manus: north korea options u.s. national security advisor says some scenarios to solve the crisis are uglier than others. pyongyang says it can shoot down american warplanes. stocks fall in asia. merkel.urns to the french president will meet germany loss support to reshape european industry. merkel's position is weakened at home. ecb willghi says the keep as much stimulus as the

euro economy needs. we will hear from the fed chair janet yellen today. welcome to "bloomberg daybreak: our flagship morning show right here in london. in a half hour time we will be , renato luliaceo jacob. .t is another deal this time a $4ll explore options for billion drugmaker. have alvin gentry -- alvogen

, along with under -- other owners exploring options. the deal size could beat $4 billion. aplenty.als alvogenot unilever and on the pharma could -- pharmaceutical side. the u.s. is wargaming four or five scenarios dealing with north korea. a clear message came through. we are not, and have not, declared war. youhe bottom of your screen see a drop in value. the yuane falls -- as falls, they are holding back. , we areh korean won

coming back. the white house has said we have not declared war on north korea. you have a cabinet response versus the trump rhetoric. the market is saying we are not running away on the runaway train of war in the markets. it is reflected in the risk rate of stocks. a little lower? yes. let's have a look at the risk radar. represent an -- the chief market strategist says without doubt north korea is hovering over the market. zigsgs and his acts -- it and zags. keep an eye on brent. we are at a two-year high.

one is the opec and non-opec side. there is a threat to shut down the kurdish crude supply. that is driving the brent story. i used dollar-yen because it is a great barometer for stop -- it is a great job -- it is a great barometer. we are not quite there yet. juliette saly is always ready with first word news. greecee: the bank of if there isne capital before the end of the greek bailout program. according to officials, it may be ready in early may. that comes as ecb president mario draghi says a front load stress tests.

appeal to repeal and replace obamacare has been a fatal blow. senator susan collins begin the third gop senator to say she will vote against the graham cassidy bill. a fast-track mechanism that allows that gop to bypass democratic support ends this week. the president of the federal , asrve bank of minneapolis donald trump ways who he will nominate next year. i think janet is doing an excellent job. >> i cannot think of anybody better than her. she has financial crisis experience. she has leadership skills. juliette: in iraq millions of

kurds have voted in an historic referendum. repercussions will be felt. 30 million kurds crossed the border into syria and turkey for syria and turkey. global news powered by 2700 journalists and analysts across 120 countries. a little risk aversion momentum across asia. the yen has gained .2% against the dollar. the nikkei is leading declines in the region. tech players have been hit hard. you can see that reflected in the taiex. the market is down .1% in late

trade. tencent players, and dragging heavily. it has been down by as much as .3%. petroleum leading those gains. is one to watch. we are seeing a big gain in shipbuilders. it has a $900 million container ship contract. it is leading to optimism in the shipbuilding space. manus. manus: juliette, thank you. is -- the u.s. has run for a five scenarios for how to deal

with the north korea crisis. some of the scenarios are uglier than others. there is no precision strike that could solve the problem. while washington hopes to avoid military action, that cannot be ruled out. saysis as korea's for mr. the u.s. comments give it the right to shoot down american planes. >> since the u.s. has made a declaration of war, we will have every right to make countermeasures including the right to shoot down united states strategic bombers, even if they do not come into our -- oure will stop airspace. the latest war of words is that north korea betrays trump's comments at the united nations as a declaration of war. categoricallysays they have not declared war.

where are we? jodi: the war of words is at a new level of escalation. the u.s. has not declared war. there has been no declaration of war, and the white house spokesman made that clear. made threatsmp against north korea, particularly in his talk to the united nations general assembly last week. , butid a lot of things there is no formal declaration of war. the national security adviser mcmaster pointed that out, as well as the white house spokesman. mcmaster said other things, including the fact there are four or five scenarios that the u.s. options is getting -- is gaining out, which also adds to the tension. manus: where do things go from here? may not berike

necessarily the optimal scenario, so what are the options. the problem for the u.s. is that any military option greatly endangers south korean citizens. those scenarios are not anything the u.s. can consider without considering a major loss of life. to rely ons tried options, diplomacy, and sanctions. we have seen the sanctions ratcheted up. has these scenarios on the table, the national security adviser is making clear that the u.s. is thinking about this. manus: let's see where we go to next in terms of the rhetoric. joins us in the studio. european had of global markets

mufg, head of european markets. i have to repeat myself again. another complex between the two. when i look at global market , its, it is barely budging is hardly moving. global economic certainty is dropping. when you see these headlines, four to five scenarios of wargames, it is hard to hedge. derek: yes, i think it is. the global macro backdrop is quite favorable for risk if you look at the geopolitical front. that is the bigger driver of the risk sentiment indicator that you are looking at, the relatively low volatility and appetite for risk and return. , this focus comes in every so often, and there are ways you can see that in terms

of vinci eddie in the markets. this scenario at the moment has been going on for a considerable time and could go on for another six months. the idea of hedging a scenario where we wake up, god for bid it ever happens, and it is a huge humming somewhere, is extraordinarily difficult to hedge a scenario like that. i talked about the south korea, have a look at the global impact in terms of south korea. this is what they are saying, in the absence of conflict, trade diplomatic relations, we have a chart which shows the size of the south korea economy. to the world, that is 2% of global trade. that is the real risk. they have benchmarked it back to the iraq and afghanistan war.

south korea is 2% of the world's economy. this is the risk to the world, the risk of trade. and particularly drawing china into this would impacted significantly. that is where there was any disruption, that is obviously the immediate economic impact. there is no doubt there would be a huge market reaction if something grave was to happen. as we were saying, it is difficult to trade that scenario. this is the ratio for the south korean won versus the dollar. i am a protected grinch.

if i was a betting man at all, it would say any drawdown on political risk might be an opportunity for me to put on some hedges on the south korean won. look at this? is there anything moving further up the risk radar? derek: the ones you have mentioned are the obvious places to go. you'll see that come back down again. you take the opportunity to put . hedge back in again there is a risk for everything. if you're talking about where things could go on and on, there is a difficulty in running a hedge position. zealand.u got new

.atalonia china has its 19th congress coming together. andl talk more about japan a moment, but as i look at the smorgasbord of political risk, it is not going to get easier for you to trade. this is politics at the forefront in terms of markets. what has the ability to be the biggest alpha for markets? brexit, new zealand -- no offense to the new zealand dollar. derek: i think in new zealand it will be a. of time -- in new zealand it will be a period of time. catalonia, that is coming onto the radar.

francehat happened in earlier this year, the market's , it has about populism brought that back up. when you look at the polls in particular, when you look at the five-star movement, the left-leaning party in italy, if you bracket that as populism combined, it is about 50% of the vote. if anywhere where an election can result in a deterioration of sentiments, it is italy. camp thatam in the the uncertainty is not going to go away. i do not think it is having the major negative impact. it of course is an element of uncertainty. the fact that it is eating up in

terms of the most recent days we have had -- the fact that it is picking up in terms of the most recent days we have had. sterling has batted that away. stay with us. is the mufg, head of european markets. this is what you want to keep an eye on. let me bring you these headlines details will come through a little more. they accelerate their buybacks. throughg them evenly three years. these are breaking headlines confirming mid-single growth through 2020.

buybacks live on for activist investors. this is the personification of activism at work. macro what is coming up, makes his major speech today. we will ask of the general election has put further europeans in jeopardy. and analysis on the comments from draghi. this is bloomberg. ♪

manus: it is 7:21 in berlin. it doesn't belie a little more risk, that is the question for our guests.

the euro integration is on hold. would have to be sensible to make europe more competitive -- compatible. proposals will make for the reshaping of europe. he acknowledges it will require merkel's support to push them through. great coverage on the german elections. the haggling begins now. -- what shape will europe be? deal with aot to different number of factions that she previously had. macron would want any reforms to be sensible. passroblem is they have to the ftp test. the ftp have traditionally been thanstrict on the roles

macron would like to be. we talk to the head of the ftp a month ago here in the berlin bureau, and he said he wouldn't mind giving the greeks a haircut, but he would not want to throw them out of the monetary union after that. that is the kind of rules-based -- rules-basedts eu that he-based wants. manus: thank you, matt miller will stop mario draghi spoke yesterday, and he talked about how the euro is going to get this much stimulus as it needs. this was his quarterly hearing. in terms ofy upbeat the recovery, and he highlighted

inflation. uncertainties with respect, most notably the volatility in exchange rate represents uncertainty which implicationsible for the medium-term stability. is still with me. a dovish draghi is stepping back. they will do everything to repeat. i thought it was a benevolent draghi. what did you think? wask: i think the strategy cleared to taper qe. act, the medications case and from draghi and ecb will be stressing the importance

of patients, persistence -- patience, persistence and prudence. that is crucial. this is about avoiding an unwanted tapering. we had a speech from an executive board member, and he broke down the euro rally into what was driving it. the bulk of the rally was domestic fundamental factors. they are not opposed to that at all. why would you be? is good news. from a segment toward the peak from 116 to 120, so a factor driven move breaking through 120 would be a concern.

they need to make sure they emphasize how loose monetary policy will be in order to limit the risks on the euro. this is the one-month risk reversal. i could keep it short. derek: i think the run is done. we look at the reports on options, and we see the balance of the flows and puts, and two weeks ago there was an extreme bullish indication from the market. that has come back down close to balance. the bullish sentiment has faded a lot. around 116 to 120

for the rest of the year. thank you.k halpenny 8:30 a.m., ring the bell.

manus: it is the emperor's palace in tokyo. the yen is rallying. this is the third day in a row you are saying the dollar-yen up by .8%. .8% in a rally of energy. this is what you should be watching for today. you have the you keep prime minister and the european union president meeting today in london. what will the body lang which tell us about brexit negotiations? president marcon will make a

speech, and we hear from the fed chair janet yellen around 5:00 p.m. u.k. time. let's get into the markets. nejra: good morning, manus. index is lower. you are seeing regional benchmark slower in japan. losses also in hong kong. this is the hang seng. after three days of losses, the hang seng is nearing the level that preceded a previous rally. a support level that was hit back in april this year, and also in july when we saw stocks rebound. hong kong stocks are due a correction over the next few months. dollar-yen, this is

looking at the technicals. it is trading around the 200 day moving average. overall, money is moving into the yen. .t is gaining brent crude is at $25 a barrel. we have gone higher in the session. is it going to power toward $60? that would be the first time since 2015. it seems what is pushing these games is the tension around turkey and kurdistan. turkey is saying it will stop kurdish shipments through its territory. , we50 day moving average all know that is the golden cross, and it tends to be bullish. manus: let's dig deeper into the

oil story. derek halpenny is my guest and the london studio. when you look at that chart on the oil market, getting closer to $60, opec must be breathing a sigh of relief. it has got ramifications for all of the commodity-based currencies. ,pec and non-opec are aligning and we are making it toward $60. another building block of bullishness. derek: yes, definitely. in terms of the filtered through impact from higher oil into broader domestic underlying inflation pressures. that is a positive as well. the majors around the world are grappling with the fact that inflation is not picking up toward the target. ,aving this better picture

demand for projections on oil have clearly been one of the factors in terms of lifting the oil price. that is all positive. i'm sure central banks will be pleased with this as well. we will talk about japan in a moment. about theto think fed, we will hear from janet like theter today, i honesty they admitted last time in terms of the inflation conundrum. i don't know if we should be more worried or respecting their honesty. what is she going to do today? talking into a christmas hike. can they do three next year? it is a mystery why

inflation has been so low. i look back at the september docs from last year. the projection was there would be one in september 2016, and in 2017. if they go in december, the fed will have done more than what what was projected in 2016. they have been more aggressive the. when you look at their inflation forecast, back in september 2016, it was to be at 1.8%. we are not going to be at that. they're doing more than they were telling us in 2016. to me, that is surprising. s ins putting all your egg one basket. to say that it is a mystery,

that is a little bit worrying. manus: if that is worrying, then what do you want to hear from them? still the dollar is on its knees and pushing lower. you've got the new york fed chief sang inflation restraint will be temporary. the new york fed chief is important in terms of the alignment of the fed. derek: absolutely. there is evidence that the transitory factors are reversing. the cell phone service charges, prescription drug prices, these have turned around traumatically. the raising of those factors was very small. shelterpick core cpi ex- as a good underlying picture, on an annual business we are at a

cyclical low. backdropsaying is, the for the fed to be doing more than what they were telling us in september -- manus: why are they assessed with doing more? up to a biglding policy mistake? a misstep? derek: if you consider the last recessions have been at the end of a fed tightening cycle, there is a good chance whenever that might come. beingt saying they are uber aggressive, but they are going cautiously. don't believe that going into 2018, when you consider we have balance sheet shrinkage taking place as well.

of course they are telling us this is the monetary policy, it is going on in the background, but let's face it, is a form of monetary tightening. it doesn't matter how slow it is it is still a modest form of tightening. that takes a little of the illness off of it. it is another factor to throw in there, saying, three hikes in 2018 -- manus: what do you think they can do in 2018? derek: two, max. they don't go in december, and perhaps do two next year. the dollar has had a big move weakening, i still think there is another leg weaker before we get to a new equilibrium rate.

let's talk about japan. the prime minister shinzo abe is gambling that the economy will be strong enough to withstand another hike after an earlier bump in the levy under his watch that pushed japan into recession. hike is a key election issue. going to do it but i'm going to spend the money in a more effective way. he has set the tax hike is going to go ahead, and he said where the money will be spent. if he does not hike it, it will , mored to pay for that money for day care which japan needs more of. more money for education. he has come out and said the tax hike will go ahead, and this is where the money will go.

it was previously meant to pay for health care and social services for the elderly who are growing a lot in japan. one of the main opposition figures has said they should be cautious about raising taxes too soon. the question of whether to raise it or not is one of the issues in this election and about five weeks. it,s: the brits had to do talking about balancing budgets and going into surplus. is that something that will fade to black? even before this discussion, even with that sales tax being increased, the government's of figure said they would not reach their target in 2020. it adds more spending on to what the government is projecting. it will push that further back.

, theconomy minister said is still government policy. today he was weaker on that statement. sales tax is going ahead, but where the money goes is going to change. they are not going to know until next year when they are going to reach that balance. the government has come out and said as everyone expected we're not going to reach that 2020 goal, but we are not going to know when or if we will reach a surplus for quite some time. manus: thank you very much, james. has been sitting and listening. the 1990's, promising fiscal packages weren't

annual feature of japan's slumped into stagnation. they demonstrated very little. here we are on another stimulus package. do you think that carries the ability to take japan in terms of growth? derek: it possibly can. when investors look at japan changes, the one massive relative to before is that the boj holds 40% of the markets. from a financial market dynamic, associated risks with this fiscal spending, which was very pronounced in the 1990's is a little less so given that that portion of the market is going to sit on the boj for

many years. in a sense, you do your calculus they stop that portion of the market. that possibly gives a little greater impetus for the fiscal side of things. economics is about the monetary policy and the boj aspect of trying to lift inflation. manus: the sales tax hike pushed .he economy into a recession there is a long way to go between now and 2019, but this is about changing the consumption habits of the nation. you have to wake up the japanese and get them to spend more. a sales tax hike is a market risk? might bethought this abandoned. perhaps with the election on the 22nd, essentially abe does not

want to give up on a symbolic be-nomics.f a perhaps he was sticking with it now. there is a lot of time for that is implemented. i'm not convinced they will go with that. of all the policies and developments that have taken place since prime minister of a came into power -- prime minister abe came into power in 2012, the data is on the consumer side of the economy. abe-nomics is good for growth and bad for debt. they will have to stay there longer than anticipated. they have the yield curve targeted at the moment. ultimately, with the fed more aggressive as you said, the bank

of japan probably means the yield curve will need to stay in place for longer if we have a period.nomics derek: i think that is part of the plan. the doj will come under pressure to allow yields to move up. you have to buy more and go back to the constraints of the boj purchases. they can still control the way in which he yields are higher. market, theyn the have pricing control power. we spent time talking about that rather than are is -- of session with the ecb. worry, inflation expectations in japan are

trending lower. they have been trending lower since february. that is where i looked to see what investors are thinking about abe-nomics. investors are very skeptical about abe-nomics success in lifting inflation. that tells you this has further to go. manus: thank you. our guest is mufg, head of european markets. if you're about to head out to work, you can listen to myself and the team on bloomberg radio. by latinm joined america's biggest corporate investor. later bloomberg will be speaking to hear oppenheimer -- peter oppenheimer. this is bloomberg. ♪

it is new york in the middle of the night. 1:49 a.m. someone is having a martini somewhere in new york. markets are rattled. scenariosfour to five the united states are working in regards to north korea. america says, we have not declared war. north korea says it has the right to shoot down u.s. warplanes. it is a war of words. where do we escalate to? julia is standing by. is working onens it -- working on an agreement. their supervisor aboard is meeting to sign off on the deal.

the agreement could be announced as early as today. both companies declined to comment. an initial public offering next mostcould value china's powerful netflix style streaming . --y want to continue holding profit target,a saying its underlying trading margin should be 17 and a half to 18 and a half percent. they are sent to me investors in london today. they are said to sell their stake in a l'oreal.

the pharmaceutical company could be valued at $4 billion. the controlling shareholders of the drugmaker have held on and of talks focusing on a sale alvogen's business. that is your bloomberg business flash. manus: juliette, thank you very much. investors and political leaders will gather in london for a major conference. i have got the ceo, renato lulia jacob. this story has shifted, hasn't it? you have this conference in the world of investors looking toward your's special guests. what is the pitch? the pitch is one of the

renaissance of growth. years of aer two , the olderion indicators are converging. 2017 -- manus: give me a sense of the renaissance and the initial public offering, and what kind of things are coming to the market. renato: it has always been strong even in the hardest of times. ipo's, and 2016 there were only two priced in brazil. manus: did demand from the investors in the u.k., do they

believe the reform story, and that the reform story will hold? renato: that is right. all indicators are pointing in the right direction. be lower.should that, interest rates .re going down there is fiscal adjustment to be done. you talk about the continuation of reforms. you have elections for next year. do you think that will be a question put to the brazilian finance minister? risk is everywhere else. how high is it in brazil?

is too high, especially in election year. the sentiment is that they want to carry on the reforms. they want someone who will carry on the reforms. it is not just brazil you are talking about, but a host of other countries. argentina is in there as well. give us an assessment of argentinian risks. renato: argentina has been doing a good job the last few years. positiveelections were . the market is back. several transactions we have not seen for 10 years or so. in terms of private

equity, what is the perspective and potential cross-border mna in latin america? renato: more than halve the transactions we do are already cross-border. chinese investments have been responsible for over half. a lot of people in securities and infrastructure but interest is spread all over the place. there is a lot of interest for mna in the region, and the chinese are writing the checks. manus: have a great conference. , ceo,s renato lulia jacob itau bba international. are a bloomberg

customer you can watch on tv . time you can hop in at the bottom of the screen and join the conversation. this is bloomberg. ♪ what did we do before phones?

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manus: three options. u.s. security advisor mcmaster says some scenarios solve the crisis with pyongyang are uglier than others. stocks fall in asia. the havens rise on wall street. macron turns to merkel. the french president will need germany's support. weakeningl's position , how much help can she provide? mario draghi says the ecb will keep as much stimulus as the euro area economy needs. we will hear later from janet yellen. ♪

manus: you are welcome to "bloomberg daybreak: europe." it is our flagship morning show. i am manus cranny. a little bit of breaking headlines coming across the bloomberg. pan-european operator, they are saying that higher customer satisfaction helping the business. they are also saying that full-year underlying ebit outlook remains unchanged. if there is one thing that britons do, they go on holiday. no matter how strained the pocket might be. thomas cook reports sis with expedia -- reports new alliances with expedia.

boost revenue is up and customer satisfaction is up. andalliances with expedia beywhy -- lm the war of words with north korea and the united states ratchets higher. you are seeing london up 1%. your asian stocks seeing a couple of lines come through. msci asia down .3%. what you have going on in the markets is a representation of escalation in rhetoric. it raises the risk of tactical missteps. you have yellen speaking today. prudential says north korean risk is hovering over the market.

there is a couple of different factors at play. oil is up. again --ays dish president erdogan says -- dollar down, yen is up by .3%. it is day three of that move. that one day move the lies and more substantial story. three days of rising in. we are up by .8% over the past three trading sessions. these are your bond markets, fairly flat. you have bunds down. -- they are going to do what they said they are good to do which is reduced the talents sheet. just the balance sheet. juliette saly standing by.

juliette: the bank of greece plans to start -- to determine if they will need as capital before the end of the greek bailout program. according to a bank of greece official, it may be ready in early may. the comes as mario draghi said yesterday the advisory mechanism may frontload stress test for greek banks. in washington, the latest republican bill to replace obamacare has been dealt a blow. that as a susan collins became the third gop senator to say she would vote against the bill. it is the latest failure by republicans to deliver on a promise. a fast-track mechanism that allows the gop to bypass the mechanic support expires at the end of this week. the president of federal reserve bank of minneapolis says -- has backed janet yellen for a second term. his comments come as donald trump continues to weigh who we

you -- who he will nominate next year. >> excellent job. i hope she is reported. i cannot think of anybody who is better equipped to read just to lead the federal reserve in her. she is the rare economists with excellent leadership skills. juliette: in iraq, millions of kurds have voted in a historic referendum on independence. the repercussions will be felt farther it more than 30 million .urds brent crude climbed to a two-year high amid concern that a backlash against the vote may disrupt kurdish oil supplies. global news, 24 hours a day, powered by 2700 journalists and analysts in more than 120 countries. you can find more stories of the bloomberg at top .

as manus has mentioned, we are seeing the lows in asia at about .4% for the fourth session of losses. you've got japan down by .33%. the australian market closing down by a quarter of 1%. if we look at the stock in focus, it is a battle of the tech players that have sold off in asia. tencent dealt a fine from china over its reach out application. you have this rally coming through in the energy players based on that oil story we were talking about. petrochina one of the front runners in terms of index points . a lot of focus on these korean shipbuilders. new concerts overnight, including samsung winning a contract. overall, a bit of a down day as we continue to face results of

these haven assets. manus: the difficulty is knowing how to hedge in these risk-off scenarios. the national security adviser he h.r. mcmaster says has -- says the u.s. has 45 scenarios on how korean scenario can be resolved. while a washington hopes to avoid military action, that cannot be ruled out. that as the north korean foreign minister says u.s. comments give the right to shoot down american plains. >> since the u.s. has made a declaration of war, we will have every right to make countermeasures, including the right to shoot down the united states strategic bombers, even if they do not come into our airspace. manus: let's bring in asia editor, jodi schneider.

onis great to get your take the jets position at the moment in the war of words. ?here are we on the risk >> things have heated up yet again. u.s. has already declared war on north korea. what they are referring to our president trump's comments last week at the united nations and he gave a fiery warning north korea. , no, we has now said haven't declared war. this is any kind of war declaration. the warnings tend to get more significant and it is hard to see with each round of this war of words, they get more fiery and more descriptive. manus: they do indeed.

where do things go from here? what are the options for the united states? jodi: we don't know what the military options are, per se. the national security adviser he did not -- advisor did not specify but he did make the point that any kind of action at miller test by the nets states would provoke some reaction from north korea that would gravely endanger the citizens of south korea and perhaps the citizens of japan which are two allies of the u.s. so that has to be taken into account and even the military test that has gone on that have purdue -- that has provoked things in the u.s. has done some exercises there has raised the evocative level from north --

raised the provocative level from north korea. it is interesting that the national security adviser come at the same time he was saying there were scenarios and options, they are still calling for trying to find some way out of this with talks, but also to make clear that they are not -- this is not any type of declaration of war. manus: judy, thank you very much. thank you very much. neil mackinnon, thank you for coming in. it is ratcheting higher in the war of words. as a global macro strategist, have you shifted any position in the past number of weeks in reaction to the ratcheting higher? neil: the investors have been quite sanguine about the north korean situation. if we remember, u.s. equity markets reached a record high

last wednesday. we have seen the equity markets do have this capacity to absorb political risks quite well. get -- youioned, you get these zigzags and risk-on and risk-off. the latest situation does ratchet up the rhetoric a little bit. some -- it is something you have to bear in mind. either investors are being too complacent, or there is a serious situation that is imminent and could rock the markets. manus: i had a look at this, a chart put together. city -- the citi macro risk. it is above average. we are distinctly below .5, so our assessment of risk city -- o aversion is below average at the moment.

it is interesting that the u.s. keeps reaffirming the dialogue route. the 45 scenarios -- before or five scenarios are not white about scenarios. gap. is a neil: bearing in mind that china is a part of the dialogue as well. in a situation where the increasedituation is come i think we have to ask ourselves is what happens afterwards. china is going to be partial of all of that. any u.s. military action left to take on board direction of+++

that is why there's been this slowness in terms of the u.s. reaction, more circumspect u.s. reaction. there is always the risk of unintended consequences that could upset the financial markets. manus: let's move the can -- let's move the conversation on it we have janet yellen -- conversation on. we have janet yellen later on today. derek says he connected the dots september of last year. he said the fed has been more aggressive. newco he is exactly right just neil: he is executive right. manus: that is exactly right. manus: do you think three hikes is a consensus? can they get three hikes and next year? neil: they may find it difficult next year pick what the fed wants to do this year -- difficult next year. what the fed want to do this year, u.s. corporate leverages at its highest level. u.s. equity markets are at historic streams -- historic

extremes. they can move in december. they are relying more on unwinding the fed's balance sheet. janet yellen's speech today is more academic. it will be interesting to see what she thinks about inflation, rather this reduction below target. manus: that is what dudley said last night, inflation restraints would prove temporary. derek was shocked that janet yellen admitted that it was a mystery to her. she said you should be quite perturbed by that. a concernare some that maybe the fed is looking at what determines inflation through the wrong model. it.s: they are obsessed by neil: they are obsessed by it. there is a growing acknowledgment there may be structural factors in a world of supply. it is very difficult to get

inflation up to 2% target. there is that debate going on but janet yellen may adjust that. manus: what do you make of this? good guess we had a chief global strategist last week from jpmorgan asset management who said why are you obsessed about getting to 2%? just be assessed about not getting deflation. i thought 2% would help with debt. neil: global debt is at record levels. manus: so we do need to percent inflation? neil: we need inflation to reduce the real about ou -- the real value of debt. we are moving away from conventional policy. the ecb has said deflationary

factors are less of a concern. way fromill some getting the inflation dynamic, the price dynamics and sink with what is happening with the eurozone economy. that is why he wants to give stimulus, rather that is the right thing or not -- whether that is the right thing or not remains to be seen. the whole debate about inflation, what drives it, it is going to be a key debate for central bankers and free economists. ok, you stay with us. that is neil mackinnon. there is just over 45 minutes to go before the start of the cast trading market. here is what we are going to be watching. netflix, they say the probability target, it sticks -- as earlye from

as today. up next, we are going to talk about the implications of the german election. victorykel's nightmare -- angela merkel's my pair victory. later bloomberg speaks to peter oppenheimer. is the equity rally stretched? that is the question for goldman sachs later. this is bloomberg. ♪

manus: it is "bloomberg daybreak: europe." 8:20 a.m. if you are waking up in germany. euro stoxx 50, the blooms are dubai, you goodbye have the middle east stocks trading up a quarter of 1%. .4%. are unchanged at

i will be speaking to the chief economist over at goldman sachs a little bit later on it stay tuned for that conversation. .2%. down there is a note of caution added to the markets. the foreign minister declared the nation north korea to down u.s. warplanes. share a stagell with janet yellen today. there is a lady thatthere is a e on juliette -- take stage on bloomberg daybreak every day, juliette saly. juliette: capital partners are clawing partners -- exploring options. according to people familiar with the matter, the controlling shareholders of the drugmaker have held talks with shanghai pharmaceuticals focusing on the so -- focusing on the cell.

jaguar land rover is scouting for acquisitions of international automakers amid rising competition in the industry. according to people with knowledge, the luxury unit has been holding internal discussions on buying other brands to diversify the branch of vehicles to sell. kkr is said to be trying to deflate desperate sweet apple to switch sides and join the avid that this comes days after the japanese company says it agreed to sell the unit to another group led by bain capital for $18 billion. yet toone maker has pain.with that is your bloomberg business flash. manus: the president macron makes a speech later on this afternoon. he makes a proposal toward

reshaping europe. he is going to need support from angela merkel who faces the most pressure after the strengthening of the far right move in germany. neil mackinnon is still with us. macron once more europe, francine: german alliance to be emboldened and greater european integration. the complexion of the ensuing coalition is going to involve these guys, the ftt. we think that is the most likely outcome could what chance is there of what more deep-seated integration in europe with the ftp on board with merkel? neil: i don't think it is to happen. president macron's vision of a more integrated europe is dead in the water. especially after the german elections. the nature of the coalition, the

thece by the ftp is against eurozone budget, very much against further eu integration. manus: would merkel throw it all survive her four-year term as the triumphant chancellor? neil: you could argue that chancellor merkel herself over the past three years has been resistant to any notionneil: yot chancellor merkel of a fiscal union. her own financial minister is against that as well. reunion -- a reunion remains half-baked. in terms of the future of monetary union, it could be determined not by things such as brexit but could be determined why the nature of german politics. might be determined what happens

in the italian elections next year. the idea of a more integrated eu, i think certainly doesn't look as though it is going to happen. manus: in the commercial break, fdp participating in merkel's coalition, the jamaican coalition could have serious ramifications for brexit . it could be a plus ramification for brexit. look at sterling. sterling strong. eurosterling is adding momentum. coalition be aca positive for brexit? neil: in terms of what is happening to the exchange rate, we have these scare stories about so-called brexit coalition be a uncertainty. the u.k. economy is fine. a lot of resell numbers beat expectations.

of doom andions gloom but that is been completely overstated. what is interesting posted german elections is talking in the press this morning that actually, any sort of response from the eu in terms of the brexit negotiations to be delayed. the countdown to the u.k. exit from the eu continues. thaty well be a situation there is this could so-called deal that everyone is talking about that doesn't happen. i don't inc. that will be a disaster for the u.k. economy. there's a lot more going on in the economy. i think a focus on a move towards free trade and engaging with other countries outside of thing.is a good manus: neil, thank you so much. equity markets are set to open lower could keep an eye on

crude. -- open lower. keep an eye on crude. that is it for daybreak europe team. ♪ what did we do before phones?

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guy: good morning. you are watching "bloomberg markets: european open." cash is about to open in i am guy johnson in london. matt miller over in berlin. what are we watching this tuesday morning back of the market moves from north korea to janet yellen. the dollar bounces as a result. will the fed chair keep the mood going. macron's message. the french president well line his proposal to reform the european union. the big question is