tries to weigh things and are assigning relatively low but nevertheless a probability you get some kind of political negative outcome in europe this year. obviously if that doesn't happen, as that probability goes from a relatively low number to a zero, you expect there to be further upside for the euro and for european equities. the fact the euro would likely go up means that probably that limits quite how far european equities benefit as a result of that removal of political risk pricing but nevertheless should be supportive for european

equities if you don't get the foreign national winning in france and don't get anti-euro parties winning in the netherlands and germany. and i think any of those outcomes seem pretty unlikely. francine: marcus and mike, thanks so much. you both stay with us. we're getting a little breaking news on pound. we saw a pound weakness as the u.k. minister commented to a network saying that actually she wants to curb immigration almost at any cost. that will lose angs to the single market. this is euro pound, 0.8766. you see definitely a little bit of pound weakness. i want to bring you to the bloomberg terminal. there was a little support if you look at the trend. this may signify an event. following 0.9% against the

dollar to 1.74. stay with "surveillance." plenty coming up. we'll speak to eric neel send. and after 40 years of division, could europe see a solution to be a divided island of cyprus. we'll preview this week's crucial talks. this is bloomberg. for more, tune in to radio's coverage, of course, of what we have seen and what we will continue to see. that's daybreak europe live on london this is bloomberg.

marc: let's look at the ftse, the 10-day performance, longest winning streak since may of 2013. eight of those gains have seen record closes since brexit. the game has rich by 1%, helped of course by sterling side. the steep yield curve is helping banks, and inflationary policies are helping. crude are you surgence is lifting oil companies. what a rally it's been. in dollar terms it's down by 6%. haven't forgotten that. look at sterling today, 121.45. the level to watch is 121.23. that was the october 1985 low prime minister teresa may signaling in that interview yesterday the maintaining control of immigration and law making of brexit priorities even if it means quitting the european single market. she said sunday leaving the e.u. will be about getting the right relationship, not about

keeping bits of membership. she seems willing to gamble britain's trading relationship with its biggest market in return for greater sovereignty. i.n.g. sees sterling pressing 1.21 this week as the u.k. government struggles to distance itself from the hard brexit. 1.2123 is the key level to watch today. lloyd's banking group. look at that. this is the chart going back to 2007. for the first time since its bailout by the government eight years ago, 20.3 billion pound bailout. the biggest shareholder is no longer the u.k. government. the government today cutting the stake to 5.9%. black rock has 6.3% stake. this is one step further to selling lloyd's, the entire stake. of course the government owns 70% of r.b.s. taxpayers now received 18 billion pound of their

investment back in lloyd's and finishing with the offshore yuan which is the yellow line versus the foreign exchange rate. the volatile tip this is week and last week. the offshore currency tumbling for a second day. china central bank weakening the fixing by the most since june. the offshore yuan is set to post a daily move of .5% or more in four of the six trading days so far this year. that's the magnitude it only surpassed 11 times in all of 2016. focus, francine, still on china today. francine: thanks so much, marc barton. we're getting a breg news on s&p on the report out of the euro zone. they expect the euro zone inflation to peak in the first quarter of 2017 at about 1.5% and also talking about the e.c. . they're expecting the e.c.b. to stay bullish for a long time. they're not putting a time line but saying a long time.

they're saying the e.c.b. is likely to remape but not tunnel 2018 and expecting them to stay down until 2018. there was a market tantrum from dragic which he was changing the quantity but actually length neng the time to buy for. the rest of the highlights for the week ahead. we begin today on unifying cyprus which has been divided since a turkish invasion in 1974. tomorrow barack obama delivers a farewell speech in chicago and the next day the president-elect donald trump is set to hold a news conference in new york city. on thursday we'll hear from janet yellen and several fed presidents at several event across the day. on friday, results from jp morgan, bank of america and wells fargo mark the start of wall street earning season. let's get final thoughts from the asset management columnist marcus ashworth. mike, when you look at the we talked in 2017

about the fed and politics but trump's tweets. the market wins or loses because of policy. 2017 might get more volatile a lot of these talks. mike: the biggest risk out of the trump administration is protectionist measures. if you see some kind of tariffs put on for imports for the u.s. then that's a serious risk to the global economy. how likely is it? we'll have to wait and see. certainly it's a new risk for eople to contend with. we'll see how it impacts stocks. you can look at u.s. equities but for individual stocks, you certainly are seeing them react. francine: what do you make overall, donald trump has promised two or three things like teresa may, we heard from him but see whether it's policy. the one thing we need to look

out for is it he has the support of congress to make sure he can get through infrastructure spending, tax repate reation seems more easy to deal with. marcus: he gets easy, low hanging fruit by putting out a few tweets and scaring people. people are falling remarkably into line across the board on things. he's having it very easy at the moment. when it comes to actually having to do something and you said getting it through to congress. you'll see him make bigger strategic moves but not going for a fight which he can't win. i think that's where we have to focus on. the trump administration is going to do some broad-brush stuff and we're talking about infrastructure, a lot of the stuff he'll be doing is encouraging private equity moneys in not necessarily big government spending. he won't get that through congress. in essence a lot of what he talks about and the reality is are big diversions. some of the things he'll do but

forcing people into line is where he uses the power of the presidency i think quite skillfully for his own agenda. the question really is at some point he'll have to put definitive things down and that's when we'll see the real lessons of what we're looking forward to. francine: when you look at what he actually can do, if the u.s. economy, which let's not forget is on a better trend, so the path for growth is up. unemployment, we're nearing full employment. if he replates the u.s. economy, does that help the rest of the world because of the diverge united states -- divergence play or does it put more at risk the protectionist starts of the u.s.? mike: i think it favors the u.s. but puts the rest of the world under pressure. you're likely to see u.s. growth pick up. you see low unemployment and confidence. if the u.s. economy starts to overheat and the fed puts rates up swiftly, you'll see potentially dollar strength and

higher treasury yields and higher funding costs feeding into other market. so we think it favors the u.s. in equities but has potential risk for markets outside the u.s. francine: emerging markets? mike: they're the clear candidates which struggle in a stronger dollar but if you see yields rising, then that can be problematic to emerging markets as well. it's not to say that they're in as much danger as they were, say, in 2013 when you saw a temper tantrum because currencies adjusted a lot and the fragile five current deficits were better than they were and the federal reserve not too bad. nevertheless the e. d. stand out where you could see risk in trusm from the u.s. reacceleration. francine: what's your top three plays? mike: we like u.s. equities and inancials we think the oil

prices move higher and better oil prices feed into better performance for energy producing stocks as well. outside of that, if the dollar continues to strengthen against the yen, that's supportive for japanese equities. on a japanese basis we like equities as well. francine: thank you very much. global market strategist at marcus ashworth. up next, could you get exporters heading for choppy waters. we'll talk brexit, manufacturing and the future of the high end marine luxury industry with the yachtmaker sun based international. this is bloomberg. ♪

welcome back. sebastian: lloyd banking group, he sells have sold off and lloyd's received $25.billion bail out in the wake of the 2008 crisis.

the f.b.i. has arrested a former volkswagen executive who faces fraud. according to the "new york times" citing two people with knowledge of the arrest and aid oliver schmidt to led in 2014 to march 2015 is expected to be arraigned today. the paper said the d.a.j. declined to comment? and schmidt's lawyers did not respond to requests for comment. donald trump is facing pushback against his america first policy and has been putting pressure on the u.s. stock making cars in mexico and bringing jobs back home. however, mary berra won't change plans because the president-elect sends critical tweets. g.m. is shifting production of the s.u.v. from mexico to canada. and you can see mary's first interview of the day from the international auto show at 1:40 p.m. u.k. time. that's a bloomberg business

flash. francine? francine: let's talk brexit and the future of the u.k. manufacturing. earlier on bloomberg, we caught up with the c.e.o. of rolls royce motor cars and we see how exports are holding up. >> we've seen a tremendous year in the united states this year and seen a little bit of slow own. now things have cleared, let's wait and see and i'm quietly confident for a strong market and year in the united states. >> a couple other numbers that stood out is japan up 50%. the u.k. up 26%, in china, 23%. the question is how sustainable is that? >> i would say it's sustainable because it's pure demand and individuals buying luxury goods and rolls royces and particularly the home market and the u.k. has been tremendous and 25% in britain. britts love rolls royce and for

sure i'm satisfied in coming back to your point, it's sustainable. >> you're a u.k. brand, you're owned by a german company, b.m.w. what are the conversations? what's top of your concern about the brexit risk and the prime minister on sky yesterday saying she's ready to take us out of the e.u. to keep control of the borders. the conversations you're having, what are they focusing on? >> our conversation is very clear. we are interested, first of all, let me get clear regulations on certainties, always not good for the business but number two, we are and i'm personally convinced we need to have excellent trade relations with our countries. 90% of all rolls royces being built are all exported worldwide. what i'm interested in is we stay as the u.k. in a customs union, something like that, which allows free flow of goods, free flow of capital and free flow of talent is also very important for us. francine: let's get more with

mike bell and marcus ashworth. mike, i don't know when, we talked about manufacturing in the u.k. and the pound fall, what's being mispriced in the market? we talked about your top picks but is there anything that screams of bubbles? mike: i think some of the growth stocks, particularly the sort of expensive defensive stocks the way you've seen consistent dividend growth. the people have been buying bond proxies and some of those stocks look pretty expensive. if you think yields will move higher, then you can see the value stocks outperforming those expensive defensive stocks. francine: what about treasuries? mike: they still look a bit expensive and former upside for the u.s. treasury yield and they can move up to around 3% by the end of the year. francine: overall we saw a huge rotation from bonds and stocks, will that continue next year or is it too early to say? marcus: almost special, i wouldn't call it the great

rotation but will be a trend which increases steadily. it's just simply i think the bond market is coming to or has come to a point whereby the natural journey is to go higher on yield and we will see, i think, quite a significant move higher. but over a period of time. and unless there's a major shock and the wheels fall off and all of a sudden we revert back to the ice age scenario but for the moment i think the natural route for bond yields is higher and agree on what mike is saying on equities. francine: thank you so much to you both. up next, bloomberg surveillance continues. ♪

angela merkel will give her first comments on the election year. this as the german economy continues a performance with resilient manufacturing data this morning. good morning, this is bloomberg surveillance. this is what everyone is striking. tom is in london. the tube is shut down. and it isn't just the inner city. it is a whole thing. francine: i have had a couple of comments from the french saying it is unacceptable.

tom: is it a one-day strike? francine: it is a one-day strike. reasonto do with two may. let's get straight to the first word news. >> i will start the news in london. theresa may is signaling that beginning control is her priority for brexit. she suggested she is willing to gamble her trading relationship with the biggest market in return for greater . an update on what you just talking about. commuting is a nightmare today in london. thousands of staff are staging a 24-hour strike over contract dispute. rejected a last-minute offer and the subway system warns that it will be severely

reduced. back in the u.s., top public and's are warning donald trump that he could face a risk with members of his party unless he is tough for. john mccain will push for sanctions against russia for hacking. them in thehit financial and energy sector. are's just as monetary policy would be tighter of they were in charge. taylor and kevin worse criticize the fed for trying to do too much to help the economy. possibilitiesas if he decides not to nominate janet yellen for another term. global news, 24 hours a day. powered by our more than 2600 journalists and analysts, in more than 120 countries. >> let's look at equities and

bonds. this is where futures are. curve is flattening. it closed out on friday and trading this morning is at 11.91. anything below 12 shows the furthering of the market. was saying he would not come on until there 20,000 but we expect him on this morning. i noticed that the turkish lira has a life of its own. week, week, week. my favorite word of the day. fervor. as youseeing fervor looked at currencies. -- the shares

showed the equity futures. going higher. >> this is sterling. will be briefed on this by mr. kennedy here in a moment. think is important is this was happening before brexit. june 23, 11 link out. we simply went back to the trident that we saw in the summer of two years ago. something thatis has been broken down in the analysis. >> this is what i have. guess you were doing the pound. so i wanted to see the spread. we do have a little bit of movement. the worst start since 2013 which

means that it is pushing levels to -- back to levels seen when they had all of the temper tantrum because they were shortening the amount they were buying but lengthening the timeline? i would note is that german inflation is also spiking, as well. francine: so let's go backs to brexit. theresa may talking about regaining control of immigration. in her first televised interview of the year, theresa may talked leaving the union will be about getting the right relationship. meanwhile, boris johnson met with donald trump top advisers over the weekend as the company looks to build ties with the incoming administration. we aree on all of this

joined by simon kennedy. thank you for coming on. theresa may did a speech back in october. immigration was the number one concern and we had a blueprint. and then the markets questioned whether this was the real blueprint because she also criticized it. that speech? to and try and understand what she wants? simon: it was pointed out that 2016 was about hard or soft brexit, and now we see that trade will be the second tier behind immigration and will making. and what we need to discuss now is how orderly brexit will be. theresa may has a speech coming up this month which might give us more clarity. she goes ont

television and she does a speech and says she will try to get the her red linesbut are immigration and lawmaking. she repeatedly says that and it repeatedly wakes up the market. francine: if you are a ceo of a big company or a small company, you need someone in between as a negotiator. will we have it? simon: there is a remarkable amount of leverage contained in the transition there. so let's look at the european view of it. thelonger they take for transitional deal, the more power they have over the british in that if it is not together, the banks have been gone and there is some leverage that the europeans have over the british. on the flipside, the british will make the point that europe really wants to choke on its access to britain, they may want to do a transitional deal sooner. so everything is about leverage.

we don't know. tom: your team has done fabless -- has done a fabulous coverage of brexit. it is doom and gloom out there. at what level of sterling does the gloom kick in? do you have in your head a 118 or 115 when sterling begins to spell out doom? simon: that is a good indicator of how the markets feel about exit. it goes down when the single market is threatened and it goes up when they get a sense of security. this week about how perhaps the pound is oversold given the state of the economy. saying the economy has done a lot better than what people thought. tom: do you have a level in your head? simon: if i did, i would be a

rich man. tom: you're not? [laughter] tom: when i look at how this has morphed, where will you be in three months or six months out? simon: in three months time, hopefully we have some clarity and a plan. and if couple of weeks he may have transparency for the supreme court and knowledge about article 50. so in three months time, and theresa may will have triggered the brexit and will have outlined a plan. so we know what theresa may wants but we don't know what europe wants. temporary --e some tom: did you cover kate middleton's birthday?

simon: i didn't, was it good? tom: i don't know. i was going to go. but i got snowed in. [laughter] francine: does this mean that there has to be a clause attached to negotiating? simon: let's assume that they do -- i will give you a pound forecast. if the supreme court comes out and says that parliament has the power, you can see a lift up on that. that is the assumption that theresa may will not have it her own way. brexit talk hard will be softened. aremost of the labour party looking to take some of the edge off. but what you can expect from theresa may and the government short pushing that through in the hope that there won't be multiple amendments and it will be delayed.

tom cole and simon kennedy, i hope you are with us every day this week. terrific, alan's perspective. -- wen in the telegraph will talk about what we are seeing from the prime minister and with johnson visiting the trump in new york. this is bloomberg. ♪

francine: we're looking at the market moves. my card.ught i brought my oyster card to save money. francine: you can't use it today.

so a lot of viewers and people living in london, it is a nightmare getting around. erik nielsen took two hours to get from west london to hear. this too strike will cost 50 million pounds of revenue. we will get more on the strike later but let's get first to the bloomberg business flash. taylor: mcdonald's has agreed to sell control of its china business to a consortium that .ncludes a chinese conglomerate this is the biggest yield aledo at more than $2 billion. they are revamping the ownership structure in asia in an attempt to streamline operations. and a strong finish to the year. itput was bolstered construction and manufacturing. meanwhile, german energy production fell. and that is the business flash.

francine: the market will get a sample of overseas demand with the option. this now mounts on the feds pass. janet yellen suggested that monetary policy would be tighter if they were in control. joining us now, making it from west london, erik nielsen. thank you for raising the tube strike. markets, dok at the you worry about who will replace janet yellen? or are we trying to move too quickly? erik: it was a very interesting piece of news that he got out yesterday. i was surprised that these candidates would come out so clearly to be behind the curve. we have two primers. donald trump can oversee two people to the chair.

so he wants the guy who wants low rates or lower monetary policy. francine: what is the one thing that markets are getting wrong? i remember talking with the former chief of staff of george osborne. if you are in charge, you don't want higher rate. you can say you do but it makes your job more difficult? typically, you look at donald trump and think that this guy is a low rate guy. he has called himself the king of debt. the key people, i was stunned. people for years the been dying to get the fed drop and now they say the fed is behind the curve? sizes that there is something going on in his circle that we haven't really grasped yet about the complexity of how he thinks of monetary policy. tom: i want to talk about your optimism. europe is actually doing pretty well.

how do you look at this good economic data and your optimism with all the different gloom and worry out there about europe? erik: a very good question. you saw the new german numbers which are very strong. it is almost like the world -- and the question is whether politics are going to be rated. this is a policy measure that changes the victim. tom: this is a negative rate chart. the white line is the u.s. treasury. and if yellow line is the german tenure. the negative rates are becoming positive rates. can you say all clear on the rate divergence? will this be a story from last year?

i would be very surprised if you come back into negative territory. first of all, here is the white line. out, theinted europeans are looking pretty good now. and the ecb has started to indicate tapering. tom: these charts are out for the first time with evan newman. they can grab the charts and copy them right over to the terminal. never before has this in a loud. i would have done that with a different red color. but that is the negative charge. francine: we need to talk about the pound. i know that we talk a lot about exit and tweet a lot about exit. but what did you learn from theresa may? it seems she is saying the same

thing she did in october which is that you once the curve immigration. that is the starting point. but the markets don't see it that way? erik: that's right. grow toave started to the idea that you can get a mixed bag of things and i think what we learn from her is no. the thoughts and the process, it is modeled. when she says it is not modeled, it is like trump saying "i'm smart. it is easy to say that you need other people to say it. the second thing is that it that itmost certain now will be a hard brexit and the market doesn't like that. and we can see it. i think this is a political crisis booming here for sure. francine: we will be back with erik nielsen coming up on "bloomberg surveillance."

brexit.talk more on this is bloomberg. ♪

francine: this is "bloomberg surveillance." is in london but we are showing you these pictures because -- tom: snow. therene: lets her member are a lot of people sleeping rough out there. we need to keep them in our thoughts.

distinguish the winners and losers by the sector there in or existing skills but that does not mean we should do away with experts. that the written defense is that the answers are not to be found in the old familiar places. now what she is writing about is the future. that is stephanie landers. we are back with erik nielsen. the concern is that a lot of people think they need to rethink their relationship with europe and europe needs to rethink the relationship with institutions. an idea that is the reset. no simpleuse there is answer. i read a fantastic article over the weekend that was called the flight 93. this is the flight that the passengers took down. let's just do anything to change course. you end up doing something that

kills you anyway. it is a scary thought. an easy idea to say that we have to change but to what? tom: will you change? will you write your sunday night memo from paris? last week was the big theme of moving to paris. erik: no, no, we not moving to paris. i would like to do it from france. another thing that is talked about is that he can see the pickup in sentiment in france now and i think it may have to do with the election. so you can see a pickup in the housing market. and the indicators looked pretty ok. tom: where is your level of inflation in france or germany? erik: the one thing i worry about are the oil prices and the

consumer prices. but overall, everything is ok. the headline numbers are still such that people have an increase in real income and that is supported. francine: yes, 1.5%. we will be back with erik nielsen coming up. we also will continue our coverage of 2017. we talk with mujtaba rahman. we also will talk about pricing markets and what should be priced in. this is bloomberg. ♪

tom: there is snow in istanbul. there was snow in new york city. but today it is just cold. 80 with the prime

minister of london being welcomed today. good morning. we are on the road here for being in london and then francine and i will go to switzerland. international politics with north korea, here is taylor riggs. exchanging mornings over a potential intercontinental ballistic missiles pass. they say of north korea shoes anything that threatens the u.s. or its allies will be shot down. in israel, the prime minister says the palestinian truck driver who killed four soldiers was an islamic state supporters. the driver rammed the vehicle into a crowd of soldiers in jerusalem. he was killed by other soldiers.

an update on the fort lauderdale shooting. newly released video appears to show the suspect walking through the fort lauderdale airport and opening fire with a pistol. tmz posted the video on its website. his first court hearing is today. meryl streep denounced donald trump as a bully who disrespect others. she made the comments while being honored at the golden globe awards. meryl streep: when the person asking to sit in the most respected seat in our country imitated a disabled reporter, someone he outranked in privilege, power and the capacity to fight back. it kind of broke my heart. taylor: trump told the new york times he has come under attack from "liberal movie people."

global news, 24 hours a day. powered by our more than 2600 journalists and analysts, in more than 120 countries. am taylor raikes. this is bloomberg. are we tv people? tvncine: are we liberal people? we could be liberal. tom: tv people. francine: it is time to wrap up the weekly coverage of the eurasia group coverage. merkel gave a speech today. her first policy, the head of this year's election. at the end of 2016, she warned -- and joining us now is mij rahman and we still have erik nielsen. thank you both for being on. when you look at the risks to angela merkel, and if she gets weakened a little bit more, what does it mean for europe holding together? we go back to crisis after

crisis. three years now, are we going to have the best number? mij: there is no question that angela merkel is going to win, the best question is what is the leadership on the other side? we got about the electoral calendar. greecee france, italy, -- the interesting thing is that these elections also have substantial negotiations that are not getting resolved. deal, brexit, the future of europe. a very challenging calendar. and i don't think angela merkel is going to be in a position to address those challenges in an effective way. francine: what is that one thing that we are underestimating? there is very little chance of power. what if she were to be in power? pen?marine le

her own policy platform speaks about a parallel currency. if she were to win, that might 90 program. an es m that is unlikely. the things she stands for spooks investors. outside two there standard deviations, that is a big deal. two standard deviations, that is a big deal. this is from the telegraph with a terrific essay on inflation. i try to go further. this is germany inflation might as a italian inflation. and all i know is that this is a cyclical chart and we have broken out with a vengeance. to new higher inflation. when we talk about international economics, this is about domestic politics. and angela merkel is facing a new inflation? mij: correct.

the new question is what the new macro economics look like. increasing inflation in germany, what does it do to the ecb? tom: but to a homeowner in neurotic, it is about a bubble here or a bubble there? the unhappy people are the young people who increasingly see it is difficult to get into the market. so they have tried to stem the bubbles. whether that is effective or not remains to be seen. they are less worried about the basic differences. and there is a limit to how far this chart will go. tom: francine, this is a huge deal. francine: leaving divergence, we economic expert -- what i want to ask you,

consumers are getting richer and people are starting to feel better. but what do i look forward to in the next 12 months? erik: increased employment. lots of things, actually. this is almost certainly part of the cycle and things are getting better. job creation. people are coming back into the .abor market a real income is going up. still have a reasonable cohesion in terms of income retribution which we haven't seen in the u.k. or the u.s.. so what you see now is the recovery. 18 euro zone is running months-two years behind the u.s. and it is now coming along. germany is leading it. we talk about italy which is also picking up close to 1% but that is not enough. beforestion that you ask , what does it look like -- what

does it look like when the ecb stops? francine: and we have to remember there is news on employment in france. after 45% in certain cases. the incremental improvements in growth need to be offset. markets are paralyzed. look at italy and greece. a terrorism situation with elections and incumbents and others contesting the elections. nobody capable of offering c solutions. incrementalet growth. tom: where is the leadership after angela merkel? on to make europe cohesive? mij: there is no easy answer to that. tom: ian bremmer?

[laughter] mij: good luck with that. we do have a problem in the eu. everybody thinks this is a problem. now angela merkel is a week. erik: but she is not week. she is weakened. mij: they have a fantastic leader right now. there are a pro, two leader. make no mistake. could be many people. and i don't avoid will be. it isn'tsaying is that like italy or france or the netherlands or the u.k. -- there are not serious politicians routinely around. it doesn't exist in germany. but you do have a

situation where they would want to kick grease out? or trying just to get solutions to the structural problems. italian banks -- we are sorting ourselves out. the point is with leaders in theany, generally speaking, democrats are green. but these are more likely to go to greece. a shift to the right is not likely. francine: we will be back. , we also speak with helena kennedy. talking about curbing immigration being her priority. this is bloomberg. ♪

francine: tom keene is in london for the week. which means there will be a lot of spending. will beans there downward pressure on the pound. i'm just kidding. it is all about theresa may. tom: i did bring in a suitcase. toncine: let's get back geopolitics. cyprus has been divided since 1974. could jeth president in later for the week. by the british prime minister on a spending deal. we're back with mij rahman and erik nielsen. let's go back to greece. mentioning about the fact that

if someone, angela merkel who is seen as the grown-up in the room, she has kept the door open to all possibilities. if someone else comes, what does that mean for greece? does greece go back to square one? the ims cannot agree. and until they agree, their solution is simply to ask a greece to implement more austerity. they reachedoint, the limit. i think we're probably looking at a drift scenario for the end of the year when they will brush up against the repayments. they need more money to pay the ecb and it will take about six months to come to that agreement. francine: what is the biggest risk? pen comes into power, is there reform for restructure?

do we need impetus like that? [laughter] i couldn't help myself. mij: donald trump has talked about the euro in competitive terms. he has talked about the eu unraveling. he is not an ally. he doesn't want the ims involved in financing greece. francine: erik nielsen disagrees, obviously. for what is the to do list the adults in the room in greece? it is festered. getting down the debt -- we are not there yet. i think you have to get through the german elections. and then you do it as a contention deal.

this is already been written down to a large extent. but it has to be cleaned up and we will have it soon enough. back to theto go opening comments. i was in one of the best greek restaurants and the owner went nuts over cyprus and this tension. on, we have been doing this since 1974. is this the same old, same old? is there new territory? mij: it is no longer about the greek leaders or the turkish supreme leaders. on -- the big problem is that -- tom: what does he need in cyprus? mij: he needs a continued role for turkey inside the guaranteed

framework. and it will have to accept that cut on the debt that it is expect to. and in order to do that, they want to contribute to rollover the security frame. and is that acceptable to greece? i think not. francine: and they are sitting on so much natural gas. $50 billion of offshore gas which means that europe would be reliant on russian gas. so do we need a solution in cyprus to make sure that the winter months are more secure? itk: i don't think we need for that. i think we need a deal because it has been lingering for so many years. and it was one of those weird when the cyprus return to the eu, we saw the territory.

and i think what you said is exactly right. the issue is that the democrats have a domestic agenda. about. what the issue is tom: here is the turkish lira. bring this up, please. this is the turkish lira. long quadratic. there is an acceleration of weakness in the turkish lira. there is a point when the markets start telling the markets what to do. are we there? is a slave to the currency and the international reaction? mij: i thought that when he said he would extend the state of emergency but he has done that two times now. six months ago in the aftermath of the failed coup. there hasn't been that much of a violent reaction. you do see continued --

tom: look at the chart. did i do ok? erik: i think it'd very well. this is an a plus chart. what this tells you is that you can pop out the account on this one. thatears, they have said it would happen and it is happening, along the way. is that as they talk about foreigners and the market being bad, that is because he doesn't like it. the central bank is deciding not to vote on inflation -- erik: because they have become political. they are not growing as fast as they should be growing. tom: we will come back. francine: mij rahman, thank you so much. we will come back with erik nielsen. this is bloomberg.

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tom: [laughter]

francine: i don't know if we can keep a straight face. we are going to switzerland. posting reserve -- the steepest annual slide in more than two decades. this decreased to a five-year low. bloomberg was told that capital outflows are unlikely. >> at the moment, things are stabilizing. and thek the measure measure became effective and i think the market has started to respond. will go't think they further on that. i don't believe they will totally dropped the measure. totally dropped the intervention. francine: we're back with erik

nielsen. they have the reserve problem with the outflow increasing. and commodities are going lower. what do they think? they cannot do all three at once. they have a serious issue on the housing side and the credit bubble. they need to be able to sort this out. they need to have money on shore. the problem is that if the currency starts to depreciate at , it is a dilemma. francine: what is the easiest way of getting around it? to stabilize? erik: that is the problem. you cannot solve it all. the first priority here is to keep the money on shore. so keep control of the money. tom: i agree with that. and what i find interesting is

how we use other experiences with the imf or michael moussa or others, do they have a framework now where it can assist them to stability? or is this such a unique architecture in china that there is no stability? erik: the architecture is unique. tom: it still works in china. erik: i'm sure it does. , the creditamentals growth and credit debt in china, i have never, in my 30 years of i have neveromist, -- tom: how do the clear that credit growth? you have to accept lower growth in gdp for a while. it for percent or 5% gdp? is the problem.

i would see that because of the it isaphics of china, it going to 5% anyway. it is close to zero. tom: within that scenario, critical to donald trump, the deflation,export which impacts the united states and everyone else as well? they will get deflation from china, right? yes. the priority is to keep the money on shore. if you are a u.s. company, do you look at your supply chain in case there is a trade war or trade tariff? absolutely. if i ran a company in america, particularly one that deals with

china or mexico, i would be worried about my supply chain. francine: all right. tom: erik nielsen, thank you so much. there is a tube strike. francine: london is paralyzed. tom: we make light of it but it is inconvenient for all sorts of people. it is only for 24 hours. francine: right. this is huge because it could cost them 50 million pounds tomorrow. tom: coming up on "bloomberg surveillance," we will look at some divergences and disparities across the atlantic. this is bloomberg. ♪

tom: this morning, the pound sterling and turkish lira are .eakening

it is transatlantic sliding in this hour. we will have alberto gallo. and all the waiters bartenders in london, do they go back to where they came from? the procedural complaints begin. the president-elect and republicans, they are the majority. good morning, this is "bloomberg surveillance." we are live from london. we begin to weeks on the road. london and on to dov vos, switzerland. it is all about trump. francine: he gets inaugurated, 11 days away from that. we are also getting significant speeches and significant inquiries from theresa may. leads for thenson president-elect and his staff today. where do they want him to do?

francine: they want a better deal. , song they may lose out they too look to the u.s. and say, give me a good deal. tom: alberto gallo will be with us in our. here is taylor breaks. taylor: since you are in london, we will talk about the strike. traffic is a nightmare. commuters had to find other ways to get to work after thousands of underground workers went on strike. the union rejected a last-minute offer. services are severely reduced. the london underground carries 4.8 million passengers each day. aeresa may is signaling regaining of control in immigration and lawmaking are her priorities for brexit. she's adjusted she is willing to gamble britain's trading relationship with the biggest market in return for greater

sovereignty. she says she still was the best deal possible for british companies. top republicans are warning faces arump that he risk within members of his own party over russia. senator lindsey graham says he and down mccain will push for sanctions against russia for hacking the campaign. lindsey graham wants to hit russia in the financial and energy sectors. potential candidates to have the federal reserve next year to just that monetary policy would be tighter if they were in charge. they'll weekend criticize the fed for trying to do too much to help the economy. queen elizabeth has made her first public appearance in several weeks. missed the monarch christmas day service for the first time in decades because of what the buckingham palace

called "a heavy cold." she is 90 years old. global news, 24 hours a day. powered by our more than 2600 journalists and analysts, in more than 120 countries. this is bloomberg. tom: thank you. seriously, i detect a completely different tone of the media to the royal family on this visit. people are really concerned cold and thetest aging queen. francine: let's not speculate. notthe fact that she missed one or two lessing's over the last few weeks means that people are bit more subdued and they are worried about her health. the buckingham palace says it is a cold but a bad cold. she needs time to get over it because she is 90 years old. but she was seen in public. tom: let's do a day to check. commodities. stirling is front and center.

i mentioned the turkish lira. futures are negative one. oil is churning. next chart. .ood equity market there is sterling, weaker. nielsen noted the abruptness of this over the last 4-5 days. francine: he loved your chart. he called it the chart of the month. the poundng this extending the decline since friday. theresa may said that what she knows right now is that she wants to curb immigration. a big is due to a drop since june. european chairs did get a little bit down but overall, they're better. tom: but no breakout of resistance to the weaker you on right now. let's get squared away with the sterling.

this is tangible. breaks it, the blue circle. what is important here is that sterling weakness comes from before june 23. it was already weakening. and that is the red line and down we go. islondon radio, this something you know well. a weaker sterling chart. francine: this is the spread between the u.s. and german two-year. it shows the divergence and the story is with the u.s. and also, it is with germany. the german two-year bonds heading for the worst start. tom: this goes back 15 years. francine: that's right. yields are back to the level of december 8. since keep an eye on that and what trump will do, going forward. tom: to the perspective from all of the challenges.

gallo. is alberto what is the trade of the moment, right now? forget about the international mumbo-jumbo. i need to make money this morning. how do i make money? alberto: the year started really well. we are in total euphoria. we need to be careful about the next month. and credit spreads. high-yield wants, 10 year lows. so there is a lot of positive news priced into the market. but what we can see in the coming months is some more risk coming back because of the french elections. the brexit plan which is not there. trump believing a little bit less than he has told people. tom: when you walk in and the morning, what is the thing you look at in the european market? leaf, if you will?

which spread is it? europe, financials are still the tea leaves. of skepticism around banks and it is linked to politics. so that is in france. of there have been a lot shorts. that is one area in the market where investors have not been buying. both inequities and credit. so it some point we could see a capitalization there. but we haven't seen it yet. so that will be the last capitalization. francine: what will be the catalyst for that? alberto: steeper yields. the ecb wants a steeper yield curve. they care more about profit. and potentially, we could have a good result with no more excuse to buy from europe.

that.could have .ut the market is euphoric francine: are you expecting a correction? in the u.s., a correction could come. stocks are very expensive. in europe, there is still some room to rally, both stocks for financials and for credit. bonds and government bonds in the u.s. and europe and particularly, in the u.k., they are a big cell. so we need to see the bond bubble burst effect. are most of the market. are 1.3gilt yields percent. tom: we have a great chart coming up later in the hour. we will continue with alberto

gallo. -- moreelegraph today than scathing about the eu-brexit allies. listen to that on bloomberg radio later this morning. this is bloomberg. ♪

francine: "bloomberg surveillance" brought to you from london. we are heading over to the worldd for economic forum 2017. and then at the end of that, donald trump will be having his inauguration. agreed todonald's has

sell its part of the china business to a consortium. the deal at more than $50 billion. this is an attempt to streamline operations. and industrial output in germany gained 4/10 of 1% in november. output was bolstered by a jump in construction and manufacturing. energy production did fall. and there is a report that the fbi has arrested a former fulks executive over the emissions cheating scandal. led the regulatory compliance office in the u.s.. he continues to cooperate with the justice department but it is an ongoing investigation. tom: thank you. the correspondent in

charge of the transition. he joins us now. help me here with the gossip. how is the in on going? is this a big deal? what is the back story? the facility is in 11 days. kevin: it will be more low-key than what we saw was president obama. "nald wants to have a workmanlike inauguration. " so he is only going to two balls followed by a military ball. dramatic decrease from the balls that obama went to during his first inauguration. so not asthma pump and circumstance, if you will. that said, a lot of protests are being planned. you had a great brief this

morning on taiwan. now about making taiwan great again? over the weekend, the president of taiwan actually was in texas and was accused and night before she headed south to central america for a conference. here is the thing. she met with senator ted cruz. putut out a cruise -- he out a statement saying that the chinese actually pressed ham and members of the delegation to not have this meeting. but he said this was a meeting that would lay the course for better relations economically speaking with i trade agreements as well as potential job andtion for ranchers farmers in texas. another point that i think is interesting is that all of this is coming on the backdrop of trump having telephoned the president of taiwan a few weeks

ago. which the chinese did not like. they said that broke protocol. so clearly, if you read the tea leaves with the incoming administration, as well as the republican-controlled congress, signaling a much different tone with taiwan that has china a bit uneasy. francine: we talked about this last week. chrysler over the weekend said they would start building more cars in the u.s.. what about gm? the seo is the only one standing up to donald trump. >> talking to business leaders here in washington and some of the trade groups here in washington and there is a bit of uncertainty in terms of where donald trump targets his next these with relation to companies. and we have seen this over the past few weeks. and a lot of these companies, boeing and carrier, they are uneasy.

the big thing in washington is that the confirmation hearings get underway. the big one that everyone is going to be watching is on wednesday. the same day that donald trump is giving a press conference in new york. het is rex tillerson and will face tough questions about his relationship with russia from republicans. including from john mccain. francine: how do you look at this? how much can donald trump do and how much is it affecting the markets? the initial plan is enormous. hundreds of billions of dollars in spending. a very large deficit for the u.s. in a time of growth. but it is always different. and it will probably take over a .ear to decide the structure i think there are some things that are good. it could give jobs to those that have lost them and for those who

are out of the workforce. tax cuts with the top 1%, it won't really boost growth. tom: larry summers talked about that this morning. let me go back to kevin's a go back toet me kevin in washington. talking about the confirmation practices, where the cabinet candidates are practicing the confirmation hearing? help me here. thesere any tension in hearings? could they actually be denied or stopped from joining the trump cabinet? kevin: here is the thing. democrats are going to try to frame the opposition heading into this new midterm cycle. and iace an uphill cycle put this question through the trump transition team. and what they told me is that they have had more than 300 meetings on capitol hill to try

to introduce these cabinet appointees to members of congress. they also had more than 30 practice hearings with each of these folks who are going to be grilled under the congressional questions. combined aretions how many different questions all of these picks are preparing for. so they are preparing hard. tom: thank you so much. that was kevin in washington this morning. we will hear much more from him as we head to the inauguration. westinup later, david fromdown with the engineer general motors. look for that around 8:30 new york time. this is bloomberg. ♪

francine: what is the best news of the year? besides the fact that i'm in london with francine, the bank of america stepped up its support. last week at itunes, stunning interviews. francine: larry summers would be my height. tom: and bill gross talking about mussolini later in the week was something. look for the podcasts on itunes. we go to a morning must-read now. this is out of the new york times. ramping up on fiscal policy. "they are going to blow up the

deficit mainly by cutting taxes on the wealthy, the grand old party. and that won't do anything significant to boost the economy or create jobs. he screamed about the evils of debt at a time when bigger deficits would have done a lot of good and are about to blow up deficits at a time when they will do harm." that is a smart note on economics from that professor. alberto gallo is with us. what can donald trump learn from austerity in europe two years ago? yearso: in the last eight we had a lot of monetary policy but we didn't have enough fiscal policy. is that we result is have a huge rise in inequality. demandhasn't boosted the on the street, the real economy. so you have a generation of young people who is now voting for protest parties. so fiscal policy can fix that if

you do the right type of fiscal policy -- infrastructure spending, creating jobs for people who have lost their jobs and are out of the workforce for years.t two or three however, if you do tax cuts, especially to the top 1%, it doesn't really improve the situation. this is potentially an excessive tax cut plan. deficit in thehe u.s. at a time when -- tom: this is interesting. larry summers expanded on that last week. it is important, the nuances of the actual policy that are put in place. it isn't just fiscal policy. it is what you actually do with in it. francine: and it is also the timeline. you go back to former policymakers and they say with infrastructure, you have to find the right projects. find thefficult to right project at the right time. alberto: but that plan was not

credible from the start. it was a 15 times levered plan. 70 billion up to 300 billion. and then the limitation was very strict on the project. they funded very little projects around europe. so first of all, you have what is the most important -- the animal spirit. by fiscal i stand policy, a government can spur public investment and also spur private investment. tom: to you hear that statement made in the united states right now? do you see leaders saying -- i stand by fiscal policy? i don't hear it. what trump has done since he got elected, even before going in the white house, is that he has basically unleashed some of the pent-up investment that was waiting but didn't, because congress was

divided. so i think there is a lot of businesses that are starting to invest more in the u.s., just because they think there is going to be more public investments. and that has been a self-fulfilling positive. however, tax cuts probably won't work. but this year is all about politics. the year of monetary dominance is over. have a europe, we could good populace with fiscal policy and a bad one. francine: that was alberto gallo, thank you so much. he will stay with us. this is bloomberg. ♪

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in new york city, holding court with our "first word news" with taylor riggs. taylor: boris johnson is looking to build ties with the incoming trump administration. johnson flew to new york for a meeting with chuck advisers last night, then traveled to washington to talk with congressional leaders. are --. and north korea u.s. officials say if the north koreans launched anything that threatens the u.s. it will be shot down. kim jong-un says the missile is in its final stages of development. an update on friday's fort lauderdale airport shooting. newly released video shows -- suspectto show the working through -- walking through the fort lauderdale fire.t opening santiago has been charged with killing five people and wounding six others. his first court hearing is today. actress meryl streep denounced

president-elect donald trump as a bully who disrespects others. she made the remarks while being honored at the golden globe awards. momenttreep: it was that when a person asked to sit in the most respected see in our country imitated a disabled reporter, someone he outranking privilege, power, and the capacity to fight back. it kind of broke my heart. taylor: trump told "the new york times" is not surprised that he came under attack by what he calls liberal movie people. global news 24 hours a day, powered by more than 2600 journalists and analysts in more than 120 countries, i am taylor riggs. "bloomberg surveillance." tom? francine? francine: thank you so much, taylor riggs. theresa may signaled regaining control of immigration would be prioritized. in her first televised interview of the new year, she said that

leaving the e.u. would be about "getting the right relationship, not about membership -- not about keeping bits of membership." thank you so much for joining us on the program. >> good to be here. francine: what have we learned about brexit and the negotiating tactics? it is very interesting and it does not surprise me that her concern is the immigration model. when she was home secretary before becoming prime minister, it it became clear that she had firm views herself on the immigration issue. i had some battles with the home office over the fact that there were real problems about international students coming to britain. it is one of the ways in which in the united states you may become friends for life for the nation. people who go back to the rhone countries and take on leadership roles and roles in business and

elsewhere and lose contact with britain and remain with them. aboutwere real problems -- she was absolutely tough as nails on that issue. it gave me a sense that immigration was the one thing around brexit -- she was somewhat ambivalent about remaining. but she came down on the side of remain i think out of loyalty to the prime minister, but she was always concerned about the immigration issue. francine: you are heading treasury select committee's on brexit. why have we not had assurance referendum,fter the that many do not have the right to return? helena: i think it is a mistake by the government, saying that every person who has chosen to willhere and has come here

a given -- will not be given interstitial residence. but that actually it should be for everyone who is here at the point perhaps one of referendum to place or at the point of a declaration of providing it. but we have not seen that. any of us who do negotiation as lawyers know that when you put something good on the table early on, it wins you goodwill. i think it was a mistake not doing that early on. tom: lady kennedy, francine mentioned, we talk about the weather in europe, but i'm sorry it is not funny. it is frozen in europe with it out of migrants -- with a lot of migrants out there, it is freezing. is all of the united kingdom so hardened that they just wait for the warmer weather of the spring and move on.

or is it a debate changer to see how cold europe is this morning? i do think it is interesting. this january-february period is always a feeling of inertia. you only have to have a little bit of ice or snow -- tom: they are not showing a romance picture of migrants lined up in a camp freezing, and you name the country. i know, and there is a sense of powerlessness across europe at the moment. this brexit debate has galvanized a strong sort of polarized thing here. peoplesually for british is kept under, you know -- we are reticent about being sort of too outspoken. suddenly, there is a strong change in temperature.

you are saying it is very chilly. you cannot have a conversation around brexit because it has divided families. i am sure over christmas we were stuff,that kind of people agreeing not to go there because often the young disagree with an older age cohort appears very divided francine: communities on the issue. -- does the very divided communities on the issue. bringne: how does she people together on this issue? helena: i think it is very tough for her. all of her statements about creating a unified sense of our nation -- i think she has a very strong challenge, not just with her own party. the people who are the hardline brexiteers are giving her a pretty tough time. that we are not hearing about. is beinge scenes, she

given a lot of trouble from those saying we want out, and we want it to be firm and clear, and we won a clear line drawn in the sand. i think she has -- i think she is trying to move swiftly. 48% said they wanted to remain. i would have thought that that means that you have to in some way hold this together, you have to find the best way to try to keep a certain happiness on all sides. you are not going to keep everybody happy, but you have to compromise. francine: but the problem is that on the model, if you are going to curb immigration, then you lose access to the single market. the u.k. is europe's financial services door.

japan tome here from the u.s. to set up the factories. there is the most flexible labor laws. the best justice system. but once you shut the door, you close the door to immigrants and to business. thatthe litmus paper says with eastern europe back to germany, help me here right now with the relationships you see of eastern europe to financial germany. is it tight like you are mentioning earlier? is there an optimism about the finances in eastern europe? there an optimism about the finances in eastern europe right now? alberto: i think that is a very delicate area. and also what will happen with international politics between the u.s. and russia. francine: when you look at countries such as hungary, you

also see things happening in poland, that populism that we have seen creep into brexit -- it is even stronger, and in certain cases uglier because there is a stronghold on the press. helena: absolutely. and many eastern european democracies, you are seeing problems with freedom of speech, journalists are having a hard time, and in fact sometimes the judiciary has a hard time. it is one of the reasons that we have been concerned recently. the appeal in the courts here, and suddenly all the tabloids -- tom: very quickly -- do you care were pound-sterling is? 1.40, 1.30,vious to 1.20? helena: i think we have to bank little of that. -- i think we have too little of that. i worry about the business of

what that means personally, but in the long-term getting sterling into a sensible position is probably a good thing. i do not know what you think. people voted for brexit with a certain expectation of saving money, and they need to be told the reality. the retail inflation basket -- we have 50% of food that is important in this country, 80% of salad and tomatoes are imported. so you see some food is disappearing from supermarkets. other food is going up, and all the families are going to pay this price. that is on top of job losses you may get with businesses -- tom: 80% of tomatoes and salads are imported? alberto: yeah. tom: where do you come up with this stuff? that is brilliant. helena: that is what he does. i think that this will have an incredible impact on ordinary voted fory of whom brexit. but it will be a wild before

they make that connection. and they are going to -- but it will be a file before they make that it will be a while before they make that connection. alberto: that is why it is dangerous. you considered -- you continue to sell the dream. helena: that is one of the anxieties. i am not sure there is a book on opposition. the opposition does not know which way to jump, whether to be very hostile to what is happening on brexit or whether to be saying we might lose our own borders if we are not careful on this. francine: elena kennedy and alberto gallo, stay with us. coming up later today on "bloomberg markets," an exclusive conversation. look for that at 10:30 in new york, 3:30 p.m. in london. this is bloomberg. ♪

francine: this is "bloomberg surveillance." tom keene is in london with me all week. before we migrate to davos next monday. coming up shortly is "bloomberg daybreak: americas," with david westin, jonathan ferro, julie hyman. jon:, what a you most excited about today? n: we will be talking above the brexit debate, the fragmenting trade relationship across europe. and what is going to happen over the next couple of years. of the detroit auto show, we will bring you some of that. some great -- some big

conversations coming up. francine: we have been talking a lot about it on "bloomberg surveillance." angela merkel gives a speech today, her first policy ahead of the election. germany's government editor joins us. helena kennedy continues with the spirit tony, when you look at the challenges from angela merkel, how much weaker is she than she was a year ago, and what are you expecting today? well, she clearly is weaker than she was the last time she won reelection in 2013. the reasons for that are quite obvious. there has been a refugee crisis, kind of a security rices -- kind of a security crisis. said, her party's

poll numbers are actually quite stable again. so that is something that she can obviously build on as a vantage point, january 2017. the election is in september. tom: thank you from berlin this morning. we have a modest technical difficulty and we will get back to you as soon as we can. my signal best chart today goes -- alberto gallo and helena kennedy with us as well. this is german inflation minus italian inflation back 20 years. three times we have been out two standard deviations. it right now is absolutely original on german inflation versus the rest of europe.

is this destabilizing? alberto: what we said last year is germany is going to overheat. we are seeing it right now, 10-year expectations have risen from 1% last year to 1.5%. tom: 1.7% is the statistic. alberto: correct. in germany it is even higher, at 1.7%. we are going to get to 2% for germany this year. this will happen with euro weakness, with u.s. stimulus -- this is one case where the economy is going to bank well -- is going too well. probably after elections, maybe the second half of the year, the ecb will have to talk again about tapering. keyword they cannot talk about in public. so germany is overheating. we are long inflation in the eurozone. still very contrarian.

that inflation was going to stay at 1% forever. it is not the case. inflation expectations will go towards 2%. tom: francine, this is a really elegant chart. .t is well contained it has changed. it has really changed. francine: if we actually chart , you would see an extremely different situation. brexits one thing that is probably right on, that the e.u. is in hud situation. helena: even those who are voting to remain, many of them would say there are things that need to be reforming and are serious problems. and giving it a total thumbs up. they are saying that the cost of leaving is going to be so grave.

in a huge market that we benefit him that that would benefit from doing business with come out one of theket -- things is that it will cost a lot of money to pull out, and we will see the effect of that on things that are really close to the heart of the people like the national health service. we have a very good legal system which is becoming impoverished. i think people are going to start seeing the cost of this. tom: i want to mention the banner that we have there. what is your biggest fear for your united kingdom? everybodyly speak to within the u.k. government. what is your biggest concern? helena: i feel that we are going to -- we might will do fine in the long-term economically, but i think that it is the values

that come out of this association -- and we are going to actually find it much harder, tougher, and more divided society. the cost is going to be very real. we have not suffered that really. the postwar consensus is a very good thing for britain, and she has had our troubles, but this is going to be serious. tom: lady kennedy, thank you so much for joining us today. we will continue with alberto gallo. as jonathan ferro mentioned, sterling weaker, getting your attention as well. the turkish lira is weaker as well. later today, david westin sits down with carlos ghosn of the sun. this is bloomberg. ♪

tom: we welcome all of you worldwide. "bloomberg surveillance" on economics, finance, and investment. sterling makes the headlines today on a percentage basis. that is a big move, weaker sterling. how bardo gallo is giving us perspective. turkey with -- alberto gallo is giving us perspective.

terrific photographs have been put together from around the world on the snow in istanbul. it is amazing to see the heavy snow in istanbul. francine, there is a serious side to this. francine: we worry about hypothermia for a lot of migrants, and we know that turkey has one of the biggest areas for migrants in northern africa. greece, where you have a lot of syrian refugees arriving, there are temperatures that are -15 degrees celsius at the moment. help me with the scene between albania and italy. that would be the original migrant tension within italy. is that still a tension point of , or has thateople been subsumed by everything else? routeo: there is a lot of

, going from sicily, north african countries. we have seen a lot less rivals -- a lot less arrivals this year than last year. a lot of the migrants are being kept there in turkey. but the situation in turkey is not stable, so these migrants could come back if the deal is nullified. we do not have a solution. europe agreed to relocate migrants from italy and greece, and not much of that actually happened. very few migrants have been relocated. the u.k. has accepted a few hundred. we do not really have a european solution in place yet. francine: what does this mean for 2017? does it go back to the fear of the outsider and fuel the populist movement, or is there also an economic side to this, good or bad? alberto: what you said before was key. a dividedhe u.k. is

society, and so are other countries. the truth is the u.k. economy grew divided because there was so much investment in london, in easyce, and very commercial development, but it did not reach out to the rest of the population. monetary policy has increased this. the same for the eurozone. so we need economic reform. we need a growth strategy that is inclusive, that gets to the man on the street. tom: alberto gallo, thank you. week, this, all this is bloomberg. ♪

jon: a warm welcome to

"bloomberg daybreak." with julie hyman today, and david westin is on assignment today. 0.002% away from doubt 20,000 on friday from dow 20,000. in the fx market, this gets my attention. the pound falls to 1.2166. julie: we will be digging much more into that any moment. here is what you need to know at this hour. a volatile start to 2017 for the offshore yuan in particular, the currency falling for a second day as china weakens its currency for the most since june. the pound gets pummeled. theresa may hints at a single market exit for the u.k.. tightening. potential candidates to head the federal reserve next year, including glenn hubbard