francine: the volatility trade. u.s. stocks stage their biggest reversals in 2010, while 10-year gilts briefly turned negative for the first time since 2017. heroicss late session failed to carry through to asia and u.s. futures point to lay flat open. mexican standoff. funding for president trump's border wall remains a key standpoint in the house. ♪ good morning, everyone. good afternoon if you are watching from asia and welcome to "bloomberg surveillance."

i'm francine lacqua here in london. these are your markets. 1 you look at yen-dollar, 10.40. when it comes to the markets, you are looking for a safe place to hide. the stoxx europe 600 actually gaining about 1.2%. on wednesday we had a huge rally , then a collection, then yesterday stocks went back up. u.s. 10 year yields below 2.8%. seniorup, diana amoa, portfolio manager at jpmorgan and kit juckes, fixed-income strategist at societe generale. we will be joined by a distinguished -- council on foreign relations and a special assistant to president clinton. at 11:00 a.m.,on

and then of course we speak to luca paolini pictet asset management of. >> the partial u.s. government shutdown is set to continue into 2019. remember,, you may one week ago after house republicans said they did not plan any votes this week. president trump is demanding $5 billion for a border wall with mexico. he tweeted that most of the government employees losing pay because of the closure are democrats. tariffs were imposed on china because of intellectual property violations. almost 1000 requests for exclusion were granted, covering over $134 billion of chinese goods. take effect in july and the exclusions are -- to that date. this is the sixth contraction in eight months. the outlook suggest limited strength in any rebound in coming months as businesses

navigate the u.s.-china trade work, brexit -- and brexit -- trade war and brexit. price gains slowed while japan's unemployment rate rose fractionally. -- $3.2int treat trillion hedge fund industry had it for its worst month since 2011 -- worst year since 2011. this includes those of high-profile managers to leon cooperman. the number of closures is well below 2008's record of almost 1500 liquidations. an explosion at a power plant in the borough of queens sent a wave of bright blue light flashing across the new york city skyline last night. the lights could be seen from manhattan shortly after 9:00 p.m. local time after a brief electrical fire at a substation. the unusual sky prompting a wave of commentary on social media.

bill de blasio tweeted to reassure residents that the lights were not aliens. global news 24 hours a day and on tictoc on twitter, powered by more than 2700 journalists and analysts in more than 120 countries. this is bloomberg. francine? francine: thank you so much. volatility continues. it looks like it was going to be a bad day for u.s. stocks after a blockbuster session on wednesday, but equities rebounded late yesterday, finishing the session in the green. it was the biggest reversal in the s&p since 2010. aocks have still had punishing december, the biggest we have fallen in a month and a decade -- in a decade. joining us now for the hour is luca paolini, chief strategist at pictet asset management. i'm not sure what is going on in the markets. what is the market psychology right now? luca: i think investors are very worried, they are concerned. obviously liquidity is very thin

during this. so you see this kind of big move. i think the real concern is that global growth. there are still quite a few investors out there that believe they are still in a bull market and they want to buy it. there are these two opposite forces that create a lot of volatility, especially this time of year. francine: if you look at the volatility, is that the name of the game for 2019? or has it settled from here? probably see this kind of volatility next year but i think the trend is for higher volatility. we know global growth is weakening it, inflation is still pretty much there, the fed is not clear about what they are going to do. it is going to be next year, a difficult year like this year. there may be some positive news next year. francine: if you look at the positive news, first of all is it going to be on the politics front or what central banks do?

it seems like the markets are pricing in or weren't about a recession, or -- worrying about a recession, or at least a possible slowdown. are they right to worry? luca: i feel investors right now are getting too worried. growth is still around 2.5, 3%. and as collation of the trade were between china and the u.s. seems to be manageable -- an escalation of the trade were between china and the u.s. seems to be manageable. francine: -- luca: we should never forget that the initial valuation -- violation a few months ago was desperate valuation a few months ago was -- valuation a few months ago was very high but now we are back to normal violation. we are getting closer to the end of the cycle.

obviously we have seen this in the past. whenever we feel we are getting close to the cycle, everybody is getting more nervous, that is volatility, but i think there may be some good buying opportunities in the coming months. francine: what kind of things would you be buying? bond space or equities? luca: i think both. i think you have to be very selective. i think u.s. equities are still vulnerable. i see more upside in emerging markets. some markets are actually doing very well. currency in emerging markets is still very cheap. -- by the federal reserve, this could give emerging markets a significant boost. francine: i have a chart. it basically what the fed funds rate through 2019 are looking like. is this the one call you need to get right because that will be of course your dollar call, and that will kind of get a sense of what your investments do 2019 overall? luca: i think so.

three months ago there was an 85% of ability of a fed hiking rate next year. now we are at 25%. i think probably investors are becoming too optimistic about the fed. e, butk the fed will paus i'm not sure that they won't hike at all next year. we are putting too much emphasis on the federal reserve and monetary policy. at the end of the day, ultimately this kind of corruption was triggered by worries about global growth. i think the fed will probably hike but it will not be a big factor for markets. for me it's all about u.s. growth and global growth. the fed is not the most important aspect. francine: when you look at the repricing, i feel like we have been talking about it for the last 14 months? what about german bunds? luca: every year we say german bunds can go up because they are too low.

-- is one of the few asset classes on the planet with positive returns again this year. with the ecb affectively ending qe, there is really no value whatsoever in -- obviously there is a little bit potential downside in yields, but the risks are very symmetric. we don't want to be invested in european bonds or credit either. francine: luca paolini stays with us. in the meantime, we have the italian premier, just set the content, holding his -- just 70 content -- we have you thai prime minister holding his and -- the italian prime minister holding his and of your address. we will have some of that. we will have more indication of where he sees things going in italy. there he is on the left-hand of your screen. for those listening to us on

radio, we will push it out also on social media. we will follow italian btp's, the budget and risk of recession to italy. up, oils roller coaster ride continues, volatilities have soared. wti set for its biggest order lost since 2014 -- quarterly loss since 2014. we would discuss that next. this is bloomberg. ♪

♪ francine: economics, finance, politics, this is "bloomberg surveillance." luca paolini -- i'm francine lacqua here in london. let's get straight to the bloomberg business flash. >> blackrock shares have fallen almost 25% this year with investors cashing out or staying on the sidelines. the company is still better off than many of its peers. a gauge of fund companies and

banks has plunged 29%. stock market volatility climbed to the highest in three years. nestle making its biggest push you into the booming vegan market. they aim to launch the incredible burger next spring. they are racing against new entrants, like a company backed by bill gates to find alternatives to resonate with a new generation of consumers. u.s. cannabis retailer green growth plants planning to launch a hostile takeover. value the canadian marijuana grower at $2.1 billion, a 46% premium over aphria's closing price on monday. aphria denied any wrongdoing.

instagram redesigning its platform for harrah's auto scrolling and the plan will -- horizontal scrolling and the plan most went sideways -- almost went sideways. it sparked a barrage of complaints and quickly went back to its original design. they say it is a small test that went wide by accident. francine: nothing like a bit of social media controversy between christmas and new year's. one of the biggest casualties of the year amid volatilities is crude oil. it continues on its roller coaster ride with price uncertainty. set for its biggest quarterly loss since 2014 after reaching a four-year high in early october. joining us is bloomberg's ema energy and commodities managing editor and still with us is luca paolini from pictet asset management.

every day we talk about oil and every day that is something new to say about oil. what is the market settle in 2019 -- where does the market settle in 2019? >> we had a survey published of analysts and executives at banks and they expect oil to reach $70 per barrel. the reason volatility really reflects an overly gloomy outlook for the global economy and that actually is as most people think growth persists here. there will be a relatively balanced market after opec cuts production. and that goes for prices to rebound to $70 per barrel. affecte: how does oil --? i think what is important about the oil price, it is a barometer for growth. you can also look at it in a

different way. it is a big boost to consumer spending. i think it will be a boost for consumer spending and overall we don't think the oil price is a lot of upside, because production in the u.s. is actually going up a lot, global growth is said to be weakening. i think there is a little bit of upside, but nothing significant. i see the oil price as a potential support for consumer spending more than anything else , and the energy sector is actually quite cheap, so in that sense we like to add exposure to some energy stocks. francine: how difficult is it to break down what impact the price of oil? how much of it is supplied? how much -- supply? how much of it is u.s. supply? do we have a clear idea? >> it's hard to know exactly which factors are driving in the downturn we have seen this quarter i think both of those factors have played a role. macrowas concern for

investors that economic growth is slowing fast and the oil price is a way to play that. we saw a lot of hedge fund money leave the market for sure, but as you say, u.s. production has consistently supplies on the upside throughout 2018. we are looking at january-december growth approaching 2 million barrels per day, which is extraordinary and no one saw coming, especially in the second half of the year. people thought production would be very constrained by lack of a pipeline from texas. they continued supplies on the upside. that will be the key in 2019, the resilience of u.s. shale, whether it continues to grow. francine: i am looking at some of the data send u.s. production will surge over all million barrels per day in 2019. whatever happened to -- 12 million barrels per day in 2019. what happened to peak oil? >> [laughter]

exactly. it has turned the whole oil world upside down. there was a week in december when the u.s. became a net exporter of oil since -- for the first time since the second world war. it's extraordinary. francine: does it help the consumers in asia more than the consumers in europe or the u.s.? who benefits the most? >> traditionally you see a country like china, but also a country like turkey, for example, of the importer of oil, should benefit -- a big importer of oil, should benefit. i think it is also a big geographical diversification of that. we have to understand the reason why. i still feel the level of the commodity oil price is related to the -- and the surge of u.s. production in the u.s. -- production in the u.s.. francine: this is something we

were trying to figure out yesterday, whether a decline in the price of oil was symptomatic of a world right recession. indicator, ort copper, or something else? >> we have seen aluminum and other key industrial metal down 20%. -- 18% this year. that weakness is there. the moves have not been as dramatic as an aluminum, but overall the commodity complex has had a poor year. the bloomberg commodity index is likely to finish down about 11%, which is the first annual decline in three years, which tells you how people are feeling about the outcome for growth. francine: thank you both so much. luca paolini stays with us. up next, trump versus jerome powell. the fed chair is open to meeting the president. we will talk about that next.

this is bloomberg. ♪

♪ is "bloomberg surveillance." i'm francine lacqua here in london. a report in the wall street journal says jerome powell is open to meeting with donald trump. this comes amid concern that the president could be planning to fire him. ahead, u.s. rates traders are gearing up for a landscape as jerome powell plans to start holding press conferences after all eight of

the central banks meetings. meanwhile, a different way to look at the yield curve according to a blog post by the federal reserve bank of st. louis. an inverted yield curve could hurt u.s. economic growth and pinch bank lending markets. is --luca paolini with us still with us is luca paolini. does anybody really believe the fed is not independent? fed is think the independent, but all of these rumors about trump firing jerome powell are not great. we have seen other countries in little bit under attack. i think in the u.s. we can say the federal reserve is independent. if anything it, the risk is the federal reserve would hike more just to prove that. i think i'm pretty confident that the central bank will make the right decision without feeling the pressure from trump.

francine: is it right that there is a press conference after every meeting so that they could potentially adjust monetary policy? luca: i think so, but i also feel that there will be a risk, because you just generate more volatility. i think yes, though. it just creates a little more space for them to act in a more flexible way, but that's all. francine: is the phillips curve back in 2019? you are confident that the u.s. economy is in good shape? are going to see that correlation between inflation-employment back? luca: at the end of the day it is low unemployment is actually fitting through our wage growth. ,his should result in inflation although more likely a decline profit market in the u.s.. we are still unclear if this will lead to more inflation.

i feel the curve is alive and that something we sing in the past. at the end of the day it's always going to work. francine: thank you very much. i'm sure tom keene likes the phillips curve is alive and back. luca paolini from pictet asset management stays with us. the u.s. shot down is likely to can -- shutdown is likely to continue next year as little progress is made on budget talks. we would discuss that next and this is bloomberg -- will discuss that next and this is bloomberg. ♪

francine: economics, finance, politics. this is "bloomberg surveillance." the partial u.s. government shutdown looks set to continue into 2019 after house

republicans said they didn't schedule any votes today. progress tolan for fund the nine programs that run out of funding. first of all, good morning to you.is their likelihood of a resolution in the coming days ? unlikely.ery there is no schedule votes. most members of congress are not in washington, even though donald trump remains at the white house. there is not any expectation of settling this in 2018. it will likely go into the new year. the question is, how long into the new year will it go? president trump is demanding and sticking by his demands that congress passed $5 billion in funding for the wall along the southern u.s. border. francine: who would actually compromise? at this point, there isn't

a real compromise on the table. vice president pence did send something to senate democrats that has been rejected by them. what will happen now likely is that this will go into the new year. democrats takee over leadership of the u.s. house of representatives. nancy pelosi has said that she will pass a bill without wall funding. at that point, that is likely when negotiations will start. neither side really wants a long shutdown. they both want to move on with their agendas for the coming congress. it will take some movement and some back and forth for that to happen. francine: when we spoke on radio this morning, i asked you about the effects of the shutdown.

one thing i haven't factored in was the impact on home sales. jodi: that's right. one of these unintended consequences, some u.s. home sales are being held up because they have not been able to issue flood insurance. fema issues that and is part of a department of homeland security, and it is shut down right now. we have also seen shuttered national parks, affecting tourism. so far, federal employees have gotten that paycheck. lasts longer, they will not be receiving the january 11 paycheck. it is anticipated we could start seeing economic effects. those tend to worsen the longer a shutdown goes on.

the longer it goes on, the market attention for economic harm. francine: thank you so much. straight to the bloomberg first word news in new york city. needs to speed up approval for foreign owned financial firms. they said it must speed up its opening of capital market and improve stock trading links with hong kong. it is the latest sign policymakers are opening up the financial system. japan's factory output dropping again in november. the outlook suggests limited rebounds as businesses navigate the u.s.-china trade war, brexit and slowing growth overseas. unemployment rate rose

fractionally. the hedge fund industry is heading for its worst performance since 2011. to put the challenges of this year into perspective, the number of closures is well below 2008's record at almost 1500 liquidations. wave of blue light after an explosion in queens. this after a brief electrical conedt a con it -- substation in a storstoria. astoria. global news, 24 hours a day, on air and at tictoc on twitter, powered by more than 2700 journalists and analysts in more than 120 countries. this is bloomberg. francine: thank you so much.

italy's populist government is racing to put its budget bill through parliament. -- it willersial double the tax rate for nonprofit entities. speaking in rome, the italian premier is aiming to avoid the increase in the coming year. how many hurdles does this budget law still have to pass to get through? we are all there. the last vote is looming. easy hurdle to jump for the government. parliamentarye

,ommittee is still discussing they went past midnight trying to fight over each legal measure. as you mentioned, a tax increase on charities is just the latest burst of the stress in the majority. when people wake up in 2019 in italy, what will they be thinking about? btps, some of the returns they want, fresh elections? ara: italian citizens will the up with two thoughts, first is how long will this government last with european elections coming up in may? the second thought is how soon will the government deliver on its key election promises? tax cuts ofabout four companies that was promised by the leak, pension reform, and

income for the poor. those are all costly reforms that have been budgeted, but the details of how they will be implemented are not there yet. growth,: high debt, we is italy at risk of recession in 2019? chiar absolutelya:. this is one of the biggest concerns and challenges italy is facing next year. we had a slowdown in recent months. how is labeled a country be able to pick up, is a big? mark.a big question you are very clear that you don't like any of the periphery bonds. i imagine you don't like italian btp's. as we going to speak of euro

a currency entity in 10 years or will it have fallen apart? >> i think we have to put everything into perspective. that when youet look at italy and portugal and spain, at their and a better position than they were 10 years ago. the only points of the pace is very slow. i fear countries like italy will release struggle if there is a global recession. it is a big question mark. it was a difficult challenge and i think the euro is moving in the right direction. francine: why don't you like italian btp's? euro, fayeu look at percent looks quite attractive.

-- 3% looks quite attractive. i think the real problem that i see for the italian btp's that you can have much better returns were fundamentals are better. i think i wouldn't have btp in portfolios. tookine: emerging-markets quite a beating in 2018. a lot of people are hoping they will come back in 2019. do you pick countries or take as a whole? luca: i think you have to be selective. in terms of equities, we like china. i think the market is cheap. china is probably the only country in the world doing some fiscal policy easing next year. in terms of bonds, i think

mexican bonds are becoming interesting. we like russian bonds, south africa is interesting. i think you have to be selective, and i think there could be quite a few opportunities in emerging markets next year. francine: we will come back to the. -- that. up, china's economy has slowed for a seventh straight month. what are the challenges facing the superpower? that is coming up next. this is bloomberg. ♪

francine: this is "bloomberg surveillance." china's economy slowed for a seventh straight month in december. the nation's economy is

deteriorating. plentiful borrowing is failing to boost growth. we are talking about some of your best place for 2019. you are seeking you see value in chinese equities. what do you do with the trade story in the? luca: in terms of trade, i think we are already seeing a lot of damage. obviously, the market has already done quite a lot. i personally feel that the risk of an escalation is now much lower than before. the u.s. and china are talking to each other. i think the trump administration is well aware that an escalation could have a significant impact on the economy. i think we has peaked in terms of trade wars. is movinge trade side very slowly and the right direction. francine: what do you buy in chinese equities?

i don't know whether things like construction or that are actually doing well in this environment? luca: the good thing about the chinese equity market is that it is very policy driven. decision driven by the by the government in china. monetary policy is actually now easier than before. you see also policy in terms of the fiscal measures. evaluation is positive. china was 14%.t, the domestic economy is still pretty solid. francine: let me bring you over to my chart. it is a simple chart looking at

renminbi. if it stays at seven, is that a psychological deter for equities? obviously, it is significant psychological pressure. the question is always have the policy makers will react to that. i don't think we are a situation where the chinese economy is at risk of significant capital outflows, but if there is, we don't expect the dollar to rally, if there is a significant depreciation, it will be potentially significant. i don't think the dollar will continue to rise. i think that is a general view on the dollar. francine: were talking about emerging markets. what do you do with the more immediate markets linked to china? luca: it is difficult to say because if you look at a country

like taiwan or korea, they are very dependent on china but are also competing with china. cyclical.ery you need to expect acceleration of growth. that is led for us, the chinese economy is actually more attractive than other parts of the region. isncine: going back to iran, that dependent on which way the elections go? seeing think we are south africa moving very slowly in the right direction. we have to be patient. i think there is good value and i really believe this is a story , coulduld be very potentially be a surprise for next year. francine: thank you so much.

downfall. dramatic . began 2018 on a high, allegations of corruption and money laundering have wiped half of its valuation off. we discuss that next. this is bloomberg. ♪

francine: economics, finance, politics. this is "bloomberg surveillance." let's get straight to the bloomberg business flash. : blackrock shares have fallen almost 25% this year with investors cashing out or staying on the sidelines. the company is still better off than many of its peers. stock market volatility climbed to the highest in three years. nestle is gearing up for its biggest push in three years. launch the burgerible are -- incredi next year.

instagram redesigning its platform for horizontal scrolling in the plan almost immediately went sideways. it sparked a barrage of complaints. it quickly reverted back to its original feature. that is the bloomberg business flash. francine: thank you so much. i missed it.it was a social free week . people complained enough and it got changed swiftly. danske bank shareholders began with high returns. the narrative around the nordic bank took. a dramatic turn just before christmas shareholders had to digest another profit warning. came days after police say

they detained 10 former executives in the dirty money scandal. good morning to you. when did investors realize things were going wrong and what do they need to be most afraid of? say. is exactly as you 2018 has been a remarkable year. they started from such a position of strength. the money laundering scandal hit and it was really around about july, it had been burbling in the background in local media. in july, a report came out that the figures involved were so much bigger than anyone expected. from then on, it kept getting worse. in september, the bank did its own investigation and revealed what it said was a full-scale

diversion. the bank has taken some dramatic steps to clean things up. what is the status in terms of getting a replacement for the chief executive? tasneem: they have received a bit of praise from local regulators for being so draconian. they have removed the ceo, the chairman has been removed by the biggest shareholder. they have tried to replace the ceo, of the candidates wheeled in were rejected by the financial regulator. they now have an active ceo. he has indicated he might be willing to take the job, but there is still an awful lot of uncertainty about who is actually running the bank during this difficult time for them. francine: thank you so much for

the update. we will continue following this very closely. still with us, luca. year, what is the the biggest risk for 2019? there may be a little bit of a slowdown, that what do markets get wrong today? luca: i think for next year, i think the major risk that i see a potential policy mistake by the fed. francine: hiking too much? luca: yes. the second risk is that the market will take some kind of momentum on its own. this can create a condition for a recession. we see a lot of electronic trading. point that i think is very important is that you would there is no recession, there is

a significant risk of a disappointment of u.s. earnings. 8% consensusl an growth for earnings next year. marginally speaking, u.s. growth going down, this year was actually great for u.s. earnings. what about liquidities? the banks don't seem to be worried about it, are you? luca: i always look at liquidity in relation to the global economy. i personally feel that liquidity, central banks balance sheet falling for the first time in 10 years. central banks are withdrawing for the first time in 10 years. i think it is really down to growth. what i feel is that if you are starting to see weakness in business spending, earnings declining, this could generate

momentum and that is probably the biggest risk for next year. francine: thank you so much. we continue in the next hour. i will be talking to the senior portfolio manager at jpmorgan. tom keene off enjoying venice. taking the temperature of the venetian economy. european stocks enjoying a rebound. yen climbing. gold is up. gold climbing as traders are looking for havens from the volatility of the week. this is bloomberg. ♪

stocks face the

biggest reversal since 2010. onward, america's late session a failed to carry over to asia. funding for president trump's border wall remains a keep impasse and the house. good afternoon if you are watching from asia. this is "bloomberg surveillance." tom keene enjoying a well-deserved break in venice, keeping us up-to-date with the temperature on the venetian economy. let's get straight to the bloomberg first word news in new york city. 2019 may begin with a partial u.s. shut down.and started a week ago after house republicans say they didn't plan any votes this week. president trump demanding $5 billion for a border wall with mexico. he tweeted most of the employees losing pay because of the

closure are democrats. the office of the u.s. trade representative approved almost 1000 requests for exclusions. tariffs taken effect in july. china reported place up approvals for for nonfinancial firms. the vice chairman of the regulatory commission also saying the country must speed up its opening its capital market. it is the latest sign policymakers are pressing ahead for efforts to open up the financial system. an explosion in queens created a wave of bright blue lights flashing across the new york city skyline. could be seen from manhattan shortly after 9:00 p.m. after a brief electrical fire at a coned substation.

the unusual sky prompting a wave of commentary on social media. a spokesperson from the mayor tweeting to ensure residents the light was not aliens. global news, 24 hours a day, on air and at tictoc on twitter, powered by more than 2700 journalists and analysts in more than 120 countries. this is bloomberg. francine: thank you so much. we are talking about mary poppins here. we aremeantime, basically talking about films. there is quite a lot going on in the markets. after the rally we saw on tuesday, european stocks rebounding, yen climbing. gold climbing as traders are looking for havens for volatility. emerging-market equities also on the up. counterparts dipping

below zero. this is my bloomberg. at what theg futures are now pricing for the fed funds. this has to do with one of the biggest calls you have to get right if you want to get the markets right for 2018. it is about a u.s. recession and -- ifhe fed will do this a recession hits. it looked like it was going to be a bad day for u.s. stocks, but equities actually rebounded finishing the day in the green. it was the biggest upward reversal for the s&p since 2010. punishinge had a december. diana. us now is what is going on in the markets?

diana: that is a good question. seenast few days, we have an incredible amount of volatility. i hesitate to read too much from christmas market's. i think the fact that a lot of people are off their desks is probably exacerbating the move. has certainly been a slightly higher volatility regime. that is to be expected. the u.s. is tightening liquidity conditions and that is exacerbating moves in the market. that said, i think it is very much christmas markets. francine: we have a brilliant story. drunk.markets said,look at markets and the market has been lacking

have repressed volatility with this quantitative easing. was saw that volatility stay down even as we got this take upsurge in geopolitical risk of trade wars, brexit, italian politics, merkel leaving. finally at the end of the year, i think we're just getting come back from all of that. the bond market is on the move and has unlocked everything. francine: is there not a catalyst? kit: i think it is everything. ee have a lot of peopl positioned. this is the biggest correction since etfs took over the world. we sold off more than bears that we would selloff. we are all talking about slowdowns, cutting expectations of how much the fed will go next

year. the data is fine and america. are we misjudging the probability of a recession in the u.s.? it seems that it may have gone to negative, or are we still to positive? think markets have just shifted too much to the extreme. when you look at u.s. data, there is nothing particularly alarming there. we knew the fiscal trust would fade into next year, though we are talking about growth growing from will above trend. i think markets are becoming a little bit -- markets have tilted too much. francine: what is your best bet for 2019? what asset class? diana: i may fixed income investor, so you know it is

going to be something fixed income. i think value has been created in equity markets. some of the moves in u.s. high-yield spreads, you look at where we are now trading above 400, there is value there. u.s. high-yield looks attractive. local government bonds in some markets.w yield as the u.s. five cycle starts to fall behind, me start to talk ,bout the fed remaining on hold we should see those bonds perform well. francine: i know you have specialties, but is it yours that will draw the market? will start the year with the equity market in charge and i think bonds will take over for most of the year. i think it is a bad year for the dollar over the course of it. i hardly ever like gold, but it

is christmas, so i can like it this time of year. if i am negative of the dollar and i don't like anything else, as good a golde environment as i will pick up. don't mind being bearish for the dollar, but there is nothing much to like about the pound or the euro. think it might be a year when cash does pretty well. cheaper, but some of the bits that drove the correction got very expensive to a lehman. a loware turning into yield bond market. bullish bonds at 22 basis points are not exciting. there is not tens of value in government bonds.

francine: is the biggest over what happened to bonds in germany? diana: i think we are not likely to see that repricing happening in the first quarter. there is a lot of uncertainty still around trade that needs to be resolved within the first quarter. if we can maneuver through that, and if they get favorable outcomes, if the u.s. and china come to a deal on trade, if the brexit outcome is something a little bit softer for the markets, it will give the ecb scope to continue with what they are doing, which is stepping back from over accommodative helices. -- policies. kit: don't sort them. -- short them. the story of negative bond yields coming back is not inconceivable. you can see with oil prices are

doing to inflation data. francine: kit and diana stay with us. up, the white house is reportedly trying to set up a meeting between president trump fedthis chair -- and the chair. more on that next. this is bloomberg. ♪

viviana: this is "bloomberg surveillance." blackrock shares have fallen almost 25% this year with investors cashing out or staying on the sidelines. the company is still better off than many of its peers. stock market volatility climbed

to the highest in three years. gearing up for it they just push .f the year totle racing against rivals find products of that resonate with a new generation of consumers. a u.s. retailer is planning to bid that would value a canadian marijuana grower at $2.8 billion. earlier this month, the canadian company sought share price almost half in two days. instagram redesigned its platform for horizontal scrolling.

a barrage of complaints. the app quickly reverted to its original feature. they say the redesign was a small test that went wide by accident. francine: thank you so much. a report from the wall street journal says jay powell is open to a meeting with president trump amid concerns the president could be planning to fire him. jay powell plans to start holding press conferences after all 8 of the central bank's meetings. still with us our diana and kit. the fact that now every single meeting is live, it felt so strange that they were in meetings that were dead because of the needed to do something in monetary policy, the market would it be able to. diana: given where we are in the cycle, it is not a bad thing for all of the meetings to be live.

we will have a little bit more volatility into the meeting. short-term, it is a policy thing. francine: does that change, a little bit of the scope for monetary policy? gone tohink we have over guidance in terms of the precision we get from both the ecb and the fed. bits in the diary where we know we are going to get it and make the regular press conferences boring. in terms of take some of the mania out of the whole process. having them there in the diary ought to make it clear. if you think that this degree of guidance is a good idea. francine: do you think it is a good idea for jay powell and president trump to meet?

met inwould rather they private and have a conversation about life than what we have now which is jay powell clearly feeling he shouldn't say anything about what the president says, and the president feeling he needs to say something on social media. that can't be the right outcome. publiclyannot respond to what the president says, so let's have them do it privately. there are questions of whether or not it would ever really be private. do people really start to question fed independence or is it just annoys? -- noise? diana: if you had told me we would have been talking about this, i would've put my money on turkey, not the u.s. where we are now is not good for the markets because you saw how work its reacted to political interference with turkey. i know it is a stretch to

compare the u.s. to turkey, but there is a reason why central banks need to be independent. they are setting policy for the long-term horizon. to the extent that the two can meet and reconcile this and find a way forward when we don't look to twitter, markets are going to start focusing on fundamentals. francine: does jay powell actually changes outlook because of what president trump does and says? diana: i think the fed shouldn't be trying to prove their independence despite the economy. they shouldn't hike just to prove they are independent, they shouldn't step back because of that. i think jay powell is very aware that the minute he succ ombs to political pressure, you

have to move that independence. i don't expect the fed to react but i docal pressures, expect a way forward in terms of political and policy. you see any kind of uncertainty in the markets because of it? kit: most of the markets look at it at a human level, but don't actually think the fed reacts to this. the question is still one of, is the fed going to make a crucial mistake, or they going to make the mistake the fed made in 1998 russia and give us a big bubble and then give us a recession in 2007. at this point in the cycle, it is a really fine balancing act because we will do really well at telling you you over tightened or stopped too soon.

we have very good hindsight vision. francine: we will talk about hindsight in japan next. diana and kit. japan 10 year yields drop below zero for the first time since 2017. this is bloomberg. ♪

francine: this is "bloomberg surveillance."

on to japan and japan's 10 year bond yield falling below zero for the first time since 2017. kit both still with us. first of all, what you do with japan in 2019? diana: you do exactly what you have done in the past 20 years, which is not a whole lot. in terms of where the debt is, i think it just makes a lot of sense.when you think about japanese investors invest in the u.s., the cost of hedging back to the yen is very prohibitive where you are not getting much of a return. for them, investing in jgb's makes a lot of sense. the yen does look to be trading reasonably well. if we are about coming to the end of the year -- u.s. dollar

strength, where patria some keep the yield anchors. francine: what do you make of japan? we are getting a bit more wage growth. the role over a mile prices, which for the next couple of months is going to come marching through your cpi index everywhere. i think you are going to -- francine: overall, are we going to see a slower global growth? how much will that her japan? -- hurt japan? think there is probably

less volatility than what is happened in the economy. as china slows, that takes a lift from japan. if they get a stronger currency as a safe haven, that will particularly help them. the challenge they face is that the economy is not going to accelerate from here, and they are still trying to work out how they can get to the exit door from their current policies. francine: if you look at japan, it seems a lot of investors have the effect of brexit and the u.s. china trade war. u.s.-china trade spat get better into 2019? when you look at what is happened since the november g20 meeting, we have seen a little bit more encroachment between the u.s. and china, which is a better place than we are if i was to extrapolate.

between what happened with mexico and nafta, it seems like closer toting something like that materializing next year where you will have a deal with very little detail. i think there is a lot of negativity built-in from a trade perspective, the potential for upside is quite low. francine: thank you so much. diana and kit stay with us. this is bloomberg. ♪

francine: this is bloomberg surveillance. i'm francine lacqua in london. let's get to the first word news. viviana: 2019 may begin with a partial u.s. government shutdown

. it started a week ago after republicans said they did not plan any votes. president trump is demanding $5 billion with a border wall with mexico. he tweeted most government employees losing pay because of the closure are democrats. the administration has granted its first exclusion for tariffs imposed on china for intellectual property rights violations. the united states trade representative approved almost 1000 requests for exclusions . they cover $34 billion worth of chinese goods. the import tariff taken affect in july. the exclusions are retroactive. giuseppe conti says 1% is the italian government threshold for growth. the prime minister making the comment today at a press companies before a vote on his budget bill is due tomorrow. if italy misses a deadline, it must use a special procedure to revert to this year's budget.

the hedge fund industry is headed for its worst performance since 20 11. 440 funds closed during the first five months of the year. those included leon cooperman. to put the challenges into perspective, the number of closures well below 2008's record. bright blue light flashing across the new york city skyline caused by an explosion in queens. the likely be seen across the river from manhattan after a fire. sky prompted a wave of commentary on social media. a spokesperson for the mayor tweeting to reassure residents the light was not alien. global news 24 hours a day and at tic toc on twitter, powered by more than 2700 journalists and analysts in more than 120 countries. i'm viviana hurtado. this is "bloomberg." francine: thank you so much.

european central bank expects the economy to slow next year as protectionism curbs trade growth. chose what may be seen as a curious time to halt its bond buying time. some are saying it should have normalized reports. great to have you on the program. conundrum,ok at the and what we need to look out for in 2019, is it who will replace mario draghi? >> the questions might end up to cross each other. term is ending in october of 2019. there is a chance he will end his term with one rate hike.

he has not hiked even once. he cut rates on the second or third day when he joined the job. now, rates will be on hold until after summer which keeps the door open for a rate hike in october. it depends on how the economy develops. francine: investors seem concerned about the euro area. what do they worry about? is it a stronger contraction than we are thinking of? >> that is the point. headwinds and the external threat is not good, what is happening with the u.s. and with the fed monetary policy, trade wars, the possibility of a slowdown in china against the backdrop of solid domestic demand.

it is the biggest market in the world and it is doing fine. unemployment is following, people have money to spend, consumption is good. the economy,n that even if at a lower level, it will keep growing at a decent pace. who are the front runner to replace mario draghi next year -- front runners to replace mario draghi next year? >> the main event in the runoff would be in may, 2019 when there are european elections. willthese are over, we know who will be the next head of the commission, the head of the council. debated and will be the ecb role will be one of the seats allotted. german in one of

the roles, you cannot have a german ecb president. the new president will be decided in the context of this topr decision on the prospects. there are some front runners, the french governor, the former finish central bank governor, who is the expert of all things, too early to tell. francine: thank you so much. still with us is diana amoa of jpmorgan and kit juckes. when i woke up, i forgot we should be celebrating the 20 year anniversary of the euro. will it be here in 10 years? kit: it will. , think it has got deeper roots

emotional baggage but deep roots. things have lots of wrong with it but it will be here. do you expected to be here and when it comes to fixed income, is there anything you like at the moment? diana: i agree. the euro will still be here in 10 years despite headwinds we have seen in the past with peripheral debt with italy. they have shown an ability to muddle through some of these. outcomergue whether the has been optimal and there have been winners and losers in the policy that the ecb adopted. there is a willingness to muddle through. when i look at the peripheral space, right now is not the time to be going in with the headwinds to growth, with the ecb starting to normalize and

ultimately, italy is ongoing. they have shown a willingness to compromise. we know their ability to deliver the numbers is going to be the test for the markets. on the are for, we are staying out. peripheral on the space, we are staying out. there is too much uncertainty. it should help consumers at the margins? kit: consumer should be fine. at the beginning of last year, everybody thought that might last a while. that is not the trend growth rate. we were losing that and we have been buffeted by the problems in the german car industry, brexit, italy, and in terms of economic impact, we have not had a big

impact from the others. those have come one after another to get in the way of a good story. in the new year, we get low inflation which should help the consumer but we need the consumer to get spending. we need to get the car industry moving. we need to get past the end of march. the danger is, having been buffeted by the storms, we are done with them. francine: you're talking about political risk impacting the economy? kit: yes. the u.k. is the eurozone's biggest trade partner. it is going to affect -- these storms and the german car industry is a big part of the european economic engine. but are political in nature in economic terms, they are real. francine: is there any positive?

we have been talking about trade wars. it could benefit german exporters. diana: coming into this year, there was optimism. the market has been able to rationalize slowdown as a series of one-off's. for european growth could surprise on the upside. the one offs, the first half was weather and the german auto industry and if we see a brexit deal, that restores confidence and investment. you could see a surprise. francine: we will get back to brexit. do you like anything in spain? the is the child of european union that took the tough medicine and is on a better path. diana: not ahead of the political risks we are facing in the first quarter. francine: do you like spain? kit: i love spain.

bunink both btp's and are fine. bunds are fine. we are going to get these headwinds out of the way in the currency is undervalued against the dollar. i love the idea of going into january 1. francine: fair enough. they both stay with us. diana amoa and kit juckes. on the commute, tune in radio, bloomberg daybreak can be heard from new york, the bay area, and across the u.s.. this is "bloomberg." ♪

viviana: this is bloomberg surveillance. let's get the business flash. blackrock shares have fallen almost 25% with investors cashing out or staying on the sidelines. the company is better off than its peers. fund companies have plunged more than 25%. more than three times the s&p 500 index as volatility climbed to the highest in three years. nestle gearing up for its biggest push yet into the booming vegan market. they plan to launch next spring "the incredible burger" under its gourmet label. nestle is racing against unilever and new entrants, beyond meat, to find products that resonate with a new generation of consumers. u.s. cannabis retailer green growth brands planning to launch a hostile bid for aphria. the bid would value the canadian

marijuana grower at $2.1 billion. earlier this month, the canadian company saw its share price almost halve in two days, after short-sellers alleged it paid inflated prices for assets held by insiders. aphria denied wrongdoing. instagram redesigned its platform for horizontal scrolling. the update forced app users to swipe left and right instead of scrolling vertically. you can imagine what happens. complaints. the app quickly reverted to its original feature. it says the redesign was a test that went wide by accident. that is the business flash. francine: thank you. economy slowed for a seventh straight month in december, following indicators on business conditions and market sentiment.

turn ratingis to and risks are heading for a weaker 2019. private firms are failing to boost growth. with us, diana amoa and kit juckes. what do you do with china in 2019? is it positive for the economy because they can stimulate it or could it be the downfall for the rest of the world? diana: from an investment point of view, you buy chinese government bonds. the policy response to the slowdown has been easing. they did several cuts. we see that carrying on. their targeted medium-term lending facility that they targeted -- that they started is an attempt to get credit growth going. that is what you do a china. --far as the rest of the what you do with china. as far as the rest of the world,

-- theylikely to be the are trying to change their growth model away from infrastructure into higher and manufacturing and consumption. it is focused on the domestic consumer and trying to boost credit growth. world, china is not going to be the tailwind it has been in terms of policy response. the of the concerns by market and what we are seeing to do with the book are priced in as far as technicals go. it?ncine: k kit: the biggest uncertainty is how much they use the currency. going to ease fiscal policy, take advantage from the bond inflows to ease monetary policy, that all looks good.

we going to end up with the ?ollar-yuan we have to get past that move through seven. we get so much guidance from the fed and the ecb, i get no guidance on monetary policy from beijing. francine: if it goes through seven, i am going to try and bring up a chart, is seven psychological? what does it mean? kit: it will matter on the day. if you said the highs and lows on the euro-dollar coincide with the highs and lows the other way around, it moves markets. 7.20 and settled, it is not life-changing for markets. the date of the move happens, we

will pay attention. the move happens, we will pay attention. francine: i do have a chart. let's show it. juckes bothnd kit stay with us. we were talking about remnimbi at 6.8701. if you are a bloomberg user, you can take our charts. gtv , you can take some of the charts, use them, you can change them, send them back. this is "bloomberg." ♪

francine: this is bloomberg surveillance. i'm francine lacqua in london. tom keene is off. , wes talk about brexit talked about other risks, what we can expect is a lot more uncertainty into the new year.

we are expecting a vote happening january 14. the u.k.s is government reporter. amoa andh us is diana kit juckes. i do no one know what to do with brexit. i think all options are on the table. >> the most likely outcome is that the u.k. leaps. -- leaves. that is not to say the other outcomes are not possible. leaves and on what terms is what parliament will be debating as soon as it comes back. default legal position will take more than parliament to overturn. it would need a new administration or a change of mind within the current administration to reverse what is a countdown to the u.k.

leaving. francine: i am looking at the shouldaying theresa may cut the holiday short. is this high risk? low, is in mid-january -- the first vote is in mid-january. stuart: an opposition vote in parliament is the risk. that would put pressure on lawmakers who would be unwilling to follow a course of action that would create a no deal brexit chaos. lawmakers on both sides have problems with that. jeremy corbyn is focused on the timing of the debates and trying to get it done as soon as possible. i do not think the government is going to budge. francine: where do you see

brexit going? kit: i agree. is an extension after some kind of deal is agreed, is the only economically sensible way to go forward. push this to the wire because everybody believes the other side is going to blink. we are doomed to push this until later than is comfortable for any of us. that, you want -- you would not want this to happen too soon because there is a lot of work to get done. arrears of passing. francine: thank you so much. we have plenty more coming up. it has been a week when it comes

to market volatility. marcus, a little about what is happening in the geopolitics world -- we talk about markets, a little about what is happening in the geopolitics world. wednesday was a big day in terms of the rally. repositioning yesterday. andks rebounded yesterday futures in the u.s. gaining. the yen leading gains against the dollar, gold climbing. this is "bloomberg." ♪

faceine: your us stocks

their biggest reversal since 2010 while japan's 10 year yield turns negative for the first time. late session heroics have failed to carry through to asia. president trump's border wall, the shutdown is likely to last into the new year. good morning. this is bloomberg surveillance. i'm francine lacqua in london, tom keene having the day off. what a week in terms of volatility, a great time to take stock, we look at emerging markets, the selling off over the summer. where you 2019, should be taking positions, what the fed does if the ecb hikes and what we do with this china-u.s. trade spat. let's get to first word news. viviana: 2019 may begin with a

partial u.s. government shutdown. it started a week ago after republicans said they did not plan any votes. president trump is demanding $5 billion for a border wall with mexico. he tweeted most government employees losing pay because of the closure are democrats. the administration has granted its first exclusion for tariffs imposed on china for intellectual property rights violations. the office of the united states trade representative approved almost 1000 requests for exclusions that cover $34 billion worth of chinese goods. the tariffs taken affect in july. the exclusions are retroactive. china speeding up approvals for foreign owned financial firms. the vice chairman of the china securities regulatory commission says the country must speed up its opening its capital markets and improving stock trading links with hong kong. it is the latest sign policymakers are pressing ahead with efforts to open up china's financial system.

a wave of bright blue light flashing across the new york city's thielen -- new york the's skyline in queens and light could be seen across from manhattan after a fire in a substation. the sky prompted commentary on social media. a spokesperson for the mayor tweeted, reassuring residents the light was not alien. global news 24 hours a day and at tic toc on twitter, powered by more than 2700 journalists and analysts in more than 120 countries. i'm viviana hurtado. yourine: this is what markets are doing, it has been a volatile week. saying thisple are is because of christmas and there is not much volume. we need to take stock of the week that was. rallying, asian

stocks finished mix. ed. traders are struggling to make sense of this. i am looking at yen leading gains against the dollar. it did look like it was going to be a bad day for stocks after the session wednesday. equities rebounded yesterday, finishing in the green. stocks have had a punishing december, the biggest fall in nearly a decade. joining us now is andrew. what is going on in the markets today? andrew: today is interesting. day in at a third up

row? yesterday, it turned around at the end of the day. this month, it has been a selloff into the close. a steep selloff. the opposite yesterday and that is interesting and tells you people are willing to hold positions not only overnight. i'm interested to see if we can or unchanged, indicating people are trying to hold positions. have seen uncertainty between politics, china, brexit, that people are nervous. when they are nervous, they are not willing to hold stocks. if we can get a higher close today, you are seeing a change areentality and how traders perceiving a change in the sentiment. that would give you more of an

upbeat feel as we roll towards 2019 and we put this behind us. francine: when you look at sentiment, what will give the markets the catalyst in 2019? is it fed policy? you mentioned trade, monetary policy, growth. there is not one catalyst? andrew: i do not think there is. we have had a lot of things to throw into the pot. the fed is a big one. it has not indicated it support. that knocked out another leg under the market. little byg to be little of solving each one of these problems. gets solved, brexit ends up being a huge deal. if the u.k. were to fall out of the european union, people are

talking about a recession for that spills over into europe, perhaps into the u.s. and affects china in some ways. this is a lot of uncertainty people are trying to digest. guests were discussing, it is hard to put numbers around these kind of things. you have never seen a china slowing dramatically. we have never seen the u.s. having this enormous deficit. there are a lot of moving parts and there is not any easy way to quantify it. francine: andrew, we have been the big stories, we spoke to a couple of big guys. what are selling signals you see? if there was a recession, is it

financial stocks going down, is it the yield curve, or is it impossible to say? andrew: the yield curve has turned back positive. spread is back up to 22 basis points. the thing that is concerning to i watch stocks is the banking shares, whether that is jpmorgan or regional banks. hardseem to be getting hit and yet earnings do not seem to be awful. delinquencies on loans are low and that is despite a year in which people were discussing delinquencies will go up. the plunging oil was the latest reason people said these banks could get hit by lower prices.

yet, the data does not seem to support that. we seem to have emotion ahead of reality and the hope would be to get some good data that you have a positive reaction in stocks. before,ck to the point all news is bad these days, no matter what it is. it comes out and reaction is negative. the reaction is positive and we get these rallies into the close and that tells you you have had a sentiment change on wall street, that investors think it has priced in all the bad news you can think about. let's watch out for those. francine: thank you so much. saying with the volatility story, joining us is megan greene, manulife asset management. great to have you. is there liquidity concern?

we heard from steve mnuchin he is worried about liquidity when no one else was. megan: i do not think it is a liquidity concern, it is a question of whether investors want to pay what they have to. there are concerns now that the fed is shrinking its balance sheet. with that being said, part of it is the press. banks cannot play the same role of they could previously so that has changed market structure. i'm not worried about liquidity. francine: do you worry about a recession or a downturn in the u.s. for 2019 or have these been overdone? megan: i think the markets have overdone this. no one has accused me of being a bull but i am sanguine about the economy. are few signs of

overheating and the data looks decent. slowing down from 2018 but in the u.s. that means we are slowing down from the potential gdp growth -- but that slowing down from the potential gdp growth from a high level. central bankers have been signaling they are aware we are slowing down. they do not want to be the only game in town as they were in the wake of the financial crisis. most governors came out dovish. dovish, mario draghi said the risks were on the downside. the pboc governor said the policy would remain accommodative. the bank of japan has not changed their policy. central banks are signaling we are slowing down. they are alert.

it does mean we do have some backstop if we were to go into a downturn. francine: megan greene there will be staying with us. coming up next, the government shutdown enters its seven-day with all signs pointing to a lasting into 2019. and of course, the border wall. this is "bloomberg." ♪

viviana: this is bloomberg surveillance. let's get the business flash. nestle gearing up for its biggest push yet into the booming vegan market. they plan to launch next spring "the incredible burger" under its gourmet label. nestle is racing against unilever and new entrants, beyond meat, to find products

that resonate with a new generation of consumers. instagram redesigned its platform for horizontal scrolling. the update forced app users to swipe left and right instead of scrolling vertically. that sparked complaints. the app quickly reverted to its original feature. it says the redesign was a test that went wide by accident. that is the business flash. francine: thank you so much. the partial u.s. government shutdown looks to continue into 2019 after house republicans say they did not plan to schedule any votes. there was no plan to fund the government departments for home funding ran out. joining us now is kevin cirilli. is there anyway we are going to get some kind of agreement?

no bow today and no developments expected. -- no vote today and no developments expected. five to seven days, on january 3, house lawmakers are going to come back. democrats are going to take over. there is going to be another vote. the house is likely going to pass a vote for the budget, whether short-term or long-term does not matter because it is the wall.to include it is a messaging bill, and they are back to square one. no one is here yet and until that happens on january 3, we are in a stalemate. francine: i have questions. is going to compromise? are we going to have funding for this wall? kevin: the president has shifted

lot of sources have noted he is not just saying the wall. he is saying fencing and that auld suggest that that is negotiation tactic. the government cannot stay shut down forever. saidke with an aide who that the numbers, while they are worlds apart, the numbers in terms of a percentage standpoint are closer together than we know. francine: when does the shutdown start hurting the economy? there are unintended consequences. are right and you are seeing that in here from washington, small businesses are impacted by this. the deputy mayor is speaking out against this. the economy inside the beltway is impacted and i think this is

going to go all the wake. -- all the way. calendar,, mark your if the shutdown gets to that, it becomes the longest partial shutdown in history. francine: kevin cirilli there. greene.t back to megan ,here do you see the shutdown worrying investors and having an impact on the economy? megan: it will take a while for the shutdown to influence either one. i agree with kevin. it is likely the democrats will so you the senate bill might find some kind of compromise when the new government comes in. the economy is hardly affected by this shutdown. it will take the government being shutdown a long time for

that to happen. we are not getting a lot of economic data. we should get our jobs report and inflation data. ,he bureau of economic analysis that means some of the trade data will be delayed. that is not a huge deal. trade is one of the biggest sources of uncertainty and given we had so much volatility, that could have impact. francine: what do you expect the dollar to do in 2019? lot depends on what you think happens with trade. if the trade war re-escalates, the pboc could step away from allow it to and depreciate and that could push the dollar stronger. medium to long-term, there are forces that should be pushing the dollar down. as central banks withdraw accommodation, there are fewer u.s. andwing into the

having a sizable current account deficit should put downward pressure on the dollar. in the short-term, trade and what the pboc does has more impact. francine: megan greene there from menu life stays with us. manulife asset management stays with us. coming up, we speak with the council of foreign relations. this is "bloomberg." ♪

francine: good morning and good afternoon if you're watching from asia. i'm francine lacqua in london. president trump's retreat -- decision to retreat from the syrian battlefield could cause turmoil in the middle east. kurdish militants were fearing a turkish offensive. joining us now is martin indyk, the former u.s. ambassador to israel and he understands the middle east like you people do. first of all, was the fact that the u.s. retreats from syria a play into vladimir putin's hans? martin: very much so. nature abhors a vacuum. the united states

had a small footprint in syria through our alliance with the kurds, we controlled one third of the country bordering turkey and an important strategic position in the southeast area iraq.ing iran and as we move out, the russians have been backing a syrian reconquer theto areas not under its control. we see this morning it is moving to take advantage of that. francine: what does it mean? this was a campaign promise that president trump gave and he is trying to hold. where does israel fed? the ones who have the most to lose are the syrian people. a loser because it was

depending on coordination with the united states to block, contain, and pushback iran's influence in syria. that was they declared goal of the trump administration, repeated by the secretary of state, by the national security advisor, and by trump's on voice to syria. now, -- envoys to syria. now, trump has given up on that which is a win for iran. as a result, israel has stepped up its activity, which we saw yesterday, in a direct attack. francine: what does this mean for al-assad?

is he the big winner? middle east the conundrum more difficult? martin: yes, he is a winner. is a big toryime us in its internal battles against its opponents -- is victorious in its internal battles against its opponents. with united states point out, we have made that easier. francine: martin indyk stays with us. megan greene is back. we will talk about geopolitics and the political risks markets are latching onto. this is "bloomberg." ♪ ♪ there's no place like home for the holidays ♪

♪ 'cause no matter how far away you roam ♪ ♪ if you want to be happy in a million ways ♪ ♪ for the holidays you can't beat home sweet home ♪

amazon prime video so when you say words like... show me best of prime video into this... you'll see awesome stuff like this. discover prime originals like the emmy-winning the marvelous mrs. maisel... tom clancy's jack ryan... and the man in the high castle. all in the same place as your live tv. its all included with your amazon prime membership. that's how xfinity makes tv... simple. easy. awesome. viviana: -- francine: this is bloomberg surveillance. i'm francine lacqua in london. tom keene is having a great time in venice.

--8 has not been a year ma has been a year marred by scandals. has beennk investigated. germany us now is the finance managing editor. -- joining us now is the finance managing editor. first of all, what are you looking for? is it european banks, u.s. banks, scandals? >> it is a combination. looking at valuations that are not far from where they were in 2011. capitale almost doubled , they have retooled their models and investors have concerns about profitability which is less than a concern with the u.s. banks because they

are fueled by a stronger economy. at thee: if you look share price, it is down. is there anything that could revise european banks. elisa: the fourth quarter has been tumultuous on the markets and we have seen banks hitting at a -- hinting at a hit. closelyill be watching how well banks can whether that. people will be looking at the ecb and whether it precedes with a new round of cheap loans for the european banks which would be helpful to the italians, for example. that is something to watch early. you mentioned the scandals and the money laundering. e has wide concerns there

are industrywide legacy issues, not so much legacy, but issues that may bite lenders. any signs that these are isolated incidents would be positive for the industry. francine: what do we do with 1mdb? how much more are we going to find out? .lisa: this is a critical phase investigations take a while and this is where we will start hearing more details. we will see more about any repercussions on its client base and whether clients are uneasy and the repercussions it has on business and not just the one-off settlements they face. francine: thank you so much. covering all of the finance team. she will shortly move to bloomberg opinion.

let's get to first word news. viviana: 2019 may begin with a partial u.s. government shutdown. it started a week ago after republicans said they did not plan any votes. president trump is demanding $5 billion for a border wall with mexico. he tweeted most government employees losing pay because of the closure are democrats. the administration has granted its first exclusion from tariffs imposed on china for intellectual property rights violations. the united states trade representative approving almost 1000 requests for exclusions that cover $34 billion worth of chinese goods. the tariffs taken affect in july. the exclusions are retroactive. two's epic content has played down the italian government level of debt. the prime minister said the economic fundamentals are "very solid." a final vote on his budget bill is due tomorrow. if italy misses a deadline, it

must use a special procedure to revert to this year's budget. a wave of bright blue light flashing across the new york city skyline was caused by an explosion in queens. seen in could be manhattan after an electrical fire at a substation. the unusual sky prompting commentary on social media. it cut off power to the airport. for the mayor tweeted, reassuring residents the light was not alien. global news 24 hours a day and at tic toc on twitter, powered by more than 2700 journalists and analysts in more than 120 countries. i'm viviana hurtado. this is "bloomberg." francine: thank you. populism has been spreading in latin america. the brexit battle continues and trump's exit from syria could trigger tension in the middle east.

let's look at this with martin indyk and megan greene. let me come to you. when you look at the economy and the markets, do they move on the back of geopolitical tensions? it seems in 2018, they ignored it. megan: i think that is right. we have seen little market sensitivity to political risk, since the euro crisis when into remission. it seems to be back but volatility generally is back. on an average day, 90% of equity trades are done by passive bots. they are not reading tweets, listening to analysis. they are agnostic. there is less sensitivity. about one third of the population has the opportunity to vote. political risk could be bigger. where do you see the

main geopolitical risk? china, not talked about korea, are those dangers? because of the oil, we focus on the middle east but there are other risks. martin: in broad terms, the biggest risk comes from the united states is withdrawing from its leadership role in the world and with president trump as the disruptor in chief, the united states is no longer the stabilizing force. it has become destabilizing. the vacuum in terms of who is going to be destabilizing force is filled by china and russia who have interests in destabilizing and revising the status quo. the fact we do not have a strong superpower as an anchor means

the volatility that is in the international system is bound to grow. francine: what do we misunderstand about america's foreign-policy? with the general leaving, does of a vacuum in the allies understanding what the next move is? the united states has for decades played the role of the leading stabilizing force in the world. it has been the leader of the international order and the force that has shaped the international order in a direction that has been positive for markets overall. that is no longer the role of a president trump intends to play nt has made that clear, -- to play and he has made that clear

in his decision on syria. there is a limit. trump does not want the united states engage in foreign wars. i think that china and the united states do have a common interest in trying to figure out trade differences, rather than allow that to explode into a trade war. we have seen indications of that. expectough one should higher volatility and greater political risk as a result of these broad shifts, i think there are some limits as to how far and how bad it can get. francine: apart from the price of oil which is moving on the back of geopolitics, is there an asset class or a part of the economy that is vulnerable? is hard to generalize

across countries and issues. peak populism has not hit yet. if you look at the history of populism, a coincides with the business cycle. the cycle typically lasts around 10 years. this cycle is so much longer, it has given populous a longer road to run. 2019,ve to assume into that we probably will get more populists and that means more governments that are antiestablishment, anti-european and are willing to break rolls. .- rules i think we can expect a shift in terms of the liberal order not populistported and governments coming into power

next year. that could feed volatility. francine: when you look at the g of the u.s. administration is political leader of the world, who does it play into the hands of? china or russia? martin: both are revisionist powers. they see the opportunity that comes from trump's decision to isolationist approach and they are busy filling that. we see it most clearly with russia in the middle east where it is seeking to take over as dominant power, a role we played for the last five decades. we see it in asia, with china losing -- moving their deliberately. ishink the united states going to push back on china because trump does recognize the

danger is there. gets awaythat russia with it more than china. russia is less of a threat. overall, russia and china are the big beneficiaries. in lesser cases, turkey and others benefit from the fact the united states is no longer there. francine: thank you both for joining us. martin indyk and megan greene stay with us. into radiomute, tune on bloomberg daybreak. it can be heard across the u.s. on sirius xm. this is "bloomberg." ♪

francine: this is bloomberg surveillance. i'm francine lacqua in london. to push itsing budget through parliament by the end of the year deadline. the controversial taxes the latest hurdle. the prime minister held a news shouldnce, saying reform be driven by parliament and that 1% is the minimum threshold for growth. joining us now is the bureau chief. what do we do with these hurdles? do they get passed? >> it looks like they will with these hiccups. was holding his press

conference and at the same time, there was a suspension in parliament because of this debate. the opposition is not happy about the changes. au -- e.u.'s the fall because of the lengthy negotiations. francine: what are you looking forward to in 2019? what will our coverage focus on, is it fresh elections, or immigration? dan: i think it is all of those. clearly, the leaders of this salvinin, dimaio and are in endless campaign mode with the european elections a few months away. i think that is going to be at

the forefront. is a risky, there that italy could fall into a recession. the next data will be crucial to see whether or not they will be able to meet the growth targets that come down. there are lots of questions about whether they can reach growth of any were close to 1%. -- anywhere close to 1%. francine: thanks so much. let's get back to megan greene. you have been following europe. you cover the spanish crisis. what do you do with italy? megan: i think next year, we will be talking about recession. i think italy is in recession, even if just technical. as much as everyone has been focused on the deficit, growth

is just as important. if italy is not growing, it's debt burden is unsustainable. even though the government has caved, it remains a risk. we have some sense of how this government will respond to pressure, which is it will of thethe greek example government pushing to the edge and capitulating when they have to. i do not think this is the last time markets will put pressure on italy. francine: we are seeing the prime minister still speaking where he is taking questions on the tax. what is the prescription for the economy? likely it could fall into recession. what do they need? unfortunately, i think there have been labor market reforms but they have not gone far enough in terms of liberalizing the labor market.

am -- trying to free those up to help the economy. those are not short-term issues. i think the economy is in for a rough ride if you consider the rest of europe is slowing down. the ecb is no longer buying up assets. refuge, provide some ,articularly for italian banks long-term refinancing operations, that could help. accommodations been withdrawn and global growth is slowing. that is not a great backdrop for an economy that is on life support. francine: if you get through the middle of next year without hiccups, does it rally from here? if we make it through this year without hiccups, i do think the euro could rally. dollar relative to the

and there are a bunch of forces that should be pushing the dollar down. that could cause strengthening of the euro. it is not just italy. the german economy contracted and has not shown signs of rebounding. i do think germany will go into recession. the growth engine of europe is slowing down. it has not implemented reforms. structurally, it is slowing down. you have got elections in may. areparliamentary elections boring. this time, they will be interesting as fragmentation will increase across the spectrum and will be a sign that will be replicated in national capitals. francine: thank you. megan greene of manulife asset management stays with us. we will talk more about your markets and we will get into 2019.

this is "bloomberg." ♪

francine: this is bloomberg surveillance.

may francine and london. we are back with megan greene of manulife asset management -- i'm francine lacqua in london. we are back with megan greene of manulife asset management. what we have not talked about are the chances of a recession in 2019? is it overblown? our markets pessimistic? megan: the markets have overdone it. they are not a macro story. the fundamentals in the u.s. are good. there are few signs of overheating, inflation is contained. there are few signs we will get this search in inflation -- surge in inflation. the yield curve is flat. it is likely it could invert. that means a recession is coming. recoveries of business cycles do

not die of old age. they are murdered. the fed could be a prime suspect. 13 ratef the past hiking cycles have ended in a recession. they are aware of that. they spend their time talking about the yield curve. trade is a risk. ofwe do get a reinstallation the trade war, which i expect, that could hamper both u.s. and chinese growth. nonfinancial corporate debt is something worth looking at. it is potentially a systemic source of a recession. i think the next recession will be a couple of quarters of retraction. if i were going to highlight ways to get to a systemic ,ecession that is sustained

nonfinancial corporate debt would be at the center of it. francine: megan greene, thank you so much. here how the markets are doing. european shares rallying on friday. traders trying to make sense of these price swings. the yen, posting gains against the dollar. gold up. crude oil, $45.66. this is bloomberg. guy johnson pimm fox on radio. ♪

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alix:alix: the big bounce. big swing. s&p, biggest reversal since 2010. the dow swings 800 points. global stocks lose $17 trillion in 2018. asia closes with a whimper. peak to trough, 20% of global gdp this year. cannabis m&a grows hostile. take over. we speak to green growth ceo, peter. welcome to "bloomberg daybreak," on friday, december 28. i'm alix steel. what an unbelievable week. did you make money or lose money? yes. in the markets, we are looking at a continuation of the rally we saw. up 6/10 of 1%. tremendous move on no news. is this short-term? pension r