From beijing that will travel to washington. Manus warm welcome to daybreak europe. The world wiccans up to reassess where we are with geopolitical risks. The iranian response is interesting. We see them withdrawal, verbally withdrawal from the nuclear agreement. Responseheir first rather than a tactical hit. Nejra yeah, absolutely. And in terms of hits, one of the things the oil market is trying to assess is whether we get risk to supply. It reverberates, not just equities and commodities. But weve seen flattening in the yield curve. Manus we have indeed. It was worths worse before christmas. To the gold market, Goldman Sachs say this is your preferred mechanism for hedging. You are looking at a very large range of scenarios coming to play. Its better to use than the oil market, 1600 rocks for them. Bux for 6,000 for them. For them. The price could rise another three to 10. They warn of heightened missile attacks at military bases. The havens are performing as you would expect, which is the havens are good. Today,japan back online bearing the brunt of losses in asia. Firmly in the red. Worstp 500 had their month friday and it points to more loss today, perhaps muted. The 10 year yield dropping below 118, down to basis points. The curve flattening for a third day around 25 basis points right now. To talk about the top story, President Trump threatening iran with major retaliation if they do anything to avenge the killing. Tehran says it will no longer be bound by the nuclear deal on enrichment of uranium, while a wreck is calling for American Forces to be expelled from the country. Manus some major issues to deal with. Secretary of state mike pompeo says there were no deaths within the Trump Administration about the intelligence behind the incision to kill so money last week so the money last week. Any will be lawful in the u. K. Dominic raab reiterating his calls for escalation. I think the important thing now is to deescalate the tensions and make sure while we maintain actions iran is taking, the door to diplomatic route out is there, but ultimately going to be for the regime and the leadership in tehran to make that choice. We have our government reporter tracking the story here from dubai. Its amazing the british response, the German Response was also tepid. But here in the gulf, weve got qatar and the uae sending delegations. So, the uae, the response from the gulf has been unequivocal. We dont want escalation. We dont want war because the war will be felt across the region here. This region will bear the brunt of it and they are not ready for another destructive round of escalation. Isright now, saudi arabia sending the brother to washington, d. C. To convince the administration they need to tone it down. The uae had the first reaction. Weve seen from a golf official that problems are complex and need a lot of wisdom and an emotional dealing to figure them out, basically also calling for the escalation. Nejra thank you so much. Joining us is the global head of flow strategy and solutions. Great to have you with us this morning. Goldman is out, saying the rally in oil will likely be shortlived unless we see supply disruption. They also see gold as a better hedge to geopolitical risks. How are you assessing the space this morning . This is an interesting point. I do agree oil is a supply and demand, and gold is an interesting safe haven, particularly in an environment where yields are low. There is no opportunity cost, and not owning gold in terms of kerry. But i would like to also make a point that last year we had the more north korean crisis, a lot of these sort of events come to pass. As an investor, if you make Big Decisions in reducing your portfolio, its a big drag in your performance. Investors are more likely to sit on the sidelines and wait for the outcome than trying to act too early for the risk of losing money or not being invested. Manus but of course, were trying to assess the response mechanism. Were showing live pictures of the moment at the funeral of solar money live from iran. It will have the various prayers, mr. Abe making comments, speaking for further diplomatic efforts to stabilize the middle east. So those are the imagery being broadcast to the world. Market participants, to assess what happens next, if theres a response from iran, where will that be . A little earlier, i caught up with bob mcnally. He thinks although a war may be avoided, crude still has pricing to go. An overt u. S. Of military conflict with iran went from about 5 to about 25 . Has some morerude risk pricing to do. At the end of the day, we think well avoid a war because both washington, or President Trump, and the iranian leadership, wish to do so. Manus thats the base case. Do you think 6 in two days reflects deficient geopolitical risk . Good morning. Good morning. I think this is an interesting situation because the volatility of the probability itself is pretty high. This is a classic situation. I do think the profitability is increasing probability is increasing. Its important to bear in mind that the will to go into war is a lose lose situation for both parties. This is where the diplomatic angle is going to be quite powerful to ease the tension. Again, the north korean crisis last year is a good carol to take into consideration. This is where we could go into some sort of bargaining, where iran might get something in return for not escalating. But this is something we will have more details in the coming weeks or months. Nejra if the heightened risks get clearer and investors do start to pile in and we see one right trade, risk of for whatever, what is the best way to get caught in that liquidity trap, in the event this does escalate and investors do start to react more than they are now . Kokou i think this is where portfolio construction is going to be important. Having safe haven assets, treasuries longerterm, or gold, as we mentioned. But obviously, volatility or put options, particularly the s p or stocks that have done very well in 2019. This is where a lot of the p l have been in, and this is where the pain threshold for investors will be the most significant. Clearly, s p is the upper former , and s p puts call option the ultimate per flu hedge. Portfolio hedge. Manus spending money on call options. Well write a few things. Kokou stays with us. Lets get you first word news if i can get my words out, with Annabelle Droulers in hong kong. Annabelle thanks, manus. Sterling authorities are counting the cost of wildfires ravaging the country. We can Sell Properties from small towns in the south coast of New South Wales and alpine villages in neighboring victoria hit by places that were so the large, they generated dry thunderstorms. Thousands have been evacuated to recreation grounds, hastily converted into makeshift camps, shredded in toxic smoke. China has a new top man in hong kong. Hes a communist party still wont. Star what. Stall work. It signals beijings intention to restore order after seven months of unrest. He says the situation will stabilize. We have confidence that the constitution and the basic law will be fully enacted in hong kong. That will maintain the one country, two systems policy, and ensure prosperity, thanks to carrie lam, the government, and all parts of the committee. Annabelle japans tightening its immigration seizures after Carlos Ghosns escape from the country. The former giant skipped bail and fled to lebanon. In his first comments from the japanese officials, Justice Minister said authorities were probably asked to find out how he left japan without detection once they became of dish over of the incident. And the Golden Globes has once again lived up to the reputation of the most unpredictable awards shows. 1917, a world war i epic won the prize for best drama. That was bad news for netflix, oneh won just two prices, for the crown, the other four marriage story. Global news, 24 hours a day on air and on quicktake by bloomberg, powered by more than 2,700 journalists and analysts in more than 120 countries. This is bloomberg. Nejra . Nejra Annabelle Droulers in hong kong, thank you so much. Lets have a look at your week ahead. Tuesday, we get inflation. Plus, boeing announces its latest livery numbers delivery numbers. Manus industrial production, germany, inflation reading for december. Thats key. The big one . Its friday. Its jobs day. If youre traveling to work, tune into blubber. They are live on your mobile device, dab Digital Radio in the london area. Back to work at bloomberg. Manus its daybreak europe. I manus cranny in dubai. Nejra im merrick a pitch in london. Heres what we will be watching in london. A press conference this wednesday in beirut. He will sign the first phase of a trade deal with china at the white house and over to davos, switzerland, where the World Economic forum begins. Manus and to the u. K. , brexit day is quickly approaching, the last day of this month. Weve got rate decisions, the ecb the 23rd, the fed the 29th, and the bank of england on the 30th of january. Were watching fourthquarter earnings results. Busy, busy, busy. Lets stick with the u. S. Data front. Manufacturing the weakest since 2009 in december. Orders shrinking and factories dial back production. Thats the fifth straight month. They purchase a managing index at 47. 2 in december from 48. 1. Fed officials see Monetary Policy to remain appropriate for the time being. Thats according to the fomc released on friday. Cleveland fed president says the underlying fundamentals feel strong in the knee u. S. Economy. I think its great we can have an economy with 3. 5 unemployment and inflation thats well contained. We dont have an inflation meant problem in terms of inflation being too high. Inflation has been running under the 2 goal. Those fundamentals suggest the economy is healthy. Between lot of fed talk friday. Host. Is our guest the data was disappointing and we can ruminate about that, but i want to get to the curve. We showed that with the Balance Sheet. Weve seen the saving of the curve before christmas, didnt wait . Weve cop didnt we . Weve come off the high. We have factory gate. We have three major headmans. Headwinds. What does that do to the curve in terms of the next move . Weve seen it come off the steepener. Do we reenter at these levels is my question . Kokou this is a good point because as you know, curves can move both ways. They can steepen through a booth steepener if you go into a recession and the fed starts cutting the shortterm of the curb, or a conversed if you get more growth momentum. Our view is that we like buying options on the curve because clearly there is a risk of flattening if we get a massive risk off scenario. We think the balance of risk, particularly over a 12 month period, is more for further steepening. The resilience and we need to bear in mind the fed has cut three times and has injected a huge amount of liquidity. Analystscession most and economists are expecting is sort of shallow. We could see, particularly with the whole physical agenda, more momentum on the growth side. A curved cap using options to get exposure is in adjusting. Nejra do you actually see a bottoming in the u. S. Manufacturing cycle then . The data looks painful on friday but it was different to what we saw from ihs, as well. Kokou this is a good point because they will have a mild recession in q4 of this year. Given the fact weve been in one of the longest Business Cycles in u. S. History. A review is that it will be transitory our view is that it will be transitory. We will have stronger mental in 2021 momentum in 2021. Theres a developing theme, that of a fiscal put. If we get a recession, governments pressure on government to do more in terms of sustainable investing, Climate Change, etc. , will be another source of momentum for the economy. Manus is the fiscal put you refer to something which is outside america and cant really take place in america because were in this election cycle . Is it a differential trade that we look for trade outside america versus the u. S. . Kokou this is a good point. The fiscal put is a function of governments ability to spend. In europe, it would be the jase of the countries. But in the u. S. , it can still have that as part of the agenda, not particularly for 2020, but for 2021, etc. There is mounting evidence that the Central Banks marginal effect is diminishing and alternative link to fiscal stimulus is going to be more on the agenda. This is a factor that could be depriced in as it prices going forward. Me thatou reminded youre yield call is 120 and or Something Like that, one of the more gloomy forecasts. In the meantime, weve had in bernanke say quantitive easing can provide the equivalent of about three additional Percentage Points of shortterm rate cuts. We talk about the limits of centralbank policy, but is this a direction that if the fed goes down, how would that impact the curve if what he says is true in replacing the rate cuts . Impact inhink it has terms of stimulative the economy. You also bear in mind the Central Bank Actions usually take two to three quarters before having an effect on the economy. We just need to look at the effect of the cuts that already happened and how they are likely to impact the economy. It is appreciative strike. This is where Central Banks have been pretty good in terms of seeing the weakness in the data and reacting quite early as opposed to acting after the fact. This gives us confidence in the fact that this is most likely a recession and 2021 should be a pretty strong recovery. Kokou stays with us. Lets get the Bloomberg Business flash with Annabelle Droulers. Annabelle b. N. P. Paribas planning to join jp morgan and citigroup, setting up an electronic currency Trading Platform in singapore. The facility will support electronic trading in 50 currencies in nondeliverable forts and options, according to a company statement. It will also allow trading of pressures and base metals. Lloyds renewed its pledge to land 18 million plans pounds to british businesses. It will make available for companies of all sizes. Uncertainty over brexit clouds the british economy. Lloyds reported a declining commercial banking income in october, but said overall credit quality remains strong. And would you give up facebook for a month in exchange for 50 . The question could help economists at m. I. T. Measure how Much Technology is reshaping the economy and our lives. They estimate the social Network Alone could add 0. 11 Percentage Points annually to u. S. Gdp if measured by its benefit to users. That your Bloomberg Business flash. Nejra and manus . Manus thank you very much. Coming up, jolted awake. We look at the big moves priced in the currency market. Thats next with your chart. Live and were seeing pictures from tehran, where the ayatollah led the funeral prayers for the general. This is bloomberg. Nejra this is daybreak europe. Im nejra cehic in london. Manus im manus cranny in dubai. The goal post has moved. The assassination of irans general sunna money has sent a shudder through risk markets with the impact on emerging markets most pressing. Weve got a chart that matters. The wakeups maybe call nobody asked for but they got it anyway. We can see the direct impact of these tensions, especially when it comes to emerging market effects, which i should say was trading at the lowest since 2014. Over the past week, we see this big pickup in the implied volatility levels. This is the biggest one week pickup since back in august, nearly half a year were looking at here. I talked to analysts who told me the low volatility is like quicksand, really difficult to get out of. They need Something Big to shake them awake and this might be the thing. Nejra thank you so much. Kokou is still with us. Emerging markets shaken awake. Do you want to get in . Kokou we think the emerging market could be more resilient at this part of the cycle, given the huge growth and impact china has in terms of consumption and demand. So the world where they are having a Downside Risk in terms of growth and its massive impact could be less relevant this time. An area where we see opportunity, particularly for strong Balance Sheets in p. M. s versus Balance Sheets in emerging markets. Manus how do you deveteran trait how do you differentiate ems . Do you look at the world between australia, asia, china versus let on . Do you differentiate . Kokou yes, so theres clearly an element in terms of data, in terms of the ems ability to generate cash flow. And there are external debt exposures. But Southeast Asia is one angle to look at how we look at the emergingmarket world from a balance standpoint. Clearly, this one belt, one road theme is also something that could reverberate across the em landscape, in our view. Us,s ok, kokou, stay with other more work to do. His trades for 2020 with nejra and myself. Speaking of which, risk and rules. Global stocks trade to the downside. Treasury yields x slightly lower. Gold surges to the highest level in six years. However, that must be said we are at the most overbought in nearly two decades. Nejra have some of those traits gone too far or are investors waiting on the sidelines to see how this could escalate . This is bloomberg. Morning from bloombergs European Headquarters in the city of london. I am nejra cehic with manus cranny. Fallout iran says it is not bound by the nuclear deal after the killing of a top general. Donald trump vowing retaliation if iran does anything. Risk off rules. Global stocks trade to the downside. Gold surges to the highest level in more than six years. Trading places. Chinas top official in hong kong says he is certain that the city will stabilize. A delegation from beijing will travel to washington on january the 13th. Nejra if markets wake up to geopolitical risks this monday morning. Read on the screen for the asian red on the screen for asian equities. Oil on a tear. We have the Market Action from around the world. Manus how much more is left in that market . We have the Team Standing by including Annmarie Hordern in london. Iniette saly is resident singapore. First to you. The asian Market Reaction this morning. Juliette looking at a risk off mood across asia. Specifically, a flight to the yen. It could be the biggest beneficiary of the attention in the middle east. Sinceat its lowest level october. The movingng below averages. The yens correlation with the volatility index climbing to its highest in almost three years. Analysts say you may not see much further upside for the yen against the dollar. It is unlikely to breach 105 unless we see further retaliation in the conflict. Nejra the jump higher in oil not helping indian equities. It is not. And good morning to you. We started out about 1 lower. That is the correlation we usually have. Discussion the one interesting note. Niftys a chart of the smallcap. You are seeing the current like which is similar to what we saw in 2008. Most think this means the smallcap well rally. The question i have is what if it is not the small caps that rally . That would start a lot of popular sentiment so people have to be wary of that. Back to you. Manus thank you very much. Let us take it to Annmarie Hordern. There is a constriction in the market. What is the spread telling us . Rie the spread is widening especially when you look at the march and december contrast. The premium for the price of oil about six dollars more per barrel. Mcnally told you that he somethe price go higher, three dollars 10. It all comes down to geopolitical risk. Not a single barrel has been taken off of the market but the risk is there. Over the weekend, the state Department Says there is a heightened risk of around u. S. Military bases. The market is worried and that is what you are seeing this morning. Nejra thank you to Juliette Saly and Annmarie Hordern. Let us get to the first word news. s is pulling out of a key part of the 2015 nuclear deal. N will no longer abide by any limits on uranium enrichment. Parliament also vowed to expel american troops from the country. Tensions between the u. S. And iran are rippling through markets. Surgeperienced a dramatic above 70 per barrel. Military bases and Energy Facilities at risk. President trump reiterated threats of retaliation should iran do anything. Gold surged to the highest level in more than six years. It is a more than thats it is a more effective hedge than oil. Australian authorities counting the cost of wildfires ravaging the country. Properties w the blazes are so large they generated dry thunderstorms. Many have been evacuated. China has a top new man in hong kong. Stalwartommunist party. The appointment signals beijings intention to restore order in hong kong after nearly seven months of political unrest. He believes the situation will stabilize. We have confidence that the constitution and basic law will be fully and acted in hong kong containing the one country, two systems policy. The efforts of carrie lam, her government, and all parts of the community. Global news, 24 hours a day, on air and on quicktake by bloomberg, powered by more than 2700 journalists and analysts in over 120 countries. This is bloomberg. Nejra nejra turning to growth around the world and top central bankers have shared a sobering view. They say the u. S. And the rest of the industrial world may have to resign itself to an extended period of slowed Economic Growth and low interest rates. That sobering message was shared at the annual conference in san diego. 2020, looking ahead to that is what we are here to do. Says the debate is raging on. Especially when Global Growth slows. Agbobloua is our guest. What is the most obvious fractal market we need to get a hold of for the start of 2020 . Kokou the fractal market hypothesis was in response to the ineffectiveness of the an efficient market hypothesis. The idea here was to say that the asset prices are at the when longterm investors meet shortterm investors in terms of low. You havere stable when a good diversity of investors when it comes to their investment horizon. You tend to get high volatility when all investors have the same investment horizons i. E. If you have an impending recession or crash come everyone sells and you have high volatility. The idea of rectal markets and 2020 was to argue that they could there could be a tug of war between shortterm investors focused on recession, and that is well documented by most investors and strategists and the longterm consideration about the fiscal journey that we might be embarking on and the potential growth that might, as a result over the next years. Our view is the shortterm risk of recession could be a essentially not as big a factor in terms of asset price to theance compared longterm Growth Potential that the fiscal Climate Change investment agenda that most governments are considering could be. Nejra you also talk about the balance of power between short and longterm has big implications and the dispersion within equity markets as well. How would you trade around that . Kokou we saw a huge amount of cyclicals creating a huge amount of volatility within the market. Looked low within the sectors where volatility is high. The way to treat that is to sell volatility on the index. Becausex does not move it is offset by things going down. Manus what are the hallmarks of 2019 one of the hallmarks of 2019 was centralbank action. Looking at the Balance Sheet activities, not quantitative easing or not yet. What we have seen so far in q4 was reminiscent of what we had in 2013 and 2014. Does this action by the fed repress volatility and act as a buffer in 2020 with three rate cuts by the fed in 2019 . Kokou as i said earlier, it takes three or four quarters to see the consequences of Central Bank Actions. This is clearly going to have an impact on the market leading to a repressed volatility in the repo market. The market is flooded with volatility. That being said, the volatility does not disappear but shows up in different sectors or in companies with weak Balance Sheets for example which is one of our other important things. Volatility is clearly one of the targets of Central Banks and it is an asset class that has to be traded carefully looking at supplydemand, location, and relative value trades of cross asset classes. Newly appointed top official in hong kong is certain the city will stabilize. Up next, we will bring you the stories you need to know. Nejra this is bloomberg daybreak europe, i am nejra cehic in london. Manus i am manus cranny in dubai. New tops appointed a official to hong kong and he has said that the city will stabilize following month of political unrest. To discuss the situation from beijing is make it is tom mackenzie. Good to seo. What is it that beijing is signaling here . Him we heard briefly from who is taking over this position. At the head of the hong kong Liaison Office. What it signals is beijing wants a return to law and order which is something they havent been saying for a long time. We have had seven months of protest in hong kong. What we knew about this new head of the Hong Kong Affairs office in that city the chief Liaison Office for beijing is that he has a track record of carrying out and executing the orders of the chinese president. He is a party centric. Muchhe does not have is experience in hong kong it self or foreign affairs. It does not seem there is any suggestion that beijing will be making concessions. They want a yes man on the ground. He is described by some analysts as a strong man for beijing. Someone that will carry out their orders to the letter. Hasng over from someone who been seen as making policy missteps on the ground and being too close to the hong kong l. A. Hong kong elite. Detail in give much his comments about the policies he will be implementing. That is where the focus remains in hong kong. Sejra bloomberg anchor, tom mackenzie. Delegation will be traveling to washington for the signing of the trading deal. The visit had been rescheduled the cause beijing did not expect donald trump to unilaterally declare a date or two agreed to endorse the deal if beijing was unavailable. Kokou agbobloua is still with us. Is signing of phase one katy. Over the weekend, china pledged to step up measures to shore up its troubled banks and Small Businesses will continuing to crack down on property speculation and shadow banks. How do you see this unfolding . A huge amount of pressure on the chinese economy as a result of the trade war decisions in 2019. The chinese economy clearly relies, even though it is mostly now increasingly consumption driven, it still has exposure to the Global Economy and exports etc. In terms of the bargaining power, the chinese will want to have a deal as soon as possible. That being said, they still have many ways to cushion the blow from the trade war with the trouble are cut which they have a lot more room to do in terms of the incremental cuts but they could also launch more fiscal investments. I do not think we will see some of the fears we had in 2015 when withd the massive scare respect to the chinese economy. If we look at how some of the markets performed last year globally, Chinese Government bonds missed out that resplendent rally. Yield and ad a 3 promise of Capital Gains this year. I know you do not do outright trade but is there a reflective to be hadncome yield in a zero bound world . Kokou what could be interesting is to look at the pricing between credit and equities in the chinese market. We feel valuation there is a lot more value to be had particularly given the heightened risk premium. If you look at the credit side of things and the risk in terms of the shadow banks or the sophistication of some of the chinese corporates, there is an interesting discrepancy between the largecap versus some of the weaker credit names. This could be an angle to consider. Manus i think im going to have to brush up on my Balance Sheet analysis. That is one takeaway 49 minutes into bloomberg europe. Let us get you up to speed with the business flash headlines. Thank you. Bnp paribas deciding to join j. P. Morgan and citigroup by setting up electronic currency platform in singapore. The facility will support electronic trading of 50 currencies. It will also allow trading of precious metals. Lloyds has renewed its pledge to much as 18 Million Pounds to british businesses in 2020 matching last years commitment. Lloyds reported that overall credit quality remains strong. Would you give up facebook for a month in exchange for 50 . That question could help economist at m. I. T. Learn how Much Technology is changing our lives. And that is your Bloomberg Business flash. Manus . Manus thank you for rounding up the flow of news. Coming up, risk assets repriced. One strategist says you should not be selling your stocks right now. That is next. This is bloomberg. Manus it is daybreak europe. I am manus cranny in dubai. Nejra stocks are sliding in the wake of escalating middle east tensions but traders may be making the wrong moves. We have your morning call with dani burger. Who thinks this is the wrong move . Evercover course bes dennis says you may making a mistake. The tensions may be having an impact on earnings but the degree of that is unclear. Investors that sell as a that punch reaction tend to lose money. There is someone else taking the other side of that that that makes money and this is especially true with the macro backdrop as it currently is. Manus dani, thank you. Do not pull the record too soon. Kokou agbobloua is with us. Do i throw the baby out with the gop political bathwater this morning or do i show stoicism and hold in on my longs . Ou quoting mike tyson everyone has a plan of they get punched in the face. Manus [laughter] kokou it is tricky with planning. When you make a decision to sell, it might be too late. The whole argument is about construction. And in this particular case i have to hold with the argument that it is important to focus on the long term and fundamentals. Equities are the only game in town given the little yield you get from the fixed income market. That being said, it is also a pretty crowded asset class given the performance it has had in 2019. It falls back down to how you design your portfolio and not put all of your exam one basket. Long strong Balance Sheet versus weak Balance Sheet is one angle. And having a bit of Risk Protection for that 10 or 20 scenario escalation is also something sound to do. Nejra do you prefer to make the trades like you just described . Is where it typically goes up. There will not be a huge amount of that whether you are in the u. S. , asia, or japan. This is why we like to have a portfolio overlay. In the meantime, you have to be careful if you have any return targets because having no position is a position you can afford a half. Manus ok, it is all about having the Balance Sheet and protected trade. You, a great hour. Our guest host, kokou agbobloua from societe generale. The one story is geopolitical risk. E bring you live to iran leaders are attending the funeral of general soleimani. Supreme leader khamenei has led the prayers at the funeral. The next move and what will be the pushback from the United States . Thea and that is what market is trying to assess. In terms of equity markets, the s p 500 had its worst day of the month on friday. A lot of red on the screen. When you are traveling to work, tune into bloomberg radio. This is bloomberg. Good morning. Welcome to Bloomberg Markets european open. We are live from our European Headquarters in the city of london. I am anna edwards alongside matt miller. Matt riskoff sentiment sent investors running for havens with stocks set for a negative open. The cash trading is just one hour away. Is just one hour away. Fa