Welcome to Bloomberg Markets the european open. Im matt miller. Cash trade is less than 30 minutes away. Trump trades antagonism for bipartisan appeal in his first state of the union address, but his opponents find little reason to warm to his vision. What does this mean for his big Spending Plans . And under pressure. Pushing down on may. The u. K. Prime minister tells rebels back home she is not a quitter as she tries to drum up trade in china. Plus, brazil keeps giving for banco santander. Our interview with the chairman in less than an hour. We are less than 30 minutes away from the european open. Take a look first off, at the futures. Drop in u. S. Stocks, we saw a recovery in asian stocks and it looks like this could be the end of the global drought. We do see the ftse futures down, although only just fractionally and use the gains in dax c futures and cac futures. Not quite as tech heavy as the u. S. Stocks got hit the hardest. Lets look at the gmm this morning. As far as the big moves in indexes, you can see the new zealand index was up 1. 7 . There was a big gain in some asian indexes overnight. Especially those that were not super tech heavy were up. You see drops in luxembourg and canada. But these are probably closed markets. The rupee was a gainer overnight. The taiwan dollar, a big gainer. And the new Zealand Dollar you see as well. Some big moves on the gmm. Thats really going to be the story of the day. What is going to happen to equity indexes after the global route we saw from the u. S. Monday and tuesday. It looks to be over on a wednesday in europe. Look at the bloomberg first word news with juliette saly. U. S. President donald trump his first state of the union speech, telling congress and the rest of the world that this is a new american moment, in contrast with polling that shows most americans find him divisive. He also hailed the tax cuts as helping the u. S. Compete globally. President trump we slashed the business tax rate from 35 all the way down to 21 . So American Companies can compete and win against any one else anywhere in the world. Hasette theresa may landed in china with a message to rebels back home who want to oust her. She will not quit. She faces questioning from her facesship she questioning about her leadership from reporters on the plane. When asking if she would fight any formal challenge to her leadership, she dismissed the idea as a hypothetical situation. Chinas official factory gauge has called to an eightmonth low in january, 51. 3, compared with a 51. 6 forecast in the Bloomberg Economist survey. That is as efforts to reduce pollution dragged on activity. The Prime Minister has said he expect the nations economy to turn a corner by 2020. His administration is facing a wave of protests over Living Standards which have been slow to improve after the arab spring revolution. He says the government is working to reduce spending, revive exports and reduce social measures to make the concern of ostias dirt antiausterity demonstrators. [indiscernible] to create jobs, that is the number one challenge for us. Juliette global news 24 hours a day, powered by 2700 journalists and analysts in more than 120 countries around the world. This is bloomberg. Matt thank you for that. Traders seemed to like what they did not hear from President Trumps state of the union address, no mention of the strong dollar mantra, sending the greenback into retreat. Joining us from singapore is mark cudmore, bloomberg mliv strategist. Let me ask your take on trumps state of the union address. It was not quite as devices as you might have expected from this president. Is that a load off of traders shoulders today . Mark absolutely. The big takeaway from markets is that it provided some relief that he did not roil markets. This president is known for causing drama. It is very rare that he passes by without letting a moment for the media to height up what he said. Today the novelty was that there was no novelty. The issues,ided whether it was infrastructure. For the threat on trade, which might have been a negative. He did not say anything too worrying, and that will lift the gloom there from yesterdays price action. Matt we do see further dollar weakness today. Against a number of currencies. The yen stronger, the euro stronger and the pound stronger. What is going to stop this dollar drop . They seethe moment, this overriding sentiment. At some point these things do correct. Turn around hard to at the moment. The markets have dismissed the fact that u. S. Yields have rallied a long way in the last few months. Short and yields have rallied by 78 to 88 basis point. Inflation has not picked up that much at all. Overall, it has been positive and u. S. Yields are looking higher than most of the 10. Most of the g10. This is the market not focused on fundamentals. It will only turn around when the market gets too stretched, too bearish and at the moment, positioning is not overly stretched. Matt how much more upside could we see instead of a dollar weakness story, we could see some Pound Strength here. We could see further euro strength. How much does the other side of the trade have to do with dollar weakness . Been veryink that has important to some extent, that it has supported the story. The dollar weakness has been the main theme in fx. There has been some yen and euro strength. The yen strength seems particularly strange given today we saw the doj really emphasize that they are not planning to tighten policy anytime since. You had the doj governor and Deputy Governor saying the same message, that they will persist with easing and you had the boj increasing the bond purchases for the First Time Since july. They are committed to easing and yet, the fx market seems to be ignoring them. They might regret that eventually, but not at the moment. Same with the euro trade. Given how long the market is, you have to think it is vulnerable to correction at some point. What market do you mentioned that could persist a bit further . The sterling one. Carney shifted yesterday that they will go for a more Monetary Policy approach, implying they are moving beyond the easy brexit scenario. That would be perceived as august. Th that will be perceived as hawkish. So, if he sees a conventional policy approach is being appropriate, that implies a lot of hikes. Matt it is not all about currencies. We had incredible equity swings in the last couple of days. And not just equity. We have seen volatility back across assets. Is that here to stay . Will we see more volatility in 2018 . I guess you cannot see much less than we thought in 2017. Mark that is right. It is hard to get lower than last year. 72ething over the last hours, i am getting worried. I was on your program earlier this week, i said the Global Equity program is remaining solid. Whats worrying me this week is everyone else is saying the same thing. Where have all the bears g one yesterday the dow jones fell the most in eight months. Suddenly we are not seeing any bears. Even the people who were previously bearish are going, it was just a correction. Investors were warning about stretch valuations and now they are talking about a meltdown. What is worrying me is i have gone through my inbox and i cannot find any bears. When anyone else is pretty i get fearful. I am slightly worried there is more to come in his correction. Matt thank you, mark cudmore for your time. Mark and the rest of the team on the bloomberg at mliv. Up next, buoyant growth, but slowing inflation. We look ahead at the euro area cpi data and what it means for draghis as it purchase plans. Asset purchase plans. This is bloomberg. Matt we have 15 minutes to go until the start of cash trading. Lets get up to singapore no, it is hong kong this week. Lifted up to hong kong for the Bloomberg Business flash. Santander has reported fourthquarter net income of 1. 5 4 billion euros. The banksbrazilian unit saw a 26 jump for the earning period. The artist lender posted the firstrate year of rising profits. We hear from the santander chairman at 8 00 a. M. Siemens has reported a sharp drop in quarter profit. Europes largest Engineering Firm says profit fell 14 to two 2. 21 billion euros. The results included a net benefit of 437 million euros. Surged afterronics it recorde quarterly profit. The maker of smartphones greens and Consumer Electronics also unveiled a stock lift. That drew the curtain closed on an eventful year, where a chairman was jailed for corruption. Said it is falling to apple has said it is responding to u. S. Government queries. They say they would never intentionally shorten the life of any of their products. Earlier, they reported that the wasand the sec investigating whether they had slowed older models. A Consortium Led by blackstone is buying 55 of the financial and risk units in a deal that values the business at 20 billion. That includes the pension plan, Investment Board and singapores sovereign will fund. Bloomberg lp competes with thomson reuters. Is chairman of bloomberg lp a nonexecutive director at blackstone. That is your Bloomberg Business flash. Matt thank you for that. Now, lets focus on the euro area economy. Headline inflation is likely to have slowed in january. We look at that data at 10 00 a. M. U. K. Time. Economists expect that volatility will be absent from the core measure. Lets talk about which measures will mean what for the ecb stimulus plans. Richard jones joins us now from berlin. Richard, some pretty strong Growth Numbers out of europe recently. We have seen a slowdown in inflation, especially in the core german numbers, which were out yesterday. What is going on . I think thel, growth backdrop is very favorable. I looked at 2. 7 growth across the euro area, and that is broadbased. You and i living in germany know about the Economic Growth story here and the strength we are seeing in europes biggest economy, but the broadbased growth we saw yesterday is positive. The big challenge for the ecb is to turn that positive growth dynamic into inflation heading in the right direction. We have not seen that so far, but i think one of the things we need to watch is the actual wage and negotiations going on in actual Wage Negotiations going on in germany right now. For the first time in 15 years, workers feel they are in a stronger position they can strike. If we have got into that shifting dynamic, that might lead to the inflation the ecb is looking for. That dynamic will be something new, not anything we have seen after the Global Financial crisis, matt. Matt first of all, it seems to me to be better to have strong growth and maintain inflation, but draghi wants to get to his target, as all central bankers do. What does this mean for the future of the ecbs asset purchase program, which now everybody is expecting to come to a solid and in september. September. D in richard we are not talking about runaway inflation. We are talking about inflation on a core reading of just under 2 , which is consistent enough still to allow strong growth, but at the same time will allow thiscb to get out of emergency Monetary Policy they have had since 2015. I think the big challenge for Central Banks and not only europe, but around the world is to actually see that wage growth pick up after we have seen the decent growth and amex in general. Decent growth dynamics in general. I think we are looking at a september or december end to qe. Matt we have Janet Yellens last meeting today with the fed, her last presser. What do you expect from the u. S. Central bank . Richard i think steady messaging. I think we will get more of the same from the fed. I think they will talk about the strong growth dynamics, about the job market doing very well. Still a little concerned about inflation. 1. 5 is not pce at where they want it to be, but that is consistent with what we have heard in the past from the fed. Changes will be coming from powell, but that will take time to take affect. Matt get more on richards take and more of that from his teammate on the bloomberg mliv blog. You can find that on your terminal. We are minutes away from the open, 10 minutes and change. Coming up, we look at your stocks to watch, including page h m, capita, and siemens. The bloomberg open, now just nine minutes away. Matt we have breaking news from hna, which owns a stake in Deutsche Bank. They are looking to sell 16 billion worth of assets in the first half. Keep your eye on Deutsche Bank shares at the open, as this is a big holder and is looking to sell 16 billion of assets. It does not specify which ones in the first half. It does not surprise the market is the Deutsche Bank among those sales. Joining us from our Equities Team is paul jarvis. There is a lot to watch today. Obviously there was a slew of earnings out this morning and we continue to get a lot of equity news and there is real volatility here. H m was out this morning. Paul abu dhabi , the news is better than we might have expected, big from a number of fronts. The dividend being unchanged at pretty good news. There were thoughts the dividend might come under pressure. The pretext par profit in the market was better than expected. We knew those sales were really very weak. That is reflected in the h m strength today because they dont expect to meet their growth target for the current fiscal year. Matt weve already seen a huge drop in that stock, down 45 . Things do not look good at the open. Paul i and shares to open lower today. For have cut the sales infineon. This is due to the dollar. The dollar weakness is really hurting this company. They say the depreciation will negatively affect more than half of the company revenue. Matt we have seen the strong euro hurt a lot of companies this morning and over the last couple days. Stock you are watching closely. Paul they are extending the dividend and seeking new equity funding. They are indicating that if they underwriting in place matt it is a 2. 3 billion pound company. Too the ceo says they are widely spread across multiple markets and services and they are underinvested in the past. Really, he is taking all the right steps, but this will hurt capita shares this morning. Juliette we are getting a look at the very latest stock stories from our Equities Team. Its available to subscribers via the mobile app. The open, jsuust four minutes away. Retail. Under pressure like never before. And its connected technology thats moving companies forward fast. Ecommerce. Real time inventory. Virtual changing rooms. Thats why retailers rely on comcast business to deliver consistent Network Speed across multiple locations. Every corporate office, warehouse and store near or far covered. Leaving every competitor, threat and challenge outmaneuvered. Comcast business outmaneuver. Matt we are less than one minute away from the start of stock trading across europe. Lets look at futures. It looks like we will see an end to the global route that kicked off in the u. S. Around the world, twice basically, and a stopped in asi overnighta. We have futures up across the board. We have futures on the s p 500 that are gaining as well. Here you see the wei screen. Weve got the present mispriced here. We are looking at an indicated open of about 0. 2 , even on the ftse. Its important to notice the percent misprice here. If you look at just the wis scr indication wean could see a drop. We could see a less tech heavy europe this morning. We are now getting to the stock market open. Lets take a look at the monitor and see as these markets pop up. We do see the ftse opening just up zer ositively, 0. 05 . The dax takes a long time to open, i have to say. I dont know if it is because the germans want to be more exact, but it takes them longer to open. Xhe spanish are open, the ibe is gaining as well. A very marginal gain, but that is the 1 change we saw in the u. S. Last night. That has got to be a welcome relief for investors. The cac is up 0. 2 . The core markets look to be a little bit better than the ftse. We saw on the indication, we will see if that pans out throughout the day. Still waiting for the dax and the smi to open. So, the germanspeaking countries will take a little bit longer. The breakdown is for the integer groups. Financials look a little bit mixed this morning, though they are down this morning. The santandero ceo later on. Industrials are for the most part green. We have a lot of earnings out from industrials. Siemens with a little bit of a disappointment. That could be the red pie piece you see there, but the rest of the industry is really gaining. Consumer staples, very green this morning. Consumer staples being up is not necessarily a good thing for a long market, meaning investors are defensive. Health care is down the morning. Discretionary is good this morning, as well as materials, energy. I. T. Is down a bit. The stocks got hit hardest yesterday. We see infineon lowering the expectations for the year. Back over here, we will see if the germanspeaking indexes have opened up. The dax and smi are still closed. We do see a 0. 10 gain on the ftse here in london. We the double that i in paris. 0. 2 wiss smi is open, down this morning and the ibex, unchanged. Still waiting for the dax to open. Stocks the breadth, 340 gaining. Thats ok, because that is the story today. Actually, siemens up, 1. 4 is morning. So, siemens doing quite well, though they had a little bit of a disappointing earnings announcement. Pretty sure American Tobacco is up, one of the most offensive stocks of all because they make a product where want to start buying it, you cant stop. Nestle is also a gainer. We saw Consumer Staples will be strong this morning. Volvo up this morning after putting earnings a little earlier on. A lot of them are stable here. Record bank highs are a gainer. Botin, we willna hear from her later in the program. Total is also getting this morning. Take a look at some of the losers here. Lets get rid of the winners and pull up the red. Here you have got ing group we spoke with the ceo, anna and i d id, a little bit ago. The stock is down 2 . You also see ericsson down. This long and impossible name to pronounce is actually ericsson. Trading down 6 this morning. A big hit for the telephonic whitman stock maker. Is also down the morning. Pressed will be hard this morning. Speaking of yesterday, donald trump delivered his first state of the union speech, telling congress and the rest of the world that this is a new american movement. He also previewed his infrastructure plans in Broad Strokes without giving any policy specifics. Alsod trump any bill must streamline the permitting process, getting it down to know more than two years, and perhaps even one. Together we can reclaim our great building heritage. We will build new roads, bridges, highways, railways and waterways all across our land. And we will do it with american heart, american hands, and american grips. Matt that was the president of the united states. Now you are looking at pictures of theresa may there in the red jacket. The u. K. Prime minister being welcomed in beijing, kicking off a threeday visit to china. Itll be interesting to see what her reception is like there. She spent the flight open saying she will not quit, saying any attempt to oust her, for discussion thereof, is purely hypothetical. Well continue to cover that for you. Joining us on set in london is helpsk armstrong, he manage 4 billion. I have got to first talk about donald trump and the state of the union. I think the markets were expecting something a little moredivisive, a little btiit aggressive from him. They did not get that. Is that a good thing . Trick i think it is fair to say the market was worried about that. A lot of his big speeches he has tended to stay on script. Which he did last night. I think the market is taking some comfort from that. There was nothing outrageous or shocking. Probably nothing we could grasp onto and say this is going to to be mending bridges between the democrats and bipartisan. And bipartisanship. Matt but also nothing you can write home about, as far as infrastructure is concerned. There was so much talk about this 1 trillion infrastructure plan during his campaign. We have not really heard any specific seven over the last year, and we did not get any last night. Patrick i think he wanted to applaud his the congressman, the tax, the stock market and the economy. There was not much forwardlooking on the infrastructure which was the key one you would have expected him to highlight that it would be a coming effort for the coming year. But it was missing. Matt is there any hope that infrastructure will power the gains we sell,e almost 20 for the s p. It was a strong year. Even with the little hiccup we saw over the last couple days, jr he has been a great month. Does that continue . Patrick we dont think it does. We think valuations will jump off the potential returns for the s p. Tax reform is great. But that is in the prices right now. You are looking at 90th to 100th percentiles right now. They are not many people who arent optimistic. Matt what do you expect to happen, then . An even trade this year . Patrick most likely they will be a correction at some point. I dont think it will be a crash or that we are moving into a bear market, but there is likely to be a pause. Something is likely to disrupt, whether it is the protectionist policies, or the technical their pocket. Technical air pocket. We built those technical air pockets above the 200 day moving averages. You cannot have such extreme positioning without having some consequences, in terms of a downside. We got used to that. Last time i was on with you in september, you said to me the market was down 0. 5 in the future, and you said it was a dip, and i scoffed at you and it was the biggest dip in september. We are getting trained that 1 to to present selloff 1 to 2 selloffs are dips. If we have 10 Earnings Growth this year, which i expect, it is a most in line with condenses, and you get to the 75th present nt multiple, that shows if you go from extreme complacency to a little bit more, there are potential downsides pricing those in. It will not be a great year for u. S. Equities. Matt you mentioned the rate picture. The 2 level on treasuries was cited. Is 2. 7 attractive . Are we looking at four rate hikes priced into that . Patrick know, they are not. If you look at fed futures, you have one rate hike priced in, another 50 priced in. We think three or four happening. Three is the best case, four more likely than two. Leading indicators show a continuation of economic strength. A lot of people are settling into the potential risk. It is the best case you get some inflation starting in q3. The missing ingredient for the fed hikes has been inflation. Once they get the inflation, three or four hikes are likely. Matt everyone is familiar on the bloomberg with the work screen and the overview is the familiar picture there. If you click on the second tab, you can see those chances that mentioned, which is a fascinating screen. Inflation, is that the u. S. Story for 2018 . Globally Central Banks have been struggling. Patrick the u. K. Is the only country in the g7 which has inflation above target. We think the u. S. Is where it starts to build. It is coming from a weak dollar, Higher Commodity Prices and stronger Economic Growth. The u. K. Does not have the kind of inflation anyways. It is not coming from a strong economic backdrop. We think the u. S. Is the beginning of inflation, but the u. S. Iishole, the gone. In aggregate, theres no gap anymore. Any further acceleration, which most indicators are pointing to, should be inflationary. Matt no more slack. We have a very interesting show ahead. Patrick armstrong will stay with us. There is a lot more to talk about. We will bring you the stocks on the move this morning. We are just about 11 minutes into this session. Capita is one we talked about before the kickoff, slumping as much as 31 at the open. Well talk more about that. This is bloomberg. Matt welcome back to the european open, looking at a beautiful picture of what i gather is st. Paul. Im justrom here, filling in for guy johnson as he skis the day away. One of the big movers today is capita. This company is planning a rights issue that is worth 1 3 1 3 of Market Capital before trade started. It has halted dividend. Here you can see we are at a 52week low after this drop, which was at one point, but its now still more than 32. 5 . Its a big change, losing 1 3 of its value. Sells,three buys and two as you can see in the upper righthand corner. Check it out on your bloomberg. Lets get to the top stock sto ries of the larger nature with nejra cehic. Nejra the capita story is fascinating in the midcap space. Fourthquarter operating profit, beating fourth dividends. The return to organic growth is pleasing. We see that stock rise the most since october and is one of the best performers on the stoxx 600. Along with volvo, this riding the most since october as well. It has boosted the forecast for tech markets in the u. S. And eur ope this year. Low oil prices and Interest Rates pushing demand. We see volvo vgain. On the downside, im looking at ericsson down 8 . FourthQuarter Sales missed estimates. It has got a weaker market for mobile equipment and a struggling to turn around the ,igital Services Business slumping today the most since july. Matt i want to focus on the Corporate Bond market. Signs are mounting that something has gone awry between the tightest Corporate Risk premiums in a decade. Investors have pulled cash from the biggest investmentgrade bond etf at the fastest pace in more of a year. Fresh set of short bets which have been placed on the fund. That spring lets bring in dani burger and Patrick Armstrong. Investment conditions should be bullish. Spreads are very tight, but there are signs that investors think otherwise. Dani the tightness is since 2007, but things have really deteriorated. Thetipper here is ld2, biggest investmentgrade Corporate Bond in the u. S. Assets so farlion this month. And the strange thing here if you have Short Interest moving even higher, 3. 7 now and yet, we seem to have a good underlying spread, with appetite for new issues continuing at a healthy pace. So, investors in the etf and derivatives are seeing a very different story that investors in the underlying. You have to imagine that will trickle down at some point. This is definitely something to keep an ion, not only in Corporate Bonds, but jump ones as well. There is a really big disconnect between the underlying in the bond. Matt there is a great chart that bloomberg users can access. I have it up on my screen right here, 1064. You can also see it on the monitor their, over my left shoulder. With as being the tightest since 2007, why would cacs Bond Investors behave differently from etf investors . Dani there are a couple different investors. Couple different reasons. Some people like to say, they dont know what they are doing. They are all millennials. They dont know what they are doing. But another reason, active investors really do tither totune in the bond space credit. They will hold onto those catch cash bonds until there is a big event, maybe a spike in inflation, where it is easier to trade the etf. It can absorb liquidity much easier. So if there is going to be trading, it will occur on the etf first because you are more able to do that. And the last reason i will give you, there is a difference between the benchmark and the etf itself because of liquidity constraints. Sometimes the Duration Risk can very. People might be taking different bets because of the constituency difference. Patrick, which side do you fall on here . Patrick we sold our Corporate Bond positions. Corporate highyield are yielding 2. 5 less than u. S. Treasurys, 60 basis points above treasuries in the u. S. Those are pending. Economic environment, spreads her low with defaults nonexistent. If you get higher Interest Rates, you can also see a higher credit spreads structure. Those are the kind of things will lead to the headwinds for Corporate Bonds. A spreads at record lows for likely then not they are going the other direction and narrowing further. Matt you are only in european corporate debt though. Patrick we were in u. S. And european debt bonds actually. We sold them in march. We still have unknowns at which is symptomatically when you get higher yields than jumped at, but you are actually safer on the Corporate Capital structure as well. It is a carry trade which comes are not onand risks the individual the folks, but on macro spreads and widening environment. Matt danny, very interesting from you. We will bring you strategies every day with dani, or whatever she is noticing in the market. Dani burger and Patrick Armstrong will stay with us. Up next, Prime Minister theresa may has one message to china. She is not a quitter. Maybe that was meant for britain as well. More on this critical threeday trade mission, though, next. This is bloomberg. Matt welcome back to european markets and this is the european open. A quick check on how markets are faring across the continent and the island of great britain. You can see we are looking like we have a gaining picture this morning, though little change in the u. K. The ftse is down, but only by 0. 4 . We see gains in italy, france, spain, germany. A lot of the continent is up. Prime minister theresa may is on the defense. To told reporters en route china that she is not going anywhere, despite reports that lawmakers in her own party are privately plotting to replace her. She called that hypothetical. Heather armstrong is still with us. I want to talk just specifically about the u. K. Right now. How does this sort of uncertain administration affect your investment thesis . Patrick well, the country right now is participating in the global growth. It is the one thing that is working for the u. K. Right now. The u. K. Group 1. 5 last year and it lacked for the rest of the g7. You have such clinical uncertainty. Theresa may is an unwinable situation. She has to get policy through with northern ireland. And on the brexit, it is a very difficult task. She does not even know what her and game is there. What hurt end game is there. The transition is possible news, but it is still not outstanding news because we still have the uncertainty on the political aspect, as well as on the economic aspects. If you have hundreds of millions of pounds to invest, will you be doing it in europe now . Transition just extends the uncertainty for this country. There will be a frustrating headwind. It will not be recessionary. But it will lead to the u. K. Underperforming potential. It is the one country we bet against. We have Global Positioning within our portfolio. That is the most cyclical aspect of u. K. Companies. Matt and you are investing a few hundred Million Pounds, or billions. What do you do besides just shorting the ftse . Patrick we have them in largecap companies. Multinationals. So, Companies Like hsbc and shell. We are not completely shorting prefersets, but we companies that are benefiting from the strong global aspect. Matt what about the fx issues . We have heard across europe from Continental Companies dealing with the strong euro, the cable rate has climbed. Butre looking at 1. 42, even if you look at the pound index, it is much stronger this year. Is that bother you when you are looking at internationally those companies, but those that are domiciled within the u. K. . Willck i think that trend reverse. We have a strong sterling and that comes from the transition deal. We have taken baby steps to getting the best case scenario. From there, there is inevitable disappointments. Is going to be muddling along, trying to get through this transition. And i think that creates uncertainty and economic surprisingnd it is to me, if you look at your work function, you have got the fed and the bank of england, almost very similar probabilities most 100 chance they hike this year. The second one is 5050 right now and i dont think that will happen. They give the bank of england could hike once, but the strongc backdrop is not enough. It would be cruel to be hiking. The u. K. Consumer is suffering if you look at retail sales and for me, the fed hiking three or four times is more likely than the bank of england hiking twice. Matt i have the work function up. We have the United Kingdom in there. Does the pound, even if you see the situation turning around, does the pound give mark carney a bit of relief in that he does not have to hike as much as he would . Patrick you get some sort of typing by the nature of a stronger pound. Some of the Inflationary Forces coming through from the pound, ebb. Should matt patrick, he will stick with us because you have a lot to talk about. You have interesting traits in europe and you have a very interesting trade in the auto industry, which is my personal hobby as well. I want to focus right now though on the banking industry. Santander had a net income of 1. 54 billion pounds. Earnings were a little stronger than expected on the bottom line. I have a graphic on the screen behind me. You can see the stock is trading up this morning although, only a little bit less than 1 . I guess that is still a big amount when you consider what a big bank it is. With such a big chairman, ana botin, in hundred speaking with francine. Us to 17 this year. And we have some strong topline growth. And doing things the right way for customers. We have really started focusing on digital. Mexico, also. Actually, all of latin america has done very well. Have you worried about protectionist measures . Actions, look at the and what the u. S. Has done, in terms of the economy, it is pretty good. The tax bill is pretty good, it is very encouraging. We will put that back into higher wages. Has theadministration right attitudes in supporting growth and making banks of for growth again through all these measures. Francine what do you expect Interest Rates what do you expect Interest Rates to do. Ana it is a doubleedged sword for banks. That is good. As long as they dont go up too much. We are concerned what happens when qe ends. Equities not doing very well, so that is one thing to look out for this year. Outlook on the u. K. , if brazil is your star performer and the u. S. Is doing well, are you worried about the u. K. I want to separate brazil for as a country from our bank. It has done very well this year. Pretty good performance. However, there is a slowdown in in 2018,my and probably the u. K. Will grow the least. Years, every country this in 2017 and again in 2018 is expected to grow. The one where growth will be less, probably around 1. 4, will be the u. K. Francine will that mean you need to move bankers outside the u. K. . The most british of the british banks and by the way, the most resilient according to stress tests. That is a good place to be. Happens to the economy, we will be tied to that, but will do better in a less good scenario. Look at when you assets across the world, is there a region or country where you want to be stronger . Is there a space you see santander getting into . Ana i always say we are into 10 markets with a billion people, the strategy we follow is to have more digital customers, Loyal Company customers and there is still opportunity to grow on an organic basis. In poland, argentina, portugal and this is good because we are the buyer of choice in many of these markets. We are always very disciplined butur investment criteria, the most important thing is we have organic growth within our customer base. Francine talk to me about digital. This has grown exponentially. How many transactions do people do on their mobile . Ana we are building a mobile platform, so we started the investment in digital in 2015 and 2016. That year, growth was 7 . Last year, 2017, the growth was 155 percent. Digital transactions have gone from 4 million per month to 10 million per month. Spain has quadrupled. As it has multiplied by three, u. K. By 2. 5. Today, 39 of all transactions of the Santander Group are digital and customer sales, up 31 . This is a huge change and we are excited about what that means for customers and shareholders. What is the dividend policy for the future . Dividendtated our policy last year and i invite you to find what it is this year, but we have grown our dividend by 11 , so that is good for our shareholders. Our share price has done quite somethingyear, 20 percent up. We expect dividend policy to be roughly 30 to 40 of distribution and that is something earnings per share have grown on an underlying basis, 8 , and as reported, also up 1 . Francine talk to me a little about your capital. You have raised capital twice and are a little below some of your peers. How do you justify that . Ana it is the Business Model. What matters is the buffers against the minimum. We are the bank that is the most predictable. Has grownsantander and hasby four times had average quarterly volatility. We do very well on stress tests and these are the reasons why we have a lower requirement than others. Francine do investors see that . They understand the Business Model . Ana absolutely. In 2017, we generated 53 basis points of capital, we spent 20 basis points on acquisitions. If we wanted to generate 50 basis points, we can do that in one year. Theound opportunity to make business stronger and we are absolutely on target to be about 11 next year. Francine talk to me about the biggest risk you see for 2018. Ana it is difficult to predict, but we are looking at what happens when rates normalize. The geopolitical risks are all over the place in different certain forms. For us, it is about execution. We have the strategy, the scale in markets, we are diversified and are investing in technology and innovation. It is really about external events. For the next 12 months, i think the economies will continue to do well. Matt that was our own francine loblaw speaking with santander chairman ana ana botin. President donald trump has delivered his first state of the union speech telling congress and the world this is a new american moment. In contrast, most americans show trump divisive. Tax cuts istears helping the u. S. Compete globally. The business tax rate from 35 all the way down so American Companies can compete and win against anyone else anywhere in the world. Sebastian theresa may has arrived in china with a message to rebels back home who want to oust her. She wont quit. She faced questioning from reporters on her trip to china. Would fight any formal challenge to her leadership and dismissed it as missed estimates falling to an eightmonth low in january. The index slipped to 51. 3 compared with the 51. 6 forecast in Bloomberg Economist survey. That is to rein in debt and reduce inflation. Global news 24 hours a day, powered by more than 2700 journalists and analysts in more than 120 countries. This is bloomberg. Matt thanks very much. Our guest says he is long european equities in the same proportion to his short of u. S. Equities. He also continues to hold european industrials and french banks. Patrick armstrong is still with us. Patrick, is it mostly evaluation debt on european stocks . Patrick mostly, but also the cyclical recovery in europe has been strong. In pmi, europe is leading the growth. In Economic Growth, europe is matching the u. S. Is actually participating in the Global Recovery for the past 12 months and showing acceleration. Arecal risk is where you going to be rewarded, particularly within industrials and banks. Companies at 10 to 15 times earnings. As a valuation as well cyclical backdrop. Matt when i ever whenever i ask why it is so lower than u. S. Or japanese valuations, they always say it is the lack of tech stocks. Patrick i dont agree completely. When you look at european industrials, they trade at 17 times earnings. Total, royal dutch shell, exxon, they are all the same company exxon trades at 15 higher multiple bento towel. Than total. It is not just because of tech. J tech is part of the margin story and growth story, but it is on a sector by sector basis. Europe is cheaper, as well. Matt french banks, we were just listening to ana botin talking a great game for her bank. A much moreare in difficult situation, but why do you like french banks . Patrick that is a sweet spot in terms of middle ground. Core ratios are very good, they are trading at 11 times earnings, 4 dividend yield, trading at tangible book value so you dont have the tail risks from the bad debt. They have cleaned up more than peripheral countries have. You get paid 4 while you wait for the recovery. If you have a shift up in yield curves, you get an Interest Rate margin. Valuation combined with a cyclical back drop, we think french banks are wellplaced for that. Matt and the possibility the ecb makes some moves . Patrick we think september is almost inevitable unless the background changes and they are done with qe by this year. Zero Interest Rate policy is probably on the cards for next year. That is an accommodative central bank compared to the u. S. , higher valuations. Matt it could attract more investors to the euro. Does a stronger euro hurt your industrials . Definitely. Ewhat, the banks are more of a pure play if you are worried about a stronger euro because of all other assets, our industrial play would be hurt by a stronger euro but will be helped by a stronger cyclical background. Matt we still have a couple more trades to talk about. Also, when i want to talk about is highlighting european versus u. S. Nvestments investment possibility. Staysedecin from plurimi with us. Also, our iphone x sales helping samsung more than apple . We will bring you the firms record profits in the smartphone market. This is bloomberg. Matt welcome back to the european open on Bloomberg Markets. We are 44 minutes into the trading day. Lets talk a little tech. Pete was a big problem for the u. S. Market yesterday. We saw a little recovery overnight in asia, but i want to focus on the iphone x helping samsung more than apple possibly. Samsung electronics shares jumped the most in two years after surging sales for memory and screens made for the new phone led to record profit. Get a full update from apple on thursday when the worlds most valuable Company Issues earnings, but lets get more with our global tech reporter Adam Satariano and still with us, Patrick Armstrong from plurimi. Strong numbers from samsung, but not such strong results for apple for the phone. What is the story . Aboutwill find out more apple later this week. With samsung, they benefit from different ends of the spectrum. They sell the devices themselves which are still popular, but also components that go inside everyone elses phone. Do well on that front. In terms of apple, it will be interesting to see the breakdown if they do break it down, of how the percentage of sales for the new x model that sells for 1000 and up versus some of the older models. Sometimes, they are secretive about the breakdown but it is important because it tells you how well the devices they have put so much muscle behind is doing. Matt i just want to show a great screen on the bloomberg terminal. As plc, ive got it up for apple. I think this is one of the coolest things the bloomberg has to offer. This shows you the supply chain, breaks it down by suppliers on the left side, customers on the right side. Samsung is on the left side of this equation and it is a cool way to look at a business and how it is working. X, we are starting to hear from more suppliers that production just isnt as much as was expected or is being pulled back. What is the problem with sales . Is it too expensive . Adam this is based on some numbers coming, in softer than expected. Some suppliers are saying reports have gone too far. He have to wait till thursday to see, but there were some delays on the phone so they missed a little bit of a window when there is an initial demand when phones go on sale and during the holiday period. I think the price point is, for a lot of people, pretty high and right below that, you have the new iphones which they also introduced, which have the home button and a lot of the similar features, just not the full screen and facial recognition stuff. Maybe a lot of people went for that instead of forking over the extra few hundred dollars for the newest model. Chart. ve got the gp max it is not bitcoin, but the chart looks pretty good. Patrick, what is your take on apple . Patrick we like apple as a company. We have held it for years, we sold it in march which we have some sellers regret. Trading 15, 16 times earnings. It is not super expensive, but it is not cheap. Disappoint, any ,lowdowns in this trajectory returns on capital deployed, all those things can start to suffer. You do need to see strong sales and continuation of turnover. Is this their only product . Do they just make phones, do they have anything else to offer . Around whichhe sun every product orbits. They have done more in the services area, selling more icloud, music, they make a good amount of money from commissions through the app store, so that bucket is growing considerably but still, as the iphone goes, so goes apple. This is a company of size now and maturity where it is not going to be producing the same sort of growth that you saw five years ago when the iphone was still in its trajectory like that. It is a much more modest growth now, but those are numbers that a lot of companies would love to have. Matt doesnt everybody in the western world now have three cell phones . Isnt this market kind of saturated . Patrick it is definitely saturated. Apple is still commencing commanding huge margins, on the luxury end they are very stable. Will there be deterioration in that is the question. Now, they are still extracting 50 Profit Margins and have a huge footprint. Matt will there be any sweet new breakthrough products . Will there be an apple car . Will they make an Apple Television . Adam there are a number of things they are researching. I say they are looking into Autonomous Vehicles and are making a big bet on augmented reality, which could lead to a glasses type product. There is a hint of that in the latest iphone, and they are also make some moves into health, which is interesting. New healthfering services and partnering with some Health Providers that over could be an interesting business for them. We will see. Matt thank you for joining us, Adam Satariano. Patrick armstrong is the ceo at plurimi and he will be joining later on. Mberg radio you can listen to that on london dab digital in the area. You can listen to it on the internet or your phone with the Bloomberg Radio plus app. I will talk about one of the traits i find interesting, which is long bmw, short tesla. It has worked for him. Tune in to Bloomberg Radio if you want to hear more about that from patrick. Next, some of the stock movers this morning, including capita, the british stock that has lost more than one third of its value today. A lot more, this is bloomberg. Welcome back to the european open on Bloomberg Markets. We are 55 minutes into the session. Lets get a roundup of your midcap movers with nejra cehic. Inra i getting hammered this session, propping the most since 1994, the most in 24 years. The ceo has announced plans for a rights issue and suspended the dividend payouts. It is also looking to raise as much as 700 Million Pounds in that issue and plans to sell noncore assets. This is a company that provides Customer Service functions to Companies Like m s and others and has been morning since brexit of reduced spending by corporate clients. This news about the rights issue, suspending dividend payments, comes at a time when britains outsources are facing Economic Uncertainty following the collapse of carillion. Very much on the downside. Others on the downside are wizz air announcing third you quarter Third Quarter revenues that missed calls on the open but is heading lower. Ritvic lower. The ceo said it was a solid start to the year and will have further progress in 2018, but rbc saying growth was subdued and oneoff cost is going to weigh on sentiment. That stock lower by 2. 7 . Matt thank you for that. I want to give you our stock of the hour and go out on a positive note. Electrolux shares are gaining today after coming out with Quarter Sales that beat estimates. Analysts were only looking for a 1. 80 7 billion krona and we had net sales of 32 point 4 billion krona. Analysts were only looking for 31. 4 billion. You can see the stock on the dashboard. In the upper righthand corner, you can see analyst estimates. Four buys and four sells. High,n see the 52week right now we are trading at 278 with again of almost seven percent. Electrolux is climbing hard in the first hour of trading today. Stay with us on bloomberg television. Up next, surveillance with Francine Lacqua after her interview with ana botin and tom keene join me on Bloomberg Radios daybreak europe. I will be talking with peter from plurimi about bmw versus tesla. We use our phones and computers the same way these days. So why do we pay to have a phone connected when were already paying for internet . Shouldnt it all just be one thing . Thats why Xfinity Mobile comes with your internet. You can get 5 lines of talk and text included at no extra cost. So all you pay for is data. Choose by the gig or unlimited. And now, get a 200 prepaid card when you buy an iphone. Its a new kind of network designed to save you money. Call, visit, or go to xfnitymobile. Com. Francine President Trump delivers his first state of the union, calling for more than 1 trillion in infrastructure spending. The Prime Minister brushes of calls, as she heads to china on a trade mission. We are live in beijing. Der chairman tells me that spain is back. Ana this is the fourth year that spain will grow and create half of one million jobs per year. Spain is one of the best performers of any country in