Welcome to the pulse. We are just getting breaking news. Euro area december services pmi are unchanged at 54. 2. But when you look at the strength of the economies. France weaker than expected. Germany doing better than expected. The most volatile start to the year since 1999. 1. 0732. Dollar at mark china again devaluing its currency or weakening its currency in an orderly fashion. The currency falling to a fiveyear low. This is the last 8 trading days the currency has fallen against the dollar and all but one of those trading days. Hen fall into a fiveyear low. The signal is from policymakers that they are more tolerant it seems of a weaker currency. Yuan also sent to a fiveyear low in hong kong trading. That is freely traded currency. The gap between the onshore in the offshore rate was the widest on record. What is significant is that asias currencies, ages, chinas neighbors will be watching this closely because chinas yuan currency swings does tend to impact exporters. Many of these countries trade with china. China is the biggest trading partner after the likes of south korea and taiwan. Treasuries rising for the fifth day in a row. The yield has fallen by nine basis points. This is a year when forecasters said the treasury yields would rise as the fed forecast to as many as four times. Volatility at the start of the year has forced some to question how quickly the fed will move again. We get minutes from the fed later. Vw shares are rising for the first day in four. Yes, we had u. S. Sales falling 5. 9 in december. And this is brent crude. Coming close. Falling to the lowest level since july 2004. Data later that should show that stockpiles rose again. Analysts protecting that crude, fallrent, but crude could near 30 a barrel this year. The strength index tells us that crude is not oversold. Certainly busy. Quite a lot of reports out and to saying that oil could go 30 a barrel. North korea says it has conducted its Fourth Nuclear test. Detonating a Hydrogen Bomb. The move marks a setback for the u. S. And chinese efforts to convince the leader to retaught to restart the talks. Increasinglyk as the day wore on, Nuclear Scientists were questioning the veracity of the claim mainly because the magnitude that was registered from the explosion really was not enough to indicate a Hydrogen Bomb. As they explained to us, Hydrogen Bomb you need several atomic bombs to explode and trigger it. And what they found with the seismic wave that came from the earthquake caused by that explosion was actually more like what they saw in prior atomic bomb tests. Think the day wore on, i the actual claim is becoming questionable. What impactter, will it be on relations between north korea and its neighbors, even if it does turn out to be not exactly what they said, it suggest further strength. Peter it still was a nuclear test. And south korea, United States have always said that another test would be a provocation. Whent came at a time relations are actually starting to improve. It was a bit calmer. His newjong un in years address had talked about improving relations. Then you had this today. As you saw all day long, almost every country has condemned it. China even has criticized it. So the security of this region definitely has worsened and tensions are escalating. Well see what happens in the next few weeks. Francine thank you so much. Now lets welcome our guest host. Bell, chief Investment Officer at stanhope capital. Thank you so much for joining us. It has been quite a few days. The start of the trading year. The last three days have been the most volatile since 1999. ,eopolitics, saudi arabia, iran north korea and china. What worries you the most for the next 12 months . Jonathan the next 12 months is not the things that happened in the last week. First of all, china, think the issues at the moment are issues to do with the circuit breakers, peopleo to do with being able to sell what they have not been able to sell for six months of people thinking ahead of that. A number of issues with china. Oil certainly is an issue and i suspect we will see further oil weakness. The 35 level is a very important level. If we falter there, i am not surprised to see brokers seeing we could go to 30 or below. I suspect that will happen. I think it will be more interesting in terms of the oil price in the summer because we will have the june opec meeting. June, get more action. You will have iran producing oil again. There will be clear oversupply from opec. Maybe we will see a point to that point where the price can rise. Francine this concerns you for emerging markets or the countries that produce oil. Its a net benefit for the rest of the world or for the growth in general. Jonathan its certainly a net benefit for the rest of the world. The u. S. Consumer is really benefiting at the moment. They have got wage increases when there is no inflation and they have got income rising by gas prices falling. So, there has been a big boost to the west. That is going to begin to reverse over the next six months. We may see a change. In the meantime, you have got a boost to western demand. At a time when countries like saudi are having to borrow or sell savings to cover their budget deficit. Francine do you worry about the u. S. Consumer . Im hearing more calls about a possible recession. Jonathan come the summer, will have to start being concerned about the u. S. In terms of u. S. Interest rate rises, i think at the moment we may see another rate rise. Come the summer, people will start getting worried. Francine we will indeed talk about centralbank diversions and what janet yellen will do. 2016 latermes for in the show. Onts at 9 45 u. K. Time bloomberg. Coming up on the pulse, we will look at the slide in chinas currency. Plus, what will minutes from the fed tell us about the future path of u. S. Rates. Can cameron persuade Angela Merkel to back him on u. K. Demands. Francine welcome back to the pulse live on bloomberg tv, and radio and streaming on bloomberg. Com, your tablet and your phone. Caroline thank you. Vw brand has of apologized to the American People for the emissions scandal. He was speaking at the Consumer Electronics show in las vegas. The Current Issue with the diesel engines is certainly nothing to be rproud of. We disappointed our customers and the American People, for which i am truly sorry and for which i apologize. European shares in apple supplies have fallen after the nikkei reported that the u. S. Company would reduce the First Quarter output of at least by 30 . Inventories of smartphones have piled up at retailers in china and europe. Saidretailer John Lewis Christmas sales were up by 4. 1 to 1. 8 billion pounds. Online sales rose 21 . Its Supermarket Chain saw like for like sales fall by 1. 4 . Thank you. Francine lets get back to china and the onshore, offshore gap has widened. Now the move could signal a major shift in thinking of the pboc. Lets get straight to our Shanghai Bureau chief. Why have they done this . Greg good morning. The pboc is trying to manage a controlled depreciation of the yuan. Economyy to bolster the but they do not want to depreciate to quickly, too quickly because that will affect liquidity and might lead to excess outflows from the country. Thecine what are invocations of this diversions between onshore and offshore . Offshorearly, the yuan, which represents a more maybeurrency market, is you could say trading ahead of depreciationpected market, which is a more control market by the pboc, it seems that the gap continues to widen. Onshoree that whereas has dropped by 0. 6 , the offshore market has increased is increasingly, increases to drop and has dropped more than 1 today. Francine it seems we have had quite a difficult start to the year because of china. We have seen so much volatility on the markets but investors seemed to say this is market movement. It does not touch fundamentals. Yet we had some Week Services data. Greg well, yeah, the Services Data coming today was from a private survey, and that contrasted with a Non Manufacturing data that came out several days ago that was the official data from the government. It calls into question to the credibility or the reliability of the government data. Todays data certainly shows the deterioration in the Services Government is,he uh, focusing on as a way to shift away from their exportbased economies. Francine thank you so much for all the insight. Now, Jonathan Bell is still with us, our guest host. We touched on china a little bit. You were saying this is market movement. This is a correction or also circuit breakers. How worried are you about fundamentals . Are we going to see more volatility . Jonathan there are a number of issues. The fall on monday was as much about people testing the circuit breakers, about looking forward to people selling. The yuan move i think is part of a gradual depreciation, which started in june last year. Depreciation7 since then. Over the next year, we will see another depreciation. Youre looking at onshore and offshore, that is what the gap it telling you. Francine we can see the fiveyear dollaryuan trading band. The move today gives us a glance into how the pboc is thinking. Is that right . Jonathan you had a close for the last six months. Their thinking. Theyre concerned about the dollar having been so strong. When we talk about the currency falling, if you compare them to the euro over the last year they have gone up. Has startedthe pboc to say when we need to look at a basket of currencies, not just the dollar. That is what they are doing. If the dollar remains at these sorts of levels, well see the yuan continue to fall over the next year. Francine but last summer was much messier because they let it trade little bit and kind of fell back. Jonathan last summer, they were panicking about currency falls. They are getting a little bit more experienced in managing this currency movement. Still officials managing the currency, seeing how far they will let it go. Which is why you had daily news. That is going to continue. The offshore markets already predicting we will see further falls. Jonathan how much do worry about policy mistakes . And it can be the reversal from the fed. Well talk about that next. It could be the pboc not really understanding or being not prudent enough. They could be something from the ecb. Jonathan that has to be a big concern. In china, we think there is going to be a gradual slowdown that is reasonable. As long as you dont have a big banking failure, then that is manageable and should not be an issue. Jonathan how much are you worried about francine how much are you worried about a credit crunch . Tom jonathan will havein china, we a gradual slowdown. That is acceptable. The credit crunch is this is my 10 probability and if it happens, that is a big hit. 20 to think about how we ensure portfolios against such an event. We have to think about. Francine you are saying 10 . Still something we need to think about. Are you confident that the pboc has a handle of the situation . The researchers saying eventually they will have to deal with janet yellen, because euro bound and q. E. Jonathan if we are talking about a banking crisis, then i think they will copy what has happened in the west in terms of q. E. They have got the ability to do a lot of moves. Fiscal moves, we have seen the moving, reducing Interest Rates. They will go further. Draghi saying i will do whatever thanks. It takes. Pboc will come out with a similar statement. Francine what is the feds definition of gradual . We talk central bank diversions in the dollar next. Francine welcome back to the pulse. U. S. Later today, the Federal Reserve releases the minutes from the december 15 fomc meeting at which rates were raised. Will we get clues about the timing of the next move . We hope so. The markets hope so. We continue the conversation with Jonathan Bell. Thank you for sticking around. We were talking before about some of the calls we are getting from the u. S. , and you are saying we should not worry about the strength of the economy till the summer. At the moment, the markets are thinking the fed will do one thing. The fed are telling us they will be more aggressive. Jonathan the fed tells you they are going to be more aggressive because they are sending a message that everything is all right and the economy is ok and they will be able to raise rates. That is what you expect them to say. And you would expect the market to question whether that is the reality. There is a little bit of confusion with data this quart er. If we remember back to the First Quarter last year, there was confusion about what data was coming through, whether the very cold january and the effects. So, there may be some difficulty intervening this years First Quarter data. But certainly they going to head off tell the road of lsow, sl ow, gradual increases. We had john waves of San Francisco said early in the week saying he thought there would be three to five rate rises John Williams of San Francisco said. The discussion afterward and they raised at other meetings. And the markets saying that is a bit optimistic. I suspect we will have a hiccup at some point this year. They will start perhaps with a march rate rise and following on from the one we had in december. Hike which dovish has come into our lexicon. Jonathan the concerns you do not want to repeat 1937 means its small, dovish hikes. Or what is happened in europe. Francine what are the chances of reversal . Not that they have to stop hiking but the have to start cutting rates . Jonathan for the time being, what you have is a point where they have to stop hiking. Because of concerns about the economy not being quite as strong. If you get Oil Prices Start to pick up again. You start getting consumer squeezed. We know Earnings Growth has not come through in u. S. Corporations. So investment might be weak. Our central cases that we expect rises two or three rate this years. It is more gradual than the dot plot implies. Francine the system must it. This would not because by some international events, either china or something going wrong jonathan the focus of this is domestic, u. S. Francine what is the central bank that would give you the most headache . The one that could actually get it wrong . The chances of a brexi vanished at the end of last year and now i am seeing commentary saying 2016 we could have another crucial year where the ecb gets tested and we do not know whether q. E. Works. Jonathan it is difficult for the ecb to get it wrong. They are going to carry on with q. E. There is a bit of mismanagement of Market Expectations with the last set of moves. Hopefully, they wont do that again. But they are going to stay on an easing path. The difference is you have ecb contending with q. E. And u. S. Raising rates. That will create a challenge for markets. Francine we will talk about the you. Nthe u. K. Next. Up next, David Cameron has to germany to meet Angela Merkel. We talk about the referendum. Francine welcome to the pulse live from london. Im francine lacqua. We are getting breaking news. U. K. Pmi numbers are ok. Are out. Mark risks including a brexit weighing on hiring, weighing on Business Expectations which fe ll to a three year low. The pmi falling to 55. 5 from 5 5. 9 in november. Economists in a survey had forecast a reading of 55. 6 themarket also say today report with the latest service of manufacturing and construction indicates the economy grew. 5 in the final quarter of the year, down from the initial. 6 estimate less month. The findings suggest the domestic economy, which has been the big path of the economy in the u. K. , may have troubles as firms prepare for an increase in the minimum wage, continued fiscal alterity, and this referendum on whether britain should stay or leave in the e. U. Has to be held by the end of next year. Really quickly earliest sterling falling to a ninemonth low. Francine the latest on the u. K. Is getting a boost after its pimco unit snapped a 31 months streak a reduction. Caroline because 31 months puts it in perspective. How long the pain has been for pimcos total return fund. 1. 3st, net inflow of billion. This was money being reinvested, dividends being reinvested. Lets take the positive for pimo. How the mighty have fallen. The extent of money that has come out of what was once the biggest mutual fund in the world. 200 billion has been withdrawn since april 200 third13. It was the rivalry and that fall out and the top that saw the likes of bill gross, the cofounder of pimco, take to the exit in september 2014. It is now close to a 90 billion funds. Way bigger than where bill gross has gone. Much more than it used to be. These outflows having Getting Better for a while, meaning december was the first time in november we saw 2 of assets withdrawn. It looks as though they are starting to prove their performance. Comanagers, total return fund 2014. 7 of its peers in remember back in 2012, when it was in 92nd percentile . Clearly, this is a turnaround for pimco. Francine now, the u. K. Prime minister David Cameron is traveling to a very today to talk brexit with Angela Merkel. He told them they would be allowed to choose which side to campaign for. Prime minister cameron there will be a clear government position that it will be open to individual ministers to take a different personal position while remaining part of the government. Francine lets go straight to hans nichols in berlin. What sort of scene is David Cameron walking into it bavaria . Hans there is a great deal of tension between Angela Merkel and her sister party, hosting this. Thel be meeting beat with chancellor who is somehow puzzled and eric hated by David Cameron puzzles and irritated by David Cameron. Cameronways as prepares to lose allies in his own country, he is traveling around europe trying to gather new ones. Hes in a very and then he is often hungry. He is the first british Prime Minister to go to austria and 30 years. This is a Prime Minister who i hope has a fresh passport because he needs a lot of stamp. More on the german position. They continue to view David Camerons position to call a referendum a strategic blunder. As i said, they are sort of puzzled by this decision cm to allows made cabinet ministers to go wherever they want on the brexit. Francine you did not mention the tensions on refugees. Is either side backing down . Hans no. What you saw overnight was a lot of interviews. You saw one by the transportation ministers saying you are never going to have a solution that is bearable, thats sustainable if you do not have upper limits on the number of refugees coming through. He says this is the last clear list. 4000 and day is the average in terms of new arrivals in germany. Most of them are coming through bavaria. And overlaid on all this is some reports of an incident of violence that took place outside the cologne train station on new years. It was just revealed tuesday, five days after it happened. The incidents, women were sexually assaulted. One allegation of rape. The government said the alleged perpetrators were north african and of arabic descent. That had caused a great controversy here in germany. Whether or not we know where these potential perpetrators are from and whether or not they are new arrivals. Have been in german society, are they new arrivals . A lot of controversy. This could threaten Angela Merkels coalition. It has been an underground issue. Francine, there is no solution. Merkels insisting we will let have an upper limit. And the csu is insisting you need to have limits. I suspect this will kind of cut finally come to the fore with regional elections. This controversy is likely to devide european furthers to divide europeans further. We talked about china. We talked about oil, the fed. What we have not talked about in great detail is the referendum in the u. K. And every Economist Says i do not know how to model it. Do you . Jonathan it is difficult. I think the area is going to concern markets most is sterling. How sterling reacts ahead of the referendum. We know the referendum is probably going to be close. People will not trust the polls because they did not trust the polls in the scottish referendum. Poll, people the will not know what is going to happen. I think sterling will be weak ahead of the poll. What you will probably have is a vote in favor of staying in the e. U. The equity market wont have much of an impact. Even if we do get a vote to that happens is another matter. You have a onceinalifetime vote in after the vote, it happened in france when they voted, you say, lets go back and see what we now do about it. So, i think sterling is the area to look at. Francine i have been trying to figure it out. If you look at the boe. We went into the end of 2014, saying that once the fed hikes, the boe is next. He cant really touch Interest Rates in the runup to that because that would be seen as political. At the same time, he has weak data coming at the moment. So, when does he hike . Jonathan at the moment, he does not need to. The referendumn is, you can say, lets switch off doing anything. He indicated it could be the end of this year. But its not something to concern us yet. Jonathan three top calls for 2016 . Jonathan european equities of have to be my first call. Isarea i may invest in energy equities. A short position if youre a longterm short in Government Bonds. Francine thank you so much for joining us. Now, coming ujp next, plummeting stock markets, middle eastern tensions and Nuclear Tests by a rogue tests. First sixk if the days of 2016 are a taste of things to come. Francine welcome back to the pulse live from london. Im francine lacqua. And than a week and a 2016 we have had a stock market crash in china, a diplomatic in the middle east in a nuclear test by a rogue test. Is it all doom and gloom. Who better to ask then marc farber. Ago,id a couple days you think the u. S. Is probably in a recession. What makes you say that . Are there a specific number of data checks you are looking at . Marc if i look at exports, industrial production, and recent car sales and the slowing down of credit growth. Smalin particular the di performance of commodities and lso of also of equities last year. If you talk about doom and gloom for 2016, i have to point out in that in 2015, with the exception cf people that held bits oin, the performance of all Asset Classes has been poor. In the u. S. Stock Market Indices have held up relatively well because they are driven by 20 stocks. The majority of stocks is already down 20 or more. So, i think the fed has created an environment by inflating prcieices where future returns n orets whether its bonds stocks or real estate will be poorer. Francine given what you said, first of all can the fed afford to hike rates anymore this year . And whats your outlook for stocks and bonds for the next 12 months . Marc i think ms. Yellen will go into the financial history books for having waited to increase rates since 2010, 2011, when they should have done it. Until right before a recession in the u. S. In december 2015. Bestnk that will be the failure of monetary policies by the monetary authorities in recent history. Francine where do you see the 10year treasury by the end of the year . And what do you see treasuries doing . Marc when you talk about gloom and doom, this is one sector that i think offers investors some potential. Years Treasury Bonds because of the economy is as weak as i think it will be, then Interest Rates are more likely to come down than going out. Your previous person that was interviewed, he said Government Bonds are a good sho rt. Well, we have to distinguish the spreads between 10year u. S. Treasuries and 10year german bunds is at the widest it has been in recent years. So, i think if someone wanted to really do something, he should go long 10year u. S. Treasuries as short bunds. Francine where do you see the s p 500, come december 2016 . Marc i think it will be lower than it is today. Francine how concerned are you thats the u. S. You are expecting some kind of correction in u. S. Markets. Marc worry. I believe the stock market in the u. S. Peaked out last may on the s p 2000 134. And that will go down 20 to 40 from that level. Francine what is your take on china . We saw a lot of volatility over the last three days. Is there a disconnect between the markets and the fundamentals of the economy . Marc well, there is a disconnect between real Economic Activity in the world and asset prices. Most everywhere with a few exceptions where markets have adjusted significantly on the downside, but in general, markets asset prices are high and Economic Activity in real terms is very poor. In china it was evident already for two years that the economy was slowing down. But the eternally optimistic funds managers that essentially have to advertise their products to make money, they of course remain bullish of the chinese economy. This is something i will never understand that people Pay Attention to the statistics that the Chinese Government publishes. When other statistics are much more reliable. Import and export figures out of taiwan to china, they pointed out to a meaningful slowdown already for one and a half years. Commodity prices pointed out a meaningful slowdown. Yes . Francine you are not seeing a hard landing, right . A meaningful slowdown is different to a hard landing. So, a lot of volatility on markets and how much will the yuan be corrected by . Marc i think we had a hard landing in the stock market already. And we had a hard landing in commodities. We might have a hard landing in the economy. We have a colossal credit bubble in china. And how it will unwind we dont know. It may happen through significant weakness in the renminbi. Although it is not sure. It could also happen through significant weakness in the economy. And some sectors of the economy in china like steel production, they are to have experienced hard landing. Would rather be overly cautious on china than overly optimistic. Alsoine marc, we have seen like today we have seen the spread between the offshore and the onshore yuan widen. At what point does a become problematic for chinese leaders . Be thatll, it may not problematic because they could essentially let the yuan float down. Whether that would help the economy much is debatable because in the case of japan it hasnt helped at all. In the case of europe, it hasnt really helps. So, this currency devaluations have relatively minor impact on real Economic Activity. But this is an option china has. They can also print money. They can buy assets, support the stock market. Central banks and governments can manipulate markets essentially almost endlessly until the final collapse occurs. Whether the collapse occurs through the currency or through asset prices or a credit inflation is not clear at this point. Francine right. Lets take a step back. You are pessimistic, cautious on china. You say the u. S. Is in recession. Is there a bright spot in 2016, or should we worry a lot more than we are at the moment . Marc i think that investors overlook the fact that we have been in a colossal asset inflation period since 1981. When Government Bond yields in the u. S. , the 10years peaked out close to 16 . Since then bonds have rally, stocks have rally, real estate lied globally, and we have an explosion of credit in the world. And we have had a decelerating real Economic Activity. Accelerating productivity growth. So, we have this asset bubble. Thing that the next will happen is that all the asset markets like the titanic will crash. [alaughs] it wont matter whether you all going to, its go down. Francine you are pretty jovial for someone who is predicting a huge correction on the markets. Are we talking a 20 correction . When youre talking about the titanic, you are suggesting it could fall by half. Marc could be. But many markets in dollar terms have all declined by 50 . And currencies have been very weak against the u. S. Dollar. This year, 2016, everybody is bullish about the u. S. Dollar, but i dont see any reason why the u. S. Dollar should be very strong. Argue it ise can in a better position than other countries, but other countries have now valuations, more reasonable. You have to choose. You can buy emerging markets that have underperformed the u. S. Since 2011 or the and the time horizon is 10 years, then i would say i would buy american markets. I have a do think it is too early. I would rather be in emerging markets than in the u. S. I would also owns some gold and gold shares. This is the asset class that is very very priced and where i pricesee a doubling of easily with a limited downside risk. Francine all right. Afraidn that note, im we are running out of time that i could talk to you for the whole day. Youll have to come back. Er thehailand, marc fab author of the boom, gloom and doom report. The meetings from the december fed meeting will be released at 7 00 u. K. Time. Economic editor Michael Mckee joins us from new york. What is the main thing we hope to learn . Michael it is not so much about what they did about what they are going to do. Forecasts imply that will be for more rate increases this year. Investors are looking for only two. So, people today are looking to see if the minutes will give us any clue as to how they bridge that gap. Janet yellen says they are looking for signs of actual and expected progress towards inflation goals. Exactly what that means. To they have specificity in the minutes about what actual progress would be . We are not seeing that in the Inflation Numbers of United States. So, people be looking to see if there is any group or serious discussion that points towards any kind of reaction, what the fed will look at to decide what they do next. Francine we heard from several fed officials this week. Have they given us any clues on how they will react . Michael John Williams, two fed they areidents suggest still on train for a march increase. We have not seen new data. We have seen the oil price collapse. Of course, we expect job growth to remain strong. But until get the numbers later this week, we are not really going to know. Francine very quickly, there is a big week, big data. Its ve early in the quarter. We are looking for 200,000 jobs on friday. If we get that, the market still do not know what the fed is going to do. If there is an upside surprise, the will price in more hikes. If theres a down side, people start looking for reasons. They will either hold off her thinking about going other way again. Francine a pretty explosive interview. If you did not come out of the interview feeling depressed Michael Mckee, bloombergs economic editor in new york. Lets get a market check. Yuan falling to a fiveyear low. To the lowest level since april 2000. Signaling the policy mak ers are more tolerant. Treasuries rising for a fifth day. Treasuries rising because of geopolitical concerns. Saudikorea, iran and arabia. Ahead of those fed minutes. Will the fed raise rates by four times this year . Vw shares are rising for the first day in four. U. S. Sales falling but not as much. Brent crude falling to the lowest level since 2004, ahead of stockpile data in the u. S. Which should show an increase. 15 seconds. In who is the champ . Francine you are the best. A reminder, you can follow me on twitter. Coming up we have surveillance. I will be with tom keene in new york. In london, we will talk more about china. We will revisit the highlights of that marc faber interview. Later on surveillance, we speak to stephen roach. All of that and much more coming up. Concern and skepticism as north korea claims it has tested for a Hydrogen Bomb. Some leaders challenge the claim. Confidence crumbles again. Since 2011. Fixing and mapping the past. The fed minutes today are expected to provide clues on another hike. Good morning, this is bloomberg surveillance,