Transcripts For BLOOMBERG Bloomberg Surveillance 20180207

Im also looking at the treasury yields. You can see that 10year at 2. 77. Things are stabilizing somewhat. Gold had a big move it yesterday as a hedge against all the volatility. Old is still up. We will hit the latest market moves. Oil. Also talk crude on, weittle bit later will be joined by blackrock. I want his take on investing in the markets. Lets get straight to the first reviews. The u. S. House of representatives had passed a stopgap spending bill to fund the government until march 23. A senate vote would send it back to the house before thursdays deadline. President trump said he would welcome a shutdown if democrats refuse his demand for a immigration overhaul. President trump if we dont get rid of these loopholes, people continue to come into our country and kill. That are many gang members we do not mention. If we dont change it, we will do a shutdown. It is it it is worth it for our country. I would love to see a shutdown if we dont get this taken care of. Nejra donald trump has ordered the pentagon to plan a military parade would have tanks rolling down the streets of washington. The u. S. President is seeking a parade similar to the bastille day in paris. During his visit to france he hinted america may hold a parade on july 4. U. K. Business is split on how to move forward with brexit planning. Many companies are disengaging from the process. In an open letter to theresa may, they warned there would be no room for continued ambiguity. They would try to make decisions for the future. Germanys Angela Merkel and the social Democratic Party have negotiated through the night on a packed for the countrys next government. The chancellor and other withials are holed up leaders with no sign of a deal after more than 20 hours of discussion. A final decision is not expected until a larger group reconvenes later in the day. President jacob zuma seems a step closer to resigning, this after the National Congress delayed the meeting to discuss whether to force him from office. The ansi described constructive talks. Zuma had been slated to give his state of the nation speech tomorrow. Global news, 24 hours a day, powered by 2700 journalists and analysts in more than 120 countries. This is bloomberg. Francine european markets in the green today. They seem to be the only bright spot in the Global Equity rebound. U. S. Futures, bloomberg spoke to an exclusive interview looking for buying opportunities. They have struggled with the fact they have lots of liquidity, and they felt valuations were stretched. Not surprising when you see the s p 500 was north, and there looking for buying opportunities. When you see a spike in the volatility, it might make people cautious. They were looking for a second or third order effect. People are looking for a buying opportunity which is why you saw a Market Reaction on tuesday. The Research Director at bloomberg intelligence, thank you for joining us. When you look at the volatilities, the volatility yesterday was crazy. For the last 48 hours, hasnt it taught the markets anything . There are a couple things to consider. Yesterdayeresting that the u. S. Mix was a substantial usvix was substantially higher. That is a rare occurrence over time. Volatility comes and goes. It is inversely related, volatility will spike. Assuredly, when we see a spike like this, in our estimation, when there is not an underlying fundamental change, we do not have a crisis of some sort, this will come back. Cycles,go through life from value to growth momentum. We are in a momentum phase. You get catalysts like Interest Rates that we have seen rise on both sides of the atlantic. You end up with a little tweak. And then volatility goes. It didnt affect the fx markets. You get a sense there are people who short volatility. Weve been addicted to low rates for a decade. Whoe are a lot of people short volatility in a bunch of ways. There are fx trades that are affected. It is tangential, a second order effect. Francine it was volatility pentup . You could argue that is indeed the case. Weve seen a downtrend the last couple years in volatility. To a higherving Interest Rate world, and the market needs to adjust, and we have valuations, it is not a surprise you have a momentary oneoff spike as there is some adjustment. We will go through days like that. Francine it seem like the adjustment was brutal and quick. Is this algorithms . A lot of people have volatility trades in ways of being short volatility through derivatives. If you think that is a smaller crowd. At the peak of the last crisis, it is more manageable. That. Also a reflection of we are in the superlow rate world. Here we are trying to tiptoe our way through, spooked by one wage number. If we got a normal inflation of a normalhint inflation cycle, we have a problem. We will have to go see whether we have a deal in germany, but it does seem like we are closer, if not there yet to get a proper working government. On the back of what kit was telling us, there are notable losers from this volatility. Time and go back over look at various new product innovations, whether portfolio insurance in 1987, and we can go forward in other instances over the last two decades, you have in thewho are caught up fervor of the moment. There are Financial Products that are levered to short vix, short volatility, and they got taken out yesterday. Somevolatility subsiding at the end of yesterday and today, they very well may go the opposite direction, as funny as that is. Francine kit, give me something on this Merkel Coalition so we whether there is something impactful. Does this impact brexit . Does it impact the euro . Patient market has been while we have been talking. , patientsks concluded would rear its head. We spent the second half of last year with most of the market looking for we will do the same thing at the moment, not enough. This is not going to help them. Is Angela Merkel weaken, and what does it mean for her immigration policies . Kit it probably helps balance europe between france and germany. I think from a market perspective, that Angela Merkel is still in charge, stability is what it wants. We have a strong economic recovery in germany. Changes willpolicy get in the way of that. Have some stress in geopolitics that could have made the markets turn. They turned on a on wage growth. Tim it is more than the wage growth number. It was a build up. I will go back and use the momentum word. There was a build up in momentum in the u. S. And europe of good earnings coming into a strong fourthquarter reporting. The macro environment. That all makes sense. Weve gotten ourselves at a valuation point where we had to be beat and raised. At the end of last week, we did not have large u. S. Technical had modestpanies disappointments. Sales have been better than expected in europe. They were a smidge disappointing. Francine couldnt the correction have been more gradual . Week, yesterday we did not know where we would be by lunchtime. Had concerns about building inflation not only from the wage numbers, but Commodity Prices that are up. Interest rates starting to spike last week and the week before, going back to december 6. That is when we saw a rotation toward financials. This has been building up, and the pressure goes off. When we have valuations extended as they are, then they below. Vixcine are you expecting to be back with a vengeance . Kit i think we will be bumping around a fair bit. Degree, the markets got used to that Interest Rates. The are not going up very far. Weve got this narrowband of , everyone else moving up a little bit. The market was asking itself questions for the last two weeks. Could we be wrong on that . Inflationlike expectations. We cant answer that question. Weve gone through several months with hard Economic Data. Is there any inflation coming back . We are comforted by the fed that short, the rate is going to be low, a little higher than it was before, and that is ok. I dont think we can be comfortable for several months. Craighead, from bloomberg intelligence. With surveillance. Running the risk of a Government Shutdown. And transition talks. Zuma with novitiate negotiations. A step closer. This is bloomberg. Economic markets and politics. This is bloomberg surveillance. Im Francine Lacqua in london. Nejra steve wynn has stepped down as ceo of his resorts after being embroiled in a sexualharassment scandal. Wynn resorts has been appointed ceo. Crude recovery to a larger extent. Compared withrose a loss of 40 million earlier in the year. , raising oil and gas production. A lot of uncertainty in the markets. There is demand during growth. That will continue. I think we will see more supply from the u. S. Particularly on the onshore. Downturn, that will come into production on the supply side. I expect they are priced this year, it will be lower. The statecontrolled dutch capital ratio, a measure of financial strength, at the same time the underlying profit came in at 2. 7 9 billion euros. The markets are cyclical. Cycles. D all expect we seem surprised when markets moved sharply. We have business exposed to the equity markets. We will work with our clients through this. We are feeling relatively comfortable during this volatile. Nejra that is the Bloomberg Business flash. Francine the u. S. House of representative have passed a stopgap spending bill until march 23. Beforeoader budget deal, the senate votes, it will have to go back to the house before thursdays deadline. President trump laid out what he is willing to risk if democrats continue to refuse his demands. If we dont get rid of these loopholes were killers come into our country, gang members, there are many gang members that we dont mention. If we dont change it, lets have a shutdown. We will have a shutdown, and it is worth it for our country. I would love to see a shutdown if we dont get this taken care of. Do we have to worry about the president saying he is willing to shut the government down, or is this just noise . It is usually more noise than policy. Somest be possible at point. We have pushed it away for another month. Thinks, does this mean the extent of easing you can get done just gets lessened by the process . Francine do you think it does . Kit im not sure. Its neutral for growth. I dont think this economy needs a boost from anything at this point in time. It is getting pretty hot, and that is fine. Francine are you worried about overheating in the u. S. Economy . , the faster the economy grows now, the way you get to a recession in the United States is by having a tight economy, having price pressures, having the fed have to raise rates. Then you bring the next downturn closer. Id rather it landed smoothly than bumping down hard. That has always been the worry. The most likely outcome, you can glide this thing down gently. In that sense, a shutdown does not simply hurt. See the where do you dollar by the summer and the end of the year . If there is more dollar weakness, does it mean that that will have to ramp up interest hikes . We might have to do what we did between august and december. We hit a peak level, and then we have a pause. Im slightly biased. I put out a forecast in november of 127. We are getting there too fast. Value, them fair last year 10 year average, the average of the next 10 years is probably 129, is it good is guest as any. We should pause, unless you get Something Like a major rethink and how the ecb hikes rates. It feels a bit early for that. Go as faryou wouldnt as the city u. S. Has a week dollar policy . We heard controversial comments in davos and trump was quick to address this. Kit the u. S. Doesnt have a dollar policy. I had a spice girls moment last week. What matters is what you really want, not what you want. Ecb really wants to normalize Monetary Policy. It wants a week euro but it cannot have it. I dont think we get a weak dollar out of this. If the ecb wants to normalize policy, then it cannot have a cheap euro. Are going to find out how much they really want to keep their yen cheap because it is getting harder. U. S. Reallyext, the does not know what it wants. Francine lets see how these negotiations and germany are going. In the last 15 minutes, we understand they have agreed on a Coalition Government. It seems they are still talking, they dont have a coalition yet, but they are a step closer. , wecrats are poised understand you also get the defense ministry. Is it time for the germans to head the ecb . Kit i think so. What i care about is who is the outstanding candidate. Im not sure were zynga candidate better im not sure we are seeing a candidate that is better. Francine were talking about south africa. Jacob zuma appeared to take a step closer to resigning after the african Congress Delayed an emergency meeting to discuss whether to force him from office. A Party Spokesman said the decision came after constructive talks between zuma. Parliament had previously asked to delay his state of the nation speech which was scheduled for today due to fears of violence. How close is the south african president what does that mean for jacob zuma . I think it is all over but the shouting. Jacob zuma is on the way out. It will probably happen very soon. The postponement of the state of the nation address indicates that the party is in no state with him at the top to be presenting an agenda for the next year. It is a question of the precise timing and the terms of his departure which could be interesting, given how many prosecutions he is facing. What will be prioritized in the next few months . This is a company a country that needs to get a grip on unemployment. It is running around somewhere like 30 . There are titanic economic challenges. You need to win back investors, which are alarmed by the developments in south africa over the last few years. There is also a political to do list. Francine are there still opportunities . Kit it is one of the cheap currencies out there. Flips from despair, the next thing we will get a land grab. Get ae we will multiethnic democracy. It has the capacity here for hope to win. Next on theat is timetable . Will there be a speech in the next few days . There are discussions now. I expect we will hear something firm before the end of the week. Francine thank you. Matt campbell. Innext, a breakthrough berlin with Angela Merkel and her negotiators, they have reached a key deal. This is bloomberg. Francine economics, finance, and politics. This is bloomberg surveillance. Lets get straight to the bloomberg first word news. Nejra the u. S. House of representatives has passed a spending bill to fund the government until march 23. A senate vote would have to go back to the house before thursdays deadline. President trump says he would welcome another shutdown if the democrats continue to refuse his demands for an immigration overhaul. If we dont get rid of these loopholes where killers are allowed to come into our country and continue to kill, gang members, many gang members that we dont even mention, if we dont change it, lets have a shutdown. We will do a shutdown. It is worth it for our country. I would love to see a shutdown. Nejra donald trump has reportedly ordered the pentagon to plan a military parade in washington. According to the washington post, the u. S. President is seeking a grand parade. During his visit to france, from into that america may hold a july 4 military event. U. K. Businesses are split over with brexitforward planning with Many Companies disengaging from the process. That is according to the british chambers of commerce. The bcc warned there was no room for continued ambiguity as companies try to make decisions for the future. That comes as the Prime Minister heads into talks over the negotiating position on key issues such as the customs union. Global news 24 hours a day powered by more than 2700 journalists and analysts in more than 120 countries. Im nejra cehic. This is bloomberg. Francine thank you so much. Rocket company succeeded in launching the worlds most powerful rocket yesterday. The falcon heavy was laid in usks own tesla roadster. The success of spacex has made it one of the most richly valued private companies. Lets bring in our tech editor. Thanks for joining us. How big a deal is it for spacex . Enormous deal. You have to look at it in the context of what elon musk considers to be a success. If it didnt explode on take, that was a win. The fact that it did take off successfully, it did put its car into orbit, and it did return back to earth, which has never been done before by anyone, theres a huge win. Francine are there any other companies or countries that are trying to do the same . They are basically taking on governments. The u. S. , china, russia, everyone has the ability to launch large amounts into orbit, but none of them can take anything as heavy as what spacex can take. It is like what the nasa shuttles can do or any of spacexs launches last year, which i think they did about 18, 20. Francine the pictures were amazing. What else was the rocket carrying . It was carrying a tesla roadster, one of elon musks first models. It was carrying a digital copy of one of Isaac Asimovs novels or collection of novels. Is,really interesting thing this is going to be spinning in orbit for about one billion years potentially. Theres the tiniest little chance that it might crash into mars. Colonizing the red planet, we should be mindful that it might rain cars. Really cool spacex pictures. Is there a correlation between the outward looking economies and the u. S. , first man on the moon and all that . Important,ce becomes there is a historical clarity. Once the private sector starts getting into the business of space, the cost of Space Exploration comes down, because that is what the private sector does well. It is a plus for the u. S. That they are leading that. Expect to see more retaliation from the rest of the world. Francine what does this mean for the future of transport . Website which i urge everyone to go and view, looking at the future of transportation, driverless cars, and Space Exploration. Also Space Tourism. This is one of the next exciting ventures on the consumer front. These very large commercial missions, these expensive and elaborate missions for wealthy individuals who want to go into orbit and see the earth from above, those are the ones that are going to help Companies Like spacex bring down the cost of Space Tourism and make it one day more accessible to you and me. Now, spacex as customers for this new rocket. They are doing commercial payloads in the next three to six months. Francine im going to try to learn a little more about space. Those images touched a lot of people. Look at that. Ooks like a david bowie cd Bloomberg News europe tech editor, thanks for joining us. We will be back with kit juckes with some Foreign Exchange space correlation. German chancellor Angela Merkel cdu has reached a deal on ministries with spd. According to the german newspaper, the spd are poised to take control of the finance ministry. Controlis said to have over the economy and defense ministries. Lets cross now to berlin and speak to our bureau chief. Breakthrough, or still early days . Now thatalso confirm we are hearing from sources that the social democrats are poised to take the allimportant finance ministry. That is a role that was held by Wolfgang Schaeuble for a long time. Schaeuble has switched over to running the bundestag, the parliament, as president. That was really a sticking point. That decision, we are hearing, has been made. They are still negotiating at this hour. We dont quite have a deal yet according to sources. They are looking at a number of domestic issues that are sticking points, Like Health Care and so forth. Deal,we are closer to a they are still talking, and theyve been locked in that room for more than 24 hours. We will see if that helps get a deal. What are the difficult points that they are still negotiating . They are still looking at health care. In germany, we have a publicprivate system and theres some real discussion about how doctors are compensated. We are talking about nittygritty domestic policies. The labor issue is a sticking point. There are a number of temporary workers. Their base is labour and they want to tighten those rules around that to make it more difficult to have temporary that would be in a position for a long time. , butine if you are italy also portugal, spain, greece, youve got to know who you want to deal with. Any clue . Ofwe dont know yet in terms who that person will be. The social democrats are very proeuropean. It is likely that the french are going to be very happy to hear that the spd is taking that ministry. It will likely be someone who is one of the key party leaders. Exactly who will take that post, we are not hearing yet. Francine thank you so much, chad thomas. We were talking about impact on euro. Does it actually impact anything at the margins . Does it impact brexit . I think europe has been very good at having unified their side of the brexit negotiations, as good as the u. K. Has been hopeless. Francine we spoke to christine lagarde. Just hasaying germany to get rid of the surplus. They need to play ball more with europe. Will we see that . Someu will probably see policies, but when the economy slides, it is hard to turn around and start boosting consumption, boosting imports. Whenis a better suggestion an economy is going cold. Now, you would be really challenging german participation in the ecb. Are you comfortable that inflation will actually pick up like mario draghi said it will, and what does that mean . Has the labor market tightened in europe, you get wage growth. Europe, which in we dont have in the United States. I do think that we are on a path towards not just normalization in terms of the end of bond buying, but especially with where the euro has gone already, i think it is impossible. Where do you think neutral rates are in europe. Got just under 70 basis points on a 10year german bund. What is the right price . We might have made an adjustment closer to fair value on u. S. Bond yields. Until the ecb gets out of the market, we are nowhere near the right price. Francine could that mean we have a nasty Market Reaction generated by europe this time . The story of 2018 is going to be the ecb trying to water it down. That is why they are not going to stop before september. That is why they are not going to raise rates until the first half of next year. Is mario draghi really the savior of europe . It is almost thanks to the ecb that we dont really see spreads widening. It is 100 thanks to the ecb. Hes done a great job stopping the existential crisis. Say the french electorate have done a great job stopping the danger that populism drags a major economy out of the euro. I dont think the italian election is a major threat to italy be in part of the euro. Francine lets say theres some kind of coalition that doesnt deliver reform. How many italian coalitions have not delivered reform . Francine what do you mean . [laughter] we can live with domestic problems in italy. Francine it is an italian problem, but i went through every single proposal and none of it really makes sense when you are trying to balance the books. It may come back to be an issue. When we find a market clearing level for bones, everything else, then we are going to start focusing on actually balancing the books. Divergence back to between european bond markets when whatever it takes ceases. Francine kit juckes stays with us. Coming up, we will hear from the statoil ceo as his Company Turns the page on the crude crisis. Get the view on oil prices. This is bloomberg. Francine this is bloomberg surveillance. Statoil is turning the page on the oil crisis. Through aosts turnaround. The company is now ready to raise investments in new projects and deliver higher cash dividends to its shareholders. Speaking to a guy johnson and matt miller, the statoil ceo discussed earnings and plans for the future. Eldar a lot of uncertainty in the markets. There is a strong demand. That will continue this year as well. We will see more supply from the u. S. Theres more volumes coming in. Thats a lot of projects will come into production on the supply side. The price willct be lower than 70. We do have a slightly stronger view in the mediumterm. That is basically based on the fact that we still havent seen the impacts of the really low investment levels. Guy your sense is that youve turned a corner now. If you read your report, if you look at your outlook, the since seems to be that the difficult period, we can now call time on that. I think the deepest part of the downturn for now is over. Still facing a lot of uncertainty. This is a cyclical industry. There will be things coming up down the road. We are now breakeven, possibly below, well below actually. That is something we will have to take very good care of and continue to improve. If the heat starts coming back, costs might come back. For us to continue to improve is extremely important. Cost you were able to keep down last year compared to expectations. They came out and said cash generation was a touch weaker than they expected. What do you attribute that to . Weve seen cash generation miss industry expectations. Eldar we had a very strong cash generation. Yearthan 3 billion on the after Capital Expenditures and dividend. That we would we see a strong picture on cash generation, basically based on a highquality portfolio. Portfolio,n a strong the product on average has a breakeven below, and that gives us a strong resilience for the volatility ahead of us. Francine that was statoil ceo eldar saetre discussing economics with guy johnson and matt miller. Lets we have some breaking news on germany, negotiators reaching a coalition agreement. I dont know whether this is the final agreement. It is not really having an impact on the foreignexchange markets. We are keeping a close eye on what is happening in germany. Lets get back to oil. Joining us, im rita sent. Thank you for being on today. This is the day after oil was swept in this Global Market route. Are we back to looking at fundamentals, are we back to looking at u. S. Stockpiles now . Thanks for having me. I dont think this is over yet. Theres definitely a big macro momentum in oil right now. Think thespects, i dollar is going to be the key in the short term. Fundamentally, nothing has changed. That is really a reflection of the fundamentals. This is a softer time for oil demand given its refinery maintenance. The correction in oil has been less than other markets. That does tell you that we are in a stronger position. Does it tell you about the price of oil . It seems like finally the market is listening to opec and what theyve done. For sure. Weve been saying that weve probably been more bullish for a while, precisely because the overhang was getting eroded quickly. Opec has maintained its discipline and that has helped to clean up the market. Year withtered this very limited, if any, overhang. While right now the pressure is on the downside, we actually dont think this is going to last very long. Prices will be susceptible to upside spikes if there are any geopolitical outages because we dont have a buffer anymore. Francine what does it mean for underinvestment in the oil and energy space . Is there a concern that it goes back to 110, 115 . You are asking this question, because weve always had a spiky Oil Price Forecast for 2019 because of that. This is the last year when the legacy projects, online. From next year onwards, we have the number of projects and decline rates picking up. They are now talking about this lack of investment. I do think there is a potential for spike. Shale is growing. Weve seen a huge amount of shale production growth. Day andion barrels a still we are drawing stocks everywhere. Demand growth is very high. Going to gok we are back to 100 and stay there, but could we spike up to 90, absolutely weekend. Francine how much can this agreement between saudi and russia last . Great question again. That is where the focus is. Do they roll back the deal . I think the markets should expect tapering towards the end of the year. They may not maintain the 4. 5 cut. But they remain extremely committed to the deal. They want to make sure the industries go down, more so to a they want zone, and to make sure investment comes back. They want to maintain stability. We dont see this deal ending anytime soon. Francine do you see demand picking up from emerging markets . This year is going to be more about demand. Years, 2 Million Barrels per day, but in the last three years, weve had some weakness, latin america, the middle east, even india last year. Now we finally have synchronized Global Economic growth. There isnt a single region where Oil Demand Growth is likely to fall because the economy is doing so well. High oil prices might lead to lower gasoline demand growth. There is clear upside potential to that. Kit, how do you look at the oil price . It reflects the strong Global Economy. It affects a bunch of currencies that are linked to it. I listened to a lot of experts going to remain under 70 a barrel. I think if we traded oil prices up to 80, 90, you get a significant stronger canadian dollar. Even the Australian Dollar would be stronger. If we started moving up again very quickly, it is going to keep markets testing the upside of the range. Most of thing to me is, the major Oil Sensitive currencies are underperforming the oil price already. If this little correction is this shallow, they are all going to be winners. When you look at a lot of the dividends being paid out, we also have the saudi aramco ipo potentially in the next 12 months. Will that change the oil market . I dont think so. They are completely separate events. The ipo was talked about well after saudi arabia agreed to doing the deal with opec and russia. I think they are separate. I think the commitment is to ensure that prices are stable. Understanding, a seven handle would be a desirable price. The last thing they want is prices to overshoot in the coming years. They have a very longterm scenario, and outlook much longer. I dont think the ipo changes any of that. Francine thank you so much. Kit juckes, thank you. He is from Societe Generale. Bloomberg surveillance continues in the next hour. Tom keene joining me out of new york. We will be talking volatility in markets. This is bloomberg. 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. Francine the selloff takes a breath as investors try to remember how to trade a market that moves both ways. But will it last . We look at the 8 billion bomb in the markets. Offroading as gravity returns to the stock market. Elon musk launches his car into orbit. There could soon be a tesla. Tom keene is here. Very tough negotiations after months of negotiations. Looks like we have a deal in germany and breaking the deadlock in this deal with the social democrats. We have a better understanding of who gets certain industries. It helps with the brexit negotiations and the trading when the e. C. B. President steps down in 2019. Tom we hope that Angela Merkel did not short the vix. That would be great place to start. That would be exclusive. How strong the government after eks and weeks and weeks of battles over immigration . Francine months of battles over immigration. For the moment we dont have the details on the collusion. We have to go through it with a finetooth comb testimony tr the moment, it is just sketchy. Tom i want to say thank you to all of you for our response to our coverage yesterday on the markets. We will continue that coverage today. All of surveillance, thrilled that richard home runhill will join us in a moment. Im going to call it stability. If yesterday had not happened, today would be a huge day. Francine yes, today would be a huge day. Volatility, we need to go back to what happened with volatility in the u. S. First, lets get straight to the bloomberg first word news. Here is taylor riggs. Chancellor Angela Merkels bloc has reached an agreement with the social Democratic Party. Members of the social democrats will still have to vote on the deal. On capitol hill in the u. S. , the house passed a temporary spending bill. It would lift budget caps to fund the military through september. A deal may be added to the legislation before the senate votes. Leaders in both parties want to thend cycle of temporary budget measure. Vice president pence is in japan where he is threatening north korea with the toughest economic sanctions yet. He spoke after meeting with shinzo abe. Meanwhile kim jong un has name his sister to represent north korea at the Winter Olympics in south korea. She will be the first north korean representative to set foot in the south. Elon musk launched the most powerful rocket in 34 years. The falcon heavy. Then two of the rockets flew to the border coast for a recovery on land. Global news 24 hours a day by that analysts. Im taylor rmp iggs. Tom well visit many over the charts yesterday to give you a 24hour per spebtpism dow futures negative 214. A euro a little bit weaker. Thank you for the great perspective. Next screen. The vix, 30. 77. Call it 1050 back down to 30. Thirdyear bond is one thing im watching. 3. 11. Down under 3 . That should be red. Were three basis. S lower in the 30year bond today. Not signaling the fear of many watching the fixed income market. Francine . Francine this is what im looking at. A rebound in stocks prices spreading to europe. Macts remaining a little bit on edge. Looking at treasuries. Rebounding. Gold climbing and crude advancing. Were kind of back to normal but i think the markets have changed since yesterday. Tom here is the chart to have dow. Everybody take a breath. Lets go over to bloomberg. The dow up, up we go. All we are is back to january 3. We basically have given up january. Whether your per expect sieve one week or 10 months or the great bull market out of 2008, Everybody Needs to put vix dynamics and equity dynamics in perspective today. Francine . Francine yes, absolutely. Vix is the name of the game. Volatility back with a vengeance. European stocks continue with the rebound. Equities paired the gains. Futures in the u. S. A slightly lower open. Despite the market whiplash, Goldman Sachs says there is only one thing to do. Dave costen twriss stock Market Correction appears to be more technical and position driven rather than fundamentally based. He says we believe the fundamental drivers remain intact. E said our forecast is 2850. Does goldman take the fall in line with word on the streets . Our guest, richard, thank you so much for coming on. The vix. What does it do from here . Thank you so much for inviting me. Great to be here again. You are asking exactly the right question. When we look at whats happening in markets, it is driven by volatility and the epicenter of that has been driven by the vix. That volatility is very concentrated. You have seen it in the vix and equity markets. You havent seen it spill over into broader Financial Markets or fixed income volatility. That supports this is a technical move. Were going to see some stability return to the markets, hopefully quite soon. To your question about the vix, we have been in an exceptionally low level of volatility for some time. 2017 was not normal. The lowest level of volatility since the 1960s. The spike we have seen in the last few days is unwarranted. Thizz disproportionate to what we have seen in equities. A 4 for monday associated with over 100 increase in the vix. It is really disproportionate. As it settles downing back down, were still in a low volatility regime. Francine because of the quiet thans we saw over the last 18 months, has the market changed . Is volatility going to come back . Thats how you trade away any kind of uncertainty . I think were still in a low volatility regime going forward. That regime is really supported by the maker economic environment. We think were in the middle of a sustained economic environment that has some years the run. You look at the Economic Data, Earnings Data out of the u. S. , out of europe, asia, it is all supported by a synchronized and sustained expansion. We know that all the significant regime changes, volatility regime changes are associated with economic regime changes. Were not seeing that right now. Tom i want to show a chart over the carnage there. This is the Credit Suisse product. Thanks for killer reporting on this. Here is before this is the gorgeous price in 100, 110 in the massive log rhythmic showing a drop as low as 5 a share and out here at 10 a share. I get that blackrock thinks this is discreet and sprapt separate, but the money question this morning which im sure blackrock is looking at is does this creep over to the shadow vix, the shadow rate parity contract world . Does this come over into other derivative worlds of 2018 . 2018 . Leverage products are different to e. T. F. s. We have seen that in the last few days. They provide leverage exposure to the vix. You see the extraordinary price come back. I think it is important to put the scale in context. Roughly 3 billion to 4 billion in these products. If you invest in these products you have lost a lot of money in the last few days but in the context of the Broader Market that is relative di tom i agree, but we have a huge rate parity play over the last number of years. This morning on global wall street, what are those hedge funds and over the counter people doing . Do they just do business as usual or do they have to change their game or change their behavior because of the last 24 trading hours . What you have seen in the last couple of days has been a significant Short Covering as you have seen risk parity and c. T. A. Strategies struggle. Im just going to drink some water. Tom i have the same thing m im using water but go with the vodka if you want. It is working ok for now. You have seen some Short Covering in those strategies. We dont see the systemic risk, the spillover from these strategies that they are talking about clearly exposed to this volatility move. We dont see the potential for that to spill over into broader financial crisis. The health of the Banking System is the strongest it has been since the Global Financial crisis. We dont see the exposure over the Global Economy to that spillover effect. We dont see it as a systemic risk. It has the pnl for more shortterm volatile di but if you take a longterm view, were still in the volatility regime, we think eck treasuries the place to be. Francine richard of blackrock, stay right there. Well get back to you. Tom, i think the other important piece of news which we touched at the top, we may have a name financial an minister. Ola spnch schultz. Olaf schultz. They see mayor of hamburg. We have more on what this new government means for the markets. Coming up, a conversation with Mark Chandler. Look for that interview at 6 00 a. M. In new york. 11 00 a. M. In london. This is bloomberg. Taylor this is bloomberg surveillance. Steve wynn has quit over a Sexual Harassment schedule. He said he could not be effective in his current role. He will be replaced by the companys president , matt addox. Increasingly focused on uber. He has unveiled plans for an i. P. O. In japan that would separate softbank into investing and telecommunications. Thats your Bloomberg Business flash. Tom . Francine . Francine to you so much, taylor. While the bank of england is said to keep Monetary Policy on hold and the first policy meeting of the year, Bloomberg Economics predicts Michael Saunders and cafty are expecting another 25 basis points rate hike. Richard, well get on to the b. O. E. In a second. Seems like the fed is actually the one thing that could hurt the markets. Is inflation going to be quicker an the market expects or slower . One thing is making a comeback. Fwelt the market was underpricing what the fed was likely to do this year. Essentially what the fed would like to do. What it told us it was going to do, at least three rate hikes and possibly even four. The last few weeks you have started to see market adjust to that. We have seen stronger data come through and some signs that inflation is picking up. That has been one of the potential triggers for the recent volatility. Whats happening is inflation is moving back towards the Central Banks. I think the fed will be pleased seeing inflation move back towards that target. Also inflation just above 2 over the next year. Yes, inflation is making a comeback but we dont see that disrupting the markets. We see the economy somewhere close to middle of its cycle. Somewhere close to full capacity. But typically, that leaves significant runway for the economy to continue to expand before you get into the overheating phase. One thing youll have to watch closely is the tax cut in the economy. That will boost growth up to 1 of g. D. P. If that accelerates, that would bring forward that overheating phase. The end of the cycle is at least two years away. Tom we had chairman powell yesterday with the obligatory photographs, he and the members of the fed greeting each other. What is so important here after 1. 5 to 3 , 48 months out, we assume richard a nice, smooth, bankerly path along the way. That confidence was destroyed yesterday. How do these various banks begin to adapt to a vix at 30 . So i think the fed is going to be focusing on the Economic Data more than anything else. What were seeing in the data is a broad based recovery. Not just in the u. S. But outside the u. S. We are also seeing inflation is returning back toward central bank targets. Some of these fears of deflation which have haunted the markets for sometime are starting to disappear. I think the fed will be comfortable with gradually raising Interest Rates in that environment. I think they wont overreact to a shortterm rise in the vix. Looking for any evidence of that market volatility spilling over into the economy. No evidence of that whatsoever. Tom i agree that we see no evidence whatsoever. The fact is in 72 hours we got a 9. 6 gyration in the Dow Jones Industrial average. As we continue to see Interest Rates rising, how close are we or how important the tip point where we get instabilities in the fixed income space . It is obvious that youre eeing steady and garage rate hikes from the gradual rate hikes from the fed. They are starting to adjust that Balance Sheet and raise Interest Rates. I think it is hard to point the finger at the fed and say they are the cause of this recent market volatility. Taking a step back and saying Interest Rates in the u. S. Are still exceptionally low. The market can certainly withstand a garagal normalizeation of Interest Rates. What causes the market tobs destabilized is the that she knows the fed is somehow behind the curve and the economy is overheating. We really dont see the evidence of that. We see a steady normalizeation of Interest Rates as the economy starts to expand at a healthy rate. Francine say there is a market selloff. Should the fed stay put or go from a number of rates they were thinking and reduce it by one . I think three rate hikes are the most likely outcome for this year. Bear in mind that means they will pause once. With that market volatility, the risk is actually to four. The data is going to come through consistently above trend. With inflation moving back, coming back towards target, you need Something Like a market event to cause them to pause. Three rate hikes the most likely outcome to that. Volatility itself is not enough to change the view. You have to see them change their assessment over the economy. Francine just inflation, right . Nothing else that would make them shy away . I think they will be looking at inflation and wage growth and their own assessment of how much excess, capacity there is in the economy. With growth, above the feds measure of trend. Francine coming up tomorrow, a fantastic conversation in frankfurt with robert caplain. He will be speaking to our manus cranny. He will be speaking about inflation. This is bloomberg. President trump if we dont change the legislation, if we dont get rid of these loopholes where killers are allowed to come into our country and continue to killle, gang members, there are many gang members we dont even mention. If we dont change it, lets have a shutdown. It is worth it for our country. I would love to see a shutdown if we dont get this stuff taken care of. Tom for our global audience. Very different discussion from the president than what we have heard from any other president. Talking about shutdown. This is a con slovo luted story. It is turmoil of a budget bill passed to the middle, end of march yet there still could be a shutdown. Richard turnhill, blackrocks global strategist, this leads into the confidence trade and the vix trade as well. How do you overplay politics at blackrock with the confidence of a sustained bull market . When we how about the about one of the potential events chksd disrupt this environment of low volatility that we have been in for a number of years, one is a political or geopolitical shock. The u. S. Shutdown is now viewed as not one of the potential catalysts. It historically shut down and had limited impact on markets because investors have tended to take the longterm and look through the shutdown and look at the broader picture of whats happening in the government and look bheexfment when we at geoPolitical Risk, it is the domestic politics. It is geopolitics, u. S. Trade policy. Nafta. Potentially increasing trade tensions in the u. S. And china. These are the factors we have been looking at most closely which could create a rise in volatility going forward. Francine thanks so much. Stay with us. Coming up on bloomberg day break america, a conversation with william dally. Look for that interview at 7 00 a. M. He will have a thing or two to say about selloffs and how he is treating volatility. This is bloomberg. 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 this is bloomberg surveillance. We are focusing a lot of our efforts on the vix. We are looking at the market wrap that we saw the last 48 hours and a little bit of stabilization and also focusing on the new german government. We understand the coalition has been formed, but Angela Merkel trying to figure out those last wrinkles. On germany, lets get to bloomberg first word news with taylor riggs. Taylor the stalemate in europes largest economy is over. Chancellor Angela Merkel has agreed on a Coalition Government with the social Democratic Party. According to people familiar with the matter, the social democrats will get the finance, foreign, and labor ministries. The others will have the defense and economic position. The members will have to ratify the deal. We will be live in berlin next. Prime minister theresa mays cabinet will not agree on a brexit plan this week. Thats according to a senior u. K. Official. The march deadline alex optimistic. Plus, britains proposal for its future customs relationship with europe is not close to being ready. Taiwan, search for the rubble in the earthquake. 6. 0 quake hit a hotel tuesday. President trump was apparently inspired by grand military parade he witnessed last summer in paris. According to the washington post, the president wants the pentagon to plan something similar to shop military might. He brought up the parade with top generals last month. Global news 24 hours a day powered by 2700 journalists and analysts in more than 120 countries. Im taylor riggs. This is bloomberg. Tom much to talk about here, but part of it is that we have a new german government. We will have Kevin Cirilli in the next hour, but away from the market distraction speaks about a president trying to deal with washington. We will talk in the next hour about this parade he wants to run like the french run a good parade. Lets run a parade if we will. This is news last night. He wants a parade. Francine remember if you look at how he was greeted by World Leaders in the last 12 months while he was in office, you macron dide that the best job. He wined and dined him at the top of the eiffel tower. When he was quizzed about brexit, he said he was a big fan of emmanuel macron. It is something that im sure people want to replicate around the world. Back to a top story that broke this hour, ji german chancellor Angela Merkel has agreed with the social Democratic Party ending a fourmonth political stalemate. According to local news outlets, the hamburg mayor will become the nations next finance minister. Joining us now is chad thomas. Give us an update. Do we know what this new finance minister, if confirmed, stands for . To have aould like parade here in germany as well after 24 hours of negotiations. We finally seem to have an agreement here in place. Chancellor merkel is known as the queen of the all that talks and she emerged with this agreement with the social democrats in the last hour. She did give quit up quite a bio reach this deal. The finance ministry will go to the social democrats. They will also take the Foreign Ministry. The social Democratic Party will according to sources in the local media become the new foreign minister. German media reporting that schulz will become the new finance minister. He is the mayor of hamburg. He is not well known outside of germany, but he is a Political Insider within the social democrats and the person that the party leader has been pushing for this role. The social democrats are going a half about an hour and from now to hammer this all out and we are expecting to hear more from them and chancellor merkel this afternoon about the details of this agreement. I know its early days, but what does he need for brexit, european reform, and trading . Chad his sort of policies are not really known because currently hes in a very regional role. Hes the mayor of the city of hamburg. Democratshe social are very keen on deeper european integration. They are also pushing for deeper cooperation with france and that is certainly something that they will be able to push forward by taking these two power ministries the Foreign Ministry and also the finance ministry. In terms of his exact policies, we will have to wait and see how that plays out in the next couple of days. Whether in fact he is going to become the finance minister, the german media reporting this. We are hearing from sources that this is a very controversial pick. See howhave to wait and things play out in these meetings still happening this afternoon. Francine again we have to wait until the dust settles, but various parties got various ministries. Where does it leave Angela Merkel . How she been weakened by this new coalition . I should given up too much power . Has she given up too much power . Chad by giving up the finance ministry, she is essentially giving up control of the pursestrings of the government. Man fromr right hand the christian democrats and a real party elder that held that role for a very long time. One thing to note is that we are not out of the woods yet. The social democrats have said that this agreement will go to a full vote of the social Democratic Party members. That vote is set to happen some weeks from now. It will take a while to organize that. To whethere off as the Party Membership is going to back all this. There are 460,000 people who can vote in this across germany. While this is a big step forward today, we will have to wait and see how that party vote actually goes some weeks from now. Tom let me get back to the data right now. I want to get to the market with the vix at a 30 level. The big 30. 72. Bring up the data check right now before we go to stephen. I want to focus on what we saw yesterday with the markets. We have some real stability yesterday afternoon and you can see with the futures 27. The curve steepening. We have seen tremendous stability of away from equities over the last 22 hours. Stephen gallo with us as we look at the linkage here right now. Bring up this chart. Jason, bring up this chart. This is exactly what we do on the show when we shared between the control room and myself. This is the Merrill Lynch move index. We are not seeing a correlate of move in other markets. What does that mean to you . Stephen for the most part, we have seen a pickup in fx volatility, but it has been very controlled and certainly nowhere near the size of volatility we have seen in other asset classes. It speaks to the general fund mental backdrop, which has been influencing fx markets for the past six months. Globalst is strong growth has caused the dollar to weaken because it has raised the attractiveness of investments outside the United States. Secondly you have a situation where the u. S. Twin deficits is increasing. The fiscal deficit will continue to increase and we have the spells it generally weak dollar fame. The weak dollar is still very much intact despite the equity route. Tom come back to the move index. Jason, pick it up if you would. This is the volatility of the yield curve. It has moved up a little bit, but the vix would be up here equivalent and equity market space. The way that this has been expressed is maybe dollaryen. Have you adjusted a strong yen call because of what we have seen in the last 72 hours . Stephen i think most of the yenvity has been in the crosses because it has been clear over the last few sessions that short yen was used to fund the long positions in euro, sterling, and aussie. There has been unwinding of that and that has led to a generally stronger yen. Dollaryen has been relatively muted because the yen and the dollar tend to perform as safe havens when market angst increases. Our fundamental view for dollaryen is still the same. We see a going to 1. 04. This will be driven by a weaker dollar. Tom focus into what you look at black rock in the bond market and into the fx markets. I know you have three bloombergs at your desk with 12 screens. When you log in, what do you look at in the bond market . Is it liable like shortterm paper or is it something esoteric . We are looking at the shape of the yield curve in the u. S. Last year was a dramatic flattening of the curve. We see value in the short end of the curve data compared to the long end. Is repressedmarket significantly and we would much role a rather hold the long endf the curve. Longterm bond yields are going to rise and we saw a secular low and bond yields a year or so ago. We look forward over the next five years. We see the path of bond yields being higher but only gradually higher. That were gradual is very important because an environment bond yields rising because of stronger growth is one in which equity markets can continue to do well. Francine let me bring you over to the eurodollar chart. If the dollar becomes weaker, what does that do for fed policy . Stephen we do think it becomes weaker from here. Next 12ut 4 over the months so we do not think the january decline of the dollar is going to be repeated on a monthly basis. Fed policy in our view is largely in the backseat and terms of the driving force of the dollar. It is largely the fact that other Central Banks will be normalizing their policies, which will be driving the dollar lower. Francine does that mean you can change fed policy with extra stimulus to an overstimulated economy . Stephen i suppose of the dollar weakness were to get to a point where it was quite extreme, the first thing that you would see is the g20 starting to intervene verbally or otherwise slow down. That would be the first issue. I dont think the first issue would be the fed moving to 50 basis point rate hikes premeeting. The g20 meeting in march is going to be important, especially with the broad trend of the weaker dollar intact still. Tom i want to bring up a chart. This is the chart that we have shown from the trump election folks. The massive curve steepening the belief in a certain politics out of washington. Down we go with the curve flattening to 50 basis points. I will put this out on social for Bloomberg Radio london as well. Richard, what will drive us to a further curve steepening . Richard i think there are two important factors that will drive steepening overtime. One is the macroeconomic environment that will lead to a reassessment of the path of Interest Rates not over the next one or two years but longerterm. The second is supply. We know that bond supply is likely to increase. Its going to increase with the tax package is exacerbating that. The combination of those factors will likely lead to yield curve steepening. Its important to put this in context. The yield curve today is very flat. What we are moving back to his a much more normal shape yield curve. We will see huge demand from our clients and Global Investors for a Long Duration of higher yield assets. There will be 22 trillion of savings this year looking for a home. Much of that will look for a home in higher income assets. This is the steep curve looking gradual. Tom a terrific conversation. Stephen gallo, too short a visit and we look forward to your views on the yen. The vix now 31 for those keeping score at home. Certainly not the turmoil we saw yesterday but nevertheless, a most interesting day in the markets. For your morning brief, very important here. Bob moon, karen moskow, coasttocoast and on Digital World wide. Your morning brief on bloomberg daybreak. Bloomberg radio, check that out. This is bloomberg. Tom futures 23 with dow futures down 200 points. Francine lacqua in london and im tom keene in new york. Its one of the great debates with the gyrations in the fix. Is it just about the short vix trade or more going on . One of the great debates on the buy side and Investment Management is the dynamic of everybody in the passive trade. There is passive investment and active investment. Has that calculus changed the volatility of the market when we come under crisis . Richard some of the volatility we have seen in the last couple of days has been driven by some of these levered products and some of these inverse products in the etp market, but the vast majority of the volatility has been driven by Short Covering. If you look at the last 48 hours, we did see a big spike in etf activity and index activity. It went up roughly 20 to 30 . Still by far the minority, but it did increase. One of the notable features over the last 28 hours is the orderly nature of the kleins. This is exactly what they were meant to do. You have seen the use of index products increase, but that has not caused the volatility. It allowed that market decline to take place in an orderly fashion. Tom whats important here is the weighting. The media gets this wrong a lot so lets make it clear right now. The worries about passive, active, and other more systemic dynamics are completely secondary and tertiary as compared to that dreaded word leverage. Leverage gets you in trouble, right . Richard the vehicles we use are the index vehicles or the alpha sitting vehicle is how you implement your strategy over time. Whats important is that those vehicles do what they are designed to do and provide liquidity to the market. What will get you into trouble is when the markets writedown and you get this locations in the market. That is often a driver of that could whe. When we think about what could cause a shift from this low volatility environment, than actually focusing on the shift between index and apple products is looking in the right place. I think you have to look at the potential dynamics that could cause a dislocation in the economy. Leverage is one of those. A really important point is that Financial Leverage has gone down dramatically since the Global Financial crisis. Tom francine, a very important point here around that jargon of alphathe idea seeking vehicle. Alpha seeking vehicle is something and President Trumps parade that he will have some it can be like the french. Francine the analogies are brilliant. Richard i will come back to it. We really like this use of the term active and the way that you used it because the reality is that all decisions and investor makes in their portfolio are active decisions. Whether i choose to implement that using an index vehicle or apple vehicle is all active decisions. Francine alpha seeking vehicle. I quite like it. Talk to me about emerging markets. Richard one of the notable features of the last 72 hours is how well many emerging markets have held up. A number of investors have compared the recent events to the taper tantrum. What you saw the taper tantrum was emerging markets get hit very hard. Emerging markets have held up much better. I think that partly tells the investors are focusing on what are increasingly robust fundamentals but the terms of Economic Growth but also in terms of earnings. Most importantly in terms of valuation. One of the criticisms placed on the market in general is that everything has become expensive and this chase for yield is driven all markets to be expensive. Arere seeing areas that expensive, but when we look in equities, we find significant areas that a reasonable or good value. Emerging markets are one of those. Francine you told clients yesterday to buy on the depth . Richard absolutely. Its interesting that many investors have been sitting in cash or safe haven assets, even more so than cash, looking for an opportunity to buy. When you get the opportunity, volatility spikes and that is the time your most nervous about putting money in. Not because we are calling the bottom, but shortterm market timing is incredibly hard. If you are prepared to take the long view, you want to be focused on where youre taking that risk. When you look across all markets, the debt segment of the market for taking risk is emerging markets. Francine what is your view on europe . Is your concern that the volatility we saw the u. S. Yesterday generating that spark off coming to europe next . Richard we have seen some volatility in the european markets. The political news will be taken positively and that creates the potential for germanopean and government for proeu access across europe. We look at European Equity markets and we remain positive. Theyre supported by stronger fundamentals. It is something many investors often forget. The europeane stock market with the european economy with was half of revenues coming from outside the eu and almost 20 come from emerging markets so we are getting the strongest growth right now. Be verywill cautious so all that points to a very constructive environment. Tom we have an important ecb conversation at the top of the next hour. We have shown the move index of what is not happening and shown foreignexchange with stephen gallo. Lets review. There will be a quiz on monday. What we have got here is the vix. Im putting this out on radio in about three seconds. Up we go with the friday vix explosion. Heres 2, 3, and four standard deviations. We got out beyond four standard deviations with the vix of 50 and a little bit of a moment yesterday and back down here right now at two standard deviations. Its a huge quiet as we have heard from mr. Turnill today. Futures 24 futures 220. Thisng you uptodate on and there is the vix at the 31 level and bitcoin with a nice rally off of 5000 handle. Francine this is what im looking at. Theres definitely a little bit of repressing on the markets. U. S. Futures drop and oil slipping. If you look at gold climbing and crude giving up some gains. Lets take some stock at where we are in two to three hours from now. Lets talk about tesla and elon musks Rocket Company spacex. That was Pretty Amazing pictures. It was laden with the tesla roadster, which is speeding towards political orbit around the sun. This has helped make it one of the worlds most valued private companies. Joining us now is jeremy cons. Richard is still with us. Lacked ofnot been controversial things as well. Will this become the boost that is needed to become a successful launch and things are looking up . Jeremy things are looking up. They needed a big success and got one yesterday. Verytried to set the bar low and basically said as long as it does not blow up on the launchpad, we will consider it a success. They managed to get this thing up into orbit. The roadster is now circling and will be for millions of years in this elliptical orbit between the earth and mars. It will be very interesting. Francine what does this mean for government . Are they taking the role that they should be taking . Jeremy this is the largest spacecraft launched by nongovernment entity ever and government is increasingly relying on the private sector when it comes to space. Spacex has contracts with nasa to fairy things up to the International Space station and you see more private Companies Launching microsatellites now. You are seeing a trend toward privatizing space isolation. Tom they said it was 18 or so boeing 747 cite out this puppy and the space. Sandra musk going to put bullock in George Clooney back into space . What is the real goal here . Musk has said he wants to send a mission to mars and colonize mars. This is the first step along that way. Its interesting that he has lofted this piece of space junk up there. He might get some criticism for that, but in the meantime, spacex is making money by getting paid by nasa to fairy things. Tom jeremy, if George Clooney cannot do it, youre just as good looking as George Clooney. Jeremy, thank you. , thank you so much for your wisdom on these markets. In the next hour, a conversation with the newly minted chief executive officer of realtime to rio tinto. Mark chandler on your vix. This is bloomberg. Tom this morning, stability of a sort. The pros are fixated on a fixed income market. Credit suisse is fixated on the vix. A 72 hour 9. 4 gyration in the dow as the crisis in volatility systemic. Do no harm. How should the adults respond to the collapse of a sure thing . Chairman powell, mario draghi, and Company Provide reassuring words. They were not short the vix. The president is fixated on having a parade. Not flowers and the tournament of roses, not snoopy turning left on broadway. The president once a military parade just like the french do it. Santa is not invited. Good morning, everyone could thi. This is bloomberg surveillance. Im tom keene. Francine lacqua going what is he talking about . Help us with why the french do parades like nobody else. Francine because the french are proud. The french have been doing it for years. They have one of the biggest militaries in europe and its a tradition. They do the 14th of july like no one else. Our producer is reminding that the chinese do some pretty Strong Military parades. For france, its part of the pride of being french. Last year there was a real turning point. You have a new young french president inviting donald trump to paris. They dined on top of the eiffel tower. Listening to a slightly modern regime daft punk doing the French National anthem and that was popular. Tom are they going to have a parade in germany today . They got a Coalition Government. Should they have a parade . Francine they have less parades in germany than they do in france. Tom we will get started with a lot of market coverage, but first, your first word news in new york. Heres taylor riggs. Taylor we are starting with germany. Oppotaco stemming that lasted since september appears to be over. Angela merkels block has reached an agreement on a Coalition Government with the social Democratic Party. Thats according to the social democrats. Members of the social democrats will still have to vote on the deal. The house hasl, passed a temper a spending bill that would over a Government Shutdown tomorrow night. It would lift that cap stuff on the military through september. A broader budget bill may be added to the legislation before the senate vote. Leaders say both parties want to end the cycle of temporary budget measures. Vice president mike pence is in japan where he is threatening north korea with the toughest economic sanctions yet. He spoke after meeting with japans Prime Minister. His sister has named to represent north korea at the want to olympics in south korea. She will be the temp dynastys First Official representative to set foot in the south. Global news 20 for hours a day powered by more than 2700 lists and analysts in more than 120 countries. Im taylor riggs. This is bloomberg. Tom a data check very quickly with stability in the markets. Thank you to richard for giving us that perspective in the last hour. Dow futures 238. Other than that, some remarkable stability with the dollar with a bit of a bit. We will talk to Mark Chandler about japanese yen and that global fx proxy. Bitcoin with a nice rally off the 5000 handle yesterday. Francine . Francine this is what im looking at. Its a very similar data check in europe where treasuries are stabilizing. Gold is climbing. Tom let me show one chart here in this shows the stability. Where are we in the market . I did this chart separate and i saw in the New York Times the same idea as well. Where are we . This is a simple dow back to january 3. The vix and all the dynamics of that is separate but isnt. That is the theme through all of surveillance this morning. Chaos of with the friday monday and a nice little rebound yesterday afternoon. Francine you know what im charting . Im charting vix, but im not charting the u. S. Or european one. This is the Velocity Shares to be inverse vix shortterm. , it justok at this shows the popularity of these vehicles, which may have contributed to one of the most violent moves and u. S. Equities in history. Its nice to see the moves and the resurgence. If you bring it back to 2012, its a even bigger move. Tom very good. Francine we will have plenty more on that. According to mario draghi, the ecb cannot claim victory in its struggle to revive inflation. This is despite the euro area economy expanding to its fastest pace. The ecbler spoke with executive board member and supervisory vice chair at the Central Banks annual press conference on banking supervision. He asked her if she is confident the central bank will get closer to its goals for price growth. Sabine im confident that we will achieve our objective to ensure price stability. All the ingredients, all the requirements on the table are there and we have a robust growth, broadbased growth in the euro area. We have rising investment activity. We have a decrease in the unemployment. We have very generous financing conditions for private households and corporate. We come in the mediumterm and that is our goal with price stability being there. That is why i think that in this year we can exit the net in orderof our program to balance with coming back to a more normal Monetary Policy. The rest of the measures, the , thenterest rates generosity we are providing to the banks, the reinvestment in , givencks are plenty plenty expansion in the Monetary Policy which will support going in the direction of the price stability we wish to get. Matt are those things even Still Necessary . Looking at next year as Global Growth underpins stable strong european growth. Can ecb start to get back to normalization with regards to those other tools as well . Sabine we are talking not about next year. We are talking about this year. The first step in the normalization is to have the stock finish to the net purchase seeram and then we have to how the price stability goal is achieved. Im confident for the mediumterm and many indicators show it in the right direction. Well see what the next steps are feared matt. Matt one final question. I moved here a year ago and the euro was trading at 105. Now its trading at 124, which for me as a personal citizen has affected decisions i make. It must affect the decisions banks make as well. Does that concern you with the strength of the currency and the strength with which it has occurred . Sabine with regard to Monetary Policy, we are not targeting any specific exchange rate. It would be wrong to do this. You rather have to look and analyze into what other fundamentals and what are the reasons. It might be that the fundamentals changed and then its justified that you have a certain direction in the exchange rate. Am i concerned as a banking supervisor . You always have to take into account what kind of monetary see and howwill banks are able to cope with this kind of market direction. Here we come back to my favorite topic, which is mathematics. Banks need to be able to steer and manage the risk. This is one of the most difficult, but it is one of the major works as a supervisor to look into each and every specific bank, especially when they are significant or relevant , that they are able to do so. Francine that was bloombergs matt miller speaking with the ecb executive board member. Joining us now for the hour is Mark Chandler. Great to have you on the program as always. When you look at currency strategies, as the euro the one that concerns you because it can go up quite consistently . Mark i think the euros rise is counterproductive for the ecb. Heard, the rise of the euro is going to probably dampen inflation and slowdown growth. This puts the ecb further away ism their objectives, which to finish the purchases this year and i think the markets are adjusting rather than stopping in september like many people thought. The latest hand from the ecb is they are likely to taper into q4. Earlier you had someone on the show suggesting the reason they were dollar bearish is because they thought the ecb and boj would be exiting their plans and extraordinary Monetary Policy and i dont see it happening this year. I see the ecb completing this year and not raising Interest Rates while the fed will be raising Interest Rates two or three times this year. I still see divergence is a factor and that is why i think the dollar slowly coming back. Tom let me bring up this chart. We think mr. Juice for bringing this up as well. This is from Societe Generale that the markets vol is moreo low than its addiction to low rates. The economic damage might be limited. That is the message were hearing. Gravity wants to drag dollaryen and yet stronger. They are not drawing effects from equities over the world could how does that play out . Marc the key is how our currencies used. What is actually happening is that many people in the professional side use the yen and the dollar. They borrow them to sell them to buy other assets. As they sell off these other assets like equities, they have to buy back the yen and the dollar and the swiss franc. Areeuro and the swiss franc the only currencies against the dollar that rose last week. Tom within this is the basic idea of grocer economics moving yields higher and things are Getting Better and everybody out there is talking about stabilities. You have the 200 anniversary and brown bothers herrman knows its much of malarkey. I we at the point where things become unstable as we have seen within the vix market . Marc the vix explosion we have seen is the reflection of the lack of stability we had seen previously. Valuations were stretched. The vix was like a string coiling. Most investors do not trade the vix. Most retail investors, at the end of the day come i think your chart is to the point and that is to say all that has happened is the stock market rally strongly and given back all thats gains and nearly all that scans. Write about the astronomy of the financial system. Can the disease evident friday and monday fold and rebound over into the g fixed income market . Marc the fixed income market was the trigger to this. Things were moving along swimmingly until we get that jump in hourly earnings. We headed back up to almost 285 or 286 on the 10 year, which most people i think you had a Bloomberg Survey at the end of last year shorting the media expectations for the 10 year yield to finish at 290. We were there at the end of january and early february. Tom this will be a great conversation. Lets call it the global litmus pac paper. It was quite a system under shock. Let me turn to the bloomberg right now. Still way out and elevated from the norm that was up wednesday last week. Tomorrow, and important conversation with the most interesting president. Not President Trump, but more interesting alice fed president dallas fed president Robert Kaplan. We will have that for you in the 5 00 a. M. Our. Hour. Stay with us. This is bloomberg. Taylor this is bloomberg surveillance. Im taylor riggs. Lets get the Bloomberg Business flash. In italy come a court has rejected a civil claim filed by a food company against citigroup. The case has to do with the companys collapse in 2003. The court ruled the claim was a duplication of the case that had already been dismissed by the new jersey court. Steve went has quit as ceo of wynn resorts of a sexualharassment scandal. He will be replaced as ceo by the companys president. That is your Bloomberg Business flash. Tom thanks so much. Trying to give you perspective today on all thats going on. Right now we need to go to london to somebody who has been killing themselves working at bloomberg gadfly to explain the game. He is marcus ash word and joins us. Today is not monday, but we are clearly not back to stability. What are you looking at right now with the vix crisis . Marcus looking at realized historical vol over where the vix now is. It is now 18 from eight. That is what has happened. The vix looks at the implied volatility where it puts them together at a moment where it is 30. It is elevated above where historical vol is. I think we are going to see short volatility trades come back. It is too good to miss. Theres too much invested in this type of strategy. That should tighten the spread between what the s p itself does and what the vix does. Tom we talked about this yesterday with elsa. I dont want to get you in trouble here, but i am going to get you in trouble. On the x axis, the stuff plays out. And backit plays out to stability in all this. Did Credit Suisse act to hastily yesterday when they shot down xiv . Marcus no. I dont know too much about the ins and outs of it, but we know the last sort of 15 minutes that is that when it all pearshaped for everyone. They had to act and they acted as best as they could and i believe probably within their rights. I dont know for sure. I dont know the specifics of that, but this is not going to go away. There are problems with what happened with various instruments and im sure that over time we will get a closer look at what should be allowed and what should not be allowed. From there it will be a better place. This crash could be good news. It can make a more fair and level system for everyone. Everyone understands a better. In the longterm, it might be good anyway. Get normal perspective on where valuations are for everything. Interest ratend volatility is als up. Francine do you really think it will be regulated and change the game that we are seeing the markets . Marcus the vix does what it does. That is why other things around it art filling the gaps. A lot of these are not necessarily turning out to what people thought they would be. And thats why there needs to be closer regular should potentially. Tom Marc Chandler squirming out of control. Marcus is talking about the linkage in the fx vol. Do you see the correlations in the market . Marc not right now. The currencies have been calm given what has happened everyplace else. My general sense is that im old enough to remember the 1987 equity market crash and people at the time blamed portfolio insurance. Now we have learned that a lot of other things have taken place. People are used to these new tools. I suspect the same thing will come out of this crisis. Tom portfolio insurance in 1987. Marc the same private story i think. Tom im going to put this chart up. This is real broad trade weighted. I dubbed this the mnuchin move. Its a weak dollar policy. Can you fold rhetoric by politicians into a path to instability . I dont want to say Steve Mnuchin caused the vix crisis, but there can be tertiary relationships there. Is that true . Marc those relationships can a exist, but how fast the u. S. Can pull back from mnuchins comments. Tom write it out and use an adverb. Marc he came out strongly and quickly. They recognize the violation and how quickly they responded. My general sense is that this is not really mnuchin and the big dollar rally might not have ended yet. Tom marcus, back to you in london. I want to talk about what you are working on with gadfly. As wes your Research Item struggle for stability and equity markets . Marcus im looking at what is happening in europe at the moment as the new German Coalition and what that means for on spreads. That is slightly off the subject of what youre looking at here. Yesterday i wrote a piece on credit spreads. Was a trend that went on too long and the rise of the s p matched with a big selloff in u. S. Treasury yields, unbalanced, the next thing logically that may fall over would be credit spreads, which have come in incredibly. You cannot have a falling stock market raise vol and spreads keep on tightening. You see people backing away from bringing deals. Francine thats a great piece and i urge everyone listening and watching to get to gadfly. If the selloff persists and credit moves like the next frontier for trouble, what part of the credit markets specifically . Marcus it started with highyield already aware of 50 basis points. We are starting to see a little moves which is not great, but its 10 extra on the more investment great stuff. You will see investment first in the new issue market. The percentage of the deals after launch that tighten has dropped dramatically from as high as 80 . They have improved even further. More there like 30 . It shows that people are pushing back against spreads that will probably lead through, particularly if stock market volatility continues. I dont think we are going to drop back where we were before. It will stay much higher than it was, but maybe not as high as a got the past few days. Tom lets just keep it going. Im tearing up here. Francine get a grip, tom. We will ask Marc Chandler if he thinks credit is next frontier to be tested. Marc im not sure we have really seen a big crisis and equity market in the first place. Im struck by the idea we are exaggerating. All we have seen was a big rally in january, unprecedented among the record levels in the month of january. I think the italian stock market led the move. It has been violent, but at the end of the day, the market was overvalued at the end of last year, is it still overvalued . Tom how come the fx guys bring up the italian stock market . This is unamerican. I want to go to a chart. This nails it for you, marcus. You can steal this from bloomberg surveillance. This is the be aa industrial. Where else are you going to get this . Its like lululemon. Its record types. We are here in the glory days of 2007. Up we go and down we go to new record tights. It comes close to the full faith and credit. Thats the distortion that may be coming, right . Marcus maybe am pushing too hard against it from his understanding, but the point is this is not right. This needs to correct at some point. Im not saying it will happen today or because of what has happened the last two days in the stock markets, but i think its a warning sign and something to keep a close eye on. This is going to have some perspective. Credit spreads are just too tight. For good reason, theres too much money facing too few assets. Calm down, marc. Marc the Federal Reserve is draining for sure, but the ecb is still expanding. The bank of japan is still expanding. Tom you are in the late great martys likes camp. Dont fight the ecb, bank of america, etc. Marc theres too much capital chasing too few goods, but there is no draining capital yet. It might be coming but not this year. Tom i love it when i guess disagree. Marcus ashworth, you can come back tomorrow. You can disagree on a thursday. Francine thursday and a friday. We have a great yield spread that we will show shortly. Marcus ashworth, thank use a much. Marc chandler stays with us. Coming up shortly and about 15 minutes, we speak with the rio tinto ceo. Look for that interview at 6 30 a. M. In new york. Thats 11 30 a. M. In london. Andill be talking m a dividends and the good news that we saw in commodities is finally filtering through the minors. That interview that you dont want to miss right here on bloomberg. This is bloomberg surveillance. Morning mustreads, we like to give you a narrow perspective, sometimes a broader perspective. Mr. Brooks, the victorian politicians had a stewardship mentality. Thank you, mr. Gladstone. He listens to the people that stood slightly apart. Thank you, mr. Gladstone. Governanceg, seeing is a shared professional responsibility. Our leaders from america come from a much broader swath of society, but they have lower standards of behavior and less of a shared stewardship mentality. Described the philadelphia eagles. Kevin cirilli joins us in washington right now. I look at that wonderful essay, searching for a new america. Within the budget battle in washington, can there be any agreement to get to the shared responsibility of balancing or doing our books . Kevin the clock is running out, the house approving the partial funding bill to keep the government open. Lawmakers have until tomorrow night, and the senate, in order to get this done. I was talking to some folks puterday in the daca thing forward by a republican and democrat respectively is not something this white house is on board with. Tom thats exactly where i want to go. My amateur take is that they are trying to move immigration out of the debate. Will President Trump allow that to occur . Or is he superfluous to the debate . Kevin the white house is not want to see this wants to see the issue of immigration can really separate from the issue of government funding. Republicans want the issue of immigration to be totally separate from any type of brinkmanship or government funding battle. On the flipside, democrats are saying you had how long to deal with daca and immigration . We have to get this done. Francine the impossible question will we get a deal, were not . Kevin deal or no deal, we just dont know. Mitch mcconnell has been wonderful rabbit out of his hat for quite some time now. One to pull a rabbit out of his hat for quite some time now on the issue of government funding. Most people are saying that can be another shortterm fix keeping the government funded through march 23. Bolstering defense spending, which is something a lot of republicans want to see happen. We just dont know, because a lot of the senate, for example, you have to see longerterm deal and get away from this kicking of the can in the brinksmanship from one cliff to another. Francine Jared Kushner and trump junior escape public hearings. Kevin the miller probe the miller probe is ending the itsler probe is ending route. I spoke to someone who has been interviewed frequently by congressional committees and there is a sense that bob the sense is probehe Miller Mueller is there a manitoba between the noon is memo in the democrat memo, no news nobody knows what to make of the committees anymore. Tom youre going to the single starting february 10. We wish you the best of luck. Vice president pence will be at the olympics. This is heating up quickly. What is the washington take on what Vice President pence should do have a livex at the olympics . Kevin i was at a briefing with a variety of think tank folks talking about north korea, and what they said is they dont anticipate too much hijinks regarding north korea with the olympic games. We should note that there are scheduled military practice runs, military parades, so to speak, in north korea. Reportedly scheduled for next week. We should also note the last time the games were that region of the world, north korea ended up sending a delegation of about 50 people. Wes is intensifying, but would hope for humanitys sake that everything goes according to plan. Everyone yesterday at this panel , the bipartisan panel, suggesting that talk is good. Tom thats interesting when you look at the shades of the pentagon build up on these issues as directed by the president. Kevin cirilli, thank you so much. On this busy day with first word news, heres taylor riggs. Taylor the former Clinical Study in europes largest economy is over. Germanys chancellor Angela Merkel has agreed a Coalition Government with the social Democratic Party. According to people familiar with the matter, the social democrats will get finance, foreign, and labor ministries. Christian democrats will have the defense in the economy position. Members of the social democrats still have to ratify the deal. In the u k, Prime Minister theresa mays cabinet wont agree on a brexit clan this week. According to a senior u. K. Forcial, march deadline charms in a transition phase that looks optimistic, but britains proposal for the future customs relationship with the European Union is not close to being ready. In taiwan, hundreds of rescuers are searching for people trapped in the rubble after a killer earthquake, and at least six people were killed and more than 200 others injured. Strucknitude 6. 0 quake taiwan and the hotel was when collapsed. G that President Trump was inspired by a grand military parade he witnessed in france. According to the washington post, the president wants the pentagon to plans of being to show off americas military might. The poster says he brought up the parade with generals last month. Global news, 24 hours a day, powered by more than 2700 journalists and analysts in more than 120 countries. Im taylor riggs. This is bloomberg. Francine up next, we also have a little bit of the surveillance, parade, and tom is micromanaging that very thing. Lets get on to the bank of england. It is tomorrow, the bank of englands turn to be in the central bank spotlight. The governor is expected to keep Monetary Policy on hold at the first policy meeting of the year. Predicts economics they are likely to dissent in favor of another 25 basis point rate hike. How does the boe address the inflation situation . Thats exactly what economists are hoping to know more about. Dan. E joined by i wonder whether as a first port of call, they have to look at the market around and decide what kind of line the boe takes on this . To be just about Inflation Numbers is the first time in a long time but that you are threeyear forecast will rise which we see the policy thezon, you might i was inflation target. For the past 18 months, the bank of england has been forecasting inflation running above target for the whole of its forecast horizon. Curveit of an oil futures and downward sloping, but mainly sterling is going to weigh on the Inflation Numbers. That two or three or horizon, you might get inflation at target, which actually makes their communicational little bit easier. You are not having to justify why you are not doing anything with policy on inflations running quite a bit of a target. Francine given the political mayhem we have at the moment and theresa may and are pressure on all sides, under pressure on all sides, does the hike for the party, does it make it likely that we have general elections . One of the pitfalls of putting Monetary Policy when you are negotiating brexit . Dan its very difficult. Theres been a lot of speculation on which point the border the bank of england moves. We have a good will, with a go away until august. Of what taylor was saying is the transition deal may not be agreed by march i think a big part of that may hike may deliver that the bank wants to see progress on brexit. Is the bank of england Mark Chandler, does the bank of island have asymmetric risk not going to be a game changer. The inflation dynamics and improving sterling, what are the asymmetric risks or asymmetric choices the Governor Carney has . Mr. Chandler so much of a choice for this meeting, but further out, they may be choices. I take exception to the idea that sterling is somehow strengthened. It is strengthened against the u. S. Dollar, but at the dollar weakness story. Against the euro, it is in a trough. The u. K. , you have a slowing economy and all three pmis for january were below expectations. Tom weve come in a little bit. Mr. Chandler boosting the slowing of the u. K. Economy, the backward appreciation of sterling so you have inflation still fallen falling. I dont think the stock market is much of a factor in this weeks decision. Thank you, mark and dan. Dan henson joining us on the boe and Marc Chandler stays with us. We speak with the chief executive officer of rio tinto. Jacalked dividends with mr. Ques. And that tomorrow, Robert Kaplan. You just talking an event saying corrections are healthy and the u. S. And Global Markets have gone for an extended run without a correction. Ask him to elaborate on that. This is bloomberg. Taylor this is bloomberg surveillance, im taylor riggs. Lets get your Bloomberg Business flash. The parent of snapchat delivered its first upbeat quarterly reports and going public last year. Orrth Quarter Sales betterthanexpected, 72 and the number of active daily users broke 18 . That has snap shares soaring in premarket trading. Dissing is trying to stem the tide of people dumping his espn cable channel. The company is revealing more information about the espn streaming service that will be introduced in the next few months that will cost for 99 a month 4. 99 a month which will give subscribers access to thousands of live Sports Events a year. They are close to five and Million Dollar deal for the los angeles times. He is one of the major shareholders. Journalists at the l. A. Times have been at odds with the trump administration. Francine rio tinto shares, positive territory today and a threeyear high and Commodity Prices helped that. They raised fullyear dividend cash returns1 and for investors for 2017 rose to around 9. 7 billion. We are happy to say that the Rio Tinto Group chief executive officer John Sebastian jack Jeansebastien Jacques joins us. Congratulations, shareholders wanted buybacks, but now you have a lot of money to play with. What we do with it . What will you do with it . Mr. Jacques its a great day for rio tinto i am very proud of what we achieved. Promises, which is return for cash, 9. 7 billion, million of5. 2 dividends, the highest in the history of the company. 145 years ago. Today is a great day, we are in great shape. We have the momentum and the growth options. What shareholders expect is just keep on giving. We are committed to the cash return, we have the momentum and we just keep pushing. Francine talk to me about your growth options. You have three options that you can do all three at once, but you either give more back to investors, you invest more than you spend on, or you buy companies. Mr. Jacques if like they were obligated than that. We have a very disciplined capital application, we do twice a year and for us, its two things. Its very important. Its about rewarding shareholders, its exactly what we did today. As about investing in their own terms. We have three drivers in terms of investors and we say growth, is about growth in cash, its not about volume or market share. We are not as shouldve been the largest, its about being most profitable. One is about organic growth newons and we are building books like line in australia as we speak and a new mine in mongolia. The second lever we have is about productivity. We have 50 million of invested capital in the company and i can tell you we could do more and we are pushing out. We are committed to a 5 million target in the next years market in the last one is about m a. We look at them, we are looking at them, we will go for m a only if it is created by shareholders. We are on the right track. Notcine you say you are interested in being the largest. Let me bring over to the chart of your shares since the danger over at rio tinto. The first of since the day you took over a rio tinto, the first of july, thats a increase. Do you think m a that is too large for the share price . Mr. Jacques its not only about share price, its about dividend and Share Buyback as we demonstrated today. Good,are price is very but the past is the past, and i cant change it. We are looking forward very positive and we have the momentum. We have growth options and we clear aboutly returns in the short, medium, and long term. Wonderful tom wonderful to speak with you. Congratulations on the aprovements coming of done fantastic job over the last 2436 month. 24 or 36 months. You have copper the yuan personally out in arizona. Likere you going to be not , whats the o religion so you dont buy it to be bigger . For us, its about being the most profitable one. We are very clear, to be profitable, we need to run it better. On productivity, we committed to 5 billion, but we need to grow. Its one option which is in the usa. We go over the permitting process, and the u. S. , the permitting is very slow and i am pretty confident that it will be mine at some point in time. Tom what is the management process to say no to certain projects that are bigger is better . Is that at the board level, is that you want an airplane over the pacific ocean, or is it an internal rio tinto process . Mr. Jacques the answer is all of the above. We have very clear borders and ande are a series of steps, the expectation in the threshold are very clear and very high. One of the things we changed in the last two years is to look at internal rates of return. Because if you want to be the biggest, for sure, and tv, spend more money. That somehow we look at it. Thats that is not how we look at it. Its about ir. Tom if you are looking at the irr of these transactions, how is that linked to your guests on the recovery of the economy super cycle . Adapt your irr elasticity to the bear market we have seen in commodities, and hopefully lift that you see . Mr. Jacques thats a very good question. The way we look at it is to say is better person its better to pursue few projects into the well then to pursue many projects and have them less. Australiaproject in and the other is in mongolia. When you pursue a five or 10 million project, you want to make sure youre a team is working on it. Francine on mongolia, what can you do to reduce the Political Risk surrounding that . Mr. Jacques rio tinto has been around for 145 years. In job is to operate countries and we have been able to do it for 145 years. Its a large project and its a complicated one. Are there challenges . Yes. ,ut in my personal experience while the challenges, but each time, the working in the winwin approach, we have been able to solve them. You have to give credit to rio tinto, we have been in business for 145 years and we dont do this. Its not easy, but we know what to do. Tom he said francine you inflation is grieving back up, especially in the alumina business. Is that a headwind . Mr. Jacques its across all commodities. Expect cost inflation to come back and we see inflation in terms of raw material energy. We expect inflation returns in terms of energy of wages. Natalie to offset inflation, but to strengthen the margin. Francine on the mining injury industry, are you worried there has been a chronic underinvestment from the Mining Industry . So prices will go through the roof and five or 10 years . Mr. Jacques whats the problem . Francine will it not choke demand further down the road . Mr. Jacques when you look at it is very simple. Cycle, wevest in the can invest 5 billion to 6 billion, which is a pretty significant quota of money. We are in the long term business and we are going to spend 5 billion in the next five years to build a new underground mine. More than thes seven years to wrap it up and we will have the mine for 40 years. Longterm is the price out whatever they are. We dont tear about the price today, were looking at longterm business and all commitments that is why today is such a good day for rio tinto. Superior cash returns. When take a longterm position. Francine what is your longterm view on china . They are shifting away from a more infrastructure led commodities intense. What do you think about china . Mr. Jacques in the shortterm, we are not too concerned with china. We expect to throw down in the coming months, but medium to longterm, we are not that concerned. You need to be in china. We as rio tinto have a very we have aition and very strong position in copper. We are wellpositioned. Create more will infrastructure. And once again we are very wellpositioned to do that. Tom chief executive officer of Rio Tinto Group. Lets migrated over to the single best chart. My bloomberg terminal, the vix is now under 30. Call her markets, the single best chart is with the pros are looking at, when in doubt, look at the fixed income market. This chart is an actual bloomberg chart, its a little hard to see, but this is what we look at in the trading day. And the yield down is the flight to quality that we saw and we bounced up the inverse vix. Marc chandler, you are watching the bond market within the swirl of everything else. , is it singletch one analysis or youre looking at spreads within the bond market . Mr. Chandler both are important. 10 year yield in the benchmark for longterm investment rates, but the yield curve is one of the best pictures of the economy and the flatness of it became more concerning towards the end of last year. Tom which yield curve does Marc Chandler look at . The vanilla differencing yield between the 10year in the two years, or do you have a special one . Mr. Chandler i look at the twoyear and the 10year. The markets only to be contest, is not who we think is beautiful, but to pick whoever what else is going to think is and thats why i follow the twoyear in the 10 year because thats what everyone else follows. Francine who want you looks the most ugly . Mr. Chandler its a good question. We are going to see further backing of abuse is Interest Rates im concerned that the resolution of this debt ceiling crisis we are having in the u. S. Will lead to a shutdown and its both guns and butter. On spending for defense and nondefense spending coupled with a taxcut, coupled with the Federal Reserve not buying as many bonds and upper pressure on u. S. Interest rates. Win one, but it did when miss congeniality. Can you see me, francine, as was congeniality . As miss congeniality . You, im notan see sure what that says about our show, but i can picture it. Tom Marc Chandler with Brown Brothers harold and we get important perspective tomorrow from mr. Chaplain of the dallas fed. Germany,ation with Robert Kaplan on the turmoil in the markets. Was certainly dont think this is a start of a sustained a bear market. This is more of a shakeout in the secular portion. As by the didhs in u. S. Equities. In mixed apology after investors were why dont a low volatility product. What is the next etn vols shoe to drop . And the house passed the shortterm spending plan and hopes are high the longerterm budget agreement can be found. David welcome to bloomberg daybreak. Alix about 2. 5 hours to the catch up in the u. S. , a big rebound yesterday in u. S. Equities, now i have futures trending lower. Looks like we are in for another ugly open in u. S. Equities. Global equities lost 3. 5