francine: the dollar drops again. the postelection euphoria subsides as the reality of a trump residency sets in. economists say it is running hot and overshooting inflation is a concern. china has factored the rise of -- to export inflation to nations around the world. and forest talks brexit. the yuan foreign secretary faces parliament after he says no decision has been made on the single market, while the reminds

britain that access requires number ship. good morning, everyone. this is "surveillance." these are your markets, let's get straight to them. we need to start with the dollar. a little bit of dollar weakness, retreating a touch. asia makes commodities on the rise. this is a picture of european equities. if you look at asia, there have been losses in japan offsetting advances in hong kong. oil moving higher on monday, and the vix index a little bit higher, but nothing to write home about. let's get straight to the bloomberg first word news with sebastian. china's producer price index rose at the fastest pace in more than five years in december, pvi jumped compared to the median estimate of 4.6%. that is as the world's second-largest economy swings to another potential force. reiterated heras

position on the uk's future in the european union. in her first policy speech of the year, she said aiming to maintain good relations with britain. >> [speaking german] that thed to be clear internet the common market can only happen if four freedoms of market access are adhered to. otherwise, we need to settle for less. we cannot liket negotiations take the form of cherry picking, because such consequences we cannot let happen. sebastian: president-elect donald trump's son-in-law is to be a senior, unpaid white house advisor. he played a leading role in the campaign and will work with the chief of staff reince priebus and chief advisor stephen bannon. it conflicts with conflict interest rules.

toyota has become the latest carmaker to offer a share of its commitment in the u.s. the japanese company says they plan to invest $10 billion in america over the next five years. >> we understand what the president wants to do, and i think we all agree with the president that we want to make america strong. we want to have good paying jobs, a good economy, and eventually that helps the business, because i am selling cars in the strong economy, which allows me to sustain the future. sebastian: yahoo! has announced a sweeping management changes as it transitions to an investment company. the ceo and five others will leave the board, reduced to five directors. the new company will be called alphaba. global news, 24 hours a day, powered by over 2600 journalists and analysts in more than 120 countries. i'm sebastian salek. this is bloomberg. francine: thank you. the dollar is down for a second day, continuing its live from

the multiyear peaked hit at the 2017 open. fund that profited from the rebound and 30 year treasuries has taken its name off the table. the asian asset management unit thinks the rally is coming to an end. and speaking to bloomberg, the boston said president sounded a hawkish note, saying that the u.s. economy is already running a bit hot. >> we are close to where we want to be with inflation and unemployment, and we should have an interest rate that is more normalized for those kinds of conditions. that is why i was supportive in december of raising rates more quickly, why i was very supportive of the decision in december to raise rates, and why i think that the summary of economic projections, which indicates we will be raising rates over the course of this year, would also be appropriate. francine: now with 10 days until president trump becomes a

reality, we will talk politics with stephanie baker. head let's introduce the of g 10 fx research. thank you so much. good morning. we're going to talk dollar in the second. we need our donald trump update. we follow on an hourly basis the comings and goings of trump tower. yesterday, he hosted jack ma of alibaba and others. are we going to see ceos one after the other going in? >> it almost appears like a right of passage for corporate executives. have you met him? yes i have. in each case, they come out with some kind of statement. in the case of jack ma, he promised to create a million jobs. in the case of bernard are neau, he talked about expansion. it's a double-edged sword, because if they get roped into promises they can't keep, that will come back to haunt them.

it shows that donald trump is basically using the presidency as a bully pulpit to make sure that companies fall in line, try to create jobs. whether or not it is about creating the right headlines, there's the real reality of those jobs is unclear. francine: he was, in many ways, the person -- the son-in-law, in many ways credited with getting him to the white house through data crunching and numbercrunching. now he is going to appointed as a senior advisor, unpaid. >> right. and the big question is does this violate anti-nepotism laws put in place after john f. kennedy appointed his brother, bobby kennedy, to attorney general. the lawyer working or kushner says it won't, because he is not working for a federal agents antinepotismefore laws only apply to people working within the ministration.

he will just be a white house staffer, but it could be contested, and you could have a lawsuit that would really test that antinepotism provision. francine: we have so much news, driving the dollar on the one hand, with a couple possible contenders to replace janet yellen. we're trying to figure out how the hearings will go. what the policy will mean from here. are you seeing dollar strength this year, or is it going to peter off? >> we expect the dollar to get to 2%, 2.5%, if only because the fed delivers the rate hikes they've signaled with their dot plot. so that is priced in, so a second driver of the dollar of performers would be the upcoming tax reform, and any potential inflows into the dollar. the combination of those two factors will likely continue. francine: drive to what level? if the dollar gets too high, or gets there too quickly, does that mean the fed won't be able

to -- >> that's always the risk. if anything, they are already highlighting first quarter last year, where they took it more dovish stance. i think there is some important differences here. yes, the dollar appreciation is causing concerns about the debt sustainability outside the u.s., which is why they turned more dovish. this time around, however, inflation gauges are much closure. remember, u.s. data is much more supportive. i believe that even if those concerns were to arrive, sustainability outside the u.s., the fed may be slower to respond . by implication, the dollar continued to rise against the correlated commodity currency related to countries outside. francine: i want to ask, stephanie, about the eurozone in a second. you have rex tillerson, you have a number of people that may be

sworn in, if they get accepted, a couple months from now. the longer the delay, does it have an impact on corporate america? the first 100t in days of his a ministration, the next three months, to get an idea as to what he's doing when it comes to the fiscal stimulus, the tax reform, and all that. clearly, some of what we have in the market will be pulled into closer scrutiny. if you reach tighter vetting by the democrats, there may indeed add to headwinds. but i don't think it will be sufficient to derail the rally. a delay will only delay a buildup. francine: a marathon of hearings. who are the most contentious? you have nine members to focus on. >> rex tillerson. secretary of state. jeff sessions as attorney

general. there's a whole host of them. what you are seeing is the consequence of trump not having done the initial preparation work before the election, having done the initial background checks, etc., and now he is trying to push through all these hearings without many of them having completed ethics disclosures or basic background checks. democratswill -- can't stop these nominations, they can delay through procedural tricks and drop the process out, but the republicans have the vote there, and they are likely to push them through. francine: all of them? are there people -- for example, rex tillerson -- there were questions about his relationship with russia, and prominent people in the republican party were also questioning other ties. >> i will definitely come up in his confirmation hearings.

i think that will probably be the most high profile one, because of the russian hacking allegations against the dnc. it looks to me, unless there is some new disclosure that we don't know about that comes out in these ethics disclosures, something about their financial arrangements, or some new revelation that those appointments will go through. francine: quickly, we mentioned the tweets and the fact that jack ma went to trump tower -- say, ok, i will give you a little bit of jobs in the u.s. we saw it with ford, with a couple other automakers. how does that translate into your world? does it give as the basis to think that he will create jobs in the u.s.? >> they are already at full employment. further job creation is clearly inflationary, and it will push wage growth higher from here. if anything, that's a positive development for the u.s. economy.

i guess the key here is with the timeline of the investment. if anything, the last time around we had a sustained in fluid foreign direct investment into the u.s. during the dot-com 1990's, were late the dollar really rallied. so a repeat of that may be less likely, if only because the u.s. is operating a full employment, and if anything, the target of most of these inflows, the so-called old industries, the u.s. is still not having a competitive advantage. if you are a business leader and you have to make a decision where i create more expensive jobs in the u.s. and sacrifice jobs elsewhere, he has to hit the bottom line. i'm not sure that's going to be a significant or sustained positive. i guess the compromise would be that it would be spread across time. francine: thank you so much.

stephanie, valentin. we will talk a little bit about the chinese currency next. let's get to the bloomberg business flash. sebastian: some senior volkswagen executives and germany have been warned by lawyers not to leave the country, according to a person familiar with the matter, this as u.s. prosecutors are said to be preparing to charge more high-level employees over emissions cheating. executiveeekend, an was arrested in miami and faces charges. the company says it continues to cooperate with the u.s. department of justice. valeant has agreed to sell three skin care brands to l'oreal in its second asset sale announced today. earlier, the struggling drugmaker agreed to sell its pharmaceuticals unit to a chinese power group for about $820 million. valeant has been embroiled in scandals about its high prices and accounting that led to legal and regulatory investigations. has soared on news

that alibaba wants to take it private with the offer of $10 hk foper share. this is part of a strategy to integrate with brick-and-mortar stores. and that the bloomberg business flash. francine: thank you. china's factory prices are rising at the fastest pace in 'sve years as the world's economy swings from being a drag on global and nation to another potential source of pushing prices higher. ppi jumped 5.5% in november, ahead of estimates. meanwhile, goldman sachs says china's central bank has altered its fixing mechanism in favor of a stronger currency, as capital outflows mounted in the election. speaking at the ubs greater china conference in shanghai, the president says he doesn't expect the pbs he's recent decision to be -- the pb oc's recent decision to be permanent. >> the so-called capital control

is temporary, not necessary. i think going forward, more rational asset allocation, a more free flow of capital together with china going out and international capital coming domestically, is that you are very much -- and financial sector reform goals. francine: let's bring you over to my bloomberg terminal. we talked about pbi prices, an --s is from you can see them rising in tandem. we brought this chart back to 2008. what does this tell us about inflation over a? >> on the whole, it's a tax on consumption, it makes things more expensive, and it's up to the producers whether they will

pass it onto the consumers. but it is something that unless growth picks up it is unlikely to be sustained. in the current situation, it is helping the chinese currency, if only because the central bank a need for thet loosening of policy is unlikely. really, the reason for the sharp depreciation of the u.s., it was the emerging capital between a awkish -- francine: outflows will increase. >> that's going to be tricky to balance for the chinese officials. i inc. they have learned to live with outflows, and they have a point where they have enough deserves where they can defend the currency. from that point of view, the regime will persist, so no shocked evaluation or -- francine: do they? reserves are dwindling. >> that's the point.

we look at what the chinese companies have to pay, and indeed we put it against the reserves and believe the reserves will be more or less sufficient. that's presuming that all the liabilities would have to go. it's not going to be the regime state. the outflows will continue, and we expect the renminbi to depreciate gradually, and we expected to peak. but on the whole, the emphasis for the chinese officials is gradual, no shock depreciation. francine: all right. thank you so much. that was exactly 12 months ago, messy. was pretty valentin marinoff stays with us. up next, fresh from his trip to meet trumps team, boris johnson prepares to be interrogated by

parliament. we'll look at that, next. this is bloomberg. ♪valentin marinoff stays with u. up next, fresh from his

hour,ne: within the next the u.k. mp's will start to hear evidence about the country's future economic relationship with the eu. we are talking about the u.k. hsbc's chairman are amongst the witnesses, and later this morning, boris johnson aces questions in parliament after his trip to meet a senior trump advisor.

jitters still abound, with sterling down, and theresa may's interview in which she signaled control over the single market access. valentin is still with us. when you talk about the pound, you basically say that pound weakness against the dollar is probably fully priced in, but it has further to go against the euro. >> that is what our analysis has shown, that hard brexit is in the price. in the case of euro-sterling, further gain seems likely. part of the story there could be repetitive nation of earnings by euros and -- be repatriation of earnings by euros into the u.k., and they will reinvest any profits in the u.k. but may decide to repatriate them.

that could provide additional support. francine: to what kind of levels? we are currently at 87 -- >> we are long for euro-sterling, and our interim target has a 90. of the factious that political risks do not stop with brexit. we're conscious of the fact that come march, we have a general direction in france. so 90 is an interim target, but longer time, we'd argue for further gains that could be likely, especially with the risk of hard brexit. francine: will we ever get parity? i want to get a chart up for you while you think about it. it would be pretty punchy if we do get parity. >> yeah. it will be a possibility, i guess, especially given that the further up we go, the less liquid the market gets. the question for me from a strategy point of view, are we

going to stay there? to me that will be more of a selling opportunity. fact thatto see the the euro could continue to outperform the pound as a longer hard brexit continues to weigh on the currency. francine: run me through your model. a hard brexit is that the u.k., because they want to control immigration, lawmaking doesn't have access to the single market. what does it mean for finding workers here? what does it mean for inflation? is it going to be a nightmare for the bank of england? >> to a degree, there are two key risks. one is that productivity will drop significantly. there will be limited access to more productive workers, which have been coming in part from the eu, and productive capital will draw. i mentioned the earnings are patriot should. -- earnings repatriation. productivity is likely to slow down. francine: with the cheaper pound, can there not be more

investment coming from outside the eurozone? >> that is also the offset, the longer-term protection. it's also the case that it will increase the risk is a potential balance of payment crisis in the u.k., which will then put th an interesting position where they can heighten financial condition, where at the same time the boe will try to fight a cost push inflation. francine: how much is inflation? 3% or 4%? can i go up to 4%? >> it's conceivable, i guess. 3% is with the boe is looking for, but when you look at the inflation report presentation, it wasranspired was that quite aggressive. there were quite a few questions about how you justify the inflation profile. i think that the risks are on the upside, and that really

highlights the vulnerability of the pound at the moment. where we are, we have no real certainty or clarity as to what the government wants to do with brexit, which is less than three months away. at the same time, different from last year, erosion of real power in the u.k. is happening. more, butok to spend now my real income has dropped and is likely to drop further, which makes a more cautious. francine: thanks so much. marinoff.anvalentin up next, donald trump is the talk of the town in detroit. we talk cal carmakers. ♪ with the xfinity tv app,

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only xfinity gives you more to stream to any screen. download the xfinity tv app today. i've spent my life planting a size-six, non-slip shoe into that door. on this side, i want my customers to relax and enjoy themselves. but these days it's phones before forks. they want wifi out here. but behind that door, i need a private connection for my business. wifi pro from comcast business. public wifi for your customers. private wifi for your business. strong and secure. good for a door. and a network. comcast business. built for security. built for business. francine: this is bloomberg surveillance. i am francine lacqua in london. china's consumer price index rose more than five

years -- more than in five years in december. that is as the world's second-largest economy swings from being a drag on inflation. angela merkel has reiterated her position on the uk's future in the european union. the german leaders said aiming to maintain good relations with written does not mean caving in once brexit talks get underway. >> we need to be clear that the entry to a common market can only happen in the four freedoms just if the four freedoms aren't here to. otherwise, we need to settle for less. that become cherry picking, and such consequences we cannot let happen. sebastian: donald trump's son-in-law is said to be a senior unpaid white house

advisor. jared kushner will work with chief of staff reince priebus and will divest from his various business assets to comply with conflict of interest rules. he has been described as a tremendous asset and trusted advisor. volkswagen executives have been warned not to leave the country, according to a person familiar with the matter, as u.s. prosecutors are set to charge more high level executives over emissions. the company says it continues to cooperate with the u.s. department of justice. yahoo! has announced sweeping management changes as it trans -- transfers to an investment company. the board will be reduced to five directors. the new company, a shareholder in alibaba and yahoo! will be

called -- global news 24 hours a day, powered by our 2600 journalists and analysts in more than 120 countries. i'm sebastian salek and this is bloomberg. the north american international auto show is underway in detroit and president-elect trump's presents is being felt. several ceos have given us their views about the incoming administration. common withore in the administration and the president-elect then we have at odds, and we are looking to strengthn the country, and obviously business performance because we are a big provider of jobs. we provide over 100,000 really good paying jobs, and also looking for some regulatory streamlining. he has artie made statements about the taxes, and those are things that will improve our business and allow us to reinvest. >> i think we all agree with the president that we want to make america strong. we want to have good paying jobs

and a good economy has eventually that helps my business if i am selling cars in a stronger economy. is beinghing which done in collaboration with the industry is much easier to be done. no matter what the administration wants, the industry can do a lot of things as long as it's collaborative effort, as long as we have some kind of visibility about what is going to happen, we can do a lot of things. the only thing we do not like is being caught by surprise. >> as a global company we would like to have open trade. -- most carsnnot will be locally for the u.s. but some we will import. we will export out of the u.s. and i think an understanding for such an open, fair trading environment is something we would of course expectancy. have had good working

relationships with every administration and policy makers through the years. we would like to see free and fair trade agreements, regulation and regulatory policies that are more reflective of market realities, and we really want to see corporate tax reform. in the u.s. amongst the locations we have the highest corporate tax and we think that would be good for the economy. francine: let's bring in trevor greetham. great to have you on the program. happy new year. when we listened to ceos say we want to make america strong, make america great again, is they are going for the donald trump step -- soundbite. do you see as these tweets and a lot of carmaker saying, we will bring 1000 jobs back to the u.s. , and if america is strong is the rest of the world week? trevor: the first thing to say is we are not used to

president-elect's or presidents tweeting. some say once he is president he will stop treating. we know he is not going to stop tweeting. i think you will get the shocks and algorithmic traders have , so they areook at shorting the stocks. across alln common of those conversations was good paying jobs in america. i think what you're going to see is from a macro policy point of view, policies aimed toward at low wages big raises. that could mean border tax, it might mean the economy running with inflation higher than you might expect. i would not be at all x -- surprised to see pressure on the

fed to raise its inflation target. francine: is he creating quality jobs? if you are creating manufacturing jobs but the rest of the world has become more or bioteched, tech or innovation, where does that leave america five years from now? trevor: is global growth as a whole, protectionism and barriers are negative, there is no doubt about that. on how far depends the stocks have gone. the market is going up because the macro data is improving. we have quite loose policy and i think that is key. at 2017: when you look and the biggest risks and the biggest risks in your portfolio, where to put your money, give me the top three right arteries. is it -- priorities. as it linked to what donald trump does or is it

fundamentals? trevor: it is primarily fundamentals. growth and inflation is signaling overheat. growth racking up, inflation is picking up, modern-day prices are rising. commodities,weight resource companies, and equities, and that is the mixture of positions we have going on at the moment. people are saying the animal spirits have back aligned again because of donald trump. i do not know about that. right ratherthe than the left increasing fiscal spending, and that might be good for low gravelly -- growth globally. francine: if the person on the street does not feel it, you could have a backlash in europe. what does that do to your investment? trevor: i think the aim will be to allow wage inflation to rise a bit further than people are

expecting. there is no appetite among the fed for creating and it -- a recession. there will be benefit to people of lower wages from inflation at the cost of owners and savers. one thing to be clear about, if there are problems with the economy, if it does not live up to expectations that a been built up for that segment of society, you will start to see division in populism and finger-pointing, blaming immigrants, blaming whatever for the weakness. view, economic point of whoever won the election, gross inflation was picking up. we are starting to see proper growth coming through finally. i think that is why stocks and commodity prices have been doing better. francine: trevor, thank you so much. head of multi-asset at roy at london -- royal london asset management. merkel stands strong.

they must stick to rules on a you free movement if they want market access. last week the dow came within 0.0 002% of the 20,000 level. we will discuss whether milestones matter. in the next hour we will give you the morning's top stories and we will focus on what president-elect donald trump could mean for the commodities market. you can also tune into radio daybreak europe in london. this is bloomberg. ♪

francine: this is bloomberg surveillance. i am francine lacqua in london. we just had breaking news out of the italian central banks. thank i tell you saying italy's banks bad loans stand at 100 billion euros in november. this is pretty much in line with what we thought. we know they are trying to deal with of course monte paschi. we are still expecting a little bit of news on the details of that, but there is nothing shocking. we have not seen a big repricing of italian banks this morning. they are saying the bad loans owned by italian banks aren't 199 billion euros for november. -- are at 199 billion euros for november. ftse 11 in a row for the 500. it is quite a rally we are

saying because of the weak pound , boosting all sorts of companies that of course our global players. exporters, especially when they derive their overseas earnings. commodities are benefiting from the reflation trade, thanks benefiting from the higher bond yield as well, all companies benefiting from the resurgence. sterling, 1.2123 was a really important level. we breached an earlier. we are above it now, because that was the low october 11 last year which is still the lowest since may 1985. the low today, 1.2108 is the 1985. since may 8, it is a political currency now. it is trading on the news which investors believe, especially after theresa may's interview on sunday that is pointing to a hard brexit versus a soft brexit, this may is not use

those terms -- miss mae does not use those terms. rbc says 1.15 and the first quarter. rbs is 1.29. the comparable sales excluding fuel are rising. a four-year underlying prospect. best profit. china, -- the factory to the world swings from being a drag on global inflation to another potential force pushing crisis -- prices higher. francine: angela merkel has reiterated her position on the uk's future in the european union in her first policy speech of the year. maintain goodg to relations with britain does not mean caving in once brexit talks get underway. clear that thee

entry to a common market can only happen if the four freedoms of market access are adhered to. otherwise, you need to settle for less. we cannot let negotiation's take the form of cherry picking as this would have fatal consequences for the other 27 members, and we cannot let those consequences happen. francine: the political uncertainty continues in 2017 with elections in germany, france, and the netherlands. let's get back to trevor greetham. i did a friday and slip. i called angela merkel -- 840 n slip.- freudia i called her a lender. there is clearly a loss of internal stress going on in europe. francine: if we break those down, if we look at internal

stress, let's do the politics. marine le pen becomes president of france. let's talk about brexit. out of those three risks, what is your number one concern? one,r: i think the second from a european point of view. brexit clearly has sort of energized separatists within europe, people who want to leave the euro. really the sort of, the raw material for that kind of antiestablishment view is the fact that there is very high structural unemployment in europe because a single currency without major fiscal transfers. as a result you get these areas that become very competitive and high unemployment, and it stays that way. tension.he essential it still feels like the euro is

not likely to be in its current 5,m with the current members 10, 15, 20 years from now. it is always difficult to judge once things come to a head and it is possible -- popular to say , and nowump and brexit we will get le pen. there will be worries in europe and a bit of a black cloud, but it does not feel like you will get the big separation movements happening. francine: what does it mean for portfolios and managing? a guest say we will see more weakness in pound versus the euro because of investment coming out of -- from multinationals. trevor: when global growth is quite good, inflation is picking up and the u.s. is raising interest rates we would expect a strong dollar. no one else is going to be raising interest rates. that is good for countries like japan exporting to america, and

normally it is good for european equities but we have a preference for japan over europe because of the political risk hanging around in europe. they see on the news all the time about brexit or the election cycle in europe, i think that is one thing you'd the pound is a different matter. you have a tension drain economic data that is still pretty good, surprisingly good. if you look at the cable and plot it against interest rates interest rate differentials explain exactly what happened to the pound. if the data stay strong maybe there is an upside to the pound. i think may is correctly focusing on what happens after the two-year period, and not asking for a single market membership. personally, i think we should have stayed in. francine: the vote did not go

that way. trevor: it did not. trouble is, there is no time so i think there would be lots of disorderly mess in the next couple of years. that is why i think the pound -- disorderliness. francine: getting bullish last week, the pound came within a point of the 20,000 level, but do milestones matter or are they a load of bull? ♪

bloomberg surveillance, i am francine lacqua in london. the dow jones is being very closely wanted to hurt as it flirts with record levels. 002 percent of0.0 the milestone. it really matter? we are back with trevor greetham. what dothe thing, psychological levels actually mean? does it change or investment strategy? trevor: no, it means almost

nothing. i never look at the dow jones, i look at the s&p. there is kind of a psychological effect and all of the traders are flirting with who will be the first to push it to that level. in the 1990's, every time the dow went through a 1000 barrier the meeting stopped and there was polite applause but i do not believe it means much. francine: we are talking about this huge rotation because of animal spirits and donald trump and how we are seeing macro data trends reversing a little bit. higher we go, and a fundamentals do not follow, the harder the fall. trevor: everyone is waiting for the correction because they want to buy. they see the macro data improving, the business service going up, and they want to buy but not yet because there is no correction. at some point there will be a correction possibly related to trade policy, but the

fundamentals are positive. seasonality is very strong this time of year. of the last 40 years, global equities returned 10% per annum but 10% has happened between september and may. francine: talk to me about ftse, we saw a record highs but if we change the currency that we look pound, and if you screen, the blueline and purple line is basically priced in dollars or euros, then it is a different story. trevor: it depends whether you hedge currencies or do not. francine: do you want to hedge currencies this year? trevor: sterling, i would be slightly underweight. in terms of equity markets, if you own u.k. equities you do not have the exposure to sterling you have done very well. if you are in a u.k. equity fund

and has sterling in the mix, it has been pretty much your worst performer of the year for major markets, so u.k. versus the world in dollar terms, it has been underperforming for about seven or eight years. francine: what about japan? equities like japanese but you have to own them without the yen because one reason for liking them is because the yen is weak. if you can be overweight japanese equities and short the yen, you are in an environment where as bond yields rise in america they stay at zero in japan. francine: what happened to the structural reform? you still like japanese equities even if that third arrow does not comment 2017? trevor: the third arrow has always been icing on the cake for me. back tol part of a move stoke up nominal growth.

japan needs to do more than anyone, america is moving in that direction and i would not be surprised if a year or two down the line the u.k. is doing something similar. if they can reform the companies, brilliant. i do not know how much is in the price. greetham, headr of multi-asset at loyal rendon asset management. bloomberg surveillance comes -- continues. this is the icing on our cake -- tom keene is in london all week. we kick off the conversation with hans redeker and paul de grauwe. this is bloomberg. ♪

♪ >> anxiety creeps in, the dollar drops as the inauguration for donald trump limbs.

the economy is running hot and warns not to jeopardize the recovery. atna's reserve prices rise the fastest pace in five years as speculation continues over currency. sterling, theresa may says britain will need a new relationship with the eu as angela merkel says cherry picking will have fatal consequences. good morning. this is "bloomberg surveillance." tom keene joining us. a lot to talk about with the negotiation tactics doing with the eu. tom: there is a lot going on in the united states and britain. use of the present of the boston fed said the economy is running hot. a fair number of our guests aggressively disagree with that idea. francine: yes.

i spoke with one of our guests, even if it runs hot. tom: sterling is weaker this morning. francine: here is taylor. beginsu.s. senate confirmation hearings today for president-elect's nominees. the spotlight is on rex tillerson. donald trump has named him to be secretary of state. he will face questions on his ties to russia. as you mentioned, theresa may says the u.k. will need a completely new trade relationship with the european union after its withdrawal. there is growing concern that they will pull the country out of the single market. the pound fell to its lowest level against the dollar since october. u.s. prosecutors are preparing to charge more books like an executives and the testing scandal.

oliver schmidt was arrested in miami as he was returning to germany from vacation. for top vw executives have warned their clients not to leave the country. the first will be the prime minister to speak in switzerland. she was speaking at the opening conference for billionaires and political elites. chinese business executives will accompany the meeting. global news 24 hours a day, powered by more than 2600 journalists and analysts in more than 120 countries. this is bloomberg. ♪ tom: thank you. currency commodities, fairly quiet. futures are not all there. there is the second board this morning. a little stronger dollar.

noticing weaker lira and sterling. francine: i would like to look at sterling with the euro. i had someone coming on saying that if you are a multinational from europe, you don't want to invest in the u.k. but bring back some of your earnings to your. this is my board. you mentioned the pound. -- a keep a little idea little bit of an eye on the vix. tom: i did this as a mental exercise. i need to do some math. francine: here we go. tom: it was math tuesday. let's look at the turkish lira. this is our emerging market index. index. blended it has gone flat recently. i interpret the weakness of

dollar-lira from the beginning of last year. you can see the beginning of massive weakness against other emerging markets. francine: i like that. i like the little bit of math. away fromlittle ways that. it is a pure ftse chart if you strip out motto these. tom: interesting. commodity stocks. francine: bhp, for example what we see with the oil producers. the blue is normal ftse. we saw a record high. white, if you strip out the commodities. this is a dollar play. it is china. if you are seeing strengths and weakness in the pound, if you strip out commodities. tom: this is a beautiful chart. it has brought me to tears. francine: there you go. tom: you did this with

contractor on the set. francine: i hope he can keep it together. no crying onset. hans redeker, paul de grauwe. tom: it is great to have an fx guy of this caliber together. francine: thank you for coming on. first, i want to focus on the pound. we will see a lot more weakness in the pound. will be with the dollar-euro? i think sterling is likely to stay weak. our valuationat metrics, you see sterling is undervalued. another observation, when you look at economic data for 2016, the british economy was one of the strongest in g 10.

we are talking about a political currency that is driven by the prospect of britain leaving the common market. it is about the degree. to which degree to you leave the common market? some have left the impression that we are banging the door. markets are concerned about that. that is driving the exchange rate. over the course of this quarter, as we are getting into article quarter, weter this get to a situation where the divergence between the negotiation position of the europe and u.k. is diverse. that is where most of the risk premium on denominated assets is. they will trade on the back foot. i think that is going to impact sterling. you look beyond that, over the next few years, given valuations and potential flexibility of a

policy response. taxes, if youte are successful cutting that. francine: we are talking about the pound and getting the reporter on to talk about the pound. we have select committee hearings from a lot of the bankers at the moment. do you worry about global growth and overheating? six months ago we were talking about deflationary, now we are worrying about inflationary pressures. paul: i don't think we have much evidence of overheating right now. prospects are. improving. the eurozone prospects are improving. that should we do a continuing recovery except that there is so much political uncertainty as you mentioned that all this good unravel. also if some scenarios come out. tom: i want to talk about 1974.

you were coming out of johns hopkins at the time. foreign-exchange markets unraveled. would you frame instabilities within the system, the calculus of politics that hans redeker talked about, does that mean we are heading towards equivalencies of 1992 or the early 1970's? the: i would compare to 70's. we had huge disparities that had to deal with oil price shock and inflationary pressure. they were also political. many of these decisions underlying the oil prices were nearly -- purely political. the political uncertainty is going to be the same. tom: you and i remember that it was george and mark and lebanese mark anddeutsche

lebanese pound. what are the cast of characters telling you right now? are you observing that now? hans: money goes where you have the highest flow relative to the risk you can achieve. in that respect you need to go back to our framework were you say -- were you were saying -- when it comes to output gaps, you have a divergence taking place. the output gap in sweden and switzerland and the united states seems to be close. maybe germany falls into this category. within the eurozone you have huge divergence between italy and germany. what i would like to look at is the output gap, which is still very big in asia. where we are now glowering at our screens as morning and seeing chinese inflation goes up to 5.5.

from minus five to plus five, global inflation is working. , youyou do the mathematics are doing the mathematics and figure out that 76% of that is driven from the commodity front. you wonder, how can a country reflate when you have capacity underutilization which is now bigger in china compared to 2008 and 2009. people are losing that out of sight. the observations of the 1970's, when we're talking about currency volatility and the 1970's, we are showing very volatile exchange rates. we are heading towards central-bank policy divergence. tom: i want to get back to this chart. we're going to go to break.

just bring up this art in new york if you would. this is germany, italy inflation. we are where we have not been before in 20 years. we simply jumped to a higher german inflation, weaker italian inflation, and the divergence hans redeker just talked about. we will continue with all the grout and hans redeker -- paul de grauwe and hans redeker. marvin barth will join us from barclays. i am tom keene. stay with us. this is bloomberg. ♪

francine: i am here in london with tom keene.

it is quite a busy week. we have a little bit of news, this is when mps grilled ceo's. they are focusing on brexit. the -- saying of he is monitoring is closely, saying he is a little bit concerned. he recommends grandfathering systems in brexit. of thendfathering systems is when you have parallel systems that you keep a little bit. it could take a little longer. let's get straight to the bloomberg business flash. >> valeant pharmaceuticals has agreed to sell more than 2 billion dollars of assets. selling their pharmaceuticals unit to a privately owned chinese

conglomerate for $820 million. the company has been caught in scandals over high practices -- high prices and accounting practices. atres rose in china in 2016 the fastest pace in years. the 16% gain from the previous year. chinese shoppers took advantage of a tax cut on small engine cars. british companies could face a shortage of new workers because of brexit. according to the recruitment and employment federation, the availability of permanent and temporary staff fell in december. brexit is expected to lead to restrictions in migration to the u.k. british employers are seeing shortages and accounting and other skills. francine: thank you. the european tour to smooth brexit. secretary british

boris johnson faces questions after meeting with donald trump. this is a treasury select committee. that introduce the concept to tom keene. this is what we're seeing. let's bring up the life screens. they go one after another. we now have the chief investment they feel and when questions, everything is quite political. it has the potential of getting ugly. we are talking with hans redeker a little bit about fx and the impact on pound. do we need to focus on how long this process will take? if theresa may believes they want to start at the bpo levels, this could take 10 years -- wpo levels, this could take 10 years.

hans: after the process has ended, the two-year process has dark, they cannot allow matter to take over. withll have to live conditional measures. that will be key in the next two years what these measures will be. no clue. nobody knows. i guess the prime minister doesn't know. tom: i appreciate your candor. bring up the chart of pounds sterling. we show this yesterday. when does this unravel? for those of you on london radio, it is really simple. we migrated from 150 all the way down over the last two years or so. there has to be a level where your radar goes up. where is it? is it 119? no. is it 110?

>> if you are looking for a level that you say is the bottom , and there is more to come there is panic in the market. i think where the market is currently moving is going to present the type of extreme political scenario with the potential cliff edge coming up. i think that is going to be priced into sterling right now. our projection is 115 117 in cable. tom: this is really important. right nowman on air is very controlled. these guys know there is a point where everybody is not calm, controlled, collected. 115?ou suggesting is >> at 115 we will be at an extreme level of valuation.

you have to look at what is and what is market reaction to that panic. this valuation of sterling is offering new extreme value. francine: the person on the street cares about inflation. you have the chairman looking , but but as people -- calm as people lose workers and look at what to do, how does the bank of england react? is there a negative for the economy and there is a risk of a cliff edge. you have to do the exercise of valuation, think what is in the price. we make the calculation as we were trading still at about 160 rms.able te what is a fair exchange rate? the fair exchange rate would give us something like 135.

everything below 135 is related to britain moving out of this situation, the common market. that will hit an extreme. make no mistake, i am bearish on sterling this quarter precisely the situation where this becomes a political market. it is not a market driven by economic data. better housing data. this is about the political event. francine: thank you. hans redeker there. we are back with paul de grauwe. coming up later on bloomberg daybreak, the conversation with a donald trump advisor. look for that at 8:30 a.m. in new york. this is bloomberg. ♪

tom: the trains are running in london. francine: yesterday. tom: i went to mcdonald's yesterday. francine: you get home faster. tom: you do. we are here in london. hans redeker of morgan stanley and paul de grauwe of the london school of economics is with us. paul de grauwe is bordering on legendary on death over the last eight years or so. we have been talking about the

responsibility of europe to retire debt. neare no near -- nowhere the courage to retire bad debt. >> there are two ways to do it. one is to default. the other is to produce good education. that is the other way we are going to get out of this we are starting to do it. the eurozone is starting to experience more growth, inflation is picking up. that will be the way out. tom: when in doubt, lengthen maturity. this is the austria senate the to 85. 100 down long-duration. francine: why not default? if you are a country, get out of the eurozone. default. argentina did it and came back. want to't think i would be living in argentina.

on the contrary, many new problems arise, quite often very political. clinical instability that changes regimes. although you may solve technically some of the problems, you may create new political problems that are much more difficult to contain. that is why i think the only way out is the one that historically has been desperate to work, and that is growth and inflation. a combination of the two is the one that will allow the eurozone from its debt problems. francine: thank you. we are with contractor later today. we have a great conversation. this is bloomberg. ♪

tom: strike is the word. it is not just a tube strike, the acclaimed london subway in in our london. it is about trends to the south. francine: it is not anymore.

there was one yesterday. tom: there is another strike. francine: british airways. it is so very continental. i am worried about getting to heathrow. let's go back to new york city right now. taylor riggs has first word news. >> on capitol hill, a group of senate republicans is pushing to delay repeal of obamacare until march. some members of the party are concerned about repealing the law with no agreement on how to replace it. those arguing for the delay, senator bob corker of tennessee. one of president-elect donald trump's senior advisers in the white house will be his son-in-law, jared kushner. he will not be paid and will divest from his various business interests. soccer is getting bigger. the global sanctioning body for soccer, fever, has agreed to

increase the field for the world cup from 32 teams to 38. they expect to bring in another billion-dollars in broadcasting and soccer deals. global news 24 hours a day, powered by more than 2600 journalists and analysts in more than 120 countries. this is bloomberg. francine: thank you. let's discuss commodities. barclays is questioning the stability of the pot these markets. china could disrupt global supply in a trade war with donald trump. ofh us is hans redeker morgan stanley. michael lewis, welcome to the show. is there a significant change in the commodity cycle? they are paying back dividends because the commodity market is point. what if we get a trade war? michael: i think the

fundamentals, this is what producers are trying to combat. this is a job i used to have. now i have moved into renewables, which i am much more excited about. trade wars are where markets are going. this is what we're trying to figure out how globalization is now stalling. i think that is going to be a feature we will see for the next four years. my sense is we have a huge supply problem within commodities, and this means we are not on the roller coaster ride. it will still remain a very weak environment. francine: we will talk about sustainable's and renewables. this is my chart. this shows ppi coming out of china. we have figures today in orange. this is basically the benchmark we look at for china. how much of the inflation that we're seeing globally comes from commodities?

how much comes from chinese demand? hans: you cannot generate inflation when you have an output gap. china has an output gap. when you have producer prices that are going up 5.5%, and you wonder less when you have 76% of that driven by commodities. observation number two is if you look into what happened in china from the third quarter of 2015 onwards. there was a boost to state-owned companies. these state-owned companies are primarily operating in so-called old industries. commodity sensitive industries. we have seen a boost on the commodity market on that side. the question is what will happen to the investments spanning state-owned companies given productivity levels and efficiency levels. the outlook is not to rosie there. on the outlook side, the

retracement of the commodity market may take place. the third observation is on global trade, we have seen very poor global trade numbers for three years. thehat actually means improvements we have seen in the commodity market may be related. tom: i want to get to renewable energies in our next section. to me, one of the halves is cold. .- coal business week is coming out with an amazing these on american cooal. bring up the chart here. this is the long-term commodity 1950's,y back into the which is massive commodity deflation. coal into the michael lewis worlds. michael: i think the situation

is quite dire. what we have seen with renewables how for the first time ever in 2015 we saw renewables surpass fossil fuels, meaning coal in terms of new power generating capacity coming online. that happened because prices falling and also renewable prices falling. --y are much more negative competitive. coal is a 20th century industry now. power in therating u.s. is almost 40 years old. investing into an asset with a 50 year lifespan is incredibly challenging even for the new administration to turn that around. tom: what is critical is a real knowledge for coal. the secretary of commerce wilbur ross. how would you propose

commodities in america will be when we have a trump's cabinet of people who have spent a fair amount of time financing commodities. michael: maybe the u.s. should be thinking we cannot turn our own domestic coal firing powergenerating industry around, maybe we can export it. that is probably easier said than done. we would have to increase a huge amount of facilities on the west coast. those are being rejected for environmental concerns. that is an option to think about. there is a lot of legislation even at the state level that does not want coal. huge amounts of corporate and the united states say they want renewable energy. francine: i spoke to many ceo's. many of them are committed to sustainability. they say nothing has changed with the appetite from

consumers. michael: there are certainly things. we are looking at the clean power plant. ratified.likely to be it is unlikely to be repealed. that would probably be scrapped. then you have the tax credits within the renewable energy sector. will those energy tax credits be repealed? you also have the withdrawal from the paris climate agreement. there are definite things that will turn this around. don't forget, there is still the state level, the corporate level, investor level. california state just told pension funds to divest from coal. of 2015,he big shift 2016, and 2017 -- this goes to our next session, our renewables finally at scale to be with hydrocarbons? >> there is a long way to go.

if you are looking at the renewable sector, the sweet spot is the distributed utilities face. slightly smaller powergenerating facilities whether it is wind or solar. they are used by consumers. they do not rely on this old transmission and distribution grid which can raise your costs by 50% or 60%. these smaller activities are the best spot within it. scale is expanding. renewables globally have surpassed fossil fuels. there is a shift. things are changing. tom: things are changing. switzerland has the least snow in 100 years. that is michael lewis's fault. surveillance, in touch. >> i'm trying to resolve this. tom: the least flow in 100

years. francine: we will be back. in the next hour, we will focus on fx with marvin barth. we will be talking pound, euro. that is at 6:00 a.m. in new york. this is bloomberg. ♪

tom: good morning. francine lacqua and tom keene. what's going on from the raging battle over brexit that continues. i think it will continue. there are other raging battles around the world. one of them is the weaker turkish lira. we have any number of middle

eastern themes. i'm going to say turkey is on the edge of your world, but all eyes are on a weaker turkish lira. frame for us the pressure of the weaker turkish lira on the erdogan government. how does it respond to the ever weaker turkish lira? >> it is tuesday. that means the lira must be at another record low against currencies like the u.s. dollar. the approximate cost of the latest drop is this constitutional referendum that is working its way through the turkish parliament. that would basically reform turkeys constitution and hand over more power to hurt again. if you are an investor, maybe turkey and the retrenching even retrenchingnds up even further into itself. their continued pressures like

higher-than-expected inflation and a central bank that seems committed to doing as little as possible in the face of that. a lot to go through here. tom: this chart is an accelerating weakness. it is the way it has been weak. francine: it is politics. it is whether the central bank in turkey gives in and does what erdogan wants. or whether it remains independent. that is looking increasingly unlikely. there are fears that monetary policy will bow even further to government pressure. can they breakaway? is that a done deal? >> that is a question. the thing everyone is hoping for is for the turkish lira, the weakness to eventually feed into exports and for us to see a little bit of a pickup in turkish is this activity. that has not happened yet.

we are less waiting to see what the central bank does. the commentary from commerzbank's this morning, was saying that they expect the central bank to raise interest rates by 50 basis points. that is not what is needed at this point. if you're going to stop inflation, you're going to have to look beyond 50 basis points. most of the analysts, commerzbank, they don't see that happening unless we get a currency crisis that forces the central bank's hand. francine: thank you for that. we are back on set in london with hans recker and michael lewis. when you look at the lira, it depends on the move, right? doesn't force the turkish --tral bank to reinforce rethink their policy? >> we have the potential instruments, currency intervention you have been mentioning.

as well as the central bank and its monetary policy approach. when we're talking about high-yield emerging-market currencies, and the turkish lira here is not any different from others. it is driven by yield differentials. when you have a central bank that will stay accommodative and you have local inflation rates going up, and those are driven additionally by the exchange rate, you get into a vicious price which leads to a behavior you are indicating. the question in addition to that , it has been suggested that the weakness of the exchange rate could have an impact on trade for the country. i agree with that. we have seen it quite influential study that connect in 2015 that try to weigh the to finance, and

what you see in high-yield currency environments is weakness is leading to tightness in global liquidity. you have less lending activity. that is currently happening. it has relevance on other currencies, and for that i say maybe the turkish lira is too small not like brazil. tom: i want to turn to renewable energy in your work with deutsche bank. what are you trying to accomplish? ael: an enormous strand for that discussion is probably our work with the green climate fund, which the fact that our proposal was approved by them, which brings clean energy to sub-saharan africa. what is interesting is it brings the public and private sector together to tackle climate change. also within the real estate sector, and that is probably one

of the asset classes, maybe the most powerful factors driving sustainability. there is a much bigger story, which is trying to assess the risks that portfolios in bed within them with all of this climate legislation that is really going to focus people on the carbon. tom: what is the ultimate risk of these good intentions, and most people would suggest they are good intentions, the political push, not much from climate deniers, but from administrations saying they are not going for public-private combinations. chael: i think it is more than good intentions. people are incredibly worried, not only because of the spread of carbon taxes around the world. that is going to affect your bottom line. the top line will be affected because we had this shift,

massive changes in power generation going on around the world. we are looking at fossil fuels and wondering if we can burn these assets. if we can't, this means stranded assets. this is not trying to be nice to the environment. these are massive financial risks we don't understand. we need to understand. the powerful financial related disclosure will provide us with the information to assess these risks. francine: you need tangible things. that is why you have sustainability goals and ways of measuring things. do we need a carbon price? will we get one? does the donald trump and ministration of his father from that goal? >> in the u.s., probably that does. there are carbon taxes. this is expanding. china is securing their leadership in this. that is probably the endgame. they have transferred even greater leadership to china. tom: i have 10 seconds left.

what does it mean that the secretary of state is from exxon mobil? does that have any symbolism? >> i think there is huge symbolism because fossil fuel companies are now telling us the climate risks for their businesses. they're the best people to tell us that. tom: you are seeing a change in big oil. yes. the dialogue needs to happen. francine: to an extent. tom: wonderful. let me know when copper goes along. michael lewis of deutsche bank. inendary in bit it's -- business and commodities. working on important climate research. we will continue with hans redeker. coming up on bloomberg daybreak in new york, an important time to speak to richard clarida from pimco. this is bloomberg. ♪

francine: welcome back. this is "bloomberg surveillance." francine lacqua with tom keene in london.

we will migrate to a discussion on china. it is time for our morning must-read. we picked up a good one. the traps cited by the chinese president refers to the warning by the ancient greek historian that cataclysmic war can corrupt if an established power like the united states becomes too fearful of a rising power like china. donald trump also has to worry about another trap if china seems to week rather than too strong. we brought it would back to ancient greece. we worryrue because about trade wars and the relationship with donald trump in the chinese premier. >> people come to this impression. recentne of the most example being the changing germany ofp between

1898, which was with the u.k. and germany becoming bigger and challenging the u.k. as a european power. escalationed in an of the relationship. you also have to take history and the context as farce the development from human beings. we are making our experience. we are digesting metrics. go into mistake after mistake? i doubt it. i think we are getting into a different relationship between the two powers. i do not believe into this type of theory. is too aggressive. the peterson institute talks about compensating factors. it is not just dollar and in the, it is against 12 or 14

countries in asia. what will it do? you wrote in your report the idea of stronger dollar against select countries. are those countries asia and they all adjust? >> the reason we are projecting higher data, there is a huge output cap sitting there. china overdidve there economy for four decades. you have a stock of money relative to their reserve or reserves relative to their money at a low level. you look at deposits relative to gdp at a high level. you want to diversify your assets out of china, and that is creating this tension and creating this flow which has twice led to significant equity market corrections.

august of 2015 and january last year. what we have seen since then in china is they are taking preemptive measures. when they were stepping into this environment last week, i see that as a good thing. they are trying to calm the situation. they're trying to be on top of the situation. they have learned from the past. tom: thank you so much. hans record with morgan stanley this morning. we will drive this discussion forward in the next hour. marvin barth will join us on many of the same themes. we will look much more closely at the challenges for the united kingdom. from london, this is bloomberg. ♪

tom: this morning, the price of a reflation trade is higher inflation.

pound sterling this morning, weaker. 2017. time to kick off the european debt debate. simply, they will kick the can further and farther down the road. in this hour, margaret barnes from barclays. and the senate says no to trump nominees. what we have is a failure to disclose. good morning, everyone. this is "bloomberg surveillance." we are live from london. i am tom keene. francine, it is great to come over before davos. everyone transits through london. we get a lot of co's later in the week. we get a little bit of perspective of what theresa may used to do. center. trump front and ahead of the inauguration. in new york, here is taylor riggs. taylor: the u.s. senate begins

confirmation hearings today for at least nine of president-elect donald trump's nominees. trump predicts all will be confirmed. tillerson, whox trump named to be secretary of state. he will answer questions about his ties to russia and his extensive investments. the u.k. willys need a new trade relationship with the european union. there is growing concern that may will pull the country out of the continent's single market. the pound fell to its lowest level against the dollar since october. senior managers of volkswagen find it risky to leave germany. prosecutors are planning on charging more of them in the in missions testing scandal. according to a person familiar with the matter, lawyers for some top vw executives have warned their clients not to leave the country.

xi jinping will become the first chinese head of state to address will become the first chinese head of state to dress the foreign conference in -- to address the foreign conference in davos. global news 24 hours a day, powered by more than 2600 journalists and analysts in more i am taylorntries, riggs. this is bloomberg. francine? tom? tom: taylor, thanks so much. let's look at equities, bonds, currencies, commodities right now. i am calling it a churn with interesting nuances in foreign exchange. a little bit flatter over the last few days with some dollar 1.0588., euro we go down to 11.49 after a remarkable level of complacency on the vix. indicating the quiet that is out

there. the turkish lira -- i will get to that any moment. sterling was a 1.21-something earlier. francine: i like the fact that you look at turkey. this is a political story. the dollar falling for the second day. gold, i want to show it to you. it is at a one-month high. at u.s.hat you look dollar versus pound. but euro-pound is probably the one that will go higher because we have not priced a hard brazen in as much as we had. be clear, euro-sterling has not moved as much as sterling-dollar. francine: if the trade barriers go up, then you will bring back your money instead of reinvesting in the u.k. so watch out for euro-pound. tom: let's go to the bloomberg

here. i wanted to impress marvin. this is a blend of currencies with uighur emerging markets over the last five years or so, a real stuck stability, leveling in emerging market currencies. i interpolated turkish lira on top of that, and it shows the outlier that has become the depreciation and outright evaluation of the turkish lira. francine, this is a huge deal to see how the turkish government and the turkish central-bank response. francine: it is something we will keep a close eye on. this is my chart. in blue, you have the ftse, so you can see the ftse 100. you strip it out, strip out the commodities companies. ,ou can see a lot of the u.s. it has something to do with pound, but it has to

do with commodities. tom: let's go to our guest today. we have been driving forward on currencies as one of the themes today. barclays, head of european ethics strategy. he has had to take a larger perspective going into 2017. you have the most inflammatory research piece i have seen in rage." "the politics of that is quite a statement. >> i took the title from the press, so this comes out of the press. this is something you have seen across a wide spectrum of , thisent countries rejection of the political center. that is what it is about, and that is a measure we use across countries. what is in the loss of vote share of the center-right and center-left parties.

does it lead to brutal moves? asvin: i think that it can markets transition to this. in the last year we saw this with brexit, with the u.s. election. markets clearly did not expect this outcome. shockingly, because the polls were relatively good in both cases. it suggests people do think, or the markets have been trained to think the status quo will always happen. once we get to a new equilibrium, i am not sure it will be persistent volatility. francine: a lot of people in power do their best to say it was not immigration fear that led to the election of donald votingto this country for brexit. but if you believe there is a politics of rage, does that means that marine le pen has a bigger chance of getting into power this year? marvin: i think that this is

across countries, and we are seeing some common themes that are related both in the u.k. and the u.s. there are some that people have not caught on to as well as perhaps our research would suggest. to your specific question about marine le pen -- yes, there is definitely increasing support for candidates like herself. but let's remember this is someone who in any poll we have seen over the last couple of years is down by around 20% to 40 percentage points in the second round. so it is highly unlikely. rage or: what does populism mean for the way the economy is structured? do we have the right populace in place? martin: this -- the realhis is question. some of the key things are wanted to take back sovereignty. greater demande

for direct democracy. these are the types of things that people have not been talking about. on theve been focused economics of trade and immigration. do not forget that the first 2 -- think about in your home country of italy. mores talking about integration with europe. this is not a rejection of europe. it is i want some sovereignty back. tom: i have a phrase for davos -- davos distracted, douglas b will did. 13 years, francine. marvin: i've got one for you. tom: mine is populism trumps davos. the elites have been overcome by all of the events you are talking about. but then how does that fold into your professional world of

foreign exchange? how do you take this political debate and either hedge it on the industrial/commercial side, on foreigne exchange? what do you actually do? marvin: you need to look at which countries are going to benefit and how. one clear example is that we should expect g 10 outperformance relative to emerging markets, not just in foreign exchange but more broadly. this is because clearly and emerging markets have been some of the greatest beneficiaries of globalization. this populism, however it comes in indirect forums or direct forums, will lead to some deglobalization. but some countries imposing tariffs are slowing down there long run potential growth rates, and that will have an impact on exchange rates. francine: what is your catchphrase for davos? is it better than tom's?

marvin: i would say "davos aloof." tom: i like that. that was brilliant. tomorrow, speaking of brilliant, out with a new book, ambassador haass will join us, with the council on foreign relations. discussed within trumpump employees -- new appointees. from london, francine lacqua and tom keene. stay with us. this is bloomberg. ♪

francine: we heard from douglas flint of hsbc. ofwill be hearing later on

mark carney, being grilled by mp's. asking about the repercussions and how they will handle brexit. francine lacqua and tom keene, in london for the week. navigate the weakness that is pound. tom: what is your next big moment for the brexit debate? help our global audience. francine: in the next two to three weeks, one is we are expecting a theresa may speech, and the second one is of course the supreme court decision on whether article 50 -- tom: february, right? francine: it is actually in january. kevin cirilli is in washington, our washington correspondent. he joins us now. before we get to the president-elect and the meetings taken quietly on capitol hill, the 44th president of the united states will speak tonight to the

nation from his chicago. what will be the surprise in his speech as president o obama will speak about a better america? kevin: obviously we are living in a very inc. is is than political time, but this is a president who ran eight years ago on hope and change and as someone who will unite the country. he leaves office at a time in which many americans are feeling increasingly divided. as he lays out his case and touts his legacy, also look for him to try to unite the country. tom: help us here with the last 24 hours. i think we can talk to you for 40 minutes or maybe even a full hour nonstop. quiet to go to the meeting last night on capitol hill with the speaker of the house, and the select bandits of the trump administration. who was leading the meeting? what was the dynamic of speaker ryan with the secretary

designate steven mnuchin and others? kevin: top republican leaders in the house met with steven mnuchin, and gary cohn was there, steve bannon was there. i spoke with someone who was in the room at this meeting, and what they said was that they laid out the groundwork for tax reform. they talk about all things tax reform, of course the corporate tax rate which trump has said he wants to lower within his first 100 days. but they also said they want to pass personal income tax reform. they want to take a full approach to tax reform within donald trump's first 100 days. senior source, it was a very productive meeting. the bottom line when you take a step back politically speaking, this meeting comes at a time when the confirmation hearings are set to begin, some of which are quite controversial. and then of course the second point i would raise is that they

were also talking about obamacare. that has divided republicans. i was speaking with senator rand paul yesterday, who thinks when republicans repeal obamacare, they shoot replace it right away. -- they should replace it right away. others disagree. thecine: we were following comings and goings of trump tower yesterday. we had alibaba, they come out and do a statement in support of some job creation and investment in the united states. is this what we will get day in and day out? kevin: it is. when you look last week and what josh earnest told reporters, he was not going to comment on a specific company and a new contract within the incoming we haveration -- truly seen the trump administration speaking day and and day out about specific companies. i talked -- i talked to a lot of

the trade industries, and they view this as that corporate tax reform as a big part of why businesses are so excited, as well as the regulatory policies. tom: i know you are doing welcome wagon on the side. ivanka trump. we need perspective from you on your washington this morning. ivanka trump, i am happy to report, is moving to a new house a few blocks from mine in washington. tom: this is a great piece from margaret carlson. what is the difference between georgetown and kalorama. help ivanka trump out this morning.

kevin: i would argue that kalorama is a little bit more cool. it is up and coming, it is a bit younger, if you will, and georgetown is the neighborhood everybody knows. but it is not in the thick of things like kalorama. reshapeps are going to washington and position themselves in the heart of things. tom: i am sure you will be on the doorstep with a welcome wagon. if you are not there, i know margaret carlson will be there. kevin cirilli, thank you. on the real estate of a transitional washington. tonight, the president speaks his farewell address. he will do that in his chicago. look for that speech at 9:00 p.m. new york time. this is bloomberg. ♪

tom: "bloomberg surveillance." good morning, everyone. francine lacqua in london. i am tom keene, joining her as well. marvin barth with some dollar dynamics right now he is with barclays. bring up the chart in new york, if you would. this is the bloomberg dxy index, which is pretty elegant. without brutal move 18 months ago and that new leg up right now. is this about weaker currencies, or is it simply about a trump reflation with a stronger dollar? marvin: it is more of the

latter, but you cannot discount the former part of it. the key issue seems to have been yields driving this. you can see that particularly versus thepanese yen euro, and there is this -- tom: the history is shock comes out of nowhere. we never see it coming. we have been talking about butterflies come of, that, and the other thing. where is your butterfly out there right now? marvin: i think right now the butterfly has to be sterling. tom: that is interesting. marvin: if you look at where sterling is on a long-term basis, you are at the weakest level sterling since basically two other times in history. it got down for a month this low 2009 in the middle of the global financial crisis, and it got down this low when the imf

theed out the u.k. back in 1970's. you know, you cannot say -- regardless of whether you have the worst possible outcome from brexit -- you cannot say this is the worst possible outcome for sterling. an all-time low. francine: i don't know what it means for inflation or boe. hopefully you will have more insight and we will get to that shortly. away from pound, what is the one thing you would watch out for? out fori would watch the dutch election. the dutch election is clearly one of the key events. everybody has been focused on france, but before we get to france, we are going to get to the netherlands. theooks highly likely that freedom party is going to take the largest share of seats.

given that other parties have said that they are not going to work with them, that is going to fracture the dutch parliament more than it looks like it has ever been fractured before. this could be a real problem. marvin, does that actually mean that the eurozone can hold together, or europe as a whole? at some point will we be kicking down the can until we do not have a can anymore? the political fracturing of europe is one of the key risks in the coming couple of years. come back toay, i the politics of rage issue of sovereignty and direct democracy being the key issues. increasing noise coming out of various segments of europe about actually maybe we should give up on the superstate idea and devolve more power back to the state. if you do that, that will adjust

those two key concerns, and you can effectively save germany -- and you can effectively save europe. tom: quickly, on deutsche mark, where is fair value? euro approximate for an independent germany? francine: who knows? marvin: exactly. you would have to decouple the entire economy at this point. remember, you are going to get a flight to call initially. tom: i like the idea of nobody knows. ,rancine: coming up next richard clarida of pimco. this is bloomberg. ♪

tom: good morning, everyone. "bloomberg surveillance" in london. look for brian wieser at 9:30

a.m. in new york, 2:30 p.m. in london. that will be in the 9:00 hour with brian wieser. we bring in paul sweeney, and his is on yahoo! is this really the end of the road for marissa mayer? is this the day where things change? paul: i think it is. they are signaling that they are pretty confident they can get the sale of the operating company of yahoo! to verizon completed. if that does happen, you are left with an investment company with ownership stakes in alibaba and japan. plan tomayer does not be it part of the management of that investment company, so stepping down and stepping back from yahoo! as we know it as an operating company. tom: i want to forget about the soap opera in "vogue magazine."

let's go to the yahoo! chart showing the arrival of marissa --er in the bloomberg circle in the blue circle. i am sorry, paul, that is a pretty successful chart for her. is she leaving chin up, or is she slinking out the door? paul: it is a little bit of both. the outperformance of the stock has been driven almost exclusively by the performance -- andaba, and that it that company's increase in value has been extraordinary over the last five or six years. yahoo! has been a direct beneficiary. from an operating perspective, she has never been able to turn the company around. that was a situation that was almost unfixable. yahoo! had fallen so far behind the googles of the world and the facebooks of the world, that when she got there there was no chance for her to turn that around. so when the see the sale of

yahoo!'s operating company to verizon, those legacy businesses from internet 1.0 back in the 1990's never made the pivot to internet to put zero, which has been dominated by google and facebook. francine: give us a sense of what yahoo! will look like, and the markets being stronger five years from now. paul: the operating company will now be paired up with aol, will have well over one billion users, which i really think is the threshold for advertisers to pay attention. they will be managed by tim armstrong, originally from aol, who really has got a good track record with madison avenue, with wall street. the expectation is they will be able to take that huge user base. some of the advertising technology that both companies to make a gamey

of it against google, facebook, some of the other large players and internet advertising. francine: thank you so much for all the insight. let's get back to some other corporate stories we are watching out for. here is "bloomberg first word news" with taylor riggs. taylor: a group of senate republicans is looking to put a delay on oh, care's repeal until march. -- on obamacare's repeal until march. there is no agreement on how to replace it. among those arguing for a delay, senator bob corker of tennessee. one of president-elect donald trump's senior advisers in the white house will be his son-in-law, jared kushner, who will work with white house chief priebus andnce stephen bannon. and soccer's world cup is getting bigger. fifa has agreed to increase the field for the world cup from 32

teams to 48. that will begin in 2026. of 64, matches instead it is estimated it can bring dollars fromon broadcasters and advertisers. global news 24 hours a day, powered by more than 2600 journalists and analysts in more than 120 countries, i am taylor riggs. this is bloomberg. francine: now let's discuss commodities, questioning the stability of a lot of the commodities. this is what they are talking about. .e need to look at iron ore the commodities market overall has been questioned. this means that barclays is suggesting it is possible there could be a trade war. between donald trump and china, which could disrupt global supply. marvin barth is still with us.

thank you both for sticking around. we seeing a shift in a lot more growth and appetites for commodities. will there be a peak or a downturn in china yet the -- or a downturn in china? some, you're seeing recovering global growth. after that, some markets like russia, they are producing commodity countries. i think that is overall supportive. the u.s. has a big infrastructure, and that also could be quite useful. francine: how much are you expecting from infrastructure spending projects? what does that do to the price of commodities? kona: the u.s. is really not huge. when it comes to the final numbers, the u.s. potential

fiscal stimulus pales compared to what you're seeing in china. china at least 42017 will maintain their stimulus on real estate construction, and this is going to continue to support demand -- for iron ore, steel, coal. when i first study ammodities, ed and f man was storied company. there were doing it with ed and f. here is our single best chart, a boring old bloomberg surveillance chart. great commodity deflation. within this is the merchant around sugar cap and particularly about the emotion of coffee. is the business of coffee for you people the same as it was 10 years ago or 100 years ago?

kona: interesting question. they are emergent -- they are a merchant company still. you are seeing demand for high-quality special coffee from key -- it is very much driven by millennials and hipsters. do you know she was not looking at me when she said that? our entire staff was in a four block area of brooklyn, and the hipsters are driving your world. do you still have to hedge coffee the way you used to? kona: you certainly do. it is concentrated in brazil, vietnam, indonesia. variable climate and weather issues. that is volatility still very immense. tom: why is the coffee in london better than in new york? is it

because it is closer to italy? francine: of course. tom: help me with sugar. it has become a huge political issue. give us an update on the commodity dynamics of sugar. that sugar wass one of the best performing commodities last year. in the middle of a two-your deficit. year, it has done quite nicely. how do you speculate successfully in coffee or sugar? you are on the other side of the trade. is there any way to make money consistently in coffee or sugar, or is it a license to lose money? kona: no, that is the job of research. we have to understand the regions, what trade flows make sense. that is the way you understand that you have to go along or you have to go short. honest, both sugar and

coffee. francine: talk about trade wars. when you look at soft commodities, a lot of it has to do with the weather, hurricanes, crops, and patterns. if donald trump goes after a country that solely or 80% sugar, -- or 80% export what do you do? it is now unpredictable. kona: sugar will be one commodity that is immune to a potential trade war. commodities like soybeans, where the u.s. relies heavily on china . 50% of u.s. soybean production goes to china. impose xre going to could of tariffs, china affect soybeans. that could be huge because there will be a glut.

of aif we get the rage strong dollar, does that affect typically akona: strong dollar is not good for commodities, so on that basis, assuming we are thinking the dollar is going to be strong, it should not do well with commodities. gold could do well because there is a lot of volatility there. we expect inflation to go up, so -- thatl be good to will be good for commodities. as well?ou do tea kona: no. tom: we love the smoky earl grey. thank you for looking commodities.of marvin barth stays with us. coming up today on "bloomberg

daybreak: americas," a conversation with the founder of sky bridge capital. this is bloomberg. ♪

francine: it is "bloomberg surveillance." tom keene is in london for the week. we are looking at brexit, the pound, and dollar dynamics. tom: and the temperature in davos. to investyota plans $10 billion in the u.s. over the next 10 years. the automaker's ceo for north america outlined the company's plans an interview with bloomberg tv. investments in mexico have drawn criticism from donald trump.

optimism among america's small businesses rose last month for the most since 1980. expectations about the economy's prospects improved the medically following the presidential election. -- latest survey from the the latest survey says more companies plan to invest and hire. in hong kong, an unnamed buyer has bought a mention for $86 million. the home is 7900 square feet. it overlooks hong kong's exclusive bay. that is your bloomberg business flash. francine: thank you so much. philip hammond is on the european tour for the brexit process. boris johnson is taking questions in parliament. a brexitined by

reporter. marvin barth is with us as well. great to have you on the program as always. think -- this is what marvin was saying -- a lot is priced in on a hard brexit when you look at the pound and dollar dynamics. do we assume that it is now a hard brexit so that we start from scratch, our relationship with e.u.? >> when you look at what theresa may said yesterday in her speech, it was not really about brexit at all. she was asked about hard and soft frexit. she said for a start she does not accept those terms. but then she was clear that what she actually wanted to see was a completely new trading relationship between the u.k. and the european union. that does not sound like we will be heart of the single market after brexit, but it does leave open the option because she is not completely ruling it out explicitly. she wants a new relationship and not to hang on to existing membership with e.u..

assume that she wants to control lawmaking and immigration. if that is a promise, it is very likely that we will have to follow the rules, which is that we do not have access to markets. merkel has made that point in the last 24 hours. she has given a speech in which she has said there will be no room for cherry picking. the u.k. will have to accept all of the key freedoms that go with membership in a single market. a toughening of her stance. tom: your wonderful book "why the tories won" misses the mark on why labor loses. stand, and where do they need to be in six months when they do with prime minister may? labor is behind the tories,

a good 10 to 15 points behind them. they have good ground to make up for jeremy corbyn will be making a speech later on today. the issue is around immigration, really. tom: they could get that seem to coalesce in opposition? tim: they have failed to get to grips with the immigration issue. it isas one reason why -- difficult for labor, because if you look at the makeup of the areas that supported labor in the last election, there is a pretty even split between the number of those areas that were very strongly pro-brexit and the number that was very strongly post day. strongly pro stay. tom: do they want some stability when they coalesce around immigration and migration? marvin: i would be surprised if sterling was a big topic of

discussion for jeremy corbyn right now. they have so many bigger fish to fry right now. some of the issues you were getting at about the erosion of , and their owne internal disarray. with respect to sterling, one of the things i think is important here is that we have not seen that much pass through into either inflation or exports yet, and we have done some pretty significant econometric work on this and found that actually historically, once you control a preferred margin, there is very little pass through in the u.k. it is not clear how much sterling is helping. francine: what does inflation mean for the consumer? we have had strong economic data out of the u.k. and the wageat 4% increase -- how does that affect

me as a consumer? marvin: we do expect exactly the erosion of real wages that you are talking about. that is one of those things that is going to keep sterling at lower levels, but as we talked about earlier, it is at such historically low levels, it clearly has to have upside from here. francine: we know the prime minister. she has given three speeches that really focus on inequality. she wants to make the u.k. a fairer society. how do you succeed? said herself in a speech yesterday, it is the big issue. a lot of politicians have promised to deliver that kind of equal society. she is clear that she does not want her premiership to be defined solely by brexit. this is the issue that gets them out of bed in the morning, trying to make things work more equally for people. she is committed to doing it and

will set out more details in the coming weeks, with a series of further speeches she has promised to give. francine: thank you so much. marvin barth stays with us, talking more with us. look for this guest at 10:00 a.m. in new york, 3:00 p.m. in london. this is bloomberg. ♪

francine: this is "bloomberg surveillance." thekeene is in london for week. coming up is "bloomberg daybreak: americas." alix: finally the team is back together for the first time in weeks, and we will tackle the data out of china, and how key it is to china as well. along with the ftse as well, up for the 11th straight day. we are looking at nine record closes following that. and we will be digging into the

trump administration transition and the confirmation hearings. we will talk with anthony scaramucci, one of the key members of the trump transition team as well. and tobias levkovich of citigroup. he is a bull. what about down 20 k? we just -- what about dow 20 k? we just cannot seem to get there. and you move from london to davos next week. i am jealous. you get to ski. alix.e do not get to ski, it is going to be freezing. let's get to the forex report. turkish lira, the e.m. of choice this morning. i would also note euro-swissie 1.0726, stable. trump and the elites of europe,

saying we are not going to play this game. you are not going to flood our nation. what would be the s&p strategy? this is the question for the last several months. we have seen reserves pass 100 gdp. this seems to be their continued approach. we are going to maintain negative rates and we are going to intervene aggressively to prevent any sort of politics of europe blowing back into the swiss franc. francine: they say no, but how much do they have to spend 48? marvin: spain the brexit, i want to put out there was another country in europe -- speaking of brexit, i want to put out that there was another country in europe -- right?e: switzerland, and they had to back down.

marvin: you had the swiss franc , and you-decade highs have sterling at multi-decade lows. face the same issue, and switzerland does two thirds of their trade with europe. the u.k. does one third. tom: thank you so much. marvin barth from barclays this morning. he will join us on bloomberg radio. tomorrow on "bloomberg surveillance," richard haass will join us, on the council on foreign relations. out with a new book, "the world in disarray." from london, this is bloomberg. ♪

guy: good morning and welcome back to "daybreak."

i'm jonathan ferro. back together in the markets, futures pretty stable across the board. u.s. small business optimism surging to a 12 year high. if you switch up the board, sterling weakness and it ftse rall continues. yields up. alix: good to see you. here is what you need to know. inflation ahead. factory prices rising at the fastest pace in five years, adding to the global deflation seen in the market. and a post-brexit pound is the gift that keeps on giving, a double record for the ftse 100 as it haeadeads for his ninth all-time high. up senator jeff sessions is -- how many democrats will vote against him, and what potential changes could he make? that is what you need to know. david: they