tv Bloomberg Daybreak Americas Bloomberg December 7, 2016 7:00am-10:01am EST
in the markets, banks stocks keep flying. futures are for. 1% onth of about 1/10 of the dow jones. the cable rates dropping to 12596. a little bit softer. alix: here is what you need to know. china's reserve of foreign currency is the largest in the world, dropping the most since january for an eight year low. will be named u.s. ambassador to china. u.s., jp morgan and bank of america are forecasting fourth-quarter trading gains. the ecb begins its last meeting of the year today. base that will extend the online program. that is what you need to go. david: let's go back to the
decline in currency. we winter to our chief asia correspondent. talk about the report of this in the month of november, but also in a longer contact of what is going on with foreign currency reserves. >> we are not anywhere near a classic emerging market but alarm bells are going up. we are seeing china's reserve steadily decline every mor mont. companies will say they are moving money out of china at a time when economic growth is slowing. not all of the foreign reserves is due to intervention. some of it is down to valuation impact on china's own foreign exchange portfolios. with the dollar remaining strong, the fed rate hike expected to come.
the dollar will strengthen. more pressure on capital outflows and more pressure on foreign exchange reserves. david: despite the efforts to prop it up, it continues to decline. we have a president-elect is complaining they are currency manipulators and are trying to drive it down. the governor of iowa is likely the next u.s. ambassador to beijing. is it too early to get a read on how china will react? here i saw one analyst today who tweeted that. is being tempered as a possible positive move for the china-u.s. relationship given the expected tensions ahead and how mr. trump tackles china on the trade and currency markets.
if there is an ambassador that has a long-standing relationship that goes back to 1985 when they first met in iowa, the view here is that it is positive, but we have to wait and see how it plays out. david: thank you so much. jonathan: let's continue the conversation with david rosenberg. great to have you with us on the program. help us put these two things together. offenses they are integrating the currency, trying to drive it lower. he is saying one thing and a dozen other with potentially his appointment as ambassador to china. how do you gauge it? david rosenberg: i put the politics aside and maybe this is a case where we will take all caps at his word -- take donald trump at his word. tariffs?ng to slap on
if so, how big will they be? we saw an late on the cards over the weekend with his tweets. the relationship with china, although it will remain strong, is the most important relationship the united states has. in terms of trade flows and the states where donald trump won the election in the battleground midwestern states, it will be very important for him to at least if he is going to be doing one thing in his presidency is attacked this right side -- the trade side. chances are very high he will move as well as he could to regress this record high trade deficit. jonathan: there's no way the market position for that. the market is helping those things do not come about. you can call that a manipulator. the significance of which is not that big. on a diplomacy stand scalia said his, but will the markets care? : i doubt theyg
will be the 35 to 45% that he has been talking about. he would not be the first president to slap tariffs on other countries. looking at disputes or different import duties that have been put on, where donald trump said during the campaign that these trade wars have already started, he was not wrong on that. it is hard to handicap. the bottom line is that was a very over campaign pledge as to who will deal with china and mexico in terms of trade issues. i don't know if you will go as far as 35% or 45% on terrorists. -- tariffs. that will be a real killer on the u.s. consumer. he raised the cost of living for
a lot of low and middle income households that shop at walmart, target, home depot, so on and so forth. do i expect there to be a different relationship with the u.s. and china going over? i fully anticipate that. how the markets respond, we will see.they have focused on a lot of the good stuff that will happen. deregulation, not trade issues. alix: the market to me is truly stunning. if i put these two conversations together, this does it for you. the top panel is the dollar index. dollar index is the blue line. the shanghai versus the s&p. s&p is the pink. the shanghai composite is the purple. the horrible august we had is shaded. if you added august with valuation the threat of a trump presidency and the 40% tariff, how do you explain that to me? david rosenberg: it comes down
to the comment earlier that what are the markets focused on right now? if you take a look at the stock twoet, we are talking about sectors that have carried the load since november 8. it has been financials and energy. energy is it is. space. in its own with the opec meeting and the move, the financials, that is the easiest thing trump will be able to do, water down dodd-frank. are aboutinancials the only group going into the election you could have considered to be undervalued. they are being re-rated right now. that is perfect sense. the point about trade, the markets have put on the back burner or are dismissing. the markets are saying all the best of trump might do, we will handicap that at low odds, but
the good stuff he will do, we will handicap that at high odds. jonathan: i think the easiest thing he could do is something with the executive branch on trade. it will probably need to have financials because he to have congress to get that through. why are the market supplying the low probability outcome for something that is easier for him to do at a higher probability outcome for something that is harder? david rosenberg: i think there is more widespread support to take the to make it off the banks on both sides of the aisle. on the traitde side, i don't disagree with you. you have to take a look at the market pricing action and come to the conclusion that investors do not see that as a real threat. we go back to this time last year were were were talking about china's foreign exchange reserves coming down with an expected. they are having to impose capital controls to stem the outflow. this is a situation we had last year.
it did not hit the markets until january. we had a super strong dollar, yields were backing up, fed ened, not just with the language they used. at the same time, it was around this time last year where the market started to focus on the foreign exchange reserves and capital flows of china. it is not hit the market rental until january. it is almost a perfect storm right now. if you ask me we will be sitting here today post-trump victory, the onset of the fed tightening, concerns over the banking system, with mario draghi will say tomorrow, if you told me the vets will be sitting at 11.5 today, there is widespread complacency. jonathan: they call it an easy uneasy calm.
david rosenberg is sticking with us. time to get outside the world of business. >> thank you. majority of americans say president-elect donald trump should not have to sell his business empire to avoid conflict of interest. that is according to the first bloomberg national poll since the election. far to tellgoes too him to get rid of his hotels and golf courses. say they are more optimistic about his presidency. in north dakota over the head of the standing rock sioux tribe call for oil protesters to go home. the pipeline remains stalled after the army corps of engineers refused to grant permission for it to go underneath a like. a song underwater earthquake
killed 100 people and destroyed dozens of people. it was a magnitude 6.5. in 2004, more than 100,000 people died after a great triggered a devastating tsunami. global news 24 hours a day powered by more than 2600 journalists in more than 120 countries. this is bloomberg. alix: we have oil prices moving slightly lower. headlines out of opec right now, saying they accept national decline for part of the non-opec deal and that non-opec producers have natural decline rates, not a net supply cut. they will take those a part of the overall cap. -- cuts. they say russia and oman are the only ones ready to cut production. meeting iner to the
vienna on saturday. 7%, banks are flying today, having its best day since april. one ceo is promising $1 billion more in cost cuts. no word on job cuts on top of the 6000 already announced it 2016. they are concentrating on cost cuts. it is the international wealth management units that have struggled. the cfo is looking to complete the staff cuts by the end of 2017. the market cheering that movement. morgan fined. the trio were accused of colluding on prices. wrapping up with western digital heading to its best day since late october. that company is renewing its licensing deal with samsung until 2024, raising his margins
questioning the agreement and execution of it at this point? alix: shocker? i will say yes. we will talk about that a little bit later. -- stockglobal bank stocks leaving higher. that is a clear line of the euphoria in the u.s. as j.p. morgan and bank of america talk trading and the reality in europe. joining us from london is jonathan. great to have you with us on the program. let's begin with global banks on an absolute tear. i was looking at deutsche bank up 8% seemingly nothing. what do you make of it? every time you like it and make a move, what are you seeing? >> in the last month commodities thanks of the world are up about 25%. moved.ave
that is good for banks per se. solid positive for 2017. we are getting towards the end of the tightening. in europe, we have seen the minimum capital requirements. of ae coming to the end lot of pain and restructuring rates. as jamie dimon pointed out, q4 looks like another bumper. jonathan: things look good for q4 building a q3. we could get more in the pipeline. cost-cutting doing even more. it will be a struggle for lenders in the year to come, shirley. -- surely. >> we have italy and the story during the routes about that
applying for esl loan. we have a new credit restructuring plan on the 13th. we know deutsche, rbs. are by no means out of the woods. a lot of this stuff has been right side now. technology investments will begin to pay off. only citigroup is the one trading below the price targets. what will do from here rolling into next year given everybody has now rallied above its average price target. jonathan: they have to play catch-up. great to have you with us on the program. i was looking back at j.p. morgan, the february lows when everybody thought the road was going to end. the stock up since then almost 60%. david: is a good investor. jonathan:. alix-- not bad.
alix: still with us is david rosenberg. this is the chart that i struggle with. hopefully you can help me break it down. the white line is that 10 year yield. blue line is the 10 year really. if we credit bank rally to the improvement in the yield world, the yields are rolling over a touch. real yields are headed south. what do you make of that? david rosenberg: there is three reasons why the base have rally ks have rallied. when we talk about oil, don't forget that when you had the bank stocks in north america hitting lows this entire the oil got below $30, the big concern was they were going to have to provision for a lot of loan losses of the energy sector.
you will see a release of these reserves. to me, we are talking about reality, but the market sometimes are priced on hope. we talk about the fact that the banks are now being re-rated because of the prospect we will have a totally different and less regulatory structure in front of them that will allow more risk-taking and credit growth. if you take a look at the buy list and sell lists under a hillary win or a trump win, it was clear. there is no doubt that a trump victory was going to lead to a rally led by financials and energy, and that is exactly what happened. the one thing we did not mention that i said before is the correlation between oil prices and the bank stocks is very high. david: there is a reality and i psychology. sometimes psychology drives
reality. even if we do not get all the rapport, is this really lead to loosening of credit? if you are jamie dimon, you're feeling good about your situation. without be stimulative in and of itself -- will that be stimulative in and of itself? david rosenberg: we know dodd-frank will be watered down, but we don't know to what extent. we have to make assumptions will mean for credit extension at the bottom line for the financials. i said before that when you take a look at the overall market, it is expensive. financials are one of the few that were trading at a historically low multiples relative to the markets. they have some upside. i say that the answer to the question in terms of the prospect that we will get more lending growth is actually one
of the factors that will keep the financials the leader for the next several months. i would not be surprised if there is more like to that value. jonathan: they were beaten up beginning of this year in a big way. what leads to happen in the year to come to justify the revaluation we have seen? or is it just that things were going to get worse, and now they are? david rosenberg: there is still a correlation with the oil price. that has been a big part of the story nobody is talking about in terms of freeing up low loss provisioning. the question will be, how much will the fed go? the banks are a good place to be because it's the best the front end of the yield curve. the markets are not even price 50-50 in june. if we get a repricing and the fed, the question will be the extent to which we get deregulatory situations for
the banks that allow for credit growth. my sense is that if you will draw the probability curve, for this particular part of the stock market, there is still more upside in the next three to six months than downside. i am more areas positive on. david: thank you so much. coming up, the european central bank convenes tomorrow in frankfurt to discuss the next move for monetary policy in europe. we look at what to expect, next. this is bloomberg. ♪
golf courses. 2/3 cedi's needs to choose between being a president or a businessman. he is planning to discuss his plans for his business next week. wordsf reposes say his and actions since the election leave the more optimistic. it is not unusual for a president-elect to enjoy a postelection bump. david: going into this election, the thought that very low approval ratings and have come way up. liking what they are seeing and what the media wants him to do versus what the people want him to do. alix: very different. jonathan: coming up, 24 hours away from an ecb decision. ♪ generosity is its own form of power.
you can handle being a mom for half an hour. i'm in all the way. is that understood? i don't know what she's up to, but it's not good. can't the world be my noodles and butter? get your mind out of the gutter. mornings are for coffee and contemplation. that was a really profound observation. you got a mean case of the detox blues. don't start a war you know you're going to lose. finally you can now find all of netflix in the same place as all your other entertainment. on xfinity x1. alix: this is "bloomberg daybreak." i'm alix steel. here is what you need to know at this hour. capital outflow, china's foreign currency reserves the largest in the world, dropping the most since january as the yen cells
that an eight year low. terry branstad will be named u.s. ambassador china. shares a story is the bank shares cost-cutting measures. fourth-quarter trading gains forecasted. mario draghi's decision. the ecb begins as last meeting of the year today. must predict it will extend on buying past march. jonathan: 24 hours away from that decision. you just positive up nine points on the dow. the banks outperforming in europe. 15 of the 19 in positive territory. one,able rate, a weaker lower with a 125 handle very briefly but now 126. downside surprise for u.k. data. yields on a low at 236. david: turning back to china now, china is spending his
foreign reserves to keep the u.s. from falling too low -- yen from falling too low. the chinese reaction so far has been muted, with brings us to our morning must-read. bloomberg is reporting on a commentary signaling to chinese officials worldwide that they should under react to what mr. khatrump says. he might think china is a soft persimmon easy to print if they do not react, but the country does not throw a tantrum to strive for temporary superiority or gain immediate gratification. joining us now is john lou. interpret this a bit for us. interesting to say it has been muted. there is an apparent appointment of the governor of iowa. help?t h it
john: good morning. saycials here in beijing what is spot on the campaign trail often does not transitive to policy so the mood here is wait to see what action is taken and not listen to what is set. the appointment will be taken with a positive note given his relationship with the president and that they benefited substantially from trade. david: take those two things you said, number one the relationship. what do we know about the relationship? ahn: president spends time in iowa when he was a young man as official so they knew each other from then. when the fruit was made to the u.s. vice president, they met up again and have had several
meetings since then. i went not estimate how close the two gentlemen are, but i would not underestimate how powerful it can be to talk to someone you recognize you have a past with. david: you also mentioned the relationship between the state of iowa and china, which is something people may not focus on, how significant chinese trade is to iowa. john: absolutely. china in a lot of ways really depends on u.s. agricultural goods. we are talking about soybeans, corn, and wheat, even stuff like omens and lobsters -- almonds and lobsters. one of the big beneficiaries of that has been iowa, south carolina, alabama, the south, all these agricultural centers across the u.s. iowa is representative of that. david: i also wonder whether it with the chinese
how important this appointment apparently was for mr. trump. we do not have a secretary of state nominated yet, but he has reached out apparently to pick the chinese ambassador. does that say something about where it is on his agenda? john: i would have to think it sends a message that china is very important for mr. trump. obviously, with some of the recent tweets, this might counter some of the thinking about what the actual attitude andtrump has about china is that he might actually be ready to talk trade. if you ask a governor who knows quite well the benefits of doing business with china. david: thank you so much. our own 24 hours away from the next ecb decision. will they extent the asset purchase program, and by how much? most think yes by six months and
$80 billion a year. either an of bonds to buy -- are there enough bonds to buy? this is the german sovereign curve, the green line. the white line is the zero. here is the rate, -.4%. below theonds that rate. we had a huge selloff in the bond markets so you have had the ability for the curve to move a bit higher and steeper. the ecb can buy more bonds in the german world, but how much does the extent the purchase program? maybe three or six months tops and then you will run into more issues. this point out what the problem is. on your terminal. the majority of it comes from germany, france, italy, spain.
they are putting all their eggs in the german basket. they are in proportion to how much the country contributes to the eurozone gdp and economic output. there is another option that some economists are floating and that is to move more into the debt keys so how much a country issues and ecb buys a proportion of that. that would be radical and you can bet those in germany was not like that. this chart comes from bloomberg intelligence. the blue bars are purchases based on the debt key. therotate into a debt key, ecb will be allowed to buy more italianate, almost 30%, versus germany at 20%. this could be a huge game changer. the question is, how will the ecb address it? jonathan: good question.
let's bring in the guest, simon wells out of london. great to have you with us. time magazine calling donald trump for men of the year for 2016. surprise, surprise. i wonder if that changes in 2017. what are your thoughts on how they recalibrate this program and whether we are focusing too much on the technicals of the program and not enough on the data? the data is not signaling taper, is it? simon: i think mario draghi's job will get a lot harder in 2017. if we go to the economic summit a case for keeping a loose policy is strong. core inflation's second-round .8. wage growth still decidedly absent. huge amount of slack in economies like italy and spain. the case to tighten is there. if you look at the paper next year, a lot of the support from
low inflation, low oil prices starts to come out. there will be a little bit of fiscal spending, but they had room will start -- the head room wane.thet to short-term data is pretty good . if we look at the mi, highest level in eurozone on the competency basis since the start of the year. people in germany thinking maybe we do not need to keep policy loose. jonathan: that opens up a big opportunity for the hawks on the governing council. december 2015, the ecb talked a big stimulus package. we don't have to have that debate. the base case at the moment right now and you are part of that scenario, a six-month scenario at 80 billion euros every single month. is that the base case and the best case as well? simon: it will to think these
technical committees the ecb has had, with our reporting on the constraints of the program we just heard about the lovely to think they suddenly found a new monetary solution to the ecb woes. the bank of japan has been trying for decades. post-brexit, the bank of england wanted to get in with monetary policy. for a lack of imagination, more qe government bond buying is probably the part they will take. to mean: someone repeated over and over again the boj and the ecb looking for ways to carry on expanding the balance sheet but recalibrating to enable them to do that. how do they do that? continuew them to expanding the balance sheet without bumping credibility issues everywhere? -- every quarter? simon: we don't know.
the technical committees want to spring something more honest than just an extension -- on us than just an extension. it is highly likely that always see is increase in the concentration limit on bonds. that should be enough to give us another six months without looking at the heel floor -- y ield floor or t, both of which would be toxic. jonathan: in the background of this is the attention of italy. it will be addressed in the news conference in the q&a. how does he tried the line between the world of politics and what is happening with the financial system and what is happening with spreads as well? simon: be ecb said that weren't italy to go into the program, it could use rnc's to content pressure on italian that, but others may be adjusting the capital key. options are limited.
there has been speculation in the italian press that italy may go into a small program dedicated to the banking sector in order to allow the ecb to use s, but there is a huge political cost for that. it is a very difficult situation.the ecb will say italy has to go into the program if it wants help. jonathan: great to have you with us on the program to have a look ahead 24 hours from the ecb decision. big decision for mario draghi to make. time, he has managed to kick away decision they may not have wanted to make. alix: the question is remember this time last year? member how much he disappointed a market? jonathan: exactly what we just discussed.
intervening in the businesses of individual companies? it seems we are all about to find out. yesterday, we reported on his tweet taking boeing to task on the new air force one saying we should cancel the order. in the afternoon, he took credit for the japanese telecommunications company investing in the u.s. and creating 50,000 new jobs here. joining us now to sort through the real effects of mr. trump's efforts is ivan, senior partner, chief investment officer, a director of research for tigers financial partners, and we are joined in washington by robert levinson. welcome to you both. let's sort out what the truth is about these air force one planes . only asays there is contract for $170 million. what is going on with this project? ivan: these are prototype planes with very advanced technology, but we don't know if $4 billion
is the right amount for the planes. in this week and when he got elected and why he is popular is that most people feel the government i does not spend money efficiently and this is his way of showing he will be on top of this and is much more engaged. this is the first time we have seen a president react and confront or interact with companies so he is showing a much greater level of transparency. enough, byr an president obama canceled an order for helicopters to $13 billion so he did take action in this particular area. ivan: but he did not do it as a tweet so nobody really knows. david: it does not exist. realistically, the way defense contracting with, how much influence does the president have in starting or stopping defense contracts? >> normally not that much, but in this case, donald trump is doing things a lot differently
than previous presidents. the government can terminate a contract for the convenience of the government. they have to reimburse the contractor for costs and profit on those costs, by the government has a lot of power to cancel contracts, and if the president really wants to cancel one, he can do it. he cannot put continuing contracts in his budget proposal when he submits it to congress next year. david: as we continue to see with the president-elect, we have one thing being communicated in tweets and something else going on at the same time. let's see what he had to say about the defense sequester, the cutting down of defense spending. >> in my first budget report to congress, i will as for the elimination of the defense sequester. david: this might be good news for the boeings of this world and united technologies and other defense contractors. ivan: absolutely. spending will be more focused and helicopters and strike fighters will be more important to the army of the future.
i think that will be the focus. david: overall, do you believe this is net positive or net negative? some people directly in mr. ase may be nervous about him having a direct say in the actions of private companies. ivan: they do have a big say in business with the government. however, i think that the key is what he is showing is this level of engagement and transparency that people have never really seen before. that is the interest. david: you are an expert in defense contracting and defense companies, industry. where are the stocks right now? how are they reacting? ivan: boeing was off a little yesterday in the premarket and ended up on the day. it was not really a factor. the situation with the carrier plate was resolved by the ceo of btx and trump as
positive. that was a win-win. overall, i think the trump administration will be positive for the defense stocks. david: robert, who is next? we had talking about big infrastructure spending, a lot more government contracts under the common ministration. trump administration. ivan: information -- robert: information technologies. that have been difficulties with a bigger i.t. contracts so i would not be surprised to see action on that front. david: many thanks to robert levinson coming to us from ivan.gton, d.c., and time now for your other stories. emma: thank you. turns out americans are paying apple millions of dollars to shelter its overseas profits. apple has become the poster
child for u.s. multinationals accused of giving earnings overseas to avoid paying taxes. the company has legally stashed much of that profit tax rate in the u.s. according to people familiar with the matter, apple bought government bonds and the treasury has paid apple $600 million in interest in the last five years. finedan union regulators jp morgan, hsbc, and credit with $521 million for manipulating interest rates. they are accused of colluding on the benchmark euro interest rates. that wrapped up a five-year investigation. they refused to join a loss of installment in the case. the best place in the u.s. to work, according to an annual survey by glassdoor, is vain and -- is bain company. others on top on our facebook, boston consulting group, google,
alix: the story of the morning with china's reserve falling about $70 billion to $3 trillion. these charts tell that story and why it is so critical. chinas a chart of the orton stories since november. we have seen steeper declines in last five months in terms of the foreign reserve. we strip out chinese surplus. the decline in november could be as high as $80 billion. this was in the middle of capital control.
the fear is this is going to get worse because it is a $5,000 limit that chinese citizens can convert from you and a year -- ear, so you could see more outflows in the beginning of 2017. the worry is you will see more year and depreciation and out" pressure on the reserve. let's take a look at what traders and exporters are doing with that. chinese exporters converted the equivalent of 58% of the overseas revenue into u.n. in october. it was 80% in 2014. they are expecting further u.n. depreciation and keep more of their money not in that currency so this is a key portion to watch. the other part of the situation is what it means for actual traders. the you and closed weaker -- the un closed weaker. this shows china banks have been that sellers from foreign
currency for the past 16 consecutive months through october. that also poses a significant risk. the question is, how bad can this really get? does it get disorderly? are we going to look at august 2015 situation where you have the markets responding in kind? or can it reveals the full? david: thanks so much. it is so ironic. currency is too low. it keeps going down. jonathan: china is a currency manipulator. get?sked how bad it i will ask how bad is it? a decline in reserves because the end is so much weaker and the euro was so much weaker. but not topulator, depreciated currency, rather to support it.
that is the problem he's got. david: it is more than the appearance. wto can come in and allow china to impose sanctions the other way. alix: right. as we see what happens if you years ago, you get the train more. jonathan: coming up in the next hour, ceo and president of omam to discuss everything happening in china and beyond as global banks take equities to new highs. futures positive throughout much of the session. up 7 points on the dow. from new york, this is bloomberg. ♪
i'm jonathan ferro. it is a market that we have gotten to use too saying, record highs. that is where we are on the dow. awaye fx markets, 24 hours from an ecb decision. alix: capital outflow for china's foreign currency reserves, the world's largest, dropping the most since january. the yuan calling to a new low. this as donald trump names terry branstad as ambassador to china. in the u.s., jpmorgan and bank of america are forecasting fourth-quarter trading gains. the ecb begins its last meeting of the year today. most it will extend its bond buying program past march. we are relatively flat against the dollar. jonathan: for the latest on
china, let's bring in the ceo and president of omam, peter bain. also joining us is john, our executive editor. let's talk about what's happening on the political side. the u.s. sends his ambassador to china, talk to me how important that role is to begin with. >> extremely important. diplomacy matters now more than ever. it looks like we were in for a pretty rocky relationship between the u.s. and china -- we will see how this plays out -- but in an environment like this, a personal touch matters more than ever before. it is significant this morning that the chinese ministry of foreign affairs has come out and said that he is a friend of china. using that phrase is very significant.
it would look like an interesting appointment by president-elect trump. have been markets worried about trade, but not worried enough. does this reassure them? i think it reassures them with respect to the quality of the relationship, which jonathan points out, it is an intentional statement. , from myhave the risks perspective, and looking at the markets, we still have the risks of a confrontational trade policy, the risks of the new administration reacting somewhat militantly to chinese efforts to control the currency. i think both of those things are permanent aspects of the relationship between the united states and china economically. thatrms of the choice trump has made in picking his ambassador, i think it's a very strong statement of a desire to function. it is certainly not a hawkish decision. the relationship between branstad and xi is real.
if you are in china, do you just ignore what you wind up seeing in the public rum trump and just focus on the back channels? didhe officials we spoke to not say it like that, but clearly there was a desire to see trump as a dealmaker, pragmatist. a newspaper of couple days ago that came out, urging strategic patience when it comes to dealing with trump. urging members of the party to look through the rhetoric and put that to one side and look at what america's strategic interests. very difficult to imagine how any u.s. president would want a trade war. that is the rhetoric. if you nominate this person as ambassador to china, is that enough to stem the jitters around this story, two things need to be addressed within
china? this is another thing that we americans fall into the cultural trap of. we somehow project that the signals we send determine what other people decide to do. the reality is, -- and being there is useful. i was there a week before the with coupled we met state authorities on financial exchange. i think this is important, and have said this to a few folks. when you look at this past election cycle, there's a case to be made that donald trump is the least ideological of any candidate who ran for office. he is potentially the most pragmatic. the chinese had not focused on that fact. number two, the chinese will control their capital flows based on their own economic reasons. is it useful, yes. is it controlling? absolutely not. we all know donald trump
is a dealmaker. negotiation like predictability. the fact that you are not ideological means it is hard to predict, and that is part of what donald trump likes about it, but how will markets react when you have contradictory things coming out? >> the markets will deal with it by getting to know the new president. if you reach a point of equilibrium, which is we are not going to worry about the tweets, but we will see what happens -- and the first couple of months he will get stuff done, and the markets will say here are the 90 million contradictory things that got sent during the process of the legislation, but this is legislation that came out. alix: what does this do for china money? china foreign direct investment into the u.s., $15 billion in 2015. over $230 billion in foreign m&a this year alone. what do they do with that money? >> my colleagues in hong kong
had an interesting interview with the former head of china goldman sachs. point. an interesting the u.s. now is no less predictable than china. that chinato say now is more unpredictable than u.s. domestic policy. the you are seeing from chinese are people are falling back, they don't know what kind of president they will get. they hope they get a pragmatic dealmaker but they don't know. alix: does that mean you would rather buy a chinese company that has domestic exposure, rather than a takeout target or a chinese company? >> i'm not sure china will be interested in our buying chinese companies for a while. i'm not sure that is a relevant conversation. i also think the government has been pretty clear they will not and permissive in letting chinese capital go overseas and invest in non-chinese markets. they were straightforward in
announcing they would take a tighter regulatory view of chinese capital going offshore. i think the activity across-economy will be muted a little bit. which might be fine until the inauguration and we can see some real proof about what happens. jonathan: moving toward the end of the year, for china it will not be about the united states but about president xi and the back end of the year. how important will internal politics before president xi? this will be at the very apex of the chinese state. toare expecting xi consolidate power more and more, but what people will be looking for our commitments to the .everaging,
also how does he extend this anticorruption push, which people say is hindering the functioning of the economy on certain levels. chinese politics is always very difficult and opaque to analyze, but it makes it all the more fascinating. that will be one of the big stories into next year, the reshuffling of the party. david: thank you for being here, john. peter bain will be staying with us. let's get an update on what is making headlines outside of the business world. a pakistan international airlines domestic flight carrying about 40 passengers has crashed here the northern city of a bottom pad. it is understood they lost contract with -- contact with aviation control. no confirmation on casualties yet. that is according to the first bloomberg national poll since
the election. 629% of those surveyed say it goes too far to force trump and his family to get rid of his hotels, buildings, and golf courses. more than half say that his actions and statements since the election make them more optimistic about his presidency. italy's prime minister is now wavering on whether or not he will actually resign, that is according to a senior government official. said he wouldzi quit after voters supported a referendum. others want him to stay on to provide political and economic stability. it is the 75th anniversary of the japanese attack on the u.s. fleet in pearl harbor, hawaii. a handful of survivors will be among those attending today's ceremony. global news 24 hours a day powered by more than 2600 journalists and analysts in over 120 countries. i'm emma chandra. this is bloomberg.
equity futures going nowhere, but some stocks on the move. chesapeake energy up over 1.5%, raising $1 billion through a bond sale, up from its original $750 million plan. it will use that money to pay down debt. it is a good thing that their credit rating has been upgraded to b-on this buyback. trying to claw their way back. taking a look at square. jack dorsey says square cash will be on apple day. they also plan to be on android pay and samsung day. food and games, people are buying and using both. wendy's is up more than 3%. z upping his shares there. financials got hammered
jonathan: from new york city, this is bloomberg daybreak. i'm jonathan ferro. one hour 17 minutes away from the cash open. down by two points on a doubt. in europe, the gains continue. autos, basic resources, and banks higher. in the fx market, ahead head of the ecb decision tomorrow, one euro is $1.07.
to price earlier from manufacturing in the united kingdom, cable right down to 126.12. jonathan: not what i expected. supply chains are so complex pricesays, the input emma when you input the goods you need to make the goods to export, they are surging. david: now let's talk about banks. there was one thing we knew this morning, and that is that they are doing well. this compares worldwide bank stocks with global stocks. you can see how well banks are doing. the question of why banks are doing so well may not be quite as clear. it may be for different reasons in different parts of the banking business. to help us sort. all is peter bain, president and ceo of all men. also with us is allison williams, a senior banking analyst.
peter, i want to start with you. you have jamie dimon and brian monahan saying things are going pretty well for the big center money banks in the u.s.. credit suisse says they have to cut and they are going up as well. defense, he has been saying that for a while. we have seen this in the portfolios that our managers are constructing. there have been three fundamental changes in the three core aspects in the way the markets view bank stocks that have turned favorable in the last eight to nine months. the first in a general perception about the direction of interest rates. the second is general perception about economic growth and sustainability. general perception about underlying economic stability and fundamentals. each of those was eat skeptically by the markets,
which made it difficult for banks to get well valued by the markets. when you have the view that interest rate will go up, the fundamental earnings of these banks is spread-based. as rates go up, they can widen their spread. .2, on the view of general economic growth, i think there is now a move -- to some degree the election has affirmed this a a sense that the regulatory dragnet has been placed on banking businesses is going to be somewhat mitigated, so they'll be able to grow. in terms of stability of underlying economic fundamentals, that goes to people's views of credit quality and credit write-offs. the way banks make money looks much better today than eight months ago. that makes perfect sense for the u.s., but the same story is not true in europe. we do not see the ecb going to raise rates as the economic situation -- so why are european banks doing so well? >> it depends on which bank you
are looking at. my team follows the global investment banks. they have big u.s. businesses and exposure to interest rates and i definitely have exposure to the u.s. regulatory environment. there is also a sense that what happens in the u.s. may trickle globally. if there is regulatory easing in the u.s., does that somehow allow for global regulators to perhaps might not? as you know, the european banks have been under more pressure than the u.s. banks. they restructured earlier, had a healthier economy. it has been a little tougher on the european side. with a slew of regulations set thisme in for those banks, may help to alleviate some of that pressure. if you look at the global investment banks, some of my credit suisse, who is holding their investor day today,
deutsche bank, ubs, they all have very big u.s. businesses. has the wealthar of american business very exposed to u.s. rates. credit suisse and deutsche bank, .ig trading businesses equity trading, not doing as well. businesses seem to outperform european businesses. jonathan: you borrow short, you lend along, you lock in the spread. about that, but when you invest in banks, you do not take that simplest approach. the central banks are saying their activities have not harmed the net interest margin, so the perception of what will happen on the back of a steeper yield curve and the reality, what calculation do you make when you look bank to bank? first, i believe the central
bank actions had constrained yields for some time and the view of what the central banks were trying to do constrained the banks and managing their own spread. so start there. and i believe that has changed. important to remember spread really drives the profits of the banks on ballots. the other piece is what markets they are in. old douglas amendment days are long gone, so you cannot say it is a bfa, let's look at the western mountain states lending environment. markets to look at what they are in. you also have to bring down what businesses they are in. banksou talk about non-us , you have to start sorting through how much of them are driven by spread, how much is capital markets activity, how much is emerging market activity. you have to dig into it, but i do believe, at the core, the fundamentals in this industry will always come back to his managing their spread.
if you get those right, you have a decent shot. price to book for some of these banks have really improved dramatically. what do they need to have happen in order to justify the price? what happens if regulation does not happen, where they do not get to reform glass-steagall? >> i'm not sure that we need regulatory reform anymore. almost if you just froze the regulations where they are, the banks would be able to deliver on the profit growth assumptions. itorgan -- because you named -- delivers over the next two quarters what the market believes they will do. i think you validated it. allison williams, peter bain, thank you for joining us. coming up, italy's prime minister resigns monday, you thought he did, but apparently he may not. the latest from rome. a look at the italian finance system as well.
jonathan: from new york, this is bloomberg daybreak. i'm jonathan ferro. resigned matteo renzi after his referendum defeat, at least he thought he did. we are now joined by our rome bureau chief. great to have you with us on the program. let's begin with prime minister renzi. we thought he was stepping down. now report suggest that is not happening. walk me through this please. >> it is complicated as always in italy. he offered his resignation but not everyone wants him to leave, mainly the president. he is the one who decides to form the next government. the president is concerned about stability.
that are electoral laws need to be passed before the next election. we are hearing that it may be a better idea for renzi to stay on briefly and then go to elections. will he accept that? we don't know, it is extremely complicated. they are also voting on the budget as we speak. renzi will be meeting with his party, so there is even a slight chance he may have to leave the leadership of his party. we are really in chaos right now, we don't know what will happen. part of the political system would like renzi to stay on. jonathan: prime minister renzi has to address his own party, and then the president will like them to pass the budget, and then have an election at some point. between now and then, the immediacy of what's happening in the financial system, can you walk us through that and why that is so important for matteo renzi to stay on as the care for theime minister
foreseeable future, to clean up the banking system before they move on? >> i think that is a factor, one of the things the president is concerned about. even more important than renzi is his finance minister. he is one of the possible prime minister's, if renzi is not the one. the banking system has been, for many months, in quite a lot of trouble. we do not know it this bank monte dei paschi can be saved. and ad some continuity dialogue with the banks, european union, in order to keep the financial system stable, keep investors feeling somewhat confident about what's happening here and not completely lost and therefore not attacking the italian market. believe it was a company may time the european stability mechanism. how will italy address this situation?
>> what you have said has been denied by italian officials. it is possible that it could happen. fantastic to have you walking us through the situation. i don't know where to go from here. alix: you are trying to predict italian government stuff? you should know better. coming up, what banks are looking at the head of the key rate decision, and what they are looking at in terms of euro volatility. this is bloomberg. ♪
the ecb decision, the euro is stable at $1.07. overnight volatility flying ahead of that decision. here's what you need to know this hour. china's foreign currency reserve dropping the most since january as the yuan fell to an eight-year loan, this as donald trump names terry branstad as the ambassador to china. global financials flying. credit suisse steps up cost-cutting measures. jpmorgan and bank of america are forecasting trading gains. the ecb begins its last meeting of the year today. most predict the central bank will extended bond buying program past march. but today, the euro goes nowhere against the dollar. david: let's stay on that topic, the ecb decision. let's go to paul gordon, joining us from frankfurt.
there seems to be a pretty broad consensus about what is going to happen, what will not happen, take us through that. the bets are on that there will be an extension of qe, but the details are up in the air. most economists are looking for an extension past march, at 80 billion euros a month or about six months, but there is clearly a sense out there that there is a non-negligible chance that it will be perhaps for a longer period of time but at a lower pace, maybe 60 billion euros, or may a surprise, an increase. on top of that, you have various configurations of the implementation of qe, how do you get there, by raising issue limits, moving minimum yield requirements, extending maturities? that leaves room for potential uncertainty and market reaction. the past, mr. draghi has played is pretty close to the vest. talk about the taper
possibility. how likely is it that he will indicate something about ta pering? >> i doubt it, to be honest. the ecb is fearful of the word taper. we have seen what happens in europe whenever it pops up. markets do not like it. the ecb has been keen to say so far that it will do what it needs due to ensure inflation returns back to its goal of just under 2%. we will get some signal tomorrow when new economic forecasts are released, including the first forecast for inflation in 2019 which may be around 2%. that could be a sign that at some point the ecb can stop talking about tapering but i would be very surprised if that happened tomorrow. david: thank you very much, paul. jonathan: that is the subject of today's morning meeting, looking at what key banks are looking at ahead of tomorrow's key ecb
decision. with me now is marc chandler. and with us in a minute is richard cucina. mark, the euro, the spot price is incredibly stable, overnight in time volatility is spiking. when you look at how we are sent ahead of tomorrow, what is the market position telling you? >> we are doing some short euro positions. last week we were touching $1 .05. i think we are in the range right now but the market has been reducing short euro positions just in case the ecb gives us what a lot of people in the market would call a hawkish ease. jonathan: richard, the base case scenario at the moment seems to be an extension and continuation of the pace at 80 billion euros a month. is that also the best case scenario as well for parity? i'm not seeing anyone go out more than that. >> i think in the short-term
ist will be determining euro the year-end factor and how much of a surprise you get on this asset extension. at consensus is pretty much 80 billion, so a continuation of policy for three to six months going forward. we tend to be less dovish at citi, we are expecting 60 billion starting april 1. nonetheless, to get below $1.05 and below parity, you need a couple of things. an idea the ecb will be basically buying purchases for longer than expected, you will need a moving treasuries. that rate differential will drive the currency lower. your data in europe has been strong and data in the u.k. has the riskng, and factors surrounding italy, upcoming elections, is not on our front doorstep yet. so you need the rates to move to get down below parity.
alix: even if we go back to what the ecb will do, you say 60 billion euros, the markets are pricing in 80. at the end of the day, they have to find ways to buy. how do they fix the short-term issue? now, they have a minimum floor on interest rates. they cannot buy individual securities lower than the deposit rate -40 basis points. rather than apply to an individual security, they could apply to a whole portfolio. is second thing they can do raise the cap on any individual security. right now it is a third. they could go up to a half and still be within broad parameters. the scarcity issue is less important. what people are not talking about is the repo operations which have been under stress. you look at the interbank rate in germany. seeing is the ecb
is likely to make an announcement green up these securities. this is a lending program, a technical operation, but will relieve some stress in the bond markets. thethan: the scarcity in near end of the curve. talking about rate differentials, what will that mean for the fx markets? >> i think we are looking at the front end of the bund curve. when we see this steepening, that is some of the most aggressive that we are picking up. if you overlay that with euro-dollar, you can see there is a nice correlation. is right when it comes to what the ecb can do. this buying under the floor is essential. if you get a steeper curve, that alleviates pressure on the banking systems. it tends to be euro negative on a medium-term horizon. ultimately, it creates an
environment where it helps to instill confidence, it gives you the idea that you will be raising inflation levels, you will be moving up this disinflationary environment. , it the ecb's perspective is not so much the nominal level of rights they are looking at, but really the shape of the curve in the front and. , thateeper you get correlates well with euro-dollar lower. the shape of the curve is important for the ecb, but for anyone looking from the outside, not just the shape but the rate differential you have touched on, richard, on my bloomberg right now we have the 10-year treasury versus 10-year bunds. we have not been here for a long time. you have to go back to the late 80's to see in this wide. is there any oxygen left here, or have we seen the top of the spread? >> in the short term i think you may have seen the top. when it comes to treasuries and
where we see the differentials, we are not there yet. most of the market is running with this idea of light cycle stimulus, which we know will be a lower growth in fact, higher inflationary impact. that impulse on the u.s. side should get more premium to treasury curves, so that should be the sector that widens it out. when we look at europe, there is uncertainty, uncertainty of the feedback into the u.k., and ultimately you will probably be left with a taper that takes longer when it starts. to a large extent, most of the driver of that is on the treasury side, whereas i would expect the nominal levels of european rates to be stuck at these levels for a while. similarly, we expect the same in japan. alix: back at home, you look at the dxy trading around one hundred. how much more upside is there? when you look at the scarcity issues in the market and the run of that we have seen. >> we have seen a move up in the
dollar index. i have been watching the short-term topping pattern. we had to get above 60 for me to believe that we are getting to new highs. richard and i probably agree here. the big picture, citibank technicals and my own view, we are going back down on the euro to historic lows which will put the dollar index closer to the $1.20 level. interest rate differentials already giving us the incentive structure. this is not to mention all of the political problems that europe will have starting next year. jonathan: great to have you with us. 24 hours away from a big ecb decision. richard cucina, marc chandler, thank you. we will bring you that ecb policy decision tomorrow, 7:45 eastern time, followed by president draghi's news
donald trump is making news this time not for a tweet. he has been named time magazine's person of the year and he has also called the today show on nbc to talk about that. for more on that we are joined by our executive editor for international government. tell us what news donald trump has been making today. >> the news really came from external sources when time went on the today show and announced donald trump was person of the year. and magically, donald trump called in immediately after. david: he just happened to have the number right there. aboutas he been saying how this process is going, how he is handling the transition? a i thought matt lauer did pretty tough interview, actually. he challenged him on his continuing to be aggressive in tweeting and donald trump defended it. he said he is talking to 40
million people through social media. he indicated that this will just continue and has no regrets about any of it. david: where are we on secretary of state, any guidance on that? >> it is clear he has been made his decision yet, he has had nice things to say about mitt romney, and interestingly enough, the first person he mentioned was rex tillerson, the exxon ceo. that name seems to be moving up in the list of people he is considering. probably a week or more away from a decision on that. also saw some language that you don't normally see some republicans, there is a need to time the pump when it comes to the economy, which i guess is referring to the infrastructure plan he wants to move forward. >> there has been tons of speculation about how that will work on capitol hill, where republicans are very concerned that every dollar spent should be made up somewhere else in .uts
paul ryan is a big champion of that, and that is the person that will have to make it happen. stay tuned for that battle. david: thanks very much for being with us. executive editor for international government, marty schenker. trumpfor more on donald and his relationship, this morning, richard haass, council of foreign relations president discussed his approach to china relations. the most interesting development over the last five days has been china and taiwan. been a twitter element of it, both in the initial reactions of the president-elect about the phone call seemingly saying it was just a congratulatory phone call. and then the follow-up tweets which were much more critical of china across the board, about its alleged currency manipulation, military buildup in the south china sea. it was clearly a double down.
but we do not know is exactly what to make of all of that in terms of, is that spontaneous, does it suggest lasting or real policy follow-up? everyone also need to slow down it is still the transition, virtually none of the national security team is in place. >> you don't know who will be secretary of state? >> who knows. >> when we are reporting that the u.s.ump will pick ambassador to china, and iowa governor, close to the premier. what does this tell us about resetting the u.s. china relationship? >> not a whole lot. ambassadors do not set policy, but what's interesting, terry branstad has a personal relationship with xi jinping. i don't think he will have a typical two-year presidential term. the other thing with iowa, it is dependent on agricultural
exports to china. it shows the importance of american trade. ,here is an inconsistency there essentially, tpp has been killed, and it's not clear with a trade policy is with china or anybody else. so there is a bit of a disconnect. sooner or later, that will need to be addressed. articlese are so many talking about being like reagan, not like greg and -- it is not the same world that reagan had. not the same person. ronald reagan came into office with a really developed velocity. he may have been under a decimated by the pundits but he had been giving hundreds of policy speeches. and the politics were different. washington was a much more malleable, functional place. because of funding reforms and how politics are conducted, how society has changed, it is harder to garner concentrated
political power. so the parallels to ragan are not good. sense -- some have called it animal spirits -- that this is a moment where we will go from probably in under 2% long wait of growth to something much higher, with some kind of individual and corporate tax reform. it is almost as if we are saying the only game in town's monetary power and the central bank is over. now we have something larger going on in washington. alix: that was richard haass speaking earlier. time now for other stories making headlines. here is emma chandra with the business flash. emma: americans are paying apple millions of dollars to shelters overseas profits. apple has become the poster child of u.s. multinationals accused of keeping earnings overseas to avoid paying taxes. still, the company has kept most of those taxes away from the
u.s. legally. european union regulators have find a jpmorgan, hsbc, and credit agricole a total of $521 million for manipulating interest rates. the banks are accused of colluding on your board -- euribor. the three banks refused to join a multibank settlement in the case. find medical device maker medtronic's $70 million for what regulators called monopoly pricing agreements. the chinese government said medtronic was penalized for fixing prices with dealers in china. medtronic is based in ireland and managed from the u.s. that is your bloomberg business flash. is it too late to jump on the cyclical stock bandwagon? we have a chart for that.
david: this is bloomberg. i'm david westin. time for battle of the charts. mark barton is taking on alix steel. mark, you get to start. mark: four nuggets to tell you about. i love this chart in the wake of the ecb meeting and as we ponder the future of italy and whether renzi will stay on as prime minister. cumulative growth for four countries since the introduction of the euro in 1999. this is normalized at 100.
the first nugget is the white line, italian growth. the italian economy has grown a , a mere 6% since the introduction of the euro in 1999. the blue line is germany, the white line is italy. italy was growing faster than germany until 2006, when germany started overtaking italy. germany has risen by an accumulative 26%. what is also fascinating, since the financial crisis, as you can see, italy has not come back. theas not come back with growth. it is still negative since the financial crisis, unlike these other three countries. the yellow line is france. of thehe introduction euro, france has risen by more
than germany. germany up 26%. france is up 27%. and for all of those euro out there, look at the purple line. not even a eurozone country, it is the u.k. eurorforming these mere area countries, giving eurosceptics fueled. who needs them all? david: a profound chart. you know what it proves, they misnamed it. they called it the european union. there is not much more union anymore. alix: while mark will ponder the growth of countries under the euro, i will ponder opec under this potential cut coming up. this is 30 at this on :00 hour. this is the saudi's official selling price of light oil to asia, what they market their oil
four. the higher it goes the more they are charging, the lower goes, the more -- the less they are charging. the cut their price by $1.20 to a -$.75. they want to get their oil out there, they want oil to buy. two expirations i have heard from this. they are fighting for market share. deal or no deal, they are putting for market share. the other is sort of a threat. if you don't follow through on a deal, we will with a price and flood the market and compete in asia. either way, an interesting development as i ponder my love for oil and a potential deal. david: these are two great charts, they have nothing to do with one another. mark, i love your chart, but i'm voting for alix because she loves oil so much, she would be disappointed if i did not vote for oil. alix: i never win against mark. david: there you have it.
alix is the winner today. 10:00, wecoming up at are getting job openings out later. 3:00 p.m. eastern, u.s. october consumer credit. coming up next, bill emerson, quicken loans ceo. tomorrow, we will bring you the ecb policy decision at 7:45, followed by president draghi's news conference at 8:30 eastern. 34 minutes away from the cache open. futures are a little bit negative. equities gaining in europe, the banks outperforming. we will bring down the upper farmers in the banks. this is bloomberg. ♪
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500. futures going nowhere. dow futures positive two points after another record high yesterday. bank stocks just flying high. switch up the board very quickly. ond markets looks like this. david: soaring global financials. credit suisse shares are up as the bank accelerates cost cutting measures and the country's biggest banks, j.p. morgan, bank of america and citi are all forecasting fourth-quarter trading gains. draghi's decision, e.c.b. officials gathering. most economists predict the bond buying program extended to past march. capital outflow. china's foreign currency reserves drops the most since january. the adrienne -- yuan declined.
and what's this you need know at this hour and alix, you have movers. alix: taking a look at the dow, a little softer equity futures. the dow did close at a record yesterday and they weren't the only indices that closed. s&p mid cap and small cap stocks and year-to-date up double digits and all of these incease closed at record highs yesterday and a big part is the big part of that rally in global banks. over 20% of the russell 2,000 versus tech. it was a beneficiary of the global banking rally that we've een. that's helping its competitor c-gate dragging that stock up by over 1%. and a new buy over its city. the price target is 2216 with iti sees 30.
david: we're joined by day con campbell. so we've been talking about owl morning long how extraordinary the banks are doing. why? >> i think it's a two-pronged explanation. one is obviously interest rates. everybody expects the fed next week to hike rates and then at least two hikes probably next year. obviously higher interest rates are good for bank lending margins. the other one is the rhetoric coming from donald trump and his administration about rolling back some parts of financial regulation. a lot of people are thought that the banks, their business prospects had been held back by more regulation that came after the crisis. and trump and members of his
team have talked about rolling some of that back. david: but so far, nothing's happened. the fed hasn't raised even yet. even though there's 100% likelihood in december. we haven't gotten an infrastructure program. no tax reform. how much of this is just psychology and maybe that's what's important. >> the conversations i've had with people, they do bring up the fact that nothing has happened yet and we actually don't know what the rollback in financial regulation is going to looks like. when you talk to investers and bankers, they sort of laugh a little bit and say this feels a little overdone and what does the market know that it is unknowable. one of the questions asked in the program, i thought what needs to happen to justify the valuation now? maybe nothing needs to happen at all. we just stay here and they don't unwind any regulation and they don't introduce anymore difficult for these banks to go
about their every business. is that enough? >> it's a good question. i think so with higher rates and with the fact that these banks have really -- it's taken them a couple of years but they now understand what's expected of them. they've hired all the compliance people that they need to. they have a better understanding of the regulation that they're held to now. i think so. i think some of this is obviously expecting that some of it's going to get rolled back. jonathan: i want to bring paul chryst here. paul, looking at the moves we have seen, big, big moves in small caps. big moves in bank stocks. hat's where i want to begin. >> the markings have a good probability that they're going to get some sort of deal on
regulation that's less onerous, perhaps going forward than they would have had otherwise. and it's important to recognize that the economy's getting better too. it's not just the magic of november 8 that's all of a sudden the markets are taken more notice of. it's prospects for some higher inflation going forward, a steeper yield curve. alix: yeah, yeah, but is the correlation 100%? take a look at the bloomberg here. the purple line is s&p financial index, blue line is the real yield and the white line this yield. they're tightly correlated but i'm seeing a divergence with real yield as they are coming down. is that is headwind or a pause? >> it's more of a pause. when you look at the 30-year market, they have to price in inflation far further into the future than other instruments do. stocks included. and so therefore, they're more sensitive to these sorts of prospects for inflation and that's what we're seeing now. the steep of course the yield curve represent answer increase
in term premiums that inflation is going to get higher as the economy continues to normalize. that's a good thing. but it does mean that the banks get a little more opportunity. jonathan: that's one of the positives. one of of the negatives has been the amount of fines that halve had left field at these banks. the news this morning with the latest, j.p. morgan, hsbc, is it a positive that we're almost done there? we are almost done? >> i think so. and obviously, in the new administration, you're going to get a new attorney general here in the u.s. and there's some thought out there that he's going to be less interested in going after financial firms as this current administration has been. david: one thing i don't get is the divergence. the u.s. vs. europe. a lot of the factors are not equally applicable on each side of the atlantic.
most people i talk to when we talk about deregulation is expected to affect smaller banks than the larger ones. >> that's a very interesting point on the large and the small banks you probably will see more deregulation applied to the smaller banks but going forward, he path-of-the trajectory of additional regulation looks less onerous for the large banks and combine that with the favorable interest rate outlook and you get some upside for the large cap financial as well. europe is a different story. europe is not going to benefit by as much because frankly, they haven't cleaned out their balance sheet as much as the u.s. banks have. alix: tell us what you like and what you don't, paul. >> we still like a global economy that is gradually recovering from the deregulation shock of 2015. i'm not talking just about financials. we do like financials but we're saying look, buy for long-term
investors. buy the cyclical recovery. it still has legs and buy the u.s. first and then develop second. development markets second. david: what's overbought? >> >> a lot of things right now but this is not the time to start timing the market. this is the time to have some cash in reserve so when you get that pullback, you can put money to work. alix: the other question when it comes to financials and the yield curve, yes, i understand that's good but at what point do financial conditions start tightening where banks have to step back from the loan market and their dwinds up being hurt? >> that's a good question. for the last year to two years, we've talked about a very good credit cycle. certainly consumer, but with companies as well. i don't see that in getting any better than it has been now or that it is now. it's a great credit environment for these banks. so to the extent that the credit cycle starts to turn, that is
something that could harm these banks and could pull in their portfolio. we are seeing consumers at the bottom of their deleveraging sibling getting ready to pick up more cycle. confidence builds. that's going to be something to watch going forward. i said that recovery still has legs. the cyclical recovery still has legs but watch out for build-up the debt especially on the consumer because side. >> it's worth noting that banks like to put loans on their books. so when consumers and companies get ready to put more data on before that debt goes bad, that's a good thing for them. david: at what point do you have to be concerned about growth versus inflation? >> when we it reaches levels that would start to promote additional inflation or accelerate inflation by itself. we're probably not there yet. easily a good four or five or six quarter waste from that. avid: thanks, gentlemen.
for an update on to news outside the business world, we go to emma chandra with bloomberg's first word news. emma? emma: mortgage fund traders have found a new home. the shadow banking system. bloomberg reviewed employment records and found 20 traders left their banks for a forced out because of a probe. at least half ended up at-line lenders and less regulated firms. a federal judge in detroit called a hearing to consider if michigan's presidential recount should continue. the state election board is meeting after the appeals court-ordered it to dismiss green party jill stein recount petition. there will be a court hearing on friday on a possible recount in pennsylvania. so far, a recount in wisconsin shows president-elect donald trump gaining vofertse hillary clinton. and italian prime minister
ramsey isn't so certain he will resign according to a senior government official on sunday. he said he would quit after voters overwhelmingly rejected a constitutional reform referendum. they wanted him to stay on conomic stability. i'm emma chandra. this is bloomberg. alix? alix: coming up, pump up the volume. oil trading around $50 a barrel and speculation opec cuts will be more than offset production here. and what will non-opec doo do? and what deal donald trump said he will block. we're going to have all those details. this is bloomberg. ♪
alix: the market contemplate the struggles between opec and an non-opec deal. here is more. >> i think what needs to happen we need asitment for many countries as possible. is is not just an opec worry or a concern ep. all of the producers, the benefit to all of the producers. so what we need is to see more countries participating. alix: more countries participating but how will they senator here's what happened earlier in the session. you had crudup in the day. and then it is off by 1% and here's why. only oman and russia will commit to literal deliberate production
cuts. the rest of the non-opec cuts potentially could come from natural decline. will they reach the $600,000 barrel a day cut or will it just be natural declines and not a real cut? this is what the energy market is contemplating today. et's join chris. the markets skeptical. crude holding over $50. what's your trade today? >> alix, the markets should be skeptical. opec makes these rules and they can't even enforce them. all these traders know that opec can't enforce these rules and russia cutting 300,000 barrels? this is a joke. you think they're going to let the u.s. pick up all the production? i don't think so. a follow-through went had a failed move. we had some information come out that actually inventories fell even more than expected. just a couple of hours ago, you saw that rally up to 51.25. it made a lower high.
and all of a sudden, the sellers really start to slam that bid and that's why we're down 1% right now. cink the momentum is definitely lower. alix: whether or not their real reduction rates or -- a cut is a cut. how much are you shorting them or selling? >> went it's between 4952 shade ahead of the fed. the fed is going to play a role for that rate hike to go up. i believe that giving a chance for traders to sit on their hands for a little bit, i think we hold above 45.25. no higher than 52.50. all of our systems are really focused on the mean reversion right now. but if more news comes out opec countries are bailing, you can test that 45 handle. david: bank deregulation.
david: this is bloomberg, i'm dave day. yields are up and we're told that's good for the banks but what does it mean for people buying a house and for the mortgage lenders who help them do it? the application index fell last week after falling almost 10% the week before. our next guest runs the second largest retail mortgage business in the country and his new initiative is taking mortgages online for millennials. he is quicken loans chief
executive officer bill emerson and he joins us in his headquarters in detroit. good to have you with us. how are the mortgage business doing? bill: it's doing great. we're seeing as you see in the nba, -- m.b.a., numbers come down. for us, our businesses continue to be strong. the home purchase market has been strong for us and, you know, people, they communicate and connect with us differently that they do with a lot of lenders. so they're still interacting with us and communicating on a regular basis about the opportunity to refinance given where rates are because they've gone up about half a percent maybe. so you're going to see a little bit of a movement. for us, not so much. david: when does it cut into the desire to buy new homes? bill: that's a great question. with rates in the low to mid fours, it's not going to cause nybody buy a home.
if rates are up a half or three quarters of a percent t going to impact the monthly payment between $30 and $50 a month. that might cause you problem but otherwise, it shouldn't cause you a problem at all. david: back in 2008-2009, the mortgage business took a big hit and home owning took a big hit in this country. how far back are we in building back to after where we were before that crisis? bill: so depending on the data you look at. home price values back to where they were precrash which is an important thing. with anything though, that the national average and we all know real estate is regional and local. the western part of the country is seeing home price appreciation and a lot of the home price appreciation that you see is a result of the lack of inventory. one of the things that we have to start focusing on is where does that new inventory come on
and how is it possible to get to the pace where we need to be so that lie and demand issue starts to get more in line with where we would see it historically. david: so quicken loans is different from the way most of us grew up thinking-a-mortgage rates. you're down to your local bank and you apply for it and sit down with a banker. how is your business really faring in this new world? bill: our business is faring tremendously well. you think about the shifting and changing demographics of this country, if you think about the way people communicate now, whether that be social media, the advent of the smartphone and the ability for people to do complex transactions through their technology, you know, we have been on that cutting edge for a long, long time. we have a centralized model. most folks are coming to us either online or because of a result of some advertise thought we're doing and with the rollout of the rocket mortgage and the ability for someone to start online and completely go all the way through the process to be
able to import their income information directly from the source, cutting out the need for paper and being able to provide it, when you think about people and the way they tranc -- ransact and that's the future. rocket channels will wind up being 10% of our closing chase tremendous number when you think about something brand-new into the market someplace and we see that continuing to build and grow towards the future. david: a lot of the talk these days is about donald trump. i would like to know specifically what does donald trump as president means for you as a business and even than that, there's a lot of talk about deregulation. does that free them up more to do things in the marketplace that could compete business away from you? bill: as you guys know, the
devil niece the details, right? hat really is going to happen? there's a lot of euphoria in the marketplace. we'll see what happens when the administration actually gets in there. i do believe there's an opportunity to cut back on some of the regulation. will banks benefit from that? i think they will. will we be able to benefit from that? yeah, i think we will. if you start looking at what's going to happen at some of the dot frank stuff, having a clear underwriting standard i think it's important for our industry and that's going to cascade across every platform not just the larger financial institution. so it just depends on what ultimately happens here. i believe they have an opportunity to clean up f.h.a., to bring clarity armed that program. i'm excited about the opportunity as it relates to what the d.o.j. is going to do and start moving away from so much the crazy stuff they've been doing in our industry. there's a lot of optimism but we've got to see what that
ultimately comes down to. david: when americans hear about deregulation, they get nervous. what is going to prevent that from overheating and the abuse of the system? bill: to me t what i just said. it's having a clear underwriting standard. one of the things that came out of the dot frank this qualified mortgage rule saying you've got to underwrite a loan. i agree that that needs to be in place and that needs to stay there. there's tweaks and modifications to that rule that need to be made but if you have a clear underwriting standard that says you have to fully document income and asset, you're going to have a safe underwriting standard and it's going to cause those industry to keep those guardrails in place. to me, that's the most important thing about safeguarding to what we do in the future. jonathan: thanks so much, that's bill of quicken loans, emerson. jonathan: the italian parliament opened the wave for the italian premiere renzi to resign. he did say he will do that at
7:00 p.m. central european time. hat's the update out of italy. futures positive up after closing at an all-time high yesterday in europe, the d.a.x. at 1.4%. the banks outperforming in a big big way. a solid q-4. in the fx market, ahead of tomorrow's e.c.b. decision, the euro, stable. treasury yield up to be basis point. the equity open is next. ♪
the fx market. dollar index spot at 100.39. the euro stronger ahead of tomorrow's e.c.b. decision. yields are lower by two basis points to 2.37. and some doubts emerge about opec's ability to tell everyone outside of opec what to do with owl output. crude rose over $50.20. alix: what a complete shocker. a deal, potentially on the edge there. here's where reopen. lower. dow jones flat. the s&p up by not even 1% but nasdac, biggest decline off by %. on the other side, you have the monster global banking rally. and that helping to support indices somewhat. credit suisse up over%. bank of america, softer.
citi group, flat. but there was a monster rally earlier in the session over in europe, unable to bleed as much through here to the u.s. although you do have citi and bank of america and j.p. morgan all predicting better trading revenues here in the fourth quarter in the u.s. citi, the latest saying trading revenue may rise 20% in the ourth quarter. that optimism not as strong here as it was over in europe. credit suisse up over%. it was over in europe at the highest level. the c.e.o. saying there's going to be $1 billion in cost cuts to offset some revenue in the wealth management business as its asian trading unit. the push and pull for markets today. the other big story has been the outperformance of small caps tocks versus large cap stocks.
small caps up 13% versus the s&p which is up by 6%. you know the big story in that has to do with outperformance of banks. jonathan: yeah, banks and the tax cuttings and the best way to play those small caps. want to bring in dan. for the company level what, are you doing? >> well, first of all thanks for having me back. great to be with you all again. i think if you look at the policies of the incoming trump administration and leave aside politics and personality for the moment -- jonathan: if you can. >> there's a lot to say about personality but if you look at
the policies t very difficult to argue that those policies are not going to be super constructive for small and mid capitalization stocks. and that's what we focus on. our whole portfolio are companies that are focused on the united states with less than $10 billion in market capitalization. you look across our portfolio, only about 30% of the revenues are outside of the united states. you look at the trump administration sexoils the areas where they're most likely to be successful early on, talk about taxes, talk about regulation, talk about currency and you can see those effects across the portfolio like ours. let's start with taxes. that's the easiest one and we'll start with corporate tax reform. largely u.s. focus companies tend to pay higher taxes. we've got lots of demls our portfolios. so we have a couple of small capitalization stocks. one called rudolph technology
and one called nanometrics. they make complex tools that measure all the steps when ou're making schmuckers -- semiconductors, high-tech tools. they stay close to their statutory tax rate. their largest competitor is also an innovative company called k.l.a. ten corps. trump is talking about cutting corporate taxes to 15%. these are enormous savings. jonathan: did you go through a list of company and looked a list at the effective tax rate? what did you do after you saw president-elect donald trump that was going to be it? >> we've always been focused on this part of the market not because we thought trump was going to be good for it because that's with a where we see the best opportunities and where we think we have expertise. but it's undeniable that the policies again focused on
policies will be good from a tax standpoint. i think you can see it in regulation as well. we've not another company called aris international in making settop boxes. for the last year and a half, the f.c.c. has been talking about regulating settop boxes, trying to regulate the content on them. that wouldn't be great. those proposals are deader than a door nail. alix: you quantify the earnings upside for this? overall, the strategists are saying 11, 13% upside when it comes to the corporate tax rate cuts. what are you seeing? >> those are fair estimates and i gave you some sovense the magnitude when we were talking about nanometrics and rudolph called to like a k.l.a. if you're playing 30% or more and they go to 15%, that's pretty meaningful. but you got take it to the second step and look at where that extra cash and that income is going to go and the other
aspect of the tax reform is letting people repatriate at an advantage rate. some of it's going to find itself into buybacks which is going to increase earnings per share. it should be super constructive for equities for small and mid cap space. david: it's going to take some time. it's not going to happen right away. when you try to sort through what donald trump is planning, there are some things you know right away. one of the things you know is the cost of capital is going up. it's already gone up. for your small to mid cap company, that's an important factor. at what point do you get squeezed? >> yeah. i think some of that has to do with stocks selection. so most of the companies in our portfolio don't have any debt. i think a couple have a modest amount. none of them are highly leveraged. most of them have net cash. so i think beneficiaries of the
changes will be companies with rather simple capital structures. complex capital structures, those dependent on the deductibility of interest payments are more exposed. david: ok. thank you so much. that's daniel plants, the founder and c.i.o. of sullivan and cromwell. coming up, defenders and losers under trump. boeing shares down after trump's tweet criticizing the company. we'll look at what trump's policies could mean for defense stocks. that's next. this is bloomberg. ♪
emma: in the hewlett-packard enterprise greenroom. coming up, founder of colony capital, tom barrack. jonathan: let's get to the markets just very quickly. stocks just retraces some of yesterday's move the dow down not even a half of one point. a record high. just for everyone that loves them. s&p 500, that little bit negative down 1%. let's go to abigail. >> one of the big movers this morning that alix has talked about a couple of times is western digital. shares are higher up. nearly 5% after the company did host an investor day coming out of that investor day. they are renewing a license with sam subject. thaw raised the second quarter
outlook. revenues 4% above industry estimates. mark is very bullished. and he has a price target now of $85 per share suggesting significant upside is ahead. when we go into the chart, we see that western digital over the last two years had a huge decline. at one point, they were down 41%. it's now up 11%. the question is can the gains continue? there are two reasons to think yes. first, we have western digital now above the 200-day moving average. the long-term buyers are very interested. they're supporting the shares. and we have a bullish reversal pattern marked in green. it carries an official target of $7 per share suggesting the stock can climb. sometimes these patterns overshoot and perhaps, david, the shares of western digital will climb right back to mark's price of $85 per share on this bullish turnaround. david: thank you, abigail. now, we're going to talk about
americans being comfortable with president-elect donald trump and his family continuing to own investments. at least that's according to a poll out today. how comfortable are they are the new president intervening with individual companies? we're about to find out. yesterday we reported on donald trump's tweet taking boeing to task saying we should "cancel the order." then in the afternoon after meeting with the head of soft bank, he took credit for the company invest in the united states investing in 50,000 new jobs here. joining us, we have with us, richard saffron. he is director of equity research. welcome back to the program. good to have you here. let's sort out how material this is for boeing. because there were some movement of the stocks. ow much is this going? >> this is a contract over 10 years. that's roughly a rounding error.
so also, it's mostly development work. and development work is notoriously lower margin than production work like for example, on the f-18 fighter that boeing produces. so in the overall scheme of things, this is more a prestige program for boeing rather than the substance of earnings contributor for boeing. even if the program were to cancel, build a blip on boeing and it would be relatively small. david: there is a bigger issue here? it reminds me of the united technology. that was a different job. but if you're going in all the time getting new contract, are you worried about getting on the wrong side of the new president? >> you're always worried about getting on the wrong side of the p. that's why you want to brief him and speak to him early. a lot of the defense companies are. with president trump, we have to get used to out of the box thinking and an unorthodoxed approach with the way he's doing
things. it's very unusual for a president to twitter and say this is the way we should cancel a program. that's a very highly unusual event. it's unprecedented in my time. so i think that if i were a defense company right now, yeah, i would be worried. i would be concerned and i would be focused op how new businesses is going to be in the new trump administration. alix: air force one might be a blip for boeing but the defense contract aren't. what kind of reforms would we see with the new contract mplemented under donald trump? >> under a trump administration, what they're going to try to do is first, they believe that the pentagon t a very large brock and i there's probably a lot of money to be found there, you know, through changes in contracting, through changes in procedure and the way they do things. most importantly though, what you could be looking at is a situation where for my defense
companies instead of doing large development programs where they're trying to break new technologies, maybe it's more of a approach of we're buying more off the shelf type of technology which most defense companies might generally like. development programs fraught with risk. >> there are maybe more dollars for bifplge we heard from donald trump yesterday. let's play that for you. president-elect donald trump: i am going to ask for the elimination of the defense sequester. so no. david: ok so much if airforce one is not very material to boeing, how much is i doing for the other contractors? >> tremendous. it's been a noose around the neck for all the defense companies because of the constraint it puts on defense spending. even with congress. congress doesn't leek to have restraints put on it and the sequester has forced decisions that none of the commanders and
nobody in the pentagon really wants to make. so if you're going to now go out and remove this sequester, that's going to be a tremendous positive for all my defense companies in general. and just a positive overall. i don't think the sequester was a very good idea. i don't think a lot of people do. i think and its removement is will be better for everyone. alix: so if you wind up saying lockheed-martin sboming defense in india, for example, you have to agree that trump's probably not going like that. is he going to have foreign contracts and how will that hurt them? >> well so i understand that trump has real problem with just you moving jobs overseas. for example, with the f-35, that's a huge f-16, huge international program for lockheed-martin. there were deals that have to be made in other countries in exchange for their participation on the program. in general, yeah, companies are
going to be concerned about in manufacturingving offshore and that's like throw be kur tailed under this administration but i'm not sure on a case of major contracts where the deals have been set that they're going to now be changed. david: thank you for being here, richard. he is buckingham research group defense analyst. jonathan: let's go to mark barnes. he will begin our coverage as we count you down to the market close in europe. what's coming up? says as long tz as inflation remains in check and earnings growth is positive, u.s. equities should be able to generate mid to high single digit returns the big centerpiece of our show, mr. david west on, yes, you know him well. he's going to interview tom barrack, he's the chairman and founder, advisor to mr. trump.
i'm not even going tell you what he's doing to ask. head of the g-10 strategy. we had u.k. manufacturing today. and an australian contraction guide. we've only seen fur of those in the last 25 years. i'll zy 12 minutes. jonathan: tomorrow, a year since e december 2wif6 e.c.b. meeting. i remember being in london, the excitement about what draghi may or may not deliver. how are we set up and what are the comparisons between now and then? >> john, brilliant question. because a year ago, we were set up for draghi doing something. he disappointed the euro and bond yields rose as well. so draghi will want to control expectations. i think the answer to your question is an extension is nailed on, probably by six months, $80 billion a month. the big question is when are we going to get tapering? the economist suggest we might
get some action in the last half of next year. and then we get on to the other side, capital keys the deposit rate but extension nailed on and draghi will not want to disappoint the markets like he did last year because he set us up and he disappointed. and he disappointed, john, as you remember on december 3, 2015 when john pharoah was in town. seemed like a long time ago. jonathan: i know. nostalgia. it all comes back. looking forward to the coverage. full e.c.b. coverage on bloomberg tomorrow the news conference beginning at 8:30 eastern time. next, at&t and time warner, $85 billion deal question. they will be testifying before the u.s. senate judiciary committee in just a few minutes time. could be megamerger. we will discuss and anticipate that hearing. that's next. from new york, this is bloomberg.
david: this is bloomberg. i'm david westin. we are less than 10 minutes away from congress hearing on at&t's proposed $85.4 billion takeover of time warner. for more on what this means, we're joined by alex sherman. so alex, what is congress doing with this at all? the justice department enforces the law. can congress block this even if they want to? >> they cannot. so this is sort of a political show what we're going to see. that said, we might get a little bit of insight. the major question armed this deal is if the f.c.c. is able to have, you know, jurisdiction for lack of a better word over the c.e.o. will they insert themselves in this deal and therefore, weigh in on whether or not this deal benefits the public? because the f.c.c. has a different standard than the department of justice which this
actual regulatory body. the reason comcast time warner cable didn't go through was because the f.c.c. said we do not see a demonstrable public benefit. not that it won't do no harm, but no benefit of this deal. and therefore, we plan on kicking it to an administrative hearing, which can sometimes last years and therefore, the deal fell apart. this dials uncertain if the f.c.c. will even be able to weigh in because time warner, inc. only has one license to a broadcast station. if they sold that off, the f.c.c. will say we're not involved. david: that's the speculation. the f.c.c. would lose jurisdiction. even if they had jurisdiction, it's going to be a different f.c.c. tom wheeler is already stepping down from the chair. >> absolutely. but at least you can follow along today and listen to what these different senators and so forth are saying and think about it in the lens of will at&t and time warner be able to make a case that there is a public benefit for this deal? that's the reason to pay attention today. what are they going to say? you can guess what they are
going to same. you can say that owning -- by at&t, owning this content, we can move forward the progression of mobile video in a way that we couldn't if this merger didn't happen because by owning time warner, we therefore have at least control over some content and therefore, maybe can sort of pressure other programmers to hop on board and join our mobile video service. david: and i also suspect that they're going to say why are you worried about us when you should have be worried about google and facebook. those are the really big guys. >> right, exactly. so the one area where they press might be one of the more interesting things here is this idea that at&t could take time warner's content and then if you watch time warner's content on an at&t mobile video service, it is not counted against your data. so that might be one thing that regulators look for to say is this fair? do we think this is fair? are they favoring one content by another? what do we want to do with this?
>> hearing is six minutes away as we all wait for it. is the elephant in that room comcast and nbc? >> to some degree. i mean, donald trump said he would try to roll out comcast zphbs he would block at&t-time warner. now that he has become president-elect as with many things with donald trump, he is starting to walk back his former statements and some of his advisors have talked to the two companies already and basically said we'll give you fair hearing. just like congress can't block a deal, the president also can't block a deal. david: how does this play out for the renzi if the democrats, it's a clean shot. the renzi, you have to get the pop lies and we don't like big government or big at all. you're typically not put for a egulation. >> it would be hands off. i would be surprised if the
biggest waves comes from renzi. they're going to come from the people you expect like al franken and etc. jonathan: so nearly 26 minutes into the session. this is how the session is shaping up. futurings were flat throughout much of the session. stocks are too. we're up by a marginal two points, the s&p 500 rolling over by about three. tomorrow, all about the european central bank decision. the stage set with the euro stronger. the cable rate softer at 125.98. that does it for "bloomberg daybreak." thank you very much. "bloomberg markets" at the top of the hour from new york. this is bloomberg. ♪
julie: we will take you from washington to rome and cover stories out of india, and theand and the u.s. next hour. but first, at&t executives are set to testify on a proposed merger. randall stephenson and jeff dukas and mark you can are about to go before the senate judiciary subcommittee on antitrust, commission policy on capitol hill. if the two companies are able to go ahead with the acquisition -- the committee chairman michael lee and a ranking member will give opening remarks as well. we will continue to bring you updates on this hearing over the next hour. you can also watch right now on live no.