>> china intervenes. $590 billion selloff. we have new inflation figures, the 2% targets may be increasingly hard to achieve. the euro declines against the dollar. and more on the saudi attack in tehran. good morning, this is "bloomberg surveillance? -- this is "bloomberg surveillance." so this has been impact on the eurodollar. it also has an impact on the ecb's thinking. been keeping our mandate at 2%. and at this point, it seems impossible. tom: what is interesting to me is the further idea of deflation. depicted agermany spot here and a spot there and it becomes a concern for anchors. wherene: inflation is not mario draghi was expecting to be months ago. let's get to the first word news. vonnie: china has moved to prop up the sinking stock market. state-controlled funds in china -- equity. that -- willhows stay place passed this week's expiration date. both the shanghaied index and the shenzhen fell. allies in saudi arabia are following the kingdoms lead and are downloading their relationship with iran. they cut diplomatic ties with iranians. anwill no longer have abbasid are in tehran. embassyafter the saudi was a tax after the death of a popular shiite cleric. making itobama is tougher for criminals or the mentally ill to buy some guns. -- increased background checks purchased from dealers, even if they are bought online or at gun shows. it targets many gun dealers who are not required to submit names for background checks. he is using executive order. federal authorities are keeping their distance from an armed antigovernment group over a national wildlife refuge in oregon. the goal is to turn over the property to the government. says it is working to bring about a peaceful resolution. rips up hisanders attack on wall street today. york, hech here in new promised that he would break up the banks that are now considered too big to fail. he says those banks have too much economic and the little power -- and a little power over the country. i am vonnie quinn. tom: thank you. many of our journalists will be with us this morning. a lot going on in the markets, particularly in the middle east. let's get started with the equities, bonds and commodities. futures have deteriorated and have done that over the last number of minutes. -13 on the bloomberg terminal. that is a big deal. we will have much more on that. 36.77.rude, the fix is well over 20 points. i call that the 20 year average. michael purvis is with us in the next hour. i'm going to bring back the difference in yield the treat the two-year and the 10 year. this is a big deal as the spread comes through the 120. it is 1.19 percentage points. that is a little inside baseball. francine, i will let you talk about the sterling because you cannot afford to come here. francine: that is exactly right. overall on the risk mode, we are again in lift off because if you look at what is happening to the european stocks, they are now fizzling out on worries about china. the stoxx 600 is down 2%. and a littles up bit of relief for the canadian dollar at the australian dollar. tom: the mexican peso and the resilient re-out -- the are rising.yale the idea here is economic 2006-2ion slowdown in thousand seven, up we go to a steeper yield curve. this is a rollover. , one point 20 difference in yield between the 10 year and the two-year. vonnie: it seems to be suggesting lower expectations for inflation. tom: they want a steeper yield curve to make the cash register ring. foreign exchange is front and center this morning. francine: let's focus on fx. we are joined now from the i know tomlondon -- wants to talk about the dollar strength, but how much extra pressure does that add to the european central bank? >> it is a major disappointment. we have seen this story again and again. inflation is refusing to that. another country with a similar story, it is sweden. look at what they did yesterday. they are sharpening their talk. low inflation is a big problem for these europeans still. what does that mean for the european dollar? jane: it is reflective. it is not reacting the way you might think. the euro didn't go down against greece. and then we had the bursting of the stock market in china and the euro again went up. the euro is more likely to go down when risk appetite is good, when investors want to short the euro. so i think if we have the chinese stock market more stable by the end of the week, the risk appetite is a little bit better, and it is likely then that the dollar would go down. tom: run up the sterling chart. there are sterling folks and sterling dollar. we will look at the sterling dollar, we are breaking down a new weakness. there is a currency war in south america and in asia. is there, all of a sudden, a currency war with washington and jane: i think there has been if you look at the eurodollar and then on the backs of the swedish, they look very closely at the euro. but i don't think necessarily that the bank of england has been involved for a much in a currency war. the weakere look at sterling against the dollar, u.k. inflation is too weak. so this will give them a bit of an injection in terms of inflation. happens if we get a parity call on sterling? the eurodollar to go through parity, what does that mean? 1.42 sterling? we are not calling for parity. we don't think it will get down that far. but certainly, for the bank of england, euro sterling is more important. that is this currency that they will be looking at quite closely. what we have seen in the past month is that the sterling has given up some ground, it has been weakening, that is good for the bank but it is something we will be watching very closely. the u.s. referendum could weaken the sterling if there is uncertainty in the u.k.. francine: thank you so much. that was jane foley. we have david stubbs, a market strategist. great to have you on the show. tom keene is in europe next week. that is why we are focusing on the sterling. there were traders who were worried and we saw a lot of stock shift in pound. there is a referendum, if you go do anything, you have a sure lifted window to do it. david: there are a lot of factors that are cutting both ways in mark carney's world. -- is going to be important for an economy like the u.k.. and also the political risk and the suggestion that they want the referendum to be earlier on are going to be in mind. but if you look at the data, there has been a slowdown in leading indicators. it is not clear that the domestic economy is where we want it to be for a rate hike. manufacturing, business confidence, confidence in pmi at waitrose as well, as it has slowed slightly in recent months. it certainly doesn't give you the idea that they are ready to go for rate hikes. francine: it was september and october that we were thinking we would wait until the hike. but now the hike has been pushed back to 2017? it is i'm not sure that deftly going to happen next year. things are falling into place. the fed rate hike was a big one. we don't know what the fed will do this year. i would be surprised if they move in the first quarter. i think they will wait until the second quarter. the may bank of england meeting in serious doubt. boldly less than a 20% likelihood of a rate hike there. but then we do have to watch the deflationary impressions. and of course the global disinflation very story that we see in china, in the manufacturing prices paid in the united states, we saw it in germany's inflation yesterday and we will see it again in europe. we are still in a dis-inflationary environment. very quickly, when you talk to your team at jpmorgan, what are the correlations across assets right now? are we tightly correlated? david: i think what we are hoping to see is the ability for stock pickers to make good decisions amongst the stock universe. it is clearly not where we want it to be. it doesn't have the same kind of potential in recent years. we are in a large bull market. the euro, you saw some extraordinary divergences and low correlations at certain , especiallyt year in the u.s. stock market. but now if you look at the multi-asset group, more than ever, because of doubts, the most important correlation of all, between bonds and stocks, you are having to employ -- having to employ more sophisticated techniques. us as wed stubbs with go into an interesting five hours of bloomberg surveillance this morning. we thank you all for watching. purves will join us in the next hour. we are looking forward to catching up with him. he is watching the asian foreign-exchange markets. ♪ finally, you can skate across the hudson river. it is a little cold in new york city. , --lly, entered a sense finally, winter has dissented. here is vonnie quinn. vonnie: volkswagen is facing billions of dollars in penalties they installed illegal devices meaning to beat emissions tests. they are already facing hundreds of private lawsuits in the u.s. they say they're working with all agencies involved. orange, iscompany, in talks to buy a rival telecom unit. there is no predefined outcome. day -- thea bad global selloff cost them millions. $3.7 million.t -- was down $2.5 billion. buffett, carlos slim and bill gates lost a combined $2.5 billion. that is the bloomberg business flash. francine: thank you so much. the area inflation rate remained at 2% in december. for more on what this means with the ecb, let's go to berlin where we are joined by hans nichols. was lower than expected. does that mean that qe is not working? or is there a push to do more so that we can make sure it works. hans: maybe both of those. we need to do more. mario draghi insisted that it worked. in germany, i'm treated to the german view. that you do have inflation but it is the low price of oil. when you strip out the oil and energy, you have 0.9%. that is not an impressive number and it is a challenge for mario draghi. ,rancine: why are central banks and the ecb, targeting a price gain in a disinflationary environment? and itt is their mandate is their challenge. have to do something to have upward pressure on wages and that is the lowering unemployment rate. we saw better numbers than expected coming out of spain. in germany, unemployment fell as well. it is still around 6.3%. the challenge is wage growth. the same wage growth in france. when you look at last quarter, 0.2%, you are not seeing its rebuff. tom: the idea of the hollow alliance -- tell our international audience of the german support and the vector of support for chancellor merkel. how hollow is the support in germany? is not so much hollow as it is being even away at by the alternative for deutsche land. but the problem, if you want an alternative to merkel, there isn't one. whatever coalition you put together, she has to have the spd. so the coalition in some ways is more dependent on each other. -- could see a scenario for the most popular politician in germany, he is at 77%. angela merkel is at 57%. then you get back to the coalition. how would his coalition look different than angela merkel's coalition? it's hard to say. tom: thank you for the briefing from berlin. martin feldstein, we will speak to him on bloomberg about international economics. american deficit. stay with us in new york and london. this is bloomberg surveillance. ♪ francine: welcome back, i am francine the clock, i'm in london with tom keene in new york. funds to prop up the stock market after a drop yesterday, chinese central bank has moved. for more, let's bring in tom orlik. was meant to be the year of reform. what does today's action tell us about free-market globalization. tom: nothing good. the government has achieved its short-term objective. they have stabilized the market on tuesday. but once again, it has come at the price of heavy-handed intervention. the buying of state owned funds and reports that chinese securities regulator has extended the ban on share sales by major investors and china state own eggs have been active in the foreign exchange market, preventing a sharp slide. short-term objective of market stability has been achieved, but this is not some kind of equilibrium in the market. highs been achieved at a price in government intervention and damage to the operation of china's market. overall, china seems to have restored a little bit of stability. what price of they paid? -- what price have they paid? tom: it is a heavy price in terms of the government's credibility, the credibility of the longer-term commitment to reform. 2013, remember back in china's new leader set out and agenda, marketn control of the economy. they have made some progress on that. thewhen they wade into market so aggressively, it questions their commitment to that process. francine: thank you so much. that was tom orlik. david, our guest host for the hour. does this make you think that it will actually make it take much longer than we thought? the chinese stock market has not corrected anything back to a reasonable valuation in our view. you have to separate two things. the chinese government is comfortable with this gradually slowing. they have the tools and yes, they can use fiscal policy with things like the housing market looking stronger. a differentrket is animal. it is a casino in some ways where you get the huge swings and interventions, not the market we want to see. francine: david stubbs will stay with us. we will crispin hawes, be talking about the saudi and iran relationship. ♪ tom: in our next hour, from hong kong, michael purves will join us. what is he watching? the number one thing he is watching is the asian currencies asked japan. it is well timed with the foreign exchange and the move this morning. here is the first word news with vonnie quinn. government chinese is trying to reverse the route in the stock market. the securities regulators signaled that a selling band will remain in place past of this week. the shanghai index is close down again today. beijing had its first two red alerts for pollution late last year but officials say the city's air quality was better than 2015 than the year before. it fell 6% from 2014. deliberate acts caused more airline deaths then accidental crashes last year. last year's eight accidental crashes killed 161 people. the lowest in years. in 374 people died deliberate crashes that are called preventable. you remember that flight, in march? the russian airliner also that went down. can't get guna legislation through congress so he is using executive order to keep guns away from criminals and the mentally ill. it will require background checks for gun spot from dealers, even if they are bought online. it aims at more dealers who are not subject to background check. , i am vonnies quinn. francine: it is time for a morning must-read from the financial times. it says, if dialogue has to , washington will first have to deliver some tough messages to the saudi's and iranians. this is a time for reason and containment, not recklessness. we are john -- we are joined now by crispin hawes. welcome to the show. when you look at what we have seen over the last couple of days, it is unclear to me over whether the death of the cleric -- because they found him too liberal? they are optimistically -- they are optimistically responding to this. they are using this to reestablish and set the bar for radicalism. say, they have sidelined him to some extent. , thisne: when you look does have an impact because opec is made of many members. two of them are iran and saudi arabia. that: you can tell tensions in the middle east can cause a spike in oil upward. but obviously, the big story over the past couple of years have been the breakdown of any functioning, even if that was functioning at all. this has turned the breakdown of opec into even more acrimony. or me, it it makes it look like supply will be out of control. tom: how alone is saudi arabia? crispin: in what respect? tom: in respect to its allies. kuwait has decided to move relationships with tehran. how alone are they or do they have a group of staunch allies? crispin: they certainly have a group of allies. among them is kuwait, the -- that is more of a dependency rather than an alliance. we would expect all of those countries to line up on the saudi side. the emirates have their they are in iran, so downgrading relationships rather than cutting them. i would suspect that the tension between saudi run -- saudi and iran is going to be cause for concern going forward. dubai looks to benefit from that. we are seeing a lining up on one side of the fence. the iranianes military project? i have no clue. what is the state of the iranian military? way it: in terms of the affects saudi arabia, it is by its proxy relationships in places like yemen and syria and its alliances with various shia militias in iraq, where it is most important and effective. andink they could line up iss assessment of military strengths, that it is not relevant in this case. francine: who is going to mediate the standoff? on a geopolitical base, why have we not heard from vladimir putin , who is someone who has a been friendly to the country? i think that is an exaggeration, it is a fixed relationship going back many decades. so to see putin on the iranian side because he is not on the u.s. side over civil size the situation. logical -- really a at this point. it is a matter of these two regional powers working out they are toxic relationship. francine: where does this leave the nuclear deal? then david, i will come to you. but does this put it on the back step? this was the year when iran would become more international. again, the iranian regime is using this as an opportunity to remind the world that it is not a moderate patsy. it is coming back economically but it is its own economic organization. will continue to hold to its principles. market question isn't about iran, it is about saudi arabia. we had the news last year that they were opening the market to international investors. be a sourcet could of geopolitical tension puts it? on that. a question mark on that. tom: what is the u.k. differential? the u.k. sees its role slightly differently. between the major eu states like france and germany, suffer , andmically towards iran the u.s. position which is a hard line, a very difficult relationship. the u.k. finds itself caught in between. reopening ofe relationships with iran over the last seven months is something that they will want to defend and protect. relationships are not full ambassadorial level yet. so the u.k. will not move aggressively in that direction. they will follow the eu lead. and as sanctions come up off iran, the eu will see those sanctions as part of the eu law. tom: how can we have sanctions if we have an agreement coming up with iran? i don't understand that. how can we have new sanctions? crispin: the u.s. in particular has sanctions in many countries without problematic relationships. we have many countries who have export restrictions on things technology, dual use technology. it is not uncommon to have sanctions and measures in place. ofiously, the process additional sanctions by the u.s. on iran has a lot more to do with the internal political situation in the united states. crispin hawes, thank you so much. coming up, we continue our analysis of the relationship. hani sabra will join us. we will look at more than the hollow alliance. stay with us on "bloomberg surveillance." ♪ francine: welcome back, this is "bloomberg surveillance." you are looking at live pictures, tom keene does not like this shot. it is not the most glamorous place but it is an important place. a lot of companies are based in that part of the city. still with us is david stubbs. we also have happier black. oil.arted to talk about the functioning of opec. i ask you, and you spoke about this with heavy air -- with javier, and you disagreed with that. david: i would have disagreed and say now, it is alleged with oil. the lack of supply control that the group has entered that has been the major for the route that we have seen over the last 18 months with surging from the united states. of course, during these recent courses when opec has been trying to get their act together, you have them saying, we will not restrict any sort of oil production because we haven't been able to sell it for years. francine: when you look at oil, has it bottomed out? javier: no, the most likely situation is that we will see lower prices in q1, but at the end of the quarter when the winter starts to fade, a lot of refining capacity goes into maintenance. maintenance to prepare for the summer when there is a need for the gasoline. that'll be the critical one. that is where we will see a reduction in the demand for crude oil. if you believe the more -- outlook from goldman sachs, we could see gas in the $20 range in the first quarter. tom: when does iranian oil come on? we are doing saudi arabia and iran, saudi and iran. when do they deliver barrels? javier: in the next 2-3 weeks, we have the implement date, and at that moment, they are able to sell. the barrels could come very quickly. iran is going to take a long time, up to one year. now, that thinking within the trade community is that it could be delivering a lot of oil in weeks. tom: i like that analysis. is it priced into the market at $36 a barrel? javier: it is beginning to be while i think some beginningnian oil is to be priced into the market, i think there is still some skeptical traders and investors out there who do not believe that it will come so quickly. the moment that it happens, i .hink iran will price that is when we will see lower prices. that will coincide when refineries are going out of work , that is when we create the glut. francine: this brings us back to inflation across the world, especially eu inflation. zeros stayed close to the level. they only have one mandate, to put prices up. david: absolutely. we are seeing an extension over the last year and 18 months of the dragging headline inflation lower. end, itpoint, it will is not going to zero. when we do, it is going to be very pro-risk and it will lead us to flow input costs into companies and it is good for margins and profits and the economy and consumer spending. the market is extremely violent right now, not just for central banks. we have energy companies struggling with oil prices. what routeuickly, will iran take for exporting oil? what countries does it need to keep as allies? target iran is going to traditional customers of the crude oil. china, indiana, japan. those countries are already buying crude oil, but they're limited under the agreement with united states. the moment it is lifted, china and india are countries where you will see more oil from iran flowing. france -- those three customers will be keen customers. tom: david stubbs, who is the horse and who is the card? is the dollar chasing oil? think what is happening in commodity markets is related markets themselves rather than the price of the u.s. dollar. collapsing commodities, not just in oil, but also in copper and gold -- we have the dynamics of oversupply and the reluctance in the market for many reasons. the dollar has been rising for completely separate reasons. ultimately, the united states economy is more stable than any other economy in the world. in the uncertainty that we have around the world, it it is tempting to buy the dollar. tom: fascinating. javier blas, -- thank you. mostaid one of the fascinating things in 2015. catherine mann. look for that this afternoon on bloomberg markets. stay with us on "bloomberg surveillance." ♪ tom: thank you for coming to us for across asset market view. we are looking at bonds and commodities, they have moved. -13.es are now , strong comes in strong dollar, strong dollar, strong dollar this morning. i will call the bid on nymex. karen demand that we go to the second board. sterling is joy to me. 1.4684. here is vonnie quinn. it is a warning sign that british retailers didn't have a great christmas. next missed analyst estimates by a wide margin. mild november whether is partly to blame that also increasing online competition. the world's largest money manager has issued a warning on wants. bondenchmark 10 year rate now yields 2.25%. lack rock says that will rise to 2.8% by the end of the year. women make up half the workforce in the u.s. but they could be 40 years away from reaching parity with men when it comes to corporate board. about 22% of open seats in the s&p went to women in 2014. that is the bloomberg business flash. last 24noted in the hours, -- becomes chairman? chairwoman? vonnie: chair? tom: i think it is fabulous. an engineer is going to gm. vonnie: just like janet yellen. to each his own. her own. when you talk about women in the board room, it is an important issue, but it is also an important issue when you look at countries like japan where you have a structural problem. one of the areas that shinto abe was going to kickstart. let's get back to equities and possibly to japan because it is one of his favorite countries to invest in. david stubbs from jpmorgan is still with us. in 2016,look at japan, we are at the start. you like european equities and japanese equities? david: sure. some people prefer developed markets over emerging, japan is an unusual example to kick off because it is doing things it has never done before. if you look at the margin, they are at all-time highs. they have been explosive in recent years. there is a question about or aer this is a new world temporary sugar high which will fall back. we are reluctantly and cautiously optimistic. it has certainly worked for investors. you have less austerity which is crucial in europe, they have announced their is the potential for margin expansion. the valuationsing note, look at emerging markets. since the early 1990's, they are cheap right now. but we still remain cautious. that analysis. i love the small percentile of emerging-market valuation, what do you see a flow of money from chips or does that fall to emerging markets, or do you say american centric? it as ae certainly like core equity holding. it is on good foundations although there are margins of pressure. we do believe they will continue to hold up. once the drive from oil has faded, in the second half of the year, and the dollar stops rising as fast, it will be just fine. the big story on emerging-market flows has been the net outflows. we have seen emerging markets have left the core professionals and only investors remain. certainly, that is one part of the building case for emerging-market equities and the ability to reengage. we just don't think the fundamentals support that right now. in a tease for the next hour, bring up the fix chart. what do you say to rising volatility? bringing it back to the 20 average? david: for a long time, we have seen volatility as too low. we think they need to defend themselves for a volatile few years. and thes comes returns ability to outperform as an active manager. we think that is something that will be a big theme over the next couple of years. but investors have to go into this with realism about what they can expect. we think made single digits is what we can expect from the old the asset portfolio. and given the risk, it is going to be difficult. david stubbs, thank you so much. i look forward to seeing you next week. weing up in the next hour, will continue this conversation with a focus on foreign exchange and how it unfolds in the equity markets. michael purvis will be with us. stay with us on "bloomberg surveillance." ♪ tom: 2016 brings renewed dollar strength. but the currency wars continue. -- chinese equities -- they cannot find a bid this morning. beijing intervenes again. we continue a consideration of the rest of 2016. the future of american ally saudi arabia. good morning, everyone. this is "bloomberg surveillance ," live from our world headquarters in new york. where is the month going? i am tom keene in new york. in london, francine lacqua. tell me which restaurant at harrods i should go with with my strong dollar. francine: you can go to harrods, buy anything you want. tom, look at inflation. if you look at central banks, it seems that inflation is a losing gain. we had the confirmation of that, the euro inflation in the last hour, much worse than expected. right now we are going to inflate to our first word news. here is vonnie quinn. vonnie: china's government quickly props up the sinking stock market after a selloff. to balance selling by major investors, it is being extended. sources asked not to be named. and market wide halt was triggered in trading. kuwait -- posted by attacks by protesters on saudi officers in iran. d thattrators are angeree saudi arabia executed a shiite muslim cleric. president obama is taking steps aimed at making it tougher for criminals or the mentally ill to buy guns. the administration wants to require background checks for guns or dealers even if they are bought online or at gun shows. is using executive orders to bypass opposition in congress. acts cause more airline deaths than accidental crashes. last year's eight accidental crashes killed 161 people, the lowest total in nearly 70 years. but 374 people died in two crashes the firm calls preventable. the germanwings plane that was flown into a mountain last march and the one that was shot down over egypt last october. i am vonnie quinn. tom: thanks so much. let's go to the data check. i want to get to our esteemed guest quickly. futures negative four, deteriorated the second day in a row. the euro weaker, the stronger dollar. the oil is tenuous at 36.64. on to the second board quickly. brent there under 37 now. 1.4 668.ing, francine, what do you have? francine: if you look at the stocks here, we had an early recovery or that fizzled out, investors worried about the prospect of a global recovery but also worried about -- i wanted to show you gold. the second there on story, it is classic risk off. 4.0 five,lian real further weakness, signaling the tensions we see within their political economics. right now, vonnie quinn, a two cent spread. here are the economic slowdowns were you get a curb and, two-yields higher than the 10-year note yield. dimon wants a steeper yield curve. we do not get it. we get this rollover. are far from inversion, but it looks like traders are anticipating weaker growth and less inflation. tom: can i use my hands? two-year it yield -- two year yield here, 10-year yield here. they can go like this, like this, or like this and this. confused? there will be a quiz on thursday. right now, no quiz needed for michael purves, who has nailed the renewed dollar strength. we will talk about this with our single best chart. is it about dollar strength or about a currency board? michael: it is a little bit of both, i think. now, welates to markets talk about dollar strength, but what strength? is it with the euro? the euro is a little bit weaker, but not dramatically so. i am concerned with the em fx currencies, particularly with china and the asian currencies. tom: within the asian currencies, they are joined by a weaker sterling. bring up the sterling chart. i don't think anybody expected this. 2.10, then we come down and roll over again. why is sterling joining the rest,-- the euro and the being weaker versus the dollar? michael: i am not going to opine too much on the fundamentals of they are aonomy, but much more open economy than the united states. in certain respects, everyone is vulnerable to this sort of issue that we are seeing from china and the eurozone. tradingand the euro is .6% lower today, too. michael: there are a lot of things hovering over there. thes also indicative of point you were just suggesting, tom, that there is a currency war -- currency war is a bit of a strong term. tom: we are in the media business. come on, francine, help me out here! it is not a currency skirmish, it is a damn war, right? francine: i know the strength in the pound was a problem now for the boe, and then the fed raises rates and we thought that mark carney goes next. and we have weak manufacturing. seems that the boe will have to probably wait much longer than we thought. saving foroing to be central-bank banks in 2016 overall. michael,ight? tom: that was a question to you. michael,, on. for 2016.our hangover michael: i'm sorry, i'm having a problem hearing you. probably the chinese central bank to a certain degree. they sort of cut out the strategies and they seem to have the political will to support those strategies. you do not hear a lot of euro debasement on the political front there. i think china is the one i am going to be watching the most, to see whether they develop much more like a developed central market bank. there is some talk about them, developing some sort of qe program themselves. vonnie: given the european inflation data that we saw today, is the ecb first interest -- how will that play out in 2017, do you think? michael: i think it is going to later, not sooner. tom: how do you link the recent turmoil of two days into equity markets? michael: you have to look at what these asian currencies are going to do. it is not about u.s. jobs data that we are going to be getting. it is not -- to a degree it is about europe, but the big swing variable in risk appetite is things that the fed cannot backstop, which is china. the idea of asian dx why rolling over, that is an important chart for this year. lookg up, we continue our at the risk of 2016. ian bremmer with us yesterday. stay with us. "bloomberg surveillance." ♪ tom: we are thrilled you are with us on economics, finance, investment, international relations with a frigid new york. we are warming up this morning, but nice to get a dose of winter. there is vonnie quinn with business flash. vonnie: volkswagen is facing u.s. finds that could reach $80 billion. for using software in diesel testingcars to trick equipment. president obama's specific rim trade pacts will get an endorsement today. the manufacturers trade group yesterday. the roundtable is made up of ceo's from major u.s. companies. burger king is investigating a fast -- burger king is investing in a fast food price war. recent offersf from wendy's and mcdonald's. burger king is not saying how long the promotion will last. that is the latest "bloomberg business flash." us to discussing escalating tensions between iran and saudi arabia is our guest and we are lucky to have him in london this week. great to have you on the program. we have been trying to figure out what the escalation, the standoff is it we had diplomatic ties being severed from saudi arabia. run us through the tensions that have been brewing between the two countries for quite some time. why has it now come to the forefront? toi think you need differentiate between two things, between the execution ofelf and the eruption relations between saudi arabia and iran. the execution seems to be to deliver a domestic message. what the administration has been doing, taking bold assertive policies -- in 2013 they went to war in yemen. they ended 2015 with some unprecedented, risky economic reforms. they started the year with executing 47 shiite clerical men. in one message they say we are not going to tolerate dissent or terrorism. was, we arereaction criticizing that and then we had the saudi embassy attack. you can say that the cutting ties fits with this bold, assertive move, and then you can see in history they did the same thing in 1989 after a similar attack on the embassy. tension has been brewing since 2011, and this is the latest eruption. vonnie: these are two -- francine: these are two big opec members, and there are tensions because of iraq and syria. will this escalate? alaa: this is been going on in syria and yemen and other parts of the middle east now. will this escalate further? serious efforts in peace have been stumbling anyway, but this will likely deal a blow to the efforts that have been underway. there was some peace talks in and will thisnth, actually materialize, or will the saudis more aggressively push yemen? tom: thank you so much again. good to see you in london, from our dubai news bureau. we continue to look at the risks of 2016, of course with eurasia group. hani sabra joins us. the chart of oil is simple. this is the humility of 2015. the nixon years, and up we go with another leg of opec. the 1986 collapse. we come up with china, the boom. saudi arabia learned a lot of lessons with the collapse of oil. real oil adjusted for rising wealth. i am fascinated with your take on how saudi arabia looks at their oil experiment of the last 12 months. hani: i think a large part of the saudis would say that it is somewhat successful. i do not think it succeeded in the way they wanted it to, but they demonstrated that they have a higher ability to withstand lower oil prices than their competitors. that is the point they are trying to make. they want to show they can deal with the lower oil environment than iraq can, then iran can, then russia, venezuela, nigeria. show that the era of doing a favor for those countries is over and that they have the money to back that up. there is a heritage of oil security analysis. how wrong were we 12 months ago? michael: are you talking about peak oil? iran pushed against that, i remember. michael: one of the questions i would love to get into is, what are the saudis expecting from the long-term price of oil? and showts back to 60 producers start going back in, how do we get out of this game? is in saudi arabia also at war with technology a little bit, in terms of the rising cost of oil? an -- thatnk that is is in large part due to the fact that they have not cut production. they knew that they would get very temporary relief because it would spark shale production. they did not do that. so they are constantly going to be playing catch-up. that is part of the reason why, as the bloomberg correspondent said, the saudis have implemented these economic reforms at the end of 2015 because they know they're spending patterns have to change as well. michael: in their long-term planning, do you have a sense of what they are expecting? do they model $50 oil from $60 oil? alaa: my guess is they would want the oil to be in the $70 to $80 range. michael: but this flaring to 100 or 120 -- hani: that is not going to happen. to the analysis of the terminal value, which to me is smoke and mirrors, the boston red sox figuring out carbon analysis in london is a mystery to me. francine: when you look at opec, you look at saudi and iran being the two most important opec members -- where does this lead the cartel? opec, they also sit on the side by side. hani: i think that opec is becoming much less relevant. foras not acted as a cartel a long time, so it is not that relevant. when you look at production, production restraint, the big thing to look at is what saudi arabia and the core opec countries do. that is key. tom: we are going to come back. i know you have something with michael purves to get to on oil, and hani sabra as well. brendan greeley is at the annual meetings of the american economic association. he will speak with laureate robert shiller of yale university. dow futures -1.02. this is "bloomberg surveillance ." ♪ tom: at the bloomberg terminal, we keep you abreast of the markets -- equities, bonds, currencies, commodities. the equity weaker, the strong dollar. the shock and all of distant -- the shock and awe of disinflation. we have a smart morning must-read. francine, what do you have? francine: we picked nouriel roubini writing in "project syndicate." he says -- he starts off saying what could go wrong, but -- francine: this is a pretty bold call because we see a lot of concern in europe -- talking about shenzhen yesterday. geopolitics not only in asia, but also the presidential election in the middle east. we wonder if middle east is the hotspot. sabra, what do your risks say about greece? it sort of drifted away in our mindset. alaa: i think -- hani: i think europe is still a big risk. in addition to brexit, when you see the likelihood of greg's it -- tom: francine has a charm bracelet that spells out grexit as well. did you think we would be saying this five years ago? vonnie: the funny thing is, everything will country is putting in a series of measures in place as a backstop in case any of this happens. somethingfear is that that was perhaps maybe a 10% months ago has increased to maybe a 40% scenario. vonnie: overall -- i know we should worry about europe, but i live and work in london. it day inbout grex and day out, but the middle east needs to be solved. the middle east should not get worse. will get middle east worse p when you look at the tension between iran and saudi arabia, it is not going to get results. the conflict is going to worsen, so the proxy wars between those two countries is going to worsen. tom: can we caught -- can we pause and go back a years? i did not realize this. the irish-german spread is under 1%. -- , dubl they didnd italy -- not need a grexit. michael: i just got back from spending a week in spain following the elections where the socialist gained -- where the socialists gained a lot of traction there. it is not so much anything so much as dramatic as an exit, perhaps, but maybe more stagnation of reform. that to me is one of the bigger risks. you have a lot of polarization on the left and the right, and as it happens, my sense is that as the polarization happens you are going to have less chance to perform. tom: michael purves is with us. as stiglitz writing it up in well. stay with us. ♪ francine: welcome back. it is a classic risk-off mood. we are not seeing the situation we saw yesterday. s&p futures are down, and gold is higher. look at the pound. tom keene is showing up, and it just got a lot cheaper for him. and also how you model grexit. vonnie: iran is sending mixed responses today after being snubbed by saudi arabia. it is telling the united nations it wants to arrest those responsible. iran's president says the saudis cannot cover up cutting off diplomatic relations. the weight joined other saudi allies in ending relations with iran. china's government is trying to avert the country's stock market route after stocks fell 7%. onwas event -- the ban selling majo investors was -- president obama is using executive orders to keep guns away from criminals and the mentally ill. the administration will require background checks for guns purchased from dealers is and if they are bought online or at gun shows. the plan is aimed at smaller dealers who are not required to do background checks. three nfl teams are not buying into the old "there is no place like home" idea. a day after the regular season ended, the oakland, san diego, -- st. louis franchises tom: you're kidding. i did not know this. owners would have to ok a franchise move. they are seeking to move to los angeles. i am vonnie quinn. who do you vote for or against? francisco 49ers to oakland is an easy move. what do i know? ambiguity is something we do not run from. tony blair, the former prime minister of the united kingdom, maybe is the most forthright about ambiguous international relations over the last decade, even two decades. my morning must-read is from prime minister blair. i thought this was a very nuanced piece for the critics of prime minister blair as well as those who support him. we should think of the middle east and islam as being in a process of transition. tales -- this dovetails perfectly into eurasia group. -- middle east and northeast the middle east and north africa practice for eurasia group -- it's a shoe back to the time of our romney and the the idea of a wrist -- the idea of a wistfulness. hani: one of the things that he is probably arguing for is talking about countries were rule of law matters most. i do not think that is across the region. i think the one country that will probably happen is maybe tunisia, this is not a country that has a great deal of influence on the rest of the region. tunisia is not egypt, saudi arabia, syria, iraq. with a nobel prize going to one of their leaders. in the tribal history of these nations, how close are they to anything like rules-based, which will be comfortable for washington and for london? hani: nowhere near it. tom: it is not even a dialogue, is it? francine, your thoughts on prime minister blair's morning must-read? you said it directly, that it really shows the nuances. we have been covering the story over the last 72 hours and you can see the different factions. it is not only about the region but about internal iranian politics. what would be the biggest fallout if this escalates? we also have to remember that we are looking at a possible nuclear deal with iran. is iran the biggest loser in all of this? the: i do not think that is case at all. saudi arabia is one of the bigger losers in what we are seeing developed in the region. that is part of the reason why you are seeing a more assertive saudi arabia. saudi arabia wants to respond to what they see as a rising iran in a forthright and assertive manner. i do not think iran is a loser in the region. iran's alliances and place in the region is improving, and saudi arabia's alliances and place in the region is weakening. i think saudi arabia is one of the bigger losers. one of the things to discuss is domestic politics and saudi arabia. that is a big factor as well. you can mediate this. is there a country that could help moderate this escalation, or is there no one? hani: i think at this point there is not, to be honest. in the longer term, perhaps the russians or the americans could play some sort of role, but that is not likely. tom: we spoke yesterday with ken pollack, who is shockingly cautious, not pessimistic, but almost defeatist about moving this dialogue forward. politics,ose domestic the saudi arabia domestic scene. one of -- what is the focal point for you? hani: the big thing we see is a deputy crown prince who is 30 years old who wants to demonstrate he is in control. part of the way he is doing that is by being bold, by being aggressive. tom: is he is a 30-year-old deputy crown prince doing their foreign policy? hani: yes. he is technically the second most powerful man in saudi arabia. the day-to-day affairs in saudi arabia, he is running the right now. the crown prince, 59 years old, the interior minister, is someone who has a good relationship with washington. he is becoming less politically relevant. tom: i fly into riyadh to sell bloomberg terminals, and i am looking out on riyadh. does that riyadh support this deputy crown prince of the vintage 30 years old? hani: i think that riyadh supports any leadership as it delivers to the public. i do not think that -- saudi politics, it really happens at an elite level. it does not matter at this point what the public thinks, as long as the public is being served. if the public is not being served, then what they think matters. the reason it does matter is these economic reforms. gasoline prices are increasing. the welfare state that the accustomed toown is slowly being scaled pack. over time, the saudis will begin to be more assertive. francine: i was going to ask you about timing. even though we were at the imf summit in lima, and there was so much talk and appetite to understand where saudi arabia was going in 2016, and this was before this escalation happened. hani: the important thing to watch in where saudi arabia is going is with domestic politics. do you see a change? does the king decide to remove the crown prince from the line of succession and appoint his son, the deputy crown prince, to become the crown prince? that would be a messy situation. that would impact saudi domestic politics in ways that are more critical than questions like the oil price, like the conflict with iran. that is the key to watch in 2016. tom: a really smart conversation. hani sabra with us. risk analysis for next year -- all this week we will focus, as a template for the look and international relations on the eurasia group effort. michael purves is with us from wheaton group. today,mberg radio johnberg surveillance, golub will join us. we will come you this morning. ♪ francine: welcome back. this is "bloomberg surveillance ," and i am francine lacqua in london. next week, a weaker pound. "london, this is the bbc." that is what it looks like. we need to get to a bloomberg business flash with vonnie quinn. vonnie: bernie sanders is doubling down in his attack on wall street. he is promising that he will break up the two biggest banks if he reaches the white house. the woman who is steering general motors has a new title. mary barra is chairman as well as ceo of the company. she became the first woman to lead a major automaker in january of 2014. samsung is showing off a supersmart refrigerator. that a 21-inch screen shows recipes and orders takeout. why do you even need a fridge? tom: that is the most important thing you have learned on "bloomberg surveillance" today. let's do better with a single best chart. michael purves with a victory sdxy.n asia the down we go with weaker asian currencies. we come back over. are we going back to the trendline? are we going to take asia dxy back down to that weakness? the answer comes down to china. 41% of that. the other currencies are heavily tied to the economic radius of china. the china economic data is the giant unknown, and it is an unknown that our fed and the ecb does not have the ability to backstop. is it the data, or the reaction? we got some pmi's over the weekend, and they were not disastrous but it was showing signs that it is bottoming and the chinese getting --sort of has sort of gotten a new stability. services maketter up for weaker manufacturing echo michael: ultimately, yes. what i am saying here is that this transition is an awkward adolescence for this incredibly important economy that is underlying global growth and is going to increase as a deflation exporter. tom: they are a deflation exporter and currencies are weaker. larry summers pushes against that and suggests the first-order condition is an disruption,ealth for taiwan and the korean people as well. is it an export game or is it a weakness, a lethargy to the system? michael: it is a great question and i do not pretend to have the answer to that right now. if you look at the chinese import data, that has been going horribly in the wrong direction. exports, you go through the demand side here, and in europe and elsewhere, global trade will be a defining issue this year, and it is not good anywhere. tom: francine, the ofde-weighted dollar is 61% the strong dollar move we saw in the 1990's, up to 2002. we have come a long way over the last two years. francine: we have come a long way. when you look at china, the dollar, a lot of people are saying he will not be the moves in china that we have seen, but michael, when you look at china and after we saw this intervention with china moving to support the stock market, as a market strategy, are you comforted by the fact that they are there and ready to act, or are you concerned that it will take so much longer for it to be market for a? referring to the intervention we saw overnight, no one likes to see that in any market. i think you expect it more in china. than you do in developed markets. it is sort of annoying, it is it does notbut really change my views or make them more negative. the bigger question is, are they going to be increasingly inclined to massage some of the economic data? that is an answer we will never know, but i think that is a question that will continue to hover on risk appetite. what does it mean for dollar strength? back to tom's point. michael: dollar strength here is -- obviouslyeavily influenced by a lot of variables. when you talk about dollar strength, are you talking about it with respect to the chinese currency or just due to develop market currency? that discussion is divergent. we will talk at what it means here. 17,148,with the dow, and with futures below -110, we get dow at 17,000. sanders will be on. he is going after verizon. -- s see if he goes after ♪ tom: strong dollar, forex report, yen through 1.19. a shout out to robert sinche who nailed that call. euro-dollar finally gives way, 1.09, under 1.08. andnonstory is ruble-peso brazilian real do not move this morning on oil, firm at 36. sterling is a big story, 1.4675. vonnie quinn has breaking news on eli lilly. vonnie: they are announcing that their adjusted earnings will be 3.45 to 3.55. they are giving revenue at $20.2 billion to $20.4 billion. byis lower in market trading 2.4% now. what the success from indianapolis has done. vonnie: and there are nine potential new medicines on the pipeline. the latest coming from animal health. tom: there it is on eli lilly per let's go to "bloomberg ." david westin, what do you have? david: first of all, we have the former chair of the council of economic advisers. he will talk about the u.s. economy and emerging markets. ,hina surprises yesterday surprises today by intervening in the stock exchange. we will be talking with our colleagues from over there in east asia as well as experts such as from sandler o'neill. we will be joined by brendan colleague out in san francisco, who will bring us interviews with the head of the cleveland fed and the former blanchard. tom: all of this international talk is great, but i have a 401(k), and i do not know if i am brave enough to open the envelope. everybody is behind or feels behind in their retirement plan. what do they do? michael: a couple of broader comments. when you step back and -- tom: the grateful market and all that. michael: it is important to step back and realize that if you were long on the spx last year, you did not really lose money. it was basically finishing where it started. and you clicked a 2% yield on that, if you will. clipped a 2% yield on that, if you will. it is athe question -- hard question to forecast next year in terms of how equity in the broader risk is going to do because there are two swing variables. it is not the u.s. jobs data. it is oil and it is also china. both of those things are hard to predict. that is one of the reasons why things are going to be -- tom: what strategy do i take? what is my two-do list? all, do not --of there are a lot of reasons to be bearish, but i am convicted we will not get into a real bear trend in the u.s. from a trading strategy, one thing i am fond of now is looking at selling strangles or selling out of the money calls on the s&p 500. -- wass that a month of that a massive jargon alert? when you sell a strangle, you are doing a strategy to bring in income, to enhance your income, because you believe it is going to be -- francine, there will be collarsn strangles and next weekend. francine: when you look at global equities, two notes caught my attention. strategists, citi saying that global equities could go up 12% this year. and that they may go up 7%. is that overly optimistic? michael: i do not. and there is ap, good chance they will, that china will get its act together enough, and that oil will stabilize. i do not think you will get a lot of clarity on it in the next two months. but if some things do happen, the ability to generate these significant earnings growth, in this year, is very real. you could easily have a 10% to 12% year if those factors lineup three. fix back 20 the years. there has been a rising volatility. but to put it in scale, we are back to where we were. what does it mean that there is more volatility? is that good or bad for me? michael: ultimately it is going to help. the increase in volatility, correlations among sectors group,the u.s. equity and stocks themselves, is really pretty low. that is intuitive because you have macro factors like the dollar and oil driving on these divergences. tom: david stubbs mentioned that earlier, the greater dispersion of returns. where do i win? where do i want to be to gain value and alpha from that dispersion? michael: i think there are some -- these are traits, not necessarily -- these are trades, not necessarily long-term investments. we need to be cost us there. you need to look at ultimately if you can find some decent value, and i know that is a tired theme. working,what has been ultimately will probably play strongly. tom: congratulations on your call. tomorrow on "bloomberg surveillance," one of our heritage guests, stephen roach will join us, formerly with morgan stanley. stay with us. acrosserg surveillance," all of bloomberg media. good morning. ♪ david: brace yourself. it's likely to be another rough ride in the markets. futures indicate stocks will fall again at the open. china comes to the rescue. government-backed bonds buy stocks to stop the freefall in government equities. and gender equality in the boardroom? don't hold your breath. a new study says women may not reach parity for another 40 years. ♪ david: welcome to bloomberg go. i'm david westin. stephanie: and i'm stephanie ruhle. trying to deduce whether we will have a bullish or bearish day. jonathan ferro joins us from london. one of our favorite contributors, wall street author bill cohan. happy new year. >> great to see you. stephanie: we are going to get some news.