♪ >> welcome to the "best of bloomberg markets: middle east." here are the major stories for the region this week. egypt suffers its worst terrorist attack in modern history, but why didn't the markets seem to care? what are the implications and -- e.m. investors? bitcoin goes ballistic. it smashes through $10,000 for the first time. is this a bubble waiting to

burst? but first, coming to terms with an attack in egypt that left 300 people dead. i spoke with the senior executive officer at emirates. >> it is a truly shocking event. i think the thing you have to remember is egypt has gone through a series of reforms on the political side as well as market side, so for now, i think we should view it as an isolated event and see where it goes. they will clamp down hard on this. i think we should take a moment and see where things progress before jumping to too many conclusions.

>> the question becomes how how investors should look at the story. 2015, stock market sold off. your appetite for egyptian assets remains firm. >> it is an interesting one. if you look at it and go back a year, you almost have to view this as a timeline situation, a year back, very few foreign investors had an appetite for egypt. the security situation was a bit of a mess. last october or just over your -- a year go, 20 billion dollars. today, they are $36 billion. half of it has been dispersed or approved, so things are looking good. even if we talk about ourselves, we have participated in both egyptian securities and on the

fixed income side we have participated from august onward in the local market on the treasury auctions. every week, there are two treasury auctions on tuesday and thursday. interestingly, today is the nine-month auction. that and be a key month to look at in terms of foreign participation. the yield onek that was 18%, so that will be an interesting one to watch great. >> we will watch that for sure. we know that the egyptian president has already reshuffled his top security. what are the chances that these security issues become a distraction for him and maybe he takes his eye off the ball? >> that danger is always there. one of the things when foreign investors are looking at any of these markets, if you look back

pakistan,er story in they have got a similar situation in terms of security. one of the things that helps pakistan that has been improving is the security situation. that is one thing that agrees with you. that is where we have to see if this remains an isolated event or there are more follow-ups. >> there was zero negative reactions from the terror attack. i asked the ceo of renaissance capital whether that meant investors have simply grown a thick skin when it comes to egypt. >> that is a very important point. local investors have accepted that this will remain unstable.

-- as been going on for sad as it sounds, it has been going on for quite some time. thick skin might be one way of putting it. this is more of an isolated territory and hope it will sort itself out. >> are foreign investors going to react differently when the market comes online today? are they going to say they are going to pull out their money? this is the most violent incident in egyptian history. >> yes. international investors, the way they are looking at it now, some of them will be putting more money into the market. i don't think you'll see money really coming out of egypt on the back of this. to givet up this chart perspective to what has been happening to egyptian stocks. basically, the egyptian stock exchange story is one of the few remaining positive patches in the region, which is filled with some of the worst performing exchanges in the world. this is year-to-date

performance. egyptian stocks up almost 30% year to date. the saudi performance barely above the flat line. how much more meat is in the story? >> the fact is egypt is the strongest in the region. if you look at the earnings season, it has been very strong even through the consumer sector. it is showing very strong signs of recovery, so if anything that is purely fundamental. you have the recovery story translating into results. >> has anything changed your view on the other markets like qatar? the bloomberg team, they have been able to make 7% profit by switching between offshore to onshore with the saudi real.

getting interested in either valuation? >> devaluations are attractive. as long as the political situation remains the same, it will be very difficult for me to put money to work on contract at the moment. >> what about the rest of the gulf? showing a lot of positive signs. if you look at the market, it is actually switching. >> that was the ceo of renaissance capital. up next, jay powell saying there is no sense of an overheating economy just yet. is he right? we discuss that next. ♪

♪ >> welcome back to the "best of bloomberg markets: middle east."

the fed chair nominee jerome powell said the case for raising rates is quote coming together. he says the economy does not appear to be overheating. that aligns him with a more dovish flank of the central bank. we asked the founder of ht research if there is anything that could derail a december hike. >> there's only one thing i could think of. that is the pce coming out tomorrow. if it is 1.3% or below, that could sway the fed. again, there is an outside chance here that if you have a weak inflation, the fed will hold the fire for now.

>> this issue of a flattening yield curve, many have put it off as being down for other things. have you subscribed to the view that it does not signal a slowdown ahead? >> the yield curve has flattened, and we are a little bit more than two rate hikes away from an inverted yield curve, and that is usually a precursor of a recession a few months later. that is something we have to watch for carefully. i think that is the most important data point. another one is high yields which have widened. you have all these yellow flags that you have to be very cognizant of, and it looks like 2018 will be a lot more volatile than 2017 was.

>> we put that yield differential on the bloomberg as we speak and the spread between -- we have added gold futures. as it comes down, it could be a headwind for gold as well. a lot of discussion about the world post. hiking rates, reducing the balance sheet -- do you think the fed is making a policy error ? >> that is possible. you have inflation, which doesn't seem to want to materialize, and i think the reason for that is strong demographic forces. the other one is robotics and automation that replaces labor and excessive debt levels and if interest rates go too high, the debt service will become important. the feds will be too high. you are taking it to a certain extent and i think the fed will

data dependent on rate hikes in 2018. >> how convinced are you that we will get something meaningful in terms of tax cuts? possibly the biggest source of upside as we look ahead to 2018. >> it is a strong likelihood that some type of tax reform will be passed. the question is, how much of an impact will it have? historically, it has not had the same impact as monetary policy. fiscal policy in the 1950's had a lot of infrastructure spending and three recessions in those years. policyructure and fiscal is a lot weaker than monetary policy. i'm not holding my breath when it comes to this. >> up next, bitcoin goes ballistic, reaching $10,000 for the first time. is this a bubble waiting to

burst or just the beginning? we discuss that next. this is bloomberg. ♪

♪ >> welcome back to the "best of bloomberg markets: middle east." the bitcoin search hate new -- heights thisew week. many investors think we are into bubble territory. >> there's really one four letter word -- fomo, fear of missing out. bitcoin really is in a virtuous cycle right now. the higher prices go, the more money wants to go in.

>> what is next? >> people are looking at whether u.s. regulators are going to approve futures, which is a major milestone of bitcoin acceptance and whether banks will offer that to their clients, whether we will see more mutual funds tracking bitcoin. i think what people are looking at is bitcoin really going to go mainstream? >> absolutely, thank you very much. we will see where this goes. he is still with us over in singapore. i want to ask you. you have been asking about bitcoin, i'm sure. what have you told them? >> everyone is talking about it right now. it seems there is a uniform view that bitcoin is in a bubble, and

if everyone talks about the bubble, my guess is it would go higher before the bubble bursts. i think at the end stage it will be when the last bear has thrown in the towel and everyone wants to get in. that could be a turning point so you can control the price via the futures market. you have physical gold and you have the futures and 500 times more futures on the line. the same may happen with bitcoin and then the market will be more controlled. >> the team here at bloomberg makes an argument that human psychology is ultimately going to bring those valuations down. it is only in human nature to

push selloff at these levels. this is not a normal market. how much more upside could we see before the bubble bursts? >> that is anyone's guess. it could go to $20,000 or $100,000. nobody really knows. central banks still look at it -- the reactions from central banks are different from country to country, but want to bitcoin -- once bitcoin gets to a certain size, then you will have reactions and directions could be anything from clamp down to acceptance. maybe even creating their own -- their own cryptocurrency. >> many have been labeling bitcoin digital gold. it certainly has outperformed the precious metal this year. should investors put their securities in one of the oldest

or newest? we have gold expert who chipped into the conversation. >> you see a lot of money coming in. that's really what is driving it up. you see people taking money off the table and there's a lot of money going into the crypto world. we see it in the long-term going up, but it will reach saturation at some point. >> we are talking about volatility. i have to ask the question, so in bitcoin, does that make it a store of value? >> i think there's about $250 billion now in cryptocurrency, so in that respect it does make it a store of value. compared to gold, it is a baby. i think there's about $8 trillion of physical gold in the world. i think it is still the elephant

in the room in terms of safe havens. >> i'm wondering if we will have to put a divider between both of you. let me see if i can get more reaction from you both. the chart behind me is ounces of gold required to buy a bitcoin. i feel a little bit silly every time i bring up this chart. what is a bitcoin compared to gold? also, if you look at the amount of bitcoin that will be in existence, bitcoin would have to get to $350,000 per coin to equal gold. what do you say to that chart? >> one of the things we talked about, it is new. when it is new, that means money comes in.

gold, the money is already in there. you see people that are looking at gold and saying even digital currency is a better way to store value. it is a faster transfer. it is something people are trying out, as you can see, it is succeeding. >> just to show our viewers what is happening with one of the cryptocurrencies, specifically ether. it trails its two biggest rivals , which and bitcoin cash has tripled. how should investors look at the different types of currencies? there are many out there. are we going to need consolidation?

>> this makes it very interesting when you talk about cryptocurrency. we talk about bitcoin, but that is not the only cryptocurrency out there. while bitcoin was designed to be herium wasle, et designed to be used. you can get utility tokens. there's lots of utility when it comes to the new cryptocurrencies. arestore of value, you looking to invest, or utilities to buy services available in the future. >> what about the security question? last year we saw a $30 million heather. it is not a crime.

that said, i remember gold in the 1930's. the government confiscated gold. how should we be thinking about bitcoin and gold as a safe haven ? >> gold has been a safe haven for 5000 years. today it is as relevant. i remember in the late 1990's, the youngersaying india, theyin would not be interested in gold. trust me, every indian that gets married has a lot of gold. gold is that fundamental safe haven. some people say gold was the original cryptos. maybe it was. i have no problem with bitcoin or the other cryptocurrencies because they are an alternative to paper. fiat currency. it's not an alternative to gold.

what i love about the bitcoin development is actually block chain and that instant transfer of ownership. you take gold and add block chain, then you have an interesting topic. >> some have been doing that. if we talk block chain, we will be here forever. eric, your reaction to the hacking. >> i think it is on the mind of everyone who owns their own currency or an investor. if you own bitcoin, you can hang on to your own key. it is incredibly secure. it is not about the security of bitcoin, but it is about the security of where your bitcoin is and who is providing or services. if you notice, the hacking is taking place at individual companies, and bitcoin is being transferred securely to the wrong person. >> up next, debt downgrade. south africa's local currency

debt is cut to junk. what does that mean for emerging-market investors? all of that next. this is bloomberg. ♪ is this a phone?

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♪ >> welcome back to the "best of bloomberg markets: middle east." the week began with market investors reacting to news that south africa's debt score has been cut to junk. we begin by asking whether a move by moody's was only a matter of time? >> i think it is a matter of politics again. you need a big change in south africa on the political side. the stories about corruption are still there and that is affecting the economic outlook. as well as investment. investment is down to historical lows in terms of investment.

i'm talking real investment and unless the -- and fdi. you're not going to have any upturn. >> how do you look at the emerging markets and some of the more recent developments from south africa to turkey and others as well? >> e.m. has been a great story. no question about it. both on the debt side and the equity side it is fantastic. the outlook continues to remain on a fundamental basis, pretty solid. just like i was referring to earlier, most of the projections are keeping. that remains there. from a political point of view -- pakistan you just got on the roadshow.

this is a country which has had problems in the past but has been from a security point of view very stable. now you have the issues coming up over the weekend, as well as the finance minister has just been replaced. or he has gone on leave so to speak. what that does to derail things a little bit, you will have to watch. that is one of the things that always remains a risk with e.m., these uncertainties that may crop up. >> speaking of risks and the rally we have seen in the space so far this year, i put together a chart that shows emerging-market stocks, theks, currencies, and bloomberg dollar emerging-market bond index. all of these are up, but the bond space absolutely remarkable. i'm old enough to remember two decades ago when a bunch of african countries were burned by

their overseas borrowing. in terms of those liabilities, should we be worried about the e.m.'s being able to pay that back? from 2015 recovering and 2016, where e.m.'s were sold . so the 2017 story is a story about europe which is growing again and a story about e.m.'s. remember, what we missed out is china, asia and the belt world. what china is doing is nothing short of phenomenal. we look at egypt, pakistan and much of africa, turkey as well. the real story of emerging markets is asia. asia is keeping up. if you look at all the countries that are strongly integrating

into china's economy, they are doing extremely well. the debt side is understandable. you have record low interest rates on a global basis. they can tap the market, and there is still enormous liquidity. maybe a bit rich in terms of pricing, but they are benefiting from historically low interest rates. >> what about the soft dollar? how does that play into the e.m. rally? >> that is the interesting thing. part of the reason that e.m.'s have struggled historically or if you go back in history, as the markets have grown, emerging market sovereign's continue borrowing big-time in dollar denominated debt and as interest rates go up and the dollar strengthens, that is where they

struggled. look revenue, you have to pay in dollar. this time, a lot of the countries have managed to get the structural reforms on their side. i think increasing dollar will not hurt them as much as it has in the past. secondly, the absolute levels of where the interest rates are our much lower this time so you will not get to the high single digit levels anytime soon. >> this is part of the emerging-market conversation. we are watching the ongoing development. you were saying earlier you disagree with some of the other comments. you think what we saw over the weekend is much more significant. it is not an isolated incident. >> it is simple. you look at the rise of isis in syria and iraq. we are talking about 30,000 to 40,000 fighters. hardened fighters, militants, extremists.

those are likely to spread across the region, so expect trouble not only in egypt but in other surrounding countries. i don't see this as an isolated incident. what happens is they will disband and then terrorist attacks all over. what is most interesting is for once, we have a political coalition between saudi, uae, turkey, egypt and others. to turn the wave against extremists. i think this particular act is going to galvanize the efforts of all those countries to fight extremists, and that is a very positive thing for the region. >> a costly plea-bargain. this is bloomberg. ♪

>> welcome back to the best of bloomberg markets: middle east. one of the most high profile suspects in saudi arabia's weekption crackdown this was arrested. said to top $1 billion. a prince was released tuesday and at least three other suspects have agreed to deals. the prince was recently seen as the second most powerful person in the kingdom. i asked the head of macro strategy if these deals could be

a catalyst to the upside for the kingdom? >> it would be, and it will go in line with what the saudi's have been saying. we are committed to structural reforms and have taken the necessary adjustments needed towards transparency and men -- they show a strong sense of commitment by the authorities. as you have more positive news this will uplift markets and put the light back on the positive aspects of reform plans the visiting sinceen the beginning of the year. >> this is the saudi benchmark dowell index year to date. media, retail, and food and staples really standing out. consumer services down 27%. a lot of the selloff comes from stocks that are said to be

linked to some of the people arrested. that is why we could see pockets of upside. how would you see positioning for some of these sectors? which sectors are likely to outperform going forward? >> i think investors will go and zero in on fundamentals on these sectors. the fundamentals on a lot of these sectors look quite constructive. it is an economy that is in growth mode. it is still investing in growth. i think foreign investor sentiment in saudi arabia should pick up, and all these factors should pick up over the next year. >> the other interesting story coming out of egypt, aggressive reform program there. esd increased its guidance. they see a 20% upside in 2018. are you as positive as egypt ? >> we have seen just yesterday the egyptian authorities take deposit capsal and

that were there on foreign importers. that effectively removes what is seen as the last step that has been there on capital control and goes in line with what we have seen in terms of improvements with the $12 billion agreement with the imf in the last year. improvements have been made over subsidies, cuts and spending and we are starting to see inflation in egypt start to level off. i think the sectors to watch out for are the tourism sectors where we have had an impact. you could potentially say there short-term impact from what we have seen over the last week, but traditionally events i have seen do not have much repercussions. >> what is the biggest risk? is it the availability of u.s.

dollars? >> in terms of liquidity, -- the central bank is doing well. the biggest risk is deviation from commitment to reforms. they have been moving forward on that. the last step is further removal of energy prices. is that likely to pass through before the next presidential elections? potentially not. we have seen egyptian authorities committed to reform the economy in the long run. spoke to -- ahead of this week's crucial oil meeting and asked for his response over the production companies. >> i think it circles around the ideal oil price. russians have been pushing back, saying if we cut too much, if we push oil prices the on the $60

level, too many producers come in. potentially they will reach an agreement potentially for cuts into the year, but with a caveat that those cuts are revised in june of 2018. >> what about geopolitical tensions we have seen? on, itnking iran, caps not the- qatar, it is situation we have seen in the past few years. >> the oil prices are becoming more sensitive to political tension. we are starting to see that materialize right now so oil prices are becoming more sensitive to political tensions. the proper price is dropping. we are starting to see that materialize right now. political tensions are feeding into oil prices. have put this up in a chart. that is your brent crude spread.

that is near a two-month high and we have circled some of the events. you are looking at 4.1 on monday. we might not get what the market is baking in around the nine-month mark. in terms of where the story goes, the exit strategy is the other unknown. even if you prolong 46 to nine for six tot is -- nine months, what is a winding down going to look like? how will they manage that? >> if you look at what we are forecasting, we already revised our budget deficit from 7.7% to 6.8% on a five dollar rise in oil prices. i think in the medium run, over the long run, these countries are doing a better job of managing the budget within a price range of $50 to $60. the key question is how long can they take the pain of cuts in

oil prices versus they need to manage oil prices at that level? >> goldman sachs says opec may may not be able to deliver on that nine-month extension. at $80 a barrel. do you buy or wait for the meeting? buy as the data comes in. the agreements, potential surprises over opec. >> will it be the biggest disappointment coming out of this meeting? they have said they are data dependent. is key and we need to see the data. so far, saudi arabia has been taking up the brunt of cuts we need to see.

we need to see wider compliance across all members. >> up next, the feds inflation situation. can jay powell have any more success than janet yellen recently? we discuss that next. this is bloomberg. ♪

♪ >> welcome back. let's return to the united states now. jerome powell thought the labor market to get even stronger without creating inflation struggles. you will seeink inflation pick up rapidly. i think the fed is going to have to be more realistic. already they are talking about no longer about an inflation target. they are talking gradual increases in prices.

so it might be the beginning of a change in policy. we are not seeing commodity prices or cpi's. were you are getting the inflation is on asset prices. the and liquidity central banks have poured into the market. that's and stocks have increased in prices. that is where the inflation is. economists and the feds have never come around to the green whether the inflation target for the feds should target asset prices. i think we are beginning to say that increasingly we should be looking at asset prices as well as cpi's or ppi's as a target. a good chunk of the story we saw in u.s. equities came off the back of u.s. fiscal reforms and deregulation. in terms of tax cuts, the folks at j.p. morgan are pointing out

that investors have only a 30% chance of tax cuts passing. where on the spectrum do you stand? >> on the tax reform side, the markets are not sure where it is going to go. 20% to 30% seems light. i think some kind of reform will go through. the question is, what kind? we have seen the house version of the bill and the senate has its own version. now that is going to come to a head. what we are seeing on the markets is irrespective of that because the rest of the fundamentals are so strong, the market is powering ahead. that is not seen to be anything putting a roadblock in the way and that is why this week a whole series of houses have come out with very positive outlooks for the 2018 market.

>> tax reform is exasperating -- exacerbating the pains with the yield curve. this is your key metric in terms of the story around u.s. and 10-year spread. is that going to continue narrowing? >> i think so. i think you have got a very low long-term yield curve. depressed because of qe. what is happening is qe is no the fed islace, and going to the lower end of the yield curve. what i think you'll see is a gradual opening up of the yield curve. no longer the flattening you have seen so far. >> your take on the yield curve, this is a question we ask every guest. >> the recent weeks, that has

been the buzz word. everyone is looking at it and seeing what is happening. what you see is the 10 year has come down 10 basis points in the two-year has gone up 50 basis points. the idea was or thought was that when this new administration you would see a lot more longer dated issuances. that is not come true. if you look at what has come through, the average maturity has been just shy of six years. most of the issuances have been at the shorter end. >> that is it for bloomberg markets: middle east. we have a busy week ahead for the region. we will be back sunday morning at 8:00 a.m. join me then. this is bloomberg. ♪

♪ matt: coming up on "bloomberg best," the stories that shaped the week in business around the world. really for retailers, opec extends production cuts, nuclear flashpoint flare again in north korea. president trump: this is a situation we will handle. matt: the senate grapples with the tax bill. the fed chair into the chair apparent speak on capitol hill. >> the case for raising interest rates at the next meeting is coming together. matt: a fed president shares insight in an exclusive conversation. >> the strategy of m