lift from the ecb, but if china's cpi follows yesterday's disappointing ppi figure. after 24 hours of talks with the social democrats, no breakthrough for and allow merkel. but how much do germans really care? matt: we have the inflation numbers, the banks coming out. look at futures, up across the board. this is the wei screen. significant gains on the continent, lighter gains here in london. the treasury trade. this has been the saga of the past couple of days. after we saw u.s. treasuries go above 2.6% briefly and bill gross called for a bear market. in the other big names bond industry seemed to be positioned that way. you had the yield coming back down. right now, we are hovering around 2.55%. been oneit may have day for us to use that term bondsmegedden. yields downthe bond story produced an uptick in equity markets and the s&p. up .7% yesterday. and i had a very solid session. europe didn't do so well. -- airlines had a very solid session. 120.uro, back above you can see the moves as the more hawkish ecb minutes came out. today will be interesting, you have options expiring coming through. once that clears out, maybe there is more upside on the euro, plus we have this cpi data we need to factor in later. if that disappoints, that gives the euro another leg higher. let's look at the stories surrounding the commodities and give you an idea of what is going on and the bond markets. iron ore down by 1.69 percent. that could be a factor this morning. let's get a first word update with juliette saly. andette: german chancellor the country's social democrats negotiated through the night to sketch out a government alliance seeking to end political deadlock and open the door to her fourth term. leaders of merkel's christian democratic union and the social democrats have been at the headquarters in berlin with no sign of an outcome. the parties have set themselves a deadline of yesterday, though merkel said at the outset the talks would be arduous. china's exports rose last month, capping a year of stronger trade growth buoyed by a robust global economy. exports rose 10.9%, topping estimates. at the same time, import growth slowed to 4.5%, leaving a trade surplus of $54.7 billion, well above forecast. donald trump is said to have decided to extend sanctions theef for iran, leaving nuclear cord in tact. the administration is also preparing new sanctions against iran over ballistic missiles, human rights and cyber violations. the justice department meanwhile said it will establish a toancing and terrorism team target has block, which u.s. continued -- considers a terrorist organization. donald trump has triggered accusations of a foulmouthed outburst about immigrants. the president is said to have made the comments about haiti, el salvador and african nations as he questioned senators in an oval office meeting yesterday. a white house spokesman didn't dispute this claim, saying certain politicians choose to fight for foreign countries, but president will always fight for the american people. donald trump has confirmed his plan to trick it u.k. will now not go ahead. in an apparent response to news report, the u.s. president said the reason i canceled my trip to london is i am not a big fan of the obama administration having sold perhaps the best located and finest embassy in london for peanuts, only to build a new one in an off location for $1.2 billion. that deal. wanted me to cut ribbon, no. vladimir putin says north korea's kim jong-un has won this to acquiree contest nuclear weapons. he made the comments in a meeting with russian editors in chief or he called him an educated and mature politician. his unusually warm words for the secretive leader came after north and south korean officials this week held their first direct talks in more than two years. global news 24 hours a day, powered by more than 2700 journalists and analysts in more .han 120 countries this is bloomberg. thanks for that. let's kick off the show talking about 2018's best-performing on europe's stoxx 600. in eight trading days, the auto sector has gained more than 6%, way ahead than the overall market, which is up two point 1%. fiat chrysler is up 27% so far this year. we are only at january 12. joining us, the head of global automotive research at ever core isi. thank you for your time this morning. let's talk about what is driving this. it is not just fiat chrysler that is the standout, but is up,s, behemoth -- bmw volkswagen, what is up? >> autos are still among the cheapest equities globally. people like buying cyclicals. some of these global oems benefit from a strong u.s. market still. some recovering emerging markets, china is holding up, even though we are cautious there. it is still pretty sound global market. i truly believe some of these names are just too cheap. guy: the numbers have moved quickly, though. would you tactically change your view? after such a strong start for the year? ardt: everyone who owns a stock that is up 25% is taking some profit and managing the position. these names, especially fiat, are veryn, they company specific, very dynamic stories. they have many legs in the equity story and the earnings are moving higher. i think they still look very attractive here. at volkswagenook -- and we will talk with lamborghini's ceo on bloomberg when iion later today -- look at volkswagen, i think lamborghini has to be undervalued in the group. portia has to be undervalued in the group. they have bentley, bugatti, in the same way for our he was, which is now trading at 20 times earnings and at fiat, it was trading at six. couldn't some value be unlocked for this brand? ardt: it must be very painful .or a ceo if you look at what is going on in the markets and you have a portfolio of the greatest brands on the planet, not just votto, but brands per se, ducati, lambeau and porsche. porsche would be worth more than 100 billion euros. the entire market cap of volkswagen is a cure 90. the hidden valley in -- value in volkswagen is huge. long does this current situation last, because the last 15 years of volkswagen's history have been about aggregation, not disseminating brands back to the world. it would be a brave man to change that strategy. if he demand to make the move? -- the man to make the move? he was not to see -- seen as an outsider with a broom. matt: he is a cleanup guy, don't they have to get someone else to start that work? ardt: he has done a great job helping vw group turnaround and deal with the diesel crisis and that is not an easy job. what we also know is his contract is expiring in 2020. -- ceo bya new cto the beginning of next year. the races open this year. still, he still has some things to do. he really stands for decentralization of the volkswagen group. a more global way of running the business, less germanic. if you discuss things with him, i think he would be a fan of creating a volkswagen holding giving more autonomy to the brands. guy: that valuation would get reflected? ardt: i believe it only gets reflected if you ipo, partially ipo some businesses, which i believe they will do with trucks business first. whether they think about a , they willo group ipo that business in my view. whether they go further to think aout ipoing porsche, audi, portion of those businesses remains to be seen. i personally think it is the right thing to do in the world we are living in. it is an industry trend. you need to have smaller, faster flagships that can perform in this drastically changing environment for individual mobility. matt: i am looking at the anr page on volkswagen. out of 3526 buys analysts. the industry likes the stock, but it still hasn't hit the price target. where do you see volkswagen going? ardt: you see where we were only a year ago. a total out of favor stock 12 months ago. now, people have caught up with it, we have seen upgrades -- another one today. where can the stock ago? on a very cheap multiple, seven times 30 eps, you get to 210. slightly richer multiple, you get to 40. if they want to lift the potential of the vw business, we talked 300 or more. guy: let's talk long shorts. we have an idea of what the longs are. look at the bottom, bmw, underperformer this year. is that my barbell? vw on one end, what is the other end? bmw has a funding short, they were looking for something that probably has less excitement, earnings growth. know some of the parts to get excited. that is what people globally took ford as a funding short as well. i think portia should also be in that basket. it sort of makes sense. today, you want strong cash flow momentum, you want strong earnings momentum. some of the parts are a breakup story. even daimler has that. these are the stocks -- these are the names, people are looking at. matt: in what sense does daimler have that? they have the smart brand, they have the trucks. where do you see daimler getting more value? ardt: daimler is the biggest heavy truck maker in the world. they have a 40% market share of the u.s. class eight heavy truck market. that business is not valued. it should probably be worth 35 billion. management has communicated they are creating a holding. the riskk about separation of the businesses, legal separation of the businesses. whether that will lead to an ipo of the truck business, i think they will do that because otherwise, although it doesn't make sense -- but it is not happening overnight. for legal reasons, accounting reasons, this can be done in 2019, 20 20 and for many investors, that is not soon enough. over time, that is becoming a bigger factor for the site. stands for car show. it is not a technology show anymore. matt: for viewers, the sea is consumer electronics show? guy: pretty sure it stands for cars now. where does the threat comes from for that space and is there an m&a story that surrounds it? matt and i were talking about whether or not fiat is a possible takeout for one of the big tech companies like google? ardt: i am just back from ces and i am taking the other side of what you have just said. threat fromis a big tech coming. i think there is a huge opportunity. is now the most exciting thing in silicon valley. it is what everyone talks about at ces. to doese startups want business with the bmw's, dialers, audi's of this world. i think that is a huge hugetunity for oems with innovation potential to use this to create mobility, to create driving experience that is much better than what we have today. i drove in a semi-autonomous level three audi a couple weeks ago in germany. high-speed autonomous. take my hands off the wheel, watching movie, read a book. if that is your commuting future , that is awesome. that is very exciting and it is not valued in any of these oems. matt: it is exciting, from early in to munich is the bane of my existence. to live in the coolest city in germany i have to be in lynn, but to get to the best places in europe, i have to be south of munich. guy: i drive a long way to work every day. plenty more to come from ardt ellinghorst at evercore. will there ever be a breakthrough in berlin? angela merkel and social democrats continue their all-night talks. matt: it looks like they may have concluded. we may have news on that front. coalition talks have succeeded to this point according to dpa. guy: is there an angle on the automakers on that one. all of that is coming up, this is bloomberg. ♪ ♪ matt: welcome back to the european market open. at 11 minutes to the start of cash trade. could have awe breakthrough in negotiation talks. angela merkel and mark schulz, have been inties coalition talks for 20 hours. they were supposed to finish yesterday. they have gone for an all nighter. it looks like they may have a breakthrough, but these are only preliminary coalition talks. these are talks to decide whether or not they will enter talks. put this to ae to party vote. there is going to be a closed-door meeting. for now, he in germany, for the union. on january 21, the party will vote on whether they want to enter talks. still a way to go. guy: euro-dollar has picked up on the back of this. but wemuch as yesterday, are trading just off the highs on this chart. on the back of this expectation that maybe we're moving in the right direction. we have a big auctions expiring coming through. watch out for the factor around that. we talked to mark cudmore about whether the cpi number could drive euro-dollar even higher. ist ellinghorst at evercore with us. is that a headwind? ardt: it is a headwind, even though the germans, which are most exposed come hedged their dollar exposure over three to four years. you won't see a full impact, but a hundred million for each of them and not much more. some em currencies are helping out. currency overall isn't a huge concern. matt: we were talking about bmw a little earlier, i was just that their south carolina plant. biggestne of the exporters of goods from the united states. automobileslion of from the u.s. elsewhere. they have had this local currency production issue sorted since the early 1980's. the best is probably company in running a truly global footprint. they are naturally hedged with all of their plants in china, india u.s., in south africa, the u.k.. that is what you want to have. you want companies to have value streams that leave them less exposed to volatile markets. theme of increasing trade protectionism that provides a hedge around that, presumably. saw: i don't think they that coming, but of course. it is a big hedge. it is difficult to explain how big. guy: we believe that for another day maybe. the german story. ago, threesix months months ago, we were talking about the diesel story in munich. if we do see another grand coalition, the implications are what? it is hugely important for the auto industry what is happening in berlin right now. germany is at the edge of losing it on the electronic mobility side of things. there are a lot of statements, we want one million, 2 million in germany, but i see no action. no charging stations, it is choppy where they are. germany is still spending more than 8 billion euros a year subsidizing diesel fuel. what is that all about? why don't you take that money and put it into the electric? europe still doesn't have any capacity for batteries. matt: that is actually a big threat right now. where do we stand with regard to the possibility of driving a diesel car in the downtown of stood guard. there are at least 17 lawsuits in german cities to ban diesel cars because these cities already operate at levels that are considered illegal by eu standards as far as toxicity. we have an important court ruling in february that will determine whether the current actions are sufficient to deal with the breaches in air quality in some major cities. germany -- politician, auto industry, local politicians, berlin, everyone wants to enjoy -- avoid driving bans because it seriously hurts the consumer. it is extremely painful, telling someone you can't arrive to work with your own diesel. everything needs to be done to avoid that and if it is the retrofit solution to put an fcr or system onto an old car, which i still believe is terrible because you are throwing money after very old cars -- even if that is a solution, it is better than driving bans. germany should really support big time, even more than they do already, scrapping of old cars so people by newer cars that are safer, better customer experience and more fuel-efficient. guy: we will leave it there. thank you for coming to see us. , the head ofrst global automotive research at evercore isi. let's get an idea of what we should be watching into the open. joining us, sam instead. -- unstead. city expecting the equity bull market to continue, looking at 20% returns over the course of 2018. europe cyclical, commodity sectors they like. not big fans of defenses. what are we looking for as far as the most important sector to keep an eye on. is more about individual stocks. we have a few individual stock stories today. kering has sold its stake in puma down. either of those stocks could move today. guy: basically they are admitting they are not good at leisure wear. they do cap walk. puma aey invested in decade ago, they are now getting rid of that state and focusing on gucci. matt: guy always likes to keep tabs on the supermarkets. guy: french supermarkets today. scandal and casino, in an online7% retailer there from a company owned by steinhoff. guy: that is interesting. is mainly the brand in france most affected by this scandal. it is a less of an effect coming through. we were just talking about the car sector. what is going on in the industrials in europe? investors will be paying attention to that. sam: you could see a little of that today. we also had notes on the capital goods sector, big industrial stocks. a couple of calls two different ways from merrill lynch and goldman. to have good momentum, bank of america merrill lynch turned more defensive. fromsam unsted joining us our stocks team. you can see their work on your bloomberg. we will bring you the market open in just a moment. it is u.s. banks reporting season. this is bloomberg. ♪ guy: a minute to go until the start of cash trading. let's talk about what we need to be factory in this morning. euro dollar higher. the coalition talks moving forward in germany. u.s. cpi coming out later on. you could see euro-dollar getting higher. we have the account yesterday from the ecb. that is a factor to think about. then he tied down by .2%. there is a dollar factor in all of this. remember to think about oil trading on the contract, backing off 6896. the right has been meteoric. it is the reporting season that starts today. will the test story continues everything? there's going to be lots and lots of one-off factors you need to think about in these numbers and it is going to confuse everybody, to be honest. there is the countdown. let's see what europe delivers up the get go of trade. where the london market is coming to fairly flat. to be honest, the market seemed fairly flat throughout this week at the get-go. i guess that is inevitable. gas so farto get this week. the market up by .1% at the moment. i suspect we are seeing similar stories throughout much of the continent. financial is into that reporting season starts a little bit mixed. the back trading a little bit lower right now. energy is trading down soil is giving back a little -- so oil is giving back a little bit of brown. you have got to think about how the euro is going to factor into this story. most of this will be hedged or naturally hedged. health care looks to be solid right now so that is a factor you need to think about as well. the market of by .2% at a headline little. we do see at least some gains on the cac. guy: i had to go over here so we can get your charts. let me deal with that. the ibex up by .2%. there we go. matt: i was want to point out -- just look on the screen. the continent is opening up with a little bit more strength than could in london, so that be some direction as far as european stocks are concerned out of france come out of spain. germany takes a lot longer to open the markets, but it looks like germany will have a positive start to the day as well. mrr screen on the stoxx 600 and it shows you which stocks are moving by the most in percentage terms. here, you can see fiat chrysler is one of the big gainers. we have been talking about auto stocks today. he was talking about a great balance sheet story at fiat chrysler. sergio has done such a great job . it is nearing the end of the 10 year. it is possible fiat chrysler could make a deal. that has been the speculation in the market and that's why the inck is up 30% year-to-date the last nine trading days. he got chrysler up 30%. let's take a look at some of the losers as far as the stock exits hundred movers switch it up to bring us the red. as far as the losers, you have auto trader group, which is interesting that. there has got to be news. loser. also a but you are not seeing quite a losses as far as size and scale on the gaining side of the ledger. it looks like we are going to have a positive day in european stocks. guy: let's think about what's going on in terms of these markets. the dollar heading for its fifth week decline. the speculation that policy tightening could come sooner than expected. going to be a factor in all of this. the euro is going to be something to think about today. u.s. cpi a little bit later on which could be a factor in that as well. we have got a decent start for equities so far this year. generally, european stocks have done well. the is a solid start to year as well. europe is trading higher. the ibex is up by .4%. we are watching as well what is happening on the political front. with state street. what does the start of the day of friday tell us about in the equity space? we refer to a lot of more of the same. continuing the themes that ended last year with the strength and resilience of commodity markets, particularly oil markets. mid-to-lateclassic cycle behavior where commodities melt up and catch up to risky assets after having a fairly torrid time between 2015 and 2016. with that, you are getting the pressure on the front end rates if not long end rates and a flattening of the curve. what we have seen so far this year does not necessarily market anything of a sea change. it is a continuation of where we sat in the cycle. matt: but it has been so positive. looking at the market open, i to 170 losers on the stoxx 600. even if we have not had a gap, we have had more gainers than losers all week. the brett had -- breadth has been positive. tim: generally, sentiment. at its highest level since 1987 now. sentiment, we have reached this, shrugged off the persistent worries. we always used to come up with something to worry about. sentiment is very strong. more importantly, earnings. it is all about earnings and the expectations are for another the quarter which continues this run we have had over the last year of persistent surprises in earnings and the momentum of analyst upgrades remain supportive of risk for the time being. it will all come to an end at some stage. it is probably not going to be this quarter in our view. guy: they are expecting 20% on equities. are they under playing it? lowballing it? is that right? is that too much? what do you guys think we're going to get out of trade this year? tim: absolute returns a positive, fairly positive. proceednue the run and in 2016 by a fairly strong year as well, that is a little bit aggressive. we are due a pullback given how little people seem to be paying attention to some of the warning signs out there, things like he chinese demand story we got evidence might be weakening. things like that will come to the fore at some stage. the earnings profile is strong. over the course of the year, positive returns are very much in scope. matt: it is all a global growth story. that is what the citigroup attributes expectations to. we have been hearing about this every time we ask people what is the positive momentum behind -- the impetus behind the stocks rally. if i look at the group ranked returns and i have a chart here, and we have been talking about this this morning. automakers. they are the biggest gainers, 7.7%. is that a global growth story? investors expect these guys to move more metal because everybody is going to be making more money? tim: that is kind of the classical late cycle. you have financial is up there as well. again, a harbinger of the market environment where we are in, where interest rates are starting to rise. regulation is being talked about. trump mentioned that in his comments about rolling back dodd-frank. oft is why to be supportive breaks in -- banks in the cyclicals. guy: in terms of the broader picture, what have i learned thus far this year from the bond market relationship? it is going to be interesting bondyear because if the market has a few more jitters and has a meaningful move higher in yield, it is the mechanics of how that happens that is really important for equities. story, that'swer fine. if it is a fast story, it could upset the apple cart pretty quickly. tim: thus far, what we have learned from the bond market is these dips on the china story are perhaps to be bought. we saw the demand that u.s. options. since then, that has helped to support treasuries. the reality is, in a market where markets are yield start, they are high yield is. i don't think you will get a disorderly bond market selloff, which is again, a continuation of what we saw last year where treasury returns were very muted, but we did not have the catastrophe even though we had a fed hiking rates. i think they will end of form and perhaps on an absolute basis, pretty's return, but it is not this disaster scenario as waiting inal money the wings for you have other central banks looking at buying treasuries. matt: a ton of, actually. in the 30 year option, there were a ton buying treasuries. i don't want to get too deep in the weeds, but why was that 30 year auction so successful? there was one that had the highest bid to cover ratio since 2014. do investors want to get long maturity? what's the story? tim:tim: there is a residual demand for safe haven assets. it is harder to know. much more strategic considerations. and particularly, when you consider how low the composition of it is in the reserves, there up be just an attempt to that percentage i would not do debt,ing 30 year, 40-year but perhaps that is motivation. it's very unclear. when it comes to higher-yielding markets, i could maybe see a little more appeal given that there is some yield. there is probably this environment where inflation is not expected to spike and there is decent relative value in markets such as that. guy: plenty more still to come from tim graf at state street. still to come, industrials and focus this morning. take a look. we have been flashing the numbers. absolutely on a terror this morning. fiat chrysler authorizing quite nicely, adding to what has been a pretty positive start to the year. up 27% so far this year. we are going to come back and take a look at exactly what is happening stateside. we have the start of the earnings season coming through. it starts later today. it will be jpmorgan and wells fargo. little bit ofde a confusion. movers are next. this is bloomberg. matt: welcome back to the european market open. i am matt miller in london. 13 minutes into the trading day, we have gained on the indexes, but let's look at little bit deeper into what is going on. for that, we go to nejra cehic. nejra: i'm starting with a carmaker, yet chrysler, one of the biggest gainers in this session, investing $1 billion in a michigan truck factory, and paying workers bonuses in the wake of the u.s. tax cut, adding 2500 jobs. one way of interpreting this is it could offset any risks from a breakdown in nafta. the stock is higher by 2.5%, hitting a 2014 high. looking at the downside, i'm focusing on the luxury group paring back its puma shares after a decade. it is going to pass on 70% of puma to investors. we are seeing puma decline significantly off the back of that, down 12%. earlier, 15%, the most since 2002. right now, the most since 2008. reportingivendi, preliminary earnings that fell short of earlier forecasts. it was dragged down by paid tv costs at can help loose -- c anal plus. matt: i want to quickly point out that puma, founded by would dolph.ffler -- ru fascinating fact that i bring up a lot and it think it is interesting. thee is a great film about 1950 world cup team out of germany. let me quickly, speaking of germany, mentioned some headlines we are getting across the terminal in regards to the coalition talks. remember come earlier, dpa was coalition talks had produced some sort of breakthrough, although obviously, no final agreement. these are preliminary coalition talks. cdu and thef the csu as well as the german spd are said to reach a deal. bloomberg has confirmed that. --do know that the next date the next date that is important it january 21 in the spd. guy: but what is interesting as what we are not getting is a big reaction. big leg higher. you can see the accounts when the account came out yesterday for the ecb. sessionrading close to highs. we stated that a little bit. be a bigot seem to currency story considering the data are so strong. matt: i don't want to speculate, but you may see a bigger currency story if the talks broke down, especially if they are expected to succeed. asymmetric risk, our favorite kind. guy: i just want to get a quick comment from tim on this. what are your thoughts on german political risk? is it an asymmetric story here? why does the market -- why is the market comfortable with more coalition, more grand coalition in germany? tim: first of all, it removes the possibility of a second election. it confirms the state's crow in germany, which given the way the german economy is performing, it's probably no bad thing. and not having political disruption to what is a very, very strong economic story, where you saw yesterday, a surplus been posted yet again, and quite a large surplus, that should allow actually -- guy: a lot of money to spend. tim: that should allow for some flexibility in these talks and give the spd a little bit more of a say in how that is spent and if that is spent to further this recovery. i think it is a question of not rocking the boat. that really interest into it. i agree it is very asymmetric, where you are heading into a year where you have residual political risk in italy, smaller political risk in spain. you don't really need it in the strong is performing eurozone economy that said that the heart of eurozone politics. so i think it is a positive story. it was discounted long ago when the talks between the two parties began, really, and everybody expected this to be the outcome. guy: we are going to have more analysis later on in the program as to what is happening in germany. as we have been discussing, a reaction in the fx market leads to this stage, reasonably muted. data out of the united states later on which could pair more aggressively. let's talk about what's happening stateside. and look at it from a different angle. walmart says it's boosting its starting hourly wage to $11 in the wake of the tax overhaul. the increase comes into effect next month. joining us now, jodie snyder, bloomberg news editor. is the reason behind walmart doing what it's doing in terms of hourly wages and delivering bonuses as well? the warehouseout deal as well, laying people off. living with one hand, taking away with the other. assess this from a political angle for us. >> certainly. they are doing this, they say, because of the recently passed tax bill passed by president trump by the end of the year. it allows them to do that. it gives them the opportunity because they are anticipating this will help their profits and do something sacred not have done in the markets. on one hand, they are making a lot of this. $11 per hour, and they have raised it at nine dollars per hour to $10 per hour and then $11 per hour. a number of states in which they operate require $11 per hour minimum wage and more will be doing so in the future. it is not such a great deal, but at least they are trying -- and what they are trying to do is compete with target stores, their main competitor in that space. time, they are closing a number of their sam's club stores. supermarket warehouse stores, and there will be some layoffs associated with that. it is a mixed message, but they are saying to the president we are going ahead and doing this because we think that the economy is going to get better, going to be strong, going to move forward. what you had mentioned earlier, fiat is doing that -- fiat is doing this partly because they want to try to convince the administration to help them out on the north american free trade agreement. negotiations. and by thinking that they are giving -- that they are basically touting the potential effects of the tax bill, the tax legislation, that they may get something back in return when it comes to those trade talks. jodi schneider, bloomberg news, editor for congress and tax policy. still with us is tim graf, head mema.cro strategy for an we give you something and expect something in return. fiat chrysler helps out the trump administration by saying has helped them get money back to workers. we saw it from telephone as well , we saw it from comcast. a number of companies. boeing. have come out and on this. walmart now. is it really, you think, going to pay off to the american consumer, this new tax plan? we see obviously great news for corporate some the earnings side, but what about the american consumer? tim: i think that effect is really hard to assess. these limited examples of potential wage gains, at this stage, are limited. history tells us, looking at past corporate tax relief efforts, and other tax reform efforts, that these gains are not necessarily passed on, so i'm somewhat skeptical. when you look at the market reaction to the tax plan, particularly the long end of the u.s. curve, the performance of inflation securities in the u.s., there is skepticism. it was not tax reform that push breakeven rates higher. it was oil prices. there is skepticism, and quite rightly so. what we have seen in the past our corporate tax relief efforts really going towards buybacks and dividends, which does not tend to favor the majority of the american working class. it tends to favor the asset owning proportion of the population, and that is quite a bit smaller, and their marginal propensity to spend as much, much lower. guy: dudley at the new york fed is worried it could end up overheating the u.s. economy. he is probably a little bit more candid in his views. that? we threat is have cpi data coming through later on. at some point, i don't know where it is, there is going to -- wages are going to have to go up at some point. you are already seeing it in skilled sectors. what effect do you think that tax will have more broadly? tim: the reality is the fed doesn't know. secret.not really a the inflation picture is very nuanced. you have online inflation gauges for the u.s., and they don't really .2% -- they don't really point to persistent pressure. i think the proof will be when we get through to maybe march, when some of the effects from last year, the big collapse in mobile phone price, mobilephone s off.es, rolle if you are pushing for 3%, maybe the fed does need to think about a fourth hike. the evidence we have, and even looking at wages which have improved, but no are closer to where you would expect them to be at this point in the cycle, it does not give them any reason to be in a hurry. matt: i look at f kahn on the bloomberg, the financial conditions monitor. even as the fed raises rates -- and guy has fantastic charts -- even as the fed raises rates -- financial conditions continued to improve, so is there a concern that three hikes this year would hold back the economy, hold back the stock market? priced in pretty much and there are no worries about the financial conditions getting heard? tim: i believe there are 55 basis points this year out of the projection of 75. the fed has shown in the past they can ratchet up the rhetoric on rate hikes without being overly destructive -- disruptive to the dollar. there will come a point where financial conditions will tighten. the fed is hiking in response to improving consumption data. operates independently with regards financial conditions. so i think the fed is looking at , but there is no real control over that until it's too ratesuntil real interest go into sharp territory. guy: let's talk about what is happening with the map. matt is very keen on this. matt: i love the function. i think it gives you a great picture of what's going on in equity markets, especially today. guy: we are trading up a little bit this morning. maybe not quite so rosy. we are trading positive. a lot of those feel like they are going to go more great. the netherlands is currently more great. floating above that. higher --low .1% i don't think there is a lot to talk about in europe, but we will wait and see deadly what the stock story delivers. matt: it is an automotive story again. aerospace,? -- right? opportunistic. t matt: i want to talk about tech on a different level. maybe facebook's into this. facebook making major changes to its flagship social network, shifting newsfeeds back to friends and families, away from -- i want to quickly ask you about facebook. only 30 seconds. does it make sense to you? tim: absolutely. facebook has already come under a lot of pressure in response to the recent election, not just in the u.s., but the referendum in the u.k. and some of the elections around europe in germany in particular, so i think they are probably trying to get ahead of that story a little bit, -- guy: should shareholders suffer as a result of that? tim: i'm not sure. if you are making it a more user-friendly experience -- there is some demand for people to see less advertising. guy: tim is going to stick around. this is bloomberg. ♪ matt: we are now 30 minutes into the trading day. let's get your top headlines. after more than 20 hours of talks with the social democrats, angela merkel is said to have reached a preliminary deal for a new german government talk issue. we are --were concessions made? what were they? euro-dollar gets a lift from a more hawkish ecb. will the move gather pace today if u.s. cpi follows yesterday's disappointing ppi bigger? those are inflationary measures. u.s. earnings season kicks off with j.p. morgan and wells fargo reporting. the question about that is will the tax changes really confused the earnings story for investors? good morning and welcome to "bloomberg markets: european open." i matt miller in london alongside guy johnson at our new european headquarters. guy: let's talk about what's going on at the sector level. matt mentioned what's happening with the car sector. it is a bit more broad than that. it is up by 2%, plus. the m&a stories that has been rejected will come back to that a little bit later on. the airline sector had a decent day yesterday in the united states. that is being replicated in europe. trading a little bit stronger as well. they have not had a great time. some of the bond proxies doing a little bit better today, so that is something to think about. check is not doing quite so well. personal households and goods trading down as well. oil and gas backing off. let's get a bloomberg first word news update with sebastian salek. sebastian: angela merkel and the social democrats have reached a preliminary acquired. of the christian democratic union and the bavarian sister party and the spd hammered out a deal after more than 24 hours of talks. they say the agreement will be announced later today in berlin. china's exports rose up, casting a year of stronger tray growth by a robust global economy. exports rose 10.9% in dollar terms, topping estimates. growth slowed to four point 5%, leaving a trade surplus of $54.7 billion, well above forecasts. donald trump has decided to extend sanctions really for yvonne, leaving the nuclear accord in -- fort iran, leaving -- donald trump has decided to extend sanctions for iran. the justice department said it will establish financing teams to target iran's ally, has below, which the u.s. considers a terrorist organization to refresh accusations of racism after reports of a foul mouth outburst about immigrants. the president is said to have made the comments about how ut, haiti and el salvador. president trump will always fight for the american people. donald trump is concerned that his planned trip to the u.k. will now not go ahead. news apparent response to reports, the best president tweeted "reason i canceled my trip to london is that i am not a fan of the obama administration having sold perhaps the best located and finest embassy in london for peanuts, only to build a new one in an off location. bad deal." vladimir putin said kim jong-nam has "won mismatch in the contest to acquire nuclear weapons." he made the comment in a meeting where he called kim and educated and mature politician. this week, they held their first direct talks in more than two years. local news, 24 hours a day, powered by more than 2700 journalists and analysts in more than 120 countries. this is bloomberg. matt: sebastian, thanks very much. let's get to the top story of the hour, developing right now. the german political stalemate seems to have been eased somewhat. angela merkel's block negotiates through the night. the parties are said to have reached a preliminary deal. the latest on this with -- we have heard a lot of numbers. say, it has been more than 20 hours of negotiations overnight. everyone has been waiting for a solution. long?d this take so they were supposed to be done yesterday. they know each other quite well after having governed together the last four years. >> exactly. they have been governing for four years, but in between, there was an election. saying thisdes are cannot go on. we had to change policies. both sides are saying different things. the spd wants to turn the country more towards social policies. christian social party in bavaria, they want to turn it more towards the right. they want to be more anti-immigration. so there is a general battle where this country is going to go, and it is not going to go more into the same direction. guy: the spd has a party conference on the 21st. presumably, they know that that is a high hurdle they have got to get over in terms of getting the party membership on board. what does that mean in terms of the outcome here and what they need to get out of the negotiations? indeed one of the biggest hurdles. 21stpd will decide on the to enter into negotiations with the grand coalition. at the end of this, the party members will -- there are two big hurdles. what does this mean? they obviously will look at what the spd has presented, but it is not so much really for what is part of the coalition agreement. they have got something a lot out of the last coalition, and this does not help them. the convention is much more about the dynamic. what is going to happen. take over thets dialogue, and will they be able to swing the mood? the party leadership is united. they want to get it through. , andase is very critical it is a lot what the mood will be. matt: january 1 is really -- january 21 is really the first of many stumbling blocks. this could still fail for sure. i want to ask you about a headline we are getting across from dpa. it seems fairly obvious, but i still want to break it down. do notand the german spd plan any tax increases, according to the deutsche presse to her. the economy is going well. this government continues to have a surplus. my question would be, are there going to be tax cuts? birgit: well, we will have to see this, but the economy is going well at the moment, but a lot of people in the government think we don't know what's going to happen within four years, so we should not really at the moment plan major tax cuts because we have a lot of big spending bills built up over the last four years, and introducing social cuts, which will be much more difficult. there was this discussion about cutting back the solidarity surcharge which was introduced or eastern germany, but the spd says we will not agree to this because we really need the money for our social spending programs. matt: 27 years later. guy: 27 years later. on thatuick question tax issue. there was some suggestion that may be upper higher earners could face tax increases. does that signal this is not going to be happening? birgit: exactly. that was really the main stumbling block until the end. the spd wanted something to prove that they are doing something for social equality, and this rise in the tax rate high income earners is a symbol of the spd. at the same time, the bavarian parties of merkel was adamantly because we signal are in a situation where the economy is growing. no need to increase the tax on high income earners. so there was on this tax issue, you did see sort of the two strands pulling into different directions. the result is that they basically agreed that everything stays as it is. matt: thank you very much. tirelesslyen covering the coalition talks out of berlin. let's get final thoughts out of tim graf at state street here. i think it's interesting. imagine if helmut kohl had said back at the reunification "we are going to put a solidarity surcharge in place, and keep it for 30 or 40 years." it would have been insane. guy: has it worked? matt: i guess it depends on what kind ofmatt: result you thought was necessary. guy: it was amazing that they won for the foreign exchange, just a one-for-one. the amazing thing happened at the time. bring your currency over, we will swap it. it is a one-for-one translation. at matt: the time, that was almost as criticized as merkel's immigration policy, although it turned out to be a genius stroke. guy: and it was the start of the euro as well. they be unification of germany provided momentum for the genesis of that story. it,: no matter how you see the german economy is doing great. not only is it strong, but it's strength is sustainable, at least according to the people i spoke to at the goldman sachs conference a couple of days ago. and they had money to spend. does germany need to invest that money? they have what many people are surprised by, a crumbling of the structure story. tim: i think it is a government and country that has shown itself to be quite forward thinking. i would always expect there to be this massive fiscal stimulus. the economy is doing pretty well without it. i think there is room. there is room for concessions to the spd on fiscal -- a little less fiscal restraint. there is not a case where we go back to fiscal deficit, maybe getting back to zero, and allowing for a little bit more fiscal spending to sustain the economy. they are always going to be think about 10 years down the road. i don't think it will be a massive giveaway. there is a sense of not just planning for the here and now, but plenty for five to 10 years down the road. matt: did you see the euro charge us right now? pretty amazing chart. that,ind of picking up on that's point, the ecb has got to be looking at this. if you apply any normal metric to germany, rates are unbelievably low. that, you justd wonder when they are going to start crystallizing in this year and next. tim: they have to, i think. it is absurd to have a negative deposit rate and have bund yields where they are. and to have peripheral yields were they are and spreads to germany being as tight as they are. in light of the economic performance. ,e were in recession approaching this recession. i can completely understand it. that policy normalization starts to take place, perhaps even a little bit sooner than the market is expecting. comments from the ecb minutes yesterday underscore that this is being talked about now. matt: incredibly, they have this a stable growth in germany. you have the euro at the highest level since december of 2014. are trading for 60 basis points. tim: inflation will restrain their hands somewhat. we are not seeing the takeoff, really. we did not see the inflation story takeoff when the fed started -- matt: germany loves inflation. it is not particularly beloved -- guy: they have so much history of it. later on today, we get an options expiry coming through which could take out some of the hedging. you have a factor in the cpi number. that cpi number disappoints. what is your view on the upside near-term on where this euro can go and candid overshoot on your year-end targets at least? probably setwill to verbally pushback if you start to get disorderly moves above 122, 123. they will talk about excessive volatility in 2006. guy: the rate of change is important. tim: it is. one of the previous meetings, draghi picked up on it, and it was clear as day that that is what it was aimed at. that is when the euro rally was starting to accelerate without any sign of it stopping. they don't mind, i don't think, that much of a stronger euro. the euro has less of an impact on inflation now than it did 10 years ago. inmuch non-euro trade is euros. i don't think it necessarily care about levels. they care about rate of change. matt: thanks so much for joining us. tim graf, head of macro strategy state street, and he's going to join guy and myself on bloomberg radio. in 15 minutes, you can tune in on london dab. you can tune in on bloomberg.com. xm, any number of ways to get more from tim graf on bloomberg radio. in's get your mid-cap movers a market that is gaining a little bit more on the continent than it is in london. nejra cehic. nejra: my first stock has rallied so much that it is actually approaching a $10 billion u.s. market cap. up 26%looking at it right now, rising the most since 2009. highest since 2014. this after it rejected an unsolicited takeover bid from melrose industries. they produce automotive -- they are a key supplier to airbus and also said it would separate its aerospace and auto parts divisions. a bid from melrose. i am also showing that here by the way. almost 7 billion pounds. the offer was for 405 pence per share. you can see it trading at 420 pence per share. another one i am looking at is &m europeanopean -- b value retail. said it was confident that it will meet its full-year estimate for ebit da. the trading update was reassuring, so we are seeing the stock gain the most since august last year. matt, guy. guy: earnings season comes it?nd so quickly, doesn't big u.s. banks kicking us off later on. at that managers come here with numbers. j.p. morgan chase, wells fargo, and blackrock reporting earnings today, focusing on the impacts of the legislation. banks reported they will take charge us from the new legislation. so is it time to forget the bottom line and how should we make sense of the results this time around? joining us for more on this story, sophia acosta. sophia, i am confused already just looking at the kind of look atnd getting a some of the previews. this is going to be a confusing set of numbers. how many one-off are we going to get? sophia: jpmorgan is great to have a $2 billion charge. goldman is going to have $5 billion. investors already know that. we know it is going to be a lot of numbers and things we need to take into account. isare focusing on what management saying, what are they saying about how this tax legislation will change tax rates in 2018, how they see it changing in u.s. gdp more broadly? the focus will be on the calls rather than the numbers themselves. matt: imatt: know from my days of covering deutsche telekom when they were doing the option to date myself a little bit, you can strip out these one-time gains, and you do that, and look through those numbers. you heard from ceo's like jamie inon, so strong, so vocally support of this tax legislation. they knew this was coming, right/. ? sofia: a new this was coming, but we all knew this was coming. it was one of the major points of the campaign. we did not know how and when it was going to come through, and to what extent. the fact that optimism did -- just look at the chart, the shares of how financials are doing. they were moving because there is expectation that interest rates would go higher, but in the past two weeks, it has been all about the tax reform, and not just bank. it is blackrock as well, all of the financials and asset managers. matt: you can see they beat over the last year for sure, up almost 25% of the s&p. guy: long financials is the trade right now, but you need to break it out a little bit more. do i need to be slightly more the communityt because we don't have volatility as a result of which their client portfolio doesn't look quite so good? do we look at banks that have the opportunity to increase their leverage ratios? how do i break it down? sofia: i think we are going to get a lot of data that will help. remember that these banks are still dealing with low volatility, so there's trading members are not going to be good. , j.p.eady had some ceo's morgan and bank of america, 15%ng trading will drop this quarter. so that's not going to be good. we will also look at any word about credit quality. there was a bit of noise around that at the end of last year. and that actually dragged the shares of the bank. so unexpected. is the american consumer loading up on credit quality that it cannot pay back anymore? that is a story we have not heard in a wild. matt: [groans] that is rough, trading to drop again. guy: it will be interesting to see what the reader cross is into the banks. again, pay attention to that one. winky very much indeed. sofia horta e costa. thank you very much. sofia horta e costa. we need to focus on what is happening with crude as well, setting up for its fourth week of gains. how sustainable is the rally? we will discuss that, next. this is bloomberg. ♪ matt: welcome back to the european open. no doubt, the story of the hour german coalition talks. the preliminary talks concluded successfully. they will go to a vote in the spd on the party level january 20. it has boosted the euro. at least, it's one of the factors that lead to a boost in the euro. pt screen.e gi you can see the live trades. it has boosted the euro tebow highest level since i believe the end of 2014, so we are looking at a euro right now at 121. this is something we have been talking about even before the rise with arndt ellinghorst this morning. it is important to german carmakers. bmw, less than others. it is very important because they want to sell the things overseas and how to bring the profits back to germany. when a higher euro hit them, it's a little bit painful. guy: you have options acquiring today, which is something to factor into this trade. you have cpi data out of the states later on. you could see the dollar coming down on the back of that, which could in theory -- should in theory, will in theory, at practice and therefore deliver a higher euro. let's talk a little bit about what that's going to be for the crude price. trading around $70 per barrel, just shy of that. will kennedy joins us now from our commodities team. good morning, will. if we see a sustained push higher on euro-dollar, bank that into the crude trade for me. will: clearly, there is a dollar factor. the euro has been higher since 2014. even though there are many fundamental reasons why oil is rising, the background is definitely key. matt: how does opec feel about this? how does opec react to $70 oil? will: this price surprised people by how quickly and how soon it has come. i think it's going to make opec's positioning quite difficult in the start of the year. everyone thought the first half of the year to be difficult. they expected the stockpiles might build again. that does not seem to be happening, so we are hearing from opec ministers quite a lot in the next two weeks and it will be interesting to see if they try and talk the price down, because the danger with $70 oil is that it just helps the u.s. industry. guy: you're getting onto my next question. what does this mean for shale? it has got to me not shale will: will continue to rise. -- it has got to me not shale that shale will continue to rise. we will see a lot more out of the u.s.. the ia, the official forecasting bought her in the u.s., expects u.s. production much sooner than expected. they expect as much as 11 million barrels in 2019. over the next 12 months or thereabouts, we are seeing another $1 million from the u.s.. will kennedy, managing editor for energy and commodities. let's wrap the show up with a quick stock of the day. matt: i think that would be a great idea. gkn is what we have been watching closely because it said no to an offer from melrose industries. it is a 7 million pounds company. melrose is a smaller company. guy: it is an investment vehicle. matt: gkn, what do they make? tier one are a supplier into the aerospace asustry and into the -- well. this is a significant chunk of the supply chain from a company like airbus, and the car sector come in and around europe. this is an opportunistic bid that is coming through. back to the currency story, factor in what is happening with the currencies. take a look at the gd function. you haveike how arranged your graphic dashboard, by the way. you can change the settings on this. mine does not look as good as yours, and have to say. guy: we could extend that conversation. matt: i will just steal your settings. guy: matt has already stolen my settings on the launchpad, which we will use a lot in radio. matt and me are going to radio. up next, "surveillance." this is bloomberg. ♪ retail. under pressure like never before. and it's connected technology that's moving companies forward fast. e-commerce. real time inventory. virtual changing rooms. that's why retailers rely on comcast business to deliver consistent network speed across multiple locations. every corporate office, warehouse and store near or far covered. leaving every competitor, threat and challenge outmaneuvered. comcast business outmaneuver. >> breakthrough in berlin after 24 hours of coalition talks, reports of chancellor merkel reaching a preliminary deal with the social democrats. the euro surges to a three-year high. exports pick up in china and a slump in import growth. is it a warning sign for the economy. we get gdp next week. the president triggers fresh accusations of racism after a fouled mouthed against immigrants. ♪ to "blo

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