from: good morning bloomberg's middle east headquarters in dubai. i'm manus cranny. u.s. equity futures rally after president trump expresses optimism over trade talks. the china slowdown continues with the latest data back in contraction. malaria and the latest to say the fed would benefit from a better feel from markets. that amid reports the white house is trying to organize a trump powell powwow. italy's government passes its budget at the 11th hour. could 2019 see the uneasy populace alliance fall apart? ♪

manus: a warm welcome to daybreak europe. the markets are on the march, higher based on the telephone and a tweet. s&p futures are rallying. mohamed el-erian saying the fed needs a better feel for the markets. you are seeing the s&p rise. goldman sachs have their -- in terms of growth. mohamed el-erian says it will be growth of 2%. dollar-yen, the dollar slightly higher this morning, but yen takes the mantle as the strongest g10 currencies, third year in a row we saw the yen trade up. will it be 2019, the year of the yen as well?

let's look at the oil markets, particularly relevant on a global perspective in terms of importers and exporters. hedge funds decided to go long and frisky into 2019. roughly three weeks in a row in terms of net longs on the brent positions. you are seeing the market get long into 2019 on the brent position. long positions jump for the third straight, $70 will be hit. yvonne man is standing by in asia. good morning, good afternoon. yvonne: good afternoon. most markets are closed. malaysia and italy -- india stocks are open. we are seeing a slight rally, but the performer has been hong kong. we ended the day up 1.3%. the optimism between president trump and xi, also china

approving 80 new gaming titles after lifting that nine-month freeze. that has relieved tencent, some of the trade profits as well like w h group, also rallying. albeit, it has been a very rough year for asian stocks, $5 trillion wiped out in market value alone in 2018. hong kong one of the victims. we are on course for the worst year since 2011 for hong kong stocks, china faring off worse. but we are closed here today. certainly wrapping up a volatile session and year. manus? manus: great roundup. yvonne with the asian session. we are closing with a lack of liquidity in these markets. let's get first word news. debra mao is standing by in hong kong. debra: italy's parliament approved its 2019 budget law. this follows the weeklong standoff with the european commission. they agreed to lower a 2019

deficit target to 2.04%. the initial 2.4% target was rejected by brussels as breaching eu rules. the chances of the u.k. leaving the eu are 50-50 as parliament rejects theresa may's deal, according to uk's international trade secretary liam fox speaking to the sunday times. he called on fellow lawmakers to back the deal, saying he would rather have an agreement that falls short then risk no brexit at all. russia and turkey have a crucial role to play in syria. that's according to a message from vladimir putin who ha -- to his turkish counterpart erdogan. they met in moscow and agreed to coordinate military steps to fill the void left by donald trump's decision to order a military pullout. won byesh's ruling party

a landslide in it and election marked by violence. according to the nation's election commission, the allies won almost 90% of seats up for election, but the opposition called the the vote farcical. this election gives prime minister sheikh hasina an unprecedented fourth term in longest-serving premier since the nation became independent in 1971. south korea says kim jong-un wants more summits to resolve the impasse. the north korean leader sent a letter of well wishes over the weekend. kim said he was willing to meet more often to advance peace talks and achieve a nuclear free korean peninsula. he is set to deliver his speech on tuesday. global news, 24 hours a day on air and at tictoc on twitter, powered by more than 2,700 journalists and analysts in more than 120 countries.

manus? manus: thank you very much. debra mao with the latest from hong kong. a lengthy phone call with president xi. trump tweeted progress is being sideshile xi says both push for stable progress. china's factories drop in september, underscoring concern of domestic economy. let's get more with our chief asia correspondent. stephen engle joins us from hong kong. good to see you this morning and great coverage. what do we know about? -- about this, the detail? stephen: the detail was lengthy according to the white house, donald trump saying they had big progress on the negotiations so far since that meeting in argentina with president xi and saying themen

telephone call went quite well. you heard the comment from china saying they want stable progress. that is very telling because past negotiations between the two sides have not moved the ball forward that much. back in may, you had the right hand man going to washington, d.c., apparently striking a deal with u.s. officials, including steven mnuchin, only to have that could lost by donald trump. progressse want stable and they want the united states thathina to meet halfway, according to the news agency quoting president xi, meeting halfway on contentious issues. if you heard the speech saturday from resident xi jinping, that is the advisory body to the communist party, he pretty much avoided the trade war and the

friction with the united states altogether. he said, "our circle of friends is expanding." he concentrated on the domestic successes in 2018 and the challenges in 2019. he didn't mention trade fiction. he mentioned the fight against pollution, corruption, poverty. either that means he's downplaying the significance, or is not wanting to mention this is a big lori for the communist party -- big worry for the communist party in 2019. manus: it certainly is. what does it mean for trade talks? robert lighthizer is not on that team in terms of going physically to china. i think that's quite interesting. stephen: yeah, it is. lighthizer has been one of the more significant hawks, along with navarro. perhaps they are using the goodwill engendered over the last few weeks after that meeting in argentina to push the

ball forward a little bit. i'm just speculating. the meeting next week with the trade delegation heading to beijing, trying to build on the successes, including what will happen tomorrow, china is basically announcing a third round of tariff cuts, this time on 700 products. buy're also promising to more soybeans. they could begin rice imports in the united states. they also extended a temporary increase in autos that were retaliatory in major when trump lifted those tariffs in june. manus: ok, thank you very much. stephen engle joins us from hong kong. my guest host is janice. janet, good to see you. welcome to the show. we have the push and the pull. we have the bearish data reading from china, and we have the

bullish optimism of a tweet and a telephone call. how do you part these do new year's eve messages? janet: we have been there before. trump previously tweeted positive on the trade progress so i'm not sure how much you can read into that. i think these trade tariff issues are very complex. it's actually really structural. it's not just about trade, but the structural issues that the u.s. has issues with china, intellectual property rights, investment in u.s. technology. i'm really not quite sure if these can be resolved in the next 90 days. i think it might take longer to resolve. i think the best case may be push that line or tear for increased tax further. but i don't think we should read too much into this positive tweet. i think today's week pmi data is not surprising given the trade

tariffs hurting the chinese economy. with laurie seen previous -- we have already seen previous export being down. and china's economy is willing to implement more physical easing. i think the national appeals congress in march will be important to watch because we may see more announcements from fiscal easing from their. manus: there's a lot in there to digest. let's take it back a little bit. this is the growth. this is the pmi for china relative to the eurozone and u.s. ve to the you can see just how tough it is for the chinese pmi. do you expect there to be more policy response? this smacks of the synchronized, really decent organized growth

all over china and all over the world. policy response from china? janet: i think there has already been policy response from china i think the march national people's congress will be important to watch. i think the chinese government will introduce tax cuts for those of us heavily impacted by trade tensions, in particular the private sector. it will probably introduce tax cuts to the average consumer, in particular help individuals with lower average income. i think we are going to expect more easing from china because of this weaker data, which is confirmed. manus: one thing i liked about your notes that you sent to me, janet, was that you bring them back to market. i want to tie together this growth wall -- growth wobble we are experiencing. i put it together with the ratio

of stocks to gdp. it's the equivalent of $17 trillion in terms of wipeout, the equivalent of 20% gdp. my question is this. have markets got ahead of themselves in terms of the downside [no audio] janet: the answer is yes for now. markets have corrected sharply in recent months. that's got ahead of economic data. there has been some weakness in china, for example, and europe. but if you look in the u.s., what we see is a strong labor market, in particular the unemployment rate is a 40 year low, and we see wage growth picking up, which is positive. in his environment, u.s. economy is going to be robust next year. we have seen oil prices fall a lot, and that's going to push up

retaliatory earnings for u.s. consumers. the fundamentals are not that bad, but i can understand why markets have been so volatile. there is continual uncertainty with regards to trade tariffs. there is the fed tightening in the background. we have the ecb ending in qe, withdrawal of liquidity. there is a lot in the background markets are worried about. and the markets don't like it. but i think for now, the market has gotten ahead of the economic fundamentals that we see. manus: it certainly has, which as you are speaking, i was thinking where do we go next? let me do something to my screen. when you're driving the bus and changing the gears, it can be hard. these are the stock markets of 2018. i want to take your island down to the bottom -- i line down to the -- eye line down to the

bottom. do you think the flow of money -- by the way, the flow of money out of china was stupendous this year. we saw the biggest outflows in a number of years. $2.3 trillion was wiped off the market value of china. do you think we see a flow of money back towards china on trade and policy response, 2019? i think the underperformance of chinese stocks is not surprising at all given the economic hit to china from trade tariffs. think potentially money could come back into emerging markets like china. we see a peak in the u.s. dollar, if the fed holiday may start deposit interest rates next year, and the growth differential between the u.s. and the rest of the world narrows. if the dollar weakens, we may see the money coming back into emerging markets.

if there is some sign of an improvement in trade negotiations, that could be money coming back to china. the market significantly underperformed and presents a reasonable valuations. e going to make some market bulls cry on the dollar there. janet, you stay with me. coming up, the italian parliament passes its budget at the 11th hour. tensions within the populace coalitions remain. how will italy's government fair in 2019? and if you're traveling to work, you can tune into bloomberg radio or dab digital radio in the london area. this is bloomberg. ♪

london,:19 a.m. in 10:19 in dubai.

time to put money into play. dollar slightly better, yen was one of the stronger currencies in g10. target 100 99 here. the waivers are going to come back in this conversation. the italians agree to their budget. made no difference. euro stocks futures are up 1.74%, all on the back of big progress from president trump and xi jinping. the fed mates to get a better feel for the market. through to debra mao. she's got your business flash. debra? debra: for the second year in a row, goldman sachs is to be the top bank for takeover advice. they are set to exceed 28%, up from 26.4%.

andlays, citigroup, jpmorgan round out the top five. the deal falls china of the $3.4 asllion record set in 2007 market volatility put takeover aspirations on hold. china ended its nine-month freeze on new videogame licensing. beijing approves 80 new titles for commercial release. a chinese gaming executive told the financial times to could take months for officials to clear the more than 5000 games awaiting approval by sensors. disney and verizon reached an 11th hour deal to keep sports programming flowing the cable customers. the distribution agreement, covering 4.6 million customers, was due to expire 5:00 p.m. new york time new year's eve. the negotiations were a litmus test for disney's business model for charging higher fees for espn, even though many consumers are switching off sports.

-- recession without state help. he said the company has a strong capital base and a record liquidity levels. germany's biggest lender is closing out a rough 2018 with stocks around 60%. that's your bloomberg business flash. manus? manus: debra, thank you very much. italy's parliament approved a revised budget for 2019 amid opposition complaints it was dictated by the eu, the country's populist government. they vowed to push through costly campaign promises, including a universal basic income. under a deal struck with the european commission, if we agreed to lower its planned 2.0%t deficit, 2.4% gdp to -- 2.04%.

janet is still with us. did the italians blink? or were they just pragmatic, and they lower the deficit because why go to war with the commission at this juncture? janet: yeah, i think that the italian government probably faced a lot of pressure from the markets, given the bond yield has risen, which is bad for the repayment. majorityty of the -- a of the deficit is interest payments. they definitely felt market pressure from that. i think it's good news from the italian government that an agreement is reached, but in the future, people are still going to be worried about the ability

of italy, especially if growth in the eurozone continues to slow from here. manus: we'll circle back to that because italy is flatlining. let's bring in bloomberg's western european editor, kevin. thank you for coming in. the budget is settled. is everything fine and done and andy for now, so to speak? kevin: not really. the government cut back its economic growth forecast. then you have the rivalries within the coalition. right now, italian deputy premier matteo salvini is pulling ahead in the polls, and he may be tempted to do something, such as bringing down the government and seeking new

elections in the coming year. manus: do you think that is the 2019?risk going into is that what 2019 holds, political chassis in italy? yes, that is the major risk, the political rivalry coalition. salvini pulling ahead and the other italian deputy premier demaio being somewhat left behind in this race for power coalition. let's kevin, as you say, see what happens in the parliament. from hugs and kisses to rhetoric our western european editor kevin costelloe. to our guest. janet, to a certain extent, the narrowed. the markets have become familiar with the number 2.04%. is the biggest risk in italy more political angst? could salvini try to go to the polls? is that a risk of the economy year?ford next janet: i think generally, the italy, nottlook in only italy but the eurozone, is of subdued for us. think italy has productivity issue. it has one of the lowest productivity in the eurozone. for is a big problem sustainability, because it would have a lower potential gdp. for the outlook next year, the is going toa whole, be affected by this ongoing trade tension. -- are slowing quite sharply, so pmi's,an see from the from currently negative -- sorry, below 50 in italy, for instance. i think this is going to continue in 2019 because the exposed to trade. policy, astightens the euro strengthens, that will be bad for exporters, as well. tidings of not such great cheer. janet, you stay with me. could the stoxx 600 the next to go to bear market territory? coming up next, face-to-face. white house officials are trying meeting between trump and powell. who could benefit? this is bloomberg. ♪ nefit? this is bloomberg. ♪

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manus: new year's might be a holiday in much of the world, but a number of exchanges are still open. some are taking a half-day, as is the italian stock exchange. trading on the ibex will end 1:00 london time. most futures are closed for the holiday. excuse me. as is germany, the nordics, and switzerland. in asia, trading is still open. in india after closing in hong kong. that is your market timing today. early lunch is what could be

called for. let's check in on the markets around the world. joining us now is dani burger. good to see you this morning. have a great new year if i don't speak to you before hand. you are looking at what could bring a little bit of good news to the asian stock bulls. let's face it. they've had a bit of a white up, $5 trillion. what is good for them? dani: i'm trying to bring good news into the new year. in the past when we've seen 10% decline in msci asia-pacific index, we've seen a rally the following year. asia-pacific index down more than 15%. look at these other instances on the board. in a year where it's fallen more than 10%, we do get this forceful rally. part of this may be a valuation play. investors might by the debt as stocks look less expensive. the fundamentals need to be intact. i give you 2009, fallen more

than 10%. the index falls for three consecutive years. it doesn't mean history will repeat itself, but it is a bit of optimism. speaking of silver lining, i want to tell you what silver prices have done. it crossed its 200 day moving average, now trading higher than $15 for silver. a lot of this has to do with the haven properties but it's a remarkable rally when you think a few months ago, it was trading at a two-year low. according to analysts, this is a key level and it's at hold above the 200 day moving average. $18ay see silver rally to by june in the new year. manus? manus: dani burger with the latest, looking for silver lining. that's what we like, optimists on this show. no more grinches. desley humphrey with your first

word news. desley: thanks. to china's slowdown deepens with activity at the nation's factory slowing in december. the official manufacturing pmi came in at 49.4, compared with the estimate of exactly 50. it was the first contraction since july, 2016. the nonmanufacturing pmi beat expectations at 53.8. you was equity futures rallied after president trump reported a big progress in trade talks with president xi after a phone call saturday. trump tweeted the deal is moving along very well and will be very competence of if made. italy's parliament approved its 2019 budget law. this follows the weeklong standoff with the european commission. the populace coalition partners agreed to lower their 2019 deficit target to 2.04%. the initial 2.4% target was rejected by brussels as breaching eu rules.

the chances of the u.k. leaving the eu are 50-50 if parliament rejects theresa may's deal, according to uk's international trade secretary liam fox speaking to the sunday times. he called on his fellow lawmakers to back the deal, saying he would rather have an agreement that falls short of expectations than risk no brexit at all. russia and turkey have a crucial role to play in syria. that's according to a message from vladimir putin to his turkish counterpart. this comes after they met in moscow and agreed to coordinate military steps to fill the void left by donald trump's decision to order a military pullout. bangladesh's ruling party won by a landslide in an election marked by violence. according to the nation's election commission, the allies

won by almost 90% of seats up for election, but the opposition called the vote farcical. as many as 18 people were killed. this election gives the prime minister, sheikh hasina, an unprecedented fourth term in office, longest-serving premier since the nation became independent in 1971. global news, 24 hours a day on air and at tictoc on twitter, powered by more than 2,700 journalists and analysts in more than 120 countries. i'm desley humphrey. this is bloomberg. manus? manus: thank you very much. in what is inheck store. bigger issues at play. jair bolsonaro inaugurated as president. most markets closed for new year's day. india will be open. watch for the factory pmi and the wider euro area thursday.

the 116th u.s. congress sworn in. democrats take control of the house. the first vote will be pick of speaker, a position nancy pelosi is poised to gain. from markets of 2020, it is the payrolls. estimated 180,000 with unemployment rate 3.7%. that's the data. how do you interpret it? what is the fed's role? the fed would benefit from a better feel of markets. he spoke to fox news on sunday. >> even the fed is understanding it needs to communicate better. it needs to do two things in particular. one, show that it is more sensitive to markets and what is happening outside. this risk of spill backs, what the president has called get a better feel of what is going on.

second, the fed has to realize it cannot keep a really important policy tool on automatic pilot. it needs to be more sensitive to what is happening. i think the fed can regain control and we can stop these self-inflicted wounds. manus: meanwhile, white house officials are trying to arrange a meeting between the president and jay powell. trump has been critical of the central bank in recent months. could the face-to-face risk spooking the markets even further? janet mui is still with us. we brought in paul dobson, our mliv managing editor, and fx also on the set in london. mohamed el-erian talking about the fed meeting a better feel. it needs to communicate better. it needs to show more sensitivity. what's happening and markets? would you agree? janet: markets are much more

pessimistic than what they are expecting. the markets are pricing in any rate hikes next year, where the fed is expecting about two rate hikes. pessimistic.ore if you look at the labor market, which the fed is focusing on, at think the unemployment rate is three plus 7%, there -- 3.7%, wage growth very low. the fed is enticing policy when they're looking at this data. i think now the markets are too pessimistic than the fed, i think. manus: the other thing that came through, goldman sachs is downgrading their growth. deliverable.is this goes back to the economic view. mohammed el-erian would say stop

talking. we're not getting a recession. that's not in the cards. would you agree with that? janet: i would agree with that. at least, not a recession in 2019. going back to a labor market is very strong. for u.s. gdp, more than 70% is u.s. consumption. as long as you have a strong u.s. consumer going, which we see in the wage growth, not just nominal, but in real terms because of the fall in oil prices, that's going to be helpful to u.s. consumption. we're not expecting a recession in 2019 for that reason. paul, let's bring you into the conversation. i just showed you that chart. we are one day ahead of people. the market says no rate hikes next year. what does that do to dollar? it was king dollar. it was king yen, actually, in

terms of g10, but the dollar had a good year. put the market together with the dollar positioning. there are two factors at play. absolutely.l: the strength cut everybody off guard. people were looking for a weaker dollar this year. the strength caused of those mini explosions that we had across emerging markets. it continued to cause pain to the rest of 2018. looking forward to from here, what the fed pricing shift has done has really undercut support for the dollar. we're seeing strength coming across a range of markets as dani was showing, silver and gold, precious metals gaining across the currency arena. we're seeing more signs of

stability, those emerging-market currencies now starting to stabilize, may be giving a little strength as well. the fed might not stop altogether its hiking cycle. it might start to relent on the almost predetermined shift higher once every quarter. that could give more breathing space for the rest of the currency conflicts. manus: for both of you, janet to you first of all, we put a cracking chart together. this is to understand the distance between the rhetoric being used in market notes, and reality. these are three periods of town. --. of time. 1929. 1987. this is where you really began to worry. the market dropped 31% in 15

sessions. i put it to you, janet, that we are all getting rather too distressed over a fairly reasonable cathartic moment in moments, 20% in 2018 is not the worst that it's ever been, really. you need to go back to 1987 to understand real volatility, don't you? janet: yeah, i made markets have become much more volatile this year, for sure. that's because central banks have turned from quantitative easing the quantitative tightening. so this is not surprising at all. i think what is happening at the moment, it could be a normal, healthy correction, given it has been a mature bull market. if you look at the real 10 year u.s. treasury yield, historically, it causes problems like economy and markets when it's about 2%.

aboutnow we're at just 8%. we're not really in the situation where markets should really panic that much. there is concern on the economic front, perhaps slowing economy into next year, the trade tensions. but as i said many times this morning, the u.s. economy labor market is very solid, and i don't think there will be a recession in 2019. that's why i think the market got ahead of itself. manus: ok. let's see, paul, what happens with the data on friday. paul dobson, thank you. janet mui, you stay with me. we have more together. coming up on the show, it's been a painful 2018. we just showed you that from markets, two corrections and one bear market. we're going to take a look back at the year in charts.

bloomberg terminal users can interact with the charts i use, along with the rest of the team. go to gtv . that's your landing page for everything. if you are traveling to work, to into bloomberg radio or dab digital radio in the london area. ♪

manus: this is what is trending in our world. it is the bloomberg universe. tictoc is built for travel -- for twitter. e-cigarette maker juul is now more valuable tha and the other silicon valley companyn such as airbnb and spacex. at bloomberg.com, british citizens applications for irish passports rose by more than 20% in 2018 as brexit edges closer. i've got both.

and the most read storied on the bloomberg terminal. china approves 80 new be a game titles. former bluecrest manager is said to start an $800 million hedge fund this year. and in first place, u.s. stock futures rally. yay, as trump says there is big progress in trade talks with his chinese counterparts. that's what is trending in the bloomberg universe out there. let's circle back to a favorite subject of mine, food and drink. 2018 was a good year for consumer staples, but things were tougher for package goods. they underperformed by 9%. what is the outlook? we bring in the be i.t.. duncan fox is the company elements for bloomberg intelligence. good to see you. you're a cheap man for a toast

and sandwich. listen, what are the biggest challenges? you look at food and drink and you look at the sector, things getting better. but the high street is under pressure and you've got fm bg. a couple different issues. what are the big issues in the year ahead? duncan: adding one of the big issues are european market currencies. part of the reason some have really struggled, it's been the emerging markets, the bastion of where companies grow. that's were organic growth has struggled. tough fory quite companies to get any pricing at all. unique emerging markets to recover for that to come back through. that's the biggest issue. manus: trying to get a price increase through to the customer at the end, italy stagnating. germany is debatable. when we look at what's happening

in the packaged foods area, what is going on? that has had a big knock on effect in terms of the advertising companies. what is playing out there? duncan: on smaller companies have found it difficult to get any pricing at all. the retail industry has changed in the last couple of years. in emerging markets, you've got general retail getting centralized distribution. that makes it easier for local customers -- local companies. the randy packaged goods companies have found it difficult to get any pricing through. can't see any change to that at the moment. you've got to get bigger innovation coming from the global players. the small companies can win and put innovation into what can people want, and get into market quickly. that's the biggest challenge for the global players is to shift away from doing, i suppose,

great, big innovations, the ones that are locally targeted and can win very quickly. we've gott to sum up, a premium of food and drink, what does that actually mean going into 2019? what does that actually mean for the valuation of the companies involved? duncan: i think they have to deliver. organic growth has to improve. they have to deliver on the acquisitions they've made. every company has been trying to buy growth. there's one number that's risen a lot, intangible assets. that means you buy in cash flow, or should mean you buy in cash flow. and that cash flow hasn't yet improved. they really have to deliver on that or there could be real pressure for these large companies in the next year. there is a 50% premium, give or

take, to the stoxx 600, which shows they've got to deliver or they will be under pressure. review,loomberg yearly duncan fox. he is a part of our bloomberg intelligence team, with all the equity analysis you need at your fingertips. it's been a painful your for markets, as we've been saying. stocks lost 20% of global gdp, trillions of dollars wiped off the equity markets, and a number of indices have fallen into bear market territory. dani burger has the latest. this is my favorite chart. $17 trillion wiped out, 20% of global gdp. what stands out for you in 2019? dani: a lot of interesting charts because 2018 was the year the bears finally saw predictions come to fruition. that's what i will get to.

but this shows the pace at which they fell. at the top is their high for the year, down into the trough. the real standout is oil, which is the blue line. look how sharp of a drop this is into a bear market. a lot of this is opec concerns. now it's down more than 39%, almost 40% from its peak. oil, energy stocks less of a factor, less of us way, that we saw other -- a sway, but we saw other factors. ,till, we are seeing financials japanese stocks return. more slow of a drop, but two fell into a bear market, now around 21% decline for the year. here is that chart you love that you were just talking about. this is the ratio of market cap to global stocks to gdp. falling 20% this year, which you can see at the end here.

this is a $17 trillion reduction in market value. this is economic concerns, political concerns. a lot that took markets off. this cut individual investors by surprise. caught the fell side by surprise, as well. here i have the level of the s&p 500 compared to the year and estimate for analysts. you can see right here the blue bar is what tehy're estimating, finishing at 2900. we ended at 2650, the widest spread between analyst estimates and the current level since our data goes back to 2000. manus: well done, cracking chart there. dani burger, the latest on 2018. janet mui is my guest host this morning. you've heard a lot from the team. i want to focus on a couple of things. 2019, already in a bear market,

down 20% on the dax and the euro stoxx 50. go back to your notes. i want to tie them back to the equity story. qe ends. it ends at the close of business tonight in europe. marketsgoing to irk perhaps more into bear territory, or is it priced? janet: i think the market may have priced in this quantitative tightening from the ecb already. because the market is always ahead of the economic fundamentals, to a certain extent. i think what we need to look at in the eurozone next year in terms of monetary policy is whether the ecb can actually hike as they expected after the summer of 2019. i think that would be important. right now, the market is relatively benign. they may think the ecb may not

be able to hike given the situation. if the ecb does manage to hike once or even twice next year, i think that would cause the euro to appreciate and that could be negative for european markets. manus: in terms of global economics, i know your u.s. use, but i want to get your views in terms of japan and the risk therein. 74 consecutive months in growth, the longest growths on record ever in a postwar era. are we under assuming the strength of japan in 2019? in 2019 think japan will see 1% growth. it's solid about trends, and one of the reason it can sustain growth is because of the disaster recovery assets from

the government. manus: we have to draw a line under it there. thank you for sharing your thoughts this morning. janet mui, we talk markets. that's next. ♪

this is "bloomberg daybreak: europe." these are today's top stories. u.s. equity futures rally after president trump expresses optimism over trade talks. continues.lowdown the latest factory data is back in contraction. fed would to say the benefit from a better feel for markets. that amid reports the white house is trying to organize a trump-powell meeting. the italian government passes its budget at the 11th hour.

a warm welcome to the last show at daybreak europe for 2018. it has been battering, bruising, and tough for these markets. let me show you how we are starting the last trading day. we are bid. a lot of this goes back to the discussion over the weekend and the trump tweet. we saw progress between china and the united states. that will set the tenor for what happens in the growth story for 2018 -- 2019. london is up by 0.4%. performance, the imax is up. better economic stories in the ibex.

let's show you what is happening in the bond markets. it is going to be a shortened trading day. by --s higher the fed needs to get a feel for what's going on in the markets. a double-edged sword there. i wonder if he is setting as the next fed chairman speaking the language of the white house. it is an interesting debate to be had for jay powell. let's check on the markets. japan is closed, but you have a few market. >> just a few. note. 2018 on a positive you mentioned japan, but we are still seeing a relief rally on that positive headline on trade. thatntly the only markets are trading, malaysia slightly higher by 0.1% -- 0.5%. india are racing earlier gains.

hong kong, the clear out performer today on that shortened trading. trade -- seems like wh group was up. tencent rallied. china approved 80 new gaming titles, lifting that freeze. most close tire. pmi data shrugging it off. seen in termsave of manufacturing pmi, contracting for the first time since 2016. nonmanufacturing pmi still did better than expected. overall, what a year it has been. market valuen wiped out in asian stocks in 2018 alone. much.you very happy new year's eve. does lee humphrey is in control in dubai.

deepens.s slowdown activity at the nation's factories slowing. manufacturing pmi came in at 49.4. it was the first contraction of a crime factory gauge since july 2016. the nonmanufacturing pmi beat expectations. meanwhile, the u.s. futures rallied after president trump reported big progress in talks with china. trump tweeted that a deal is moving along and will be copper hence it is made. -- comprehensive if made. the government's weeklong standoff with the european coalition. partners agree to lower a deficit target to 2.04%. the initial 2.4% target was rejected by brussels as breaching eu rules.

u.k.hancellors of the leaving the eu are 50-50 in parliament rejects theresa may's deal. he called on his fellow lawmakers to back the deal saying he would rather have an agreement that falls short of expectations then risk no brexit at all. russia and turkey have a critical role to play in syria according to a message from president vladimir putin to his turkish counterpart. this comes a day after the country's top defense and intelligence chiefs met in moscow. toy agreed to conference -- fill the void left by donald trump's order to pull out. japanese prosecutors extended carlos ghosn's stay in jail until january 11. another setback for the auto executive. stands accused of

understanding his income by tens of millions of dollars. news 24 hours a day powered by journalists and analysts in 120 countries. this is bloomberg. >> thank you very much. that is the roundup on the news. to the markets. stocks in asia rose on the last day of trading for 2018 after president trump reported big progress in trade talks with his chinese counterpart. trading with major markets in japan, china closed, and shortened sessions. futures in the u.k. are pointing to a higher open on the last of trade. martin malone is the top trader. he joins me in our london studio. to. -- toyear's eve you. thisull case is there is big progress from a telephone call it a tweet. the reality is manufacturing data is weak and it is weakening

globally. how do you react? >> there is no surprise we have seen weakening in the data. data, it wouldt be quite surprising if it was not week with the risk factors we have seen over the past three months. what we need to look at for the next two weeks going into 2018 is pessimism is quite excessive at the moment. if we go back 12 months ago, maybe we were too optimistic. it will be quite important to be aware of the consensus as we start off in 2019. one could say we are looking for goldilocks. i did not realize this. tonight marks the beginning of the new nafta, sorry, the new tpp redrafted.

get europe-japan coming to fruition in february. perhaps we are missing some of the other building blocks of growth story 2019. are we? >> i think so. politically we have seen many governments change. xi are like trump and currently in discussions rate up to march 1. those discussions will be stepped up from january 7 when the team from america drops to beijing. as we saw over the weekend with the telephone call trump and xi had a, what we have to realize is tpp is starting today. companies european are going to be at a disadvantage. when the european-japan trade villas of lamented, american companies are going to be at a disadvantage. both trump and xi need to get this deal done.

these other trade deals are like sticks have to overcome. over,.they have to to overcome. manus: i want you to reflect on this chart. 1929, down 45% in two months. sessions. i do not think we can call any of this good volatility. is this a refresher in our minds that volatility is a press and issue 2019? >> i think so. we have tokeaway is be very aware of all financial markets. particularly fixed income. even though the equity market crashed in q4, the oil price

weakened. we have counters to the equity crash. we will see after the fed hiking 100 basis points in the last 12 months, they are not going to hike 100 basis points in 2019. the debate is how much, but it will not be that amount. there will be stabilizers within the marketplace and fiscal policy is going to be much more taken up by china. is likely,, u.k. havee could -- like we seen with macron, he is up in fiscal. there are a lot of support factors which could suppress volatility. the main driver for volatility would be trade structure. 10 year u.s. interest rates at 2.7% should suppress volatility to some level at the start of the year. i want you to take a

listen to this. he is talking about jay powell's feel for the markets. >> that that is understanding it needs to communicate better. it needs to do two things in particular. show it is more sensitive to and what is happening outside. but the president has called, get a better feel for what's going on. second, the fed has to realize it cannot keep a really important policy toll on automatic pilot. it needs to be more sensitive. the fed can regain control and we can stop this self-inflicted wound. does the fed need to show more sensitivity to markets and be more aware about what's going on outside? >> absolutely. everybody knows has two

mandates. one is jobs. they also have financial stability. , he is not aowell trained economist. he has a big team of 400 phd economists behind him to do that for him. he made significant mistakes in q4. he said the fed was significantly away from where the neutral interest rate should saidhen he backtracked and they were very close. similar to ben bernanke's mistake in 2013 where 10 year interest rates doubled from 1.5% to 3% and equity markets crashed by 20%. they quickly recovered. the fed is going to be extremely subtle in trying to tell markets they are listening. the good news for the next 12 a presss we have

conference every fed meeting. we will have one march 20. manus: everyone hunkered down, get the popcorn. martin, stay with me. you are the chief economist at mint partners. theng up, banks were one of worst-performing sectors of the stoxx 600 this year. more on that story. and if you are traveling to work, tune in to bloomberg radio on your mobile device or dab digital radio in the london area. ♪

manus: 7:16 a.m. in london. 43 minutes away from the start of the last trading session for european markets before 2019 kicks in. this is the global market map.

you have global equities excluding japan up this morning. big progress according to trump in regards to his call with xi. nymex is up. what is driving oil? is at the prospect of trade wars? i -- up by 0.4%. that great brexit parliamentary vote. what will happen? s&p futures are rising. it is going to be a very interesting fixed today. how the market is positioned, very long dollars. 7.5%.ear, down the final daybreak europe business flash for 2018. for a second year in a row, goldman sachs is the top bank

for takeover advice. it's share of global dealmaking is said to exceed 28%, up from 26.4 last year. morgan stanley, jpmorgan, and barclays round out the top five. after a strong start for 2018, deal volume fell shy of the three point $4 trillion record set in 2007 as market volatility put takeover aspirations on hold. china has ended its freeze on new videogame licensing. beijing is said to have approved 80 new titles for commercial release with chinese game executives telling the financial times it could take months for the official part -- to clear the 5000 games waiting for approval. disney and verizon have reached an 11th hour deal to keep sports programming flowing to cable customers. a distribution agreement covering 4.6 million customers was due to expire at 5:00 p.m. on new year's eve. no gate -- negotiations were

seen as a litmus test for charging higher fees for spm -- espn. manus: european banks are one of the worst performing sectors on the stoxx 600. danske bank amongst the biggest losers. legal troubles and challenging management. but after a year we saw a heavy dose of realism. are the banks in any better estate for 2019? here is our senior eu banks analyst for bloomberg intelligence. run us through the biggest winners and losers of the year. were there any winners? >> the winners were the banks that were flat. related.

the losers, commerzbank and deutsche bank, the estimate -- the m&a interest dissipated. i would not bet against something happening this year. something like metro bank in the u.k.. french are another area that have underperformed considerably. we have obviously got this good news in regards to the italian budget. you have created this. this is about italian banks. they have been making progress. have they been rewarded on the equity side or the debt side? is it reflected yet? >> not fully, no. the problem with the italian banks is you have got another 600 billion to clean up. the revenue side is pretty ugly. fees and commissions is a bit of

a horror show. they are still too high for 2019. 2020 as well. manus: if i said to you, look, the revenue -- the revenue forecast being cut across the board through 2018 and into 2019. how bad is it going to be next year? is it a reality risk? >> i think we're going to have less cuts. the consensus is a little bit too high. we have been waiting for rate hikes. setrate hike has not through the margins the way people would have thought. because of competitions and rising funding costs, the removal of qe, etc., the bank funding programs we have seen -- the revenue story is still the problem. manus: where to find that revenue? thank you very much.

our senior eu banks analyst for bloomberg intelligence. my guest host is the chief economist at mid partners. martin, can we focus on italy? jonathan was making the case in terms of solving your debt problem, i'm just going to redraft that chart. the economy in italy is stagnating. it just agreed to .04% funding for the year in terms of the buffet jeff is it -- buffet -- budget deficit. what is that they to the european story yet the >> the good news is -- what does that do to the european story? >> italian stability is critically important. interesteddy that is in investing in italy.

foreign investment money into purchasing bad loans. getting political stability back, getting the budget done, that's it -- that should see further inflow. getting european stability for the rest of the next 12 months, that will be the next step. that will depend on decisions that are made from across berlin, i'm across brussels, and in london. little more fiscal latitude may be the driver of 2019 versus 2018. you mentioned berlin. reflects a dax and an autode angst. six years of a winning streak has been busted. germany is under pressure. -- can they

normalize 2019 as the markets -- every now and then we pushed into 2020. can these be normalize 2019? >> most likely not. there might be a chance to hike the negative deposit rate slightly in the middle of the year. the main theme going on this year is actually leadership change. in the european parliament we had the elections of the end of may. there is a lot of risk politically and monetary in europe for the next 12 months. they are going to be escalating further if we get a messy situation with brexit. assuming we don't get a messy situation with brexit, we will know in mid-january how the withdrawal agreement vote goes. assuming we don't, the european parliamentary elections are probably going to be the most important of the last four decades. we could see a populist-led european parliament, which is

going to make it very tricky to get issues like the banking union. the ecb is going to have a tough time considering non-economic issues for the next 12 months as well as the leadership change. we've got two minutes left. japan. 74 consecutive months of growth. the longest in the postwar era. the topics is in a bear market. you like japan. is there an opportunity there? >> i think so. there's a couple of things happening in japan the next 12 months. they will have a new emperor. they will also hold the world cup for rugby and in 2020 they will have the olympics. a couple of negative factors.

the government is going to offset almost all that fiscal typing from tax hike with physical easing in the short-term. they are aware of the risks. japan, as you know, has pushed through gdp. they have pushed through other trade deals. manus: martin, i have managed to be two and a half hours on tv barely mentioning brexit. you have 30 seconds. hard brexit, no brexit, soft brexit? take your choice. >> we will get the deal done january 14. the deal will be passed. manus: that is a big call. sterling will go to where? >> 135. manus: malone, you can come back. you are a guess that answers questions directly. that is the chief economist at mid partners. a word of thanks to the whole team.

they are very patient. they work stoically everyday. that is it from daybreak europe. have a cracking 2019. ♪

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>> good morning. we are live from our european headquarters in london. cash rate is less than 30 minutes away. -- cash trade is less than 30 minutes away. deal.s 11th hour the populist government passes its budget, but could the troubled coalition be on course for a breakup in 2019? a good end to a terrible year. amid lowcks rise volumes after president trump reports big progress in trade ta