manus: good morning from our middle east headquarters in dubai. dani burger in bloomberg hq. treasury yields surge with the two-year topping 1% since early -- for the first time since early 2020. a drone strike on abu dhabi sparks tensions. crisis planning.

finance ministers meet in brussels on how to tackle challenges of energy and russia. and our the bond markets really under siege? is this the foothill of a taper tantrum at the 2013? state street have warned this is the fed fighting the ghosts of inflation, which will fly away in 2022. good morning. dani: good morning. it comes during the fed blackout period. there has been the run on the bank many had feared. we love a nice round number. the two-year the highest since february 2020. nearly 15 basis points on the front end of the curve in just two days. manus: higher and higher. this is your two year yield up over 2%. the short end of the curve has a frisky, risky move.

the question is what happens next with balance sheet reductions? by the way, we run a risk of shock. that is when the wheels come off the bus. >> the dreaded bar shock. speaking of recessionary fears, 530's curve just went to the flattest since the peak of the pandemic. we have covered the bond market thoroughly. despite these fears, it is maybe not totally sanguine, but the market is not selling off so severely. we are looking at the s&p 500 e-mini session down 0.5%. not bad seeing superlatives in the bond market, but big tech taking the brunt of the hit. a stronger dollar, finally some dollar strength given the move we have seen in the yields.

nymex crude up one point 5%, its strongest since 2014. manus: we are shaken to our boots. oil market, brent at the highest since 2014. geopolitical risks during in our region. yemen's houthi rebels claim they launched a joan strike -- a drone strike on the uae. what did they strike? what has been the response? our oil trading reporter is in singapore. the oil market is flying higher. i think that is more to do with the goldman note. talk me through the bullishness in the oil market this morning. >> drone strikes are coming on the backdrop of already bullish markets. crude markets are rallying on

more than expected demand. gasoline markets are all doing really well. some countries have recently imposed restrictions. coupled with supply disruptions and production shortfalls, the markets are in a tight balance. it is something we are also seeing in the physical markets in asia this morning. russian crude is a favorite of china, trading at much higher levels. dani: thank you very much. that is our oil trading reporter elizabeth low. the bank of japan has adjusted its views on inflation for the first time since 2014.

let's get to juliette saly in singapore. it seems the big market reaction is to u.s. yields, but what are you looking at in japan? >> a chart on japanese price pressures, not sure what is going on with our gtv data. we are focused on oil. we did have this change from the bank of japan to the inflation forecast for the first time since 2014, and what is interesting is they are saying for the first time they can see the possibility of inflation outstripping protections and not just undershooting. there is concern that price pressures which have been rising at the fastest pace since before the pandemic could be stronger than what they are when you flip out the government measures we have seen. also, gasoline prices, you have inflation pressures expected at their highest since 2008. that was a cautious time from the bank of japan, still only seeing the inflation target at 1.5% by the end of march 2024.

the market has reacted as you expect. there's going to be that divergence as the fed tightens and the boj stays on hold. also the yield movement we are seeing and the japanese yen to fall against the dollar. the u.s. dollar strengthening by 0.2%. manus: everybody breathing a sigh of relief they do not see inflation coming back anytime soon. thank you very much. we are focused on dollar-yen. let's pivot to the chief white house medical advisor anthony found she. he says it is too soon to say whether the omicron variant will shift covid-19 from pandemic to endemic. >> there is a question as to whether or not omicron is going to be the live virus vaccination everyone is hoping for because you have such a great deal of variability with new variants emerging. manus: everybody is moving and

traveling between pandemic to endemic. israel has data on the fourth dose of a pfizer shop. what is it telling us? >> according to this preliminary data from a trial in israel, its is a fourth dose of the pfizer-biontech vaccine was insufficient to prevent infection with the omicron variant. the result comes from 154 medical personnel and it is two weeks from the start of the trial. the fourth dose helped to raise antibody levels, but that is still just a partial shield against omicron. this is something we should continue to watch as we try to enter the endemic stage of the pandemic. it is more to see if further

data will provide similar evidence. dani: thank you very much, and bless you, manus. now let's get our first word news with juliette saly in singapore. >> organizers of the beijing winter olympics which start in less than three weeks said they will not sell tickets to the general public. a small group of spectators will be invited to attend and will be required to follow strict protocols. beijing residents are being urged to wear masks and gloves when opening overseas mail as authorities try to trace a local omicron case. xi jinping has called on nations to secure supply chains and prevent inflation shock. he addressed to world economic forum by video link. china is seeking to limit economic instability as xi jinping seeks to keep power in

the second half of this year at the leadership conference. >> the fundamentals of the chinese economy are characterized by resilience, potential, and sustainability. we have every confidence in the future of china's economy. >> the balance sheets of ireland's biggest banks have risen by two thirds since the brexit vote according to an irish trade group. banks regulate by the ecb saw their balance sheets grow from 300 billion euros at the end of 2015 to 500 billion in july 2021. citigroup, barclays, and bank of america are among those to set up expanded units in ireland. more than 70 employees fired or disciplined amid efforts to address allegations of sexual harassment and misconduct. the wall street journal says -- worried about activision's

reputation. the company was accused of fostering a frat boy culture of discrimination. global news, 24 hours a day, on air and at quicktake by bloomberg, powered by more than 2700 journalists and analysts in more than 120 countries. this is bloomberg. manus: thank you very much. coming up on the show, traders intrigued by the march rate hike bets. dani: plus brent crude extending gains to a 2014 hi, but our markets underpricing the risk for geopolitical tensions in eastern europe and the middle east? this is bloomberg. ♪ ♪

dani: welcome back to "bloomberg

daybreak: europe." turmoil in treasuries this morning as we get the first cash trade of the week. what does it mean for your equity market? we are looking at s&p e-mini futures less than half a percent drop. some resilience there. but of course the pain is concentrated in nasdaq futures down more than 1%. we get treasury yields rising. that also means small caps. we will be seeing more value rotational shift as we continue. manus: risk is on the ropes. if you hone into the sovereign bond market, this is in the u.s., this is australia. the treasury markets are beginning to unfold in terms of g10 and the rate space. we have a bond market which looks as if it is under siege.

it is the speed that matters. 30 bips since the start of the year. talk to us about whether we are in the foothills of a new paper tantrum -- taper tantrum. >> thank you for the cheerful layup. we are probably not at the foothill of the taper tantrum. this means the first interesting observation is you have lost as much on treasuries as -- they were not a great investment and they are not going to be the rest of this year.

of course, pricing in tightening way too late, the long end is moving up but it is not moving up more. in the financial space, this is the normal reaction. dani: am i getting hints of potential policy errors from you? >> let's imagine -- there is no clear definition of a policy error. if the central bank has a goal of stable prices and we have 7% inflation, i would not say we have a reason to celebrate how well we achieved our goal. it is very unfortunate the tightening comes so late. a clear policy error would be if

they keep tightening until inflation is down. there is nothing that new in monetary policy. a lot of economic stimulus and suddenly you have a strong economy and high inflation. manus: it is normally me that is fishing for a headline. i'm going to have to push you for a while. you warn on duration, this looks to be the shorter and. -- the shorter end. are we anyway exhausted in this flattening? are you wary of duration? >> we are underweight duration.

we are underweight more than two years duration. we could have up to 100% and we have zero. we have 100% equities. we think they are going to keep moving up more and more. what are you going to get by holding it? as a free investor, what you try to trade off -- today is terrible. i don't think it is attractive in the long term. dani: 100% equities, what are you doing for your diversification risk at that point? if you have no bonds as a hedge, what do you do within equities to make sure you are not just exposed to that risk? >> well, i am exposed to that

risk. i am not managing as if the world was behaving as it was hoped when the portfolio construction tools were designed. we are not living in the 1950's. we are closely monitoring how the world is doing. algorithms do not panic. i don't panic much either, but they don't go very crazy. once in a while, they signaled to us this is too much. if this continues, we are going to sell 40% of our 100% equities. if the fed over hikes, we are going to go at that time. the way of managing risk by

holding bonds and saying what matters is time in the market, this year the s&p is down. there was no diversification. we are looking for the upside and managing the downside through location changes with a fully rational algorithm approach to reduce the risk. manus: you are actually -- you know on a good day you are entertaining. i love a bit of human error personally. you are going for the upside. 100% all-in on equities. where do you want to be most

long? where does the algorithm that you have to be most long? is it in the u.s.? outside? what has the algorithm intimated to you? >> if we look at the trade of the year, everyone thinking this is going to be the year of europe and emerging markets, people are underestimating the tail risk. in our u.s. dollar funds, that is the center. the key is to understand, what is the central bank -- what if the central bank has hike a lot more? let's say the u.s. fed has to hike to 3% or 4% and then what would happen? the u.s. got a recession, and europe would go bankrupt. i would rather hold american equities than european equities.

the downside risk is just much larger in europe. dani: u.s. exceptionalism six around even in a scenario where everything goes belly up. you are going to stick with us. that is mads pedersen. coming up, brent has extended gains to 2014 highs. our markets underpricing the risk of geopolitical tension in eastern europe and the middle east? we are going to discuss that next. this is bloomberg. ♪

dani: welcome back. brent oil has rallied to 2014 highs. geopolitical tensions stir in the region. yemen's houthi fighters claim to

have launched a drone strike on the uae. still with us is mads pedersen. it is not just the geopolitical tension. you have goldman calling for $100 per barrel oil. how did the bots take into account triple digits on oil? what does that mean for cross asset allocation? >> it is not so typically a reflection of drone activity. when we have strong commodity prices, it is typically a reflection of strong growth and demand. we gave it a larger weight as a cyclical signal. we talked earlier about oil prices at a seven-year high.

i don't think we have seen the global economy grow for many more years than seven. the reason the oil price does not go higher, that is because there is a risk of the world economy spilling over. manus: it depends on the pace at which it rolls over. that is the key issue. we are dealing with ukraine, russia, the u.s., and nato, a complication of global risk. we can feed variables in -- how do you see geopolitical risk? what is my biggest risk with putin for markets this year?

>> the biggest risk is probably that putin has a domestic agenda which is aligned with the global agenda. that means he has an agenda where if russia is not doing particularly well internally, it would be bad if ukraine emerges as a country doing very well. he can do two things at the same time. position himself as a strong defender of russia, what he is portraying, and he can take on the humiliation of another country. it is larger than the baltic states, but he can play with that. we know he likes to be taken serious, like most men around our age.

that is how he is playing it. you don't need an algorithm for that. the worst thing is if he starts killing human beings. dani: what do we need to wait for to price some of this into the market? we have seen this in russian assets, ukrainian assets. at what point is there more cohesion? >> at a time when this is not a conflict which involves ukraine and russia and everyone else on either supply chain or a risk basis, and i just don't see that . germany and russia have not solved this issue. the gas has to flow. when it happened last time in 2014, i was on ski holiday. i was on a ski lift. my comments back then was this

is extremely important. i think the two-year is much more important. manus: we have to draw a line under it there.

dani: good morning from bloomberg's european headquarters. this is "bloomberg daybreak: europe." bonds battered. treasury yields surge. oil markets roiled. brent hits a seven-year high as a drone strike on abu dhabi sparks tension.

an crisis planning. finance ministers meet in brussels on how to tackle the challenges of energy and russia. it is all about this turmoil in bond markets. two yields heading above 1% for the first time in quite a while. all the superlatives stacking up to be the most since pre-pandemic levels. what effect is that going to have on risk assets this morning? >> you know, to quote mads pedersen, he does not like duration. long-duration would be a poor investment. there you go. dani: exactly, 100 percent equities. i tried to give him grief on that. he said that is where you need to be positioned. when the time comes, switch to treasuries. i love it when people bat me down. sometimes i get a little bit too

much in my head. manus: when you are as unconstrained within algorithm fund, you can do those bold pivots. if the fed goes too far forward in terms of rate hikes and balance sheet reduction, he would be prepared to vault into 100% bonds, but it has to be in an extreme overreach by the fed. equities are repricing. we have risk trashed as far as growth value story is concerned. the nasdaq bouncing off lows just under 1%. the dollar, little bit of slippage. nymex crude rested up. this is an important line for joe biden. a drone attack on the uae. they are going for $96 this year.

we have had a heck in 2021. brent made 70% gains. eddie van der walt joins us now. cyclicality is good, growth will do well. set the stage. >> it is such a tough year. you have big calls. 2022 is shaping up to be the year of management i think. buying the basket is not the way to go. i think brent benefits from the geopolitical risk.

those seem to be short-lived. if i look at the fundamentals, we are starting to see shale production picking up and opec would like to pump more if the price does not drop too much. from the supply side, i think the price probably is capped. maybe it goes higher in the short term, but over the year, i think volatility just dies out. copper on the other hand, a very exciting metal. even though it is tight compared to oil, i think it can significantly go up. dani: you know what has not had an exciting year's gold. what is going on with this precious metal that it cannot be this classic inflation hedge that the gold buffs love the metal for?

>> it was just such a disappointing year last year. we are talking about 7% inflation. for a lot of people, if you told them inflation is going to run back, they would have gone straight to gold. gold responds to a lot of different drivers. primarily the u.s. dollar, dollar strength is going to weigh on gold. do we get a repeat of 10% in real terms in the gold price? i don't know. gold is a wounded animal. on the commodities front, that would be that. dani: thank you for your insight is always. now joining us is the director and head of eu metals and mining research at rbc capital markets. the calls are coming fast and thick for a new super cycle in

commodities. goldman talking about $100 a barrel oil. bank of america also talking about that. do you see a coming super cycle for commodities? >> i think there's a lot of evidence starting to point that direction. you take a look at the long-term supply demands, the constraints we have in terms of the supply, it is so much harder to find materials. so much harder to purchase it. on the demand side, gold is going to look a lot different. we are going to be using different commodities in ways we have not before. from that perspective, things are setting up very well. what i would say is i think the super cycle may have a difficult start this year in china -- if china does have a wobble like we think. there is a counterbalance in the shorter term, but over the long-term, it is hard to see

things not moving in a direction where we have sharper, tighter metals prices. manus: good to have you with us. let's talk about risk and reward. stars are aligning for the mining sector. you are joining the chorus. you might be standing at the front being the soprano or the tenor, but your joining the chorus. what is my downside risk on china? if it wobbles, what is the risk? copper? ore? other precious metals? let's run through the risk side. >> i am more of a tenor. the downside you have right now from china i think is very much focused on the property sector. the knock on implications from evergrande and the policy china has done to try to rain and -- rein-in the debt.

you stop the flow of funds, it is a natural disconnect. we all sit down with china and think, plain economy, all these mechanisms they have they can managelot easier, but there are still disconnects that can happen. this has been such a big pickup over the last four years in terms of consumption, especially for steel. we think the weakness is most likely going to come in iron ore. look at chinese steel production back in the middle of last year, 1.2 billion tons. it is now down to 800 million. it is recovering, but once we get past the new year's ola picks period, we think we will see and level of demand with how low the sales have been, that you see a bit of an air pocket in the steel market. that is going to push iron ore prices down. we have a strong preference at

the moment. dani: let me take you from risk in china to risk in europe. we had a large group of europe's leading metal producers call upon continental politicians to ease the energy prices. we have seen a lot of these energy intensive industries, manufacturers really suffer. what has that demand disruption on your end looked like and how much further could it go? >> it is really fascinating. we never had a situation since the 1970's were we don't have enough energy. it does not look like over the course of the winter that is going to change at this point, especially with what is happening with russia and ukraine putting an asterisk on that. you have metals like zinc and aluminum that are power intensive, where we are probably going to not have as much as what we would have been bargaining for previously. you know, companies have hedged

power contracts. it makes sense to sell power back to the market than it does to sell metal once you get to certain price levels. we are at a situation where the demand shock on that could be quite large. reducers are right to be asking for policymakers to try to find more. manus: when it comes to assessing where i want to be exposed, what goes through my mind when i look at the minors is, which group of these minrese -- miners have got the best portfolio to take advantage of ev innovation and -- >> iron ore does put a company like glencore into a lesser

extent anglo america above rio tinto. glencore has a portfolio that includes thermal coal, but other than that it has copper, cobalt, nickel, zinc, everything you could want. in terms of the longer-term outlook, anglo american are the ones position very well. you have iron ore and metals, platinum is going to be crucial for the hydrogen economy. you have commodities growing in terms of business in yorkshire. there is a divergence growing in terms of outlooks. that is adding to potentially the strategic changes over the next couple of years. bhp is going through a transition out of petroleum.

rio tinto concentrated in iron ore. how does that treat it as it goes forward? glencore and anglo american provide the path for 2022. dani: rio tinto yesterday reporting they have seen a solid gain in iron ore production. does that give you any assurance for rio tinto? is it too heavily concentrated? in iron ore. >> they have a really interesting aluminum business which is moving faster than peers. you also have a copper business which is growing, albeit there are issues with the portfolio. the iron ore business has been struggling. they have to put a lot more money in to keep at levels that are lower than what we previously thought they would get to. the good news is this something

-- what it does is it provides a less favorable outlook for rio tinto. manus: gary is listening in and i'm sure he is happy with your call. tyler, thank you. tyler broda at rbc capital markets. 2021, a record year for the pressure on the shipping industry and earnings are expected to remain elevated into 2022. the big take on big ships. this is bloomberg. ♪

dani: welcome back to "bloomberg daybreak: europe." it is time for the bloomberg big

take and it has been a record year of profits for the shipping industry and earnings are expected to stay elevated well into 2022. economists are warning that persistently high prices for transportation and logistics globally are stoking inflation and clouding the recovery. brandon, a fantastic piece. you quote here a vegetable processor based in rural india who says the exploit our desperation. this continues to be an issue. why is this -- why are sky high ocean shipping rates not going away? >> it is a factor of supply and demand. you have strong demand in the u.s. for imported goods. on the supply side, there is a finite number of ships and containers for those to compete for. basically what you have is a lot of strain on capacity. you add on top of that lockdowns in china, congestion on the u.s.

west coast, and you are looking at a supply and demand scenario stretched as thin as it can go. manus: when you raise prices, it is hard for them to come back down. the question is, after this ramp-up in prices and shipping, how much will endure on the global inflation outlook? how long will it last? how long will it stick? >> the longer this goes on, the deeper embedded rates get into the economy. you have a stock market for ocean freight and a contract market for ocean freight. the stock market is volatile. it has gone over $20,000 for a 40 foot container. the contract rates are negotiated between carriers and customers of those services.

those are also skyhigh, as much as 200% higher than a year ago. the economists we talked to, and one of them works for the kansas city fed, saying these are getting locked into longer-term periods. if you are paying those rates, there is only so much you can take before you pass it on to consumers and it leads to inflation. dani: can regulators do anything at this point? >> the u.s. and the european union monitor the carriers to make sure there are not antitrust rules that are broken. they have not found any at this stage. but they are continuing to monitor it. a lot of critics would say they do not really have the tools to come down hard on the carriers if they find there is behavior that is anticompetitive. manus: ok. brendan, thank you.

our trade editor with the latest. the bank of japan governor kuroda is channeling his inner powell, saying the bank of japan does not debate a rate hike at this meeting. this goes back to july 29, 2020. we are not thinking about thinking about raising rates. the markets talking about seven hikes in the u.s.. kuroda channeling his inner dove. assuring the market, we are not going to countenance raising rates. dani: maybe powelling, channeling a powell of old, not the most recent powell. we are seeing the yen fall 0.3% but that may have more to do with the stronger dollar following that spate higher in u.s. yields. coming up, the global

geopolitical risk story. the effect on the oil market. this is bloomberg. ♪

manus: it is "bloomberg daybreak: europe." the oil market expanding gains. geopolitical tensions in eastern europe and the middle east. let's get to our reporter in brussels. maria, good to see you. the prices of energy are causing havoc across the world. what are the discussions between the european finance chiefs? >> yes, today the meeting of finance ministers continues in brussels. it started yesterday. this was top of the agenda for

every minister i spoke with. i had conversations with the germans, the dutch, the french. they said the same thing. they look at this energy story because of the impact it has on inflation, but also the impact on real-life prices and purchasing power, particularly this year, for the french. remember, this is an election year. emmanuel macron said by the end of his term, the purchasing power of the french would increase and that is going to be troubled by the bill we are seeing. we know what it did to eds on friday, with french electricity companies. this is definitely an issue that is top of the agenda for europe, but it has many different ramifications not just on the economy, but also the geopolitics we have talked about for weeks on the russian front. dani: paul, let me bring you into this. geopolitics front and center. we have this attack in abu dhabi

, also goldman calling for $100 a barrel of oil in the third quarter. it is a tangled web. what do you make of this? >> yesterday in abu dhabi, another bullish factor for oil markets. it is not as if there was a shortage of bullish factors before yesterday. the oil market did not react much yesterday. european and u.s. traders did not seem concerned with the drone strike. asian traders most certainly are. that is where most of the oil from the gulf region goes. if these drone attacks which have been claimed by yemen's houthi rebels continue and a regular thing, it will be a problem for oil traders. manus: we want to pack a lot in. what is the most important thing

in terms of the next step for the uae? retaliation? what is it you think traders are watching next? >> first of all whether there is going to be a repetition of these attacks. the uae is not talking about retaliation and it has not come out with aggressive rhetoric. the other thing is who was responsible and was there iranian involvement. that will be key. if it turns out or if the uae suspects iranian involvement, that would be bullish for oil as it would raise tensions. dani: maria, quickly from you, this is a lot to square in terms of geopolitical tensions. what can european governments do when it comes to tackling their energy crisis? >> look, briefly, two things. there is a debate about joint procurement, joint purchases.

in the past, it never really took off. this is being presented as an option. the other thing is the energy transition, whether or not to accelerate, whether to go for nuclear, back in the debate. the other thing is how do we guarantee gas supplies, and this is where germany comes into focus. a very ambiguous relationship with russia. we are still waiting for the certification of the nord stream 2 pipeline. nothing will get approved at least until the summer. dani: of course, energy a big story, but it is the turmoil in yields. is risk on the ropes as we look at the two year yield jumping above 1%? manus: and where the fed fund futures go, which is the indicative future interest rate price. so the bond yields unfurl. and that has chief seven -- g7 ramifications.

this is having a global contagion impact. some would say the nasdaq down only 1%, it is not kicking itself, is it? dani: it is not a good sign if it can withstand higher yields. markets up next. this is bloomberg. ♪

>> good morning. welcome to "bloomberg markets: europe." we will take you through all of the market action at this hour. here are your top headlines. oil markets rallied. brent hits a seven-year high as abu dhabi spikes tensions. we discussed