off of the win for rubble at -- global equities in the top 2019 risks. worst year since the financial crisis, u.s. equity suffering decade,est selloff in a could your portfolio hit more volatility? let's make a deal, president trump invited top leaders to the white house to end a government shutdown with a plan to reopen the government and a stage for the 116th congress. david: welcome to "bloomberg -- daybreak" on this first day of the year. isx: what's exciting to me the bond market, purchase anything you can, there has got to be some pen of action happening there irrespective of -- china data. david: it's a flight to safety, the yen was up in a big way. alix: waking up to boom, another

the euro dollar is weaker, as david mentioned. money into the dollar and money into the dollar-yen at a the 10 year yield has a bit across the bond market even in italy and the u.k., the yield is down here by four basis points. the real dramatic move has been in the bond market germany. crude is down by 1%. considering that risk off field. david: time now for the morning brief, president trump having a meeting at the white house with congressional leadership to try to reach a compromise on funding the government and tomorrow the 116th congress is sworn in with auto sales for the month of december. tomorrow, jobs days for the month of december. [no audio]

the chief equity strategist, i will put back up this graph that shows china pmi. what you basically had was the thing that we already knew about contraction in manufacturing. looking at the risk, how big a factor does this for the market overall? china is one of the equity component market risks being faced right now. european data has been pretty weak as well. how much that extra low risk feeds into u.s. risk, standing alone in the relative strength of the economic outlook, how much do we import that risk from overseas? will learn a lot about that in the upcoming earnings season if companies don't technologies that the slowdown is real and impacting profits.

another down week -- downlink for estimates. question is, what does this do to the chinese position on trade? on the other hand, the story is that this is a weaker negotiating position for president trump. -- >> that would be would be president trump's argument. monday we reported that all five fed regional economic indexes declined in the u.s. it's not just europe and asia, it's also the u.s., which also represents a real risk to the markets going forward. with: how much of an issue china is what the economy is doing and how much of it is the trade dispute that we referred to? if tomorrow they waved a magic wand and came to terms with china, how big of a factor would that be? >> it would help a lot. going back a year ago, well before the trade discussion

happened or before we had any action on trade there were leading indicators suggesting that china was going to weaken. you now have a lot of movement on the monetary policy side suggesting improvement already with the albatross of trade weighing over the china market in an environment where structurally they are trying to rebalance with monetary policy movements creating short-term is a goal improvement in the outlook. you need to trade resolution i think to give investors some sort of hope that we are going to see it better going forward. it's more of a catalyst for risk tolerance than it is true, major game changer for economic growth, in my opinion. nonetheless you need it is you need to create something free of stability and improve the risk bigger, which is the drag right now. clearly the monetary policy has done a lot to try to re-stimulate growth, but now you the this trade issue on

overhang on top of it and we need to clear that. basically the whole world might need that because -- you can just visualize what happened to u.s. equities in the last year, global stocks losing $11 trillion in 2018, the u.s. not holding up well. marty, how do you calculate and outlook for 2018? how does that work now? >> we might get a clue about that today when donald trump brings the leaders of congress. i do think that the dysfunctional aspect of the u.s. government is weighing on the markets and will actually say a lot about how 2019 goes forward in terms of policy and in terms of any initiatives that would help to stimulate the economy. there's always geopolitics kicking around washington, but to what extent does the fed and the gcb determine the markets?

>> it's a huge and underrepresented component. it's no coincidence to me that markets made the peak when the real rate shifted above zero again. when the real rates moved positive, the markets suddenly peaked and deteriorated and the fact that the ecb is going to end qe this month was a real game changer in an instance in which we contended with a shift in central bank policy over the last decade it has created a massive contraction. 2011 is a great example, the fed and 2016in with twist was the end of the balance sheet expansion. today we are contending with this liquidity crunch, so to speak, but instead of a crunch it's a shift that has created a major change in equity market outcomes. as much as we want to point to the other things happening, the real juice has always been liquidity and a shift in

liquidity is a problem for stocks in the short run. alix: meaning that president trump is right. at least about the fund -- the fed. david: that's true. but it's almost arithmetic. take money out of the market, assets go down. let's turn to president trump right, marty already referred to it with the shutdown, a 13 today. an intriguing series of tweets over the new year with donald trump saying that they will secure the wall thing and let's make a deal and nancy pelosi comes back and it feels courtship and she said the donald trump has given democrats a great opportunity to show how we will govern responsibly and quickly pass our plan to end of the irresponsible trump shutdown. are they getting together this afternoon? >> will physically they are getting together. i just ask our leadership in

d.c. if we know any of the particulars about this meeting, and we don't. we don't know if cameras will be .n throughout this negotiation trump has famously left of the cameras on during these kinds of encounters just to see, you .now, how the process works imf fascinated to know if this is a real negotiation or if it is just another donald trump reality show. best guess? i mean, who has the upper hand here? the democrats, have the upper hand. they clearly said they don't want funds for a wall and the democrats are going to, nancy passy -- nancy pelosi will a bill to open the government in the first hour. david: do we care? there have been 22 government shutdowns and more often than not the s&p goes up rather than down.

>> it's a great point and to us this is the least of the market concerns right now. it's a sideshow. if the government is shut down for long enough it could be a drag on growth that since federal spending is such a small portion of the economy, it could contribute to a rep -- a lack of risk tolerance. one more call you in a wheel of extraordinarily negative sentiment hitting every investor , but it's really difficult to attribute a government shutdown as one of the biggest reasons equities are struggling. it will be quite the interesting few days. a reminder, you can find all of this and more on the beat -- g tv on your terminal. coming up, new year's, same markets, off to a rough start tumbling across the globe.

john hancock investment market strategists will join us next. this is bloomberg. ♪ s bloomberg. ♪

china manufacturing pmi's came out overnight and confirmed what had been indicated, that manufacturing in china is moving from expansion into contraction. chiefe from hong kong our asia economics correspondent. is this unexpected? how concerned are we? >> the big takeaway, david, is that now we have the private sector and the official pmi together in negative territory with a deep cross-section of the manufacturing sector in china. remember that the interesting thing is that the chinese export

story held up pretty well as customers tried to rush to get new orders ahead of the expected export orders with pmi readings coming together that the beginning of 2019 will be a challenging one in china and it shows how much is riding on the trade talks between the nations and whether or not both sides can reach a resolution. david: some people are now saying that these kinds of numbers indicate that they will have to double down on their stimulus that they were already planning some of. >> it's a critical question and on the one hand, of course, the policymakers know it's slowing down but they want to stick to that critical battle as they term it in the economy. the question is how long can they hold the line?

it's been a slowdown in industrial profits in regional heading intoi's contracting territory and at some point the pressure will thed on them to move beyond nuanced and targeted approach to the growth they have been taking .or more wholesale stimulus it comes back to where it started, the trade talk. so much depends on where that goes in beijing next week. it's a move coming out is positive towards the chinese economy. as you say, fundamentals and the economy place some pressure, but what about the stock market? the chinese stock market really had a bad year last year and we have a chart here indicating that. it was a difficult year and there are some domestic factors in that. drug companies have been impacted by policy shifts with pressure to act as financing

because of the broader deleveraging campaign and there are measures that have hit the chinese stock market, but the overall sense i think remains that the chinese economy and markets remain sour in sentiment with ongoing pressure on the yuan as the year goes forward. i think that the stock market story isn't going to change much soon unless and until we get visibility on the broader trade story. remember, the trade war didn't have that much of an impact in 2018 and it's really expected to be felt in the coming months of 2019. david: think you so much. data, bondsointing to equities, sell equities, by bonds, that's the theme of the morning with futures taking a hit and president trump seems to be more optimistic about what's ahead, speaking to fox news just before the head of the new year.

>> it's going to be a great form of wealth. we have created a lot of wealth for the country and that's very important. it means a jobs, we can afford to do what we are doing with the military and we are working on tremendous trade deals where those other countries have taken advantage of us so badly. alix: joining us now is matt miskin, good to see you. if we get a deal for trade, is that going to be a catalyst like we have seen for tax reform, for example? or just a sentiment improver? just a sentiment improver. it's hard to see these huge policy shifts affecting the stock market more than in the past. the truth is global growth has been slowing and it is now catching up to the u.s. and policymakers are going to have to see would they can do to help out markets and economies. alix: what the make of this move question mark matt: i think it's

the right -- move? matt: i think is the right move. throw the course of 19 we would look to trim, prune, or reduce risk and reallocate capital in fixed income. fixed income offers opportunities and we are walking into the year with a neutral balance risk in terms of our views and outlook and are looking to get more defensive over the course of the year. does that include high-yield or is that investment grade? matt: we would go up a notch in quality across a portfolio. think about bank loans and high-yield, there's a huge maturity wall, a lot of debt coming due. and when they come back to the market for that, the borrowing costs are going to increase. what we do is go up in quality. investment grade, mortgage-backed securities, bonds, look for opportunities in a court type strategy for fixed

income for next year and let that be the balance of your portfolio. alix: equities i would guess would be like a safe haven utility of health care with utilities being the most expensive versus the overall in years, everyone likes health care. what do you do with something like that? health care has lost a bit of shine, and the pause in the development is that it is one of the only places that has seen positive earnings revisions. everywhere across the 11 sectors there have been negative positions. utilities were the only places that had seen a positive revision in earnings. taking the underlying fundamentals for those sectors it suggest they can weather the storm better than the other sectors out there. david: if we want to go more cautious, is there a sweet spot that you know what?

people haven't quite figured it out yet. i would say technology. the way we are trying to figure is a barbell approach. technology is the way to do that in our view. it has a high return on equity, solid balance sheets with decent cash flow in the margins are great. they have gotten beaten up significantly. that would be the upside play within the sectors that we like, but you have got to balance that with consumer staples and utilities to make are the downside as well. if 2019 is going to be about protecting gains, where does aperture view for the fed growth outlook? so, the fed might be done in terms of raising rates. the two-year yield would suggest that. the question that we have for the fed for 2019 is do we go off autopilot?

autopilot sounded great 2018 when everything was awesome. everything was no volatility, financial assets were up, great time to go on autopilot. nowadays things look a lot different. when we did qe there were a lot of different flavors. different variations on monthly purchases, there was operation twist, all sorts of things to do. autopilot might have to come off this year in a might be what the fed is kind of forced into two readjust to the global mac road backdrop. coming up, more on the second-biggest quarterly etf outflow on record, we have more on that opportunity next. this is bloomberg. ♪

tech tumble, the worst

quarter in a decade for the andor, with the etf outflow investors getting $5 billion out of the etf since the start of october, the second largest quarterly outflow on record. fromng us, matt miskin john hancock investments. how do you understand that? it's a little bit of everything. earnings investments from technology have come down 9% to 7% and there has been a 2% trimming of estimates from 2019 and if you look at the quarterly estimates the technology is supposed to see negative growth in q4e year with a blowup and analysts are pushing up the growth potential and the comps are really hard. 30% earnings growth in 2018 and they have to be debt in 2019. a lot of that has been baked in because of this price reaction.

it's been a flushing of sentiment because of these new outflows and for us the valuations are getting attractive and the return on equity is still very attractive. balance sheets are strong and for us it's a relatively good mix going into the year. i get very confused about what tech is at this point. so many different factors in there, when you talk about tech, how do you divide those things? the communications services sector was in the third quarter and they plucked some names out, facebook and google in particular. what was left is what i would call the $700 billion club. from the market cap standpoint, apple, microsoft, the other big names in the index, it's a huge concentration in the index. and they have boring tech, think of old names from the 2000s, like the cisco networks of the world. to us it's a pretty good balance, as this to business

services that are relatively in high demand here as companies are still using to spend money on that, trying to get more efficient with automation in play and so we think that the demand remains relatively strong. you brought up facebook, which is an interesting point, it's somehow idiosyncratic, he said that to be clear, directing the issue is more than a one year challenge, that for some of these, the problems can never fully be solved. so, that seems to be -- we are worried the we are not done yet, but if you take a look at earnings and sales estimates, they are so dislocated from the actual price. how do you view that? oft: in the facebook example the broader communications services sector it's a lot of money that they have to spend to get their business right from a regulatory standpoint. they have been walking to

congress and they have all had to go up and say their piece, but really what that is is just another cost in their system to build up the infrastructure for privacy barriers in place. there are certain businesses that are more sensitive to that. facebook is the poster child of it. the valuations are relatively attractive. we see certain things within the network that are picking up and owning the name with other staying away right now. the exit deal, no deal, flareups around the world, coming up we look at the top political risks of 2019 and the market poised to react. this is bloomberg. ♪

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"all sites are green." all of which helps you do more than your customers thought possible. comcast business. beyond fast. alix: this is "bloomberg daybreak," and i'm alix steel. happy first day of trading, 2019. good news for you then off the lows of the session. s&p futures off over 1%.

same thing in europe. not down as much as earlier. italian equities off 9/10 of 1%. seenhird month we have manufacturing shrink there. economy underlying still struggling in italy. a rush to safety. dollar-yen down 5/10 of 1%. the dollar spiked higher. those are the safe haven currencies of choice. big moves in the bond market. 10 year yields down three basis points off the lows of the session. money in the gilt market and the bund market. gold up by five. oil up since the worst annual loss since 2015. david: headlines outside the business world. >> good morning.

president trump is suggesting he wants to make a deal to end the partial government shutdown. he is invited leaders to meet at the white house. he insists there will be no end to the shutdown unless congress gives him the money to build a wall on the mexican border. romney hasnator mitt blasted president trump, using an opinion article in the washington post to call mr. trump's character shortfalls, glaring. spacecraft american has pulled off the most distant exploration ever of another world. a half-hour into the new year of, the new horizon spacecraft making its closest approach to a small icy object 4 billion miles from earth, it looks like a bowling pin.

this is bloomberg. i'm fascinated by the spacecraft. 4.1 billion miles from earth. it is a billion miles past pluto. it went out there and has been going for six years. it is nasa with johns hopkins. it turned around and started sending images back of this thing. alix: when i was growing up, that was magical. it will have to be more private sector. david: which is a policy priority for the u.s. government. wilbur ross believes in privatizing outerspace. alix: past pluto. david: one billion miles past. geopolitics, an important factor for the economy and investors

starting out the new year. we will talk about what we could be facing. >> perfect. we have a history. >> she has it. david: she is a senior advisor. the news today about the shutdown. president meeting with congressional leadership. democrats and republicans. an exchange on twitter between him and nancy pelosi. >> they will get to a compromise. as we talk about risk and you look at the government shutdown. the impact has been minimal at this point, not minimal for the thousands of workers impacted at this point but overall minimal in terms of economy. next year, the problem for the president and anyone concerned about political risk is that the president's fortune is running

out and the constraints are getting greater. we have a democratic house coming in. last night in new york, they inaugurated a new attorney general who has promised to keep investigating the president and his businesses. all of those things make it more volatile for the president. as we look at the shutdown, we will find an end, but how the president responds to the noose around his neck will be daunting. david: we have to put in larger context. you have various political risks we can show. one aspect of this shutdown, is the world and investors. can they get along? can they work together? we have a debt ceiling. jeanne: absolutely. there is fear and trepidation. our clients going to be able to move forward in a positive direction? or at least not backward?

as we start out with a shutdown, the third in president trump's last year, this is not a good sign for people looking forward to political risk and hoping the government can handle things like the debt ceiling. are they able to make basic compromises? so far they have not demonstrated they can do that. alix: senator schumer and senator durbin will meet at the white house today. matt: go back to fixed income. look at treasury bonds, it seems counterintuitive. treasure market is funded by the government. that is the best risk-free asset out there. it will be a christian if geopolitical -- a cushion if geopolitical risk flares up. david: how do you discount the range of geopolitical risk? what is the most likely? the most likely to occur that we should be worried about? jeanne: we look at the weekend

institutions -- weakened institutions across the world, democratic institutions in peoplelar are being, have less confidence in basic institutions. whether it is the media, the markets, people feel like institutions are rigged against them. the outcome against that, his vast political change, whether a move toward authoritarianism or chaos. it makes it difficult for people to say -- moved to another market and invest. all of those factors create a combustible mix. as we talk about the challenge, that is one we have seen for several years. unfortunately, it looks like it will continue in 2019. alix: major banks, the first thing i thought about. in the u.s., maybe central bank is losing credibility. camerayou negotiate a

live meeting? how do you deal with that. shorter positions? tighter stocks? matt: they are separate now. the fed goes down their path regardless of what happens with the administration. you have to focus in on that. it is about risk management being top priority for 2019. making sure you have, high-quality bonds on fixed income side, quality within the equity mix, and the barbell approach we talked about, these are things that are top of mind for investors and could play out as risk to downside next year. david: any indication that president trump might change course? presidents in the past when they have lost a house, change the way they govern. do we have any indication, including tweets about nancy pelosi, that they could make a deal? jeanne: we have not seen him

change. we thought maybe after the primary he would change, after the election. i don't think we can bank on -- as a risk manager, do not bank on his changing at this point. he has not done that so far. that is one of the big risks. we don't know how he will respond in those situations. things we think would be a normal historical political response from a president seem to have escaped this president. . populism wave of throughout the world is interesting. the u.s. in some ways is included. poland, manyrazil, countries in europe as well. what happens? jeanne: the rise of populism is one of the things we talk about. this is something, these are populists who are disguising themselves as democrats and saying they are working in the interest of the people. it gets back to the issue of

weakening basic democratic institutions. we have seen that in the u.s. with people like sanders and trump, but across the world. the impact of that is this great volatility that enters into the market and makes it difficult for people to make decisions. we really don't know what will come up. be risk-averseo as possible without knowing how these strongmen and others are going to move forward. david: increased risk, downside tales, moving to fixed income. are there opportunities? places you can make money in this volatile world? matt: absolutely. the balance we saw at the end of the year, maybe that has more upside. there are pockets where you get a washout sentiment. you can take advantage. the fed is continuing to tighten. central banks will not be the

support they were in past flareups of geopolitical risk. you still want to think about, what does the portfolio look like as a more conservative vehicle? david: we have been talking about government shutdowns. what about the outside risks? north korea? taiwan? we just heard from kim jong-un. it is not clear we are headed to a good place. willing to sit with the u.s. president anytime in the future and will strive for an outcome that will be welcomed by the international community. however if the u.s. does not deliver its promise, and continues making unilateral demands, we will have no choice but to seek a nupathe -- a new path for peace on the korean peninsula. david: this was the biggest threat globally for the first year of president trump's

administration. it seems to be coming back again. jeanne: forget health care. this will be the biggest issue you will confront. barack obama was right. this is under the umbrella of unexpected security challenges, whether from nonstate actors like cyberattacks, or terrorism, or state actors like north korea, syria, russia. in the case of north korea, this --ains an incredibly support incredibly important security challenge. we do not know how this will play out. it has ebbed and flowed under the presidents watch. he seemed hopeful after the summit. most experts will tell you north korea did little to change what it was doing on the ground despite the rhetoric. alix: what are you spending your time on? jeanne: tech. you will be talking about tesla.

there is so much risk and reward to your point in the area of tech. artificial intelligence, agi, regulation, non-regulation, regulation in europe, u.s. regulating hands off. contrast with china. they let the companies do what they want as long as they get the info. that means questions of privacy, jobs, how the future of the dismantling of the economy. that is one of the most fascinating things, not just short-term 2019, but out a decade, it is fascinating. david: senior advisor. jeanne: very good, david. call it whatever you want. david: thank you both for being with us. david einhorn's green light. decline.34%

this is bloomberg. ♪

>> this is "bloomberg daybreak," and coming up in the next hour. alix: this is "bloomberg daybreak," and this is the bloomberg business flash. >> apple remains a core large-cap tech holding, in an increasingly risk off environment. apple has outperformed. it reiterated price target of $220, 4% higher than where they

ended the year. spencer newman will be the new chief financial officer. he is on leave. the current cfo plans to shut down -- step down. a computer follow-up this week pay $75 for to first class business trips. that is your bloomberg business flash. alix: return to wall street beat. first up. mifid ii report card. one year since the regulatory haul. then david einhorn's really bad

2018. total your decline, 34%. the blackwater founder is launching a $500 million fund to invest in supplies that are needed in electric vehicles. david: joining us is jason kelly. remember mifid ii? alix: we have a whole program dedicated to this. david: what happened. jason: the drumbeat was so loud. it was going to be the best or worst thing in the world and it turns out to be, meh. metta they are buzzing about the fact that they are not buzzing. it is amazing. you think about the breakup of research and trading. some of it has happened. i am not sure it has changed lives. david: we are not learning much more about it.

alix: is it one of those things where you're talking about y2k? midsize brokers belly up? jason: it is hard to see how it changes. the liquidity piece could change going forward. one of the main things people were concerned about, this research and trading bit. the breakup of that, the inability to roll and bundle es=earch into trading fe that has not had an impact. david: it separated the small guys from the big guys, who could subsidize. it is the middle guys that got left out. alix: the concern was that for small-cap equities, they would drop research. that would affect how companies operate and attract investors. jason: that has not happened in part to david's point.

the big guys and little guys continue to do it. some of the middle level to middle sized firms were left out a little bit. it has not had a profound effect on people who are consuming research. david: a dog that did not bark. alix: ok. david einhorn now. yucky. there was a horrible year. down 34%. was this supposed to be the good times? the value is going to be amazing. what about december? down 9%. jason: this was a bad year for david einhorn. value, value, value. clarion call at the end of the year, growth got hammered. faang stocks and traditional growth that had been driving the market for so long, just did not happen for him. not only did he trail the s&p,

he trailed the hedge funds index as well. david: the big bets did not pay off. alix: short tesla. david: look at what tesla did in equity. alix: should have been good if he sold out. jason: the short tesla bet hurt him dramatically. there are other bets that have not paid off. stories in the bloomberg worth reading around hedge funds and what they will bring. higher volatility should be better for the business. not sure it will happen yet. we are seeing many fewer startups and the startups that are happening are attracting less money. one $1 billion startup in hedge funds this year. david: eric prince. the founder of blackwater. ran into trouble in iraq. fund whichstarting a will invest in metals.

jason: related to electric cars. you are the detroit guy. this feels like, how a car industry is similar to other industries. it is about the cars but also all the things in the cars. the shovels and picks of the gold rush. david: this is a condo issue. the: 70% of cobalt is in drc. -- cobalt issue. companies are trying to find more nickel and other materials. by the end of the day, it is interesting when you make ev pitch, how can you argue with cleaner when what you're getting is from the drc? david: eric prince and blackwater. if you're going to drc and doing business, it wouldn't hurt to have a private security force. they may come together. jason: this is beyond em.

david: this is rough. jason: his reputation may not be the most stellar. he is the brother of the education secretary, betsy devos. he is connected into the administration as well through that channel. we will see how this goes. commodities edge segment. alix: tomorrow. david: 1:00. jason: the supply chain is different for ev. david: many thanks. tune into jason on bloomberg businessweek every day on radio from 2:00 to 5:00 eastern time. before congress convenes, new republican senator mitt romney blasts president trump's character in the washington post. this is bloomberg. ♪

david: this is what i'm watching. senator mitt romney, about to be as of tomorrow, the new republican senator, former republican candidate for president, he has written an op-ed in the washington post, stunning. he says the president should demonstrate the essential qualities of honesty and integrity. alix: the solution will be to run against the incumbent president. david: true conservative. who might that be? alix: uh mitt romney. president trump taking the bait. he just tweeted.

"will he be a flake? i hope not. i won big. he didn't." david: the flake is a double entendre. he is talking about jeff flake. cute. alix: we are not just in for democrat versus republican. david: this is wwf in washington. alix: oh god. two more years to go. coming up. for 2019.k top risk, top call. this is bloomberg. ♪

alix: global economic jitters. scrambling to safety.

yield low.year bund fed day lose. jobs friday. how the fed can keep march alive as the market prices out hikes this year. let's make a deal. president invites congressional leaders to the white house. democratic leaders have a plan to reopen the government, setting the stage for the 116th congress. david: welcome to "bloomberg daybreak," i'm david westin with alix steel. first trading day of the year. alix: senator durbin and senator schumer will be going to the white house. david: with nancy pelosi. alix: are there going to be cameras? is this grandstanding? david: we are hoping it is oval office. alix: dramatic. 2018.s rough s&p worst year since 2008.

volatile on this day. s&p futures down 1.5%. euro-dollar down 6/10. rush to safety. yen outperforming. dollar the strongest of g10 with the exception of the yen. strong bid in the bond market. u.k. and germany seeing biggest outperformance in the bond market. crude off 1%. russia is producing at record level. more supply and demand plus sentiment, for crude. david: president trump meeting with congressional leadership at the white house to reach a compromise on funding the government. the congress is sworn in tomorrow. u.s. auto sales for december. friday, jobs day with payroll numbers for december. fed chair jay powell will be appearing at a joint interview with janet ellen -- janet yellen

and ben bernanke. the shutdown is entering its 13th day. president trump will meet with congressional leadership this afternoon. from the white house, kevin cirilli. happy new year. the president was on twitter about that wall thing. pelosinot where nancy wants to start her tenure. let's make a deal." kevin: unlikely. senior republicans and democratic leaders set to visit the white house for a private meeting with officials from the department of homeland security. they're describing this is a briefing to get information on the security at the u.s.-mexico border. nancy pelosi says one of the first orders of business she will do with the new democratic-controlled house of representatives tomorrow is advancing budget largely filled with bipartisan areas, but

leaves out one key aspect -- funding for the wall. that is something senate republicans in the white house are not going to be able to get behind. nancy pelosi is making a political gamble trying to attract moderate republicans to help her. that is something the white house will strongly push back against. david: clarify one thing. as the president going to be in the meeting? -- is the president? is there opportunity for back-and-forth? kevin: we don't know. we have the official comment from the white house at this point, suggesting the president has invited lawmakers to the white house to have a briefing with department of homeland security officials. the last time lawmakers were here, expect the unexpected, the president welcoming and at one point airing their political grievances in front of the media. whether or not that happens, the 80 is reporting there might be a

press conference this afternoon at 3 p.m. either way, washington is back to work today. all of this comes before the landscape in washington officially turns over tomorrow. david: some people are not getting paid. kevin: good point. david: thank you so much. commonwealth ceo. strategies have a weight of return 20% for 2018. starting with in predictability. this is volatility for stocks and fx. fx volatility outpacing volatility of other asset classes. rick, topic? -- top pick? >> one has to do with volatility. topped a weekix ago at 36.

we had anticipated for several months we get as high as 30 to 36. -- in 2019, we will not january-february, 2018. on the downside there will be enough basic volatility in markets that we will not go back to the lows of this year around 10 to 11. 14 to 18 on downside will be the floor. 30 to 36 will be the high. david: vicks for the year. what do you see not charge -- vix for the year. what do you see in that chart? rick: this does not have some of the models we use. projecting price movement to the upside have 30 to 36 targets, where we recently peaked. that gave me that upside target.

on the downside, in 2017, the average vicks price was -- vix price was 11.05. we have moved up. between 14 and 18, the average price of last year should be the floor. hard to think with everything going on in markets, that the vix, there will be so lack of certainty in the marketplace we will go back to the low teens. alix: let's take risk. l, but not super dramatic. what will be the best portfolio mix in that scenario? brad: you want to transition slowly toward a more defensive tact. that may seem obvious but what we are seeing is even though the market is reacting, the economy is still slowing. we should see markets coming down. we will see the tone of markets

and investments getting more defensive. for that, health care a good place to be. energy is a reasonable contrarian bet. butave seen bad news there that is likely to improve. those are areas i am watching for 2019. david: in this market, how much can we rely on sectors? do we have to go stock by stock, company by company? what is going on with correlations? brad: we have seen correlations go pretty much as high as they can get over the past couple years. it has been a passively driven market. investors have been investing into sectors and pretty much all companies have moved together. now we are seeing that break down. more of a return to active management style. you will see more outperformance by active managers, specifically in a turbulent market. that said, there is a case to be made there are macro factors

that are driving sectors. you can make a reasonable bet that a sector -- we will not see the same correlations we did. the notion of sector investing is not dead. alix: we just saw sector return adding dividends, utilities and health care are the out performers. we think bond market, the 10 year benchmark yield in u.s. this year will trade in range not to exceed 3% upside, not to exceed 2.4% downside. we came up with this by looking over the last two years at a chart that shows where the volume by price was traded. topsen 2-4, which had been until we broke out and 3%, that amount of trading volume relative to what took place above 3% and below 2.4% is minimal. if we are talking a bottoming

process to a 37 year bull market and bonds that re-think has ended, it is no surprise it did not just turn around and shoot the moon. march,18 going back to recalled the end of the bull market, put a price target of 3.31% as target for 10-year. wayot to 3.25%, 98% of the to what we thought we would get. we pulled back. therens over the market, has been a bid for treasuries for 2.5 months to bring yields , 60 basis points, it is in the middle of our range. we think 3% is the bulk of the trading for this year. david: do you agree, brad? you have a higher number on the 10 year. brad: i do. i don't think we are quite done

with this recovery yet. fed hasas indicated the put this as a dead issue for the moment. we will see rates up. we have seen rates back off. we have seen fear. global worries. china. brexit. the u.s.. this is driving rates down. rates will recover and move higher through 2019 as growth continues in the u.s. worries will subside. ultimately, rick will be right. we have more upside to go. alix: both of you are sticking with us. coming up, the fed in 2019. speakers this week and next. what that will mean for yields, especially overseas. this is bloomberg. ♪

>> this is "bloomberg daybreak," and this is the bloomberg business flash. morgan stanley is the top stock underwriter, beating out goldman sachs for the second year in a row. it may be hard to catch up. morgan stanley is set to handle a premier deal, the ipo for uber. greenlightrn's capital ended 2018 with the biggest annual loss ever. 34%hedge fund ended down after a 9% loss in december. they posted best returns in early years. in china, government crackdown may lead to 70% of peer-to-peer lenders closing this year.

chinese regulators are dramatically shrinking a market that spawned the nations biggest ponzi scheme. david: thanks. the fed played an outsized role in 2018. it looks to do the same in 2019. still with us, rick and brad. we talked about the 10 year yield earlier. let's come back to you brad. what do you think is likely to happen in terms of the fed raising rates in 2019? brad: when you saw the last press conference, chair powell was clear. he did not mention financial markets despite significant downturn. markets, we will focus on what we are supposed to do, which is looking at employment, which remain strong, unemployment is low. we will look at inflation, which is running above target. because of that, they will keep

hiking, probably through the first half of 2019, quite possibly through the end of the year, depending how growth evolves. david: he talked about 2 hikes. the market does not price that in as a practical matter. less than one in 2019. a reversal and cut in 2020. what is right? the market or the fed? brad: the fed has consistently said over the past several years, we are going to hike, then not height. the market is going on past experience. -- then not hiked. he came into office saying, i will not do it that way, i will not leave the fed. the last press conference said clearly, we are not going to pay as much attention to the financial markets. people have been cheering that,

not in the pits, but that is what needs to happen economically. that will ultimately drive the 10 year over 2019. alix: what does that do to volatility? if powell wants to keep optionality, if every meeting is live, what does that mean for a traitor who is used to dealing -- a trader who is used to dealing in a different way? rick: this is different. came, it woulds be a shock to the market. the shock would not be good. i wrote yesterday to some clients, i would not want to be in his shoes. he is in a no-win situation. he has a job to reduce the fed balance sheet and that is what he started doing. now he has a president -- you

cannot do that and he is more concerned about the market. the market is adjusted to the perception that we have weakened enough that it is not the right time to increase rates. what will happen is this is a battle now between the independence of the fed and what they see as their mandate, versus a president who is overstepping boundaries that no one has done before and criticized a sitting fomc german to the point that -- fomc chairman to the point that he has actually threatened his job. jay powell is a consummate professional. he will stay on track to what he thought he would do. maybe he only does one hike next year instead of two. i do not see all this political pressure absolutely changing what he was going to do. david: we are talking about different things. one is interest rates.

one is the balance sheet and the automatic pilot. as an investor, which matters more to you? from market perspective, liquidity is the most important issue. we have seen the fed pulling liquidity out of the market. that has not mattered. now we may be getting to a point where the rubber is hitting the road in the confluence of rising treasury issuance and the confluence of banks having less liquidity to trade with, this might be where things happen. we saw that in interest rates for a while before the most recent bout of fear. with that being the case, the question is, powell has does code choices. he can keep raising -- powell has two choices. he can keep raising, which would be negative for markets. at the same time, if he yields

to political pressure, that means independence will erode and markets will not react well at all. he is dammed if he doesn't damped if he doesn't. -- damned if he doesn't. rick: if i created a headline that said the fed was behind the curve, would you know if that headline came now, three months ago, six months ago, one year ago or 10 years ago? any time that could have been an accurate statement in the way the markets perceive things. market discounts the fed behind the curve. this is known news. the fact that they may or may not hike next year is in alignment to the fact that over time, the last 20, 30 years, the fed is usually behind the game of what markets are saying. that is common knowledge. gotfact that you have

pricing in no hikes next year, does not mean the fed will not hike. alix: excellent point. rick and brad, both of you sticking with us. a programming note, thursday, exclusive interview with robert kaplan at 7:30 p.m. eastern time -- at 7:30 a.m. eastern time. do not miss. mark zuckerberg says problems will take years to fix. they may not be fixable. this is bloomberg. ♪

alix: time for the bottom line. three companies worth watching. facebook. 3% premarket. mark zuckerberg writing, "addressing these issues is more than a one year challenge.

problems can never fully be solved. " all the issues they have come against in terms of privacy, lawmakers, regulation. david: interference with elections. alix: this is a long-term problem. how does it make the case for that stock short-term? david: it is not just a matter of cost. it limits growth. price-earnings ratio for facebook has been driven by expectations of huge growth. if they have overriding structural issues, it may limit growth. they are still making a lot of money. this is a powerful company. alix: that is idiosyncratic. the italian bank, the european central bank has put in them into temporary administration because of the overwhelming debt. hadian banks have difficulty with loans.

ecb stepped in. italy?emember pmi's in not so great. i do not like populist. david: netflix. brooke sullivan, bloomberg opinion columnist. the new cfo, disclaimer, i worked with him, he was at disney before. i know spencer newman. alix: is he from michigan? david: no. alix: he was at activision. david: huge drama. they fired him for reasons not disclosed. >> but he is on paid leave. it is not clear what happened. he is being rather immediately scooped up by netflix. david wells, the current cfo, said he was stepping down earlier this year. it was orderly. david had been there for a long time. they were looking.

now you have spencer coming in. the fact that he originally was at disney is of benefit to netflix, especially as they pushed further into hollywood and ramp up media power in terms of new programming. david: you have to wonder -- that has been known to happen in that business. i have seen that. you think you're leaving? your gone. >> that cannot be too bad. we will have to see what the circumstances are. alix: there has been some analyst talk. could be of report huge import. positive catalyst for short-term. brooke: he will have to manage netflix's tendency to borrow lots of money to fund the programming binge. david: spencer is very smart, very disciplined. very different from disney.

you have to think about that stuff on the balance sheet. netflix has a huge mountain of debt. brooke: they have a lot of debt they could add to balance out the debt market cap ratio. that is not a great reason to be issuing debt. if you look at it, they have runway. investors have been willing to be patient and let them continue on the borrowing bench as long as they keep adding subscribers. alix: fair point. the race to go public. uber and lyft. what to expect. this is bloomberg. ♪

alix: this is bloomberg daybreak. i am alix steel. wednesday. it is the first trading day of 2019, and it is starting with a whimper.

the dow jones off by 386 points. as selloff over in europe as well. you had the weaker china pmi data. that hurt equities. italian equities off my .9%. pmi off forn -- three months. lots of negative headlines coming out of italy. in other asset classes, it will be a bit to safety. dollar-in down 8%. the ask andllar -- and thear -- the yen dollar benefiting. german bonds and guilds are the opera former in europe. talk about your move to safety. stronger dollar story. russia is pumping at a record. the bond market is really striking here today.

we talked about how the selloff in december did not correspond to a huge bid to safety in the treasury or bond market. it feels like today, particularly in germany, we are seeing that. david: you said that, a move to safety. germany is an outlier. alix: the lowest field there since 2017. david: time for an update on what is making headlines outside of the business world. vivienne or title is here. viviana: it is a sign that president trump might be willing to negotiate with leaders to end the government shutdown. the president said he would not start -- sign spending bills without money to start building a wall of the mexico border but on twitter suggested he wants to make a deal. kim jong-un issuing a warning to president trump, saying he will take a new path to nuclear talks if the president does not relax sanctions. he also said any deal would require weakening the alliance

between the u.s. and south korea. he reaffirmed he wants a second meeting with president trump. iszil's new president promising to tackle economic malaise. he said his election has shown as shown thation brazil is trying to free itself from socialism. global news 24 hours a day, powered by more than 2700 journalists and analysts in more than 120 countries. i am viviana boards auto. this is bloomberg. david: as we head into 2019 commit might be a big year for automobiles. we get automobile numbers for the month of december in the united states tomorrow, but in uberion, we have over -- and lyft. and lyftapped the uber

competition. uber is in a better position, and the relationship in the autonomous section is much more than uber. lyft hasay net-net, the leg up. david: kevin, let's fell at the conversation. has arse, lyft relationship with general motors. how do you see 2019 because general motors has said they would be out with autonomous vehicle in 2019 commercially. kevin: the areas we see moving to is electrification and self-driving which we think is a way off. we think a downturn in the

market and the broader economy globally, you will start to see investment rain in. the first of the -- alix: kevin, hang on one second. david: breaking news out of tesla. they delivered a little lighter than their estimate. $2000re also announcing a price reduction in the united states might have to do with losing the subsidy. alix: it will partially absorb that. overall -- the 61,000, that is for model three. david: that is the one everyone is focusing on. so, a little less than what was estimated, but at the same time, a pretty strong number. tevin coleman a very strong number. what that does is get them -- kevin: a very strong number. it gets them to the sustainable

number. david: they have a long way to go to $35,000. that is what demand and value growth will hinge on going forward. 2018 was supposed to be half of a million units. one million by 2020. at the price points they are selling at now, average revenue per unit, they will not get to the sustainable 500,000 new buyers, one million new buyers unless you are selling something closer to the average transaction price. stock issla's's approaching 5% down. the initial response is not favorable, not as good as they might have liked. kevin: right. general motors filed bankruptcy -- twos after selling years before they had sold 9.4 million vehicles. there is no finish line for tesla or any other automaker. you have to sustain the demand,

the production levels. you have to do it properly. this idea that this quarter or the next quarter -- this is something they will have to sustain over the longer term, convening with internal combustion vehicles, other automaker starting to see the profitability getting into the markets they actually have no competition yet. alix: do you feel the federal tax credits, tesla eating some of that -- is that material -- does that change the game at all for them? kevin: for me, it does not appear the typical tesla buyer right now is not -- again, at $35,000, that tax credit is a much bigger deal than it is when we are seeing revenue per unit in the 70 thousand dollars, $80,000 range. is that going to be enough to sustain this company, or how do they get to the next

level, because ultimately they will have to produce a lot more than 250,000 a year. kevin: they have to be selling -- a veryice point big difference in the addressable market at $35,000 $50,000,le versus $60,000, where they are now. david: right now, what are the gating issues -- the battery manufacturers, the manufacturers of the vehicles, and do they need to build new plants? kevin: fremont is pretty much tapped out. that plant was never much more than 400,000 units. more investment in production, but, again, what is the real, addressable market. if you look globally at 100 million units, is battery electric 2 million or is it 20 million. istever the demand level

will determine what automakers get involved. question? you have a know, in i wanted to the next five years, and you think internal combustion cars are going to be greatly reduced in production as eb car start picking up? effect onve a major the long-term prospects for labor markets. kevin: i think that is the question right now. take the hundred million units a in hybrids i think are really the best alternative, the most practical alternative because you have the range extension of the internal combustion, but that does not disrupt as totally as battery electrics will. take the hundred million units. let's a battery electrics are 2 million. there are not going to be a lot of legacy automakers fighting. they will fight over the 98

million, not the 2 million. if the number is 20, more automakers will say we want a piece of that. it depends where the price level is. david: and it depends what you mean by car -- passenger vehicles -- that is going one direction. we see ford getting out of the business, g.m. cutting back, as opposed to truck and suvs. kevin: that we'll never reversed. that is not a gasoline price issue anymore. we will see that the truck mix in the u.s. will be over 70% for the third time this year. 2018 will be the last year ever mix is below 70% and it will wind up somewhere around 69 and change. david: general motors has put a big bet on autonomous vehicles, and they have said they will be commercial during 2019. can they catch up to tesla? does tesla have a formidable lead? kevin: argument, general motors isahead of tesla, but that

technology that works if you can 24/7, 365. there is a difference between fixed route vehicles versus what you and i can buy, and use, the full-level, driving. busou are going to run a route autonomous, maybe that makes sense, but the cost of the system for the consumer is just prohibitive. alix: what is the overall auto sale outlook for this year? are we too pessimistic? another 17.2 in 2018. this is legitimately in the usa 16.5 to 17.2 market. shocks,macroeconomic there is a downside to that. david: when it comes to the u.s.

market, it is not how many units you may, but how many units you make off of them. if you can keep going, you are making more money per unit. kevin: right. you are doing more with less. the thing that a lot of other people talk about, this is not really consumer poll of more tracks. this is where manufacturers are making money can they see the benefit of the heavier truck mix and that is what is being designed, marketed to the consumer. it is as much the manufacturer pushing consumers toward the truck side of the business as opposed to consumer say and i want to ride higher, have more utility. david: we are on the verge of the big auto show in detroit. what will be the big story out there, kevin? kevin: it is funny. thes the last year that detroit show is in january because of ces. it is difficult to do a full display at ces and have

something going in detroit the very next week. it seems like the last couple of years ces has stone the thunder from the detroit show. alix: i should point out, too, that i have oil companies saying are you going to be at ces, and i'm saying what are you going to do that? and they are doing a lot of work. literally they are intertwined. i would -- i would not have seen an oil company at ces when i covered it 10 years ago. times are changing. when you look at tesla with deliveries, overall they missed estimates with model threes. they want up cutting prices by about 2 -- 2000. nomura out with a note saying for deliveriesr will be as good as it gets. we have been talking about run rates.

david: the model s model, they are in line with a 100,000 run rate. it is about $35,000 price point kevin has been talking about. alix: kevin, thank you for joining us. for more we want to turn to oil here. talking about cars, oil -- president trump tweeting gas prices are low, excited to go down this year. "this would be good." in case you were not clear, president trump likes lower oil prices. oil cap units worst annual showing since 2015. it was brutal. rick, what is your oil price forecast? have we hit the button -- bottom here? rick: we might have hit a short-term bottom. i was on your november show,

and we were already telling clients for almost a month at that point that the $76 in wti oil is not only a cyclical high, it is a secular high. my belief is you are not going for years0 oil again and years to come. dare i say ever. i know in this business you do not want to say ever. i think the game is over for oil. there are basic fundamental reasons that say over time, including technology growth in the energy space, and renewals -- every solar panel sold reduces demand for crude oil over time. there is a shift underway that fundamental analysts on wall street completely got wrong. they helped me looking at the -- helpedaviorally call the top. everyone was looking at $100 oil when we'll was in the upper-60's and 70's. we kept telling clients

something is amiss. open interest was declining in future contract -- contracts. that means shorts are covering prior longs. that is not what a bull market looks like it we were cautious about aching oil was going to go higher. with the huge decline we have $30 a barrel -- something has changed in the oil market. it is my belief this is the first leg down of what is ultimately going to be a move back to the low-30's. you're not going back to $70 an hour oil -- $70 oil. russia had the highest production. the u.s. did a few months ago. there is no issue on the supply side. overall, think demand slowly comes off and the market is pricing in some type of change.

brad, you mentioned your counterintuitive play is energy. do you need a higher oil price, or is it a pure valuation play? brad: i think it is about the oil price, stability. i think rick raises some good points. i have been saying for the past several years, we are in a new trading range. a general50 to $70 is tendency. it can go above or below. the question is not supplied, but the marginal cost of production, which is typically $35 to $40 for the u.s., which is a price setter. i see other players, saudi arabia, trying to manipulate prices. it will not go much about $70, but equally, not below $45 or $50 on a regular basis could i think we see it bounce back as marginal players get squeezed

out. alix: you are looking at refiners, midstream, where is it? some of the fracking companies in the usp and they are starting to show capital discipline. they have some chances to capture cost savings. we saw this in the last oil price downturn. and there is more upside there than elsewhere in the world. alix: turning to other commodities -- it was just oil that got hit. it was the worst performer, but also coffee and soybeans, that is purely, in some way, a brazil play. this is agricultural commodities versus the brazilian real. you can see the negative correlation at over 5. what you think there? rick: coffer needs to hold at about $.90 to one dollar a pound. over the last 17 years that range has caught the bottom. this is a major shelf it needs to hold.

if it does not hold here, i 75%k the 1992 low was near -- $.75 to $.80. for $92 area is important coffee. soybeans has multiple bottoms. in and around here, too, is where the support has been for multiple years. looking at the goldman sachs commodity index going into this year, it looks terrible. the crv, the same thing. if the dollar slides off, you could get some type of bid. the long-term stuff still says the dollar is going higher. you look at the long-term projection, years out, 105, 110 in the dollar index -- near-term we advised clients to months ago to get out of the dollar and 96 and a half.

that was virtually the peak of the move. today it is probably up. if it recs under 96, we might get more to the commodities. the last piece of if dish of this is almost every -- of this -- it is every analyst not tough to make a call that oil can be up. as far as i'm concerned, the big call is where do you sell oil? if i am right that $76 is the peak, think of an abc correction people just sold off. alix: still a rally call. great stuff. and bradignor mcmillan. thank you very much. david: we talk about soft commodities, we talk about brazil necessarily. we have a new president of brazil who addressed congress after he was sworn in and he said it is time for new opportunity to rebuild brazil. >> we have to look at this as a

rebuild ourty to country and rescue the hope of compatriots. i am sure we will face huge challenges. but if we have the wisdom to hear the wisdom of the people we will achieve our goals. julie,we are joined by our sao paulo bureau chief. a new opportunity to rebuild brazil. how is he going to do it. julie: so, that has been his campaign motto, rebuild brazil -- out with the old politics, fight politics -- fight corruption. he struck the same tone to his supporters. it is a big task and he cut down the number of ministries so far. we are still waiting to see the actual measures the government is going to implement. other the markets

telling us -- what is the stock market doing? are they waiting and seeing. julie: it is a good day for the markets. peers --outperforming the real is outperforming peers. for investors have been skittish .bout bolsonaro local investors are excited, hopeful that he will do the pension reform, deregulate the economy, cut down on red tape, and get the brazilian economy to grow again. excited fors, less now, waiting to see what happens. david: thank you very much. alix: thanks so much, david. on tesla falling on the 7% in the premarket as model three deliveries for the fourth quarter miss estimates. we will break that down in what i am watching next. this is bloomberg. ♪

alix: here is what i am watching -- tesla hit in the premarket. prices, model three deliveries for the fourth quarter missed estimates. rick: not by a whole lot. i think the bigger concern is the concern on a few levels -- they are only starting deliveries in europe in january or february. there was a hope they would have everything arranged for those markets to pick up any slack we may see from the tax credit here in the u.s. dropping in half. it has gone from 7502 $37.50 as june 1.-- 3750 as of there is concern about how much demand will slip off because of the tax credit dropping off. we have not seen that happen with any automaker because tesla was the first to reach the

200,000 eb sales threshold in the u.s., and there is concern about how we -- how demand holds up at -- going forward. david: tesla's down a little under 7% right now, but it ramped up a lot toward the end of last year. there might be something to give back. there was ank report out of number of this morning flagging a concern that this may be as good as it gets for the next quarter or two. i think that report is, maybe, sort of proving valid and consistent with how the market is reacting to this news this morning. david: what does -- alix: what does tesla need to do now -- what is the tweet we need? [laughter] craig: they need to make the february deadline for china. if there is any slippage in getting the car out to those markets, there will be concerns. they need to put aside concerns about the mala getting the car for those markets and making are dotted and the

t's are crossed. production getting started in china -- maybe getting the model y out. it has been a while since we have seen elon musk having a flash event for a new model. alix: thank you, cry chewed out. "bloomberg markets -- the open" coming up. a tough day in the market so far. follow-through selling after the worst year for the s&p in -- since 20 -- 2008. the safety -- huge move into bonds, huge move into the yen. this is bloomberg. ♪

jonathan: from new york city, i'm jonathan ferro. the countdown to the open starts right now. ♪

jonathan: coming up, new year, same old problems. u.s. equity futures dropping, investors gripped by fears. another sign the world's second-largest economy is struggling. on shutdown day 12, congressional leaders heading to the white house. futures kicking off 2019 down hard by 1.63%. in the treasury market, yields are up three basis points. euro-dollar, 113.72. >> uncertainty. >> uncertainty. >> significant uncertainty. >> uncertainty about trade. >> trade policy. >> i feel terrible for jay powell. >> the liquidity question is critical.