♪ francine: trump talks, the president-elect gives detail on policy. troubled waters -- trumps bid for secretary of state says china must be denied access to artificial islands that have built in the south china sea. mark carney defends the bank of england policy moves, saying it helped financial instability. good morning, everyone. this is "bloomberg surveillance ." i am francine lacqua in london.

we are getting breaking news, a little bit of data out of germany. one point 9% move in 2016, a touch above analysts' and economists' expectations. we were expecting a 1.8%, and we have a 1.9%. it is pretty much in line with estimates, rising 0.7% month on month. we had estimated 0.2%, so it is coming and above expectations. we have a little bit of china december new yuan loans. it goes back to an economy in china that may be boiling up a little bit, and you china loans increased almost doubled from the period last year. let's quickly check on the markets to see what all of this piece of news means. we had the first news conference, press conference by donald trump yesterday, the first one sense july of last

year, certainly the first one since he got elected. maybe because of the lack of policy details, the dollar weakened a little better there was a little disappointment and markets about the press conference, and that caused investors to unwind trade positions. gold, for example, backup, the yen $114. let's get to the bloomberg first word news with sebastian salek. sebastian: china must be denied access to the artificial islands it built in the south china sea. rex tillerson also said they the world wants strong united states. mr. tillerson: to achieve stability in the 21st century, american leadership must not only be renewed, it must be

asserted. we have many advantages on which to build. our alliances are durable, and our allies are looking for a return of our leadership. amid signsthat comes of growing trade tensions between the u.s. and china. china's grain variety, and move two point $4t billion in agricultural sales. the u.s. is set to file a complaint with the world trade organization, alleging chinese subsidy. says oiletary-general producers will decide in may if more output cuts are needed. speaking in abu dhabi, mohammed barkindo spoke of production and not of price. we have no price in mind, but we are confident the processforward,

will be able to restore some that willm price restore investment in the industry on a sustainable basis. and a $13 billion offer come almost as much as the company's value, asking it improve the conversion of every 10 share of unicredit to one share. the stocks dropped more than 45% last year. global news 24 hours a day, powered by more than 2600 journalists and analysts in more than 120 countries. i am sebastian salek. this is bloomberg. ks.ncine: than the dollar fell and treasuries gained as investors throw their online trades. president-elect addressed the rushin russian hacking claim, hs relationship with putin, and the wall.

hacking, ias far as think it was russia, but i think we also get hacked by other countries and other people. trump, ilikes donald consider that of affect, not a liability, because we have a horrible relationship with russia. russia can help us fight isis. neverg like that should have been written, it should never have been had, and it certainly should never have been released. we're going to build a wall. i could wait a year to half until we finish negotiations with mexico, which we will start immediately after we get to office, but i do not know when. as soon as our secretary is approved, almost simultaneously, shortly thereafter, a plan. it will be repeal and replace. it will be essentially simultaneously. not you. your organization is terrible. >> you are attacking our news organization.

can you give us a chance to answer the question. mr. trump quiet. i am not going to give you a question. you are fake news. francine: european drugmakers are following their u.s. counterparts come almost down 3%. let's bring in our global news correspondent, stephanie baker, and peter dixon, executive at commerzbank. there are some many questions that the markets have about the news conference. are we going to see many more press conferences like we saw yesterday? stephanie: yes. i think the press corps needs to rethink their strategy with trump. they got used to asking these three-part questions with president, which he would diligently answer in turn. you saw yesterday, they tried that strategy with trump, and he

went all over the map, i think even asking direct questions, he did not necessarily answer directly as well. highly unusual, unorthodox press conference by the president-elect, and it gives a signal of what kind of president-elect trump will peter, --wille: follow. francine: peter, i imagine you have more questions about policies. pharmaceutical stocks -- there was no policy confidence whatsoever. it was a car crash. but i think that is right, it has a benchmark for a new way of doing policy, doing government, and i do not think many people in the market like what they saw yesterday. francine: because of the style, because of lack of substance? peter: both. this is a press conference, as you said, where the president

failed to answer questions. expected muchever in terms of policy anyway, but i can understand why people are, because they have been led to believe some fiscal stimulus is coming. apart from building the wall, i am not seeing and for structure planning whatsoever. he has been tweeting when economic data comes out, saying "i have done this." this morning, he wakes up, he watches the markets, will team trump regroup? stephanie: i do not think he is watching the markets that closely that will drive his strategy. people say even his closest advisers can't influence him to keep him on message. i think what you will see is ongoing, you know, interventions company by company. mentioned the specific

automakers, for example, yesterday that he had met with and claimed to have extracted promises from. you'll see more of that. he hinted at more of that to come. he will have more announcements about companies bringing jobs back to the u.s. that will continue. as his nominees go through the confirmation process, we are going to see more details about whether or not his policies mesh with ocs nominated to be part of his administration. we are seeing disconnect on russia, with rex tillerson, what he said on a harsher stance towards putin versus what trump said yesterday, which was -- still left a summit dark with how the u.s. will respond to russian hacking claims. francine: in your reporting, what do people first want to find out about? the relationship with russia? we were watching the hearing with rex tillerson. the relationship with china? talking about the islands as well.

people, i imagine, are concerned to try to understand, or the market is, with the foreign policy of the u.s. is. stephanie: i think there are still big question marks. days, theywithin 90 will do an in-depth report on hacking, not just russia, but generally about cyber security. we can expect to see that. i think there are lingering questions, the dossier, although he has dismissed it as fake news, and no journalist has been able to stand it up, i think will contribute to lingering doubts about his ties with russia and why he seems to be adopting a soft stance towards the russian government in light of the hacking allegations. francine: peter, are you looking at algorithms? when he tweets about a equity that you own or recommend or industry, but you automatically buy? i am not sure how to do that. peter: it is a growth area, and

over the course of the next four years, people have a lot of fun tweets.ze but at the moment, you have to give mr. trump the benefit of the doubt. moment, it is not particularly good. francine: are you really a seller of pharmaceuticals, and are you a buyer of infrastructure projects, building materials, things like that? peter: i do not think you can base strategy on that. sure abouthere not trump is the consistency of his statements, his policy. "i'm going to go after big pharma," he might certainly will, but he may be forced to back down, of course. the stock will rebound really quickly. it suggests that we might get a

lot of volatility in the versatility sectors. francine: all right, we will continue watching trump and his tweets. stephanie baker come our global business correspondent, and peter dixon stays with us. later today, we will be speaking 12:25ellyanne conway at u.k. time. let's get to the bloomberg business flash with sebastian salek. beastian: it was a business , sales rising by 2.3%t, which compares with analysts' estimates of no growth. u.k. retailer said they continue to reduce, including over black friday. cartier sought revenue gain by 5%. sales are boosted by demand for

a luxury jewelry in the u.s. and recovery in china. the former barclays director has been jailed for five months in the u.s. for passing inside information for cash and free work. july,aded guilty in making a legal trades, bringing about $76,000. and that is the bloomberg business flash. he was so much. mark carney launch a defense of the bank of england, saying the actions helped divert stability problems. he was speaking before the uk's parliament treasury. majorrney: a number of institutions would have been caught on the wrong side. is reason they were not because the bank correctly identified, in my judgment, a sector ofe financial

a certain outcome of the brexit vote. peter dixon, equities economist from commerzbank, is still with us. we also have the head of global , thomas wels. ubs we do not know what brexit will look like. what is your forecast? thomas: my forecast is nobody knows. it is difficult to predict. we were asked the day before and the day after the referendum what is going to happen. much, i think, is already priced in against all other major currencies, the competitiveness of the u.k. actually increased. we actually stopped investing significantly, or we stopped

recommending investing in the u.k. to our international investors already a your ago -- year ago. francine: let me figure this out. i am going to play devil's advocate. in 10 years, you could become like monaco, and therefore real estate will shoot up. is there any truth in that?is it a 10% possibility, or is it nothing? thomas: we believe that brexit would have a 25% probability, but still -- francine: it happened. thomas: we have recommended for the last 12 months not to invest because if it would happen -- as it happened -- to our clients, that we recommended investing. we invest in the industry for the long-term. contracts are for 25 years sometimes. ubs, for example, on their

$1ance sheet invested billion in the infrastructure in the country. we cannot move so easily, so we are locked in. francine: peter, what do you think about the u.k.? peter: brexit itself? francine: and the falling pound. peter: the last six months, it has been a good time to be an u.k., continuing to rise very sharply. i do think, however, as the pound reaches the bottom, which i actually think is not that far away, that we might start to see equities fall. i think the run is being overdone. i would be cautious in the first half of 2017. francine: we have two ftse charts, which are quite popular with our viewers and guests. the first one is the ftse, a normal ftse, a record high, but if you strip out commodities from the ftse 100, then this is where it is.

it is not on all the same story from a record high we're talking about. the other chart, which i will get up for you in a second, is the ftse priced in dollars, a very different picture. is it driven by the fall in pound, or is it driven by commodities? peter: to the extent that commodities are driven by dollars and therefore the pound makes it significantly different, clearly it helps push the impact, but a large chunk of the index actually is traded internationally anyway. i think you will find a lot of dealer stocks have done ok. it is not fantastic, but we are seductively -- significantly up on the june low. there is a sense overall that the u.k. market generally has been ok. obviously, domestic index will struggle. francine: thomas, you set you told clients to avoid u.k. for

about a year. when will you say "now, guys, you can come back and"? is a love money that wants to come into the u.k. -- francine: from where? thomas: mostly asian money, which they see in london and opportunity because i think the pound maybe overdone. we start looking to the markets ,ow, whether we saw the bottom let's see. there is a significant overcapacity. i think the next inflows for the next 12 months could be 200 million pounds, 400 million pound range. dixon, equityr economist from commerzbank, thomas wels, head of global real estate at ubs global. up next, european insurgency in china's clampdown on capital outflows affecting capital markets. we will discuss global real

estate, especially on china. this is bloomberg. ♪

♪ francine: this is "bloomberg surveillance." i'm francine lacqua in london. a new u.s. president, china's capital outflows, those are challenges and opportunities to investors in global real estate. with me, a person responsible francs,ging 77 billion thomas wels, head of the global

real estate at ubs asset management, and peter dixon, economist at commerzbank. thank you both for sticking around. if you look at china, and this is probably the biggest risk to 2017, if you look at it from a trait perspective, currency wars, they have huge outflows, what does it mean if they try to curb the outflows for property prices in china? thomas: it should help the markets to stabilize, except that we already saw some niches, likely residential prices, floating up over the last 12 months or so. they have a certain overcapacity in the market, but usually when insurance companies cannot invest internationally, they are going to pump the money back into the local economies, be it equities, real estate. real estate, the returns are in

currency, close to what investors would achieve internationally. we have not seen so much flows out of china into international markets recently. butlways was lumpy, stopping this is probably actually helping the local economy. francine: peter, if we look at the risks, i do not know if there is a direct link with china, but in the last two months, two and a half months, we have seen a lot of rotation that we are seeing a lot abou of -- his money automatically go back into bonds? peter: it could well do. we are seeing a market, which has benefited from a lack of monetary policy over the last eight years, nine years now. so there was a sense, i think, have goneies perhaps as far as they will go, so

investors will be sensitive to shock. we are now in an environment in which u.s. is stabilizing, treasury yields have picked up significantly because of the last 12 years, so there is a consequence, there is incentive, at least for u.s. investors, to think a little bit more about bonds versus stocks. it could be close to it. francine: if someone were to decide to absolutely invest in real estate, because the u.k. at the moment is a little bit of a wait and see moment, what is the best place to invest? is a germany? u.s..: i think it is the the u.s. i 45% of the global real estate market. it is very liquid. if you're concerned about currency, there is more uptick into the u.s. dollar than a drop into the u.s. dollar. the new government is not going to destroy the real estate keep my so i would

position in the u.s. stable. we still believe that the recovery story in europe is intact. germany is relatively expensive already. over the last three years, we spain recommend italy and , we invest in italy and spain, and this recovery, specifically in spain, is continuing. european growth is stable. francine: yeah, it is just not increasing, but you're right. thomas wels, head of global real estate at ubs asset management, and peter dixon, equities at commerzbank. this is bloomberg. ♪

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secretary of state says china to respond toe the country's actions in disputed waters allows it to "keep pushing the envelope," and that the world once a strong united states. mr. tillerson: american leadership must not only be renewed, it must be asserted. we have many advantages on which to build. our alliances are durable, and towardies are looking our leadership. sebastian: that comes amid growing signs of trade tensions between the u.s. and china. a move could hit the agricultural sector. meanwhile, the u.s. is set to be filing a complaint with the world train organization, alleging chinese subsidies to .luminium producers opec secretary-general says oil

producers will decide in may if more output cuts are needed. speaking and out without, -- speaking in out with dobby, mohammed barkindo did not give a -- speaking in blue dobby -- abu dabi, mohammed barkindo did not give a specific price. mr. barkindo: it would restore equilibrium and price, it would restore investments in the industry on a sustainable basis. sebastian: south korean officials have been questioning sampson out tronic vice chairman , -- electronic vice chairman, jane lee, the fact that he was identified as a suspect. prosecutors want to know whether samsung and other companies make time is to a confidant.

shareholders meeting in rome will as to approve a conversion for unicredit of every 10 shares to one share. the stock drops more than 45% last year. global news 24 hours a day, powered by more than 2600 journalists and analysts in more than 120 countries. i am sebastian salek, and this is bloomberg. francine: thank you so much. if the bond market double bursts , it will be worse than the 1995 bond massacre, which is the biggest loss on record. paul schmelzing, currently visiting scholar of the bank of england, and also peter dixon commerzbank. paul, i came in, and the first thing we read a couple of days ago was, "if you thought you are , wait untilmiest you read this one." paul: it is well done, of

course, it is not news that we have had an impressive run since the 1980's, and people since then ever since then have made gloomy prognosis, especially quantitative easing across western economies, that i think was very few people appreciate is the sheer magnitude of the bond rally that we are now at. part of the bid last week was to track as far back the historical data of the so-called risk-free rate, as far back as we can, and put the current market into perspective. francine: you also talk -- you can look at historical and say, "we have never seen anything like this," but you also talk about a perfect storm. this is basically a sinking of the bond yield curve, monetary tightening policy, structural returns. does it mean that it could get ugly or turn quite quickly? -- i the best implication

mean, i zoomed into three case studies in the 20th century to look at the various drivers that could impact the current bond markets. one of them is a return of inflation, and i focused on the second half of the 1960's to really show what can happen when you have a tight labor market, improveop of that, you fiscal stimulus. byk then, we had it done lyndon johnson against the vietnam war veterans. inlation almost quadrupled the u.s. within a span of three years back then. the second aspect that you mentioned, correctly, is the 2003 japanese episode when we had tapering fears on top of a quantitative easing program. japan was the first country to improve -- to approve a large-scale quantitative easing program in 2001.

2003, potential tapering from , and the curve by a massive 160 basis points in a span of two months. we've seen since august, a similar dynamic -- francine: peter is cautious. i know you are. but you are the optimists. peter: absolutely. this is an of cycle. we have always wanted for a long time higher yields. first the bond market goes off, bond yields go up, no tension, everyone is happy, so there is a silver lining. francine: what should we actually fear or be worried about? that it takes people by surprise? is brutal moves that the markets don't like. of comparisonoint is 1994, which people have been

worried about for a long time. it was the biggest annual loss in global markets on record. it wiped out about $1.5 trillion in global bond values in one year. a lot of people got it wrong, a lot of major hedge funds got burned. in the 1960's, we were talking about a real decline of bond paces of 40% because the of inflation often takes people by surprise. if you are coming from a very row rate environment, the shee acceleration i can evolve out of that environment takes a lot of people by surprise. generally speaking, you would have thought there would be some rotation, but what happens is when you get the kind of fence rattling hurricane that we are talking about here, the financial aspect could probably take a big hit. i think i would be very cautious about equities generally, specifically since they are already significantly overvalued

on pretty much all measures. that is probably pacing the trend up toward cash or more likely toward real assets. $1.20 pound, will we ever reach it? psychologically, it is a big deal. peter: it will make some big headlines. we have come very close. if it does, then fine, but the world will continue turning. quickly, paul, very what is the piece the worry about the most -- treasuries, german bund's? paul: in this case, 10-years. will stayre:, paul with us, so does peter dixon from commerzbank. coming up, a perfect storm for bond markets. we will see what our guest, paul schmelzing, says is the worst in history. plus, the president-elect has a keen interest on tweeting.

and in the next hour of "surveillance," we will break down what the president elect's first news conference in six months means for investors. for more, tune into radio daybreak live in london. this is bloomberg. ♪

♪ francine: this is "bloomberg surveillance." i am francine lacqua right here in london. let's check in on your markets with mark barton. ftse 100 index, yes, after 12 consecutive days of gains, a record, the ftse is falling. .nlucky 13 for the ftse

it rose by 3.25%, the top five performers, by the way, all mining stocks. all but 19 on the index rose. since rsi, as it has been december, don't forget, 10 of those 12 were record highs, which itself was a record in itself. up, big news today, shares by as much as 5.7%, the biggest gain since july. deliveringing sales, a confidence boost to this retailer, which is had a pretty tumultuous year, marked by store closures and plenty same-store sales in its clothing and home , endingrose 2.3% december 31. this move indicates chief executive steve rowe, his moves to improve the popular line

seems to be winning. shares dropping as much as 7.9%, the biggest gain in four years, for the maker of cartier necklaces. predicted, but luxury and a rebound in watch sales at its own stores. it has been a bit of a struggle swissis downturn in the watch industry since the crisis cutting jobs and some of the to divisions. let's finish up with gold. after the biggest quarterly loss in 12 years, there are signs the worst may be over for gold. the client 13% since early 11-month falling to an low, gold has rebounded by 6.5%. francine: mark, thanks so much. 11-month for bond markets. he says it will be a periodlet'y

guess says is a perfect storm of sustained losses. paul schmelzing is a visiting scholar at the bank of england, also at harvard. what does it mean for here? paul: if you look at 800 years of bond market history, when the yields are less than 140 basis , that marked the lowest rate ever in nearly 800 years for the risk-free rates. you have to go back to the times of the crusades to really find an equivalent cycle. the flipside of that, as you can imagine, is that the pressures are now very intense for that sort of market to reverse. i am talking about the perfect storm because we would see not inflation dynamics picking up, if you look at chinese ppr, if you look at german inflation coming u.s. wage growth, u.s. jobs report, we are talking japanese history, for instance, that seems to culminate to some extent, really

come together at this point, and could intentionally create the perfect storm. francine: paul, when we talk about history, and you go back to the crusades to look at the risk-free rates, doesn't mean that we are actually measuring things wrong? models base is that our are wrong because we have never seen this before and we misguidedly the risk. paul: to some -- we'd miscalculate the risk. paul: to some extent, yes. purchases of bond yields, obviously, they have come down sharply. i think the market has been conditioned since then for a certain mispricing of the real risk, definitely. it strikes me that today, you are seeing italy paying less than 10% for the 10-year. it is fascinating that it is half the rate that a tiny as they to century when they were the dominant financial power all over the world. thecine: but this is what

ecb wants -- the ecb does not want to see risk out there. paul: that is absolutely correct. but that is why the normalization process in the ecb withdrawals from the qe program, it could be quite wobbly. the market needs to find the appropriate risk level again. we have not had a lot of practice. francine: paul, thank you so much, paul schmelzing, visiting the bank of england. coming up, using social media to make friends and influence people. president-elect donald trump has been making the most of it. what more can we expect in 2017? we will discuss that next. this is bloomberg. ♪

francine: this is "bloomberg surveillance." i am francine lacqua right here in london. let's get straight to sebastian salek with the bloomberg business flash. risingan: i'm sales 2.3%, compared with analysts' estimates of no growth. the u.k. retailer says it will -- itually discount over

is because of continual discounting, going over black friday. the owner of cartier so revenue growth by over 5%. sales were boosted by demand for luxury jewelry in the u.s. and a recovery in china. and the former barclays director has been jailed in the .s. stephen mcclatchy pleaded guilty in july for offering tips to make illegal traits. and that is the bloomberg business flash, francine. francine: thank you so much, sebastian salek. social media is not just social, now seen as powerful tools when it comes to addressing the people. a president-elect donald trump has been making the most of his account.

general motors was warned to make cars in the u.s. or face a border tax. present putin received public praise, -- president clinton received public praise, but social media -- president putin also received public praise. but it has also been blamed for fake news. mr. trump: i want to thank a lot of the news organizations, some of them have not treated me well over the years, a couple in particular, and they came out so strongly against that fake news and the fact that it was written about by primarily one group and one television station. thecine: joining us now is ceo of social media tech company hootsuite. we're big fans of hootsuite. the socialte, outcom media world. it is exciting for investors.

it is the buzz place to be at the moment. does trump help or hinder that? trump is definitely making social media relevant and is part of the conversation we're having today. it is showing how valuable and how powerful social media can be. but what doest, it mean? du have more appetite? are people saying to you, "look, i'm worried about donald trump tweeting about my policies? twitter."ed about further services you can give them? to be engagedneed in social. in social's are not right now, and it is an opportunity for them to get in front and create their own messaging. we see customers like ours, holders of large financial institutions, that are embracing social and connecting with their custom me in a better way. thinkingtunity around

about compliance, its risks, and how they can manage it, and that is what we do is help manage the risks around workflow and teams. difficultit can be finding your voice on social media, especially if you are a big ceo where every tweak could be a big liability. donald trump doesn't with ease ease.s it with if you're a big ceo, what is the upside of actually tweeting yourself? ryan: it is a core competency that everybody needs to build. everybody needs it in their ceo skill set. there is a risk of not having this competency. you think about how you need to connect with your consumer, and consumers now live in social. they don't go to a 1-800 call number to get to customer support -- they go to social media. the whole customer journey is living in social media from sales, marketing, and customer support, so your organization needs to digitally transform.

as the leader of an organization, you need to be there to have those conversations and understand what your customers are thinking. francine: in a fashion house committees easy to be popular and instagram because you have great pictures. is it counterproductive if you have a ceo that is not necessarily aligned? , fore thinking of ceo's example, big banks, to talk to the person on the street in london. they cannot do everything. n: i can disagree with accurate i think ceo's ceo's are the front of a band, and that -- brand, and they have to stand for what their company stands for, and the message can trickle down through the organization. it is not just millennials. it is connecting a generation out there, people on their mobile phones, mobile, social, real-time is all changing the relationship with the consumer. over the next two years, this trend is only compounding, and i

think that these ceo's have to build the core competency because they will kind of be threatened if they don't. francine: ryan, can you monetize this? kenny monetize donald trump tweeting more? -- can you monetize donald trump tweeting more? ryan: that is not our job. our job is to manage social media for large brands, and we help over 15 million businesses, 800 fortune 1000's to manage their social media at scale, and all the compliance and workflow around that. twitter, facebook, and others, that is more their job. francine: if i am a ceo, i need to be able to defend myself from attack, which can come from a president-elect or from a chinese counterpart. it is not even getting my brand out there. ryan: absolutely. it is understanding and being aware that your rant is being attacked, first off, so insights

and alerts around that -- that is something we help with. if you're running blind and do not know that is happening, that can definitely -- and this is more when we talk about the core competency and muscle building that you and the organization needs to do. your comps team needs to be prepared for if that happens. if you do not have that core competency built up and d-day hits, you have a real problem. you need to build up that core competency and then think about your messaging. that is part of building it overtime. you do not want to because flat-footed. that is where you need to be in mind. francine: do you have an ipo in mind? ryan: right now, we are just building an amazing company. we had an exciting year. we have made a number of acquisitions we will be talking about. francine: you have to tell me. ryan: we're not quite ready. we will talk about the next time we meet up. you very ryan, thank much. ryan holmes, hootsuite ceo,

joining me this morning. "bloomberg surveillance" continues an the next hour. tom keene joins me this morning. we will be talking about a lot of moves on the market, treasuries, a little bit of a movement in gold on the back of donald trump's news conference. we bring you the highlights from that. we will also be talking brexit -- what does it mean for pound, and just four days away from davos. jetlagged when we hit the slopes next tuesday. all that and much more coming up on "surveillance." this is bloomberg. ♪

♪ the trunk trade -- trump trade, the news conference

-- as trump brushes off criticism of his strategy on russia. the mexican peso falls to new lows but it is a different story for asian e.m. current. the u.k. finance industry makes a fresh push for a tailor-made brexit deal. iscome, everybody, this bloomberg "surveillance." francine lacqua in london with tom keene. quite a lot of movement on the market on the back of the news conference. tom: they raced onto a senate vote that occurred while everyone was sleeping. kevin cirilli will be from washington in our next hour. francine: a lot going on in foreign policy with china. let's get to the bloomberg first word news. taylor: obamacare is one step closer to repeal.

senate appealed a budget resolution instructing congressional committees to start work on legislation for repealing the biggest portions of the affordable care act. republicans have not announced what they will replace it with. choice forp's secretary of china should be denied access to islands it built in the south china sea. chinese --ailure to the number two leader in hong kong has resigned. she will leave her position as chief secretary tomorrow, and there is speculation she may run for the top leadership post. hong kong is wracked by political turmoil. haspular tv executive decided not to run for a second term. in south korea, prosecutors are questioning the samsung vice

chairman as a suspect in the big influence headline scandal that has led to the impeachment of the president. the focus could hurt his chances to succeed his father as head of the company. global news 24 hours a day, powered by our 2600 journalists and analysts in more than 120 countries. i am taylor riggs. this is bloomberg. .om: thank you so much let's look at equities, bonds, currencies, commodities. a little different seen today with the mexican peso crater in the last two hours. the reflation fears are a theme through "surveillance" today with risk curve flattening. oil turning. the vix, 11.48. dollar weaker. mexico with a 22 print and turkey, i do not know what to say about turkey other than it is really serious. francine: there is a lot of

research saying that maybe the central bank will come to a point where they have to do something. the dollar weakening, european stocks weakening, treasuries gained. it all has to do with disappointment on donald trump's press conference. vix, 11.49. tom: things are moving so fast that you wonder if the reflation , we saw by one vote the republicans got through that first issue on the affordable care act. a snapshot of where we are. yield curve, this is andrew sheets 101. the difference in yield, the two-year and 10 year, there is the explosion in reflation expectations, the blue circle. november 9 is the red circle. you roll over and we are back to where we were november 9 with a migration away from a certitude

of a reflation trade. francine: you are looking at treasuries, but we both wanted to show havens. mine is a very simple chart. and you see itd dipping back from early november when trump got elected, and then we have yen. havens are back. it could be that thing on that one vote or disappointment and fiscal spending. the markets are in a tailspin after the press conference yesterday. the dollar dipped as the u.s. treasury yields fell. trump gave few specifics on the timing and scope of planned policy. trump: as far as hacking, i think it was russia but we get hacked by other countries. trump, ilikes donald consider that an asset, not a liability because we have a horrible relationship with russia. russia could help us fight isis.

we are going to build a wall. acould wait about a year and half until we finish our negotiations with mexico, which will start immediately after we get to office, but i do not want to wait. as soon as our secretary is approved, almost simultaneously, a plan. it will be repeal and replace. it will be essentially simultaneously. your organization is terrible. >> you are attacking our news organization. >> quiet. i am not going to give you a question. you are fake news. francine: joining us on set is andrew sheets. tom: he took fake applied mathematics at brown. francine: of course. this is not in the cfa liberal course. it was not, or was it? how do you look at the markets

if this is what we go by? andrew: there is an enormous amount to unpack here. i think what markets have to deal with, and a very dominant piece of our economic outlook for 2017, we are dealing with an environment with a legitimately wider range of outcomes and before. --ore plausible ceremony scenario that the market moves toward euphoria. you also have a lot more risk to the downside on geopolitics, on policy disappointment, and the like. mathhave all sorts of questions for you but it is too early in the morning. i want to go back to the wall, this is a zeitgeist this morning . stephen king will be with us later. sheets,o know, andrew the morgan stanley view folded

into ellen zentner's fabulous coverage, what is the to 10 spread going to do? do?-10 spread going to andrew: we think the u.s. yield curve flattens further. it behaves differently from the yield curves we see in japan and europe. that is another one of our key themes for the year ahead, i think the reflation trade is a non-us trade. tom: where is your 10 year yield? andrew: we have it ending in 2017 at 250, a little higher than today but not substantially. francine: let me know how you deal with donald trump, because i know this was a rotation that was started before, but the markets tanked a little bit because of what he said. will he follow the markets or will they follow him? andrew: many of the trends we

have at the moment, while they accelerated with the election, were in place before the election and they have been driven by very easy year-over-year comparisons. it has been easy for inflation to rise because it was so bad last year. those trends are still with us, so as much as we like to think the market is too optimistic amount make -- about the amount of policy that is going to get done, you have these very easy comparisons to make it look like things are still accelerating to the upside. francine: when you look at bonds , if you look for example at italian yields, they are half of what they were in the 16th century where italy was king of the world in terms of finance. this is the ecb not wanting the markets to price in risk. andrew: i think it is a function of -- that question of how much

risk is in the price really varies. you mentioned liv-ex at the beginning of the program. i do not think 11.8 is reflective of a world where you have a much wider range of outcomes. if we look at the ecb, it is finally giving the weaker euro that we think it has wanted. economic data is moving higher, and it has a good incentive to stay dovish now, and that stevens the curve. help me with correlations right now. you are the cross asset guy. what are the correlations you see across equities, bonds, currencies, and commodities, and what does it signal? andrew: those cross asset correlations that we monitor, how various asset classes are moving with each other, have gone from 10 year highs to 10 year lows. we have seen those fall substantially and they fall for

a number of reasons, partially because global equity markets have seen much lower code movement. that is a healthy thing for a macro trading environment. we have always been complaining that everything is the same. tom: is the risk down the road that you get junk conditions down the road as age sbc -- hsbc is talking about? andrew: i think those correlations will go back up. thank you so much. we will be back with andrew sheets of morgan stanley. kellyanne conway, a senior advisor to president elect donald trump joins us at 7:00 a.m. in new york, noon in london. this is bloomberg. ♪

tom: it is new york, it has been cold. it will be cold in europe as well as winter is upon us. good morning from our london studios this week, francine lacqua and tom keene. taylor riggs with our business flash. taylor: johnson & johnson has tentatively agreed on a price to acquire actelion according to people familiar with the matter. they would spin off their assets into a new company and shareholders would be able to keep some stock. they had offered to pay more than $28 billion for actelion. profit rose more than expected at taiwan's semiconductor. apple and chinese phone companies have increased demand for high-end microchips. it is the world's largest contract hit maker -- chipmaker.

the british retail reported its best clothing sales and more than five years. arcs and spencer sales were up two point 3% in the quarter that ended december 31. that is your bloomberg business flash. newsine: donald trump's conference was dominated by questions about his relationship with the russian president vladimir putin. for the first time he conceded that moscow was behind the hacking of democratic computers but brushed off his relationship . rex tillerson also discussed russia in his confirmation hearing. >> we are not likely to ever be friends. our value systems are starkly different. there is scope to the financial effect relationship they can bring down the temperature around the conflict we have today. francine: brian class is an lse fellow and also with us for the

hour is andrew sheets. brian, thank you so much for joining us. if you look at what we heard from donald trump, he had in the past -- you have in the past been quite critical of him. what was the critical factor in the press conference? brian: we have a series of attacks on donald trump that i think are not partisan. there is a lot of issues that are not about democrats or republicans, but about american institutions. press freedom. keep in mind the last press ago sonce was 160 days you had six months of buildup questions. his attack on the media, intelligence agencies, and norms of the american public are deeply troubling to many people whether democracy or republican -- democrat or republican. was in your this

textbook at carleton college. if you were teaching first-year undergraduates today, how would you explain the new american democracy? brian: we are being exposed to the fact that a lot of checks and balances, the ones you hear about in school are not actually written in law. tom: are there going to be with mr. tillerson, will there be checks and balances within or outside the executive branch? brian: more and more we are seeing them rely on partisan standing up to their own party. lawas to either be held in or republicans holding donald trump to account, and we will see that happen very quickly because he is breaking norms and institutional checks immediately. francine: this is the donald trump we got when he was campaigning. to people in america care? brian: i think they do care.

was good at speaking to people, but governing is extremely complicated and they want results. does somebody who speaks in soundbites have the ability to push through effective policy? tom: the results for last night, they got through the first effort on the affordable care act by i believe one vote. that is not a gop majority. , -- reading,rating history going back to abraham lincoln of republicans against republicans? brian: the republicans have a narrow margin. trump'sy, as donald approval ratings will and and flow. quantity thatthis most americans dislike -- tom:

brian's parents spent $412,000 on his education to learn that politics -- politicians are only interested in the next election? that is a triumph. nothing has changed. look at whatn you the markets worry about, we touched on this briefly, but what does it mean for trade wars and fiscal spending? hethe end of the day, becomes politically toxic and that may mean they punish him by not pushing through spending. brian: this is bad for the market multiple. i think earnings in the u.s. will go up. you are going to have better growth next year, probably going to have somewhat easier fiscal policy and it will be easy for s&p earnings to rise. as investors look at this increasing uncertainty, some of the unprecedented political issues we are having to deal with, do you assign a higher or

lower multiple to those earnings? we think the market assigns a lower multiple which is why we ends at 2300. we are going to continue this discussion. it is an iced synthesis -- nice synthesis of andrew sheets and brian klaas. in the next hour, stephen king of hsbc. this is wonderful, stephen king with us in the next hour. from london, this is bloomberg. ♪

francine: bloomberg "surveillance." it is time for our morning must-read. visitingrom a harvard professor, paul schmelzing visiting the bank of england. he wrote an explicit blog last week and this is what we talked to him about this morning. by historical standards, this implies sustained double-digit losses on bond holdings, subpar growth in developed markets, and balanced sheet risks for banking systems with a large home bias. aas andhere with brian kl andrew sheets. what paul was saying is there is a perfect storm brewing and it comes to bond markets because of

the yield curve monetary policy tightening and structural things . will we see this reversal continue and will it be brutal? i think it is important not to get overly excited about the scale at which bond yields selloff. it is reasonable they be modestly higher, that there is still a lot of long-term factors behind the declining yield that are still with us. demographics are still working against growth, productivity is weak, and you still have a debt overhang that make it unlikely for central banks to opt for extremely high interest rates. we have to think about where is potential growth. -- we think that leads the 30 year treasury to be around 3%, which is around where it is today. i do not think, we are not in the camp to see yields go to 5% or 6%. piecehere is a research

after research piece, every buddy shows the debt growth. paul de grauwe sat in that seat yesterday and suggested that we are not going to see the bond market clearing and bond market write-down that we need to see. what is going to be the ramification if we do not write down troubled debt? that is one of the overlays of this whole scenario. andrew: i think the ramification is lower growth. the reason you write down debt and have created destruction is to increase productivity, and if you do not have that you have unproductive assets that hold down growth. if i a question of, even think that debt level is too high, what is the catalyst to do it? creditas seen a lot of growth, but why would you now all of a sudden see a lot of trigger a lot of write-downs in the european system? i do not think we are waiting

with bated breath for that to happen. francine: at some point, it does not have to be in the next six months, we have to start normalizing if growth is stronger. andrew: i think we also need to not be carried away. he has a leverage in the corporate sector move up the sectore in the banking has moved it down. leverage and the household sector is not that bad. i do not think it is anywhere near the scale of prior credit. feldsteing up, martin of harvard on mr. trumps fiscal policy. this is bloomberg. ♪

tom: bloomberg "surveillance," from london all week. tom keene and francine lacqua. taylor: the u.s. intelligence chief says he has told donald trump he is dismayed by leaks of

the classified report. it had unconfirmed details that russia had damaging information on trump. said the leak probably did not come from u.s. spy agencies. prosecutors have charged six volkswagen executives in connection with the emissions cheating scandal. to plead guilty to conspiracy and pay $4.3 billion in penalties. lastny's economy grew year. most of the growth was driven by domestic demand. low unemployment and falling interest rates led to increased spending. prime minister theresa may signaled she will not make any exceptions for the financial industry.

a lobbying group says the u k and e u should conclude an agreement that allows mutual market access and a transitional arrangement. global news 24 hours a day, powered by our 2600 journalists and analysts in more than 120 countries. i am taylor riggs. this is bloomberg. job,it was a responsible look at the british newspapers. trump rocked by british spies. this is global. francine: it is certainly global . the daily mail is somewhat more political than others. tom: i thought this was the new york times. francine: tom keene, welcome to london. currencies higher after donald trump's news conference. the worst-performing currencies were the exit can peso and turkish lira. andrew sheets from morgan

stanley, brian class from the london school of economics are still with us. paul, thank you for joining us. the turkishwith lira. the slump was so big in such a short space, what does the central bank need to do? they need to act? paul: they have already started to act. they canceled a repo auction this morning. that will tighten liquidity, a de facto rate hike. on the 24th they have a formal rate meeting. one way or the other, liquidity has to be much tighter in the lira, and that is a necessary but not even a sufficient condition to turn the lira around. turkey looks as if they will have fairly serious trouble this year. tom: let me bring up the mexican peso. you called it the trunk currency . -- trump currency. this is a distressing chart,

from the election at the 11 21, and19 level, 20, printing 22 record weakness this morning. what are the tools the mexican government has other than to parachute common sense into washington? paul: it is really very hard to see what the mexicans can do. they hiked rates aggressively throughout 2016 and did not have a lot of effect. you have a new u.s. president who has talked about things like a 45% tariff on all goods coming in from mexico, on restricting immigration, restricting remittances back. mexico really is ground zero for the new u.s. administration's populism. i cheaper currency looks the logical development. tom: brian class with us. you hear these guys talking.

the bottom line is, where is the check and balance for the people of mexico? i do not see their voice. where is it? them ishe best hope for the establishment republicans who find trump to be a lunatic when he talks about trade. this talk about terrorist and punishing individual competencies -- companies for making biz -- this talk about tariffs and punishing individual companies for making business decisions, this is lunacy. francine: we heard from the mexican president yesterday saying, he will not pay for the wall but they want a better relationship with the u.s. how do you achieve that and what does it mean for mexican credit default swaps? paul: i think the cards are all on the american side at the moment. if we do get severe restrictions on trade with mexico, that will hurt americans at some level but

at the moment all the initiatives and the trade deficit is on the american side. they have most of the bargaining power. it is very hard to see a sovereign default in mexico. we can get some distress on the corporate side. there is all sorts of possible problems, but i think cbs will will bemore -- cds much more about what happens -- francine: is there anything mexicans can do to turn this around? andrew: i think it is tough. you can continue to hike rates and make your real rates hiker and thus make your currency more attractive for a carry perspective. , but theatively cheap valuations are not enough to turn something around. the markets often want some sign of fundamental progress and may wait until there are signs there will be a bump in the policy

road for the new administration. i completely agree, i think the cards are very much in the americans' hands. andrew knows and paul knows, somewhere in that 50's block there is a hunk of their berlin wall. -- the berlin wall. it is like, i do not know, a foot thick, two feet thick. they are monitoring a 20 foot high wall of some 12 good julian -- concrete. there's got rapturous applause that every trump rally. sensible people there is much better ways to do this, digital technology to make sure people are not crossing illegally, and a lot of border control. is this the best use of america

-- millions of dollars that will come from american taxpayers? going to betually the mexican government paying for u.s. infrastructure. tom: we do not believe in fake news, we believe in real statistics. feethinese wall is 30 long. francine: how long did it take for them to build that wall? over 2000 years. it took many imperial dynasties in china to build that wall. tom: we have to go to paul mcnamara. you look at dollar strength in the cycle. how long will this cycle go, will it be 2000 years? paul: i kind of doubt it. one of the things, looking at e.m., you spend a lot of time looking at populist regimes, be it russia or turkey.

in the philippines we have a president who has been accused of feeding people to crocodiles so other antics look mild. it is not good for currency to have this kind of loose fiscal and usually loose money together . i think a lot will depend on what happens to these vacancies coming up in the fed. the idea that a populist presidency is going to definitely lead to a structurally stronger dollar, that looks questionable to us. tom: will receive philippine peso and malaysian ringgit join the lira and peso with weakness? paul: those are not currencies we are not so fond of. a lot of trade with the u.s., especially manufacturing trade or in the case of the philippines, sending workers to the u.s., those are not great markets to be in. i think you are better off with the brazil, and russia is

particularly favored at the moment. tom: paul, thank you so much. when we invented surveillance, this is exactly what we wanted. and then foreign policy and 2016 happened so we rip up the script. we are talking transposing the great wall of china. all sorts of different things on surveillance. we are back with andrew sheets laas next.k this is bloomberg. ♪

francine: live pictures of the city of london. toontown. it like

looks like roger rabbit. francine: london is great. we have the cheese grater, we have a walkie-talkie. mark carney has launched a renewed defense of the bank of england and said its actions help avert financial stability. he was speaking. andrew sheetsth and brian klaas. what do you make of brexit? if we start from what theresa may has said three times now, immigration is what she is aiming for, she wants to control immigration, which means we are out of the e.u. and it is a clean out. andrew: i think this is a case where there is a lot of discussion that while 2016 is 2017d us, let's move on to

, and 2017 is about dealing with all the political events that were voted for in 2000 escape. brexit is a big one among those. i think there is a lot of uncertainty over what part of the u.s. administration's policy to take literally versus figuratively, i think there's a lot of confusion in the market over what the u.k. brexit plan will be, and i think a lot of denial that it will really push toward an exit from the single market. this is why we think the pound will continue to weaken, that is hans redeker's call that it will move down to the 1.17 area. uncertaintyll more and market concern the u.k. will move toward a harder brexit, and that will require easier central-bank policy and will see weaker growth and currency. francine: i do not know how much politics can influence the negotiations. if you look at david cameron negotiating, that was a flop.

are there any tips theresa may can do to get a better deal, or is it rules are rules? brian: i think there is a lot of parallels between negotiations in the u.s. and u.k. now. you cannot get rid of popular part of a deal while torpedoing unpopular parts. for both negotiators, they need to try to pull a rabbit out of a hat. they are negotiating in brussels with politicians they need to live with their own constituents. it will be impossible for someone to sell a sweetheart deal to britain that makes them better off outside the european union, because then they have to continue down the pathway britain did and follow the same approach. the longer she delays, the more vulnerable she is to being held hostage by this two-year timeline because of the end, they can say, we will just walk

away from the table because you have a lot to lose. tom: i would suggest a lot of our study of democracy, and the goodwill of societies is simply about economic growth. can you assume a better nominal gdp, or if we are going to get a dampening of reflation expectations, is that the surprise of this year that nominal really does not move? andrew: i think this is bad for growth. if you are talking about a deal that will involve less trade with your largest trading partner that is going to cause serious headwinds to your largest sector, the financial sector, then it has to push the gdp rate down. the inflation rate might go up because sterling has been so weak this year but i think it is absolutely bad for nominal growth. tom: this is the e.u. some, this is not just the united kingdom. the basic idea coming we have a real nice -- the basic idea, we

have a real nice inflation pop but then we are back to where we were precrisis. you are talking about tepid growth, and you overlay, what if we do not get that inflation pop? we are back where we started. andrew: this chart has the potential to look somewhat different to what we would see in the u.k. the u.k. number has more growth down. we think the fundamentals are somewhat better there. that is one reason we think bund yields rise more than gilt yields, because of that diversion. francine: i know we focus on economics and fancy charts, but it is people, people voted to leave. does it give us, or the bank of england ammunition, or theresa may to negotiate a better deal? this is the well-being of the

state that could increase but could fall significantly as well. andrew: i think this goes back to my colleague's point, theresa may will be negotiating against the clock. i think that her challenge, like any politician, you do not have a clear mandate. i think a lot of people voted for brexit feeling it differently. some are focused on immigration or other factors. without that confidence that you have a clear mandate and running against a ticking clock, i think it is hard to negotiate from a position of strength and get the best deal possible. tom:'s are remarkable headlines out of russia. francine: we are getting from the administration of vladimir putin. they say first of all, they do not agree with what rex tillerson, the secretary of state candidate, and his position on crimea.

he is also talking about vladimir putin and donald trump. he believes they will get along, or at least the kremlin hopes they will get along. putin sees u.s. military deployment in poland as something of a threat. tom: something to tweet about this morning. tweeting he is usually 10 to 15 minutes from now. coming up, we have plenty more. we talked to mark gilbert at 10:30 a.m. in new york. i think we will be talking about hacking and that news conference of donald trump. we will also speak to martin gilbert later on in about three hours. he has met donald trump because his golf course is in scotland. ♪

be inext week, we will davos at the world economic forum. we are in london with tremendous international news for today. our bloomberg business flash, here is taylor riggs. taylor: wall street firms

expected to post their biggest trading numbers since the financial crisis. analysts, estimates , fixed income, and stock trading revenues rose 20% from a year ago. chinese mobile phone makers xiaomi wants to receive $14 billion in sales this year. they originally won praise for their online only sales mark -- model but now they are rethinking that and hoping to quadruple their storm network. -- store network. americans are drinking less milk, but the manned for cheesy demand for cheesy pizza rescues milk prices. americans drink one third less 1980.han they did in

that is your bloomberg business flash. tom: thank you so much. a wonderful hour with andrew sheets and brian klaas. brian, let it go to you on the news flow in our next hour, we will focus on the united states senate. it is grecian, it is republic. what is your to do list for a republican senate dealing with an original president-elect? brian: i think they need to go back to the basic job of the united states senate, providing oversight the power. this is an unprecedented challenge to that basic tenet of american policy. this is something where we are having unprecedented challenges on ethics, checks and balances, institutions like the media, and intelligence. one of the things i keep highlighting every time i talk about donald trump, that

separate the partisan issues from the institutional issues. tom: institutional is key. and they pull power from the executive branch and yank that back to the legislative branch in the united states? brian: donald trump is in for a rude awakening that he needs people to get along with him to get things done. tom: really? brian: i think he thinks he is going to come into office and things will shift. obama is an idiot and as soon as he comes in, it will be fixed. he will find out the hard way that has not been -- that will not be true. francine: but he has been supported by his party, so will that change and what will it take? brian: i would look at tillerson's confirmation hearing because marco rubio had very strong questioning yesterday. if he goes against tillerson he , andnot get the approval

that would be the first crack in the wall at looking at trump's approval among republicans, and that will continue to crack. francine: what does that mean for re-fleeting the u.s. economy , and how much do you look at the politics of things to look at your forecast? brian: i think the likelihood of the big game changing infrastructure program is probably lower than people expect. the idea that you will get a tax cut without offsets to say adjustability or deductibility, it will be more difficult than the market expects so that is why we look at equities outside the u.s. and are more cautious on the s&p. tom: this guy is talking 3% or 4% real gdp. economicing to get statistics in february or april or do we have to wait until the fourth of july?

brian: i think you will see that potentially from the second quarter onward. tom: this has just been great. francine: fabulous. tom: we stayed away from the markets today because they are almost actually stable with strength and the turkish lira. in our next hour we are going to continue. thanks to andrew sheets of klass.stanley and dr. stephen king of hsbc with a shocking outlier call. also, kevin's our correspondent from washington. -- kevin cirilli, our correspondent from washington. ♪

♪ morning, the trump reflation continues, a 13 day fade.

can america make it to inauguration day? build a wall, slap on various sundry tariffs. this morning, it is fake surveillance. kevin's really with pretend answers to our fake questions after an original press conference. this is bloomberg surveillance. we are live from london. francine lacqua with me. different, awas lot of reporters are going to regroup and ask questions differently. it does have a direct impact on the markets. it little bit of rotation to safe haven. tom: politics becoming front and center in each debate. the peso and the lira doing better. on the affordable care act, let's go to our "first word

news." -- instructing congressional committees to start working on legislation to repeal the biggest portions of the affordable care act. republicans have not announced what they will replace obamacare with. donald trump's choice to secretary of state says china should be denied access to artificial islands it built in the south china sea. rex tillerson told a senate committee that a failure to respond chinese action has allowed it to keep quote, pushing the envelope in the region. the number does coleader in hong kong has resigned. she will leave her position as chief secretary and there is speculation that she will run for the top leadership post. hong kong is wracked by political turmoil. unpopular executive has decided not to run for a second term. global news, 24 hours a day.

this is bloomberg. equities, bar -- bonds, currencies, markets. churning with an 52.55 -- 52.65. 21.68. peso, really good talking about the very -- the various markets. the trump bets we have seen since november -- november 9, unwinding a touch. vix a little bit of. -- a little bit up.

staying with risks, i get to go first. i'm a little bit lost, but this is a picture that goes back to my data board. i want to show that we are risk off. this is a picture for yen. it is what you are seeing in white. the havens are back in play. tom: there they are. living go to my chart which is on kevin cirilli's washington. there is a belief on a reflation trade. we need to bring you up to date on that. circle,tion is the blue the day after the election is the jump in the twos tens spread. reflation, everything is great. 13 days in a row. we are back to where we were, november 9, the red circle, on our way back to maybe where we

were with the blue circle. we need to go to washington. kevin cirilli has been out with the trump campaign and has an exceptionally important interview, today with the trump administration. what is your first question to miss conway? kevin: we have to talk about the economic policy, i think we will talk about the division of business assets within the trump organization and the administration. yesterday's press conference left a lot of questions unanswered and hopefully miss conway will help us sort through that. a senate vote i found stunning, a first vote, and it did not go well for mr. trump. kevin: not necessarily, but if you take a step back and look at confirmation hearings,

yesterday broadly, especially rex tillerson, i was speaking with several key republicans, like senator robert portman, who were candidly a little nervous about what they were going to hear coming from the former ceo of exxonmobil about his position on russia. the question and answer portion of the hearing led them to the conclusion that this is someone who would be more aligned to their more stringent policies with russia. i think he did what he needed to do on capitol hill. do you think the trump team will think that press conference went well, or will they try and get a president-elect in a room and regroup? kevin: i have covered several trump press conferences and they always cloud up a lot of media ,ttention and a lot of energy but then we move on to the next story in about a day.

heading into the conference, there was a little -- there was a lot of uncertainty, particularly regarding briefs about u.s. intel hearings and ties with russia and unanswered questions. nobody is really talking about that, now. now they are talking about his relationship with the press and these confirmation hearings. when you talk to the sources within the transition team, they feel they have cleared the hurdle of the u.s. intel questions that were heading into the hearing and to them, that is a win. tom: kevin, thank you. we will look for that interview from washington. stephen king with us, in london. he has provided years of experience on macroeconomics. update, right now on how you link stephen king economics into steve majors' call.

higher yields rollover to a new regime of disinflation. stephen: what he says and i say is almost always perfectly aligned. remember is the comparison with reagan is a more interesting comparison. you look at the data of how the u.s. economy formed and 81, 82 and you look at this reflation that people are making comparisons. 82,discover that an 81, there was a deep u.s. recession, u.s. equities sold off in the year after reagan became president. you discover yield came up a long way. what you don't discover is this economic andna of financial progress that people often associate with reagan. really his second term that led to the transformation of the u.s. economy that we associate with his overall period in power.

to what extent can a reflation trade really work over the course of the next 12 months? abe comes in, a 2013 and offer stimulus and three arrows in -- green arrows in japan, and everyone says this is the transformation. winsine: are there easy for donald trump? 's or something he can do on productivity or job creation that would give him an easy win to buy him a little more time? stephen: it is one of the challenges. u.s. productivity has been very weak for about 15 years. the weakness started long before the u.s. financial crisis. whichever power has been in

power, it has been difficult to transform that. it is partly to do with the fact that the population is aging, that investment preferences are changing, shifting more toward low risk assets because they are getting older and running out of time to catch up, if things go wrong. that puts pressure on companies to invest less and give more money back to the shareholder and if you have less investments, lower growth and lower productivity, and that is .ery difficult to change francine: -- a lot of money back from the offshore cash accounts, people start spending again and hiring. stephen: it is possible you can bring money back to the u.s.. you should not lose sight of the fact that money going back to the u.s. is not going back

somewhere else which creates instability potentially somewhere else in the world. as the one danger with the idea of bringing money back home, money stops flowing into other parts of the world, which makes them less stable. tom: let's continue that discussion with capital flows. this is economic growth in the united states with a political tinge to it. morning in america and big economic growth on a presidential four year moving average. mr. trumpto 2% and clearly wants to move that back up. we get that first look at fourth-quarter gdp in the u.s., and how that folds onto the world landscape. what number do you look for, what tone of american gdp will we see, fourth quarter?

we do know that the final quarter of last year, the u.s. data picked up, quite nicely. year,cond half of the people start -- people start the year very optimistic. you look at the bond forecasts over the last 15 years and they all said the yields are rising this year, every year and most years, they have been wrong. it is not growing as quickly. help me here, with emerging-market currencies. . -- peso, lira, we will do this in the next block. is there going to be a contagion? stephen: you have quite a significant position amongst emerging market currencies. you have the peso and the lira doing very badly.

you have the brazilian royale do -- the brazilian real doing very well. that -- if you are a commodity producing country than you do better. francine: we are back with stephen king of hsbc. a reminder that you can later today, listen to us speak to kellyanne conway. i'm sure it will be an exclusive interview. this is bloomberg. ♪

francine: this is bloomberg surveillance. another day of live television in london.

we migrate to dev us for the week. we have -- to davos for the week. johnson & johnson has agreed on a price with biotech company telly on according to people familiar with the matter. j&j will spin off the r&d assets into a new country -- into a new company. earlier, they offered to pay $28 million for actelion. -- builds processors for smartphone makers. the company said that apple and chinese phone companies have increased demand for high-end microchips. marks & spencer has gotten a boost of confidence after a year of management overhauls and store closings. the british retailer posted its best closing sales in more than five years. 2.3% inre sales were up

a quarter that ended december 1. one of our themes in the recent weeks has been butterflies, the idea that actions far away can make butterfly wings flap or even the butterfly wings flap can change her life. stephen king has monitored emerging markets in developed economies for days and is looking at emerging economies doing pretty well, except for the select few. we begin with the mexican peso. we talked about this for days. we see a 22 print on mexico, today. what is the toolkit the mexican government has two financially and within the markets push against trump rhetoric? stephen: it is difficult because what we are witnessing is a key turning point in history, and political history. you look at the symbol of 1989, the success of globalization,

the demolition of the wall. now you have the possible construction of the wall in a different part of the world. the connection between countries being built over the last 30 or 40 years is in danger of going into reverse. you put america first and protect american interests against other countries and you blame other countries for american problems and suddenly you have a major problem. circumstances, mexico will have to accept it is worse off. tom: let's bring up the chart, this is mexico 10 years back. we have the depreciation of the lehman lows. mexican stability and recent massive peso weakness with the election. remember ecuador, mexico, i believe it was 94. to there contagion features the euro and -- the lira and

peso weakness? stephen: is the wall story a symbol of the eventual crack in what is happening, worldwide? i'm fearful it is a crack in terms of what is happening, worldwide. the u.s. has been first amongst equals the last seven years, setting the conditions for how the world ought to behave. now the u.s. wants us to become increasingly isolationist, bringing capital back to the u.s. is completely the opposite story of what we have seen in many years. that creates significant difficulties for other parts of the world. it is not so much a contagion issue for mexico, it is a broader issue about america withdrawing. francine: we have peter navarro before he got appointed by president trump, coming on this show around this time, saying china and germany because we have a surplus are cheating

america and that was going to be his starting point for negotiating with both countries. what is the endgame? isphen: part of the problem a misunderstanding of what causes deficits. is it simply because china has undervalued currency? the chinese currency account has come down pretty swiftly, at least the share of chinese gdp. things have happened, yet the american deficit had remained relatively large. haveny, they will say they an aging population and they will not be in the business of spending money. the bigger problem is, if germany and china are investing in the rest of the world and the rest of the world does not deliver, losses at some point in the future should accrue for china and germany, and that has not happened. francine: thank you so much.

we will be back with stephen king of hsbc. coming up later today, fed chair janet yellen will hold a town hall. we will bring you that meeting, live, 7:00 p.m. in new york, 12:00 a.m. in london. ♪

>> some of these preterm policies, where he is basically

cajoling companies to move production back to the united states. i think that is fine, but it reminds me to some extent of policies in italy, long ago associated with mussolini and government control of corporate interests. i don't want it to go to far. -- too far. tom: bill gross, as usual, blunt and direct. hugely inflammatory about neofascism or fascism lite. stephen king, very quickly on the -- you see in the united states, -- stephen: american companies under pressure to stay in the u.s. multinationals under pressure to

be in the u.s., rather than mexico. that may be a good thing or a bad thing for the u.s. in the short-term, but to the extent that it is a kind of active capital market protectionism, it is something that will probably go against the efficient allocation of resources, globally. tom: are there international -- to these institutions not discipline the president, but do they -- can they nudge the president toward a more constructive -- stephen: those institutions were created in the ashes of the second world war and they were not designed to cope with the levels of capital flow we now see. one of the big failures of globalization is to not create better institutions to try to cope with these huge flows of capital. there is still an opportunity to do that.

with trump in the white house, the enthusiasm for doing it is a lot lower. you weather get more globalist or more isolationist. more globalistet or more isolationist. tom: driving this conversation forward, someone are you wonder will he be within the administration? martin feldstein associated with president reagan and america's fiscal economics. look for martin feldstein today at 7:00 on bloomberg television. stay with us, this is bloomberg. ♪

francine: we cover economics and finance and also every leader that we have in europe and the americas, because the world in 2017 will be driven by foreign

policy and politics, whether it be mistakes or agreements. angela merkel is speaking in luxembourg, next to the prime minister, and she is saying that remaining estates are waiting for the u.k. to trickle -- trigger article 50. i know we want to talk a bit about angela merkel and her response, so far. she has really -- she is really seen as the one adult in the room when it comes to european politics. i want to bring you over to what president erdogan is saying. he is now saying that the banks should engage in different calculation, it is clear that he is blaming the weakness we are seeing in the lira on foreign speculators. he is warning the central bank again that they have the ability to wreck this game.

there is no central bank independence in turkey. tom:'s are extraordinary headlines, particularly turning to the terminal, mr. erdogan, terrorists with weapons or dollars, makes no difference. giving king of hsbc, with us. go inton, not to turkish lira minutia, what is the toolkit different for turkey or mexico, this time around? is there such a distortion in by markets -- in bond markets that this time, the toolkit is different? stephen: turkey and mexico are special cases, looking at the emerging world in general. vulnerabilities have increased.

i suspect what we will see is the central bank having to raise interest rates. if this: i don't know is where russia was, four or five years ago. you remember -- was blaming everybody else for the difficulties malaysia was having at the time. the issue is what can you do about it, as a central bank? you raise interest rates and withdraw from the economy and you possibly impose capital controls. tom: the central bank has the ability to wreck this game, it's as if he watched the trump press conference. it is amazing headlines. rhetoric is very

similar. we get back to politics in the crossover with markets, but first let's get to the bloomberg "frirst word news." -- report had unconfirmed details that russia had compiled damaging information on trump. national intelligence director james clapper said the leak probably did not come from u.s. spy agencies. the kremlin hopes that russian president vladimir putin and u.s. president-elect donald trump get along, but it does not expect them to agree on everything. a spokesman says they see u.s. military deployment in poland as a threat and says they do not agree with secretary of state nominee rex tillerson. u.s. prosecutors have charged six volkswagen executives in connection with the diesel emissions cheating scandal. their indictments were part of a settlement of criminal

investigations. guilty to conspiracy. global news 24 hour the day, powered by more than 2600 journalists and analysts in more than 120 countries. edward heiman will join us on bloomberg radio, later today. right now, let's talk about the issue of the moment, global reflation. stephen king of hsbc and johnathan loyd's of capital economics. tensis simply the twos spread of the united states. the day after the election, the red circle. up we go, and that it fades. is the idea that this reflation trade will fade back to what we saw before november 8? jonathan: we expect the opposite.

we have been of the view that the u.s. economy is close to capacity, that we are starting to see pressures picking up and that will cause inflation to rise of it quickly -- a bit more quickly than people have been anticipating over the next year or so. tove been expecting the fed tighten policy. we expect the 10 year yield to push up to 3.5% by the end of the year. francine: maybe a little bit closer, like here. one issue is how sustainable is that recovery? the second biggest issue is will productivity pick up over the next 12 months ended third issue, will be pressures actually materialize?

in the last four years, these have not really materialized. these things are possible constraints, in my view. jonathan with a reasonable forecast, but it is more concerning that we have the same forecast for the last 15 years. francine: how do you model it, jonathan? how do you get trade wars and supply chains? this is the big elephant in the room, what we should be talking about for the next months. jonathan: i don't think any of that would get in the way of fundamental economic forces. stephen is right that wage pressures have not materialized in the way that many people anticipated. we have not been calling you the last 15 years, but we think things are different. unless you think the curve is completely dead, i think it is

reasonable to expect some modest inflation pressure in the next year or so. francine: you are not expecting a trade war or tariffs with china? jonathan: we are talking about domestic reflation and pressures --inflation we pressure inflation re-pressure. i agree there are question marks over the recovery, further out. partly because the economic recovery is almost 10 years old, probably because the dangers of trade wars and more general concerns about trump's presidency. we have talked about the possibility of a modest recession in 2019. of that will any prevent bond yields from picking up over the next year or so. stephen: is unemployment falling because wage pressures are low, or will wage pressures go up

because unemployment is falling? what has been striking over the last few years is companies continue to expand their efforts , not by investing but by using new technologies to drive wages down. the consequence has been the expected rise in wages has not materialized and that raises a big question, not in the u.s., but in the u.k., too. we may be a way from the cyclical peak. francine: if donald trump were wages,t on inflation and this he want higher wages? can he for ceos by blaming and shaming them, to increase wages? stephen: the ability of capital to other countries has allowed companies in the u.s. to drive down u.s. wages.

thenat process is cut off, it is important to stress that technology is also a big influence on determining wages, particularly for clerical work. tom: i want you to weigh in on this because stephen defended the lower yield call, earlier. this is three paths of the 10 year yield. the lower vector has something to do with the hsbc call. the middle one is stability after the jump condition of a trump election. capital economics is the upper aero, which is a migration back to normality. you are the chairman writing in the telegraph office. roger brutal talks about currencies and constructive solutions to get back to economic growth. can you have a higher yield and with it, dollar strength? roger was talking about sterling weakness. can you have dollar strength and a capital economics scenario? jonathan: we were expecting some

general dollar strength, but not to the extent that the first event -- deters the fed from raising interest rates. what strikes me as about that -- strikes me about that chart is historically, all of those lines are pretty close. you say back to normality, and i would contest that. we are not talking about the fed pushing interest rates back to the peaks of previous cycles. stephen: one thing on the dollar. few years, the dollar has been a lot stronger than people expected and it had a material impact on the u.s. economy. you go back to the dollar strengthened came through, the next thing happened was the u.s. economy slowed down. isthe extent that the dollar relatively strong in the short term based on expectations of rising interest rates, it may be

the dollar strength changes the actual path of interest rates. to go back to whether it is 2015, 2016 -- tom: this is fascinating. linesn king and jonathan -- jonathan loynes. we are thrilled to bring you some of -- some would argue the most influential market economist. edward heiman on the future of america. this is bloomberg. ♪

francine: bloomberg surveillance, comment francine in london -- tom and francine. taylor: wall street firms are expected to pose the biggest pretty number since the financial crisis. donald trump's election triggered a financial frenzy -- market frenzy. -- rose 20% from a year ago. chinese mobile phone maker posted $14 billion in sales, this year. xiaomi originally won praise for its online only sales model, but now it is rethinking that and hopes to quadruple at store network. it is one of china's most valuable tax start up -- tech startups. francine: thank you. coming up shortly, it is bloomberg daybreak, -- bloomberg daybreak: americas. trump trade is the

squeeze and yesterday was about what he did not say about infrastructure spending, still stimulus. the markets seem to react in some way. treasury positive, yields go lower, the dollar weakens as well. kellyanne conway, later on, in the program. plenty of questions about why we have not gotten much detail on what is set to come in 2017. the on that, i am looking at an fx market. dollar swissie getting better. francine: kale juice. u.s. banks are expected to post the biggest fourth-quarter earnings increase, that is what we are talking about. fourth-quarter trading up since the financial crisis.

a surge in bond trading on the back of the trump election. analyst, head of our finance team joins us now from london. hsbc's stephen king and capital economics chief economist. you know that interest rates are going up in the u.s., so is it a win-win for u.s. banks? they certainly have more optimism surrounding them. limpedically see trading into the end of the year in the fourth quarter, but you had a strong surge, last quarter. whether or not they'll carry over to the first quarter is the big question, because for the full year, it really was not a tremendous year. it just picked up in the second half. whether we can see that momentum

followthrough will be the big question. francine: give me a sense of what regulation or deregulation we are expecting from the u.s. and will it automatically mean a win for u.s. banks compared to u.k., swiss and european banks. michael: at this point, it is about the town. as you were talking about, there has not been a lot of detail on a number of issues, but certainly on banking regulation, there has not been what we will -- whether we will repeal this or take that back. there has been a tone of less regulation and a scaling back of the volker rule. that will help the u.s. banks, and even if you don't get repealing, just the absence of additional regulations, that might help as well. tom: if you look at jpmorgan, wells fargo and the troubles they have had, you still have this -- these two worlds of american banking.

those that succeeded and those that are still struggling. on the right side of this chart, you can barely see it, that in the upper right corner, that white line is the massive trump reflation play with james dimon. they got all the game of the reflation -- gain of the reflation. went to other banks catch up? it is now or never, right? michael: jpmorgan grab so much market share, immediately after the crisis, we have been waiting for the other banks to catch up and they have done it on some measure, but jpmorgan still seems to be the dominant bank -- dominant u.s. bank in the world. i think you will see that spread out a little bit, but each bank has to kind of show what it is good at, and jpmorgan in the trading world has been pretty dominant. tom: i promise to do a better chart on that the shows how more shows more -- that

clearly how jpmorgan has benefited from a trump presidency. on radio and bloomberg television, today, we will speak mayo, and get his thoughts on the leadership of the major u.s. banks. look for that in the 9:00 hour. we come back with stephen king and jonathan loynes. stay with us. this is bloomberg. ♪

tom: i am more certain that jonathan ferro will have something to say about this in a bit. erdogan out with exceptional headlines on the turkish lira a. he was quite strongly criticizing or exchange markets. mexican peso stronger as well. right now, let's get to our single best chart which is a british chart. it shows the uniqueness of the united kingdom. back in 92, trade weighted soderling -- trade weighted sterling.

unique how trade weighted sterling is back to these two moments of 2008 and 1992. francine: the situation is much more complex, now. you talk about reflation and what mark carney was saying, yesterday. we are back with hsbc's stephen king and capital economics' jonathan loynes. the pound's performance has been in line with what many people thought would happen. the peculiarity has been even though the pound has sold off, the economy itself has performed better. the questions of this year and next year is to the extent that the pound falls races headline inflation and squeezes wages, does that mean there is a hangover from the brexit story with weaker growth? is difficult to fund

when you are not sure whether or not you are in or out of europe or what the relationship is going to be. pound sterling becomes ever weaker. it might just be the hsbc forecast. francine: jonathan? rollhan: i think you can out further falls in the exchange rate given concerns about the balance of payment. the dropping exchange rate to a certain degree, although it is reflective of concerns about brexit and the impact of that on interest rates -- on the interstate outlook, it has not been an ink and -- uncontrollable dumpling. is that because we are a service sector world? are using a goods and when we areg prism looking at for, when we should be looking at more service sector analysis? jonathan: people are looking at

the outlook for u.k. interest rates relative to the other parts of the world, particularly in the u.s. and that has been the key and the drop of the pound behind the dollar. one of the reasons that we have thought the economy would do ister over the next year that we felt that the drop in exchange rate would be a shock absorber. we have seen that boost in the stock market. carney,h respect to mr. is janet yellen central banker to the united kingdom? does she drive these flows and vectors? you -- -- if the u.s. were to raise rates and the bank of england tried to stay passive, then that creates some of the big questions, one of which would be, would there be a bigger sterling adjustment at some point? the danger is if you are living beyond your means and trying to balance paying your deficit, at some point, the currency falls. francine: does the pound fall

further compared to the euro? my currency strategist has this magic series of numbers 110. is 110, 110, sterling, the dollar and again all at 110. tom: we will have to leave it there. you guys will continue with us on bloomberg surveillance radio. on bloomberg radio today, edward heiman of evercore. stay with us, this is bloomberg ♪

jon: good morning. a warm welcome to "bloomberg daybreak."

in the markets, it is the trump train desk features -43. three --ures negative dow futures -43. a weaker dollar. alix: the trump trade unwinds. treasuries gain after donald trump's news conference send a wake-up call to the markets. big pharma bust. the sector losing $25 billion in 20 minutes after donald trump said pharma companies were getting away with murder when it comes to drug pricing. trump's secretary of state nominee rex tillerson saying china must be denied access to artificial islands built in the south china sea.