Transcripts For BLOOMBERG Bloomberg Daybreak Americas 20170411

The three year came in a little weaker yesterday. We have seen a lot of former buyers foreign buyers come into the tenure market. More fed speak. Minnesotaq a at the business partnership. David westin is with us remotely from d. C. David President Trump is meeting with his Business Council, a group put together by Steve Schwarzman. They come together every so often to talk about things like the tax plan. They also speak about immigration and trade. We will go over to the white house and speak with Steve Schwarzman and some other ceos to find out exactly what they spoke with the president about, and can they get this thing back on track. Alix what is one thing they will be pushing for . David i think taxes is clearly the answer. They really want tax reform. If you go around the table with all those ceos, every single one has a part of taxes that they want or do not want. You put it all together that is the big question on the agenda today. As we just mentioned, secretary of state Rex Tillerson is on the way to moscow. The stakes could not be higher missiles atlaunched a Syrian Air Force base last week. Summit in italy, Rex Tillerson spoke out against russia. Next they have allied themselves with they have allied themselves with a poor ally in bashar alassad. Assad has made the russians look not so good. David joining us now on the telephone from the site of the g7 summit meeting is nick wadhams. Nick, you have been there reporting. To what extent did the other members of the g7 summit give support to the United States in this action against syria . I think that really was the point of the g7 summit meeting today. Originally, this meeting was set to discuss ukraine, north korea, and a little bit of syria thrown in. After the missile strikes, this meeting was really about empowering Rex Tillerson and giving him a unified message to bring to russia this afternoon and evening. With not confirmed to meet resident vladimir putin, but it is expected now that that meeting will occur. Toarly, it is an effort present a unified response from the g7 leaders when he goes to moscow. David apparently, g7 may have strengthened Rex Tillersons hand some. What would be constructed to come out of moscow for both sides . When he spoke with reporters, he said that russia has a choice. They can stick with this unreliable regime, or you can join the fold of western nations and play in the future of syria. The obvious implication there is that if you stick with the syrians, you do not get to play a role in determining their future when there is a political transition process that happens later on. David finally, is this something you believe that the administration is trying to put back into the bottle . That they will move back to things domestically, or is this going to escalate . Nick i think this will depend on the response he gets from moscow. Clearly, this is the most important foreignpolicy priority for the government right now. North korea i would say is increasingly becoming a distant second. This is a big thing. When you look at what Rex Tillerson is doing, there is a pattern of escalation here where they say the u. S. Position has not changed, but they are getting much tougher in the language. David nick, they do so much. Alix a pattern for escalation. By jurriened now timmer. Jurrien, how are you factoring in geoPolitical Risk right now . It is something that is usually there. It is by definition low probability and high impact. Iserally, what i ask myself that is the systemic to the fundamental story that my investments are affected by . A couplehen i remember of years ago when russia invaded ukraine and crimea. In europe, that was a systemic thing, but not so much in the u. S. If it is not systemic, then you stick with your more general plan. However, it is important to have a Dynamic Portfolio come a so if there is a shock you have portfolio, so if you have a shock, you have some balance. The markets are really fully valued here, and it could probably sustain a shock less well if was trading at a 15 multiple. Really is not anything new here that investments have not had to deal with for decades and decades. Alix does that sort of match up with what you are seeing in the fx market . The dollar is lower. Where is the jewel Political Risk being factored in for those assets . The geoPolitical Risk has caused quite some damage to the bearish trade. The had been a little too much consensual. Winning fromly is the rising uncertainty. The dollar is doing fairly well compared to the euro. All in all, you have mixed u. S. Economy data come a rising Political Risk in north korea and also in france. Aboutso have questions President Trump. The domestic agenda is quite busy. I think he has lost a lot of it ability with the health care vote. Next, we will be watching the spending bill. The deadline is the 28th of april. There is a lot of risk around. Jonathan in terms of risk, can you spell it out for me . What kind of risk are we talking about . What kind of risk do you see escalating from here . With the situation in syria, it is obviously quite difficult. It is not going to be easy to convince russia to change their stance. Therefore, it is hard to see how that cloud will list very quickly. Lift very quickly. In i believe that will stay focus along with north korea and france. That is a lot to go through. Jonathan does this strengthen the president s hand at home to get things done or does it weaken things . It probably creates a little bit of momentum as was the confirmation a few days ago. For the markets, it really is about the fiscal stuff now. For me, it is a question of whether we get what do we get , when did we get it, and how much of it will be offset by the fed. Fiscal stimulus with a low fiscal multiplier that is offset by the fed that would get tighter, we will not have a lot to show for it. If it is more supply slide supplyside driven, then the fed can sort of state back and we can get on a tract of more sustainable, higher growth. So, we have no details. That is why the market is sitting around. The russell 2000 on the screen here has been going nowhere since middecember. The markets are just waiting. They met the president halfway from november to middecember. The russell rallied 20 in three weeks. Now, they want to see something actually happen. Alix the difficulty i have is that we talk a lot about the geoclerical part of it, but gold is only at about two dollars. It seems to me that what we are seeing in the market is not a commentary on in fiscal stimulus or reflation, but on the fed onher than a commentary north korea. How do you derive the two . I see the you Political Risk as a valuation issue. From the market perspective, it is less able to withstand a shock. But ultimately, economic growth, Interest Rates, the dollar, they are going to be driven by economic fundamentals. Those have been pretty good. We have been on a secret night little upturn for about four months when china reflate it and the fed back off of its hawkish forward guidance. We had been in a pretty good, cyclical upswing ever since. Earnings are being reported now, and it looks like we could see a doubledigit yearoveryear gain over q1 earnings. There. Ind of a low bar vincent, jurrien and both are sticking with us. Coming up, we will speak with citigroups global head of Commodities Research. Coming up a little bit later is david westin interviewing Steve Schwarzman from the white house. The fed chair sort of backs up on supporting the economy, and President Trump will lean on the executives over in d. C. To get them into fifth gear. You are watching bloomberg. Alix this is bloomberg daybreak. I am emma chandra with your Bloomberg Business flash. Toshiba finally reported thirdquarter earnings after missing two deadlines. A 5 twoosted shiva posted a 5. 2 billion loss. The company has lost billions of dollars with its westinghouse u. S. Power business. Lvmh rose shares of to records in paris. Were boostedndbags by its fashion unit. Sales increased 15 . It is the biggest sign yet of a for the luxury industry. Police dragged a passenger off a United Airlines flight that was over both. Authorities say that will be an investigation. Meanwhile, an internal investigation will be for united. United claims the passenger was being belligerent after being asked to leave the plane. Jonathan we are less than two weeks away from the first round of the fred the front election. The twoyear the French Election. The twoyear spread is the highest in quite some time. That spread run across the curve. We are here with jurrien and vincent. Vince, lets start with you. Is this a big enough Insurance Premium head of the French Elections . Probably not. We will see a narrowing in the spread up to the general election in june. If there is an accident, that could blowout. An accident is a second round between mademoiselle the pen and a showdown between the extreme left and the extreme right. We have gone into a fourway race after a remarkable comeback. Within that group of four, the pen within the group of four, you can find six pairs. To tell which pair will make its way into the second round. Jonathan where should the spreads actually be then . I see four basis points on the 10 year. Ofi would say the risk mademoiselle the pen le pens second round in the election is about maybe 10 or fifth 10 or 15 . The market should price it around that. Of course, if that happens, the spread would love, because the policies of those two candidates would strangle fiscal stability and european stability. So, it could blowout. Right now, the markets see it only at a 10 risk. It could get fatter each day. Jurrien, what do you think . Well, a lot of things need to happen as the gentleman said. Between thef is mainstream candidate in a thestream candidate if runoff is between a nonmainstream and a mainstream candidate, it is early predictable that the mainstream candidate will win. Wins, mye pen understanding is that parliament has to call a referendum. Have enoughnot seats in parliament to and it from t to call an exit from the euro, then she has to start there. I do not think it is the end of the euro as we know it. Is kind of the sleeper hit of 2017. Like you ands everyone else. What gives you the confidence win if we do not see le pen that we will see a huge pop in equities and that euro . The s p is up to hundred 82 . It has lied about 150 percentage point behind the u. S. For a number of good reasons. Had one11, we have speedbump after another to put it mildly. Europe is about three years behind us in the business cycle. We are kind of approaching late cycle in the u. S. , the fed is tightening, we are seeing inflationary pressures. Europe is still in the goldilocks sweet spot. You just need a catalyst. If the French Election comes and goes, we had the dutch election which was nothing. The german election will probably not be anything. Once this is out of the way, i will not say that we are going to the moon, but you take away the catalyst in europe. The Earnings Growth is just as fast as the u. S. , but the market has lied in about 10 to 12 percentage points. Jonathan there is voice it seems to be worried about. They are waiting for the French Election to get out of the way. If you want to worry about Political Risk, once france is done, you start worrying about italy. Theres always something out there in italy to worry about. Shortterm and squeeze you could get after the French Election as just that, shortterm . I think so. The italian risk is not until spring of next year. We have some time until we worry about that. If we have a win in the French Election, you will see the relief rally. As i have said, if you wins, it is not quite clear what Parliament Majority he will get in jim. For the next two weeks, i think the markets are going to stay nervous. What keeps me nervous is that 55 you look at the polls, of the people who say they will vote for him say they are not sure about their choice. Effectively, this is the most uncertain election in quite some time. Vincent have and been speaking with us. So, this could be a game changer. Up, a conversation with Christine Lagarde live from brussels. Atch out for that the French Election may come up there. This is bloomberg. David this is bloomberg. Im david westin. In washington, President Trump will hold a meeting with his Business Council ceos. The leaders of walmart, gm, and pepsi are among those expected to talk strategy with the president and his key advisers with taxes likely high on the agenda. Shannon, it is good to be with you in washington. Tell us what is likely to be on the agenda aside from taxes. I thinkeverything the top thing on every ceos mind is taxes, taxes, taxes. We have heard the promises of a lower tax rate and tax reform that will help them. I think all of them desperately want to know what is going to happen with tax reform. Where is the administration lead leaning. I think it will definitely be number one on the agenda. Alix david what does the president want from the ceos . What could be accomplished by this meeting . Early on, the ceo meetings were about listening. The administration said it was very helpful, because a lot of them were uncertain about Certain Industries. So, getting feedback about what people think about a gas tax versus a carbon tax. All of these various strategies you would take as a part of tax reform. I think we may still be in the listening state, but at some point it is going to flip to where the administration really needs these businesses to listen to them. The administration is going to be coming as salesman. We may start seeing that now where the administration will test out ideas on the corporate sector to see how ideas will go over. How hard will Certain Industries push back against certain ideas. David that sales job might be a difficult one. People at the table represent different industries. Those tax reforms could affect them in very different ways. People in the Tax Department say it is so hard to get tax reform done. That 1986 tax reform through took almost a decade of work to lay the groundwork. You have all of these interests. Every industry is going to go back to the senator or congressman in their state and city, you cannot do this. You have to vote against this. All you need is to senators to drop off on Something Like a border adjustment tax which would hurt walmart, and all of a sudden you lose your majority. We expect to hear back from the white house . We have heard by the end of the year. David end of the year. Shannon, they do so much. Jonathan we will bes we will be speaking with citigroups head of Commodities Research. From new york city, the markets are getting set up on this tuesday morning. Onnting down to that holiday friday. Futures a little bit negative. We have been pretty much dead flat on friday and monday through tuesday. The auction cycle continues today with about 20 billion in 10year note. This morning, the treasury lower by two basis points. Tenure. The jonathan from new york city, this is bloomberg daybreak. Heres a look at the markets. The doubt only down 10th of 1 . Kind of echoing the price action on friday and monday. If you switch of the board very quickly, treasuries seeing a decent did this morning. Yields up to basis points. The cable rate, you know the playbook. You blame brexit. You do not this morning. You blame easter. It has changed year on year, so inflation came in around estimates. The stock creeping a little bit higher. The base case is that it will continue to climb. The euro up a little bit this morning. We are at one spot 06 and 10. Lets get over to emma chandra now for a look at news outside the business world. U. S. Secretary of state Rex Tillerson is on his way to moscow with a message to with a message to russian president vladimir putin. Yet a clear message to give up their alliance with the sharp alassad. In italy, g7 leaders discussed support for action against syria following that deadly chemical weapons attack last week. They have aligned themselves in a Bad Partnership with alassad. The russian government had signed the accord on chemical weapons. Now, assad has made the russians look not so good. Emma meanwhile, italys foreign minister says that there was no consensus at the g7 meeting for new sanctions against russia. In stockholm, the suspect in the bus crash that killed four people has admitted he committed the crime. The suspect has been identified as a native to the back is down uzbekistan. But the result tried to determine if he had any caucuses. In south korea, weve heard that they are open to direct talk with north korean dictator kim jongun. He is one of the top two candidates in the south korean election. He says that south korea must speak with north korea to resolve the controversy with their Nuclear Weapons program. Global news 24 hours a day, powered by 2600 journalists and analysts in more than 120 countries. Janet yellen spoke yesterday at the university of michigan saying that the fed is no longer putting the pedal to the middle, but shifted to Holding Gains made in growth. With the economy operating close to our objectives, we want to make sure we sustain the progress we have achieved. Stance onppropriate policy now is something closer to what we would call neutral. Whereas before we had a foot press down on the gas pedal trying to give the economy all we possibly could, we are now allowing the economy to coast and remain on an even keel. Not so it some gas, but much that we are pressing down harder on the accelerator. That is a better stands for Monetary Policy. Jonathan i have never seen the fed chair look so chilled out in my life. Twitter ofures on her yesterday just kind of leaning back in the chair. Alix looking very easy going. Jurrien and vincent, thank you for staying with us. We are all hoping to hear something meaningful. I told you yesterday that we probably would not. She does not want to talk about the Balance Sheet yet other than in general terms, because they have to operate by consensus. The real story was what you are going to do about Interest Rates. She gave us her answer. If you go inside the bloomberg, you can see what she was talking about. We had a very rocky gdp performance since the great recession. Of volatility. Now, it is kind of stabilized out. They believe we are not going to see the downturns anymore. Were going to see it go along at a fairly even pace. It is low at 2 , but they can turn their attention now to maintaining that rather than propping up the bottom of the economy. Alix that is why we have not seen a big move today in terms of premiums . We are not really getting that. Is that because of this slow, grinding growth that the fed is leaning towards . Yes, steady as it goes. I do not think miss yellen wanted to communicate anything other than what we have heard from the unc. I think they are still on track for three highs this year. At one and a half price in the markets this year. Overall is still undershooting quite significantly. I think that is justified right now by the fact that she want that the yuan gdp once again looks a little soft. Then, we have the cloud we talked about before on the geopolitical level. So, the market is priced quite dovish league right now. I think eventually, the markets will edge higher, but we need stronger Growth Numbers in the clouds to lift up. Rien, let me take this a couple of steps forward. Is the fed chair ready to concede that the problems are structural and no longer cyclical . There are structural problems. The gdp is potentially the some of later perforce growth and productivity growth. On a 10 year compound basis, nominal growth is three and youll growth is 1. 5. D growth is 1. 5. Almost by its made it, the fed has to lean into it. That will reduce the fiscal multiplier. Right now, there has been some reduction for the fed. Previously, there was constant friction. Now, i believe the fed in the markets are on the same page. In 2018, if anything goes askew, it will be then. The one thing that stood out to me from what janet yellen said yesterday is that 4. 5 unemployment is low what she considers for employment. That if weimply continue to go down that they would want to raise rates faster. You cannot guarantee it, but it could imply that. ,f we do get a fiscal stimulus where of a going to get the people to do the jobs with them for structure . Infrastructure . The fiscal stimulus is on the demand side, it will create inflation which the fed has to lean into which would offset the fiscal multiplier you might get. That is why the markets would be happier if they got more supplyside is go stimulus that could raise the output levels without inflation. Then, the fed is off the hook. Jonathan we come into 2017 with a bit of a consensus. It was the dollar showing strong. Where is the path of least resistance now, vince . I think, overall, the u. S. Economy starts to get a bit stronger again, and the fed delivered on the hikes. I think the dollar will get slightly stronger. Clearly, a big chunk of the dollar recovery that we have seen since 2011 is behind us. I would expect something much more subdued from here. I think there is some room. Example, the june Political Risk, and probably not much room in the euro if we have no accident after the French Election. If we get the ecb moving to a neutral balance on risk. We could open the door to some tightening. So, not much room for your dollar to go. Jonathan jurrien . I look at the broad dollars which includes the e. M. s. , if you look at it on an Effective Exchange rate basis, it is probably the most overvalued currency in the world. It has had a great run. I think the dollar will go lower for your. That is one of the reasons why i am bullish on x u. S. Equities. To doingthe whole key the border adjustment tax which is kind of key to tax reform at this point. I am no political expert, but i would be very surprised to see the dollar go up that much or to something so significant that it would cause that upside. Rallied a lot already. If the ecb is going to gradually ease off of this unconventional. Of easing unconventional period of easing, that will boost the euro. Vincent, thanknd you so very much. Coming up, citigroups local head of Commodities Research will join us. This is bloomberg. Alix emma this is bloomberg daybreak. Coming up, david westin will interviewed Steve Schwarzman of the blackstone ceo Steve Schwarzman, blackstone ceo, live at the white house. That is coming up. In the market, you have oil down by 2 10 of 1 . Trading went around 53 a barrel. The biggest threat to gains so far this year. Joining us more from joining us for more from new york is ed morse, citigroups local head of Commodities Research. Head of Commodities Research. Why is this not higher . Bearish is not as much news after syria as there has been bullish moves. On the better side, given the parties involved, it gives rise to thinking about whether the russian government will see eye to eye with the saudi government on the next chance to move the Oil Production cuts month. Alix that is a great point. It is really about saudi arabia and russia aligning. Syria is right in the middle. What possibility do you put now on a deal being extended . We still have about an 80 probability on it. Their interest to keep price of this year is greater. I think you have to remember that the price today is what the price was before the selloff in march. It is about the same price it was at the algiers meeting in september. The price is not really been willing to go up much above that as we go through the Second Quarter with the refineries globally going up. The real production cuts hitting the market. They do not really hit the market in q1 because of the time it takes oil to get to the u. S. , east asia. Said you saw the potential in the back half of the year for brent to hit the 60s. If we do not get the deal, you have a more bearish case . We do indeed. You have the compounding of the fiscal markets didnt much looser in the third and fourth h looser getting muc in the third and fourth quarters. Alix what is that price . 45 without an agreement. Alix we were just there a few weeks ago. Yes, it would have an impact around the world. It would have an impact on this current boom we are seeing in the u. S. Were at a minimum we are seeing a hundred thousand barrels a day of Production Growth. Potentially even more in 2018. It would slow down the momentum considerably on the u. S. Production side. Alix what is interesting is that we did not wind up seeing that follow off. Has proven anything, they have proven they can still survive. They are in a much better place now than they were two years ago. What you think shale will be more sensitive to this downside . We sort of have 55 as the magic number to reduce hedging. Aoducers were riding off period of cost inflation, and now we are seeing reflation. Going up very strongly at the moment. Alix we did see some hiring in the mining industry, the highest since 2011, on friday. How much more do you expect in 2017 . We will see another 700,000 barrels a day Production Growth in the u. S. By the end of the year. That could be higher depending on the completion of wells. So, it is sitting right there in the buchan. Numbers,pleted well the head count on that is also going up. That sustains momentum Going Forward as well in terms of greater Production Growth. Alix that would be a huge call. Where are we when it comes to inventory normalization . A big story was the asian demand pulling crude from the basin. Where is that story now . That story is premuch closed. It was heavier, more medium, and more sour crude going to east asia, to china, to japan, to create. On the inventory question, we are seeing we saw strong inventory drops on the product side. We think any week now we could in tomorrows data, we will see a drawing on it crude that will be sustainable. The question of when we will get back to normal, no one really knows what normal is. The opec companies talk about it as a fiveyear average in the past. If we look at a fiveyear average, local oil demand is up. If you look at finery requirements, we are not very much above what that fiveyear average is. We should be way above it. Globally need to produce more crude, the amount of inventory they have to hold needs to go up. That 7 Million Barrels a day would imply well over a hundred Million Barrels on that base case of inventory getting back to the fiveyear average would put us well below what we consider inappropriate norm. Alix a fair point consider an appropriate norm. Alix a fair point. A look at the bloomberg now. We are seeing a. 7 correlation. We have seen this really break down. If we do get into the 40s, is there a Systemic Risk for oil prices in the Financial Markets . We do not think so. There was not much of a Systemic Risk in the collapse of 2014 or 2015 either. We saw were concerns by the regulators putting a damper on lendingd reserve base to the highyield companies. Diminished. Will be alix want to get a quick take from you on gold here. Andre watching the yen yields, but gold is that even near 1300 an ounce. D. C. The Political Risk being priced into gold now do you see the geoPolitical Risk being priced into gold now . Probably with the French Election. I think we will eventually see gold go up. Its potential is really a macro issue. It depends on where the dollar and rates go. All of that seems on hold at the moment. If we are going to see dollar depreciation against the euro, i suspect that will be a good signal for investors to go back into gold. And that we should see that 1300 price. Alix ed morse, great to see you. If you have your bloomberg terminal, watch tv go. You can watch is online, and you can interact with us directly via tv on your terminal. You can even ask guests questions in the middle of a segment. This is bloomberg. Jonathan from new york city, this is the video that caught fire worldwide after monday. United air passengers sharp as a passenger was forcibly removed from a flight after refusing to give up his seat. Down asirlines falling much as 5 earlier this morning. It is now down by about 2. 1 . Justin here to talk with us about it from dallas. Justin, great to have you with us. How many people are going to view that in the last 24 hours and going to think twice about booking with united . The number you saw is death of a tens of millions when it comes to the spread of social media. The real question for united and a lot of investors is how many people will change their behavior in choose another airline. I think that remains to be demonstrated. To see if the public anger out there will translate into Business Results should jonathan Business Results. Jonathan the pr team seems to with this. G the statement they put up with poor to pieces on social media yesterday and today as well. The ceo response to this he used the word reaccommodating passengers, and that is not going over well at all. Not at all. People felt they were really acting sort of tone deaf about what happened on the video, and what people saw. To have the ceo apologize about reaccommodation went when it was quite a bit more brutal and the eyes of many people in the eyes of many people watching the video. Jonathan the ceo use the word disruptive and belligerent in describing the passenger. How can he turn this around in the next couple of days . It will be tricky, because they have already come out with their public statement. They are likely going to have to come up with more statements. One of the things that occurred earlier was that, if united felt the passenger was being disruptive and not following a lawful command, they did not really say that. They said it several other things, but they did not actually talk about how they felt the passenger was a threat to their crew or any other thing, because he was not really following in order. Annkly, when you are on airplane and italy to get out of your seat, you have to get up and out of the seat, because that is the contract you buy with your ticket. Know thatairlines things can fluctuate when it comes to take off time on a plane. How can they handle these things better in the future . Why did they not just offer a bigger price to make people vacate the plane . The questionat is everyone is saying. Everyone gives up their seat for the right price. What happens in a lot of these cases is the airlines will not right up like chuck. They write up a blank chec k. They do not want to see in abuse of the system with employees that are less mindful about what they are doing. So, clearly, someone on that plane would have given up the seats needed for employees if the price had been correct. It couldve been a case where they had just hit the limit, and they did not have the authority to go higher. In that case, you definitely needed a supervisor to step in and say that we can handle this situation different way. To have justin, great you on the program to break that down. It remains to be seen whether or videoter people see the if the lower price will win today. Alix at they going to have to discount more when airlines are finally getting their Pricing Power back . That is workable get tricky. Jonathan coming up, we have bob michael from new york. This is bloomberg. Jonathan the g7 wrestles with alliances in syria. It Rex Tillerson prepares for his meeting. Janet yellen says policy is getting close to neutral. Donald trump is leaning on ceos. Investors brace as the race tightens in france. From new york city, good morning. A very warm welcome on this tuesday. I am Jonathan Ferro alongside alix steel. We counting down to the opening bell. Lets look at the Market Action this tuesday. Futures are softer on the margin. Treasuries are the big story. Its shaping up to be another top tough week for the bond bears out there. Alix its time for your morning brief. Secretary of state Rex Tillerson will arrive in moscow. Andget the gel report treasury options of 20 billion worth of 10 year notes. What will there be there today . A minneapolis fred president will participate in a q a at the business partnership. Our coanchor david westin is in dce right now. David there is some white house speak that is going to go on. President trump will meet with his Business Council. This is a group that Stephen Schwarzman put together. Were going to have larry fink here. Ofare going to have a number ceos talk about how they are going to address the strategy of growth. That is the reason donald wanted to be president. Alix we have geopolitical tension pervasive any kind of rhetoric we will get out of domestic policy. David we will talk to ceos. Now, the secretary of state is on his way to moscow for what may be some tough talks about that Missile Launch against the Syrian Air Base last week and at the g7 summit, he talks about russias role. Have a live them selves with an unreliable partner. They had signed a chemical weapons accord. The russian government had signed the accord. Now, he has made the russians look not so good. David joining us now on the phone from italy is National Security reporter in the. We just heard Rex Tillerson talk about what went on. To what extent do the allies support u. S. Strategy . What is that strategy . Is russia has two choices. You can be on the right side of history and join the full with western nations and their allies. Or you can stick with the syrian conductshich the u. S. Chemical strikes on its own people. That is the choice there. What you saw at the g7 was this meeting becoming a movement to give tillerson the authority and the power to carry a unified message to moscow and say its not just me saying this. Its the entire western Community Behind me. David we hear about Mission Creep. Is there a Mission Creep going on . Its one thing to say we are punishing syria. That . Ey do can they do it and still do things like tax reform back here at home that a lot of people want very badly . The this is going to be something that plays out in the next couple of weeks. This airstrike on thursday night , is in a oneoff or is it something the United States will get more and more into another conflict in the middle east . No,administration is saying it was a response to a very specific event. There are no plans to do it again. Will be a huge crucible for the trump administration. With a lot ofng issues at home. Thats the reason he got elected. This is not something he was that it voted into office for. We will have to see how it plays out. David it will be an interesting juxtaposition. Much. You so alix joining us is bob michael of jpmorgan. Becomes, the move in treasuries, is that geoPolitical Risk . Taxt repricing of the trump plan because of its happening in syria . i think its repricing. Everyone got ahead of where actual policy was coming in. There has been some consolidation. Everyone is looking for the next level direction. They are not getting any guidance. The market is treading water. Alix this is not know by 10year, go buy gold and will see whats next. Not go some extent, its buy gold. When you listened to yellen yesterday, she is telling you there are going to be other things that are going to happen in Monetary Policy. Jonathan we are looking at was coming out of the white house, north korea is looking for trouble. If china helps, that will be great. We will solve the problem without them. Question, are they going to do something about north korea . Two, if these Foreign Policy problems . Bob theres got to be some of it. When you look at the repeal obamacare, that was a failure on the part of the administration. It killed a lot of time. Theyve got to move onto Something Else. Tax reform, infrastructure, deregulation. Thats going to take a long time. Try to find something now and focus on that. Give the market confidence there is an administration and control. Jonathan these are highimpact stories. Has the chance of that . Lets say they did make a move and try to do something about north korea. What with the market to the following morning . Bob then i would buy the safe havens. And getould buy gold rid of a lot of risk. Thato need Something Like to shake the market. Simply the rhetoric and dialogue and the backandforth, you havent seen volatility pick up a lot. You havent seen a significant repricing of the market. That tells you there is still a lot of cash out there looking for opportunity. Alix does this one up impacting the soft data . We have the optimism come down a little bit. What striking is the firms expecting a better economy fell to 46 . You can say there is distraction in the see washington dc. Bob there is a lot of debate about the soft data and the hard data and wants lagging. I pulled up a chart because im going to push back on this. We have a Credit Research team that is investing in Middle America and in small and mid range prices. They see a pick up in order books, hiring, in sales. When i look at this chart, which is some of the issues surveyed, its up quite a bit. When you look at topical goods shipments, they have picked up from the end of last year. We are now up plus 2 . Its not fair to say that its all in the sentiment data and not the hard data. There has been hard data picking up that is very positive. Jonathan where is the mess price . Mispriced is in the bond market. When i listened to yellen yesterday, she is talking about the economy looking Pretty Healthy. She talks about returning policy to something that is closer to neutral. None of that is a negative real yield on 10 year treasuries. What is keeping the bond market where it is is still the size of central bank Balance Sheets. At 16 trillion. Jonathan how much does the bond market anchored . Bob probably a fair amount. Its not just bonds by themselves. Its the actions of the ecb that keeps the twoyear part of the German Market at 80 basis points and makes. 2 in the twoyear look attractive. Its a critical component, no doubt about it. Alix once we clear the friends election and anything a status quo, we can talk about the ecb parrying back stimulus. Top yes. It has been frustrating to many investors that yields havent gone higher. Fed is ahead of with the intensity. I can look to the tenure 2. 35 , thatsay only 50 basis points higher than we were the day before the election. The fed has raised rates twice. It just moved with fed policy. Until the Central Banks stop printing money and buying bonds and then reinvesting their proceeds, until the Central Banks stop printing printing money and buying bonds and money and buying bonds and then breed inventing their proceeds. Jonathan he is sticking with us. Is not a bear. He is one big bowl. Conversationp, a with Christine Lagarde. She will be live from brussels. Thats coming to you from bloomberg tomorrow. From new york city, a beautiful one. Its a hot day. You are watching bloomberg. Jonathan from new york city, never mind the consensus and the awakening interest. That is the contrarian view from oppenheimer. Joining us is oppenheimers head of technical analysis. Still with us is bob michael. Lets begin with you. Ari this is about the longterm trend. The opportunity is in the u. S. After europe outperformance. If you look at the s p 500 versus the 50, its underperformed by 7 through the end of march. That is the first chart i brought. Historically,ck there have only been a few times when the s p has been this oversold versus europe. Its been rewarding to rotate into the u. S. I say this because its provided an opportunity to buy secular strength in the s p 500. Leadership through most longterm doesnt see shifts in the trend. We see that to continue. Jonathan the bullish narrative is not the march versus march. Its the years and years of underperformance for european equities versus the u. S. Once the push back . Global news 24 hours a day powered by more than 2600 journalists and analysts in more than 120 countries, this is bloomberg. I hope they are right. Ari i hope under that situation that would be a tremendous bullish scenario for all Global Equities. If you look at the two trends in absolute terms, thats the going part i brought, back to the year 2000, these are positively correlated markets. Right, if they are europe is in position to reverse this secular downtrend, s p 500 is going for the ride. The scenario i dont think anyone is talking about, if they are right about europe, those forecasts are way too low. The s p 500 is going much higher if they are right about europe and we are scored. We like the u. S. Better here. Alix what is your take on that . Bob we are more positive on europe. They have gone through an enormous currency adjustment. Earnings are looking good. If we get through the elections, its clear the ecb will be patient and how they normalize policy. Thats a pretty good tailwind to corporate europe. If there is any stipulation that comes to the u. S. , that will flow through the Global Supply chain and europe will benefit. I have to say when we look at the u. S. And europe, they pale in comparison to where we see cheapness in the emerging markets. Ari has that. If r jonathan thats been the big question. Oryou do it through europe through . What do you say to that . Ari we like the u. S. Best of all. We like em better than europe. Emerging markets, another example of the index since 2007. If this longterm trend is reversed and we do see that bullish risk appetite, the s p 500 is going along with the ride. We did some numbers going back 30 years. Periods, theyr only outperformed against a falling s p 500 5 of the time. Thats on em and europe are a better the u. S. As well. Its not the other way around. What we have seen over the years is the s p outperforming. Called. Ard we are bullish on these markets. Our preferences with the s p 500. Jonathan the bullish case on europe is the depressed valuation. The pushback is the politics will be there. Its not going away. You can worry about it and you can worry about Something Else after that. Higher just because we get past france. Will it stay there . Bob you have a rig Industrial Complex across europe that is operating with the currency substantially lower than it was in the past. Exports are picking up quite a bit. Most of the Banking System and i dont know if we will get into a system about the italian Banking System, most of the Banking System has been cleaned up and has been reserved for and is extending credit again. There are positive things happening on a fundamental basis. His may not be picked up jonathan weve got eight minutes. Two questions for you. I want to buy europe. Do i do it through the internal eurozone banks or through the proxy . Do i play the Big Industrial story . Bob i think you want to bigger industrial story. If the u. S. Continues to expand and profitability continues to increase and the fed is patient, everyone else is going to get pulled along. It simply a matter of where valuations are. Alix when you look it your trade, this was a longerterm view, what is the short term of rotating out of europe into the u. S. . You do like the u. S. As a way to play risk. Ari this is more of a bullish call on the s p 500. For the s p 500, its a matter of a market that is underperforming versus Global Markets in recent months. Its consolidated in a more healthy manner. When i hear the fundamental points for europe, all i hear is justice bullish thesis for Global Equities all around. This means the pullback has to be bought. We dont see any cracks underneath the surface. The leadership is strong. Participation is strong. We think the s p 500 is set up for new hires. We have a 2500 target for yearend. Bob its great to hear someone say they are bullish on the s p. Everyone is cautiously optimistic getting hear someone say they are bullish is awesome. Jonathan just look at the price targets. Most people are pretty bullish. Alix we are talking to them later. You are both sticking with us. We have some breaking news. Another m a action, lows is buying consolidated container for 1. 2 billion. Its a Plastic Packaging company. This will be part of a new segment called lowes packaging group. Strategy and continued m a, its going to be funded 50 that, which means more corporate issuance. A lot of dynamics are coming out here as m a heats up a little bit in the Second Quarter. Coming up later, david will interview Stephen Schwarzman. What will he say about the meeting with President Trump . This is bloomberg. Emma this is bloomberg daybreak. Toshiba is continuing as a going concern. The Company Reported thirdquarter earnings after missing two deadlines. They still have not signed off. A loss for the nine months in december. They lost billions of dollars in its Westinghouse Nuclear power business. In chicago, one of the Security Officer dragged passenger off a flight has been suspended. Authorities say there will be an investigation. Ceon internal message, the said the passenger was being disruptive and belligerent after being asked to leave the plane. Down 6 today in premarket trading. That is your Bloomberg Business flash. Jonathan jonathan staying on i want to ask you about this specific case. When you are a big shareholder in a big company and the ceo responds in a way that doesnt take responsibility, how does the investor mentality change toward the sea suite. Do they make the changes they need to make . Bob its been a Public Relations nightmare. You dont necessarily need the shareholders to step in. I think the consumer has been very vocal in social media that the Company Needs to do more. The response needs to be more articulate and broadbased. As owners of the company, those of the things we would like to see. Jonathan looking at the united story, is anyone waking up today or tomorrow or next week and making a change in decisionmaking . Or the charts saying . Airlines, the group has been on a massive run in the past two years, there is a secular shift in the trend. After a decade of losses from 2000 into 2007, we think theyve turned the corner. They consolidated more recently, we think they do break higher. Domestic u. S. He carriers like southwest and alaska. Legacies, three united probably looks the best. This is a chart that works back to the 2015 high. Its been under pressure as of late. We think it looks better than delta. Jonathan its great to have you with us. When you see someone get carried , its commentary. From new york, this is bloomberg. [ engine revs ] [ screams ] [ shouting ] brace yourself this is crazy [ tires screeching ] whoo boom baby rated pg13. [ screams ] did you know slow internet can actually hold your business back . Say goodbye to slow downloads, slow backups, slow everything. Comcast business offers blazing fast and reliable internet thats over 6 times faster than slow internet from the phone company. Say hello to internet speeds up to 250 mbps. And add phone and tv for only 34. 90 more a month. Call today. Comcast business. Built for business. Jonathan from new york city, this is bloomberg a break. We have a spent on the markets. Cross set is as follows. Friday and monday, similar price action in terms of magnitude. Its down a little bit. Switch up the board. Treasuries look like this. The auction cycle continues today with about 20 billion in 10 year notes coming to market. We have a marginally weaker dollar. We have some euro and yen strength. Up. 2 . Thats the story in the fx market. Lets get you up to speed. Emma good morning. U. S. Secretary of state Rex Tillerson is on his way to moscow with a message for vladimir putin. Russia should give up its unreliable partner, bashar alassad. He spoke to reporters in italy. They discussed Russian Support for syria. They have aligned themselves with an unreliable partner. They had signed the chemical weapons accord themselves. The russian government had signed of that accord. Now, he has made the russians look not so good. Emma italys foreign minister says there is no consensus for new sanctions on russia. In stockholm, the suspect in the truck attack last week and has admitted he committed the crime. Thats according to the associated press. The suspect has been identified as a native of his baucas down. The spec a stand. Make it a joint bid for the 2026 world cup, which will include 48 teams and 60 matches. They will be played in the u. S. , canada, and mexico. Global news 24 hours a day powered by more than 2600 journalists and analysts in more than 120 countries, this is bloomberg. I am emma chandra. David ceos are making their way to the white house for a meeting on that Business Council. Will be developing strategies to grow the economy, which the president wants to get done. Our White House Correspondent is here to give us a preview of the meetings. One of the agenda pieces will be tax reform. When do we have a plan out of the white house . Shannon its going to be tough. It takes a lot of number crunching. We dont have a lot of treasury officials. We dont know who is in charge of tax return. There are a lot of midlevel people. Its a little bit of an empty house right now. You dont have the people. In the white house and among the economic advisers, there is a lot of disagreement about what the best strategy is. Paul ryan, he says they have a plan. Weve been working on it since we were 13 years old. It went so well of health care reform. Shannon they could just take the house plan. If the white house once its own strategy, its a lot of work and people coming together around complex ideas. David given the people who are on the job, who is behind this . Is this Jared Kushner western mark is this Steve Mnuchin . Shannon i mentioned treasury. Cohne end of the day, gary , he is very influential to the president , he doesnt have a staff. He has a handful of people. Its treasury. It is Steve Mnuchin who has to put the numbers behind it and do the analysis. If we do this to Corporate Tax rates and income tax, where does that go . They need to work together. When they conflict on ideas, that is where Jared Kushner will step in. David its great to be with you here in washington. She is our White House Correspondent. As far as business in the markets are concerned, there cant be anything more important than tax reform. Although things may not be moving as quickly as the president thought, his economic and pfizer told us it does remain a top priority. Gary we are coming up with a cohesive plan. Were going to launch with one plan together. I dont know if its august or not. Getting it done and getting it done right is more important than getting it done soon. We are committing to getting it done this calendar year. You will see much more out of us on taxes when the Congress Comes back. David we are joined by someone who will play a key role. She is carolyn harris. Policythe chief tax canceled. We are going to nerd out here. Welcome. Ise us a sense of what doable at this point. Its more difficult to do than we thought. What can be done . Everything is doable, everything is on the table. We want progrowth tax reform. We want lower rates for all businesses. We want to be internationally competitive. We want certainty. Businesses want to be up to make decisions and they want to know what its going to look like. David those goals sound good. Everyone would sign on that. 1986,e had tax reform in it was five years into president reagans term. It took a long time and coalition building. Can this get done . Caroline they are suggesting august was a lofty goal. I think the most important thing is its going to be hard. We havent done it since 1986. This is going to die a thousand deaths. Reagan took five years. Everyone has to stay at the table. Its going to be hard. Theres a reason why we havent done it. David when you talk about tax progrowth, what are the pillars of that . Caroline lower rates for all businesses. Internationally competitive system, something looks more like our global competitors. David this is a territorial approach, which we have not had. Caroline we want to see businesses right off their investments so they can put money back in their pockets to create jobs. David to encourage capital investments. Caroline we want to see transition. We want to see we can get from here to there and do it in a way that doesnt harm business. David how are you going to pay for that . Caroline thats the trillion dollar question. I think thats hard. High,e the stakes are there are ideas floating around. I dont have the silver bullet. I do make anybody does. Of the house,g there is the border adjustment tax. He spent a lot of time. At the same time, it makes it complex. There is a lot of resistance in the senate. Is it that at this point . Caroline its an uphill battle. It faces serious challenges in the senate among republicans. Lower threshold of 51, i think it faces serious challenges. Its like anything. Its going to face greinke. Its hard a new. People are asking the right questions about it. Its part of the conversation we need to have. Before we get to congress, you have the Business Community. Ceos, they want tax reform. There are different forms of tax reform that affect different sectors. If you take walmart, they have a different point of view from blackrock. Can you bring together the Business Community and say we are on board, even though we may lose some things we would like. Caroline you have to look at the package overall. There are going to be some carrots and some sticks. We have to have a progrowth tax package. David is it your position that you need the big bill as opposed to we will cut back and take it. Repatriation, that could be something you get done quickly. Caroline we will come to it. We will stay at the table and have the conversations. Right now, we still see progrowth tax reform as viable. David do you agree . This year . Caroline weve got to stay at the table. Its the most progrowth thing we can do. David would you bet yes . Caroline i am not a betting woman. Caroline harris, thank you so much for being here. Alix thank you so much. Still with us is bob michael. 20 , is that 15 , just getting it done no matter what the tax rate is . Bob i think its getting it done this most important. We have to remember. S ps are pain 27 on average. You have to bring it out of it. Its going to help are the small and midsize companies. They are paying close to 40 . The administration has to show traction somewhere. The best place to start is with taxes. Mabel you will see some repatriation overseas. Its the one thing that suddenly trails 21 times and looks cheaper. Its meant to be the ultimate discounting mechanism. Looking forward, it seems to be time and competition. This time really matter so long as it does, over the next two to four years . Bob certainly, time matters. Its the equivalent of making an investment in saying i was just early. You were wrong if you were early. I think the market will get frustrated. Revaluation a unless Something Else helps drive earnings higher. Jonathan thank you very much. You are sticking with us. Coming up tomorrow, Christine Lagarde live from brussels. Look out for that at 6 30 a. M. From new york, this is bloomberg. Emma this is the enterprise greenroom. Coming up later today, david westin 10 interviews Stephen Schwarzman. Janet yellen spoke at the university of michigan saying the fed is not putting the pedal to the metal. With the economy operating objectives, what we want to make sure of his we sustain the progress that weve achieved. Stance of policy now is something closer to what we call neutral. Whereas before we had a foot pressed down on the gas pedal, trying to give the economy all a, allowinge could the economy to kind of coast and remain on an even keel, to give it some gas, but not so much that we are pressing down hard on the accelerator, thats a better stance of Monetary Policy. Jonathan joining us now is Michael Mckee. Still with us is bob michael of jpmorgan. We all of the story. Its not timing, its the removal of a connotation. Two words cap . Stilll the fed is accommodating. They are still putting some stimulation into the economy, just less of it. What we should see is pricing Interest Rates and a little bit less juice for the stock market. We havent seen that yet. Yield . N wyatt 10 year why a 10 year yield . Bob i am struck by how confident she looks there. Thinking, she could be the first fed chair in four or five that hands over to a successor without a disaster brewing. Granted, shes got to figure out. Jonathan there are people laughing out there at the moment. Bob thats what everybodys got to focus on. What is the right size Balance Sheet . It was 900 billion precrisis. Does it belong yet 2 trillion now . Not far away from 4. 5 trillion. The way they worked in the Balance Sheet will be critical to how the treasury behaves. When the fed would raise rates are normalized policy, they would lift the front of the market in the yield curve would flatten. We become accustomed to that. We try to figure out the fund rate has that will tell you where the 10 year treasury will approximate when they get to the end of their cycle. Now, if they are going to be liquidating tenure treasuries through not reinvesting, is that going to push up the 10 year part of the curve . With a going to wind up steep yield curve . Thats a lot for them to deal with. Alix what happens to treasuries . How much supply to we come on and how much . If the issue on the short end, thats a different story. Bob thats their unsolvable riddle right now. How do you let it run off . Its easy to allow mortgages to run off because they will start with Something Like the hundred two 140. The market absorb that. Treasuries, the current alex sheet has 800 billion maturing. Thats too much to put out on the market, looking for buyers. They have to figure out a way to reinvest that and pay some put down. Something that is transparent and formulate to make sense is what the market will adopt. I think its a better run off of 250 billion a year. The market will take that. Lumpy on it might be treasuries, but is that were predictable . Bob its very predict will. Youve got the interest payments. Its unlikely they will default. Because mortgages to pay down and advertise in a monthly basis, the fluctuation isnt that much. It can be modeled. , you have aoes by smaller Principal Amount to worry about. Michael weve got some meetings were they are expected to raise Interest Rates this year. Everybody thinks they are going to take a meeting and instead of raising rates, they will announce what they are doing with the Balance Sheet. There is market risk that day, even if they do nothing but make an announcement on paper. Stop debating whether you are going to do two or three more. I would go every other meeting until you get to 2 . She talked yesterday about something closer to neutral. That is at to 2 , reasonable place to pause. Why have the market guessing whether they are going to skip the june or september meeting . Just get there i june. Start telegraphing over the next couple of meetings with the paydown on the Balance Sheet will look like. I wouldnt start this year. I would wait until january. I would start with letting mortgages run off. Theres been a lot of the late if they shouldve been the Mortgage Market in the first place. The market can absorb that. I would try to figure out the unsolvable riddles. How do you pay down the treasury . Michael if they keep us guessing, it raises our ratings. I would really be upset. Alix Michael Mckee bob michael, its great to see you. Thank you for coming by. If you have a bloomberg terminal, you can check out tv. You can interact with us directly. This is bloomberg. Alix United Airlines is down 2 . Their personnel grabbed a passenger off plane. We did get a response from the ceo. Can you rate it for me . Of one to 10, it was negative one. It was the most tone deaf response ive seen on this type of issue possibly ever. He used the term reaccommodate as if he was trying to put a good spin it. He made it worse. How they walk it back . Scott theyre only three things to remember. One is acknowledged the problem. He needs to say this is unacceptable and we are horrified. He needs to be the person taking responsibility for it. He needs to over correct. He needs to outline what they are going to do to make sure it doesnt happen again. This was literally onetoone Crisis Management failure. It is hard to imagine someone approve that press release. It reflects poorly on the company and him. Poorly on any process they have in place for handling disasters. Airlines need to be the best in the world at how to handle disasters. Also international, the man who was removed was asian. That video went viral in china. Trending item. P what do they do in the International Community . Scott i dont think they do anything differently internationally. He needs to come out immediately happened,ize for what but also apologize for his response. This is not the incident, its the way you handle it. Its hard to imagine it. Its like they sat around and said how can we make a bad situation worse. Ive never seen anything like this. Alix two passengers care . Cheapestg to take the ticket . What is the monetary issue . Scott thats a great question. Were not sure if people will unitedy are not taking if its the best price. Its fairly competitive in oftentimes you have more than one option for same price. That meant, this is a tiebreaker. There are a lot of ties for consumers. This will hurt them. Alix can they discount enough that people care . Do they need to pay up with more money at the end of the day . Absolutely, they could buy the business, best not good for shareholders. Heads should roll around this. This is something that is going to cost them in terms of direct costs and on for seen costs in terms of damage over the longterm. Alix thank you so much. Jonathan even mr. Oleary at ryanair found out. City, its about 34 minutes away. You are watching bloomberg. Jonathan the g7 discusses angled alliances with syria. Rex tillerson prepares to meet with russian leaders. Janet yellen says that policy is getting close to neutral. President leans on ceos to get them into fifth gear. At 2700. Good morning. Welcome to bloomberg daybreak. Alongsidehan ferro alix steel. David westin joins us from d. C. Trump has adent meeting in about an hour and 45 minutes with ceos that were put together by Steve Schwarzman, head of asked him. He will speak with us head of blackstone. He will speak with us after that meeting about how they will work to get growth going in the economy as the president wants. Jonathan lifting you up to speed on Market Action this morning. Futures are a little bit softer. The s p down about a 10th of 1 . Treasuries this morning with a very decent bid. Yields up about three basis points. The fx market, it is a weaker dollar for a second straight session. The cable rate of about a 10th. That is the story across assets. Lets get to some movers with alix steel. Alix United Airlines is the store we love to talk about today. The fundamental is that american air issued a positive guidance which helped get them out the lows of the session. Of aideo went viral passenger getting dragged off a united flight. Theres also a lot of outrage in china. The video went viral there. China viewers are are actually are actually calling for a united boycott. The other part of the problem is how the ceo that with it. He apologized for having to reaccommodate passengers. How do they deal with this pr crisis . Movers, apple suppliers are getting hurt in the market. They have said they may lose the apple business as the company internalizes power chips. They get about 85 of their revenue from apple. They are at risk if apple changes any Business Strategies there. Local ad companies indicate that this franchise is healthy. A positive stock as we head into the open. Than two hours, President Trump will meet with his Business Council, a group of ceos to he talks about Growth Strategy with regarding the economy. Steve schwarzman of blackstone, ibm, gm, andof walmart are expected to attend. Shannon covers the white house. She joins us now. We know that every ceo wants to know about tax reform. We do not know if they are going to get a lot of insight at this point, because there is still a lot of heavy lifting to be done. Theres a lot of noble numbercrunching that needs to be done. The treasury may not have enough staff and manpower in place to do that. There is a lot of division in the white house about where they want to go on some of these big issues like the border tax. Ceos and investors are looking for clarity. They might get some added this meeting, i would not hold your breath on it. David ceos are not used to being very patient. There used to getting things done. What point do their patients run out . Patience run after the issue with Health Reform and how the public the Republican Party was not unified behind that, after seeing that i think they are already running out of patience. They are you concerned about tax reform. They want to repatriate their capital. They want to know where to invest their manufacturing resources if there will be a border tax. Is not only ceos am a but also ceos, but also investors who want to know. David in the past, the big issues have been trade and immigration. Have they taken a backseat to tax reform . Has putdministration tax reform at the front of the agenda. Trade is in the background. We do want to know what happened with the meeting with president xi. I do not know if we will get a lot of insight to that. Trade relations with china are very complicated. This is just a first step on what will be a very long process with our trade relations with china. Nafta has fallen into the backseat as well. It is collocated having so many parties involved. It will take some time as well. David there you go. Shannon, they do so much. Thank speaking with you so much. I will be speaking with Steve Schwarzman around noon after he gets out of the meeting with the president. Jonathan looking forward to that conversation. This the uncertainty coming out of d. C. , the s p 500 could climate 15 to 2700 year and. Morgan stanley chief u. S. Equity strategist at this now to ask playing the call. Lets just begin. What the 700 what will take us there 2700, what will take us there . Are some 700, there points we have a consensus on. The recovery 2700, there are points we have a consensus on. We were able to stay on track last year. We are trying to get too distracted by washington and a lot of political noise out there. We have probably the most synchronous data we have seen since 2009 coming off the lows of 2016. Theath of the market bredth of the market supports this idea. We have more than enough gas in the tank for the rest of this year. Point number two, there is this idea around this synchronous recovery. Every time we recover in the past seven years, it has rolled over. People are unwilling to buy into it. No one wants to be the last one into the pool. The third point is because of the policy changes last year not just on Monetary Policy where the fed is now targeting and the and japan is now yield targeting, were seeing this shift in policy. We are getting fiscal support for the first time as well. There is this idea that the world is normalizing after eight years. If the world is normalizing, that means equity risk premiums should normalize as well. We are not talking about an exuberant evaluation, were just talking about equities and back to normal to get back to that 2700 target. Alix but that has not happened. We do know that we could potentially see some is still stimulus, but the term premiums for bonds are in negative territory. What is going to be the trigger to make it move . The bond market is not going to normalize come up because of all the extraordinary policy. That is the idea of finance and repression. That is what central bankers have been trying to do. There has still been this apprehension to buy into price upequities price equities. Equity risk premiums are now at a new low. Low in the u. S. , because the market recognizes this idea that we are having enough policy change to push us into that new era. To 40. Mal is we have room to go. 230, and normal is at 240. We have room to go. Have the largest retail business. We can see that. From our data, no, they are involved. They are exposed, but they have not committed to this bullish cycle the way we would normally see. Jonathan the way we would normally see the financial crisis is something that comes up again and again. Is it so going to happen . Who knows. The title of art year end piece was are you ready for euphoria . Which means no one is really even talking about it. It is an interesting dynamic of invest in cycles. We have not yet reached the stage. We are not going to get to where we were in the late 1990s. That is not where we are going. People ask is if the number one question we get from our retail clients is when the next crisis will be. They are still giving that commentary despite the fact that this is been one of the best markets in history. Alix then, when you go to the survey, they say regular people are the most optimistic about stocks in some time in a hasbeen hedge funds and retail. Are the Institutional Investors need to catch up and not retail . By the way, hedge funds are institutional clients. Retail has not committed in any way like they have in the past. If there is one interesting statistic, it is that since two thousand eight the net flow into eds and neutral funds have been 04 u. S. Equities. Is been over 1. 4 trillion the has gone to bond funds. Theres this real dichotomy of i will go a long for the ride but not commit new capital. I would argue that institutional managers are behind the eight ball right now, because they have underperformed for several years. They are absolutely feeling the pressure more than retail. Retail investors are not feeling that pressure. It is more about are you participating . When they do call you up. What do you say to them . We just went through one of historyt periods in will ruin through a secular, their market. So, everyone is looking for the next crisis. I do not think there is a black swan that will cause a situation like that. First of all, the fed is further along than people appreciate. , andhad been tightening up we are late cycle. There is not a lot of flak in the u. S. Economy. There is a risk of a contraction at some point next year. The fed could accelerate that. Second, from an ecb standpoint, i am more concerned about the ecb tapering and the impact that would have on local rates. If the bond market were to normalize, then the 2700 target does not work. The third thing i am concerned about is some of these cracks we are seeing in the credit market again. Market around artists, those can spill over into a broader credit issue. Right now, we are ok with it, but those are three things i would be most worried about. Alix mike, great to have you. Mike wilson of Morgan Stanley, he will be staying with us. Do not miss it. We will have interview with Steve Schwarzman, blackstone ceo from white house. The focus shifting as ceos head to the white house to meet with President Trump. This is bloomberg. Alix wall street views up for earnings. This is the chart i am looking at. Annual etf revisions for the s p. The white line is where we are now. Revisions only down about a 10th of 1 . The fiveyear average is 2. 5 down. The 10 year average is 3. 5 down. Where are we heading into earnings . Chief investment strategist. Set earnings up for us. This is the chart i was going to bring. I love it. Obviously, you can see those earnings and provisions move down very quickly over the next couple of months. As you have pointed out, this is not really happening this time around. They are staying the same. Maybe that is because analysts do not know about the outlook for the political realm. What effect that will have. Whether or not they are not getting enough indication for, or maybe interestrate behind earnings. Mike, is this a good thing when analysts are standing by their estimates . Do we need to be concerned that there is potentially more room for error when the expectations do not come down . Bottom line on earnings, we look at it a little differently. We look at it rolling forward a 12 month basis. About what ises going to happen in the future. If you look at earnings as they roll forward, 17 has not changed much. 4wood 12 has continued to go up every day. 12 people look at forward month earnings from a year for years ago. We have in 14 and 15. If you roll forward to august and september, that 135 changes to 132. That is what we are basing our price target on. We do get some point, the market will price in that 142. We are not willing to give credit beyond that, because audits has dropped that day for tax reform. It is the single most important driver for members. We have pretty much the same numbers on the board when it comes to expectation. The question is how much margin is there for error would you have companies that are expected to deliver not just growth but to the pointwth you are looking at 25 Earnings Growth next year. Does that not create some potential for volatility if you see some of these crowded stocks like tech that did not quite hit their expectations . To bere are going disappointments. We have every seen disappointments going into this earnings season. Some indicators we have created that give us pretty high confidence for the next six months. I feel highly confident about march and june. Beyond june is when it gets a little more testy around can they meet these higher expectations. I would argue the First Quarter is when the yearoveryear rate of change expectations get a little frothy at 13 or 14 against tougher comparison. For the next two quarters, i think we are in shape. Alix ive some breaking news for you here. We are hearing talks that they wish to combine their operations. They want to streamline operations. The stock sort of popping on this news about 0. 7 . Well off the lows of the session now. If i look at the premarket mover here in the u. S. , that stock is not quite moving yet. We will give you more details as they come up. More headlines as they roll out. Mike, a big distinction in terms of where we will see the most earnings juice. We have seen earnings for energy down quite a bit. Tech is up about 1. 5 . Where is the jews coming from the juice coming from . Comparisons make it a pretty easy bar to create growth. Can they create enough. Your question earlier on, i would say they cant. It is the one sector we are most concerned about, because oil prices have not done what people expected. That includes us. We thought we would see higher prices for crude right now. We see crude elevating itself in the back half of the year two meet those expectations. Energy is the biggest large is the largest computer to etf growth this year. Financial should see good operating leverage. We are not in the view that we need higher rates for financial earnings to come through. It is more about costcutting. As you recall a year ago, Financial Companies really cut back on costs. Deregulation, that is very likely to happen am a because you do not need legislation to do a lot to happen, because you do not need a lot of legislation to do deregulation. Jonathan we started the conversation talking about the sectors after the financial crisis, and why the euphoria has not come about like it would have done historically. Sector by sector, is there something more predominant the on this blanket scar on the s p 500 . Financials, i think. In the u. S. , they are satisfied they are recapitalized properly. In other parts of the world, they are in huge disbelief around if the entities are going to make it. How are they going to behave in the next downturn . Likely what is going to happen in the next recession, whenever it comes, we are going to be surprised how well survive how well prepared the Financial Services handle that downturn. We would not see that kind of drawdown in earnings the way we have seen in other crisis is crisis, simply because of what has happened. Would you look at financials, because of the rally we have had, a cyclical rotation not necessarily related to the trump factor. Given the move financials have had, i wonder how sustainable it is we look at their component in the next at 14 . Is that a part of your market thesis . Can a happen without continued strength in financials . Tradehave looked at trump since november. The three we would focus on to represent the agenda of the administration is that financials or banks on the regulation. Represent the tax reform. We also have this high data, cyclicals, steep cyclicals to represent the infrastructure. All three of these started to perform last year on a relative basis after the election. After the election, they all got a pretty good pop, since then aboutcaps have given up 10 of that performance. I rates of the goals have given back about 90 . We think tax cuts are getting kind of priced out in the near term. There is a lot suspicion around if they can get that at all. On the financial side, it makes sense to only get back about 50 of the performance, because it deregulation can happen without a partisan support. The high beta cyclicals have given back most of it as well. Alix oliver, thank you for joining us. Mike wilson of Morgan Stanley is staying with us. To update you on that breaking news, a potential combination of train operations. No deal is a given yet. Fromuld require clearance antitrust authorities and it could face opposition from unions. Nonetheless, it is the potential deal of the morning. Jonathan coming up, Steve Schwarzman, Blackstone Group ceo, he will be coming up later on bloomberg television. Are about 15 minutes away from the open. Futures are a little bit negative. We are down 14 on the dow. You are watching bloomberg. Alix mike wilson of Morgan Stanley is still with us. My, we have gone through earnings and the 2700 call. Give us the over under on financial rates. Technology is still there, because earnings continue to be strong. Re is such breath in that in that sector, that he continues to be strong. The other is energy and infrastructure. There is the global synchronous recovery that we think will focus back on that after First Quarter innings. Fourthquarter earnings. As i mentioned earlier, a lot of the excitement around tax reform, and a small caps that election,ed off the those have come back down. Deregulation should help them proportionately. And you expect progress on tax we do expect progress on tax reform in the second half of the year. Tax rate happens do you still like small caps . We do. At this point, we do not think enough is being baked in for tax or form. Tax reform. That are concerned about is back tax and interest deductibility. I think those two could do a lot of damage. I would be more concerned if we had those two stipulations in a tax reform with a lower rate. A 28 without those two is better. Jonathan the flows of not yet met the rhetoric just yet. The argument is that after the election, a wall of money goes into europe. What does that mean for the u. S. . In the past eight years, we have had tremendous outperformance for the United States. Overweightlutely when it comes to International Equities in the longer term, meaning the seven or eight years, because of that undervaluation and underperformance. The u. S. Should continue to perform this year. Jonathan mike wilson, great to have you with us. You are watching bloomberg. So youre having a party . How nice. Ill be right there. And the butchery begins. What am i gonna wear . This party is super fancy. Lets go. Im ready. Are you my uber . [ horn honks ] hold on. Dont wait for watchathon week to return. [ doorbell rings ] whos that . Show me netflix. Sign up for netflix on x1 today and keep watching all year long. Jonathan from new york city, this is bloomberg daybreak. I am Jonathan Ferro. Moments away from the opening bell. 19 on the dow. The s p down about 0. 1 . On news hit for price action friday and monday. Heres the opening bell. At abouts this morning a fifth stage on three basis points on the tenure. The option cycle continues today. 10year note come in a little bit later. The fx market, lower yields and a weaker dollar. Crude goes nowhere. 63 is that handle. We will hold on to it. We are about 20 seconds and. Lets look at the market open. 0. 2 . The s p up about it has been kind of slow going as it were. Mostly lower for all of the overnight sessions. Gold still at a sixmonth high. Reflected inuite any meaningful shakeout just yet in the market. We do see that it for treasuries. The fact that we are watching we are watching United Airlines today. Take a look at it compared to delta. United airlines was off about 2. 5 , but it is now down about 2 . Heres the fundamental story. American airlines coming out and saying that their revenue per mile is rising 2 to 4 in the First Quarter. That is half a point above estimates. That helped United Airlines to come off the lows of the session. Nonetheless, the company was really played by that video of a customer getting dragged off a plane due to overbooking. The lack of a good response on the ceo and internal memo has really put the blame on the passenger. The question being will they have to lower fares to get any kind of is this back from this business back from this . How much will this cost them in china. As we head into more uncertainty risk,tax or form, ulocal and earnings risk, what we looking at when it comes to correlations . We have a great chart for you. The orange line is the s p 500. The blue line is the 50 day moving average. The pink line is the 200 day moving average. In the bottom panel, you see 65 rolling day correlations for the s p. It is now at about a 16 year low. This decline here with the election. This year was accepted this this here was brexit. Would you had the election, the correlation started to fall off. It is picking up a little bit, but still very low over the past 16 months. Jonathan alix steel, thank you. Joining us now is chris. Chris, the correlation had you express this in terms of trade how do you express this in terms of trade . I think we express it in the dispersion we are seeing under the service surface. Discretionary, there are some winners, and there are some clear stocks that are not working. I think this is a manifestation of a market that is consolidating here. Winnerss been a lot of at the stock level, and i have been someones that do not work as well. Jonathan talking about the consolidation, you pointed out the Short Interest chart. It seems to be creeping higher in the russell. Tell me why. I think it is a little interesting given how bullish the street was on small in november. Small cap started to roll over in late january into february. In terms of what is bottoming, i think small caps are close to putting in a low here. Sentimentthat is probably reflective of that here. It is pretty significant as ares said that smallcaps leading it, because it says so much about how people are seeing the mystic economy going. We certainly have seen that in this bid recently we have had for emerging markets. At the beginning of the year, the u. S. Was dominating, but over the past couple of months it is other developed markets that have been leading in terms of Global Equity indexes. Chris, as you wind up looking at correlations, where is the best place to buy . At the gift a look at what is already washed out or close to being washed out. I think banks are a candidate here. Number one, alix you buy banks into earnings on thursday . I do. Nextfeel good about the 20. The average bank stock is down about 12 from the recent highs. We have seen a number of stocks making a onemonth low spike. That is a technical side in uptrend that you want to be a buyer. Over the next couple of weeks, i think we will see a good bottom in things. I also see homebuilders here. They have exhibited a lot of leadership in the last month or so. Of pier related stocks 1 and restoration hardware, they are seeing a slight surge. Homebuilding and banks over the next couple of quarters will be a spot we watch. Jonathan a lot of people are worried about autos. Our homebuilders our Home Building stocks worth worrying about also . Historically, rates have moved higher as result of economic activity. So, member there is only 235 here. 4 or 5 . Far cry from i can we have a lot of room before higher bond yields would materially impact the Housing Trend trade. Last july. 132 135 today. There is a big change from that perspective. Atyear yields ended 2015 230. The ended 2016 at 235. On a pointtopoint basis, yields are not up that much over the past 18 months. Alix so, banks and Home Builders are what are getting beaten up. The flow out of the u. S. And a little bit into europe, talk to us about that. One thing notable about heading into this earnings season in context of those flows is that we have not been hearing from companies. Looking at the bloomberg statistics of how Many Companies are reporting their earnings, it is at an alltime low. We are seeing remarkable silence from ceos. A lot of it is that they are just not sure. They are not sure about the pace of tax reform and what is going on with the jewel political situation. Going into earnings, putting in a bid when there is so much uncertainty, it is kind of a frightening prospect. It is part of the reason were seeing this type of thing in u. S. Equities this tightening in u. S. Equities. Evil are watching and waiting to see if things will move lower especially with valuations so high. Cost youu sound sound cautiously optimistic. Why is it so difficult to say you are bullish . Tohere is what stands out me, from mid2014 to mid 2016, 70 of all u. S. Stocks went down by 20 or more. You had fair market everywhere you look. Is now down about 12 months removed. The s p is up 30 . Historically, that would be a very short market advance. Typically, 30 months at about 70 . It has been 12 months and 30 . I think there is more gas in the tank here. Alix you have the same kind of outlook for small caps, the dollar, energy . Thinkew observations, i with small caps, as we talked about, from a sentiment perspective they are getting washed out. The dollar has been changed unchanged for two years. Im not sure there is a big dollar call to be made. If you read the front page of the newspaper, a week you about is how strong the dollar has been. It is unchanged. I think tactically, it has been weaker under the surface with emerging market errors, which is why the e with emerging market, and perhaps that is why the e. M. Is so high in comparison. Think thent dollar, i dollar has been bullish for e. M. I expect that to continue here. Alix do you like e. M. . I do like e. M. The credit spread are making new lows here. Despite all the anxiety politically a broad, we are not seeing that in a fast in the riskiest were not seeing that manifest in the riskiest of risky type that. Jonathan is this related almost exclusively to a reweighing in china . E. M. Has been in the bear market for seven or eight years. This is not a trade or a move that is structurally extended. We think this is the beginning of a new move. You look at all the anecdotes about china, here is a great thing i do not think people are paying enough attention to. Swiss watch sales, who the marginal buyer of swiss watches . Probably the chinese consumer. We have seen the swiss watch bottom. We have seen a lot of anecdotes like that around the world. Global shipping stocks that are suggestive of china, at least the second derivative, Getting Better in china. Jonathan chris, great to have you with us. We are nine or 10 minutes into the session. Lets get you up to speed. The score is as follows. About 0. 1 on the dow. The s p seeing a quarter of 1 . In marginal moved to the downside. Treasuries stated. The dollar is just a little bit softer in todays session against the euro and the pound. In new york, you are watching bloomberg. Emma this is bloomberg daybreak. I am a much harder. Chandra. , i am emma coming up, Steve Schwarzman, blackstone ceo, will join our own westin for interview our own david westin for interview live from washington, d. C. We are watching United Airline stock after a video of Police Driving a customer off United Airline flight went viral. George, walk me through what the real issue is here for united aside from pr . I think all the u. S. , fullservice airlines are looking for ways to make their operations more efficient. Filling the airplane more makes them more efficient. I think we are getting close to the maximum overbooking, and what we call load factors. The amount of people in the airplane. We are getting to that maximum they can put into or sell into an airplane. I think that is the challenger. If they are, hitting up against their maximum load factor, what does that mean for their bottom line . I think it means we will not see a benefit to their bottom line by stacking the load higher. Lowcost airlines will get up to about 90 of the airplane full. Fullservice guys have gotten up to about 85 now. They have been in the 80s and 70s in previous history. I do not think we will see any more of a benefit. The airlines have to also think about, if they are going to oversell the airplanes to the degree they are right now, the economics may have to be that they are willing to raise the price and pay passengers to get off the airplane so they can get the priority passengers on. The other challenge here is that business travelers expect a trip to the city in a timely manner. It is not a leisurely traveler who may be on vacation. If you are appealing to this businessengers, to passengers, this is really bad pr. If you lose business passengers, you are losing some highmargin profit. Alix they also felt like the bottom pricing for airlines the price were visiting some kind of bottom. United airlines that does United Airlines need to rethink that now and bring their prices lower to get past this nightmare . Am usually pretty surprised how quickly people forget about this. When choppers shoppers are out shopping based on their expectations, if united is the best price, they will buy united. I do not think they will have to get crazy to fill airplanes. Alix do you need to rethink how you structure and price united . As you said, low price wins. I think we are in the middle of that right now anyways. The big fullservice airlines like elder, united, american, they are trying to compete right now with spirit or front header frontier airlines. Some Airlines Offering slightly lower amenities for a much lower price. They have flight crews that are a lot cheaper. United, american, delta, they have been pursuing the leisurely traveler by lowering fares and by breaking down the fares, so they are offering extremely lower well, not extremely , but a lower ticket price. They need to think about how far they want to go down the road of trying to compete against spirit or frontier by offering that no frills service. They could pack up the airplane, but you see here some of the negative yard ramifications may not be worth going after that pr ramifications may not be worth going after that business. The revenue could rise as much as 4 in the First Quarter. Pricing power is back for some. Who is best in the industry to take advantage of it . All the airlines, american, united, delta, they are all going to have lower profit year after year, because the price of fuel is much higher. American, i think, was much more circumspect in the amount of capacity they put into the marketplace along with delta. Those two Airlines Look like they are paring back capacity of that here. They could see better fare increases. Is too much what united curtly has. Notice, united has one of the lowest fares in the market. Of libertye ferguson intelligence, thank you so much. We want to highlight that secretary of state Rex Tillerson has now arrived in moscow. You can see the plane has landed. The cars are there ready to collect Rex Tillerson. Who is he meeting with over the next 24 hours . We are told he is potentially meeting with vladimir putin. What will the conversation be around syria . If you have your bloomberg terminal, make sure to click on tv to interact with us directly. This is bloomberg. City, we from new york are about 20 minutes into the session. A move to the downside now. It is picking up some pace good at about 1. 5 on the s p 500. All morning, if you look at the board, treasuries have had this decent bid. Yields up by four basis points. Ofare testing the lower end the range on tenyear treasuries so far through 2017. Market, as thefx yields come in, the dollar softening up against the euro and the pound. That is the story in the markets. Lets get over to david westin in washington, d. C. Inid we are down here washington for that meeting that President Trump will have with his Business Council, the group of ceos that were put together by Steve Schwarzman. Taxes are likely to be high on the agenda. Al is with us today to talk about another issue beyond tax reform that is likely to come up with the president. That is infrastructure. Al joins us now. Did you here in washington. Good to have you with us here in washington. You think infrastructure will be a high priority . I do think it will be. It is one of those fascinating things where 90 of Congressional Democrats would like a big infrastructure plan and republicans would like it. Most of the public, and all Business Leaders would like it. It is hard to get there, because how do you pay for it . How much of it is public and how much is private . Those are difficult issues. David they do at least say they are in favor of it. What does that say about other things the president wants to get done if you cannot get that one done . Would he has talked about is combining that with health care. One will not happen thing he has talked about is combining that with health care. That will not happen. He wants to try to make it bipartisan. It sounds good if you attract republicans on tax cut, and you attract democrats on infrastructure. However, they are having trouble with tax or form until they have their score if you will. David after health care, to bring democrats along, you can probably do it with infrastructure. A had Caroline Harris on little bit earlier in the program to talk about what the likelihood was of a tax or form. Lets play a little for you. I think it is sees no i think it is something we have to continue to work hard on it. It is the single most progrowth thing we can do for the economy. David would you still bet yes . I am not a betting woman. David when i pressed her on that, she said she was not a betting person. What about you . I would bet on a tax cut but not a tax reform. I think the tax that has to be individual and corporate. That is harder. It cannot be able to bring in the offsetting revenue. I would put a quarter on the table for tax cut, but not for tax reform. Get tax cuts, you have to eliminate some deductions . That is when you get into tax reform. I think they will just say we would do a tax cut. The problem with that for republicans is that the budget rules say that after 10 years, it cannot lose money. They want a permanent tax cut. The case for a permanent Corporate Tax cut is overwhelming. Individualt on the side it, i do not think they can do that if they go for a straight tax cut. David is the border adjustment tax dead . Probably. I do not think it can get through the house. I do not think it is a bad idea, but i think when you come to the politics of it, and you start with almost every democrat opposing it, and you start with anybody from arkansas all those republicans attached to walmart, they will oppose it. Once those fire breathers start hearing about a tax increase, they will start frothing at the mouth. David how about the focus issue . It is hard for him it is hard for the president to get any of his priorities done. Is there anything he can say we should really focus on this . From what i hear, and from what i read, the process of the way has is to knock the other guy. It is not uncommon to have white house feuds. It happens all the time. It has happened back with reagan and nixon. Even in the obama white house. This has taken on a new dimension. It is all over the place. They spend so much time doing that, that no one has set a ready script if you said today if you asked any of them what was donald trump priorities one through five, they could not do it. David you think it really is affecting policy . I do. I think we did talk with republicans who want to be supportive, that is what they tell you. Hunt, great to have you with us. Thank you for joining me. I will be speaking with Steve Schwarzman, blackstone ceo, at noon eastern time after he speaks with the president. Jonathan looking forward to that conversation. Alec still getting the answers to her alix steel getting the answers to the question she is been asking for months. Alix still, it is not even close to its average of 20. Jonathan for six minutes into the session. Lets get you up to speed. Futures were softer. 2. 5 on theabout s p 500. If you switch of the board, treasuries are lower. Yields on a lower basis point. The dollars a little bit weaker. From new york city, you are watching bloomberg. Mark it is 10 00 a. M. In new york. Vonnie it is 10 00 a. M. In new york. I am vonnie quinn. Mark i am mark barton. Welcome to bloomberg markets. Mark we are going to vonnie we are going to take you from new york to london and cover stories out of washington, d. C. , paris, and china. President trump set to meet with the white house this hour. Top executives from walmart, gm, and pepsico will discuss ways to move the u. S. Economy forward. Mark secretary of state Rex Tillerson is in russia bringing his message, saying putin must give up his unreliable ally, syria. How hard will russia push back . Chair janet yellen says the economy is Pretty Healthy and that the central bank is shifting focus to keeping growth on an even keel. How this impacts the bond market